<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 December 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 February 10, 1998, the issuer had 25,639,707 shares of Common Stock,
par value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
(UNAUDITED)
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 427,488 $ 168,609
Accounts receivable, net of allowance for doubtful
accounts of $240,796 at September 30, 1997
and $62,422 at December 31, 1997 263,947 298,081
Inventories 1,563,191 1,563,222
Other 56,941 59,486
---------- ----------
Total current assets 2,311,567 2,089,398
---------- ----------
Equipment 716,465 706,464
Less accumulated depreciation (549,175) (563,442)
---------- ----------
Net equipment 167,290 143,022
---------- ----------
Other assets:
Patent costs, net of accumulated amortization of
$1,678,845 at September 30, 1997 and
$1,740,311 at December 31, 1997 287,905 233,797
Technology costs, net of accumulated amortization of
$386,373 at September 30, 1997 and
$394,185 at December 31, 1997 83,333 75,521
Financing costs, net of accumulated amortization of
$148,298 at September 30, 1997 and
$169,348 at December 31, 1997 119,625 96,911
---------- ----------
Total other assets 490,863 406,229
---------- ----------
$2,969,720 $2,638,649
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
(UNAUDITED)
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Current liabilities:
Current installments of notes payable $ 6,878 $ 7,752
Accounts payable 95,469 66,286
Accrued expenses 307,891 357,220
Interest payable 17,778 50,400
----------- -----------
Total current liabilities 428,016 481,658
Senior convertible notes payable 1,650,000 1,625,000
Notes payable to officers and directors -- 125,000
Notes payable, net of current installments 7,942 5,420
----------- -----------
Total liabilities 2,085,958 2,237,078
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 convertible
shares issued and outstanding at
September 30, 1997 and December 31, 1997;
at liquidation value 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized
50,000,000 shares; 25,515,660 and 25,639,707
shares issued and outstanding at September 30
1997 and December 31, 1997, respectively 2,552 2,564
Additional paid-in capital 27,192,749 27,217,173
Deficit (29,596,509) (30,103,136)
----------- -----------
883,762 401,571
----------- -----------
Total stockholders' equity 883,762 401,571
----------- -----------
$ 2,969,720 $ 2,638,649
----------- -----------
----------- -----------
</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
----------------------------------
December 31, December 31,
1996 1997
------------- ---------------
<S> <C> <C>
Revenues $115,574 $225,179
Cost of revenues 63,922 92,842
----------- ----------
Gross profit 51,652 132,337
----------- ----------
Operating expenses:
Research, development and engineering 340,806 191,892
General and administrative 301,258 239,817
Sales and marketing 245,172 148,922
----------- ----------
Total operating expenses 887,236 580,631
----------- ----------
Loss from operations (835,584) (448,294)
----------- ----------
Other income (expense):
Interest expense (55,349) (60,125)
Interest and other income 57,771 1,792
----------- ----------
Total other income (expense) 2,422 (58,333)
----------- ----------
Net loss ($833,162) ($506,627)
----------- ----------
----------- ----------
Shares of common stock used in computing loss per share 25,710,323 25,546,214
----------- ----------
----------- ----------
Basic loss per share ($0.03) ($0.02)
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHECM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------ --------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
--------- ----------- ---------- -------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 218,998 $3,284,970 25,515,660 $2,552 $27,192,749 ($29,596,509) 883,762
Common stock issued:
Exercise of options -- -- 5,000 1 1,099 -- 1,100
Conversion of senior
convertible notes payable -- -- 119,047 11 23,325 -- 23,336
Net loss -- -- -- -- -- (506,627) (506,627)
-------- ---------- ---------- ------ ---------- ----------- --------
Balance at December 31, 1997 218,998 $3,284,970 25,639,707 $2,564 27,217,173 (30,103,136) 401,571
-------- ---------- ---------- ------ ---------- ----------- --------
-------- ---------- ---------- ------ ---------- ----------- --------
</TABLE>
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1996 1997
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($833,162) ($506,627)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 15,363 15,933
Amortization of patent and technology costs 67,814 69,278
Amortization of financing costs 20,284 21,050
Accrued interest on notes receivable for exercise of options (26,854) --
Reduction in notes receivable for the exercise
of options in exchange for services 560 --
Gain on sale of fixed assets -- (1,790)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 177,707 (34,134)
Increase in inventories (428,798) (31)
Increase in other current assets (15,714) (2,545)
Increase (decrease) in accounts payable 51,498 (29,183)
Increase in accrued expenses 4,237 49,329
Increase in interest payable 33,500 32,622
---------- --------
Net cash used in operating activities (933,565) (386,098)
---------- --------
Cash flows from investing activities:
(Purchase) sale of equipment (73,764) 10,125
Payments for patents (23,478) (7,358)
---------- --------
Net cash provided by (used in) investing activities (97,242) 2,767
---------- --------
</TABLE>
See accompanying notes to consolidated financial statements
(continued
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1996 1997
------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Payments on notes payable (3,212) (1,648)
Proceeds from the exercise of options and warrants 9,618 1,100
Proceeds from interest and notes receivable for exercise of options 9,910 --
Payment of dividend on preferred stock (46,171) --
Proceeds from notes payable to officers and directors -- 125,000
---------- ---------
Net cash provided by (used in) financing activities (29,855) 124,452
---------- ---------
Net decrease in cash and cash equivalents (1,060,662) (258,879)
Cash and cash equivalents at beginning of period 3,065,572 427,488
---------- ---------
Cash and cash equivalents at end of period $2,004,910 $168,609
---------- ---------
---------- ---------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Preferred stock issued as dividends $208,635 $ --
Senior convertible notes payable converted to common stock -- 25,000
Unamortized deferred financing costs associated with senior
senior convertible notes payable converted to common stock -- 1,664
Equipment purchased through capital lease 21,273 --
Reduction in notes receivable for exercise
of options in exchange for services 560 --
---------- ---------
---------- ---------
$6,453
Interest paid $1,565 $0
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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 December 31, 1997 and September 30, 1997, and the results of operations
and cash flows of the Company for the three-month periods ended December 31,
1996 and 1997. 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, 1997.
Certain Fiscal 1997 Financial Statement amounts have been reclassified
to conform with the presentation in the Fiscal 1998 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 which
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. During the three-month period ended
December 31, 1997, (the "First Quarter 1998") the Company received an
unsolicited offer to convert $25,000 of the Notes at a conversion price of
$0.21 per share, and accordingly issued 119,047 shares for the conversion.
All other Note holders were offered the same temporary conversion price. As
of December 31, 1997, an aggregate face amount of $1,200,000 of the Notes had
been converted to Common Stock resulting in the issuance of 1,617,851 shares
of Common Stock. Based on the adjusted Conversion Price of $0.4078, an
aggregate of 3,984,796 shares of Common Stock would be issuable if the
remaining $1,625,000 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") which 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, and contain certain piggyback
registration rights.
In November 1997, certain of the Company's officers and directors
committed to provide an aggregate of $250,000 in the form of 5-year 8% notes,
convertible into rights to purchase common stock upon registration of an
offering to all stockholders and warrant holders of rights to purchase common
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
stock. As of December 31, 1997, one-half of these commitments ($125,000) had
been received by the Company, and the remaining one-half was received during
January and February 1998.
(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 1996, the Company paid cash
dividends of $46,171 and issued 13,909 shares of Convertible Preferred Stock
dividends. On September 12, 1997, the Board of Directors determined that, in
view of the recent trading price of the Company's Common Stock and in view of
the Company's current cash position, it would not be appropriate to declare
the annual dividend payable on the Convertible Preferred Stock on November 1,
1997. As a result, that dividend will accumulate in accordance with the
terms of the Convertible Preferred Stock. 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 December 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 which has been adjusted to $0.2343 per
share, and the number of shares issuable upon exercise has been adjusted to
1,280,411. These Placement Agent Warrants are exercisable at any time from
November 30, 1996 through May 30, 2001.
During the three-month period ended December 31, 1997 (the "First
Quarter 1998"), the Company received $1,100 from the exercise of 5,000
options to purchase Common Stock at an exercise price of $0.22 per share.
Also during the First Quarter 1998, the Company issued options to
purchase an aggregate of 25,000 shares of its Common Stock at an exercise
price of $0.25 per share. These options were granted to an employee 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
The Company continues to incur substantial losses and Management
recognizes that the Company must generate additional revenues or reductions
in operating costs and may need additional financing to continue its
operations. The Company expects significant revenues during the second half
of Fiscal 1998 from its alliance with Whessoe Varec, Inc. in the aboveground
storage tank leak detection market, as well as from initial sales of
Sensor-on-a-Chip-Registered Trademark- products, and sales in the offshore
oil production platform market, although there can be no assurance when or if
this will occur. During the
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
last quarter of fiscal 1997, the Company implemented significant reduction in
personnel and other spending, and, to further conserve cash, continues to
defer payment of a significant portion of management salaries. The Company
borrowed $125,000 from certain officers and directors during the First
Quarter 1998 and has received commitments for an additional $125,000. The
Company is reviewing alternatives for raising additional capital, and on
October 2, 1997, entered into an agreement with entrenet Group, LLC
("entrenet") for advice and assistance in developing and executing business
plans, financing strategies and business partnerships, acquisitions and
mergers. For its services, entrenet will receive a cash fee of $5,000 per
month for twelve months; $60,000 in the form of a 10% convertible note; 5% of
the value of any financial transaction (as defined in the Agreement); and 5%
of any financing provided by or introduced directly by entrenet.
The Company is currently planning an offering of rights to purchase
shares and warrants, to be offered to holders of its Common and Preferred
Stock, and to holders of Class D Purchase Warrants and all other outstanding
Warrants. Notwithstanding the foregoing, there can be no assurance that
forecasted sales levels will be realized to achieve profitable operations, or
that additional financing can be obtained on terms satisfactory to the
Company, if at all, or in an amount 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
The Company had working capital of $1,607,740 at December 31, 1997,
compared with working capital of $1,883,551 at September 30, 1997, a decrease
of $275,811. Also the Company had decreases in cash and cash equivalents of
$258,879 and in stockholders' equity of $482,191. These decreases are
primarily a result of the Company's net loss for the Three-Month Period ended
December 31, 1997 (the "First Quarter 1998") of $506,627, offset in part by
the receipt of $125,000 in proceeds from notes payable to officers and
directors.
The Company had net cash used in operating activities of $386,098
during the First Quarter 1998 as compared with net cash used in operating
activities of $933,565 during the three-month period ended December 31, 1996
("First Quarter 1997"). The deficit during the First Quarter 1998 is
primarily a result of the Company's net loss of $506,627, and adjustments to
reconcile net loss to net cash used in operating activities, including
increases in accounts receivable of $34,134, accrued expenses of $49,329 and
interest payable of $32,622, as well as a decrease in accounts payable of
$29,183. In addition, these adjustments include depreciation of $15,933,
amortization of patent and technology costs of $69,278 and amortization of
financing costs of $21,050.
The deficit during the First Quarter 1997 is primarily a result of
the Company's net loss of $833,162, offset by adjustments to reconcile net
loss to net cash used in operating activities, including increases in
inventories of $428,798, other current assets of $15,714, accounts payable of
$51,498 and interest payable of $33,500, as well as decreases in accounts
receivable of $177,707. In addition, these adjustments include accrued
interest of $26,854 on notes receivable for the exercise of options,
amortization of patent and technology costs of $67,814 and amortization of
financing costs of $20,284 and depreciation of $15,363.
The Company had net cash provided by financing activities of
$124,452 during the First Quarter 1998 as compared with net cash used in
financing activities of $29,855 during the First Quarter 1997. During the
First Quarter 1998 the Company borrowed $125,000 from certain of its officers
and directors. During the First Quarter 1997, the Company paid $46,171 in
cash dividends on Convertible Preferred Stock.
The Company had net cash provided by investing activities of $2,767
during the First Quarter 1998 as compared to net cash used in investing
activities of $97,242 during the First Quarter 1997. During the First
Quarter 1998, the Company sold unused equipment for $10,125 and made payments
in the amount of $7,358 for United States and foreign patent applications.
During the First Quarter 1997, the Company made payments of $23,478 for
patent applications and $73,764 for the purchase of equipment.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company entered into an OEM Strategic Alliance Agreement (the
"Alliance" or the "Agreement") as of June 30, 1996, as amended, 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.
11
<PAGE>
The Alliance has positioned both Alliance partners to take advantage
of the new Florida regulations regarding the requirements for AST leak
detection. Internal liners and leak detection is by far the lowest cost
option for compliance with the Florida mandates and as of today, the
Company's PetroSense-Registered Trademark- line is the only leak detection
product certified for use in both contaminated and uncontaminated sites in
Florida. Approximately 1,000 tanks have been identified which are already
lined and as such are immediate targets for leak detection. An additional
population of tanks has been identified and characterized as coastal bulk
storage terminal facilities. This has raised the number of targeted tanks
from 1,000 to 5,000. The potential market for FCI from the Florida
opportunity has now grown to about $50,000,000, if the Company was able to
capture all of the business in the identified population. It is anticipated
that these projects will accelerate from program inception in 1997 to
completion at the end of 1999. Many companies have already indicated that
they intend to stagger installations over the period. Based on this level of
activity, Whessoe Varec has substantially expanded its sales and service
capabilities in Florida, and management believes that significant business
will be generated by the Alliance although there can be no assurance that
this will occur.
Florida Power Company recently placed an order with Whessoe Varec to
upgrade all of its tanks to include leak detection. Other large orders are
believed to be pending. Citgo, Dreyfus, Hess, and GATX among others, are
awaiting final approval from the Florida Department of Environmental
Protection ("DEP") to install the Company's products. There is believed to
be a significant backlog of applications at Florida DEP
The Alliance is also pursuing business with the Department of
Defense (DoD). Whessoe Varec's sister company Whessoe Coggins has a
significant presence in the military fuel depot market. Recently, the State
of California has advised that military facilities in California must be in
compliance with the state and federal underground storage tank ("UST")
regulation by December 22, 1998. As a result, there is an opportunity to
provide leak detection equipment to this market. The Company's products meet
all relevant state and federal standards and are compatible with the Whessoe
Coggins equipment proposed for the total system upgrade. This opportunity
could represent up to $2,400,000 in revenues for FCI in calendar year 1998,
and would be the entrance for the Alliance into the DoD market nationwide.
The market for AST leak detection equipment has expanded as the
States of Virginia, Pennsylvania, Wisconsin and the Province of Ontario are
in the process of promulgating regulations that are similar to the Florida
regulations.
In January of 1998, the Company received the first order for leak
detection equipment from the Taiwanese military. It is believed that over
the next year or so most military fuel depots in Taiwan will be equipped with
the Company's monitoring equipment.
The development of the offshore market for the Company's
OilSense-4000-TM- and PHA-100WL has been somewhat slower than originally
anticipated, primarily due to the availability of illegally imported Freon
manufactured in Russia, China and elsewhere. Recently, there has been a
tightening of enforcement of the ban on importation of Freon and availability
and quality has diminished. During Fiscal 1997, the Company completed
successful evaluations for several companies including Marathon, Shell, BP,
Chevron and Unocal. Exxon has leased an OilSense for an evaluation period.
Murphy Oil has begun an evaluation. Based on its current assessment of the
competition in the Gulf, Management believes that its FOCS-Registered
Trademark- technology is the best of the alternate solutions to the Freon IR
method. An incremental tightening of supply of Freon is believed to be the
impetus needed to kick start this market and for the Company to generate
significant revenues, although there can be no assurance that this will occur.
Since the beginning of 1998, the Company has been led to believe
that certain of these oil companies had budgeted for the Company's products
to be installed system wide on their offshore platforms in the Gulf of Mexico
in 1998. In addition, there appears to be a developing market for the
Company's products in the North Sea and recently the Company has begun to be
involved in an
12
<PAGE>
evaluation with a major North Sea operator interested in continuous
monitoring systems for all its North Sea platforms.
Revenues during the First Quarter 1998 were $225,179, an increase of
$109,605, or 95%, over revenues for the First Quarter 1997. Gross profit for
the First Quarter 1998 was $132,337 or 59% of revenues, compared to $51,652
or 45% of revenues, for the First Quarter 1997. Revenues during the First
Quarter 1998 included a higher percentage of relatively higher margin
development fees. Gross profit for the First Quarter 1998 also reflects the
Company's reductions in manufacturing capacity and associated costs initiated
during the second half of Fiscal 1997.
Research, development and engineering expenditures decreased by
$148,914, or 44%, during First Quarter 1998 from the First Quarter 1997. The
decrease is primarily attributable to the reduction, implemented during the
second half of Fiscal 1997, of applications and development personnel and
associated expenses. 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-Registered Trademark- technology and dual use developments
with the U.S. Department of Energy (DOE) through Bechtel Nevada Corporation.
In August 1997, the Company received contracts for two new projects from
Bechtel Nevada Corporation totaling $40,000 for the development of hardware
for use with Sensor-on-a-Chip-Registered Trademark-. The successful
completion of these contracts has led to the funding of additional contracts
for further development. The Company expects to complete these new contracts
within Fiscal 1998.
The program to develop a breath alcohol Sensor-on-a-Chip-Registered
Trademark- for use in an ignition interlock device manufactured by Alcohol
Sensors International, Ltd. continues to have high priority for the Company.
The successful completion of this project should result in the first
consumer, high volume application of the Company's
Sensor-on-a-Chip-Registered Trademark- technology.
Gilbarco has refocused on the Sensor-on-a-Chip-Registered Trademark-
for "on-board refueling vapor recovery" (ORVR). After months of delays and
hearings concerning the introduction of ORVR, the California Air Resources
Board (CARB) announced at a meeting on January 16, 1998 that suppliers of
refueling equipment needed to have their products certified to meet ORVR-II
by November 1998. The Company and Gilbarco have re-initiated a program
designed to test a modified gasoline dispenser which incorporates the
Sensor-on-a-Chip-Registered Trademark-. Once testing is completed and with
the implementation ORVR-II, the Company expects to generate significant
revenues from this application in Fiscal 1998, although there is no assurance
that this will actually occur.
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 evaluation,
completed in early May 1997. The Company received a second contract worth
over $100,000 in August 1997. This contract is designed to develop life time
data for the sensor, and will be completed in the second fiscal quarter of
1998. Concurrent with this contract, it is believed that the client has
begun a product development effort which could ultimately result in sensor
sales in the million unit per year range although there can be no assurance
that this will actually occur.
General and administrative expenditures decreased by $61,441, or
20%, during the First Quarter 1998 from the First Quarter 1997. The Company
has implemented reductions in personnel and other expenses and cash
expenditures, including the deferral of administrative, as well as other
salaries.
Sales and marketing expenditures decreased by $96,250, or 39%,
during the First Quarter 1998 from the First Quarter 1997, reflecting
reductions in personnel and in other spending as well.
The Company's interest income decreased to a minimal amount during
the First Quarter 1998 from $57,771 during the First Quarter 1997, reflecting
the difference in cash and cash equivalents during
13
<PAGE>
the two quarters. Interest expense increased by $4,776, or 9% during the
First Quarter 1998 over the First Quarter 1997.
As a result of the foregoing, the Company incurred a net loss of
$506,627, or a net loss of $0.02 per share, for the First Quarter 1998 as
compared to a net loss of $833,162, or a net loss of $0.03 per share for the
First Quarter 1997.
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 (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. The Company
and QED mediated a final settlement of all claims on January 23, 1998.
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The Company has
responded that the distribution agreement provides for arbitration, in
Nevada, of any disputes and that therefore, the French courts do not have
jurisdiction, and further that the claims are without merit. As of February
12, 1998, the French Court has not announced a decision following a January
20, 1998 hearing. The Company does not expect an adverse outcome and
believes that even in the event of an adverse outcome, such an outcome would
not have a material effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the three-month period ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
three-month period ended December 31, 1997.
14
<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.
February 16, 1998 By: /s/ Geoffrey F. Hewitt
- ----------------- ---------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
February 16, 1998 By: /s/ Melvin W. Pelley
- ----------------- ----------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM [identify
specific financial statements here] THE UNAUDITED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1997 AND FOR THE THREE MONTH-PERIOD THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 168,609
<SECURITIES> 0
<RECEIVABLES> 360,503
<ALLOWANCES> (62,422)
<INVENTORY> 1,563,222
<CURRENT-ASSETS> 2,089,398
<PP&E> 706,464
<DEPRECIATION> (563,442)
<TOTAL-ASSETS> 2,638,649
<CURRENT-LIABILITIES> 481,658
<BONDS> 1,755,420
0
3,284,970
<COMMON> 2,564
<OTHER-SE> (2,885,963)
<TOTAL-LIABILITY-AND-EQUITY> 2,638,649
<SALES> 225,179
<TOTAL-REVENUES> 225,179
<CGS> 92,842
<TOTAL-COSTS> 673,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,125
<INCOME-PRETAX> (506,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,627)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0<F1>
<FN>
<F1>(ESP-DILUTED) Omitted because of antidilutive effect of net loss
</FN>
</TABLE>
