U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________.
Commission File No. 0-23226
ROCHEM ENVIRONMENTAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
UTAH 76-0422968
(STATE OF (IRS EMPLOYER
INCORPORATION) IDENTIFICATION NUMBER)
610 N. MILBY ST.
HOUSTON, TEXAS 77003
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 224-7626
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 [ ]
As of May 6, 1998, the registrant had 19,084,751 shares of Common Stock,
par value $0.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format. (Check one):
Yes [ ] No [X]
<PAGE>
ROCHEM ENVIRONMENTAL, INC.
FORM 10-QSB REPORT INDEX
10-QSB PART AND ITEM NO.
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet as of
June 30, 1998. . . . . . . . . . . . . . . . . . . . . 3
Consolidated statement of operations for the three
months ended June 30, 1998 and 1997 . . . . . . . . . 4
Consolidated statement of operations for the nine
months ended June 30, 1998 and 1997. . . . . . . . . . 5
Consolidated statement of cash flows for the nine
months ended June 30, 1998 and 1997 . . . . . . . . . 6
Notes to consolidated financial statements . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 9
Part II Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . .13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 13
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2
<PAGE>
ROCHEM ENVIRONMENTAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 144,997
Restricted cash ............................................. 10,624
Trade accounts receivable ........................... 100,617
Prepaid expenses .................................... 21,493
------------
Total current assets ........................................ 277,731
Inventory ................................................... 99,746
Property and equipment, net ................................. 879,322
Intangible assets, net ...................................... 3,865,194
Other assets ................................................ 20,239
------------
Total assets ........................................ $ 5,142,232
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 245,953
Accrued expenses .................................... 78,926
Payable to related parties .......................... 219,111
Notes payable to related parties .................... 125,000
------------
Total current liabilities ................... 668,990
Long term note payable to related party ..................... 25,000
------------
Total liabilities ........................... 693,990
Stockholders' equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 19,084,751
issued and outstanding ...................... 19,085
Preferred stock, no par value, 10,000,000
shares authorized, none outstanding ......... 0
Additional paid-in capital .......................... 10,302,680
Accumulated deficit ................................. (5,873,523)
------------
Total stockholders' equity .................. 4,448,242
------------
Total liabilities and stockholders'
equity .................................. $ 5,142,232
============
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended June 30,
----------------------------
1998 1997
------------ ------------
Revenue:
Service and lease ............................ $ 366,900 $ 276,040
Product sales ................................ 16,066 114,967
------------ ------------
Total revenues .......................... 382,966 391,007
Cost of sales:
Service and lease ........................... 213,229 119,705
Product costs ............................... 3,315 60,673
Depreciation ................................ 37,993 46,719
------------ ------------
Total cost of sales ...................... 254,537 227,097
------------ ------------
Gross profit ................................... 128,429 163,910
Selling, general and administrative expenses:
Depreciation and amortization expense ....... 115,835 120,653
Other expenses .............................. 230,659 192,600
------------ ------------
Total selling, general and
administrative expenses .................. 346,494 313,253
Interest expense (income), net ................. 3,770 6,023
------------ ------------
Net loss .................................... (221,835) (155,366)
------------ ------------
Net loss applicable to common stock ......... ($ 221,835) ($ 155,366)
============ ============
Net loss per share .......................... ($ 0.01) ($ 0.01)
============ ============
Weighted average shares outstanding ............ 19,084,751 19,022,251
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Nine months ended June 30,
----------------------------
1998 1997
------------ ------------
Revenues:
Service and lease ............................ $ 1,070,422 $ 781,844
Product sales ................................ 78,088 208,124
------------ ------------
Total revenues .......................... 1,148,510 989,968
Cost of sales:
Service and lease ........................... 623,621 346,781
Product Sales ............................... 34,896 102,627
Depreciation Expense ........................ 111,869 121,771
------------ ------------
Total cost of sales ...................... 770,386 571,179
------------ ------------
Gross profit ................................... 378,124 418,789
Selling, general and administrative expenses:
Depreciation and amortization expense ....... 346,870 361,959
Other expenses .............................. 634,245 572,036
------------ ------------
Total selling, general and
administrative expenses ................ 981,115 933,995
Interest expense (income), net ................. 15,922 12,494
------------ ------------
Net loss .................................... (618,913) (527,700)
------------ ------------
Net loss applicable to common stock ......... ($ 618,913) ($ 527,700)
============ ============
Net loss per share .......................... ($ 0.03) ($ 0.03)
============ ============
Weighted average shares outstanding ......... 19,084,751 19,022,251
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... ($618,913) ($527,700)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......... 458,739 483,730
Compensation element of stock warrants . 6,250 25,000
(Gain) loss on sale of equipment ....... 0 (670)
Basis of equipment sold ................ 228,118 0
Changes in assets and liabilities:
Trade accounts receivable .............. (44,830) (35,956)
Inventory .............................. (22,743) (2,633)
Prepaid expenses ....................... 16,974 (24,191)
Other assets ........................... (200) (1,983)
Accounts payable ....................... 56,469 1,037
Accrued expenses ....................... 2,763 13,138
Payable to related party ............... 71,934 114,601
--------- ---------
Net cash provided by operating activities .............. 154,561 44,373
--------- ---------
Cash flows from investing activities:
Capital expenditures ................... (60,547) (155,373)
Proceeds from sale of equipment ........ 0 1,624
--------- ---------
Net cash used in investing activities .................. (60,547) (153,749)
--------- ---------
Cash flows from financing activities:
(Increase) in restricted cash ........... (4,159) 11,616
Proceeds from sale of common stock ...... 0 250
Proceeds from notes payable to rel. party 0 50,000
Proceeds from notes payable ............. 0 120,000
Payments on loans ....................... (59,896) (20,316)
--------- ---------
Net cash provided by financing activities .............. (64,055) 161,550
Net increase (decrease) in cash and cash equivalents ... 29,959 52,174
Cash and cash equivalents beginning of period .......... 115,038 151,079
--------- ---------
Cash and cash equivalents end of period ................ $ 144,997 $ 203,253
========= =========
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 16,197 $ 12,785
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL:
The accompanying consolidated financial statements are unaudited, but, in the
opinion of management, include all adjustments necessary for a fair
presentation of consolidated financial position and results of operations for
the periods presented. Please refer to the audited financial statements for
the year ended September 30, 1997, for details of accounting policies and
accounts.
2. SIGNIFICANT CUSTOMERS AND RELATED PARTY:
The Company had sales constituting approximately 81% of revenue from two
customers during the nine months ended June 30, 1998.
3. NOTES PAYABLE:
Notes payable as of June 30, 1998 are as follows:
Notes payable to banks
9.5% secured by equipment, due in monthly
installments of principal and interest of $3,794,
or on demand, matures September 16, 1998 ................ $ 24,277
Other ..................................................... $ 1,452
--------
$ 25,729
========
Notes payable to related party
10%, unsecured, principal and interest due
August 1998 ............................................. $ 50,000
Secured by equipment, interest at the prime rate
plus 2%, principal and interest due August 1998 ......... 25,000
10%, unsecured, principal and interest due
August 1998 ............................................. 50,000
10%, unsecured, principal and interest due
December 1998 ........................................... 25,000
150,000
Less: Current portion ........................................ 125,000
--------
$ 25,000
========
7
<PAGE>
4. SIGNIFICANT EVENT:
On January 1, 1998, Pall Corporation purchased 8,589,714 shares of the
Company's common stock held by Swiss-based Rochem Group. These shares
represent 45% of the Company's total outstanding shares. This purchase was
part of Pall Corporation's acquisition of the Rochem Group's reverse
osmosis and nanofiltration technologies.
5. SUBSEQUENT EVENT:
In August 1998, the Company was notified of award for the supply of a
Rochem desalination system to a large engineering company for installation
on a oil platform.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements that are based on current
Company expectations and are subject to a number of factors that could cause
actual results to differ materially. Such factors include, but are not limited
to, market demand, competitive pricing considerations, regulatory approval and
market acceptance of new technologies.
RESULTS OF OPERATIONS
Rochem Environmental, Inc., a Utah corporation (the "Company"), is
primarily engaged in the business of providing industrial wastewater treatment
services and capital equipment to companies in the refining, petrochemical and
oil and gas industries. In connection therewith, the Company utilizes patented
reverse osmosis and nanofiltration technology licensed exclusively to it through
a distributor agreement from Pall Rochem (formerly, Rochem Separation Systems,
Inc.), a wholly owned subsidiary of Pall Corporation. The Company also utilizes
patented ultrafiltration technology through an agreement from Rochem
Ultrafiltration. The patented technologies involve the use of Rochem's Disc
Tube(TM) form of membrane separation modules. Management believes this process
is superior to other technologies in its ability to cost effectively treat a
wide variety of wastewaters with the recovery of relatively pure water and the
concentration of products and by-products for reuse or disposal.
The Company's consolidated revenues grew by 16% to $1,148,510 for the nine
months ended June 30, 1998, from $989,968 for the nine months ended June 30,
1997. The increased revenue is primarily due to a product lease contract during
the nine months ended June 30, 1998 as compared to the nine months ended June
30, 1997. The consolidated revenues decreased to $382,966 for the three months
ended June 30, 1998, from $391,007 for the three months ended June 30, 1997.
The revenue generated by service and lease activity continued to
experience growth during the nine months ended June 30, 1998 with $1,070,422 of
revenue as compared to $781,844 of revenue for the nine months ended June 30,
1997. Revenue from product sales of $78,088 is lower for the nine months ended
June 30, 1998, from $208,124 for the nine months ended June 30, 1997. Affecting
the product sales revenues has been the delay in projects that the Company has a
key role to provide equipment. During the three months ended June 30, 1998, the
Company conducted major tests for a petrochemical plant and a by-product
recovery company and began laboratory testing for other new customers. The
Company continues to focus significant resources on the continued growth in
these technology demonstration efforts, as they are essential to the Company's
strategy to increase the product sales.
Gross profit decreased to $378,124 for the nine months ended June 30, 1998
as compared to $418,789 for the nine months ended June 30, 1997. For the three
months ended June 30, 1998 the gross profit decreased to $128,429 as compared to
$163,910 for the three months ended June 30, 1997. This decrease was primarily
due to lower product
9
<PAGE>
sales resulting in a lower contribution to gross profit and service and lease
activities providing a lower gross profit as percent of revenue than service and
lease activities during the previous period. The Company is in negotiations for
the sale of equipment for projects that range in value from $250,000 to
$4,500,000.
Selling, general and administrative expenses increased to $981,913 for the
nine months ended June 30, 1998 from $933,995 for the nine months ended June 30,
1997, of which approximately $346,870 and $361,959, respectively, were non-cash
expenses associated with amortization and depreciation. This increase resulted
primarily from an increase in personnel and related costs. These costs
associated with personnel are related with the Company's growth strategy and
expanded sales and demonstration activities.
Interest expense increased to $16,197 for the nine months ended June 30,
1998 from $12,785 for the nine months ended June 30, 1997.
Net loss increased to $618,913 for the nine months ended June 30, 1998
from $527,700 for the nine months ended June 30, 1997. This increase is
primarily due to the impact of the Company's investments in strategic personnel
that are expected to result in increased revenue and gross profit in future
periods.
As of June 30, 1998, the Company had a total of 10 employees, 5 of whom
were involved in field operations and testing, 3 devoted to sales and
demonstration activities and 2 involved in the general administrative and
financial areas.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had a working capital deficit of $391,259
and a quick ratio of 0.4 to 1.0 as compared to net working capital deficit of
$410,296 and a quick ratio of 0.4 to 1.0 on June 30, 1997. This decrease in
working capital deficit is primarily due to the decrease in current liabilities.
Current assets decreased to $277,731 as of June 30, 1998 from $326,782 as of
June 30, 1997. Inventory increased to $99,746 as of June 30, 1998 from $84,298
at June 30, 1997.
Net cash provided by operating activities in the nine months ended June
30, 1998 was $154,561. In contrast, in the nine months ended June 30, 1997
operating activities provide $44,373 in net cash. This increase in net cash
provided by operating activities is primarily due to the Company's improvement
in gross profit net of non-cash adjustments.
Net cash used for the purchase of capital equipment during the nine months
ended June 30, 1998 was $60,547 as compared to $153,749 during the nine months
ended June 30, 1997. This additional rental service equipment was acquired to
support contract work that is expected to continue through Fiscal 1998.
During the nine months ended June 30, 1998, financing activities used net
cash of $64,055. These financing activities were primarily the retirement of a
loan. In contrast, during the nine months ended June 30, 1997, financing
activities provided $161,550.
10
<PAGE>
In January 1997, the Company obtained a $50,000 loan from Fluid Separation
Systems for working capital needs. This loan bears interest at 10% due at
maturity and is due in August 1998. In May 1997, the Company obtained a $120,000
loan from Citizens Bank and Trust to partially fund the construction of
equipment for which the Company has a rental contract. This loan was for nine
months and was fully repaid in November 1997.
In Fiscal 1996, the Company had not generated sufficient internal cash
flow to fund operations and to satisfy the debt obligations to Rochem AG and
Lefco. In January 1996, the Company entered into an agreement with Rochem AG
whereby Rochem AG converted the principal amount of its January 1995 $50,000
loan into 500,000 shares of Company Common Stock, purchased an additional
500,000 shares of Company common stock for $50,000, and agreed to provide the
Company a $100,000 credit facility to meet working capital needs during Fiscal
1996. Through this credit facility, Fluid Separation Systems loaned the Company
$25,000 in December 1995, $50,000 in February 1996 and $25,000 in July 1996. On
January 31, 1996, the Company used the proceeds of these transactions to retire
a $50,000 loan from Citizens Bank. In December 1996, Fluid Separation Systems
has granted extensions to the maturity date and waived interest payments until
the maturity date of the loan. The loans bear interest of prime plus 2% for the
December 1995 loan and 10% for the February and July 1996 loans and are due
August 1998, August 1998 and December 1998, respectively.
Additionally, in January 1996, Lefco agreed to convert its January 1995
$50,000 loan into 500,000 shares of Company common stock and provided a $50,000
credit facility to be utilized by the Company to meet working capital needs
during the 1996 fiscal year. In September 1996, the Company exercised the
$50,000 credit facility with Lefco. This loan was repaid in September 1997
through the Company obtaining a loan for the final payment of $43,249 from
Woodforest National Bank. This loan requires monthly installments of principal
and interest of $3,794 and matures September 1998.
The Company is currently in negotiations for several contracts that the
Company believes will generate sufficient cash flows to continue to fund
operations and meet working capital needs during Fiscal 1998. Because the timing
of these projects cannot be controlled, the Company is evaluating and exploring
other financing
11
<PAGE>
alternatives. In the event additional funding is required, the Company will
consider alternatives to do so through a combination of efforts or methods,
including additional extensions on its notes payable, loans, financing rental
service equipment or contracts, joint ventures, equity investors, venture
capital groups, institutions, issuance of convertible or subordinated debt, or a
form of business combinations. Should the need arise for the use of any of these
methods to raise capital, there can be no assurances that any of these
alternatives will be available to the Company.
IMPACT OF YEAR 2000
The Year 2000 is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company presently believes
that the Year 2000 Issue will not pose significant operational problems for its
computer systems.
The Company has initiated formal communications with all of its
significant suppliers and large customers, to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. There can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for services it has provided.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference thereto:
Exhibit
NUMBER IDENTIFICATION OF EXHIBIT
2.1(1) - Reorganization Agreement
3.1(2) - Amended and Restated Articles of Incorporation
3.2(5) - Bylaws
4.1(5) - Common Stock Specimen
4.2(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock
4.3(4) - Certificate of Designation of Preferences, Rights
and Limitations of Series B Preferred Stock
10.1(2) - Distributor Agreement
10.2(4) - Asset Purchase Agreement
10.3(2) - Term Sheet
10.4(6) - Facilities Lease Agreement
10.5(6) - Termination Agreement Between Company and GH
Venture Group
10.6(6) - Agreement Between Company and Lefco Environmental
13
<PAGE>
Technology, Inc.
10.7(6) - Agreement Between Company and Rochem Separation
Systems, Inc.
10.8(6) - Agreement Between Company and Rochem AG
10.9(7) - Employment Agreement With Erick Neuman
16.1(3) - Letter regarding change in certifying accountant
16.2(3) - Letter regarding change in certifying accountant
--------------------
(1) Previously filed as an exhibit on Form 8-K dated July 20,
1993.
(2) Previously filed as an exhibit on Form 8-K dated September 30,
1993.
(3) Previously filed as an exhibit on Form 8-K dated November 5,
1993.
(4) Previously filed as an exhibit on Form 8-K dated November 19,
1993.
(5) Previously filed as an exhibit on Form 8-K dated January 13,
1994.
(6) Previously filed as an exhibit on Form 10-KSB for the fiscal
year ended September 30, 1995.
(7) Previously filed as an exhibit on Form 8-K dated October 24,
1997.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ROCHEM ENVIRONMENTAL, INC.
(Registrant)
Date: August 21, 1998 By: /s/ ERICK J. NEUMAN
Erick J. Neuman, President;
Secretary; Chief Executive Officer,
And Principal Accounting Officer
Date: August 21, 1998 By: /s/ WILLIAM E. BRACKEN
-----------------------------
William E. Bracken, Vice President
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 155,621
<SECURITIES> 0
<RECEIVABLES> 100,617
<ALLOWANCES> 0
<INVENTORY> 99,746
<CURRENT-ASSETS> 277,731
<PP&E> 2,218,316
<DEPRECIATION> 1,507,355
<TOTAL-ASSETS> 5,142,232
<CURRENT-LIABILITIES> 668,990
<BONDS> 0
0
0
<COMMON> 19,085
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,142,232
<SALES> 16,066
<TOTAL-REVENUES> 382,966
<CGS> 254,537
<TOTAL-COSTS> 254,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,770
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (221,835)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
