<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
[ ] 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, 1999, the issuer had 36,018,238 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,
1998 1999
-------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 91,354 $ 56,403
Accounts receivable, net of allowance for doubtful
accounts of $60,505 and $49,861 at September 30
and March 31, 1999, respectively 432,302 877,142
Inventories 1,248,007 994,095
Prepaid expenses and other 86,261 120,224
-------------------------------
Total current assets 1,857,924 2,047,864
-------------------------------
Equipment 706,465 704,964
Less accumulated depreciation (605,167) (625,641)
-------------------------------
Net equipment 101,298 79,323
-------------------------------
Other assets:
Patent costs, net of accumulated amortization of
$1,885,838 at September 30, 1998 and
$1,924,284 at March 31, 1999 114,274 87,022
Technology costs, net of accumulated amortization
of $417,623 at September 30, 1998 and 52,083 26,042
and $443,664 at March 31, 1999
Note financing costs, net of accumulated amortization of
$232,775 at September 30, 1998 and
$264,926 at March 31, 1999 32,151 --
Note refinancing costs, net of accumulated amortization
of $6,375 at March 31, 1999 -- 146,630
Prepaid financing costs - Rights Offering 147,970 --
-------------------------------
Total other assets 346,478 259,694
-------------------------------
Total assets $2,305,700 $2,386,881
-------------------------------
-------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
1998 1999
-------------------------------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable $ 1,600,000 $ --
Bank loan payable 32,452 34,869
Current installments of note payable 7,808 3,253
Accounts payable 396,164 245,910
Deferred salaries 179,806 70,738
Accrued salaries and benefits 157,365 154,487
Accrued warranty 113,767 142,816
Deferred income -- 56,000
Accrued legal, accounting and consulting 112,320 81,100
Accrued commissions 41,929 33,799
Other accrued expenses 84,872 76,691
Interest payable 50,065 91,382
-------------------------------
Total current liabilities 2,776,548 991,045
Senior convertible notes payable -- 1,621,000
Notes payable to officers, directors and affiliates 808,000 433,000
Note payable, net of current installments 60,000 --
-------------------------------
Total liabilities 3,644,548 3,045,045
-------------------------------
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized 10,000,000 shares;
218,998 and 207,848 convertible shares issued and outstanding
at September 30, and March 31, 1999; respectively;
at liquidation value of $15 per share 3,284,970 3,117,720
Common stock, $.0001 par value. Authorized
150,000,000 shares; 26,441,207 and 35,019,238
shares issued and outstanding at September 30
and March 31, 1999, respectively 2,644 3,502
Additional paid-in capital 27,362,272 29,106,443
Deficit (31,988,734) (32,885,829)
-------------------------------
Stockholders' equity (deficiency) (1,338,848) (658,164)
-------------------------------
Total liabilities and stockholders' equity $ 2,305,700 $ 2,386,881
-------------------------------
-------------------------------
</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,
1998 1999 1998 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $241,693 $725,938 $466,872 $1,054,833
Cost of revenues 114,726 340,694 207,568 524,288
---------------------------------------------------------
Gross profit 126,967 385,244 259,304 530,545
---------------------------------------------------------
Operating expenses:
Research, development and
engineering 204,422 129,364 396,314 284,161
General and administrative 340,547 284,976 580,364 656,911
Sales and marketing 179,126 166,165 328,048 330,350
---------------------------------------------------------
Total operating expenses 724,095 580,505 1,304,726 1,271,422
---------------------------------------------------------
Loss from operations (597,128) (195,261) (1,045,422) (740,877)
---------------------------------------------------------
Other income (expense):
Interest expense (60,666) (82,945) (120,791) (164,114)
Interest and other income 359 1,407 2,151 7,896
---------------------------------------------------------
Total other income
(expense) (60,307) (81,538) (118,640) (156,218)
---------------------------------------------------------
Net loss ($657,435) ($276,799) $1,164,062) ($897,095)
---------------------------------------------------------
---------------------------------------------------------
Shares of common stock used in
computing net loss per share 25,718,423 34,688,114 25,606,870 31,126,703
-------------------------------------------------------------
-------------------------------------------------------------
Net loss per share ($0.03) ($0.01) ($0.05) ($0.03)
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(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, 1998 218,998 $3,284,970 26,441,207 $2,644 27,362,272 (31,988,734) (1,338,848)
Common stock issued:
For conversion of preferred stock (11,150) (167,250) 111,500 11 167,239 -- --
For cash -- -- 4,195,209 419 686,053 -- 686,472
In connection with exchange of senior
convertible notes payable and
partial interest thereon -- -- 647,852 65 148,941 149,006
For conversion of notes and interest
payable to officers, directors and
affiliates -- -- 1,935,677 194 420,793 -- 420,987
For conversion of other notes payable -- -- 272,727 27 59,973 -- 60,000
For services -- -- 915,719 92 151,366 -- 151,458
For payment of deferred salaries -- -- 489,347 49 107,607 -- 107,656
For exercise of options -- -- 10,000 1 2,199 -- 2,200
Net loss -- -- -- -- -- (897,095) (897,095)
---------------------------------------------------------------------------------------
Balance at March 31, 1999 207,848 $3,117,720 35,019,238 $3,502 29,106,443 (32,885,829) (658,164)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</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
-------------------------------
1998 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,164,062) ($897,095)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 31,369 21,975
Amortization of patent and technology costs 138,772 64,487
Amortization of financing costs 42,109 38,526
Common stock issued for services 46,875 136,361
Common stock issued for interest expense -- 21,001
Gain on sale of fixed assets (1,790) (750)
Changes in current assets and liabilities:
Increase in accounts receivable (1,101) (444,840)
(Increase) decrease in inventories (57,126) 253,912
(Increase) decrease in prepaid expenses and
other current assets (18,574) (3,963)
Increase (decrease) in accounts payable 63,103 (150,254)
Increase (decrease) in accrued expenses 94,060 42,063
Increase in interest payable 5,015 84,566
----------------- -----------------
Net cash used in operating activities (821,350) (834,011)
----------------- -----------------
Cash flows from investing activities:
Sale of equipment 10,125 750
Payments for patents (20,750) (11,194)
----------------- -----------------
Net cash used in investing activities (10,625) (10,444)
----------------- -----------------
</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
-------------------------------
1998 1999
------------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from bank loan $ -- $43,660
Proceeds from notes payable, officers, directors and affiliates 494,000 --
Proceeds from issuance of common stock and warrants -- 922,946
Payment of financing costs -- (113,504)
Payments on note payable to bank and others (3,363) (45,798)
Proceeds from the exercise of options 1,100 2,200
----------------- -----------------
Net cash provided by financing activities 491,737 809,504
----------------- -----------------
Net increase (decrease) in cash and cash equivalents ($340,238) ($34,951)
Cash and cash equivalents at beginning of period 427,488 91,354
----------------- -----------------
Cash and cash equivalents at end of period $87,250 $56,403
----------------- -----------------
----------------- -----------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $25,000 $ --
Exchange of senior convertible notes payable due
February 15, 1999 for notes due February 15, 2002 -- 1,600,000
Notes and interest payable to officers, directors and
affiliates converted to common stock and warrants -- 420,987
Notes payable to others converted to common stock
and warrants -- 60,000
Payment of financing costs with common stock and warrants -- 178,005
Issuance of senior convertible notes in payment of accrued interest -- 21,000
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock 1,664 --
----------------- -----------------
----------------- -----------------
Interest paid $6,453 $11,805
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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
September 30, 1998 and March 31, 1999, and the results of operations and cash
flows of the Company for the three- and six-month periods ended March 31, 1998
and 1999. 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, 1998.
Certain Fiscal 1998 Financial Statement amounts have been reclassified
to conform with the presentation in the Fiscal 1999 Financial Statements.
(2) NOTES PAYABLE
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 at a conversion price (the "Conversion
Price") of, initially, $0.80 per share at any time after March 26, 1996 and
before the close of business on February 14, 1999. The Conversion Price was
adjusted, in accordance with the original note agreement, to $0.4078, a price
representing a 10% discount from the average closing bid price of the Common
Stock for the 30 business days prior to February 15, 1997. During Fiscal 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 February 15, 1999, 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.
On February 2, 1999, the Company offered to exchange the Notes at their
maturity on February 15, 1999 for new Notes (the "New Notes") with a conversion
price of $0.23, which was established by using the ten-day average closing price
of the Common Stock prior to February 15, 1999. The New Notes provide for
semi-annual interest payments at 8% per annum in cash or at 12% per annum in
stock (at the Company's option) and are due February 15, 2002. The Company may
require conversion if the closing bid price of the Common Stock exceeds 200% of
the conversion price for 20 consecutive trading days. Other terms are similar to
the old Notes. In order to encourage exchange of the Notes for New Notes, the
Company offered a bonus, payable in Common Stock valued at approximately current
market, of 8% of the face amount of Notes exchanged for New Notes. The Company
offered an additional Common Stock bonus equal to 4% of the face amount of notes
exchanged if the holder agreed to accept additional New Notes in payment of the
semi-annual interest payment due February 15, 1999. All of the $1,600,000 face
amount of old Notes were exchanged for New Notes, and an additional $21,000 of
New Notes were issued in payment of interest due on $525,000 of old Notes. An
aggregate of 556,544 shares of Common Stock (valued at $0.23 per share, or a
total of $128,005) were issued as the exchange bonus. The exchange bonus of
$128,005 and legal and other associated costs of $25,000 are being amortized to
interest expense over the three-year life of the New Notes. An aggregate of
91,308 shares of Common Stock (valued at $0.23 per share, or a total of $21,001)
was issued as the interest bonus, and charged to interest expense in the current
period.
The Company paid fees and expenses associated with the February 1996
offering amounting to $428,204, which has been amortized as interest expense
over the three-year term of the Notes or until conversion, if earlier, when the
proportionate unamortized amount was charged to additional paid in capital. As
of February 15, 1999
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
approximately $163,278 of unamortized deferred financing cost has been
recorded as a reduction in additional paid-in capital associated with the
$1,225,000 of the Notes converted to Common Stock. Also in connection with
the 1996 Offering, the Company issued to the Placement Agent for that
Offering, for nominal consideration, warrants to purchase up to 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 in accordance
with the original 1996 Placement Agent Agreement. 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. As
an inducement to encourage the exercise of the warrants, the Company has
voluntarily reduced the exercise price, as of April 23, 1999, of the warrants
to $0.23 per share. These warrants are exercisable at any time on or after
August 15, 1996 through February 14, 2001 and contain certain piggyback
registration rights.
On July 7, 1998, the Company arranged a line of credit with Silicon
Valley Bank. The agreement provides for maximum loans of $1 million, and is
secured by accounts receivable, inventories, equipment and intellectual
property. The agreement provides for advances against specific sales invoices at
an annualized interest rate of approximately 19.75%. As of March 31, 1998, the
Company owed $34,869 against the line of credit.
In March and August 1998, the Company obtained loans aggregating
$433,000 from Privatbank Vermag AG, a private investment bank with which a
director of the Company is associated. These loans (the "Bridge Loans") were
provided as interim financing until the Company completed its Rights Offering
(See Capital Stock below). The Bridge Loans bear interest at approximately 8.5%
per annum. In addition, the Company agreed to issue to Privatbank, as additional
consideration, 130,000 Units (consisting of 130,000 shares of Common Stock and
Class E Warrants to purchase 130,000 shares of Common Stock). The Units were
issued in October 1998 as part of the Rights Offering. Also, $50,000 of the
Bridge Loans and $1,920 in accrued interest were converted to Common Stock and
Warrants as part of the Rights Offering. The remaining $383,000 of Bridge Loans
are due on July 15, 1999.
During Fiscal 1998, directors and officers of the Company advanced an
aggregate of $375,000 to the Company. These advances bear interest at the rate
of 8% per annum and are due at various dates between December 14, 2002 and
February 4, 2003 unless converted into Common Stock prior to maturity. An
aggregate of $325,000 of these advances and $20,329 in accrued interest was
converted to Common Stock and Warrants in conjunction with the Rights Offering.
(3) CAPITAL STOCK
On October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants transferable rights
(the "Rights") to subscribe for units (the "Units") at a subscription price of
$0.22 per Unit. Each Unit consists of one share of Common Stock and one
redeemable Class E Warrant exercisable for one share of Common Stock at an
exercise price for one year (through October 23, 1999) at $0.25 per share; then
through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per
share; then through October 23, 2002 at $0.70 per share; then through October
23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each
holder of record as of October 16, 1998 of Common Stock and Warrants received
one Right for four shares of Common Stock or Warrants held, and each holder of
Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An
aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were
exercised as of the close of the offering on December 22, 1998, resulting in
gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares
of Common Stock and a like number of Class E Warrants.
Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for
cash of $922,946; 1,805,677 were exercised in exchange for the payment of
advances (and accrued interest thereon) from officers, directors and affiliates
aggregating $397,249; 272,727 were exercised in payment of a $60,000 note
payable to others; 489,347 were exercised in payment of $107,656 of deferred
salaries due to members of management of the Company; and 915,719 were exercised
in payment for legal, consulting and other services totalling $201,458.
The Company incurred $286,474 in legal, accounting, distribution and
other costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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). 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. During the three-month period ended December 31, 1998, 11,150
shares of Convertible Preferred Stock were converted to 111,500 shares of Common
Stock. As of December 31, 1998, the Company had 207,848 shares of Convertible
Preferred Stock outstanding. 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. Likewise, in September 1998, the Board of Directors
determined not to declare the annual dividend payable on November 1, 1998. As a
result, the undeclared dividends, aggregating $685,898 (if elected entirely in
cash, or 34,586 additional shares of Convertible Preferred Stock if elected
wholly in additional shares), will accumulate in accordance with the terms of
the Convertible Preferred 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. The Company paid fees and
expenses associated with the Unit offering amounting to $345,683. Each Unit
consisted of one share of Common Stock and one warrant to purchase one share of
Common Stock (the "Unit Warrants") the shares and warrants being immediately
separable. The Unit Warrants are each exercisable at $1.00 at any time from May
31, 1996 through May 30, 2001. On April 23, 1999 the Company offered to exchange
Unit Warrants for Class E Warrants. Also in connection with the Unit offering,
the Company issued to the Placement Agent for the offering, for nominal
consideration, warrants to purchase up to 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 in accordance with the Placement Agent
Agreement, 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 ended March 31, 1999, the Company received
$2,200 from the exercise of an option to purchase 10,000 shares Common Stock at
an exercise price of $0.22 per share.
(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 calendar 1999
from its alliance with Whessoe Varec, Inc. in the aboveground storage tank
leak detection market, because of a December 1999 regulatory compliance
deadline for tank owners in the State of Florida. The Company also expects
revenues 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. There can be no assurance
that forecasted sales will be realized to achieve profitable operations, or
that additional financing, if needed, can be obtained on terms satisfactory
to the Company, if at all, or in an amount sufficient to enable the Company
to continue 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 October 23, 1998, the Company granted, for no consideration to
holders of its Common Stock, Preferred Stock and warrants transferable rights
(the "Rights") to subscribe for units (the "Units") at a subscription price of
$0.22 per Unit. Each Unit consists of one share of Common Stock and one
redeemable Class E Warrant exercisable for one share of Common Stock at an
exercise price for one year (through October 23, 1999) at $0.25 per share; then
through October 23, 2000 at $0.35; then through October 23, 2001 at $0.50 per
share; then through October 23, 2002 at $0.70 per share; then through October
23, 2003 (at which time the Class E Warrants expire) at $0.90 per share. Each
holder of record as of October 16, 1998 of Common Stock and Warrants received
one Right for four shares of Common Stock or Warrants held, and each holder of
Preferred Stock received 2.5 Rights for each share of Preferred Stock held. An
aggregate of 8,976,962 Rights were issued. An aggregate of 7,678,679 Rights were
exercised as of the close of the offering on December 22, 1998, resulting in
gross proceeds to the Company of $1,689,309 and the issuance of 7,678,679 shares
of Common Stock and a like number of Class E Warrants.
Of the total 7,678,679 Rights exercised, 4,195,209 were exercised for
cash of $922,946; 1,805,677 were exercised in exchange for the payment of
advances (and accrued interest thereon) from officers, directors and affiliates
aggregating $397,249; 272,727 were exercised in payment of a $60,000 note
payable to others; 489,347 were exercised in payment of $107,656 of deferred
salaries due to members of management of the Company; and 915,719 were exercised
in payment for legal, consulting and other services totalling $201,458.
The Company incurred $286,474 in legal, accounting, distribution and
other costs associated with the Rights Offering, resulting in net proceeds of
$1,402,835.
The Company's 8% senior convertible notes payable, convertible into
Common Stock at $0.4078 per share, became due on February 15, 1999. On February
2, 1999, the Company offered to exchange the Notes at their maturity on February
15, 1999 for new Notes (the "New Notes") with a conversion price of $0.23, which
was established by using the ten-day average closing price of the Common Stock
prior to February 15, 1999. The New Notes provide for semi-annual interest
payments at 8% per annum in cash or at 12% per annum in stock (at the Company's
option) and are due February 15, 2002. The Company may require conversion if the
closing bid price of the Common Stock exceeds 200% of the conversion price for
20 consecutive trading days. Other terms are similar to the old Notes. In order
to encourage exchange of the Notes for New Notes, the Company offered a bonus,
payable in Common Stock valued at approximately current market, of 8% of the
face amount of Notes exchanged for New Notes. The Company offered an additional
Common Stock bonus equal to 4% of the face amount of notes exchanged if the
holder agreed to accept additional New Notes in payment for the semi-annual
interest payment due February 15, 1999. All of the $1,600,000 face amount of old
Notes were exchanged for New Notes, and an additional $21,000 of New Notes were
issued in payment of interest due on $525,000 of old Notes. An aggregate of
556,544 shares of Common Stock (valued at $0.23 per share, or a total of
$128,005) were issued as the exchange bonus. The exchange bonus of $128,005 and
legal and other costs of $25,000 associated are being amortized to interest
expense over the three-year life of the New Notes. An aggregate of 91,308 shares
of Common Stock (valued at $0.23 per share, or a total of $21,001) was issued as
the interest bonus, and charged to interest expense in the current period.
The Company had working capital of $1,056,819 at March 31, 1999,
compared with negative working capital of $918,624 at September 30, 1998, an
increase in working capital of $1,975,443. Also the Company had increases in
stockholders' equity of $680,684. These increases are primarily a result of the
Company's rights offering and the exchange of Notes discussed above, offset in
part by the Company's net loss for the six-month period ended March 31, 1999
(the "Six-Month Period 1999") of $897,095.
11
<PAGE>
Net cash used in operating activities during the Six-Month Period 1999
was $834,011 compared to net cash used in operating activities during the
Six-Month Period 1998 of $821,350. The deficit during the Six-Month Period 1999
is primarily a result of the Company's net loss of $897,095, and adjustments to
reconcile net loss to net cash used in operating activities. These adjustments
consider changes in current assets and liabilities, as well as non-cash
transactions including depreciation and amortization expense of $124,988 and
common stock issued in exchange for services of $136,361. Members of management
of the Company agreed to accept 489,347 shares of Common Stock and 489,347
warrants for the payment of $173,529 in salaries, less approximately $65,000 in
withholding taxes which the Company remitted in cash. Management had deferred
the payment of a substantial portion of their salaries since June 1997, and
continue to do so. Common Stock and warrants were also issued in payment for
approximately $152,000 in consulting and other services.
Net cash used in operating activities during the Six-Month Period 1998
of $821,350 was primarily a result of the Company's net loss of $1,164,062, and
adjustments for changes in current assets and liabilities and non-cash
transactions including depreciation and amortization expense of $212,250.
Net cash used in investing activities during the Six-Month Period 1999
was $10,444, as compared to net cash used in investing activities of $10,625
during the Six-Month Period 1998. During the Six-Month Period 1999, the Company
sold unused, fully depreciated equipment for $750 and paid $11,194 for United
States and foreign patent applications. During the Six-Month Period 1998, the
Company sold unused equipment for $10,125 and paid $20,750 for patent
applications.
Net cash provided by financing activities during the Six-Month Period
1999 was $809,504 as compared to net cash provided by financing activities
during the Six-Month Period 1998 of $491,737. During the Six-Month Period 1999
cash proceeds of $922,946 were received for the exercise of Rights issued to
shareholders resulting in the issuance of 4,195,209 shares and warrants. Costs
associated with the Rights offering and Note exchange paid during the period
were $113,504. Payments on advances against the Company's line of credit with
Silicon Valley Bank and other notes were $45,798 and the Company borrowed an
additional $43,660 against the line of credit. During the Six-Month Period 1999,
the Company received $2,200 for the exercise of an option to purchase 10,000
shares of its Common Stock.
During the Six-Month Period 1998, the Company borrowed $494,000 from
certain of its officers and directors, and received $1,100 for the exercise of
options to purchase 5,000 shares of Common Stock.
As discussed in Note 4 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and may need additional financing
to continue its operations. There can be no assurance that forecasted sales will
be realized to achieve profitable operations, or that additional financing, if
needed, can be obtained on terms satisfactory to the Company, if at all, or in
an amount sufficient to enable the Company to continue operations.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company has a Strategic Alliance (the "Alliance") for the AST
market with Whessoe Varec, Inc. as of June 30, 1996 as amended. The primary
target for the Alliance has been the Florida AST market. On July 13, 1998,
after a four year process, the State of Florida passed into law its new
storage tank regulations. Under the law, the regulated community has various
options for compliance. The lowest cost option is believed to be an internal
tank liner with an external, certified, continuous leak detection device.
Currently, the Company's PetroSense-Registered Trademark- product line is the
only continuous leak detection device certified for use at such sites.
Compliance is required by December 31, 1999.
In February 1999, Whessoe Varec and FCI targeted customer sites with
over 700 tanks. These sites include coastal bulk storage, inland jobbers,
industrial, military, airports, power generation and government facilities. Each
tank for which Whessoe Varec and FCI receive an order is worth up to $10,000 in
revenue to FCI. In addition to these targeted accounts, there is a secondary
market of unlined tanks which is yet to be qualified. Florida DEP held its
annual conference during May 1999 in Tampa and Daytona Beach to update the tank
community about its requirements for compliance by December 31, 1999 and its
commitment to that compliance date. Some companies have been operating
12
<PAGE>
on the assumption that there will be a delay in the enforcement process, but
Florida DEP remains firm in its commitment. Citgo, Dreyfus, Marathon, Miami
Airport and others have approval from Florida DEP to install the Company's
equipment but have not yet placed orders.
Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy,
Jacksonville Electric and GATX have already purchased and installed the
Company's equipment. These orders have reduced the Whessoe Varec inventory
originally purchased as part of their contractual obligations under the Alliance
agreement and subsequent purchases to meet market requirements. As occurred with
the Federal UST regulations which had a mandatory compliance date of December
22, 1998, following a ten-year compliance period, some companies are expected to
act later than others, impacting on the timing of revenues for the Company.
Other States are expected to follow Florida and promulgate AST
regulations. Virginia promulgated its own similar regulations during 1998.
Pennsylvania, New Jersey, Minnesota and Wisconsin have also promulgated
regulations.
The Alliance is also pursuing business with the Department of Defense
(DoD) in California, Florida and elsewhere. Whessoe Varec's sister company
Whessoe Coggins has a significant presence in the military fuel depot market.
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 military's
system upgrade. A system incorporating both Whessoe Coggins and Whessoe
Varec/FCI products was successfully demonstrated to the military in California
during April 1998. The data generated at this test was submitted to the local
regulatory authority and met their criteria. During 1998 and through March 31,
1999, the Company's revenues from sales to Whessoe Varec for this market have
been approximately $950,000. Whessoe Varec has completed the installation of
PetroSense(R) probes at approximately 30 DoD tanks. Another 30-40 tanks are
expected to be so equipped sometime in the first half of calendar 1999 largely
from Whessoe Varec's inventories. These installations would complete this phase
of the California compliance effort. There is a similar number of military tanks
in Florida where regulations provide for fewer alternatives to the Company's
products. There are estimated to be in excess of 5,000 military tanks in the
United States.
In the UST marketplace, the Company has identified that certain large
diesel tanks located at truck stops may present an opportunity for the Company's
leak detection equipment. The size and throughput of these tanks is problematic
for conventional compliance technologies. The Company is investigating the size
of this opportunity.
The development of the offshore market for the Company's
OilSense-4000-TM- and PHA-100WL continues to be slower than originally
anticipated. The combination of the availability of Freon-Registered
Trademark- and the low price of oil is mitigating against a wholesale switch
from the Freon-Registered Trademark-/IR method. Notwithstanding the above,
Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of
the Company's products on all their platforms in the Gulf of Mexico. Spirit
Energy has installed 14 PHA-100WLs and Amoco has installed the Company's
OilSense-4000-TM- and PHA-100WLs at 8 of their more than 25 sites. During
December 1998, Pennzoil placed their first order for the Company's PHA-100WLs
for 2 of their 15 sites. Kerr McGee and CNG have begun to evaluate the
Company's equipment with the intent to purchase if the evaluations are
successful. These two companies represent approximately 30 platforms. Exxon,
Marathon and Shell are also evaluating the Company's equipment. Chevron
ordered an OilSense-4000-TM- for evaluation for use at its platforms
throughout the Gulf. Merger activity among the major oil companies continues
to slow installations but is not believed to have significantly affected the
size of the opportunity.
The Company is continuing its marketing efforts in other major offshore
production areas such as the North Sea and the Persian Gulf. During January
1999, the Company received its first order from Oman.
Revenues for the Six-Month Period 1999 were $1,054,833, more than twice
the revenues of $466,872 for the Six-Month Period 1998. Revenues for the
three-month period ended March 31, 1999 (the "Second Quarter 1999") were
$725,938 compared to revenues of $241,693 for the Second Quarter 1998. Revenues
during the Six-Month Period and Second Quarter 1999 included sales to Whessoe
Varec of approximately $773,000 and $543,000, respectively, of products
primarily for installation at military fuel storage facilities. Sales to Whessoe
Varec during the Six-Month Period and Second Quarter 1998 were approximately
$32,000.
13
<PAGE>
Revenues during all four periods also included continued sales to
Exxon, EEX, Chevron, Spirit Energy and other operators of offshore oil and gas
production platforms. International sales during the Second Quarter 1999
included a purchase of fourteen PHA-100Plus monitors by Universal Electronics &
Computers, Inc. (UECI) of Taiwan. These instruments are part of the
environmental program of the Chinese Petroleum Company (CPC) refining/marketing
group.
Gross profit for the Six-Month Period 1999 was $530,545 or 50% of
revenues, compared to gross profit of $259,304 or 56% of revenues for the
Six-Month Period 1998. Gross profit for the Second Quarter 1999 was $385,244 or
53% of revenues, compared to Second Quarter 1998 gross profit of $126,967, or
53% of revenues. Sales to Whessoe Varec are at more heavily discounted OEM
prices, resulting in the decrease in gross margin percentage during the
Six-Month Period 1999 from the Six-Month Period 1998.
The Company's sensor development project with Gilbarco has moved to the
stage where Gilbarco is submitting modified products incorporating the Company's
sensor to the California Air Resources Board (CARB) for certification to meet
anticipated Onboard Refueling and Vapor Recovery (ORVR) requirements. Acceptance
by CARB is expected to lead to introduction by Gilbarco of a product line which
offers its customers a full range of products to meet present and future
national regulations and for the Company to start the process to manufacture
sensors to meet Gilbarco's needs.
The Company has signed a five-year agreement with Bosch Telecom whereby
the two companies cross license certain of each others proprietary sensor
technologies for certain specified markets. Bosch gets access to proprietary
chemistry technologies owned by FCI which it can use in the areas of security
systems, automotive and other markets. The Company gets access to certain sensor
technologies and has access to these technologies in certain regulated and
non-regulated markets. These allow the Company to branch out into certain
non-regulated markets of interest such as the medical sensor market. This is
part of the Company's strategy to lessen its dependence on regulated markets.
In conjunction with the Bosch agreement, the Company has entered into
discussions with a medical instrument manufacturing company to supply certain
gas sensor technology for a neonatal application. This company requires a
low-cost, disposable sensor package to replace its existing sensing technology.
The size of the opportunity is estimated by the manufacturer to be 2,000,000
units per year in the U.S. alone.
The Company's Port of Rotterdam projects with the Dutch engineering
firm IWACO are ongoing. The Company has become an equal partner in both IWACO
programs relating to bioremediation and monitoring technologies. The Company
benefits from access to data, technology, resources and personnel of the
Consortium's member companies which include Shell International Products and
Solvay S.A. In the event one of the bioremediation technologies is selected for
use, there would be a significant need for monitoring instrumentation to ensure
long-term satisfactory operation. Evaluation of the various bioremediation
technologies continues.
During Fiscal 1999 the Company successfully completed the first and
second milestones in its project with Horiba, the Japanese instrument company,
to develop a sensor probe for Horiba's Multi-Parameter Water Quality Instrument
product line. The Company has since delivered prototype units for evaluation.
Research, development and engineering expenditures decreased by
$112,153, or 28%, to $284,161 during the Six-Month Period 1999 from the
Six-Month Period 1998, and by $75,058 or 37% to $129,364 during the Second
Quarter 1999 from the Second Quarter 1998 reflecting Management's focus on
reducing expenses while continuing to pursue those programs considered to have
the highest potential for near-term results.
General and administrative expenses increased by $76,547, or 13%,
during the Six-Month Period 1999 over the Six-Month Period 1998, primarily as a
result of unusually high expenditures during the First Quarter 1999 related to
financial planning including travel and legal and consulting fees, including
approximately $106,000 of services compensated in Common Stock as opposed to
cash. The Company does not expect this higher level of spending to continue in
the short term, as it continues to operate with reduced personnel and other
expenses in all areas, including the deferral of management as well as other
salaries. During the Second Quarter 1999, general and
14
<PAGE>
administrative expenses decreased by $55,571, or 16% from the Second Quarter
1998, and decreased by $86,959 or 23% from the unusually high level of the
First Quarter 1999.
Sales and marketing expenditures during the Six-Month Period 1999 were
$330,350 compared to $328,048 during the Six-Month Period 1998, and were
$166,165 during the Second Quarter 1999, a decrease of $12,961, or 7%, from the
Second Quarter 1998.
Interest expense increased by $43,323 or 36% during the Six-Month
Period 1999 over the Six-Month Period 1998, and increased by $22,279 or 37%
during the Second Quarter 1999 over the Second Quarter 1998. The increases
reflect interest on loans made to the Company by officers, directors and
affiliates, and during the Second Quarter 1999, the $21,000 paid in Common Stock
as bonus interest to Note holders who accepted new Notes in lieu of cash for
payment of accrued interest.
As a result of the foregoing, the Company incurred a net loss of
$897,095, or a net loss of $0.03 per share for the Six-Month Period 1999 as
compared to a net loss of $1,164,062, or a net loss of $0.05 per share, for the
Six-Month Period 1998. Net loss for the Second Quarter 1999 was $276,799, or a
net loss of $0.01 per share, compared to a net loss of $657,435, or a net loss
of $0.03 per share for the Second Quarter 1998.
The Company continues to review the cost and operating impacts of
addressing the Year-2000 issue. Management has conducted assessments of the
potential costs associated with its internal operations, products shipped to its
customers, and material and services provided by its suppliers. The Company has
conducted tests of its products and based on such testing, believes that its
current products are Year-2000 compliant, in accordance with the Year-2000
Information and Disclosure Act. It has provided upgrades to older products, and
believes that all its products are Year-2000 compliant. The Company has not
incurred, and does not expect to incur, material costs relative to its products.
The Company has incurred less than $10,000 and expects to incur
additional costs of approximately $50,000 during Calendar 1999 to upgrade its
internal hardware and software systems which are critical to and support its
manufacturing, engineering, financial and other operations. The Company believes
it has identified those systems which require upgrades, and expects to complete
initial testing of critical systems by August 31, 1999. Implementation and
complete testing is expected to be completed by November 30, 1999. The risks of
disruptions in the business community in general, as well as with respect to the
Company's customers and suppliers, are difficult to discern. Management
continues to review these risks with respect to its operations, and does not
expect that the Year-2000 issue will have a material impact on the Company's
current financial position, liquidity or results of operations. Alternative
suppliers of materials and services as well as methods of supply are being
developed as deemed necessary.
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.
THE DISCUSSIONS IN THIS REPORT INCLUDE FORWARD LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE COMPANY'S NEED FOR
ADDITIONAL FUNDING, THE COMPANY'S CONTINUING LOSSES AND LACK OF
PROFITABILITY, 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. The next hearing is scheduled for
May 21, 1999. 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, 1999.
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 March 31, 1999.
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, 1999 By: /s/ Geoffrey F. Hewitt
- ------------ -----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
May 14, 1999 By: /s/ Melvin W. Pelley
- ------------ ---------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND FOR THE SIX-MONTH PERIOD
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 56,403
<SECURITIES> 0
<RECEIVABLES> 927,003
<ALLOWANCES> (49,861)
<INVENTORY> 994,095
<CURRENT-ASSETS> 2,047,864
<PP&E> 704,964
<DEPRECIATION> (625,641)
<TOTAL-ASSETS> 2,386,881
<CURRENT-LIABILITIES> 991,045
<BONDS> 2,054,000
0
3,117,720
<COMMON> 3,502
<OTHER-SE> (3,779,386)
<TOTAL-LIABILITY-AND-EQUITY> 2,386,881
<SALES> 1,054,833
<TOTAL-REVENUES> 1,054,833
<CGS> 524,288
<TOTAL-COSTS> 1,795,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,114
<INCOME-PRETAX> (897,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (897,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897,095)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT ON NET LOSS.
</FN>
</TABLE>
