<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 March 31, 1998
-------------------------------------------
[ ] 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, 1998, the issuer had 26,014,707 shares of Common Stock, par
value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED)
September 30, March 31,
1997 1998
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 427,488 $ 87,250
Accounts receivable, net of allowance for doubtful
accounts of $240,796 at September 30, 1997
and $104,206 at March 31, 1998 263,947 265,048
Inventories 1,563,191 1,620,317
Financing costs, net of accumulated amortization of $190,406 -- 74,519
Other 56,941 81,515
---------- ----------
Total current assets 2,311,567 2,128,649
---------- ----------
Equipment 716,465 706,464
Less accumulated depreciation (549,175) (578,878)
---------- ----------
Net equipment 167,290 127,586
---------- ----------
Other assets:
Patent costs, net of accumulated amortization of
$1,678,845 at September 30, 1997 and
$1,801,992 at March 31, 1998 287,905 185,508
Technology costs, net of accumulated amortization of
$386,373 at September 30, 1997 and
$401,998 at March 31, 1998 83,333 67,708
Financing costs, net of accumulated amortization of $148,298 119,625 --
---------- ----------
Total other assets 490,863 253,216
---------- ----------
Total assets $2,969,720 $2,509,451
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, March 31,
1997 1998
------------ -----------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable $ -- $ 1,600,000
Current installments of notes payable 6,878 8,009
Accounts payable 95,469 158,572
Accrued expenses 307,891 401,951
Interest payable 17,778 22,793
------------- -----------
Total current liabilities 428,016 2,191,325
Senior convertible notes payable 1,650,000 --
Notes payable to officers, directors and affiliates -- 500,000
Notes payable, net of current installments 7,942 3,448
------------- -----------
Total liabilities 2,085,958 2,694,773
------------- -----------
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 218,998 convertible
shares issued and outstanding at
September 30, 1997 and March 31, 1998;
at liquidation value 3,284,970 3,284,970
Common stock, $.0001 par value. Authorized
50,000,000 shares; 25,515,660 and 26,014,707
shares issued and outstanding at September 30
1997 and March 31, 1998, respectively 2,552 2,602
Additional paid-in capital 27,192,749 27,287,677
Deficit (29,596,509) (30,760,571)
------------- -----------
Total stockholders' equity 883,762 (185,322)
------------- -----------
Total liabilities and stockholders' equity $ 2,969,720 $ 2,509,451
------------- -----------
------------- -----------
</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,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $619,609 $241,693 $735,183 $466,872
Cost of revenues 323,180 114,726 387,102 207,568
------------ ------------ ------------ ------------
Gross profit 296,429 126,967 348,081 259,304
------------ ------------ ------------ ------------
Operating expenses:
Research, development and engineering 313,955 204,422 654,761 396,314
General and administrative 311,248 340,547 612,506 580,364
Sales and marketing 267,357 179,126 512,529 328,048
------------ ------------ ------------ ------------
Total operating expenses 892,560 724,095 1,779,796 1,304,726
------------ ------------ ------------ ------------
Loss from operations (596,131) (597,128) (1,431,715) (1,045,422)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (55,755) (60,666) (111,104) (120,791)
Interest income 17,053 359 74,824 361
Other, net (248,212) 0 (248,212) 1,790
------------ ------------ ------------ ------------
Total other income (expense) (286,914) (60,307) (284,492) (118,640)
------------ ------------ ------------ ------------
Net loss ($883,045) ($657,435) ($1,716,207) ($1,164,062)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares of common stock used in
computing net loss per share 25,718,423 25,668,874 25,714,329 25,606,870
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share ($0.03) ($0.03) ($0.07) ($0.05)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, 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
For services -- -- 250,000 25 46,850 -- 46,875
Conversion of senior
convertible notes payable -- -- 244,047 24 46,979 -- 47,003
Net loss -- -- -- -- -- (1,164,062) (1,164,062)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31,1998 218,998 $3,284,970 26,014,707 $2,602 27,287,677 (30,760,571) (185,322)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six month period ended
--------------------------
March 31 March 31
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,716,207) ($1,164,062)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 34,234 31,369
Amortization of patent and technology costs 136,178 138,772
Amortization of financing costs 35,453 42,109
Accrued interest on notes receivable for exercise of options (26,985) --
Write off of accrued interest on notes receivable
for exercise of options 248,212 --
Reduction in notes receivable for the exercise
of options in exchange for services 636 --
Common stock issued for services -- 46,875
Gain on sale of fixed assets -- (1,790)
Provision for loss on accounts receivable 25,000
Inventory valuation allowance 25,000
Changes in assets and liabilities:
Increase in accounts receivable (310,804) (1,101)
Increase in inventories (478,673) (57,126)
Increase in other current assets (29,681) (18,574)
Increase (decrease) in accounts payable (19,521) 63,103
Increase in accrued expenses 10,863 94,060
Increase in interest payable -- 5,015
----------- -----------
Net cash used in operating activities (2,066,295) (821,350)
----------- -----------
Cash flows from investing activities:
(Purchase) sale of equipment (83,504) 10,125
Payments for patents (34,776) (20,750)
----------- -----------
Net cash used in investing activities (118,280) (10,625)
----------- -----------
</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
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Payments on notes payable (13,257) (3,363)
Proceeds from the exercise of options and warrants 14,043 1,100
Proceeds from interest and notes receivable for exercise of options 13,083 --
Payment of dividend on preferred stock (46,171) --
Proceeds from note payable to Privatbank -- 144,000
Proceeds from notes payable to officers and directors -- 350,000
----------- -----------
Net cash provided by (used in) financing activities (32,302) 491,737
----------- -----------
Net decrease in cash and cash equivalents (2,216,877) (340,238)
Cash and cash equivalents at beginning of period 3,065,572 427,488
----------- -----------
Cash and cash equivalents at end of period $848,695 $87,250
----------- -----------
----------- -----------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Reduction in additional paid-in capital due to
write down of notes receivable for exercise of options $1,229,746 $ --
Preferred stock issued as dividends 208,635 --
Senior convertible notes payable converted to common stock -- 50,000
Unamortized deferred financing costs associated with senior
senior convertible notes payable converted to common stock -- 2,997
Deferred financing costs associated with Privatebank note -- 6,000
Equipment purchased through capital lease 21,273 --
Reduction in notes receivable for exercise
of options in exchange for services 636 --
----------- -----------
----------- -----------
Interest paid $75,651 $73,667
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 11998
(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, 1998 and September 30, 1997, and the results of operations and cash
flows of the Company for the three-month and six-month periods ended March 31,
1998 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, in accordance with the
original Note agreement, 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 six-month period ended March 31,
1998 (the "Six Month Period 1998"), the Company received an unsolicited offer to
convert $25,000 of the Notes at a conversion price of $0.21 per share, and
another offer to convert $25,000 of the Notes at a conversion price of $0.20 per
share, which were approximately the then current market values of the Common
Stock. Accordingly, the Company issued 244,047 shares for the conversions. All
other Note holders were offered the same temporary conversion price. As of
March 31, 1998, an aggregate face amount of $1,225,000 of the Notes had been
converted to Common Stock resulting in the issuance of 1,742,851 shares of
Common Stock. Based on the adjusted Conversion Price of $0.4078, an aggregate
of 3,923,456 shares of Common Stock would be issuable if the remaining
$1,600,000 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.
During the Six Month Period 1998, certain of the Company's officers and
directors provided an aggregate of $250,000 in the form of 5-year 8% notes,
convertible into rights to purchase common stock
8
<PAGE>
upon registration of an offering to all stockholders and warrant holders of
rights to purchase common stock. In addition, certain officers and directors
loaned the Company an additional $100,000, which is to be repaid with interest
at 8% by July 31, 1998, from proceeds of the rights offering. Also during the
Six-Month Period 1998, the Company entered into an agreement with Privatbank
Vermag (of which a director of the Company is vice chairman) under which the
Company borrowed $150,000, due with interest at 8% on June 27, 1998. An
additional $150,000 was advanced to the Company on April 27, 1998, which is due
with interest at 8% on July 27, 1998. In accordance with the agreement,
Privatbank Vermag will receive 90,000 units, each unit consisting of one share
of Common Stock and one warrant to purchase a share of Common Stock exercisable
at $0.22 per warrant. The units are valued at $0.22 and the Warrants become
exercisable one year from the date of issuance and expire in July 2003.
(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 March 31, 1998, 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 Six-Month Period 1998 the Company issued 250,000 shares of its
Common Stock, valued at the then current market value of $0.1875 per share, in
exchange for legal services rendered by its attorneys in connection with the
litigation against a former distributor.
During the Six-Month Period 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 Six-Month Period 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
9
<PAGE>
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 last
quarter of fiscal 1997, the Company implemented significant reductions in
personnel and other spending, and, to further conserve cash, continues to defer
payment of a significant portion of management salaries. The Company borrowed
$500,000 from certain officers, directors and affiliates during the Six-Month
Period 1998 and borrowed an additional $150,000 in April 1998.
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.
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.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's 8% senior convertible notes payable become due on
February 15,1999. The unpaid balance of $1,600,000 is therefore classified in
the financial statements as a current liability, and the associated unamortized
financing costs as a current asset. The Company had negative working capital of
$62,676 at March 31, 1998, compared with positive working capital of $1,883,551
at September 30, 1997, a decrease of $1,946,227. Also the Company had decreases
in cash and cash equivalents of $340,238 and in stockholders' equity of
$1,069,084. In addition to the reclassification of the notes payable from long
term to current liabilities, these decreases are primarily a result of the
Company's net loss for the Six-Month Period ended March 31, 1998 (the "Six-Month
Period 1998") of $1,164,062, offset in part by the receipt of $494,000 in
proceeds from notes payable to officers, directors and affiliates.
The Company had net cash used in operating activities of $821,350 during
the Six-Month Period 1998 as compared with net cash used in operating activities
of $2,066,295 during the six-month period ended March 31, 1997 (the "Six-Month
Period 1997"). The deficit during the Six-Month Period 1998 is primarily a
result of the Company's net loss of $1,164,062, and adjustments to reconcile net
loss to net cash used in operating activities, including increases in accounts
receivable of $1,101, inventories of $57,126, other current assets of $18,574,
accounts payable of $63,103, accrued expenses of $94,060 and interest payable of
$5,015. In addition, these adjustments include depreciation of $31,369,
amortization of patent and technology costs of $138,772, amortization of
financing costs of $42,109, and the issuance of 250,000 shares of Common Stock,
valued at market value of $46,875, in exchange for services.
The deficit during the Six-Month Period 1997 is primarily a result of the
Company's net loss of $1,716,207, increased by adjustments to reconcile net loss
to net cash used in operating activities, including increases in accounts
receivable of $310,804, 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 accrued interest of $26,985 on
notes receivable for the exercise of options, amortization of patent and
technology costs of $136,178, amortization of financing costs of $35,453,
depreciation of $34,234, and provisions for loss on accounts receivable of
$25,000 and inventory valuation allowance of $25,000. Also the Company expensed
$248,212 in accrued interest receivable on notes receivable, originated in March
1994, for the exercise of stock options.
The Company had net cash provided by financing activities of $491,737
during the Six-Month Period 1998 as compared with net cash used in financing
activities of $32,302 during the Six-Month Period 1997. During the Six-Month
Period 1998 the Company borrowed $350,000 from certain of its officers and
directors, and received net proceeds of $144,000 from a promissory note payable
to a bank of which a director is vice chairman. 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, paid $46,171 in cash dividends on
Convertible Preferred Stock and made payments of $13,257 on its notes payable to
a bank and on its capital lease.
11
<PAGE>
The Company had net cash used in investing activities of $10,625 during the
Six-Month Period 1998 as compared to net cash used in investing activities of
$118,280 during the Six-Month Period 1997. During the Six-Month Period 1998,
the Company sold unused equipment for $10,125 and made payments in the amount of
$20,750 for United States and foreign patent applications. During the Six-Month
Period 1997, the Company made payments of $34,776 for patent applications and
$83,504 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.
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 continuous 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 ($10,000 per tank to FCI), 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. Shell Oil Co. is an example of a company that
has initiated a phased-in program of installing the Company's leak detection
equipment at its Florida facilities. Based on this level of activity, Whessoe
Varec has twice substantially expanded its sales and service capabilities in
Florida, and management believes, based on market information gathered by
Whessoe Varec, that significant business will be generated by the Alliance
although there can be no assurance that this will occur.
The Florida regulations require compliance by December 1999 for
alternative methods including the Company's leak detection equipment. Florida
Power Company recently placed an order with Whessoe Varec to upgrade all of
its tanks to include leak detection. Citgo, Dreyfus, Texaco, and GATX among
others, have applications pending at the Florida Department of Environmental
Protection ("DEP") to install the Company's products. As applications are
approved, there is an assumption that there will be a stream of orders to the
Alliance, although there can be no assurance that this will be the case. On
May 1, 1998, the final review opportunity for input into the Storage Tank
Regulations was held. In the absence of any dissenting opinion, the
Regulations were passed on to the Attorney General of Florida for
incorporation into law on July 2, 1998. The Company believes that there are
now no other potential roadblocks to full implementation of the AST
regulations, although there can be no assurance that this is the case.
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. A system
incorporating both Whessoe Coggins and Whessoe Varec/FCI products was
successfully demonstrated to the military during April 1998. The data
generated at this test was submitted to the local regulatory authority and
met their criteria. Revenues from sales to this market are expected to occur
prior to the deadline for compliance in December 1998, although there can be
no
12
<PAGE>
assurance that this will actually happen. 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
Pennsylvania and Wisconsin and the Province of Ontario are in the process of
promulgating regulations that are similar to the Florida regulations. Virginia
promulgated its own AST rules this spring, opening up a new market for the
Alliance.
In a recent development, the Company has been advised that Florida DEP
announced at its Storage Tank Conference May 11th that the PetroSense-Registered
Trademark- PHA-100PLUS has been selected as the instrument of choice for its
field inspection program for UST compliance. Multiple units are planned to be
used by that state's inspection staff to check monitoring wells for the onset of
petroleum hydrocarbons due to leaks from tanks. The Company's unit was selected
after a side-by-side test with field instruments based on other technologies.
This program is expected to be in place during the third quarter of the
Company's fiscal year although there can be no assurance that this will actually
occur.
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.
One Company has already purchased for system-wide installation and other
companies have requested quotations for system-wide quantities of the Company's
products. This budgetary process may have been temporarily negatively impacted
by the lower price of oil in the early part of 1998.
Revenues during the Six-Month Period 1998 were $466,872, a decrease of
$268,311, or 36%, from revenues of $735,183 for the Six-Month Period 1997.
Revenues for the three-month period ended March 31, 1998 ("Second Quarter
1998") were $241,693 compared to revenues of $619,609 for the three-month
period ended March 31, 1997 ("Second Quarter 1997"). Revenues for the Second
Quarter 1998 consisted primarily of a number of smaller orders and
development contract billings; the Second Quarter 1997 included a large
multiple unit order in excess of $200,000 from Amoco Production Company, and
approximately $263,000 in revenues from Whessoe Varec. Gross profit for the
Six-Month Period 1998 was $259,304, or 56% of revenues, compared to $348,081,
or 47% of revenues for the Six-Month Period 1997. Gross profit for the
Second Quarter 1998 was $126,967, or 53% of revenues, compared to $296,429,
or 48% of revenues, for the Second Quarter 1997. The sales to Whessoe Varec
in the 1997 periods were at discounted OEM prices, reducing the gross margin
percentages in those periods. Except for sales to distributors, the
Company's revenues have been from a number of different customers and
generally have not been from repeat transactions from the same customers.
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Research, development and engineering expenditures decreased by $258,447,
or 39%, during the Six-Month Period from the Six-Month Period 1997, and by
$109,533, or 35%, during the Second Quarter 1998 from the Second 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.
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, that regulations would
be finalized in May 1998 and that certification would be required by November
1998. In April 1998, the Company and Gilbarco signed a "Commercial Agreement
for Hydrocarbon ORVR Certification" by which the two companies work together to
have the affected Gilbarco products certified to meet the new CARB regulations
in the time required. While the target date is November 1998, there can be no
assurance that this will be met, hence revenues from this relationship are not
expected to impact in Fiscal 1998, but in early 1999, should they in fact occur
at all.
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.
The Company also signed a development agreement with IWACO, a Dutch
consulting company acting for a consortium of industry and local authority
partners involved in or interested in bioremediation of contaminated sited
within Holland. The agreement, the culmination of two-years' work, covered the
development of specific monitoring applications to support the bio remediation
process. It is worth about $150,000 to the Company over the twenty month life
of the contract, and is expected to result in new products for the remediation
marketplace.
In May 1998, the Company signed a development agreement with Horiba, Ltd.,
a leading Japanese environmental and analytical instrument manufacturer. The
agreement, with $45,000 to the Company, calls for the development of a sensor
probe to be incorporated into Horiba's Multi-Parameter Water Quality Instrument
product line. Horiba has the option of marketing the developed product globally
under exclusivity tied to performance.
General and administrative expenditures decreased by $32,142, or 5%, during
the Six-Month Period 1998 from the Six-Month Period 1997, and increased by
$29,299, or 9%, during the Second
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Quarter 1998 over the Second Quarter 1997. The Company continues to operate
with the reductions in personnel and other expenses and cash expenditures,
including the deferral of administrative, as well as other salaries, implemented
during the second half of 1997. During the Six-Month Period 1998, approximately
$140,000 of accounts receivable were offset against previously recorded reserves
for specific doubtful accounts, resulting in a reduction of both gross accounts
receivable and reserves with no effect on net receivables or results of
operations. During the Six-Month Period 1997, $25,000 was added to the reserve
and charged to expense.
Sales and marketing expenditures decreased by $184,481, or 36%, during the
Six-Month Period 1998 from the Six-Month Period 1997, and by $88,231, or 33%,
during the Second Quarter 1998 from the Second Quarter 1997, reflecting
reductions in personnel and in other spending as well.
The Company's interest income decreased to a minimal amount during the Six-
Month Period 1998 and the Second Quarter 1998 from $74,824 during the Six-Month
Period 1997 and $17,503 during the Second Quarter 1997, reflecting the
difference in cash and cash equivalents during the periods. Interest expense
increased by $9,687, or 9%, during the Six-Month Period 1998 over the Six-Month
Period 1997, and by $4,911, or 9% during the Second Quarter 1998 over the Second
Quarter 1997.
As a result of the foregoing, the Company incurred a net loss of
$1,164,062, or a net loss of $0.05 per share, for the Six-Month Period 1998 as
compared to a net loss of $1,716,207, or a net loss of $0.07 per share, for the
Six-Month Period 1997. Net loss for the Second Quarter 1998 was $657,435, or a
net loss of $0.03 per share, as compared to a net loss of $883,045, or a net
loss of $0.03 per share for the Second Quarter 1997.
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. The terms of the settlement are
confidential, and had no material effect on the Company's financial position or
results of operations.
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The action seeks
monetary damages of approximately $200,000 at current exchange rates. 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 May 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 six-month period ended March 31, 1998.
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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 six-month
period ended March 31, 1998.
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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.
October 5, 1998 By: /s/ Geoffrey F. Hewitt
- --------------- ----------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
October 5, 1998 By: /s/ Melvin W. Pelley
- --------------- ----------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
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