<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, 1997 .
----------------------------------
[ ] 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 12, 1997, the issuer had 25,744,342 shares of Common Stock, par
value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, March 31,
1996 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,065,572 $848,695
Accounts receivable, net of allowance for doubtful
accounts of $204,711 as of September 30, 1996
and $229,712 as of March 31, 1997 305,473 591,277
Inventories 1,457,135 1,910,808
Other 59,060 88,741
---------- ----------
Total current assets 4,887,240 3,439,521
---------- ----------
Equipment 616,192 720,969
Less accumulated depreciation (483,827) (518,061)
---------- ----------
Net equipment 132,365 202,908
---------- ----------
Other assets:
Patent and technology costs, net of accumulated
amortization of $1,791,252 at September 30, 1996
and $1,927,430 at March 31, 1997 589,226 487,824
Financing costs, net of accumulated amortization of
$49,645 at September 30, 1996 and
$85,098 at March 31, 1997 204,245 168,792
Other 247,383 18,904
---------- ----------
Total other assets 1,040,854 675,520
---------- ----------
Total assets $6,060,459 $4,317,949
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, March 31,
1996 1997
---------------- -------------
<S> <C> <C>
Current liabilities:
Current installments of notes payable $7,315 $6,954
Accounts payable 270,503 250,982
Accrued expenses 206,565 217,428
Interest payable 18,016 18,016
------------ ------------
Total current liabilities 502,399 493,380
Senior convertible notes payable 1,675,000 1,675,000
Notes payable, net of current installments 2,551 10,928
------------ ------------
Total liabilities 2,179,950 2,179,308
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 205,089 and 218,998
convertible shares issued and outstanding at
September 30, 1996 and March 31, 1997,
respectively; at liquidation value 3,076,335 3,284,970
Common stock, $.0001 par value. Authorized
40,000,000 shares; 25,705,216 and 25,719,259
shares issued and outstanding at September 30,
1996 and March 31, 1997, respectively 2,571 2,572
Additional paid-in capital 28,714,804 27,244,294
Accumulated Deficit (26,369,551) (28,085,758)
------------ ------------
5,424,159 2,446,078
Notes receivable for exercise of options (1,543,650) (307,437)
------------ ------------
Total stockholders' equity 3,880,509 2,138,641
------------ ------------
Total liabilities & stockholders' equity $6,060,459 $4,317,949
------------ ------------
------------ ------------
</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 1997 1996 1997
(Restated) (Restated)
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $7,864 $619,609 $511,205 $735,183
Cost of revenues 3,703 323,180 214,139 387,102
---------- ---------- ----------- ----------
Gross profit 4,161 296,429 297,066 348,081
---------- ---------- ----------- -----------
Operating expenses:
Research, development and
engineering 252,247 313,955 524,719 654,761
General and administrative 415,295 311,248 732,983 612,506
Sales and marketing 182,898 267,357 444,072 512,529
---------- ---------- ----------- -----------
Total operating expenses 850,440 892,560 1,701,774 1,779,796
---------- ---------- ----------- -----------
Loss from operations (846,279) (596,131) (1,404,708) (1,431,715)
---------- ---------- ----------- -----------
Other income (expense):
Interest expense (46,397) (55,755) (48,037) (111,104)
Interest income 43,092 17,053 80,888 74,824
Other, net -- (248,212) -- (248,212)
---------- ---------- ----------- -----------
Total other income (expense) (3,305) (286,914) 32,851 (284,492)
---------- ---------- ----------- -----------
Net loss ($849,584) ($883,045) ($1,371,857) ($1,716,207)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares of common stock used in
computing net loss per share 20,715,380 25,718,423 20,651,382 25,714,329
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net loss per share ($0.04) ($0.03) ($0.07) ($0.07)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Notes
Preferred Stock Common Stock Additional Accumu- Receivable
---------------------- ------------------- Paid-In lated for Exercise
Shares Amount Shares Amount Capital Deficit of Options Total
----------- ---------- ---------- ------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 205,089 $3,076,335 25,705,216 $2,571 28,714,804 (26,369,551)(1,543,650) 3,880,509
Preferred stock dividend:
In stock 13,909 208,635 -- -- (208,635) -- -- --
In cash -- -- -- -- (46,171) -- -- (46,171)
Common stock issued:
Exercise of options -- -- 14,043 1 14,042 -- -- 14,043
Write down of notes receivable for
exercise of options -- -- -- -- (1,229,746) -- 1,229,746 --
Payments received on notes receivable for
exercise of options -- -- -- -- -- -- 6,467 6,467
Net loss -- -- -- -- -- (1,716,207) -- (1,716,207)
----------- ---------- ---------- ------- ---------- ------------ ---------- ---------
Balance at March 31, 1997 218,998 $3,284,970 25,719,259 $2,572 27,244,294 (28,085,758) (307,437) 2,138,641
----------- ---------- ---------- ------- ---------- ------------ ---------- ---------
----------- ---------- ---------- ------- ---------- ------------ ---------- ---------
</TABLE>
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period ended
----------------------------
March 31, March 31,
1996 1997
(Restated)
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,371,857) ($1,716,207)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 26,708 34,234
Amortization of patent and technology costs 131,734 136,178
Amortization of financing costs 16,478 35,453
Accrued interest on notes receivable for exercise of options (52,767) (26,985)
Write off of accrued interest on notes receivable
for exercise of options -- 248,212
Reduction in notes receivable for exercise
of options in exchange for services -- 636
Common stock issued for services 32,216 --
Provision for loss on accounts receivable 50,725 25,000
Inventory valuation allowance 55,242 25,000
Changes in assets and liabilities:
Increase in accounts receivable (81) (310,804)
Increase in inventories (170,896) (478,673)
Increase in other current assets (11,769) (29,681)
Decrease in accounts payable (97,022) (19,521)
Increase in accrued expenses 89,108 10,863
Increase in interest payable 28,250 --
Increase in other current liabilities 2,691 --
------------ -------------
Net cash used in operating activities (1,271,240) (2,066,295)
------------ -------------
Cash flows from investing activities:
Purchase of equipment (4,799) (83,504)
Payments for patents (51,174) (34,776)
------------ -------------
Net cash used in investing activities (55,973) (118,280)
------------ -------------
</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 1997
(Restated)
------------ -------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from senior convertible notes payable $2,825,000 $ --
Payment of financing costs (428,204) --
Payments on notes payable (3,358) (13,257)
Proceeds from the exercise of options and warrants 104,055 14,043
Proceeds from interest and notes receivable for exercise of options 14,256 13,083
Payment of dividend on preferred stock (23,645) (46,171)
------------ -------------
Net cash provided by (used in) financing activities 2,488,104 (32,302)
------------ -------------
Net increase (decrease) in cash and cash equivalents 1,160,891 (2,216,877)
Cash and cash equivalents at beginning of period 911,186 3,065,572
------------ -------------
Cash and cash equivalents at end of period $2,072,077 $848,695
------------ -------------
------------ -------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Reduction in additional paid-in capital due to $ -- $1,229,746
write down of notes receivable for exercise of options
Preferred stock converted to common stock 203,805 --
Preferred stock issued as dividends 228,210 208,635
Equipment purchased through capital lease -- 21,273
Reduction in interest and notes receivable for
exercise of options in exchange for services 22,957 636
------------ -------------
------------ -------------
Interest paid $3,309 $75,651
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, 1997 and September 30, 1996, and the results of operations and cash
flows of the Company for the three-month and six-month periods ended March 31,
1997 and 1996. 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, 1996.
Certain Fiscal 1996 Financial Statement amounts have been reclassified to
conform with the presentation in the Fiscal 1997 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, initially, $0.80 per share at any time after March 26, 1996 and
before the close of business on February 14, 1999. The Conversion Price was to
be adjusted if the average closing bid price of the Common Stock during the 30
business days prior to February 15, 1997 was less than the Conversion Price.
Accordingly, the Conversion Price has been adjusted to $0.4078, 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 March
31, 1997, an aggregate face amount of $1,150,000 of the Notes had been converted
to Common Stock resulting in the issuance of 1,437,500 shares of Common Stock.
Based on the adjusted Conversion Price of $0.4078, an aggregate of 4,107,406
shares of Common Stock would be issuable if the remaining $1,675,000 face amount
of Notes were converted.
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 was to be adjusted in the same event and in the same manner as the
Conversion Price of the Notes. Accordingly, the Exercise Price has been
adjusted to $0.4078 per share. Also in accordance with the terms of the
warrants, the number of shares exercisable has been adjusted, based on the
adjusted Exercise Price, to 692,742 shares of Common Stock. 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
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
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 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 $53,340 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.
These reacquired shares were retired during fiscal 1996. In November 1995,
the Company paid cash dividends of $23,645 and issued 15,214 shares of
Convertible Preferred Stock dividends. In November 1996, the Company paid
cash dividends of $46,171 and issued 13,909 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, 1997, the Company had
218,998 shares of Convertible Preferred Stock outstanding.
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 and the number of shares issuable upon exercise is to
be adjusted based on the initial and adjusted exercise prices. Based on closing
bid prices since April 18, 1997, the Company expects that the adjusted exercise
price will approximate $0.28, and the adjusted number of warrants exercisable at
$0.28 will approximate 1,200,000. These Placement Agent Warrants are
exercisable at any time from November 30, 1996 through May 30, 2001.
During the six-month period ended March 31, 1997 (the "Six-Month Period
1997"), the Company received $14,043 from the exercise of 14,043 options to
purchase Common Stock at an exercise price of $1.00 per share and received
$13,083 in cash and $636 in services as payments on notes and interest
receivable for the exercise of stock options that were issued during Fiscal
1994.
Also during the Six-Month Period 1997, the Company issued options to
purchase an aggregate of 40,000 shares of its Common Stock at exercise prices of
$1.00 per share. These options were granted to employees of the Company under
its Employee Stock Option Plans and are exercisable at any time for a period
ending five years from the date of grant.
(4) REVENUES
Subsequent to September 30, 1996, the Company reviewed its revenue
recognition policy and determined that contingencies associated with
installations, modifications in sales terms or other conditions existed or had
arisen with respect to certain sales transactions previously recorded by the
Company and concluded that sales transactions aggregating approximately
$1,800,000 should not be recorded as revenue in the fiscal year ended September
30, 1996. As a result, the Company has restated its financial results for the
second fiscal quarter ended March 31, 1996 and the third fiscal quarter ended
June 30, 1996. The restated results for the second fiscal quarter ended March
31, 1996 are included in the accompanying financial statements.
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
The Company has incurred substantial losses since its inception and
Management recognizes that the Company must generate additional revenues or
reductions in operating costs and may need additional financing to continue its
operations. Based on the Company's commitments from Whessoe Varec and others,
and the Company's product sales and expected sales and new product developments
and development agreements, management believes that it will have adequate
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, can be
obtained on terms satisfactory to the Company, if at all, nor in an amount
sufficient to enable the Company to continue its operations. During February
1997, Whessoe Varec paid approximately $60,000 and in April 1997 $250,000 of the
approximately $1,000,000 originally due on January 2, 1997. Whessoe Varec
continues to confirm their commitment to the market and the Company's products;
however, Whessoe Varec has not committed to a payment schedule for the remaining
amount due.
(5) SUBSEQUENT EVENTS AND EFFECTS ON CURRENT FINANCIAL STATEMENTS
Primarily in order to provide a means to raise additional cash through
existing outstanding options, warrants and promissory notes receivable, on April
4, 1997, the per share exercise price of all employee stock options, all Unit
and other Warrants (except Class D Warrants) were decreased as follows: to
$0.32 from April 4, through April 11, 1997, and thereafter adjusted weekly to
the average closing bid price for the five prior trading days less a discount of
10% (but never to a price less than $0.30) through May 16, 1997, when the prices
revert to the original prices. As of May 12, 1997 the Company had received
approximately $8,000 for the exercise of 25,083 options at prices ranging from
$0.30 to $0.32 per share. Effective April 17, 1997 the per share exercise price
of Class D Warrants was decreased to $0.30 through May 16, 1997 when the
exercise price reverts to its prior $1.10 per share. In accordance with
Securities Exchange Act of 1934 rules, offers to exercise Class D Warrants may
be withdrawn at any time through May 16, 1997; therefore, no Class D Warrants
have yet been exercised since April 17, 1997.
In March 1994, the Company's Board of Directors approved a plan by which
employees and directors of the Company would be eligible to exercise stock
options through the execution of promissory notes. As of March 15, 1994, the
Company received promissory notes aggregating $1,815,099 for the exercise of
1,210,066 stock options at $1.50 per share. The underlying Common Stock is
being held in escrow, as collateral, until payment is made on the promissory
notes. As of March 31, 1997, an aggregate of $373,385 had been paid on these
notes, an aggregate of $47,999 of interest had been paid, and an additional
$248,212 of interest had been accrued (through December 31, 1996) but remained
unpaid.
In conjunction with the temporary reduction of the exercise prices of the
options and warrants effective April 4, 1997 and Class D Warrants effective
April 17, 1997, as described above, the remaining unpaid principal on the
promissory notes may be fully paid in an amount determined by multiplying the
unpaid balance by a fraction, the numerator of which is the revised exercise
price, and the denominator of which is $1.50 (the original exercise price). If
the unpaid principal is not so paid by May 16, 1997, the underlying collateral
shares will be forfeited and all unpaid principal and accrued interest will be
extinguished. The consolidated financial statements as of and for the period
ended March 31, 1997 assume that all unpaid principal will be paid at the
fractional amount described above, and the two affected components of
stockholders' equity--notes receivable and additional paid in capital--have been
reduced accordingly. In addition, no interest income has been accrued for the
three-month period ended March 31, 1997, and all unpaid accrued interest
receivable, aggregating $248,212, has been expensed in the current period.
As of May 12, 1997, the Company had received $142,208 in payment for
457,892 escrowed shares at prices ranging from $0.30 to $0.32 per share, which
amount liquidated $686,838 of original note principal.
-------------------------------------------------------------
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
The Company had working capital of $2,946,141 at March 31, 1997, compared
with working capital of $4,384,841 at September 30, 1996, a decrease of
$1,438,700. Also the Company had decreases in cash and cash equivalents of
$2,216,877 and in stockholders' equity of $1,741,868. These decreases are
primarily a result of the Company's net loss for the Six-Month Period 1997 of
$1,716,207. In addition, during the Six-Month Period 1997, the Company paid
cash dividends of $46,171 on its Convertible Preferred Stock and issued 13,909
shares, valued at $208,635 of Convertible Preferred Stock dividends.
The Company had net cash used in operating activities of $2,066,295 during
the Six-Month Period 1997 as compared with net cash used in operating activities
of $1,271,240 during the six-month period ended March 31, 1996 ("Six-Month
Period 1996"). The deficit during the Six-Month Period 1997 is primarily a
result of the Company's net loss of $1,716,207, and by adjustments to reconcile
net loss to net cash used in operating activities, including an increase in
accounts receivable of $310,804, as well as increases in inventories of
$478,673, other current assets of $29,681 and accrued expenses of $10,863 and a
decrease in accounts payable of $19,521. In addition, these adjustments include
depreciation of $34,234, amortization of patent and technology costs of $136,178
and amortization of financing costs of $35,453, accrued interest of $26,985 on
notes receivable for exercise of options, as well as a reduction of $636 in
notes receivable for the exercise of options in exchange for services, and
provisions for loss on accounts receivable of $25,000 and inventory valuation
allowance of $25,000. Also, as discussed in Note 3 to the Consolidated
Financial Statements, the Company expensed $248,212 in accrued interest
receivable on notes receivable, originated in March 1994, for the exercise of
stock options.
The deficit during the Six-Month Period 1996 is primarily a result of the
Company's net loss of $1,371,857, offset by adjustments to reconcile net loss to
net cash used in operating activities including increases in accounts
receivable of $81, inventories of $170,896, other current assets of $11,769,
accrued expenses of $89,108, interest payable of $28,250, and other current
liabilities of $2,691, and a decrease in accounts payable of $97,022. 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 of patent and technology
costs of $131,734 and depreciation of $26,708, and provisions for loss on
accounts receivable of $50,725 and inventory valuation allowance of $55,242.
The Company had net cash used in financing activities of $32,302 during the
Six-Month Period 1997 as compared with net cash provided by financing activities
of $2,488,104 during the Six-Month Period 1996. During the Six-Month Period
1997 the Company received $14,043 from the exercise of 14,043 options to
purchase Common Stock and $13,083 in cash payments on interest and notes
receivable for the exercise of options. In addition, the Company paid $46,171
in cash dividends on its Convertible Preferred Stock and made payments of
$13,257 on its notes payable to a bank and on its capital lease. During the
Six-Month Period 1996, the Company received $2,396,796, net of financing costs
paid, from the placement of its 8% Senior Convertible Notes, as discussed in
Note 2 to the Consolidated Financial Statements. 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 shares of Common Stock and $14,256 in cash
payments on interest and notes receivable for the exercise of options. In
addition, the Company paid
11
<PAGE>
$23,645 in cash dividends on Convertible Preferred Stock, and made payments
of $3,358 on its note payable to a bank.
The Company had net cash used in investing activities of $118,280 during
the Six-Month Period 1997 as compared to net cash used in investing
activities of $55,973 during the Six-Month Period 1996. During the Six-Month
Period 1997, the Company made payments in the amount of $34,776 for United
States and foreign patent applications and $83,504 for the purchase of
equipment. During the Six-Month Period 1996, the Company made payments of
$51,174 for patent applications and $4,799 for the purchase of equipment.
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 to be shipped during June, 1996 and an additional
approximately $500,000 was to be shipped during September, 1996. At the
request of Whessoe Varec in order to avoid unnecessary duplicate shipping costs,
substantially all of the equipment was segregated in the Company's warehouse.
Terms of payment were 180 days and 90 days for the orders to be shipped in June
and September 1996, respectively. During early January 1997, Whessoe Varec
requested that the Company consider a revised payment schedule acceptable to
both parties. As of February 25, 1997, Whessoe Varec had paid for the items
actually shipped by that date, which approximated $59,000, and during April
1997, paid an additional $250,000 for items shipped in March 1997. Discussions
are continuing regarding payment schedules for the balance due of approximately
$690,000.
On February 12, 1997, Siebe PLC and Whessoe PLC announced an offer by Siebe
PLC to acquire Whessoe PLC. Prior to the end of February 1997, a consortium
consisting of Navia of Norway and Endress + Hauser of Switzerland made a higher
offer which was accepted by the Whessoe board. These acquisitions and proposed
acquisitions have resulted in changes of management at Whessoe Varec which have
in turn delayed satisfactory discussions and results with Whessoe Varec.
Management believes that there is a strong, long-term commitment on Whessoe
Varec's part both to the Company and to the AST market, and that Whessoe Varec's
name recognition, sales and marketing capabilities and customer base will
contribute to a relatively more rapid recognition and acceptance of the
Company's products in the AST market. Whessoe Varec is a well-respected name in
the AST marketplace and came highly recommended by our customers.
In March 1997, the State of Florida approved specific procedures for
incorporating substantially leak detection as an alternative in substantially
more expensive double-bottoming of ASTs. Since this clarification of regulatory
requirements, the Company and Whessoe Varec have discussed and quoted the
purchase of the Company's systems with a number of Florida tank owners and
operators. Based on these discussions and quotations, management believes that
significant business should develop over the short and longer term, although
there can be no assurance whether or when this will occur.
During early Fiscal 1996, the Company began pursuing applications of its
products on offshore oil production platforms for monitoring petroleum
hydrocarbons in produced water from oil water separators. The established
method, Freon extraction followed by infrared ("IR") analysis, is expected to
need replacement as the production of Freon is being phased out. In March 1996,
the Company shipped 22 of its CMS-4000 systems to Amoco Production Company for
installation at Amoco platforms in the Gulf of Mexico. This transaction was
through one of Amoco's Preferred Vendors, since the Company was too new to the
market to be registered with Amoco directly, and was treated in the restated
results of operations for the Six-Month Period 1996 and Second Quarter 1996 as
consigned inventory. Eventually, these CMS-4000 systems were upgraded to fully
automated OilSense 4000 systems, and in March 1997, the Company sold and
delivered directly to Amoco, nine OilSense 4000 systems. The systems are
12
<PAGE>
packaged for easy installation on offshore platforms, minimize day-to-day
operator interactions, and have the capability for remote communication by
modem, a key advantage for unmanned offshore platforms. The Company anticipates
that Amoco will purchase approximately nine additional OilSense 4000 systems by
June 1997; however there can be no assurance that this will occur.
The Company has seen increased levels of interest from other offshore oil
production companies in its OilSense 4000 as well as in its portable PHA-100WL
analyzer. Incentives for replacing the Freon/IR method have increased as Freon
has become much more expensive. While a number of competitors have entered or
are considering entering the market, management believes that its products have
unique features attractive to platform operators who will eliminate the use of
Freon.
Revenues during the Six-Month Period 1997 were $735,183, an increase of
$223,978 over restated revenues for the Six-Month Period 1996, and were $619,609
for the three-month period ended March 31, 1997 ("Second Quarter 1997"), an
increase of $603,881 over restated revenues for the three-month period ended
March 31, 1996 ("Second Quarter 1996"). Revenues for the Second Quarter 1997
and Six-Month Period 1997 include $263,000 from Whessoe Varec and over $200,000
from Amoco, as described above, as well as sales to a number of other customers
for use in offshore, AST leak detection, stormwater and process water
monitoring, environmental remediation monitoring and other applications. Gross
revenues for the Second Quarter 1996 of $293,064 and Six-Month Period 1996 of
$799,645 were reduced by $285,200 and $288,440 respectively, from the
recognition of sales returns and allowances arising from delays in certain
customers' installation plans, the granting of extended payment terms and the
development of other conditions and contingencies.
Gross profit for the Six-Month Period 1997 was $348,081 or 47% of revenues,
compared to $297,066 or 58% of restated net revenues, for the Six-Month Period
1996. Gross profit for the Second Quarter 1997 was $296,429, or 48% of
revenues, compared to $4,161 or 53% of restated net revenues for the Second
Quarter 1996. Revenues during the 1997 periods included the sales to Whessoe
Varec at discounted OEM prices, while revenues during the 1996 periods were
primarily at higher, end customer prices. Revenues during the Six-Month Period
1996 also included relatively higher margin development fees.
Research, development and engineering expenditures increased by $130,042,
or 25%, during the Six-Month Period 1997 over the Six-Month Period 1996 and
increased by $61,708, or 24%, during the Second Quarter 1997 over the Second
Quarter 1996. The increase is primarily attributable to the addition of
applications and development personnel, including a Director of Development
and applications technicians, whose primary focus is the development and
refinement of applications for current products. The Company is actively
pursuing commercialization of its electronic semi-conductor chemical sensor
("Sensor-on-a-Chip-TM-") being developed with Texas Instruments, Inc. ("TI")
and applications of its Sensor-on-a-Chip-TM- with Gilbarco, Inc., Alcohol
Sensors International, Ltd. and others.
The Company's engineering, research and development is focused on
applications development for the offshore and water monitoring markets, the
development of commercial applications for its Sensor-on-a-Chip-TM- technology
and dual use developments with the U.S. Department of Energy (DOE) through
Bechtel Nevada Corporation.
The development of a breath alcohol "Sensor-on-a-Chip-TM-" for use in an
ignition interlock device manufactured by Alcohol Sensors International, Ltd.
has entered the product integration stage. The next stage will be a
preproduction run and would be followed by production units, although there can
be no assurance that this will actually occur.
Gilbarco has refocused on the Sensor-on-a-Chip-TM- for "on-board refueling
vapor recovery" (ORVRII). After months of delays and hearings concerning the
introduction of ORVRII, the California Air Resources Board (CARB) appears to be
headed towards a decision regarding implementation of ORVRII, however, the time
frame is still not defined. The Company and Gilbarco have re-initiated a
13
<PAGE>
program designed to test a modified gasoline dispenser which incorporates the
Sensor-on-a-Chip-TM-. Once testing is completed and once CARB implements
ORVRII, the Company expects to generate significant revenues from this
application, although there is no assurance that this will actually occur, and
it is unlikely that it will occur in fiscal 1997.
The Company recently entered into a development agreement with a major
supplier of industrial control equipment for a sensor for a specific high volume
application. This agreement was for a short-term evaluation of the
applicability of the sensor in this market. As a result of this initial testing
and evaluation, completed in early May 1997, Management anticipates a further
product development contract which ultimately could lead to sensor sales in the
million units per year range, although there can be no assurance that this will
occur.
General and administrative expenditures decreased by $120,477, or 16%,
during the Six-Month Period 1997 from the Six-Month Period 1996, and decreased
by $104,047 or 25% during the Second Quarter 1997 from the First Quarter 1996,
primarily attributable to larger inventory valuation allowances during the 1996
periods.
Sales and marketing expenditures increased by $68,457, or 15%, during the
Six-Month Period 1997 over the Six-Month Period 1996 and increased by $84,459 or
46% during the Second Quarter 1997 over the Second Quarter 1996, attributable
primarily to the addition of technical and other marketing and sales support
activities and personnel in the offshore market.
The Company's interest income decreased by $6,064 or 7% during the
Six-Month Period 1997 from the Six-Month Period 1996, and decreased by
$26,039, or 60%, during the Second Quarter 1997 from the Second Quarter 1996.
No interest income was recognized during the Second Quarter 1997 on the
notes receivable for the exercise of options. Interest expense increased by
$63,067, or 131% during the Six-Month Period 1997 over the Six-Month Period
1996 and increased by $9,358 or 20% during the Second Quarter 1997 over the
Second Quarter 1996 as a result of interest expense accrued on, and
amortization of the costs associated with the sale of, the Senior Convertible
Notes for the entire periods of 1997.
As a result of the foregoing, the Company incurred a net loss of
$1,716,207, or a net loss of $0.07 per share, for the Six-Month Period 1997 as
compared to a net loss of $1,371,857, or a net loss of $0.07 per share for the
Six-Month Period 1996. Net loss for the Second Quarter 1997 was $883,045 or a
net loss of $0.03 per share, as compared to a net loss of $849,584, or a net
loss of $0.04 per share for the Second Quarter 1996.
The discussions in this Report include forward looking statements that
involve risks and uncertainties, including the timely development and acceptance
of the Company's products, the timely acceptance of existing products, the
impact of competitive products and pricing, the impact of governmental
regulations or lack thereof with respect to the Company's markets, timely
funding of customers' projects, customer payments to the Company, and other
risks detailed from time to time in the Company's SEC reports.
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
On February 20, 1997, FCI Environmental, Inc. ("FCIE") commenced a
lawsuit in the State Court of Nevada (No. A370091) (the "State Action")
against QED Environmental, Inc. ("QED"). FCIE alleged a breach of a Sales and
Distribution contract dated March 29, 1996 between FCIE and QED. FCIE is
seeking $123,800 in direct damages and $297,075 in consequential damages. QED
filed a motion to remove the State Action to the United States District
Court, District of Nevada. On April 10, 1997, the State Action was removed to
Federal Court and was assigned the Docket No. CU-S-97-00406 (DWH). QED filed
a counterclaim against the Company and brought a third-party complaint
against certain officers and employees and former employees of the Company,
seeking reimbursement of $62,223 paid by QED pursuant to the subject
contract. The Company has responded to the counterclaim denying all of QED's
counterclaims.
14
<PAGE>
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 January 13, 1997 reporting
under "Item 5. Other Events" that the Company, as a result of a review of its
revenue recognition policy with its independent accountants, would report
substantially lower revenues for the fiscal year ended September 30, 1996 than
were previously reported.
A report on Form 8- K was filed by the Company on January 31, 1997
reporting under "Item 4. Changes in Registrant's Certifying Accountant" that
KPMG Peat Marwick LLP had resigned as the Company's principal accountants.
A report on Form 8-K was filed by the Company on April 9, 1997 reporting
under "Item 4. Changes in Registrant's Certifying Accountant" that Goldstein
Golub Kessler & Company, P.C. has been engaged as the Company's principal
accountants.
---------------------------------------------------
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.
May 14, 1997 By: /s/ Geoffrey F. Hewitt
- ------------ ---------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
May 14, 1997 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 MARCH 31, 1997 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-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 848,695
<SECURITIES> 0
<RECEIVABLES> 820,989
<ALLOWANCES> (229,712)
<INVENTORY> 1,910,808
<CURRENT-ASSETS> 3,439,521
<PP&E> 720,969
<DEPRECIATION> (518,061)
<TOTAL-ASSETS> 4,317,949
<CURRENT-LIABILITIES> 493,380
<BONDS> 1,685,928
0
3,284,970
<COMMON> 2,572
<OTHER-SE> (1,148,901)
<TOTAL-LIABILITY-AND-EQUITY> 4,317,949
<SALES> 735,183
<TOTAL-REVENUES> 735,183
<CGS> 387,102
<TOTAL-COSTS> 2,166,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 111,104
<INCOME-PRETAX> (1,716,207)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,716,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,716,207)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT OF NET LOSS.
</FN>
</TABLE>
