<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 June 30, 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 August 8, 1996, the issuer had 25,672,836 shares of Common Stock,
par value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
(UNAUDITED)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,069,338 911,186
Note receivable from sale of subsidiary 106,390 106,390
Accounts receivable, net of allowance for doubtful
accounts of $123,123 at June 30, 1996
and $111,716 at September 30, 1995 1,597,624 565,766
Inventories 869,628 991,302
Other 97,836 109,844
---------- ----------
Total current assets 6,740,816 2,684,488
---------- ----------
Equipment 597,504 570,716
Less accumulated depreciation (472,506) (433,285)
---------- ----------
Net equipment 124,998 137,431
---------- ----------
Other assets:
Patent and technology costs, net of accumulated
amortization of $1,723,631 at June 30, 1996
and $1,525,105 at September 30, 1995 616,539 726,500
Financing costs, net of accumulated amortization of
$31,819 at June 30, 1996 241,019 --
Other 220,205 147,580
---------- ----------
Total other assets 1,077,763 874,080
---------- ----------
$7,943,577 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>
June 30, September 30,
1996 1995
(UNAUDITED)
----------- -------------
<S> <C> <C>
Current liabilities:
Current installments of note payable $ 7,191 6,832
Accounts payable 137,204 176,774
Accrued expenses 539,897 287,507
Interest payable 77,622 --
---------- ----------
Total current liabilities 761,914 471,113
---------- ----------
Senior convertible notes payable 1,800,000 --
Note payable to bank, net of current install 4,427 9,866
---------- ----------
Total liabilities 2,566,341 480,979
---------- ----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 216,089 and 214,462 convertible
shares issued and outstanding at June 30, 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 June 30, 1996 and
September 30, 1995, respectively; 25,508,102 and
20,532,033 shares issued and outstanding at
June 30, 1996 and September 30, 1995, respectively 2,550 2,053
Additional paid-in capital 28,560,699 24,844,392
Treasury stock - preferred, 10,000 shares, at cost (150,000) (150,000)
Deficit (24,719,592) (23,094,922)
---------- ----------
6,934,992 4,818,453
Notes receivable for exercise of options (1,557,548) (1,597,837)
Deferred compensation (208) (5,596)
---------- ----------
Total stockholders' equity 5,377,236 3,215,020
---------- ----------
$7,943,577 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 Nine-month period ended
----------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 719,684 320,534 1,789,187 874,056
Cost of revenues 331,906 140,822 804,622 398,873
----------- ----------- ----------- -----------
Gross profit 387,778 179,712 984,565 475,183
----------- ----------- ----------- -----------
Operating expenses:
Research, development and
engineering 351,649 294,457 876,368 925,728
General and administrative 321,055 374,174 925,793 1,096,401
Sales and marketing 257,365 153,920 817,993 501,485
----------- ----------- ----------- -----------
Total operating expenses 930,069 822,551 2,620,154 2,523,614
----------- ----------- ----------- -----------
Loss from operations (542,291) (642,839) (1,635,589) (2,048,431)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (79,467) (2,318) (127,504) (4,450)
Interest income 57,535 50,297 138,423 171,486
Other, net -- 1,606 -- 1,810
----------- ----------- ----------- -----------
Total other income (expense) (21,932) 49,585 10,919 168,846
----------- ----------- ----------- -----------
Net loss ($564,223) (593,254) (1,624,670) (1,879,585)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares of common stock used in
computing loss per share 22,094,615 20,217,606 21,130,704 20,200,991
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share ($0.03) (0.03) (0.08) (0.09)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- --------------------
<S> <C> <C> <C> <C>
Shares Amount Shares Amount
Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053
Preferred stock dividend:
In stock 15,214 228,210 - -
In cash - - - -
Common stock issued:
For cash - - 3,333,333 333
For services - - 5,204 1
Conversion from senior
convertible notes payable - - 1,281,250 128
Conversion from preferred stock (13,587) (203,805) 135,870 14
Exercise of options - - 219,381 21
Exercise of warrants - - 1,031 -
Payments received on notes
receivable for exercise of options - - - -
Deferred compensation earned - - - -
Net loss - - - -
------- ---------- ---------- ------
Balance at June 30, 1996 216,089 $3,241,335 25,508,102 $2,550
------- ---------- ---------- ------
------- ---------- ---------- ------
</TABLE>
<TABLE>
<CAPTION>
Treasury Notes
Additional Stock - Receivable
Paid-In Preferred for Exercise Deferred
Capital Stock Deficit of Options Compensation Total
------------ ---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 24,844,392 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020
Preferred stock dividend:
In stock (228,210) - - - - -
In cash (23,645) - - - - (23,645)
Common stock issued:
For cash 2,653,984 - - - - 2,654,317
For services 6,667 - - - - 6,668
Conversion from senior
convertible notes payable 883,329 - - - - 883,457
Conversion from preferred stock 203,791 - - - - -
Exercise of options 219,360 - - - - 219,381
Exercise of warrants 1,031 - - - - 1,031
Payments received on notes
receivable for exercise of options - - - 40,289 - 40,289
Deferred compensation earned - - - - 5,388 5,388
Net loss - - (1,624,670) - - (1,624,670)
---------- --------- ----------- ---------- ------ ----------
Balance at June 30, 1996 28,560,699 (150,000) (24,719,592) (1,557,548) (208) 5,377,236
---------- --------- ----------- ---------- ------ ----------
---------- --------- ----------- ---------- ------ ----------
</TABLE>
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
-----------------------
June 30, June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,624,670) (1,879,585)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 39,221 41,435
Amortization of patent and technology costs 198,526 210,861
Amortization of financing costs 45,641 --
Accrued interest on notes receivable for exercise of options (80,189) --
Common stock issued for service 43,522 184,658
Provision for loss on accounts receivable 14,559 --
Changes in assets and liabilities:
Increase in accounts receivable (1,046,417) (467,502)
Decrease (increase) in inventories 121,674 (284,925)
Decrease (increase) in other current assets 12,008 (55,521)
(Decrease) increase in accounts payable (39,570) 114,175
Increase in accrued expenses 252,390 50,266
Increase in interest payable 77,622 --
----------- -----------
Net cash used in operating activities 1,985,683 (2,086,138)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (26,788) (21,768)
Payments for patents (88,564) (67,084)
----------- -----------
Net cash used in investing activities (115,352) (88,852)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
-----------------------
June 30, June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from common stock and warrant Units $3,000,000 --
Proceeds from senior convertible notes payable 2,825,000 --
Payment of financing costs (773,887) --
Proceeds from note payable to bank -- 21,000
Payments on note payable to bank (5,080) (2,666)
Proceeds from the exercise of options and warrants 220,412 47,301
Proceeds from interest and notes receivable for exercise of options 16,387 15,056
Payment of dividend on preferred stock (23,645) (53,339)
Purchase of treasury stock - preferred -- (150,000)
----------- -----------
Net cash provided by (used in) 5,259,187 (122,648)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,158,152 (2,297,638)
Cash and cash equivalents at beginning of period 911,186 3,477,103
----------- -----------
Cash and cash equivalents at end of period $4,069,338 1,179,465
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Interest paid $ 4,242 4,450
----------- -----------
----------- -----------
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $1,025,000 --
Preferred stock converted to common stock 203,805 --
Preferred stock issued as dividends 228,210 --
Reduction in interest and notes receivable for
exercise of options in exchange for services 34,054 37,133
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1996 and September 30, 1995, and the results of operations and
cash flows of the Company for the three-month and nine-month periods ended
June 30, 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 June 30, 1996, an aggregate face amount of $1,025,000 of the
Notes had been converted to Common Stock resulting in the issuance of
1,281,250 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 or until conversion, if earlier, when the
proportionate unamortized amount is charged to additional paid in capital.
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
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
subject to customary anti-dilution provisions. Dividends are cumulative and
are payable annually, at the 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 June 30, 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.
On May 31, 1996 the Company completed an offering under Regulation S, of
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of
$3,000,000 before costs and expenses of the offering. Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common
Stock (the "Unit Warrants"). The Unit Warrants are each exercisable at $1.00
at any time from May 31, 1996 through May 30, 2001. The Company paid fees
and expenses associated with the Unit offering amounting to $345,683. Also
in connection with the Unit offering, the Company issued to the Placement
Agent for the offering, for nominal consideration, warrants to purchase
333,333 shares of Common Stock ("the Placement Agent Warrants"), at an
exercise price of $0.90 per share. This exercise price will be adjusted if
the average closing bid price of the Common Stock during the 30 business days
prior to May 31, 1997 is less than $1.00 to an exercise price representing a
10% discount from such thirty-day average closing bid price. These Placement
Agent Warrants are exercisable at any time from November 30, 1996 through May
30, 2001.
During the nine-month period ended June 30, 1996 (the "Nine-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 $219,381 from
the exercise of 219,381 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 $16,387 cash and $34,054 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 $5,388 in connection with certain deferred compensation
arrangements.
Also during the Nine-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 Nine-Month Period
1996 options to purchase an aggregate of 518,800 shares of its Common Stock
at exercise prices of $1.00 per share. These options were granted to
employees and directors 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 Nine-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, CalNev Pipeline, the U.S. Navy, the
U.S. Federal Bureau of Investigation and one of the Big Three United States
automobile manufacturers. Revenues for the three month period ended June 30,
1996, included a fourth system for Shell Oil Company and fourth and fifth
systems for Unocal '76 Products. Revenues for the Nine-Month
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Period 1996 and Third Quarter 1996 also included sales under certain
distribution agreements. Revenues from one customer represented 69% of
revenues for the three-month period ended June 30, 1996 (the "Third Quarter
1996") and 28% of revenues for the Nine-Month Period 1996. Revenues from a
second customer represented 7% of revenues for the Third Quarter 1996 and 25%
of revenues for the Nine-Month Period 1996. Revenues from a third customer
represented 10% of revenues for the Nine-Month Period 1996.
The Company has incurred substantial losses since its inception and may
need additional financing to continue as a going concern. Based on the
Company's convertible debt funding and its equity capital funding, 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 additional
financing, if needed, will occur in amounts sufficient to enable the Company
to continue its operations.
____________________________________________________
10
<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 June 30, 1996, an aggregate face amount of $1,025,000 of the
Notes had been converted to Common Stock resulting in the issuance of
1,281,250 shares of Common Stock and as of August 8, 1996 an additional
$125,000 face amount of the Notes had been converted resulting in the
issuance of 156,250 additional 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 or until conversion, if earlier, when
the proportionate unamortized amount is charged to additional paid in
capital. 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.
On May 31, 1996 the Company completed an offering also under Regulation
S, of 3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds
of $3,000,000 before costs and expenses of the offering. Each Unit consisted
of one share of Common Stock and one warrant to purchase one share of Common
Stock (the "Unit Warrants"). The Unit Warrants are each exercisable at $1.00
at any time from May 31, 1996 through May 30, 2001. The Company paid fees
and expenses associated with the Unit offering amounting to $345,683. Also
in connection with the Unit offering, the Company issued to the Placement
Agent for the offering, for nominal consideration, warrants to purchase
333,333 shares of Common Stock ("the Placement Agent Warrants"), at an
exercise price of $0.90 per share. This exercise price will be adjusted if
the average closing bid price of the Common Stock during the 30 business days
prior to May 31, 1997 is less than $1.00 to an exercise price representing a
10% discount from such thirty-day average closing bid price. These Placement
Agent Warrants are exercisable at any time from November 30, 1996 through May
30, 2001.
Primarily as a result of the sale of the Notes and the Units, the
Company had net cash provided by financing activities of $5,259,187, during
the nine-month period ended June 30, 1996 ("Nine-Month Period 1996") as
compared with net cash used in financing activities of $122,648 during the
nine-month period ended June 30, 1995 ("Nine-Month Period 1995"). Also
during the Nine-Month Period 1996 the Company received $220,412 from the
exercise of 219,381 options and 1,031 warrants to purchase Common Stock and
$16,387 in cash payments on interest and notes receivable for the exercise of
options. In addition, the Company paid $23,645 in cash dividends on its
Convertible Preferred Stock, as discussed
11
<PAGE>
above, and made payments of $5,080 on its note payable to a bank. During the
Nine-Month Period 1995, the Company received $47,301 from the exercise of
options to purchase 39,385 shares of Common Stock and $15,056 in cash
payments on notes receivable for the exercise of 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 Nine-Month Period 1995 the Company borrowed $21,000 from a
local bank for the purchase of equipment and made repayments of $2,666 on the
loan.
The Company had net cash used in operating activities of $1,985,683
during the Nine-Month Period 1996 as compared with net cash used in operating
activities of $2,086,138 during the Nine-Month Period 1995. The deficit
during the Nine-Month Period 1996 is primarily a result of the Company's net
loss of $1,624,670, offset by adjustments to reconcile net loss to net cash
used in operating activities including an increase in accounts receivable of
$1,046,417, a decrease in inventories of $121,674, and a decrease in other
current assets of $12,008, as well as a decrease in accounts payable of
$39,570 and increases in accrued expenses of $252,390 and interest payable of
$77,622. In addition, these adjustments include $43,522 related to the
issuance of Common Stock for services provided to the Company, accrued
interest of $80,189 on notes receivable for the exercise of options,
amortization of patent and technology costs of $198,526, depreciation of
$39,221, amortization of Note financing costs of $45,641, and provision for
loss on accounts receivable of $14,559. The deficit during the Nine-Month
Period 1995 is primarily a result of the Company's net loss of $1,879,585,
offset by adjustments to reconcile net loss to net cash used in operating
activities including increases in inventories of $284,925, accounts
receivable of $467,502, other current assets of $55,521, accounts payable of
$114,175 and accrued expenses of $50,266. In addition, these adjustments
include an aggregate of $184,658 related to the issuance of Common Stock for
services provided to the Company, amortization of patent and technology costs
of $210,861 and depreciation of $41,435.
The Company had net cash used in investing activities of $115,352 during
the Nine-Month Period 1996 as compared to net cash used in investing
activities of $88,852 for the Nine-Month Period 1995. During the Nine-Month
Period 1996, the Company made payments in the amount of $88,564 for United
States and foreign patent applications and $26,788 for the purchase of
equipment. During the Nine-Month Period 1995, the Company made payments of
$67,084 for patent applications and $21,768 for the purchase of equipment.
The Company had working capital of $5,978,902 at June 30, 1996, compared
with working capital of $2,213,375 at September 30, 1995, an increase of
$3,765,527. This increase primarily resulted from the net proceeds of
approximately $2,397,000 from the sale of the Notes as well as net proceeds
of $2,654,317 from the sale of the Units, offset in part by the Company's net
loss for the Nine-Month Period 1996 of $1,624,670. Stockholders' equity
increased $2,162,216 during the Nine-Month Period 1996 primarily as a result
of the sale of the Units as well as the conversion of a portion of the Notes,
offset in part by the Company's net loss for the period. In addition, during
the Nine-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
The Company entered into an OEM Strategic Alliance Agreement as of June
30, 1996 with Whessoe Varec, Inc. ("Whessoe Varec") whereby Whessoe Varec was
granted exclusive worldwide right to market the Company's products in the
aboveground storage tank (AST) market. The Agreement was accompanied by firm
orders for approximately $1.7 million of the Company's products of which
approximately $500,000 was shipped during June, 1996 and an additional
approximately $500,000 is to be shipped by September 30, 1996.
12
<PAGE>
Whessoe Varec and its parent company Whessoe PLC manufacture and market
(along with other products) products to AST owners worldwide, claim a
substantial portion of the market for its products, and are highly regarded
in the AST market. Management believes its alliance with Whessoe Varec will
provide its products with Whessoe Varec's name recognition, Whessoe Varec's
substantial sales and marketing capabilities and immediate presence among
Whessoe Varec's customer base, all of which are anticipated to contribute to
a relatively more rapid recognition and acceptance of the Company's products
in the AST market.
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 which require
leak detection and/or some form of secondary containment. To the Company's
knowledge, no other equipment or methods have received such an approval.
There are in excess of 32,000 active ASTs in Florida and a deadline of 1999
for compliance.
In response to the growth potential for the global AST market as a
result of the alliance with Whessoe Varec, and the potential of the offshore
and onshore process water markets, the Company restructured its sales and
marketing organization along strategic business unit lines, under the
direction of Tom Collins who has assumed the position of Vice President of
Sales and Marketing.
Strategic business unit (SBU) managers have been appointed for these two
key market areas and consideration is being given to further additions as
circumstances warrant. The Company has also added Dr. Mitch Means to its
technical staff as Director of Applications and Development. Dr. Means
previously worked with Nalco Chemical Company, a leading supplier of
chemicals for water treatment use, and for Turner Design, Inc., a private
instrumentation manufacturer active in the water monitoring field. In
addition, the Company recently added two persons to its customer service and
support staff. Further expansion of the Company's sales staff is expected to
be completed by the end of the Company's fiscal year.
Revenues for the Nine-Month Period 1996 were primarily from sales of the
Company's PetroSense' Portable Hydrocarbon Analyzers, PetroSense' Continuous
Monitoring Systems and PetroSense' 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, CalNev Pipeline, the U.S. Navy, the U.S. Federal
Bureau of Investigation and one of the Big Three United States automobile
manufacturers. Revenues for the three-month period ended June 30, 1996
("Third Quarter 1996"), included a fourth system for Shell Oil Company and
fourth and fifth systems for Unocal '76 Products. During the Third Quarter
1996, the Company recognized revenue of approximately $500,000 from the sale
of its products to Whessoe Varec, Inc. as discussed above. Revenues for the
Third Quarter 1996 and the Nine-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.
Management anticipates that revenues will continue to increase
throughout fiscal 1996 and fiscal 1997, based on indications that purchases
of its equipment have been included in the 1996 budgets of companies in the
petroleum industry worldwide and based on the Company's alliance with Whessoe
Varec. Management believes that the first and second calendar quarters (the
Company's second and third fiscal quarters) are traditionally the petroleum
industry's lowest and second lowest quarters in terms of authorization of
capital equipment projects for spending of capital funds, and believes that
the Company's fourth fiscal 1996 quarter and first fiscal 1997 quarter (the
third and fourth calendar quarters) 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.
To date, spending of capital funds on the Company's products has proceeded at
a slower pace than management had originally anticipated, primarily due to
extended
13
<PAGE>
intervals between purchase and installation of the Company's products. While
these delays have been entirely due to scheduling and/or weather problems,
they have slowed the Company's ability to use recent customers as references,
thus delaying an anticipated "domino effect" on other potential customers.
However, during early August 1996 several important installations were
scheduled and successfully completed.
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 other risks detailed from time to time in the Company's SEC
reports.
Gross profit for the Nine-Month Period 1996 was 55% of sales compared to
54% of sales for the Nine-Month Period 1995. Gross profit for the Third
Quarter 1996 was $387,778 or 54% of revenues compared to gross profit of
$179,712 or 56% of revenues for the Third Quarter 1995. Third Quarter 1996
gross profit reflects the impact of a relatively higher percentage of sales
to distributors (including Whessoe-Varec, as described above), as compared to
Third Quarter 1995.
Research, development and engineering expenditures decreased by $49,360,
or 5%, during the Nine-Month Period 1996 from the Nine-Month Period 1995 and
increased by $57,192 or 19%, during the Third Quarter 1996 over the Third
Quarter 1995. The decrease is primarily attributable to the Company's focus
on commercialization of its inventions and technology rather than on new
research activities during most of 1995 and the first half of 1996. The
Company eliminated most of its consulting agreements and other spending for
such research activities. During the Third Quarter 1996, the Company hired a
Director of Development, whose primary focus is the development and
refinement of applications for current products. Compensation and personnel
relocation costs along with increased spending for development materials and
supplies account for the increase in Third Quarter 1996 expenses over Third
Quarter 1995. The Company is actively pursuing commercialization of its
electronic semi-conductor chemical sensor ("Sensor-on-a-Chip") being
developed with Texas Instruments, Inc. ("TI") and an application of its
hydrocarbon Sensor-on-a-Chip with Gilbarco, Inc. Recently, the Company has
supplied, in cooperation with TI, prototype chips for a breath alcohol
application to a leading manufacturer of ignition interlock devices for the
automotive industry, and is pursuing a strategic alliance for the development
of sensors for the industrial hygiene market with a leading supplier of
equipment in that field. The Company also 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 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. Approximately $50,000 of revenue was recognized under
this contract in the Third Quarter 1996 and the remaining $50,000 is expected
to be recognized during the Fourth Quarter 1996.
General and administrative expenditures decreased by $170,608, or 16%,
during the Nine-Month Period 1996 from the Nine-Month Period 1995 and
decreased by $53,119, or 14%, during the Third Quarter 1996 from the Third
Quarter 1995. The decreases are primarily attributable to reduced
expenditures for salaries and consulting fees.
Sales and marketing expenditures increased by $316,508, or 63%, during
the Nine-Month Period 1996 from the Nine-Month Period 1995 and increased by
$103,445, or 67%, during the Third Quarter 1996 from the Third 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 and personnel.
The Company's interest income decreased by $33,063, or 19%, during the
Nine-Month Period 1996 from the Nine-Month Period 1995 and increased by
$7,238, or 14%, during the Third Quarter 1996 from the Third 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 net proceeds
from the sale of the Notes
14
<PAGE>
on February 15, 1996 and approximately $2.7 million in net proceeds from the
sale of the Units on May 31, 1996. Interest expense increased by $123,054
and by $77,149 during the Nine-Month Period 1996 and the Third Quarter 1996,
respectively, from the year earlier periods as a result of interest expense
accrued on the Notes from February 16, 1996 to June 30, 1996 in the amount of
$77,622 and amortization of the costs associated with the sale of the Notes
in the amount of $45,641.
As a result of the foregoing, the Company incurred a net loss of
$564,223, or a net loss of $.03 per share, for the Third Quarter 1996 as
compared to a net loss of $593,254, or a net loss of $.03 per share, for the
Third Quarter 1995. Net loss for the Nine-Month Period 1996 was $1,624,670
or a net loss of $.08 per share, as compared to a net loss of $1,879,585, or
a net loss of $.09 per share, for the Nine-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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders ("the Meeting") was held
at the Company's offices on May 31, 1996. At the Meeting, the following
directors were re-elected to serve three-year terms or until their successors
have been duly elected and qualified:
NOMINEE FOR ELECTION AGAINST ELECTION AUTHORITY WITHHELD
- ------- ------------ ---------------- ------------------
Scott J. Loomis 17,213,157 23,000 118,900
Walter Haemmerli 17,213,157 23,000 118,900
Also at the Meeting, the Stockholders 1) ratified the adoption of the
Company's 1996 Employee Stock Purchase Plan, providing for the purchase by
employees of up to 250,000 shares of the Company's Common Stock from
time-to-time at 85% of the then prevailing market price, by a vote of
15,799,671 FOR, 601,593 AGAINST and 250,470 ABSTAINING; and 2) ratified the
appointment of KPMG Peat Marwick LLP as the independent public accountants
for the Company for the fiscal year ending September 30, 1996 by a vote of
17,248,004 FOR, 5,841 AGAINST and 12,100 ABSTAINING.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on July 15, 1996 reporting
under Item 5. Other Events the offering and sale of 3,333,333 Units, each
Unit consisting of one share of the Company's Common Stock and one Warrant to
purchase one share of Common Stock, at a price of $0.90 per Unit.
_______________________________________
15
<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.
August 9, 1996 By: /s/ Geoffrey F. Hewitt
- -------------- ------------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
August 9, 1996 By: /s/ Melvin W. Pelley
- -------------- ------------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND FOR THE THREE-MONTH AND
NINE-MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,069,338
<SECURITIES> 0
<RECEIVABLES> 1,827,137
<ALLOWANCES> (123,123)
<INVENTORY> 869,628
<CURRENT-ASSETS> 6,740,816
<PP&E> 597,504
<DEPRECIATION> (472,506)
<TOTAL-ASSETS> 7,943,577
<CURRENT-LIABILITIES> 761,914
<BONDS> 1,804,427
0
3,241,335
<COMMON> 2,550
<OTHER-SE> 2,133,351
<TOTAL-LIABILITY-AND-EQUITY> 7,943,577
<SALES> 1,789,187
<TOTAL-REVENUES> 1,789,187
<CGS> 804,622
<TOTAL-COSTS> 3,424,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,504
<INCOME-PRETAX> (1,624,670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,624,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,624,670)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Omitted because of anti-dilutive effect of net loss.
</FN>
</TABLE>
