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 December 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 INCORPORATION) (IRS EMPLOYER 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 Feb. 8, 1999, the registrant had 19,184,751 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 December 31, 1998.............. 3
Consolidated statement of operations for the
three months ended December 31, 1998 and 1997.................. 4
Consolidated statement of cash flows for the
three months ended December 31, 1998 and 1997.................. 5
Notes to consolidated financial statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
Part II Other Information
Item 1. Legal Proceedings.............................................. 11
Item 2. Changes in Securities.......................................... 11
Item 3. Defaults Upon Senior Securities................................ 11
Item 4. Submission of Matters to a Vote of Security
Holders........................................................ 11
Item 5. Other Information.............................................. 11
Item 6. Exhibits and Reports on Form 8-K............................... 11
Signature.............................................................. 13
2
<PAGE>
ROCHEM ENVIRONMENTAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 30,287
Restricted cash ....................................... 16,715
Accounts receivable ................................... 182,920
Inventory ............................................. 10,771
Prepaid expenses ...................................... 16,847
------------
Total current assets .......................... 257,540
Inventory ..................................................... 77,003
Property and equipment, net ................................... 888,961
Intangible assets, net ........................................ 3,676,627
Other assets .................................................. 20,239
------------
Total assets .................................. $ 4,920,370
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 199,919
Accrued expenses ...................................... 22,564
Notes Payable ......................................... 7,379
Notes payable to related parties ...................... 472,801
Payable to related parties ............................ 144,365
Total current liabilities ..................... 847,028
Note payable to bank .......................................... 12,785
------------
Total liabilities ............................. 859,813
Stockholders' equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 19,184,751 issued and
outstanding ................................... 19,185
Preferred stock, no par value, 10,000,000 shares
authorized, none outstanding
Additional paid-in capital ............................ 10,331,330
Accumulated deficit ................................... (6,289,958)
------------
Total stockholders' equity .................... 4,060,557
------------
Total liabilities and stockholders' equity .... $ 4,920,370
============
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 DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Revenues:
Service .................................... $ 167,794 $ 292,825
Product sales .............................. 274,277 $ 100,200
Product demonstrations ..................... 24,840 1,377
------------ ------------
Total revenues ........................ 466,911 394,402
Cost of sales:
Product Costs ............................. 289,646 229,831
Depreciation expense ...................... 36,625 36,938
------------ ------------
Total cost of sales .................... 326,271 266,769
------------ ------------
Gross profit ................................. 140,640 127,633
Selling, general and administrative
expenses:
Depreciation and amortization expense ..... 108,691 115,518
Other expenses ............................ 229,745 210,597
------------ ------------
Total selling, general and
administrative expenses ................ 338,436 326,115
Interest expense, net ........................ 20,789 4,647
------------ ------------
Net loss .................................. (218,585) (203,129)
------------ ------------
Net loss applicable to common stock ....... $ (218,585) $ (203,129)
============ ============
Net loss per share ........................ $ (0.01) $ (0.01)
============ ============
Weighted average shares outstanding .......... 19,184,751 19,084,751
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
ROCHEM ENVIRONMENTAL, INC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss ............................................. ($218,585) ($203,129)
Adjustments to reconcile net loss to net
cash used in operating activites:
Depreciation and amortization ........ 145,316 152,456
Basis of assets sold ................. 0 90,258
Compensation element of stock warrants 0 6,250
Accretion of note discount ........... 6,801 0
Changes in assets and liabilities:
Trade accounts receivable ............ (46,906) (7,479)
Inventory ............................ 89,479 (6,868)
Prepaid expenses ..................... 20,843 14,474
Accounts payable ..................... 6,568 3,976
Accrued expenses ..................... (22,512) (16,128)
Deferred revenues .................... (88,385) 8,222
Payable to related party ............. 17,850 24,487
--------- ---------
Net cash provided by (used in) operating activities .. (89,531) 66,519
--------- ---------
Cash flows from investing activities:
Capital expenditures ................. (113,260) (39,358)
Net cash used in investing activities ................ (113,260) (39,358)
--------- ---------
Cash flows from financing activities:
Increase in restricted cash ........... 13,101 (15,308)
Proceeds from sale of common stock .... 1,000 0
Loan Proceeds ......................... 19,493 0
Loan Payments ......................... (521) (52,181)
--------- ---------
Net cash provided by financing activities ............ 6,871 (67,489)
Net increase (decrease) in cash and cash equivalents . (195,920) (40,328)
Cash and cash equivalents beginning of period ........ 226,207 115,038
--------- ---------
Cash and cash equivalents end of period .............. $ 30,287 $ 74,710
========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................ $ 13,488 $ 4,647
Income tax paid .............................. 0 0
The accompanying notes are an integral part of the consolidated financial
statements.
5
<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, 1998, for details of accounting policies and
accounts.
2. SIGNIFICANT CUSTOMERS AND RELATED PARTY:
The Company had sales constituting approximately 93% of revenue from two
customers during the three months ended December 31, 1998.
3. NOTES PAYABLE:
Notes payable as of December 31, 1998 are as follows:
Notes payable to banks
Woodforest Bank .................................. $ 19,109
Citizens Bank & Trust ............................ $ 1,055
--------
$ 20,164
Notes payable to related party
10.5%, $500,000 face value, interest
imputed at 14.7%,unsecured, principal
and interest due December 31, 1999 ............... $472,801
========
4. SUBSEQUENT EVENT:
In January 1999, the Company was notified of award for the supply of a
second Rochem desalination system to a large engineering company for
installation on a oil platform. The first system was delivered in November
1998. The second system is to be delivered in March 1999 and valued at
approximately $300,000.
6
<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. In the opinion of Management, 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 a distributor 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 18% to $466,911 for the three
months ended December 31, 1998, from $394,402 for the three months ended
December 31, 1997. The increased revenue is primarily due to a sale of a reverse
osmosis system to a large engineering and contruction company for use on a
drilling rig.
The revenue generated by product sales experienced growth during the three
months ended December 31, 1998 with $274,277 of revenue as compared to $100,200
of revenue for the three months ended December 31, 1997. Management believes
that this growth will continue into the second quarter with the delivery of a
second reverse osmosis system. Revenue from service activities of $167,794 is
lower for the three months ended December 31, 1998, from $293,825 for the three
months ended December 31, 1997. Affecting the service activity was hurricane
damage at a large refinery where the Company performs waste water treatment
services. Management believes that service activity during the second quarter of
fiscal 1999 will be in line with revenue generated in the second quarter of
fiscal 1998. During the three months ended December 31, 1998, the Company did
not have any lease activity as compared with $70,200 in the three months ended
December 31, 1998 that later was converted to a product sale through a purchase
agreement. During the three months ended December 31, 1998, the Company
conducted a major test for a petrochemical plant 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 product sales.
7
<PAGE>
Gross profit increased to $140,640 for the three months ended December 31,
1998 as compared to $127,633 for the three months ended December 31, 1997. The
increase was primarily due to higher product sales during the period. The
Company is in negotiations for the sale of equipment for projects that range in
value from $250,000 to $4,500,000. Management can provide no assurance these
negotiations will result in firm contracts.
Selling, general and administrative expenses increased to $338,436 for the
three months ended December 31, 1998 from $326,115 for the nine months ended
December 31, 1997, of which approximately $108,691 and $115,518, 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 $20,789 for the three months ended December
31, 1998 from $4,647 for the three months ended December 31, 1997.
Net loss increased to $218,585 for the three months ended December 31,
1998 from $203,129 for the three months ended December 31, 1997. This increase
is primarily due to the impact of the Company's investments in strategic
personnel that management hopes will result in increased revenue and gross
profit in future periods. Management can provide no assurance these negotiations
will result in firm contracts.
As of December 31, 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 December 31, 1998, the Company had a working capital deficit of
$589,488 and a quick ratio of 0.3 to 1.0 as compared to net working capital
deficit of $392,185 and a quick ratio of 0.4 to 1.0 on December 31, 1997.
Current assets increased to $257,540 as of December 31, 1998 from $238,879 as of
December 31, 1997.
Net cash used in operating activities in the three months ended December
31, 1998 was $89,531. In contrast, in the three months ended December 31, 1997
operating activities provided $66,519 in net cash. This decrease in net cash
provided by operating activities is primarily due to the transfer of equipment
from inventory into operating equipment for service activities.
Net cash used for the purchase of capital equipment during the three
months ended December 31, 1998 was $113,260 as compared to $39,358 during the
three months ended December 31, 1997. This additional service equipment was
acquired to support contract work that is expected to continue through Fiscal
1999.
8
<PAGE>
During the three months ended December 31, 1998, financing activities
provided net cash of $6,871. During the three months ended December 31, 1997,
financing activities used $67,489.
In September 1998, the Company obtained a $500,000 loan from Rochem Group
SA, an affiliate of Fluid Separation Systems. The loan, which bears an interest
rate of 10.5% per annum, with interest payable upon maturity, matures on
December 31, 1999. As part of the loan agreement, the Company agreed to issue a
stock purchase warrant entitling Rochem Group, SA to purchase an aggregate of
1,250,000 shares of the Company's common stock. In the event the loan is paid in
full at December 31, 1998, the exercise price for the Warrant shall be $0.35 per
share for the term of the Warrant. If no principal payment has been made on the
principal balance by December 31, 1998, the exercise price for the Warrant shall
be $0.25 per share. If a partial payment of the principal balance has been made,
the exercise price shall be $0.35 in proportion to the principal made and $0.25
in the proportion to the remaining principal balance. The proceeds of this
transaction were used to repay loans to Fluid Separation Systems totaling
$150,000 in principal. Specifically, these loans were $25,000 in December 1995,
$50,000 in February 1996, $25,000 in July 1996 and $50,000 in January 1997. To
date the Company has not made any principal or interest payment on this loan.
The exercise price for the Warrant is $0.25 per share.
In Fiscal 1998, the Company made capital investments to acquire additional
and to upgrade existing rental service equipment for present customers. These
investments are expected to continue to provide additional cash in Fiscal 1999.
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 1999. Management can provide no
assurance these negotiations will result in firm contracts. 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.
9
<PAGE>
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.
10
<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
11
<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(6) - Employment Agreement With Erick Neuman
16.1(7) - Letter regarding change in certifying accountant
16.2(7) - 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.
12
<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: February 16, 1999 By:/s/ERICK J. NEUMAN
Erick J. Neuman, President;
Secretary; Chief Executive Officer,
And Principal Accounting Officer
Date: February 16, 1999 By:/s/WILLIAM E. BRACKEN
William E. Bracken, Vice President
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 47,002
<SECURITIES> 0
<RECEIVABLES> 182,920
<ALLOWANCES> 0
<INVENTORY> 10,771
<CURRENT-ASSETS> 257,540
<PP&E> 888,961
<DEPRECIATION> (1,054,014)
<TOTAL-ASSETS> 4,920,370
<CURRENT-LIABILITIES> 859,813
<BONDS> 0
0
0
<COMMON> 19,185
<OTHER-SE> 4,041,372
<TOTAL-LIABILITY-AND-EQUITY> 4,060,557
<SALES> 274,277
<TOTAL-REVENUES> 466,911
<CGS> 326,271
<TOTAL-COSTS> 326,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,789
<INCOME-PRETAX> (218,585)
<INCOME-TAX> 0
<INCOME-CONTINUING> (218,585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (218,585)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
