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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
COMMISSION FILE NUMBER 0-20866
WILSHIRE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0433823
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5861 EDISON PLACE
CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices)
(760) 929-7200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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The number of shares outstanding of the registrant's only class of
Common Stock, no par value, was 12,943,385 on June 30, 1998.
Transitional Small Business Disclosure Format. Yes No X
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WILSHIRE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
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PART 1 - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of 3
May 31, 1998 and November 30, 1997
Condensed Consolidated Statements of Operations 4
for the Three Months Ended May 31, 1998 and
May 31, 1997
Condensed Consolidated Statements of Operations 5
for the Six Months ended May 31, 1998 and
May 31, 1997
Condensed Consolidated Statements of Cash Flows 6
for the Six Months Ended May 31, 1998 and
May 31, 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 9
or Plan of Operation
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, November 30,
1998 1997
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ASSETS (Note 4) (Unaudited) (Note)
Current assets:
Cash $ 113,000 $ 137,000
Accounts receivable trade, less allowance for doubtful
accounts of $5,000 at May 31, 1998
and November 30, 1997, respectively 517,000 335,000
Inventories (Note 2) 1,481,000 1,037,000
Current portion of note receivable (Note 3) 220,000 198,000
Other current assets 279,000 262,000
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Total current assets 2,610,000 1,969,000
Property and equipment, less accumulated depreciation
of $870,000 and $778,000 at May 31, 1998 and
November 30, 1997, respectively 2,581,000 1,293,000
Note receivable from the sale of discontinued business
less current portion (Note 3) -- 111,000
Debt issue costs, net (Note 4) 113,000 --
Goodwill, less accumulated amortization of $344,000
and $323,000 at May 31, 1998 and November 30,
1997, respectively 398,000 419,000
Patents and trademarks, net 119,000 115,000
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$5,821,000 $3,907,000
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LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current
liabilities:
Accounts payable $ 513,000 $ 625,000
Accrued expenses 296,000 372,000
Interest payable 128,000 330,000
Line of credit (Note 4) 7,093,000 3,750,000
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Total current liabilities 8,030,000 5,077,000
Shareholders' equity (net capital deficiency)
Preferred stock, no par value, 2,000,000 shares authorized
and none issued and outstanding -- --
Common stock, no par value, 50,000,000 shares
authorized; 12,943,385 shares issued and
outstanding at May 31, 1998 and
November 30, 1997 25,907,000 25,907,000
Common stock warrants 349,000 301,000
Accumulated deficit (28,465,000) (27,378,000)
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Total shareholders' equity (net capital deficiency) (2,209,000) (1,170,000)
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$5,821,000 $3,907,000
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Note:The condensed consolidated balance sheet at November 30, 1997 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes.
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended May 31,
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1998 1997
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Net sales $1,032,000 $1,000,000
Cost of sales 682,000 693,000
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Gross profit 350,000 307,000
Operating expenses:
Marketing and selling 117,000 153,000
General and administrative 435,000 342,000
Research and development 74,000 128,000
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Total operating expenses 626,000 623,000
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Loss from operations (276,000) (316,000)
Other income -- --
Interest income (expense), net (207,000) (71,000)
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Loss before provision
for state income taxes (483,000) (387,000)
Provision for state income taxes - current -- --
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Net loss $ (483,000) $ (387,000)
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Weighted average shares outstanding 12,943,000 12,943,000
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Basic and diluted loss per share $ (0.04) $ (0.03)
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See accompanying notes.
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended May 31,
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1998 1997
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Net sales $2,085,000 $1,591,000
Cost of sales 1,641,000 1,211,000
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Gross profit 444,000 380,000
Operating expenses:
Marketing and selling 247,000 277,000
General and administrative 807,000 605,000
Research and development 148,000 191,000
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Total operating expenses 1,202,000 1,073,000
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Loss from operations (758,000) (693,000)
Other income 1,000 --
Interest income (expense), net (329,000) (119,000)
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Loss before provision
for state income taxes (1,086,000) (812,000)
Provision for state income taxes - current 1,000 1,000
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Net loss $(1,087,000) $ (813,000)
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Weighted average shares outstanding 12,943,000 12,943,000
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Basic and diluted loss per share $ (0.08) $ (0.06)
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See accompanying notes.
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended May 31,
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1998 1997
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OPERATING ACTIVITIES
Net loss $ (1,087,000) $ (813,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 117,000 112,000
Provision for loss on accounts receivable -- 3,000
Net change in operating assets and liabilities:
Increase in accounts receivable (182,000) (15,000)
Increase in inventories (444,000) (538,000)
Increase in other current assets (17,000) (7,000)
Increase (decrease) in accounts payable and
accrued expenses (188,000) 246,000
Increase (decrease) in interest payable (202,000) 117,000
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Net cash used in operating activities (2,003,000) (895,000)
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INVESTING ACTIVITIES
Purchase of equipment (1,380,000) (47,000)
Decrease in note receivable from sale of discontinued operations 89,000 86,000
Increase in other assets (8,000) (11,000)
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Net cash provided by (used in) investing activities (1,299,000) 28,000
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FINANCING ACTIVITIES
Proceeds from line of credit 3,343,000 750,000
Warrants issued to majority shareholder 48,000 --
Debt issue costs, net (113,000) --
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Net cash provided by financing activities 3,278,000 750,000
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NET DECREASE IN CASH (24,000) (117,000)
CASH - BEGINNING OF PERIOD 137,000 189,000
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CASH - END OF PERIOD $ 113,000 $ 72,000
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See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wilshire Technologies, Inc. (the "Company") develops, manufactures and markets
engineered polymer products for industrial clean room use. The Company, based in
Carlsbad, California, markets products through its Wilshire Contamination
Control Division, and manufactures certain of its products in its wholly-owned
Mexican subsidiary, Wilshire International de Mexico S.A. de C.V. During 1996,
the Company divested its Medical Products and Transdermal Products divisions and
has since focused primarily on products used in industrial clean rooms, such as
gloves and contamination control products.
BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB for quarterly
reports under Section 13 or 15(d) of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter and six months ended May 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending November 30, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended November 30, 1997.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Significant intercompany amounts and transactions
have been eliminated.
During the period ending February 28, 1998, the Company adopted Statement of
Financial Standards (SFAS) No. 128, Earnings Per Share. The adoption of this
statement did not have a material impact since the Company has reported losses
and the impact of common stock equivalents is not included in the net loss per
share calculations as their effect is anti-dilutive or not required.
2. FINANCIAL STATEMENT INFORMATION
Inventories consist of the following:
MAY 31, NOVEMBER 30,
1998 1997
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Raw materials $569,000 $156,000
Work in process 150,000 265,000
Finished goods 762,000 616,000
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$1,481,000 $1,037,000
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3. NOTE RECEIVABLE
In March 1996, the Board of Directors authorized management to proceed with the
sale of the assets of the Medical Products division which was completed on June
30, 1996, pursuant to a Purchase of Assets and Assumption of Sublease Agreement
with Acacia Laboratories of Texas, Inc. The disposition of this business has
been accounted for as a discontinued operation. Pursuant to the sale of its
Medical Products division, the Company received a $540,000 secured note, payable
over 36 months, and bearing interest at a rate of 5% per annum.
4. LINE OF CREDIT
On January 5, 1996, the Company and Trilon Dominion Partners LLC ("Trilon
Dominion") entered into a Credit Agreement (the "Agreement") for a credit line
of $1,000,000 secured by the Company's assets. Under the terms of the Agreement,
the principal was due on June 30, 1996 and the interest was payable monthly at a
rate of prime plus 3.75%. In connection with the loan, the Company issued Trilon
Dominion a five-year warrant that entitles Trilon Dominion to purchase 100,000
shares of the Company's authorized but unissued common stock at an exercise
price of $0.75 per share, subject to adjustment to protect against dilution. The
warrant is exercisable immediately and expires on January 5, 2001. Also, under
the terms of the Agreement, the Company issued Trilon Dominion a second
five-year warrant which became exercisable when the Company amended the
Agreement on June 30, 1996 to extend the termination date to December 31, 1996.
The second warrant entitles Trilon Dominion to purchase 25,000 shares of the
Company's authorized but unissued common stock at an exercise price equal to the
closing price on June 30, 1996, which was $1.75 per share and it expires on
January 5, 2001.
The Agreement was amended further on September 30, 1996, April 15, 1997, and
September 19, 1997. Each amendment increased the credit line by $1,000,000, up
to a total of $4,000,000, and extended the termination date, up to the current
termination date of June 30, 1998. Trilon Dominion received a warrant to
purchase 100,000 shares at the market price with each credit line increase, and
a warrant to purchase 25,000 shares at the market price with each termination
date extension. Warrants for 225,000 shares were issued in each of fiscal years
1996 and 1997. The Company recorded the estimated fair value of the warrants
issued in fiscal year 1997 at $0.07 per underlying common share with a
corresponding charge to earnings of $16,000 in fiscal 1997.
On January 7, 1998, February 17, 1998, and March 10, 1998, the Company and
Trilon Dominion completed Demand Notes, each for $250,000 at an interest rate of
12.25%, to fund the Company's ongoing operations until a new credit facility
could be completed.
On March 31, 1998 the Company and Trilon Dominion completed an Amended and
Restated Credit Agreement and Revolving Line of Credit (the "Amended Agreement")
which included the principal of $4,000,000 from the previous Agreement and
Amendments, the principal of $750,000 from the three Demand Notes, the accrued
interest and management fees of $543,297 on the Agreement and Notes, and a new
credit line commitment of $2,200,000. Under the terms of the Amended Agreement,
the principal of $7,493,297 is due on December 31, 1998, and the interest is
payable quarterly at an annual rate of 11.5%. In connection with the Amended
Agreement, the Company paid Trilon Dominion $100,000 for debt issuance costs and
issued Trilon Dominion a five-year warrant that entitles Trilon Dominion to
purchase 650,000 shares of the Company's authorized but unissued common stock at
an exercise price of $0.41 per share, subject to adjustment to protect against
dilution. The warrant is exercisable immediately and expires on March 31, 2003.
The Company recorded the estimated fair value of the warrant to purchase 650,000
shares as a debt issuance cost in the second quarter of fiscal year 1998 at
$0.07 per underlying common share. Also, under the terms of the Amended
Agreement, the Company issued Trilon Dominion a second five-year warrant which
will become exercisable if the Company does not pay the principal and interest
due on December 31, 1998 and expires on March 31, 2003. The second warrant
entitles Trilon Dominion to purchase 250,000 shares of the
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Company's authorized but unissued common stock at an exercise price equal to the
market price on December 31, 1998.
5. COMMITMENTS AND CONTINGENCIES
BREAST IMPLANT LITIGATION
During the first six months of 1998, there have been no significant developments
in the Breast Implant Litigation. For information regarding legal proceedings,
refer to the information contained in the Company's Annual Report on Form 10-KSB
for the fiscal year ended November 30, 1997, under Note 6 to the financial
statements included therein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
During the first quarter of 1998, the Company's glove equipment suppliers
completed construction of most of the glove production line and prepared it for
shipment to the Company's manufacturing facility in Tijuana, Mexico. Also, the
Company completed an Amended Credit Agreement with Trilon Dominion which
provides funds for the purchase of the glove production equipment and the
Company's working capital requirements. (See Note 4 to the financial
statements.)
In the second quarter, the Company and representatives of the glove equipment
suppliers have been installing the glove production line in the Company's
Tijuana facility. The line is expected to be operational in the third quarter of
1998.
From time to time the Company may report, through its press releases and/or
Securities and Exchange Commission filings, certain forward-looking statements
that are subject to risks and uncertainties. Important factors that could cause
actual results to differ materially from those projected by such forward-looking
statements are set forth in Exhibit 99 to the Company's Annual Report on Form
10-KSB for the fiscal year ended November 30, 1996. These include operating
losses, liquidity, reliance on major distributors, new product development,
competition, technological change, patents, trade secrets, product liability,
dependence on key suppliers, and dependence on key personnel.
RESULTS OF OPERATIONS
NET SALES
The Company markets its products directly to end users through an internal sales
force utilizing outside distributors. Revenue for all sales is recognized when
title transfers, generally when products are shipped.
Quarter
Net sales increased by $32,000 (3.2%) to $1,032,000 in the second quarter of
1998 from $1,000,000 in the second quarter of 1997. Sales of contamination
control products were favorably impacted by increased shipments of UltraSOLV(TM)
Rollers to a major computer disk drive manufacturer, offset by lower wiper
sales. Also, the Company reported $47,000 in sales of its DuraCLEAN(R)
polyurethane glove produced from the Company's pilot plant operation.
Six Months
Net Sales increased by $494,000 (31.0%) to $2,085,000 in the first six months of
1998 from $1,591,000 in the same period of 1997 due to increased sales of
contamination control wipers, rollers, and scrub pads. The sales increase also
was related to an abnormal inventory reduction by a major distributor of
contamination control wipers in the first quarter of 1997.
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GROSS PROFIT
Quarter
Gross profit increased by $43,000 to $350,000 in the second quarter of 1998 from
$307,000 in the second quarter of 1997, primary due to an improved sales mix of
contamination control products. Gross profit margin as a percent of sales
increased to 33.9% in the second quarter of 1998 from 30.7% in the second
quarter of 1997.
Six Months
Gross profit increased by $64,000 to $444,000 in the first six months of 1998
from $380,000 in the same period of 1997, primarily due to increased sales and
an improved mix of contamination control products. Gross profit margin as a
percent of sales decreased to 21.3% in the first 6 months of 1998 from 23.9% in
the same period of 1997 due to increased costs of the developmental glove plant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include additional costs related to
the Company's marketing activities and administrative costs (such as executive
and office salaries, related payroll expenses, investor relations, professional
fees, supplies and utilities).
Selling, general and administrative expenses increased by $57,000 (11.5%) to
$552,000 in the second quarter of 1998 from $495,000 in the second quarter of
1997. In the first six months of 1998, selling, general and administrative
expenses increased by $172,000 (19.5%) to $1,054,000 from $882,000 in the same
period of 1997. The increase in both periods was primarily due to additional
personnel expenses, increased professional fees, and the timing of expenses
related to the annual Shareholders meeting.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased $54,000 (42.2%) to $74,000 in the
second quarter of 1998 from $128,000 in the second quarter of 1997. In the first
six months of 1998, research and development expenses decreased by $43,000
(22.5%) to $148,000 from $191,000 in the same period of 1997. The decline in
both periods was primarily due to decreased project expenses.
As a percentage of sales, research and development expenses were 7.2% in the
second quarter of 1998, compared to 12.8% in the second quarter of 1997. For the
first six months of 1998, research and development expenses as a percentage of
sales were 7.1%, compared to 12.0% in the same period of 1997.
INTEREST INCOME (EXPENSE), NET
The Company reported higher interest expense in the second quarter and six
months of 1998 versus the same period of 1997 due to increased debt outstanding.
The interest expense was related primarily to the line of credit due to Trilon
Dominion Partners, LLC. (see Note 4).
INCOME TAXES
For the quarters and six months ended May 31, 1998 and May 31, 1997, the Company
sustained losses for both financial reporting and income tax purposes. A tax
provision of $1,000 related to state income taxes was recorded in the financial
statements for 1998 and 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash to
fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; adequate lines of credit; and
financial flexibility to attract long-term capital on satisfactory terms.
During 1997 and the first six months of 1998, the Company has not generated
sufficient cash from operations to fund its working capital and equipment
purchase requirements. Net cash used in operating activities was $2,003,000 in
the first six months of 1998 versus net cash used in operating activities of
$895,000 in the first six months of 1997. The increase in the cash used in
operating activities was due to an increase in the net loss primarily due to
higher interest expense, payments on accounts payable and a reduction in
interest payable related to the Amended Agreement with Trilon Dominion.
Net cash used in investing activities was $1,299,000 in the first six months of
1998, versus net cash provided by investing activities of $28,000 in the first
six months of 1997. The increase in cash used resulted from the purchase of
glove production equipment.
Net cash provided by financing activities was $3,278,000 in the first six months
of 1998 versus $750,000 in the first six months of 1997. The debt financing in
both years was obtained from Trilon Dominion Partners, LLC.
On January 5, 1996, the Company and Trilon Dominion entered into an Agreement
for a credit line of $1,000,000 secured by the Company's assets. Under the terms
of the Agreement, the principal was due on June 30, 1996 and the interest was
payable monthly at a rate of prime plus 3.75%. The Agreement was amended on June
30, 1996, September 30, 1996, April 15, 1997, and September 19, 1997 to a total
credit line of $4 million and a termination date of June 30, 1998. See Note 4 to
the financial statements for details of the Agreement and Amendments.
On January 7, 1998, February 17, 1998, and March 10, 1998 the Company and Trilon
Dominion completed Demand Notes, each for $250,000 at an interest rate of
12.25%, to fund the Company's ongoing operations until a new credit facility
could be completed.
On March 31, 1998 the Company and Trilon Dominion completed an Amended and
Restated Credit Agreement and Revolving Line of Credit (the "Amended Agreement")
which included the principal of $4,000,000 from the previous Agreement and
Amendments, the principal of $750,000 from the three Demand Notes, the accrued
interest and management fees of $543,297 on the Agreement and Notes, and a new
credit line commitment of $2,200,000. Under the terms of the Amended Agreement,
the principal of $7,493,297 is due on December 31, 1998, and the interest is
payable quarterly at an annual rate of 11.5%. In connection with the Amended
Agreement, the Company paid Trilon Dominion $100,000 for debt issuance costs and
issued Trilon Dominion a five-year warrant that entitles Trilon Dominion to
purchase 650,000 shares of the Company's authorized but unissued common stock at
an exercise price of $0.41 per share, subject to adjustment to protect against
dilution. The warrant is exercisable immediately and expires on March 31, 2003.
The Company recorded the estimated fair value of the warrant to purchase 650,000
shares as a debt issuance cost in the second quarter of fiscal year 1998 at
$0.07 per underlying common share. Also, under the terms of the Amended
Agreement, the Company issued Trilon Dominion a second five-year warrant which
will become exercisable if the Company does not pay the principal and interest
due on December 31, 1998 and expires on March 31, 2003. The second warrant
entitles Trilon Dominion to purchase 250,000 shares of the Company's authorized
but unissued common stock at an exercise price equal to the market price on
December 31, 1998.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
For information regarding legal proceedings, refer to the information
contained in the Company's annual report on Form 10-KSB for the fiscal
year ended November 30, 1997 under the heading, "Legal Proceedings" and
Note 6 to the financial statements therein.
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Registrant has solicited proxies pursuant to Regulation 14A of the
Securities Exchange Act (Proxy Statement dated March 20, 1998) for its
Annual Meeting of Shareholders on April 30, 1998. There was no
solicitation in opposition to management's nominees for the directors
listed in the Proxy Statement. All such nominees were elected by the
affirmative vote of 11,885,332 shares. The number of shares represented
at the meeting was 11,890,432. The number of shares not voted was
5,100.
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
None
(B) REPORTS ON FORM 8-K:
None
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SIGNATURES
In accordance with requirements of the Securities Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WILSHIRE TECHNOLOGIES, INC.
Dated: July 10, 1998 By: /s/ James W. Klingler
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James W. Klingler
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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