<PAGE>
United States 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, 1996
---------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 0-17569
----------------------------
FIBERCHEM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1063897
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(Address of principal executive offices)
(702) 361-9873
(Issuer's telephone number)
Indicate by check mark 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
----- -----
As of May 8, 1996, the issuer had 21,097,492 shares of Common Stock, par
value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
(UNAUDITED)
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,072,077 $ 911,186
Note receivable from sale of subsidiary 106,390 106,390
Accounts receivable, net of allowance for doubtful
accounts of $123,123 at March 31, 1996
and $111,716 at September 30, 1995 1,152,307 565,766
Inventories 964,520 991,302
Other 121,613 109,844
---------- ----------
Total current assets 4,416,907 2,684,488
---------- ----------
Equipment 575,515 570,716
Less accumulated depreciation (459,993) (433,285)
---------- ----------
Net equipment 115,522 137,431
---------- ----------
Other assets:
Patent and technology costs, net of accumulated
amortization of $1,656,839 at March 31, 1996
and $1,525,105 at September 30, 1995 645,940 726,500
Financing costs, net of accumulated amortization of
$16,478 at March 31, 1996 411,726 --
Other 192,327 147,580
---------- ----------
Total other assets 1,249,993 874,080
---------- ----------
$5,782,422 $3,695,999
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
(UNAUDITED)
----------- -----------
<S> <C> <C>
Current liabilities:
Current installments of note payable to bank $ 7,069 $ 6,832
Accounts payable 79,752 176,774
Accrued expenses 559,954 287,507
Interest payable 28,250 --
Other 2,691 --
----------- -----------
Total current liabilities 677,716 471,113
Senior convertible notes payable 2,825,000 --
Note payable to bank, net of current installments 6,271 9,866
----------- -----------
Total liabilities 3,508,987 480,979
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 216,089 and 214,462 convertible
shares issued and outstanding at March 31, 1996
and September 30, 1995, respectively;
at liquidation value 3,241,335 3,216,930
Common stock, $.0001 par value. Authorized 40,000,000
and 30,000,000 shares at March 31, 1996 and
September 30, 1995, respectively; 20,777,061 and
20,532,033 shares issued and outstanding at
March 31, 1996 and September 30, 1995, respectively 2,077 2,053
Additional paid-in capital 24,907,041 24,844,392
Treasury stock - preferred, 10,000 shares, at cost (150,000) (150,000)
Deficit (24,155,369) (23,094,922)
----------- -----------
3,845,084 4,818,453
Notes receivable for exercise of options (1,571,232) (1,597,837)
Deferred compensation (417) (5,596)
----------- -----------
Total stockholders' equity 2,273,435 3,215,020
----------- -----------
$ 5,782,422 $ 3,695,999
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
--------------------------- ---------------------------
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 566,162 $ 369,002 $ 1,069,503 $ 553,522
Cost of revenues 262,280 169,513 472,716 258,051
----------- ----------- ----------- -----------
Gross profit 303,882 199,489 596,787 295,471
----------- ----------- ----------- -----------
Operating expenses:
Research, development and
engineering 252,247 319,689 524,719 631,271
General and administrative 287,050 362,864 604,738 722,227
Sales and marketing 299,454 181,601 560,628 347,565
----------- ----------- ----------- -----------
Total operating expenses 838,751 864,154 1,690,085 1,701,063
----------- ----------- ----------- -----------
Loss from operations (534,869) (664,665) (1,093,298) (1,405,592)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (46,397) (562) (48,037) (2,132)
Interest income 43,092 56,139 80,888 121,189
Other, net --- --- --- 204
----------- ----------- ----------- -----------
Total other income (expense) (3,305) 55,577 32,851 119,261
----------- ----------- ----------- -----------
Net loss ($538,174) ($609,088) ($1,060,447) ($1,286,331)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares of common stock used in
computing loss per share 20,715,380 20,202,276 20,651,382 20,192,684
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share ($0.02) ($0.03) ($0.05) ($0.06)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Treasury
Preferred Stock Common Stock Additional Stock -
-------------------- ------------------- Paid-In Preferred
Shares Amount Shares Amount Capital Stock Deficit
------- ---------- ---------- ------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053 24,844,392 (150,000) (23,094,922)
Preferred stock dividend:
In stock 15,214 228,210 -- -- (228,210) -- --
In cash -- -- -- -- (23,645) -- --
Common stock issued:
Conversion from preferred stock (13,587) (203,805) 135,870 14 203,791 -- --
For services -- -- 5,204 1 6,667 -- --
Exercise of options -- -- 102,923 9 103,015 -- --
Exercise of warrants -- -- 1,031 -- 1,031 -- --
Payments received on notes receivable for
exercise of options -- -- -- -- -- -- --
Deferred compensation earned -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- (1,060,447)
------- ---------- ---------- ------ ---------- --------- ------------
Balance at March 31, 1996 216,089 3,241,335 20,777,061 2,077 24,907,041 (150,000) (24,155,369)
------- ---------- ---------- ------ ---------- --------- ------------
------- ---------- ---------- ------ ---------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
for Exercise Deferred
of Options Compensation Total
---------- ------------- ----------
<S> <C> <C> <C>
Balance at September 30, 1995 (1,597,837) (5,596) 3,215,020
Preferred stock dividend:
In stock -- -- --
In cash -- -- (23,645)
Common stock issued:
Conversion from preferred stock -- -- --
For services -- -- 6,668
Exercise of options -- -- 103,024
Exercise of warrants -- -- 1,031
Payments received on notes receivable for
exercise of options 26,605 -- 26,605
Deferred compensation earned -- 5,179 5,179
Net loss -- -- (1,060,447)
---------- ------------- ----------
Balance at March 31, 1996 (1,571,232) (417) 2,273,435
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period ended
---------------------------
March 31, March 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,060,447) ($1,286,331)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 26,708 27,779
Amortization of patent and technology costs 131,734 139,810
Amortization of financing costs 16,478 --
Accrued interest on notes receivable for exercise of options (52,767) --
Common stock issued for services 32,216 125,183
Provision for loss on accounts receivable 13,947 --
Changes in assets and liabilities:
Increase in accounts receivable (600,488) (342,442)
Decrease (increase) in inventories 26,782 (227,636)
Increase in other current assets (11,769) (54,426)
(Decrease) increase in accounts payable (97,022) 77,485
Increase (decrease) in accrued expenses 272,447 (4,466)
Increase in interest payable 28,250 --
Increase in other current liabilities 2,691 --
----------- ----------
Net cash used in operating activities (1,271,240) (1,545,044)
----------- ----------
Cash flows from investing activities:
Purchase of equipment (4,799) (21,367)
Payments for patents (51,174) (56,189)
----------- ----------
Net cash used in investing activities (55,973) (77,556)
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period ended
--------------------------
March 31, March 31,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from senior convertible notes payable $2,825,000 $ --
Payment of financing costs (428,204) --
Proceeds from note payable to bank -- 21,000
Payments on note payable to bank (3,358) (1,057)
Proceeds from the exercise of options and warrants 104,055 24,786
Proceeds from interest and notes receivable for exercise of options 14,256 10,166
Payment of dividend on preferred stock (23,645) (53,339)
Purchase of treasury stock - preferred -- (150,000)
---------- ----------
Net cash provided by (used in) financing activities 2,488,104 (148,444)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,160,891 (1,771,044)
Cash and cash equivalents at beginning of period 911,186 3,477,103
---------- ----------
Cash and cash equivalents at end of period $2,072,077 $1,706,059
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
<S> <C> <C>
Noncash investing and financing activities:
Preferred stock converted to common stock $203,805 $ --
Preferred stock issued as dividends 228,210 215,430
Reduction in interest and notes receivable for
exercise of options in exchange for services 22,957 26,833
-------- --------
Interest paid $ 3,309 $ 2,132
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
================================================================================
(1) PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of FiberChem, Inc. ("FCI" or the "Company") and its subsidiaries. All
inter-company accounts and transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
accordance with Item 310 of Regulation S-B and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows of the Company, in conformity
with generally accepted accounting principles. The information furnished, in
the opinion of management, reflects all adjustments (consisting primarily of
normal recurring accruals) necessary to present fairly the financial position as
of March 31, 1996 and September 30, 1995, and the results of operations and cash
flows of the Company for the three-month and six-month periods ended March 31,
1996 and 1995. The results of operations are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended September 30, 1995.
Certain Fiscal 1995 Financial Statement amounts have been reclassified to
conform with the presentation in the Fiscal 1996 Financial Statements.
(2) CONVERTIBLE DEBT
On February 15, 1996, the Company completed an offering under Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8%
Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000.
Interest on the Notes is to be paid semi-annually, commencing August 15, 1996,
at a rate of 8% per annum. The Notes are convertible into shares of common
stock of the Company (the "Common Stock") at a conversion price (the "Conversion
Price") of $0.80 per share at any time after March 26, 1996 and before the close
of business on February 14, 1999. The Conversion Price will be adjusted if the
average closing bid price of the Common Stock during the 30 business days prior
to February 15, 1997 is less than the Conversion Price. In that event, the
Conversion Price will be adjusted to a price representing a 10% discount from
the thirty-day average closing bid price of the Common Stock for the 30 business
days prior to February 15, 1997. As of May 8, 1996, an aggregate face amount of
$250,000 of the Notes had been converted to Common Stock resulting in the
issuance of 312,500 shares of Common Stock.
The Company paid fees and expenses associated with the offering amounting
to $428,204, which is being amortized as interest expense over the three-year
term of the Notes. Also in connection with the Offering, the Company issued to
the Placement Agent for the Offering, for nominal consideration, warrants to
purchase 353,125 shares of Common Stock, at an exercise price of $0.80 per share
(the "Exercise Price"). The Exercise Price will be adjusted in the same event
and in the same manner as the Conversion Price of the Notes. These warrants are
exercisable at any time on or after August 15, 1996 through February 14, 2001.
(3) CAPITAL STOCK
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock"). Each
share of the Convertible Preferred Stock is convertible into ten shares of FCI
Common Stock, initially at $1.50 per share. The conversion ratio is subject to
customary anti-dilution provisions. Dividends are cumulative and are payable
annually, at the
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
================================================================================
sole discretion of the holders, in cash (11%) or additional shares of
Convertible Preferred Stock (8% of the number of shares owned at date of
declaration). In November 1994, the Company paid cash dividends of $53,339
and issued 14,362 shares of Convertible Preferred Stock dividends. Subsequent
to the issuance of the Convertible Preferred Stock dividends, the Company
reacquired 10,000 shares of the Convertible Preferred Stock dividend for $15
per share. In November 1995, the Company paid cash dividends of $23,645 and
issued 15,214 shares of Convertible Preferred Stock dividends. The
Convertible Preferred Stock entitles the holder to a liquidation preference
of $15 per share upon liquidation, dissolution or winding up of the Company.
The Convertible Preferred Stock is redeemable by the Company when and if the
closing bid price of FCI's Common Stock is at least 200% of the conversion
price for twenty consecutive trading days. Upon redemption, the Company would
issue ten shares of its Common Stock for each share of Convertible Preferred
Stock. As of March 31, 1996, the Company had 206,089 shares of Convertible
Preferred Stock outstanding, excluding the 10,000 shares repurchased by the
Company and held as treasury stock.
During the six-month period ended March 31, 1996 ("Six-Month Period 1996"),
the Company: 1) issued 5,204 shares of Common Stock of the Company, valued at
$6,668, to an individual for services; 2) received $103,024 from the exercise of
103,024 options to purchase Common Stock at an exercise price of $1.00 per
share; 3) received $1,031 from the exercise of warrants at an exercise price of
$1.00 per share; 4) received $14,256 cash and $22,957 in services as payments on
notes and interest receivable for the exercise of stock options that were issued
during Fiscal 1994; and 5) expensed an aggregate of $5,179 in connection with
certain deferred compensation arrangements.
Also during the Six-Month Period 1996, the Company issued warrants to
purchase 75,000 shares of its Common Stock at an exercise price of $0.90 per
share, exercisable at any time on or after August 15, 1996 through February 14,
2001, in connection with certain financial, marketing and strategic planning
services. The Company also issued during the Six-Month Period 1996 options to
purchase an aggregate of 191,300 shares of its Common Stock at an exercise price
of $1.00 per share. These options were granted to employees of the Company
under its 1995 Employee Stock Option Plan and are exercisable at any time for a
period ending five years from the date of grant.
(4) REVENUES
Revenues during the Six-Month Period 1996 included sales of the Company's
products for projects for Amoco Production Company, Unocal `76 Products, Shell
Oil Company, Star Enterprises (Texaco, Inc.), Citgo, The BP Oil Company,
Explorer Pipeline Company, and one of the Big Three United States automobile
manufacturers. Revenues from one customer represented 33% of revenues for the
three-month period ended March 31, 1996 (the "Second Quarter 1996") and 18% of
revenues for the Six-Month Period 1996. Revenues from a second customer
represented 53% of revenues for the Second Quarter 1996 and 38% of revenues for
the Six-Month Period 1996.
The Company has incurred substantial losses and may need additional
financing to continue as a going concern. Based on the Company's convertible
debt funding and its continuing equity capital funding efforts, and the
Company's product sales and expected sales, management believes that it will
have adequate capital resources to continue its operations into the foreseeable
future; however, there can be no assurance that forecasted sales levels will be
realized to achieve profitable operations, nor that financing will occur in
amounts sufficient to enable the Company to continue its operations.
--------------------------------------------------
9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Unaudited Consolidated Financial Statements and notes thereto.
MATERIAL CHANGES IN FINANCIAL CONDITION
On February 15, 1996, the Company completed an offering under Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8%
Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000.
Interest on the Notes is to be paid semi-annually, commencing August 15, 1996,
at a rate of 8% per annum. The Notes are convertible into shares of common
stock of the Company (the "Common Stock") at a conversion price (the "Conversion
Price") of $0.80 per share at any time after March 26, 1996 and before the close
of business on February 14, 1999. The Conversion Price will be adjusted if the
average closing bid price of the Common Stock during the 30 business days prior
to February 15, 1997 is less than the Conversion Price. In that event, the
Conversion Price will be adjusted to a price representing a 10% discount from
the thirty-day average closing bid price of the Common Stock for the 30 business
days prior to February 15, 1997. As of May 8, 1996, an aggregate face amount of
$250,000 of the Notes had been converted to Common Stock resulting in the
issuance of 312,500 shares of Common Stock.
The Company paid fees and expenses associated with the offering amounting
to $428,204, which amount is being amortized as interest expense over the three-
year term of the Notes. Also in connection with the Offering, the Company
issued to the Placement Agent for the Offering, for nominal consideration,
warrants to purchase 353,125 shares of Common Stock, at an exercise price of
$0.80 per share (the "Exercise Price"). The Exercise Price will be adjusted in
the same event and in the same manner as the Conversion Price of the Notes.
These warrants are exercisable at any time on or after August 15, 1996 through
February 14, 2001.
Primarily as a result of the sale of the Notes, the Company had net cash
provided by financing activities of $2,488,104, during the six-month period
ended March 31, 1996 ("Six-Month Period 1996") as compared with net cash used in
financing activities of $148,444 during the six-month period ended March 31,
1995 ("Six-Month Period 1995"). Also during the Six-Month Period 1996 the
Company received $104,055 from the exercise of 102,923 options and 1,031
warrants to purchase Common Stock and $14,256 in cash payments on interest and
notes receivable for exercise of options. In addition, the Company paid $23,645
in cash dividends on its Convertible Preferred Stock, as discussed above, and
made payments of $3,558 on its note payable to a bank. During the Six-Month
Period 1995, the Company received $24,786 from the exercise of options to
purchase 16,880 shares of Common Stock and $10,166 in cash payments on notes
receivable for the exercise of stock options. In addition, the Company paid
$53,339 in cash dividends on Convertible Preferred Stock, and purchased 10,000
shares of its Convertible Preferred Stock for $150,000. Also during the Six-
Month Period 1995 the Company borrowed $21,000 from a local bank for the
purchase of equipment and made repayments of $1,057 on the loan.
The Company had net cash used in operating activities of $1,271,240 during
the Six-Month Period 1996 as compared with net cash used in operating activities
of $1,545,044 during the Six-Month Period 1995. The deficit during the Six-
Month Period 1996 is primarily a result of the Company's net loss of $1,060,447,
offset by adjustments to reconcile net loss to net cash used in operating
activities including an increase in accounts receivable of $600,488, a decrease
in inventories of $26,782, and an increase in other current assets of $11,769,
as well as a decrease in accounts payable of $97,022 and increases in accrued
expenses of $272,447, interest payable of $28,250 and other current liabilities
of $2,691. In addition, these adjustments include $32,216 related to the
issuance of Common Stock for services provided to the Company, accrued interest
of $52,767 on notes receivable for the exercise of options, amortization
10
<PAGE>
of patent and technology costs of $131,734, depreciation of $26,708,
amortization of Note financing costs of $16,478, and provision for loss on
accounts receivable of $13,947. The deficit during the Six-Month Period 1995
is primarily a result of the Company's net loss from operations of
$1,286,331, offset by adjustments to reconcile net loss to net cash used in
operating activities including increases in inventories of $227,636, accounts
receivable of $342,442, other current assets of $54,426 and accounts payable
of $77,485 and a decrease in accrued expenses of $4,466. In addition, these
adjustments include an aggregate of $125,183 related to the issuance of
Common Stock for services provided to the Company, amortization of patent and
technology costs of $139,810 and depreciation of $27,779.
The Company had net cash used in investing activities of $55,973 during the
Six-Month Period 1996 as compared to net cash used in investing activities of
$77,556 for the Six-Month Period 1995. During the Six-Month Period 1996, the
Company made payments in the amount of $51,174 for United States and foreign
patent applications and $4,799 for the purchase of equipment. During the Six-
Month Period 1995, the Company made payments of $56,189 for patent applications
and $21,367 for the purchase of equipment.
The Company had working capital of $3,739,191 at March 31, 1996, compared
with working capital of $2,213,375 at September 30, 1995, an increase of
$1,525,816. This increase primarily resulted from the net proceeds of
approximately $2,397,000 from the sale of the Notes, offset in part by the
Company's net loss for the Six-Month Period 1996 of $1,060,447. Stockholders'
equity decreased $941,585 during the Six-Month Period 1996 primarily as a result
of the net loss for the period. In addition, during the Six-Month Period 1996,
the Company paid cash dividends of $23,645 and issued 15,214 shares, valued at
$228,210, of Convertible Preferred Stock dividends.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Revenues for the Six-Month Period 1996 were $1,069,503, an increase of 93%
over revenues for the Six-Month Period 1995. Revenues for the three-month
period ended March 31, 1996 (the "Second Quarter 1996"), were $566,162, an
increase of 53% over revenues for the three-month period ended March 31, 1995
("Second Quarter 1995"). Revenues for the Six-Month Period 1996 were primarily
from sales of the Company's PetroSense-Registered Trademark- Portable
Hydrocarbon Analyzers, PetroSense-Registered Trademark- Continuous Monitoring
Systems and PetroSense-Registered Trademark- Digital Hydrocarbon Probes and
included sales for projects for Amoco Production Company, Unocal `76 Products,
Shell Oil Company, Star Enterprises (Texaco, Inc.), Citgo, The BP Oil Company,
Explorer Pipeline Company, and one of the Big Three United States automobile
manufacturers. During the Second Quarter 1996, the Company recognized revenue
of approximately $270,000 from the sale of its products for installation by a
major American oil company to monitor water discharged from its offshore
production platforms. Revenues for the Second Quarter 1996 and the Six-Month
Period 1996 also include revenues for sales of products under an exclusive
distribution agreement with QED Environmental Systems, Inc. for resale in the
subsurface (groundwater) remediation and monitoring markets.
The Company's products have recently been approved by the State of
Florida's Department of Environmental Protection for use in leak detection
applications in the presence of existing contamination, as well as in non-
contaminated sites. Management believes that this approval provides operators
of above-ground storage tanks a financially advantageous method of compliance
with the State of Florida's developing regulations. To the Company's knowledge,
no other equipment or methods have received such an approval.
Management anticipates that revenues will increase throughout fiscal 1996,
based on indications that purchases of its equipment have been included in the
1996 budgets of companies in the petroleum industry worldwide. Management
believes that the first calendar quarter (the Company's second fiscal quarter)
is traditionally the petroleum industry's lowest quarter in terms of
authorization of capital equipment projects for spending of capital funds, and
believes that its third and fourth fiscal 1996 quarters
11
<PAGE>
will reflect increases in the industry's capital project and spending
authorizations; however, there can be no assurance that sales volume will
reach a level which will result in profitable operations and positive cash
flow on a continuing monthly basis.
The discussions in this Report include forward looking discussions that
involve risks and uncertainties, including the timely development and acceptance
of the Company's products, the impact of competitive products and pricing, and
the other risks detailed from time to time in the Company's SEC reports.
Gross profit for the Six-Month Period 1996 was 56% of sales compared to 53%
of sales for the Six-Month Period 1995. Gross profit for the Second Quarter
1996 was $303,882 or 54% of revenues compared to gross profit of $199,489 or 54%
of revenues for the Second Quarter 1995.
Research, development and engineering expenditures decreased by $106,552,
or 17%, during the Six-Month Period 1996 from the Six-Month Period 1995 and
decreased by $67,442 or 21%, during the Second Quarter 1996 from the Second
Quarter 1995. The decreases are primarily attributable to the Company's current
focus on commercialization of its inventions and technology rather than on new
research activities. The Company has eliminated most of its consulting
agreements for such activities. The Company is actively pursuing
commercialization of its electronic semi-conductor chemical sensor ("Sensor-on-
a-Chip") being developed with Texas Instruments, Inc. and an application of its
hydrocarbon Sensor-on-a-Chip with Gilbarco, Inc. The Company entered into a
development contract with the U. S. Department of Energy, through Bechtel Nevada
Corporation, for the development of a sensor for trichloroethylene, or TCE, a
pollutant often found in groundwater. The contract is anticipated to result in
proof of feasibility and approximately $100,000 in revenue to the Company over a
six-month period. Further development could result in a sensor product line for
the Company's commercial markets, as well as for the Department of Energy's
applications.
General and administrative expenditures decreased by $117,489, or 16%,
during the Six-Month Period 1996 from the Six-Month Period 1995 and decreased by
$75,814, or 21%, during the Second Quarter 1996 from the Second Quarter 1995.
The decreases are primarily attributable to reduced expenditures for legal fees,
salaries and consulting fees.
Sales and marketing expenditures increased by $213,063, or 61%, during the
Six-Month Period 1996 from the Six-Month Period 1995 and increased by $117,853,
or 65%, during the Second Quarter 1996 from the Second Quarter 1995. These
increases are attributable to increased commissions related to the increases in
sales, and to additional technical and other marketing and sales support
activities.
The Company's interest income decreased by $40,301, or 33%, during the Six-
Month Period 1996 from the Six-Month Period 1995 and decreased by $13,407, or
23%, during the Second Quarter 1996 from the Second Quarter 1995 and is
attributable to a decrease in the amount of short-term investments over the two
periods until receipt of approximately $2.5 million in proceeds from the sale of
the Notes on February 15, 1996. Interest expense increased $45,905 and
$45,835 during the Six-Month Period 1996 and the Second Quarter 1996,
respectively, from the year earlier periods as a result of interest expense
accrued on the Notes from February 16, 1996 to March 31, 1996 in the amount of
$28,250 and amortization of the costs associated with the sale of the Notes in
the amount of $16,478.
As a result of the foregoing, the Company incurred a net loss of $538,174,
or a net loss of $.02 per share, for the Second Quarter 1996 as compared to a
net loss of $609,088, or a net loss of $.03 per share, for the Second Quarter
1995. Net loss for the Six-Month Period 1996 was $1,060,447, or a net loss of
$.05 per share, as compared to a net loss of $1,286,331, or a net loss of $.06
per share, for the Six-Month Period 1995.
Management does not consider that inflation has had a significant effect on
the Company's operations to date, nor is inflation expected to have a material
impact over the next year.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K was filed by the Company on March 7, 1996 concerning
the offering and sale of 8% Senior Convertible Notes due February 15, 1999.
------------------------------------------------------------
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIBERCHEM, INC.
May 9, 1996 By: /s/ Geoffrey F. Hewitt
- ----------- --------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
May 9, 1996 By: /s/ Melvin W. Pelley
- ----------- --------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND FOR THE THREE-MONTH AND
SIX-MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,072,077
<SECURITIES> 0
<RECEIVABLES> 1,381,820
<ALLOWANCES> (123,123)
<INVENTORY> 964,520
<CURRENT-ASSETS> 4,416,907
<PP&E> 575,515
<DEPRECIATION> (459,993)
<TOTAL-ASSETS> 5,782,422
<CURRENT-LIABILITIES> 677,716
<BONDS> 2,831,271
0
3,241,335
<COMMON> 2,077
<OTHER-SE> (969,977)
<TOTAL-LIABILITY-AND-EQUITY> 5,782,422
<SALES> 1,069,503
<TOTAL-REVENUES> 1,069,503
<CGS> 472,716
<TOTAL-COSTS> 2,162,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,947
<INTEREST-EXPENSE> 48,037
<INCOME-PRETAX> (1,060,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,060,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,060,447)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Omitted because of antidilutive effect of net loss.
</FN>
</TABLE>
