<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 11, 1999, the issuer had 34,371,386 shares of Common
Stock, par value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1998 1998
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $91,354 $383,714
Accounts receivable, net of allowance for doubtful
accounts of $60,505 and $49,861 at September 30
and December 31, 1998, respectively 432,302 467,248
Inventories 1,248,007 1,177,613
Prepaid expenses and other 86,261 127,787
-------------- -------------
Total current assets 1,857,924 2,156,362
-------------- -------------
Equipment 706,465 706,465
Less accumulated depreciation (605,167) (616,434)
-------------- -------------
Net equipment 101,298 90,031
-------------- -------------
Other assets:
Patent costs, net of accumulated amortization of
$1,885,838 at September 30, 1998 and
$1,905,867 at December 31, 1998 114,274 97,172
Technology costs, net of accumulated amortization
of $417,623 at September 30, 1998 and 52,083 39,062
and $430,644 at December 31, 1998
Note financing costs, net of accumulated amortization of
$232,775 at September 30, 1998 and
$254,399 at December 31, 1998 32,151 10,527
Prepaid financing costs - Rights Offering 147,970 --
-------------- -------------
Total other assets 346,478 146,761
-------------- -------------
Total assets $2,305,700 $2,393,154
-------------- -------------
-------------- -------------
</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, December 31,
1998 1998
-------------- ---------------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable $1,600,000 $1,600,000
Bank loan payable 32,452 8,791
Current installments of note payable 7,808 5,898
Accounts payable 396,164 330,750
Deferred salaries 179,806 44,801
Accrued salaries and benefits 157,365 133,357
Accrued warranty 113,767 119,786
Accrued legal, accounting and consulting 112,320 52,890
Accrued commissions 41,929 35,886
Other accrued expenses 84,872 88,109
Interest payable 50,065 70,257
-------------- ---------------
Total current liabilities 2,776,548 2,490,525
Notes payable to officers, directors and affiliates 808,000 433,000
Note payable, net of current installments 60,000 --
-------------- ---------------
Total liabilities 3,644,548 2,923,525
-------------- ---------------
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 December 31, 1998; 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 34,371,386
shares issued and outstanding at September 30
and December 31, 1998, respectively 2,644 3,437
Additional paid-in capital 27,362,272 28,957,502
Deficit (31,988,734) (32,609,030)
-------------- ---------------
Stockholders' equity (deficiency) (1,338,848) (530,371)
-------------- ---------------
Total liabilities and stockholders' equity $2,305,700 $2,393,154
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
-------------------------------------
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Revenues $225,179 $328,895
Cost of revenues 92,842 183,594
------------ ------------
Gross profit 132,337 145,301
------------ ------------
Operating expenses:
Research, development and engineering 191,892 154,797
General and administrative 239,817 371,935
Sales and marketing 148,922 164,185
------------ ------------
Total operating expenses 580,631 690,917
------------ ------------
Loss from operations (448,294) (545,616)
------------ ------------
Other income (expense):
Interest expense (60,125) (81,169)
Interest and other income 1,792 6,489
------------ ------------
Total other expense (58,333) (74,680)
------------ ------------
Net loss ($506,627) ($620,296)
------------ ------------
------------ ------------
Shares of common stock used in computing loss per share 25,546,214 27,642,715
------------ ------------
------------ ------------
Basic loss per share ($0.02) ($0.02)
------------ ------------
------------ ------------
</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
Conversion of notes and interest
payable to officers, directors and
affiliates -- -- 1,935,677 194 420,793 -- 420,987
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
Exercise of options -- -- 10,000 1 2,199 -- 2,200
Net loss -- -- -- -- -- (620,296) (620,296)
--------- ---------- ---------- -------- ----------- ------------- ------------
Balance at December 31, 1998 207,848 $3,117,720 34,371,386 $3,437 28,957,502 (32,609,030) (530,371)
--------- ---------- ---------- -------- ----------- ------------- ------------
--------- ---------- ---------- -------- ----------- ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended December 31
--------------------------------------------
1997 1998
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($506,627) ($620,296)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 15,933 11,267
Amortization of patent and technology costs 69,278 33,050
Amortization of financing costs 21,050 21,624
Common stock issued for services 121,361
Gain on sale of fixed assets (1,790) --
Changes in current assets and liabilities:
Increase in accounts receivable (34,134) (34,946)
(Increase) decrease in inventories (31) 70,394
(Increase) decrease in prepaid expenses and
other current assets (2,545) 3,474
Decrease in accounts payable (29,183) (65,414)
Increase (decrease) in accrued expenses 49,329 (98,739)
Increase in interest payable 32,622 42,441
----------------- -----------------
Net cash used in operating activities (386,098) (515,784)
----------------- -----------------
Cash flows from investing activities:
Sale of equipment 10,125 --
Payments for patents (7,358) (2,927)
----------------- -----------------
2,767 (2,927)
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended December 31
--------------------------------------------
1997 1998
----------------- -------------------
(continued)
<S> <C> <C>
Cash flows from operating activities:
Net proceeds from bank loan $ -- $8,791
Proceeds from notes payable, officers, directors and affiliates 125,000 --
Proceeds from issuance of common stock and warrants -- 922,946
Payment of financing costs -- (88,504)
Payments on note payable to bank and others (1,648) (34,362)
Proceeds from the exercise of options 1,100 2,200
--------------- --------------
Net cash provided by financing activities 124,452 811,071
--------------- --------------
Net increase (decrease) in cash and cash equivalents ($258,879) $292,360
Cash and cash equivalents at beginning of period 427,488 91,354
--------------- --------------
Cash and cash equivalents at end of period $168,609 $383,714
--------------- --------------
--------------- --------------
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $25,000 $ --
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 -- 50,000
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock 1,664 --
--------------- --------------
--------------- --------------
Interest paid $6,453 $60,615
--------------- --------------
--------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO 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 December 31, 1998, and the results of operations and cash
flows of the Company for the three-month periods ended December 31, 1997 and
1998. 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 December 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.
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 to be determined based on 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 will be due February 15, 2002. In order to encourage exchange of the
Notes for New Notes, the Company has offered a bonus, payable in Common Stock
valued at approximately current market, of 8% of the face amount of Notes
exchanged for New Notes. However, there can be no assurance that the existing
Notes will be exchanged for New Notes.
The Company paid fees and expenses associated with the February 1996
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. As of
December 31, 1998 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 Offering, the Company issued to the Placement Agent for the 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 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. These warrants are exercisable at any time on
or after August 15, 1996 through February 14, 2001 and contain certain piggyback
registration rights.
8
<PAGE>
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 December 31, 1998,
the Company owed $8,791 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.
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.
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
9
<PAGE>
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. 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 three-month period ended December 31, 1998 (the "First
Quarter 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, currently convertible
into Common Stock at $0.4078 per share, become due on February 15, 1999. The
Company has offered to exchange these Notes, aggregating $1,600,000, for New
Notes, which will have a conversion price established at the average closing bid
price of the ten trading days preceding February 15, 1999. The New Notes are due
February 15, 2002 and bear interest at 8% if paid in cash or at 12% if, at the
Company's option, the interest is paid in shares of Common Stock valued at
market value at each semiannual interest payment date. In order to encourage
current note holders to exchange their notes, the Company is offering a bonus
payment of 8% of the face amount of Notes exchanged for New Notes, payable in
shares of Common Stock valued at current market value. However, there can be no
assurance that the existing notes will be exchanged.
The Company had negative working capital of $334,163 at December 31,
1998, compared with negative working capital of $918,624 at September 30, 1998,
an increase in working capital of $584,461. Also the Company had increases in
cash and cash equivalents of $292,360 and in stockholders' equity of $808,477.
These increases are primarily a result of the Company's rights offering, offset
in part by the Company's net loss for the three month period ended December 31,
1998 (the "First Quarter 1999") of $620,296.
Net cash used in operating activities during the First Quarter 1999 was
$515,784 compared to net cash used in operating activities during the First
Quarter 1998 of $386,098. The deficit during the First Quarter 1999 is primarily
a result of the Company's net loss of $620,296, 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 $65,941 and common stock
issued in exchange for services of $121,361. 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
11
<PAGE>
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 First Quarter 1998 of
$386,098 was primarily a result of the Company's net loss of $506,627, and
adjustments for changes in current assets and liabilities and non-cash
transactions including depreciation and amortization expense of $106,261.
Net cash used in investing activities during the First Quarter 1999 was
$2,927, as compared to net cash provided by investing activities of $2,767
during the First Quarter 1998. During the First Quarter 1998, the Company sold
unused equipment for $10,125 and paid $7,358 for United States and foreign
patent applications. During the First Quarter 1999, the Company paid $2,927 for
patent applications.
Net cash provided by financing activities during the First Quarter 1999
was $811,071 as compared to net cash provided by financing activities during the
First Quarter 1998 of $124,452. 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 paid during the
quarter were $88,504. Payments on advances against the Company's line of credit
with Silicon Valley Bank and other notes were $34,362 and the Company borrowed
an additional $8,791 against the line of credit. During the First Quarter 1999,
the Company received $2,200 for the exercise of an option to purchase 10,000
shares of its Common Stock.
During the First Quarter 1998, the Company borrowed $125,000 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. As discussed
in Note 2 to the Consolidated Financial Statements, the Company has offered to
exchange new, three-year notes for old notes payable aggregating $1.6 million
which become due on February 15, 1999. There can be no assurance that the notes
will be exchanged.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
During the First Quarter 1999, Whessoe Varec placed orders with the
Company for equipment for the military storage tank market (and other customers)
in the amount of $275,000. Of this amount, approximately $230,000 was shipped in
the quarter and $45,000 will be shipped in the second quarter of 1999.
On behalf of the U.S. Department of Energy (DoE), Bechtel Nevada placed
a $50,000 order for an additional 10 hand held devices of the type previously
developed for this customer. The units will be delivered in the second or third
fiscal quarter of 1999.
Incoming orders for the First Quarter 1999 were approximately $424,000
with revenues of approximately $329,000 and a backlog of $95,000.
Total revenues for the First Quarter 1999 were $328,895 as compared to
$225,179 for the First Quarter 1998. Revenues for the First Quarter 1999
included sales of approximately $230,000 to Whessoe Varec, the Company's
Alliance partner, as described below, in the aboveground storage tank (AST) leak
detection market. Most of the products purchased by Whessoe Varec were for
installation at military fuel storage facilities.
Revenue also included continued sales to Spirit Energy, Pennzoil,
Chevron and other operators of offshore oil and gas production platforms.
Gross profit for the First Quarter 1999 was $145,301, or 44% of sales,
compared to $132,337, or 59% of sales for the First Quarter 1998. The decrease
in gross margin percentage results from the relatively higher portion of sales
to OEM customers such as Whessoe Varec in the First Quarter 1999.
12
<PAGE>
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.
Whessoe Varec and FCI have targeted 360 sites with an estimated 2,500
tanks as their primary focus for the early part of 1999. Whessoe Varec and FCI
have assigned a team of eleven sales engineers to Florida and this team is
undertaking a concentrated sales effort focussed initially on the highest
priority prospects. These sites include coastal bulk storage, inland jobbers,
industry, military, airports, power generation and government facilities. Each
tank for which Whessoe Varec and FCI receive an order is worth about $10,000 in
revenue to FCI. The Florida regulations require compliance by December 1999.
Some facilities have already applied for approval to FLDEP specifying the
Company's equipment. 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.
Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy and
Jacksonville Electric have already purchased and installed the Company's
equipment. During December 1998, GATX placed an order to install the Company's
equipment at their Florida sites. These orders have reduced the Whessoe Varec
inventory originally purchased as part of their contractual obligations under
the Alliance agreement. Assuming that the concentrated sales effort is
successful, the Company expects new orders will be placed with the Company by
Whessoe Varec in order to position the Alliance to meet market demand prior to
the compliance date of December 31, 1999, although there can be no assurance
that this will actually occur. As occurred with the Federal UST regulations
which had a mandatory compliance date of December 22, 1998, and a ten-year
compliance period, some companies are expected to act earlier than others.
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 the second half of Fiscal
1998 and through December 1998, the Company's revenues from sales to this market
have been approximately $400,000. The Company has received orders from Whessoe
Varec for PetroSense-Registered Trademark- probes for over 30 DoD tanks. More
tanks are expected to be so equipped in the first half of 1999. There are
approximately 160 DoD tanks in California; however, the exact size of the
opportunity for the Company is not yet clear, since there is more than one
option available for the DoD to achieve compliance. 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.
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, 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
13
<PAGE>
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 has slowed 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.
The Company's sensor development project with Gilbarco has moved on to a
pre-manufacturing mode driven by the expectation that at some point in Calendar
1999, the California Air Resources Board (CARB) will require suppliers of
refueling equipment to certify their products to meet ORVRII. Provided that
certain key steps are completed by CARB, Gilbarco should commence manufacturing
products incorporating the Company's Sensor-on-a-Chip-Registered Trademark-
in order to meet the expected CARB requirements sometime in the summer of
1999. Revenues from this project are expected to begin in Fiscal 1999 if the
time schedule is met, but there can be no assurance that this will actually
occur.
The Company has also developed a cooperative relationship with Bosch,
the German conglomerate. Under a Letter of Intent entered into in January 1999,
the Company has provided access to certain proprietary technology owned by the
Company. After an initial evaluation followed by a short product development
cycle, Bosch is expected to put into the market devices meeting certain customer
requirements of a commercial and security nature. If successful, this may lead
to a broader cooperative effort by Bosch and the Company to penetrate other
markets, although there can be no assurance that this will actually occur.
The Company's Port of Rotterdam project with the Dutch engineering firm
IWACO is ongoing. In addition, the Company has become an equal partner in a
second IWACO program relating to bioremediation 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.
During Fiscal 1998 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.
Research, development and engineering expenditures decreased by $37,095,
or 19%, to $154,797 during the First Quarter 1999 from the First 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 $132,118, or 55%,
during the First Quarter 1999 over the First Quarter 1998, primarily as a result
of unusually high expenditures 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.
Sales and marketing expenditures increased by $15,263, or 10%, during
the First Quarter 1999 over the First Quarter 1998. The increases are primarily
in travel and reflect increased sales activity in all of the Company's major
markets.
Interest expense increased by $21,044, or 35%, during the First Quarter
1999 over the First Quarter 1998. The increase reflects interest accrued on
approximately $800,000 advanced to the Company by officers, directors and
affiliates, of which approximately $375,000 was repaid by the issuance of Common
Stock and Warrants as of December 22, 1998.
14
<PAGE>
As a result of the foregoing, the Company incurred a net loss of
$620,296, or a net loss of $0.02 per share for the First Quarter 1999 as
compared to a net loss of $506,627, or a net loss of $0.02 per share, for the
First 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 $5,000 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 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.
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 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.
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
February 12, 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.
On September 23, 1998, OCS, Inc. a Texas corporation and customer of the
Company's subsidiary, FCI Environmental, Inc., filed a lawsuit against FCIE in
the District Court of Harris County, Texas, 165th Judicial District. The lawsuit
alleged breach of warranty for goods purchased from FCIE. The plaintiff sought
incidental and consequential damages of $750,000 plus other fees and expenses.
On December 16, 1998, the Company filed a motion to dismiss the suit, and on
January 19, 1999, the Company and OCS, Inc. agreed to non-suit the claims and
counterclaims. The lawsuit was dismissed without prejudice to either party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the three-month period ended December 31, 1998.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIBERCHEM, INC.
February 12, 1999 By: /s/ Geoffrey F. Hewitt
- ----------------- -----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
February 12, 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 DECEMBER 31, 1998 AND FOR THE THREE-MONTH
PERIOD THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 383,714
<SECURITIES> 0
<RECEIVABLES> 517,109
<ALLOWANCES> (49,861)
<INVENTORY> 1,177,613
<CURRENT-ASSETS> 2,156,362
<PP&E> 706,465
<DEPRECIATION> (616,434)
<TOTAL-ASSETS> 2,393,154
<CURRENT-LIABILITIES> 2,490,525
<BONDS> 433,000
0
3,117,720
<COMMON> 3,437
<OTHER-SE> (3,651,528)
<TOTAL-LIABILITY-AND-EQUITY> 2,393,154
<SALES> 328,895
<TOTAL-REVENUES> 328,895
<CGS> 183,594
<TOTAL-COSTS> 874,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,169
<INCOME-PRETAX> (620,296)
<INCOME-TAX> 0
<INCOME-CONTINUING> (620,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620,296)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Omitted because of antidilutive effect on Net Loss
</FN>
</TABLE>
