<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
[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 94-1063897
(State of 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 the filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such sooner 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
per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1995 1996
(UNAUDITED)
(Restated)
--------------------------
Current assets:
Cash and cash equivalents $911,186 $4,069,338
Note receivable from sale of subsidiary 106,390 106,390
Accounts receivable, net of allowance for
doubtful accounts of $111,716 at
September 30, 1995 and $66,864 at
June 30, 1996 565,766 363,987
Inventories 991,302 1,199,733
Other 109,844 97,836
---------- ----------
Total current assets 2,684,488 5,837,284
---------- ----------
Equipment 570,716 597,504
Less accummulated depreciation (433,285) (472,506)
---------- ----------
Net equipment 137,431 124,998
---------- ----------
Other assets:
Patent and technology costs, net of
accumulated amortization of $1,525,105
at September 30, 1995 and $1,723,631
at June 30, 1996 726,500 616,539
Financing costs, net of accumulated
amortization of $31,819 at June 30, 1996 -- 241,019
Other 147,580 220,205
---------- ----------
Total other assets 874,080 1,077,763
---------- ----------
Total assets $3,695,999 $7,040,045
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
(UNAUDITED)
(RESTATED)
---------------------------------
<S> <C> <C>
Current liabilities:
Current installments of note payable to bank $ 6,832 $ 7,191
Accounts payable 176,774 137,204
Accrued expenses 287,507 313,848
Interest payable - 77,622
---------- ----------
Total current liabilities 471,113 535,865
Senior convertible notes payable - 1,800,000
Note payable to bank, net of current installments 9,866 4,427
----------- -----------
Total liabilities 480,979 2,340,292
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 214,462 and 216,089 convertible
shares issued and outstanding at September 30, 1995
and June 30, 1996, respectively;
at liquidation value 3,216,930 3,241,335
Common stock, $.0001 par value. Authorized 30,000,000
and 40,000,000 shares at September 30, 1995 and
June 30, 1996, respectively; 20,532,033 and
22,508,102 shares issued and outstanding at
September 30, 1995 and June 30, 1996, respectively 2,053 2,550
Additional paid-in capital 24,844,392 28,560,699
Treasury stock - preferred, 10,000 shares, at cost (150,000) (150,000)
Accumulated Deficit (23,094,922) (25,397,075)
----------- -----------
4,818,453 6,257,509
Notes receivable for exercise of options (1,597,837) (1,557,548)
Deferred compensation (5,596) (208)
----------- -----------
Total stockholders' equity 3,215,020 4,699,753
----------- -----------
Total liabilities and stockholders' equity $3,695,999 $7,040,045
----------- -----------
----------- -----------
</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,
1995 1996 1995 1996
(Restated) (Restated)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenues $320,534 $202,303 $874,056 $1,001,949
Less returns and allowances -- (78,695) -- (367,135)
------------ ------------- ------------- --------------
Net revenues 320,534 123,609 874,056 634,814
Cost of revenues 140,822 59,021 398,873 273,160
------------ ------------- ------------- --------------
Gross profit 179,712 64,588 475,183 361,654
------------ ------------- ------------- --------------
Operating expenses:
Research, development and
engineering 294,457 351,649 925,728 876,368
General and aministrative 374,174 357,833 1,096,401 962,571
Sales and marketing 153,920 236,679 501,485 680,751
Inventory valuation allowance -- 63,369 -- 155,036
------------ ------------- ------------- --------------
Total operating expenses 822,551 972,952 2,523,614 2,674,726
------------ ------------- ------------- --------------
Loss from operations (642,839) (908,364) (2,048,431) (2,313,072)
------------ ------------- ------------- --------------
Other income (expense):
Interest expense (2,318) (79,467) (4,450) (127,504)
Interest income 50,297 57,535 171,486 138,423
Other net 1,606 -- 1,810 --
------------- ------------ ------------- -------------
Total other income (expense) 49,585 (21,932) 168,846 10,919
------------- ------------ ------------- -------------
Net loss ($593,254) ($930,296) ($1,879,585) ($2,302,153)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Shares of common stock used in
computing loss per share 20,217,606 22,094,615 20,200,991 21,130,704
------------- ------------ ------------- -------------
------------- ----------- ------------- -------------
Net loss per share ($0.03) ($0.04) ($0.09) ($0.11)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital
---------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 214,462 $3,216,930 20,532,033 $2,053 24,844,392
Preferred stock dividend:
In stock 15,214 228,210 -- -- (228,210)
In cash -- -- -- -- (23,645)
Common stock issued:
For cash -- -- 3,333,333 333 2,653,984
For services -- -- 5,204 1 6,667
Conversion from senior
convertible notes payable -- -- 1,281,250 128 883,329
Conversion from preferred stock (13,587) (203,805) 135,870 14 203,791
Exercise of options -- -- 219,381 21 219,360
Exercise of warrants -- -- 1,031 -- 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 28,560,699
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
Treasury Notes
Stock - Accumu- Receivable
Preferred lated for Exercise Deferred
Stock Deficit of Options Compensation Total
----------- ----------- ------------ ------------ -----------
Balance at September 30, 1995 (150,000) (23,094,922) (1,597,837) (5,596) 3,215,020
Preferred stock dividend:
In stock -- -- -- -- --
In cash -- -- -- -- (23,645)
Common stock issued:
For cash -- 2,654,317
For services -- -- -- -- 6,668
Conversion from senior
convertible notes payable -- -- -- -- 883,457
Conversion from preferred stock -- -- -- -- --
Exercise of options -- -- -- -- 219,381
Exercise of warrants -- -- -- -- 1,031
Payments received on notes receivable for
exercise of options -- -- 40,289 -- 40,289
Deferred compensation earned -- -- -- 5,388 5,388
Net loss -- (2,302,153) -- -- (2,302,153)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 (150,000) (25,397,075) (1,557,548) (208) 4,699,753
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
---------------------------
June 30, June 30,
1995 1996
(Restated)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,879,585) ($2,302,153)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 41,435 39,221
Amortization of patent and technology costs 210,861 198,526
Amortization of financing costs -- 45,641
Accrued interest on notes receivable for exercise of options -- (80,189)
Common stock issued for services 184,658 43,522
Provision for loss on accounts receivable -- 51,337
Inventory valuation allowance -- 118,811
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (467,502) 150,442
Increase in inventories (284,925) (327,242)
(Increase) decrease in other current assets (55,521) 12,008
Increase (decrease) in accounts payable 114,175 (39,570)
Increase in accrued expenses 50,266 26,341
Increase in interest payable -- 77,622
----------- -----------
Net cash used in operating activities (2,086,138) (1,985,683)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (21,768) (26,788)
Payments for patents (67,084) (88,564)
----------- -----------
Net cash used in investing activities ($88,852) ($115,352)
----------- -----------
See accompanying notes to consolidated financial statements
(continued)
</TABLE>
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
---------------------------
June 30, June 30,
1995 1996
(Restated)
--------- ----------
<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 (2,666) (5,080)
Proceeds from the exercise of options and warrants 47,301 220,412
Proceeds from interest and notes receivable for exercise of options 15,056 16,387
Payment of dividend on preferred stock (53,339) (23,645)
Purchase of treasury stock - preferred (150,000) --
---------- ----------
Net cash provided by (used in) financing activities (122,648) 5,259,187
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,297,638) 3,158,152
Cash and cash equivalents at beginning of period 3,477,103 911,186
---------- ----------
Cash and cash equivalents at end of period $ 1,179,465 $4,069,338
---------- ----------
---------- ----------
Supplemental Cash Flow Information
Interest paid $ 4,450 $ 4,242
---------- ----------
---------- ----------
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 $ 37,133 $ 34,054
</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.
Subsequent to its September 30, 1996 fiscal year end, 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 $600,000
should not be recorded as revenue during the three-month period ended June 30,
1996 ("Third Quarter 1996"). This included approximately $500,000 of the
Company's products provided in accordance with an OEM strategic alliance
agreement recently entered into with Whessoe Varec, Inc. ("Whessoe Varec").
Although Whessoe Varec is highly respected in the aboveground storage tank
("AST") market, the Company's AST leak detection products are new to Whessoe
Varec and Whessoe Varec has not had the opportunity to demonstrate sales and
installations at customer sites, and revenue has not been recognized in the
current period. Additionally, contingencies or modifications in sales terms
related to certain sales arose during the Third Quarter 1996, resulting in sales
returns and allowances during the Third Quarter of approximately $79,000. For
the nine-month period ended June 30, 1996 ("Nine Month Period 1996") these
amounts are approximately $900,000 (revenue) and $367,000 (returns and
allowances) respectively.
(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.
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 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
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Gross revenues during the Nine-Month Period 1996 included sales of the
Company's products for projects for Unocal `76 Products, Shell Oil Company, 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. In addition, products representing approximately
$900,000 at net selling prices were shipped to representatives and distributors
for resale to end customers. However, in accordance with the Company's
revisions to its revenue recognition policy as discussed in Note 1 above, these
shipments are excluded from revenue and are instead included in inventory as
consigned products. The Company anticipates that these shipments will be
recognized as revenue as the products are sold and installed at end customers'
locations over succeeding months; however, there can be no assurance whether or
when such sales and installations will occur nor whether or when they will be
recognized as revenue.
Installation of approximately $220,000 of the Company's products at several
different customer sites has been delayed, primarily resulting from delay in the
customers' own installation schedules. As a result, the timing of payment to
the Company has been delayed, and the original sales have been reversed and
shown as returns in the current period, along with certain other previous sales
to distributors and representatives, the payment for which has become contingent
upon eventual sale to and payment by end customers.
Revenues from one customer amounted to 24% of net revenues for the Third
Quarter 1996 and 8% of net revenues for the Six-Month Period 1996. Revenues
from a second customer amounted to 19% and 6% of net revenues for the Third
Quarter 1996 and the Six Month Period 1996, respectively.
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
$2,302,153, offset by adjustments to reconcile net loss to net cash used in
operating activities including a decrease in accounts receivable of $150,442, an
increase in inventories of $327,242, 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 $26,341 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, provisions for loss on accounts receivable of $51,337, and inventory
valuation adjustments for, primarily, consignment inventories of $118,811. 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 $5,301,419 at June 30, 1996, compared
with working capital of $2,213,375 at September 30, 1995, an increase of
$3,088,044. 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 $2,302,153. Stockholders' equity increased
$1,484,733 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, whereby Whessoe Varec was granted exclusive worldwide
right to market the Company's products in the 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 is to be shipped by September 30, 1996. In
order to avoid duplicate freight and other costs Whessoe Varec requested
segregation of their inventory (rather than shipping to their California
warehouse), and subsequent direct shipment to Whessoe Varec's customers as
requested by Whessoe Varec. Since the Company's products are new to Whessoe
Varec and Whessoe
12
<PAGE>
Varec has not had an opportunity to demonstrate the timing of actual
installation at customer sites, revenue has not been recognized in the current
period. The Company anticipates that revenue will be recognized as Whessoe
Varec develops its market, although there can be no assurance as to when or even
if this will occur.
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 included sales for projects for
Unocal `76 Products, Shell Oil Company, 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. Revenues for 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.
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 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
13
<PAGE>
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 $361,564 or 57% of net
revenues compared to $475,183 or 54% of net revenues for the Nine-Month Period
1995. Gross profit for the Third Quarter 1996 was $64,588 or 52% of net
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 allowances
recorded against sales for prior periods as discussed above and in Note 1 to the
Consolidated Financial Statements.
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 $133,830, or 12%,
during the Nine-Month Period 1996 from the Nine-Month Period 1995 and decreased
by $16,341, or 4%, 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 $179,266, or 36%, during the
Nine-Month Period 1996 from the Nine-Month Period 1995 and increased by $82,759,
or 54%, during the Third Quarter 1996 from the Third Quarter 1995. These
increases are attributable primarily 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 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
14
<PAGE>
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 $930,296,
or a net loss of $.04 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 $2,302,153 or a net loss of
$.11 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.
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 JUNE 30, 1996 (RESTATED) AND FOR THE
THREE-MONTH AND NINE-MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,069,338
<SECURITIES> 0
<RECEIVABLES> 537,241
<ALLOWANCES> (66,864)
<INVENTORY> 1,199,733
<CURRENT-ASSETS> 5,837,284
<PP&E> 597,504
<DEPRECIATION> (472,506)
<TOTAL-ASSETS> 7,040,045
<CURRENT-LIABILITIES> 535,865
<BONDS> 1,804,427
0
3,241,335
<COMMON> 2,550
<OTHER-SE> 1,455,868
<TOTAL-LIABILITY-AND-EQUITY> 7,040,045
<SALES> 634,814
<TOTAL-REVENUES> 634,814
<CGS> 273,160
<TOTAL-COSTS> 2,947,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 51,337
<INTEREST-EXPENSE> 127,504
<INCOME-PRETAX> (2,302,153)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,302,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,302,153)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Omitted because of antidilutive effect of net loss.
</FN>
</TABLE>
