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 March 31, 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
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ROCHEM ENVIRONMENTAL, INC.
FORM 10-QSB REPORT INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10-QSB PART AND ITEM NO.
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet as of
March 31, 1998. . . . . . . . . . . . . . . . . . . . . 3
Consolidated statement of operations for the three
months ended March 31, 1998 and 1997 . . . . . . . . . 4
Consolidated statement of operations for the six
months ended March 31, 1998 and 1997. . . . . . . . . . 5
Consolidated statement of cash flows for the six
months ended March 31, 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. . . . . . . . . . . . .14
Signature. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 15
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2
<PAGE>
ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $132,824
Trade accounts receivable 105,460
Prepaid expenses 17,026
----------------
Total current assets 255,310
Inventory 84,036
Property and equipment, net 1,010,838
Intangible assets, net 3,959,478
Other assets 20,639
----------------
Total assets $5,330,301
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $234,437
Accrued expenses 74,537
Payable to related parties 201,250
Notes payable to related parties 125,000
----------------
Total current liabilities 635,224
Long term note payable to related party 25,000
----------------
Total liabilities $660,224
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 (5,651,688)
----------------
Total stockholders' equity 4,670,077
----------------
Total liabilities and stockholders' equity $5,330,301
================
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 March 31,
----------------------------
1998 1997
------------ ------------
Revenues:
Service and lease .............................. $ 339,121 $ 263,542
Product sales .................................. 32,021 93,157
------------ ------------
Total revenues ............................ 371,142 356,699
Cost of sales:
Service and lease ............................. 199,352 107,945
Product sales ................................. 12,791 41,954
Depreciation .................................. 36,938 38,306
------------ ------------
Total cost of sales ........................ 249,081 188,205
------------ ------------
Gross profit ..................................... 122,061 168,494
Selling, general and administrative expenses:
Depreciation and amortization expense ......... 115,518 120,653
Other expenses ................................ 182,987 219,165
------------ ------------
Total selling, general and
administrative expenses .................... 298,505 339,818
Interest expense, net ............................ 7,504 11,176
------------ ------------
Net loss ...................................... (183,948) (182,500)
------------ ------------
Net loss applicable to common stock ........... ($ 183,948) ($ 182,500)
============ ============
Net loss per share ............................ ($ 0.01) ($ 0.01)
============ ============
Weighted average shares outstanding .............. 19,084,751 18,959,751
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
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ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six months ended March 31,
----------------------------
1998 1997
------------ ------------
Revenues:
Service and lease .............................. $ 703,523 $ 505,804
Product sales .................................. 62,021 93,157
------------ ------------
Total revenues ............................ 765,544 598,961
Cost of sales:
Service and lease ............................. 410,392 227,077
Product sales ................................. 31,581 41,954
Depreciation expense .......................... 73,876 75,051
------------ ------------
Total cost of sales ........................ 515,849 344,082
------------ ------------
Gross profit ..................................... 249,695 254,879
Selling, general and administrative expenses:
Depreciation and amortization expense ......... 231,035 241,306
Other expenses ................................ 403,586 379,437
------------ ------------
Total selling, general and
administrative expenses .................... 634,621 620,743
Interest expense, net ............................ 12,151 14,407
------------ ------------
Net loss ...................................... (397,077) (380,271)
------------ ------------
Net loss applicable to common stock ........... ($ 397,077) ($ 380,271)
============ ============
Net loss per share ............................ ($ 0.02) ($ 0.02)
============ ============
Weighted average shares outstanding .............. 19,084,751 18,959,751
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
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ROCHEM ENVIRONMENTAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended March 31,
----------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss ............................................... ($397,077) ($380,271)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......... 304,911 316,357
Compensation element of stock warrants . 6,250 18,750
Basis of Equipment Sold ................ 164,886 954
Changes in assets and liabilities:
Trade accounts receivable .............. (4,961) (99,334)
Inventory .............................. (7,033) 0
Prepaid expenses ....................... 31,867 33,382
Other assets ........................... (200) (430)
Accounts payable ....................... 44,953 (7,521)
Accrued expenses ....................... (37,781) (506)
Payable to related party ............... 25,259 2,575
--------- ---------
Net cash provided by (used in) operating activities .... 131,074 (116,044)
--------- ---------
Cash flows from investing activities:
Capital expenditures ................... (59,857) (54,905)
--------- ---------
Net cash used in investing activities .................. (59,857) (54,905)
--------- ---------
Cash flows from financing activities:
Decrease in restricted cash ............. 6,465 5,186
Proceeds from sale of common stock ...... 0 250
Proceeds from notes payable to rel.party. 0 50,000
Payments on loans ....................... (59,896) 0
--------- ---------
Net cash (used in) provided by financing activities .... (53,431) 55,436
Net increase (decrease) in cash and cash
equivalents ............................................ 17,786 (115,513)
Cash and cash equivalents beginning of period .......... 115,038 151,079
--------- ---------
Cash and cash equivalents end of period ................ $ 132,824 $ 35,566
========= =========
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 12,361 $ 6,706
Income tax paid ................................ 0 0
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 83% of revenue from two
customers during the six months ended March 31, 1998.
3. NOTES PAYABLE:
Notes payable as of March 31, 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 July 27,
1998 $ 50,000
Secured by equipment, interest at the prime rate
plus 2%, principal and interest due June 28,
1998 25,000
10%, unsecured, principal and interest due July 19,
1998 50,000
10%, unsecured, principal and interest due
December 25, 1998 25,000
------
150,000
Less: Current portion 125,000
------
$ 25,000
==============
7
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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.
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
technology licensed exclusively to it through a distributor agreement from
Rochem Separation Systems, Inc. ("RSS"), a majority owned subsidiary of Rochem
AG. The patented technology involves 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 28% to $765,544 for the six
months ended March 31, 1998, from $598,961 for the six months ended March 31,
1997. The increased revenue is primarily due to a product lease contract during
the six months ended March 31, 1998 as compared to the six months ended March
31, 1997. The consolidated revenues grew to $371,142 for the three months ended
March 31, 1998, from $356,699 for the three months ended March 31, 1997.
The revenue generated by service and lease activity continued to
experience growth during the six months ended March 31, 1998 with $703,523 of
revenue as compared to $505,804 of revenue for the six months ended March 31,
1997. Revenue from product sales of $62,021 is lower for the six months ended
March 31, 1998, from $93,157 for the six months ended March 31, 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 March 31, 1998, the
Company conducted a major test at a petrochemical plant in Louisiana, sold a
test unit 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 $249,695 for the six months ended March 31,
1998 as compared to $254,879 for the six months ended March 31, 1997. For the
three months ended March 31, 1998 the gross profit decreased to $122,061 as
compared to $168,494 for the three months ended March 31, 1997. This decrease
was primarily due to lower product 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.
9
<PAGE>
Selling, general and administrative expenses increased to $634,621 for
the six months ended March 31, 1998 from $620,743 for the six months ended March
31, 1997, of which approximately $231,035 and $241,306, 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 decreased to $12,151 for the six months ended March 31,
1998 from $14,407 for the six months ended March 31, 1997.
Net loss increased to $397,077 for the six months ended March 31, 1998
from $380,271 for the six months ended March 31, 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 March 31, 1998, the Company had a total of 11 employees, 5 of whom
were involved in field operations and testing, 4 devoted to sales and
demonstration activities and 2 involved in the general administrative and
financial areas.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a working capital deficit of
$379,914 and a quick ratio of 0.4 to 1.0 as compared to net working capital
deficit of $331,835 and a quick ratio of 0.3 to 1.0 on March 31, 1997. This
increase in working capital deficit is primarily due to the increase in current
liabilities for capital expenditures to acquire rental service equipment and is
related to an increase in accounts payable to related parties. Current assets
increased to $255,310 as of March 31, 1998 from $171,330 as of March 31, 1997.
Inventory decreased to $884,036 as of March 31, 1998 from $197,576 at March 31,
1997. This reduction in inventory was due to the transfer of equipment from
inventory to rental service equipment for which the Company had a contract.
Net cash provided by operating activities in the three months ended
March 31, 1998 was $131,074. In contrast, in the three months ended March 31,
1997 operating activities used $116,044 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 six
months ended March 31, 1998 was $59,857 as compared to $54,905 during the three
months ended March 31, 1997. This additional rental service equipment was
acquired to support contract work that is expected to continue through Fiscal
1998.
During the six months ended March 31, 1998, financing activities used
net cash of $53,431. These financing activities were primarily the retirement of
a loan. In contrast, during the six months ended March 31, 1997, financing
activities provided $55,436.
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
10
<PAGE>
due in July 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 six 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 June
1998, July 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.
As noted above, the Company has had a working capital deficit of
$379,914 including $125,000 due and payable within Fiscal 1998 from loan
facilities provided by a related party. In Fiscal 1997, the Company made capital
investments to acquire additional equipment and to upgrade existing rental
service equipment for present customers. These investments are expected to
continue to provide additional cash in Fiscal 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
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, 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.
11
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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
The following matters were submitted to a vote of shareholders
during the Annual Meeting of Stockholders held on March 27, 1998.
On March 27, 1998, the holders of a majority of shares of Common
Stock of the Company approved the election of four directors for
the coming year.
FOR WITHHELD ABSTAIN
--- -------- -------
William E. Bracken 14,461,418 27,945 0
David A. LaMonica 14,461,418 27,945 0
Philip LeFevre 14,461,418 27,945 0
Erick J. Neuman 14,461,418 27,945 0
On March 27, 1998, the holders of a majority of shares of Common
Stock of the Company approved the ratification of Weinstein Spira
& Company, P.C. as independent auditors for the fiscal year
ending September 30, 1998.
FOR AGAINST ABSTAIN
--- ------- -------
14,475,563 13,800 0
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
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: 5/15/98 By: /s/ ERICK J. NEUMAN
--------------------------
Erick J. Neuman, President;
Secretary; Chief Executive
Officer,
Chief Financial Officer, and
Principal
Accounting Officer
Date: 5/15/98 By: /s/ WILLIAM E. BRACKEN
--------------------------
William E. Bracken, Vice
President
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 132,824
<SECURITIES> 0
<RECEIVABLES> 105,460
<ALLOWANCES> 0
<INVENTORY> 84,036
<CURRENT-ASSETS> 255,310
<PP&E> 2,356,843
<DEPRECIATION> 1,331,468
<TOTAL-ASSETS> 5,330,301
<CURRENT-LIABILITIES> 635,224
<BONDS> 0
0
0
<COMMON> 19,085
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,330,301
<SALES> 32,021
<TOTAL-REVENUES> 371,142
<CGS> 249,081
<TOTAL-COSTS> 249,081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,504
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (183,948)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
