<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
--------------------------------------------
[ ] TRANSITION REPORT UNDER 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 August 19, 1999, the issuer had 38,099,238 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, June 30,
1998 1999
-----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $91,354 $45,152
Accounts receivable, net of allowance for doubtful
accounts of $60,505 at September 30, 1998
and $94,861 at June 30, 1999 432,302 798,624
Inventories 1,248,007 1,032,185
Prepaid expenses and other 86,261 71,868
-----------------------------
Total current assets 1,857,924 $1,947,829
-----------------------------
Equipment 706,465 704,964
Less accumulated depreciation (605,167) (635,844)
-----------------------------
Net equipment 101,298 69,120
-----------------------------
Other assets:
Patent costs, net of accumulated amortization of
$1,885,838 at September 30, 1998 and
$1,941,781 at June 30, 1999 114,274 78,277
Technology costs, net of accumulated amortization
of $417,623 at September 30, 1998 and
and $456,685 at June 30, 1999 52,083 13,021
Note financing costs, net of accumulated amortization of
$232,775 at September 30, 1998 and
$264,926 at June 30, 1999 32,151 --
Note refinancing costs, net of accumulated amortization
of $19,752 at June 30, 1999 -- 138,264
Prepaid financing costs - Rights Offering 147,970 --
-----------------------------
Total other assets 346,478 229,562
-----------------------------
Total Assets $2,305,700 $2,246,511
============= ===========
</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, June 30,
1998 1999
----------------------------
<S> <C> <C>
Current liabilities:
Senior convertible notes payable $1,600,000 $ --
Bank loan payable 32,452 405,705
Current installments of note payable 7,808 --
Notes payable to officers, directors and affiliates -- 383,000
Accounts payable 396,164 202,419
Deferred salaries 179,806 104,757
Accrued salaries and benefits 157,365 158,114
Accrued warranty 113,767 119,751
Deferred income -- 14,000
Accrued legal, accounting and consulting 112,320 87,838
Accrued commissions 41,929 33,799
Other accrued expenses 84,872 85,574
Interest payable 50,065 84,137
----------------------------
Total current liabilities 2,776,548 1,679,094
Senior convertible notes payable -- 1,621,000
Notes payable to officers, directors and affiliates 808,000 100,000
Note payable, net of current installments 60,000 --
----------------------------
Total liabilities 3,644,548 3,400,094
----------------------------
Stockholders' 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 June 30, 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 36,111,238
shares issued and outstanding at September 30
and June 30, 1999, respectively 2,644 3,611
Additional paid-in capital 27,362,272 29,444,390
Deficit (31,988,734) (33,597,855)
Deferred costs -- (121,449)
----------------------------
Stockholders' deficiency (1,338,848) (1,153,583)
----------------------------
Total liabilities and stockholders' deficiency $2,305,700 $2,246,511
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended Nine-month period ended
---------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $538,017 $264,074 $1,004,889 $1,318,907
Cost of revenues 244,021 120,665 451,589 644,953
---------------------------------------------------------------------------
Gross profit 293,996 143,409 553,300 673,954
---------------------------------------------------------------------------
Operating expenses:
Research, development and
engineering 187,534 114,238 583,848 398,399
General and administrative 294,119 348,248 874,483 1,005,159
Sales and marketing 183,133 140,674 511,181 471,024
---------------------------------------------------------------------------
Total operating expenses 664,786 603,160 1,969,512 1,874,582
---------------------------------------------------------------------------
Loss from operations (370,790) (459,751) (1,416,212) (1,200,628)
---------------------------------------------------------------------------
Other income (expense):
Interest expense (84,807) (75,536) (205,598) (239,650)
Interest and other income 400 478 2,551 8,374
Other expense -- (177,217) -- (177,217)
---------------------------------------------------------------------------
Total other income (expense) (84,407) (252,275) (203,047) (408,493)
---------------------------------------------------------------------------
Net loss ($455,197) ($712,026) (1,619,259) ($1,609,121)
============== ============== ============== ==============
Shares of common stock used in
computing net loss per share 25,816,895 35,624,117 25,752,189 32,625,841
============== ============== ============== ==============
Net loss per share $ (0.02) $ (0.02) $ (0.06) $ (0.05)
============== ============== ============== ==============
</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 Deferred
Shares Amount Shares Amount Capital Deficit Costs Total
----------------------------------------- ----------- ------------- ---------- ---------
<S> <C> <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 -- -- 4,270,209 427 696,045 -- -- 696,472
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 -- -- 1,914,719 191 301,116 -- (156,152) 145,155
For payment of deferred salaries -- -- 489,347 49 107,607 -- -- 107,656
For exercise of options -- -- 28,000 3 4,897 -- -- 4,900
Net loss -- -- -- -- -- (1,609,121) -- (1,609,121)
Class E warrants issued for cash -- -- -- -- 8,799 -- -- 8,799
Warrants issued for services -- -- -- -- 12,000 -- -- 12,000
Deferred costs recognized -- -- -- -- -- -- 34,703 34,703
From warrant exercise price reduction -- -- -- -- 41,565 -- -- 41,565
From E warrant exchange -- -- -- -- 113,143 -- -- 113,143
------- ---------- ---------- ------ ----------- ------------ -------- ----------
Balance at June 30, 1999 207,848 $3,117,720 36,111,238 $3,611 $29,444,390 ($33,597,855) ($121,449) (1,153,583)
======= ========== ========== ====== =========== ============ ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended June 30
------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,619,259) ($1,609,121)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 44,616 32,178
Amortization of patent and technology costs 210,250 95,005
Amortization of financing costs 63,148 51,903
Common stock issued for services 121,512 191,761
Exchange of warrants and changes in
exercise price of warrants 154,708
Common stock issued for interest expense -- 21,001
Gain on sale of fixed assets (1,790) (750)
Provision for loss on accounts receivable 45,000
Changes in current assets and liabilities:
Increase in accounts receivable (408,413) (411,322)
Decrease in inventories 77,872 215,822
(Increase) decrease in prepaid expenses and
other current assets (63,829) 29,393
Increase (decrease) in accounts payable 216,713 (193,745)
Increase in accrued expenses 270,902 30,265
Increase in interest payable 56,100 77,321
----------------- -----------------
Net cash used in operating activities (1,032,178) (1,270,581)
----------------- -----------------
Cash flows from investing activities:
Sale of equipment 10,125 750
Payments for patents (30,813) (19,946)
----------------- -----------------
Net cash used in investing activities (20,688) (19,196)
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended June 30
------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from bank loan $ -- $ 373,253
Proceeds from notes payable, officers, directors and affiliates 638,000 50,000
Proceeds from issuance of common stock and warrants -- 942,946
Payment of financing costs -- (119,716)
Payments on note payable to bank and others (5,155) (7,808)
Proceeds from the exercise of options 1,100 4,900
----------------- --------------
Net cash provided by financing activities 633,945 1,243,575
----------------- --------------
Net increase (decrease) in cash and cash equivalents ($418,921) ($46,202)
Cash and cash equivalents at beginning of period 427,488 91,354
----------------- --------------
Cash and cash equivalents at end of period $ 8,567 $ 45,152
================= ==============
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 $ 74,020 $ 80,888
================= ==============
</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 June 30, 1999, and the results of operations and cash
flows of the Company for the three- and nine-month periods ended June 30, 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 originally due February 15, 1999
(the "Notes"), for $2,825,000. Interest on the Notes was to be paid
semi-annually, commencing August 15, 1996, at a rate of 8% per annum. The Notes
were 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
between March 26, 1996 and 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. In all other material
respects, the New Notes have terms similar to those of 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 principal amount
of old Notes were exchanged for New Notes, and an additional $21,000 of New
Notes were issued as 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 $30,011 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.
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
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 approximately $163,278 of unamortized deferred financing
cost had 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. The
Company incurred a charge of $41,565 during April, reflecting the estimated
differences in value of the reduced exercise price. 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 June 30, 1999, the
Company owed $405,705 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
were due on July 15, 1999, when principal of $133,000 and accrued interest of
$14,680 were converted to 1,136,000 shares of Common Stock. The due date of the
remaining $250,000 principal amount was extended to October 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.
During June 1999, an officer advanced an additional $50,000 due June 2002 with
interest of 9% per annum. During July 1999 officers and directors advanced an
additional $75,000 in exchange for three year 9% notes convertible into common
stock at $0.13 per share, the then market value of the Common Stock.
(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) of $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 every 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.
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
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 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, as an inducement to encourage
exercise of warrants, the Company offered to exchange Unit Warrants for Class E
Warrants on a one-for-one basis. As of June 30, 1999, 1,616,333 Unit Warrants
had been exchanged for E Warrants, resulting in a charge to income of $113,143,
reflecting the higher valuation of the E Warrants over the Unit Warrants of
$0.07 per warrant. The respective values of Unit and E Warrants were determined
using Black-Scholes estimates of market values. If the remaining 1,717,000 Unit
Warrants are exchanged for E Warrants, the Company would incur an additional
non-cash charge to income of $120,190. In connection with the 1996 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.
In May 1999 the Company issued 300,000 Class E Warrants for cash of
$10,000 and issued 999,000 shares of Common Stock, valued at $0.15 per share,
and warrants to purchase 600,000 shares of Common Stock in exchange for investor
relations and other services through January 2000. The Warrants, exercisable for
3 years, are exercisable at $0.18 per share for 200,000 shares, $0.50 for
200,000 shares and $1.00 for 200,000 shares. The Common Stock and warrants were
valued at a total of $203,850, which is being amortized to expense monthly over
the nine months of the agreement for services.
10
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
During the six-month period ended March 31, 1999, the Company received
$4,900 from the exercise of options to purchase 28,000 shares of Common Stock at
exercise prices of $0.15 and $0.22 per share.
During July and August 1999, directors and officers of the Company
purchased an aggregate of 577,500 restricted shares of Common Stock for $75,000
in cash. The Company also issued 274,500 restricted shares of Common Stock to
members of management in return for the cancellation of deferred salaries
aggregating $35,685, net of taxes of $23,065.
(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 will need additional financing to continue its operations.
The Company expects to obtain increased revenues during the remainder of
calendar 1999 and the first quarter of calendar 2000 from the aboveground
storage tank leak detection market, because of a December 1999 regulatory
compliance deadline for tank owners in the State of Florida. Since June 30,
1999, and as of August 19, 1999, customers have placed orders for approximately
$265,000, have submitted letters of intent for an additional $200,000, and have
otherwise indicated commitments to a further $250,000 for leak detection
installations in Florida during August and September 1999. 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.
---------------------------------------
11
<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 every 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. In all other material respects, the New Notes have
terms similar to those of 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 principal amount of old Notes were exchanged for New Notes,
and an additional $21,000 of New Notes were issued as 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 $30,011 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 $268,735 at June 30, 1999, as
compared with negative working capital of $918,624 at September 30, 1998, an
increase in working capital of $1,187,359. The Company had a decrease in
stockholders' deficiency of $185,265. These changes 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 nine-month period ended June 30, 1999
(the "Nine-Month Period 1999") of $1,609,121.
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Net cash used in operating activities during the Nine-Month Period 1999
was $1,270,581 compared to net cash used in operating activities during the
nine-month period ended June 30, 1998 (the "Nine-Month Period 1998") of
$1,032,178. The deficit during the Nine-Month Period 1999 is primarily a result
of the Company's net loss of $1,609,121, 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 $179,086 and common stock issued in
exchange for services valued at $191,761. 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 $108,000
in consulting and other services. In addition, the company recorded non-cash
charges of $154,708 related to the reduction of exercise prices of warrants and
the exchange of Unit Warrants for Class E Warrants. (See Notes to Financial
Statements.)
Net cash used in operating activities during the Nine-Month Period 1998
of $1,032,178 was primarily a result of the Company's net loss of $1,619,259,
and adjustments for changes in current assets and liabilities and non-cash
transactions including depreciation and amortization expense of $318,014 and
Common Stock issued for services of $121,512.
Net cash used in investing activities during the Nine-Month Period 1999
was $19,196, as compared to net cash used in investing activities of $20,688
during the Nine-Month Period 1998. During the Nine-Month Period 1999, the
Company sold unused, fully depreciated equipment for $750 and paid $19,946 for
United States and foreign patent applications. During the Nine-Month Period
1998, the Company sold unused equipment for $10,125 and paid $30,813 for patent
applications.
Net cash provided by financing activities during the Nine-Month Period
1999 was $1,243,575 as compared to net cash provided by financing activities
during the Nine-Month Period 1998 of $633,945. During the Nine-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 $118,515. Payments on advances against the Company's line of credit with
Silicon Valley Bank and other notes were $285,162 and the Company borrowed an
additional $658,415 against the line of credit. The Company borrowed $50,000
from an officer of the Company and issued 75,000 restricted shares of Common
Stock, at market value, to a director for cash of $10,000. Also, the Company
received $10,000 (less registration costs of $1,201) from an unrelated third
party for Class E Warrants to purchase 300,000 shares of Common Stock. During
the Nine-Month Period 1999, the Company received $4,900 for the exercise of
options to purchase 28,000 shares of its Common Stock.
During July and August 1999, officers and directors of the Company
invested an additional $75,000 in exchange for 577,500 shares of Common Stock
and $75,000 in exchange for convertible notes, and accepted 274,500
restricted shares of Common Stock, at market value, in exchange for deferred,
unpaid salaries of approximately $60,000.
During the Nine-Month Period 1998, the Company borrowed $638,000 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 depends on 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 had a Strategic Alliance (the "Alliance") for the
Aboveground Storage Tank (AST) market with Whessoe Varec, Inc. from June 30,
1996 until July 26, 1999, when the agreement was ended by mutual
13
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agreement of the parties, as described below. 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. 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 on the assumption that there
would be a delay in the enforcement process, but Florida DEP remained firm in
its commitment, while redefining compliance as having placed orders for approved
equipment by December 31, 1999.
The weeks following the Florida DEP meeting were set aside for
intensive joint sales activity by FCI and Whessoe direct sales personnel.
However, during the period, Endress+Hauser (E+H), which had acquired Whessoe
Varec, announced that it had restructured Whessoe Varec and in that process
FCI lost its access to the existing Whessoe sales and marketing organization.
Subsequently, FCI and Whessoe Varec came to an agreement whereby FCI took
back the rights to the commercial AST leak detection market while Whessoe
Varec would continue to serve the US Department of Defense (DoD) military
tank market and the Japanese Underground Storage Tank (UST) market. The net
result to FCI was to regain direct control over the Florida market at a
critical time in its development. In addition, gross revenues from projects
in Florida would accrue to the Company, in contrast to the net revenues
previously. However, this process took several weeks to resolve and until an
agreement was reached the result was that customer orders were delayed until
it was clear with whom they should place their orders. Once the agreement was
reached in mid July FCI focussed all of its available resources on the
Florida market. There has been a significant shift from a passive "wait and
see" posture to a more aggressive and proactive "we need to do something"
policy in the last few weeks. Transmontaigne/Dreyfus, Marathon/Ashland, Miami
Dade Airport, Tampa Airport, City of Lakeland, Coastal Petroleum, Koch Oil,
Citgo/Fina and Petroleum Fuels have recently committed to or have purchased
FCI's PetroSense-Registered Trademark- equipment. Florida Power, GATX and
Shell are adding additional tanks or locations to their installed base. These
orders and commitments represent over $700,000 in revenue to FCI, out of $1.1
million in projects already expected to close this quarter. There is usually
about a six to eight week delay between order and installation, and therefore
revenue recognition. Management believes that through the compliance date of
December 31, 1999, (compliance now being defined as having placed orders for
approved equipment by the deadline), the majority population of the regulated
community which has not yet taken action to achieve compliance will be
motivated to comply, with the result being significant revenues to the
Company from this market through at least the second fiscal quarter of 2000.
Shell Oil, Texaco, Florida Power Company, Reedy Creek Energy,
Jacksonville Electric and GATX have already purchased and installed the
Company's equipment. These orders 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
part of the process of taking back the rights to the commercial market, FCI
re-acquired the inventory from Whessoe Varec in order to be in a position to
supply the market in a timely fashion. This inventory has already been
partially allocated to fill the recent orders. Revenues per tank can now be
expected to be $25,000 compared with about $10,000 per tank under the Whessoe
Agreement. If only 400 of the population of 700 tanks were to choose
PetroSense-Registered Trademark- for compliance, revenues would reach
$10,000,000. Once the Company has addressed the lined tank population, it
plans to address the next set of prospects, the population of large unlined
tanks which is as yet unqualified.
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.
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Other States are expected to follow Florida in promulgating AST
regulations, giving the Company an opportunity for further growth, although
there can be no assurance such regulations will be promulgated. Virginia
promulgated its own similar regulations during 1998. Pennsylvania, New Jersey,
Minnesota and Wisconsin have also promulgated regulations, and Alaska is
developing its own regulations.
Under the new agreement, FCI and E+H Systems and Gauging Division
continue to pursue business with the DoD in California, Florida and
elsewhere. E+H Systems and Gauging (formerly Whessoe Coggins) has a
significant presence in the military fuel depot 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 June 30,
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-Registered Trademark- probes at approximately 30 DoD tanks.
Another 30-40 tanks are expected to be so equipped sometime in calendar 1999.
Equipment will initially come from inventories purchased by Whessoe Varec.
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 E+H subsidiary in Japan, Sakura, has identified an
opportunity in the retail gasoline marketplace for leak detection equipment
potentially for a large number of installations. The Company is pursuing this
opportunity with Sakura.
While the development of the offshore market for the Company's
OilSense-Registered Trademark- -4000 and PHA-100WL continued to be slower
than originally anticipated, by the end of the reporting period there were
indications that the situation was improving. The combination of the lack of
availability of Freon-Registered Trademark- and higher oil prices generated
new orders for the Company. CNG Producing Company has placed a blanket order
for portable units for twelve of its Gulf of Mexico platforms. This brings
the number of customers to fourteen and the number of units to well over 50.
Amoco, Spirit Energy 76 (Unocal) and Pennzoil have committed to the use of
the Company's products on their platforms in the Gulf of Mexico. Spirit
Energy has installed 14 PHA-100WLs and Amoco has installed the Company's
OilSense-Registered Trademark- -4000 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. The recently reported potential
link between the chemical n-hexane and the incidence of brain cancer at a now
closed research facility in Naperville, Illinois, has brought into question
the adoption by some operators of the EPA's standard reference method which
proposed the use of n-hexane as a replacement for Freon for use in reference
lab environments. This would eliminate the one serious competitor to the
Company's portable unit and would impact on some of the larger operators in
the Gulf and elsewhere. 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 Nine-Month Period 1999 were $1,318,907, compared to
revenues of $1,004,889 for the Nine-Month Period 1998. Revenues for the
three-month period ended June 30, 1999 (the "Third Quarter 1999") were $264,074
compared to revenues of $538,017 for the Third Quarter 1998. Revenues during the
Third Quarter 1999 consisted of a number of relatively smaller sales, including
sales of portable units for offshore oil production platforms. Revenues during
the Third Quarter 1998 included the sale of 64 of the Company's PHA-100 units to
the Florida DEP for use in its underground storage tank inspection program.
Gross profit for the Nine-Month Period 1999 was $673,954 or 51% of
revenues, compared to gross profit of $553,300 or 55% of revenues for the
Nine-Month Period 1998. Gross profit for the Third Quarter 1999 was $143,409 or
54% of revenues, compared to Third Quarter 1998 gross profit of $293,996, or 55%
of revenues.
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Fluctuations in gross margins occur primarily as a result of changes in the
mix of higher margin end user sales versus more heavily discounted OEM sales.
The Company's sensor development project with Gilbarco has moved to the
stage where Gilbarco is expected to submit, by the end of the summer of 1999,
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
("Bosch") 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 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. A study is ongoing to determine the
feasibility of the project.
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
programs' 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 will continue into the fall.
During Fiscal 1999 the Company successfully completed the first and
second milestones in its project with Horiba, a 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
$185,449, or 32%, to $398,399 during the Nine-Month Period 1999 from the
Nine-Month Period 1998, and by $73,296 or 39% to $114,238 during the Third
Quarter 1999 from the Third 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 $130,676, or 15%,
during the Nine-Month Period 1999 over the Nine-Month Period 1998. The Company
incurred unusually high expenditures during the First Quarter 1999 related to
financial planning including travel and legal and consulting fees, and including
approximately $106,000 of services compensated in Common Stock as opposed to
cash. During the Third Quarter 1999, general and administrative expenses
increased by $54,129, or 18%, from the Third Quarter 1998, primarily as a result
of non-cash charges to expense for common stock and warrants issued for investor
relations services, and for provisions for uncollectible accounts receivable.
The Company 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 during the Nine-Month Period 1999 were
$471,024 compared to $511,181 during the Nine-Month Period 1998, and were
$140,674 during the Third Quarter 1999 compared to $183,133 during the Third
Quarter 1998, a decrease of $40,157, or 8%, for the Nine-Month Period and a
decrease of $42,459, or 23% for the Third Quarter. The decrease is primarily a
result of reduced personnel and related costs, including travel.
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Interest expense increased by $34,052 or 17% during the Nine-Month
Period 1999 over the Nine-Month Period 1998, and decreased by $9,271, or 11%,
during the Third Quarter 1999 from the Third Quarter 1998. The changes reflect
interest on loans made to the Company by officers, directors and affiliates, and
during the Nine-Month Period 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.
Other expenses of $177,217 incurred during the Third Quarter and the
Nine-Month Period 1999 consist of non-cash charges to expense for differences
arising from changes in warrant exercise prices and terms, as discussed in Notes
2 and 3 to the Consolidated Financial Statements, and costs incurred for
registration of warrants and underlying common stock.
As a result of the foregoing, the Company incurred a net loss of
$1,609,121, or a net loss of $0.05 per share for the Nine-Month Period 1999 as
compared to a net loss of $1,619,259, or a net loss of $0.06 per share, for the
Nine-Month Period 1998. Net loss for the Third Quarter 1999 was $712,026, or a
net loss of $0.02 per share, compared to a net loss of $455,197, or a net loss
of $0.02 per share for the Third Quarter 1998.
On July 29, 1999, the Company announced it had signed a Letter of
Intent to merge with Intrex Data Communications Group of Vancouver, British
Columbia, with the expressed intent of addressing the burgeoning remote asset
management market, where the combined strength of FCI's sensor technology
together with Intrex's communications and Internet expertise are expected to
make a powerful team. The merger would be structured as an Arrangement Agreement
and conducted as a Plan of Arrangement, in order to accommodate Canadian tax and
legal issues. FiberChem, renamed DecisionLink Incorporated, would be the
surviving public entity. Intrex would be acquired in a stock transaction. The
company would address the oil and gas; tank, pipeline and utility;
transportation; environmental monitoring marine and other markets on a
fee-for-service basis. The parties are negotiating a Definitive Arrangement
Agreement at which point in time more information will be released. A condition
to closing is to obtain financing for the merged entity and to position it for
eventual readmission to NASDAQ Small Cap. DecisionLink would be headquartered in
Las Vegas, with operations also in Dallas, Texas and Vancouver, British
Columbia.
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
and Year-2000 compliance.
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. Initial testing of
critical systems previously expected to be completed by August 31, 1999 has been
delayed until October 31, 1999. This delay, primarily due to limited personnel
and financial resources, is not expected to impact final implementation and
complete testing which 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.
This Report includes forward-looking statements that involve risks and
uncertainties, including the timely development and acceptance of new products,
final promulgation and enforcement of regulations, the impact of
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competitive products and pricing, the timely funding of customer's projects,
customer payments to the Company and the other risks detailed from time to
time in the Company's SEC reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any legal proceedings
reported by the Company under Legal Proceedings in the Company's Annual Report
on Form 10-KSB for September 30, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 23, 1999, as an inducement to encourage the exercise of
outstanding Unit Warrants, the Company offered to exchange the outstanding
Unit Warrants held by all existing Unit Warrant holders, for Class E Warrants
on a one-for-one basis. The Unit Warrants were exercisable at $1.00 per share
of Common Stock at any time through May 31, 2001. The Class E Warrants are
exercisable immediately for one share of Common Stock at an exercise price
through October 23, 1999 of $0.25 per share; then through October 23, 2000 at
$0.35 per share; 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
$0.90 per share (at which time the Class E Warrants expire). As of June 30,
1999, a total of 14 Unit Warrant holders had exchanged their Unit Warrants
for an aggregate of 1,616,333 Class E Warrants and 1,717,000 Unit Warrants
remain outstanding. There was no placement agent or underwriter and there
were no commissions or solicitation fees paid in connection with this
exchange offering. Based on the above facts, the offers and exchange of the
Class E Warrants to these existing security holders was conducted as a
private transaction, exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") pursuant to
Section 3(a)(9).
On May 1, 1999, the Company issued 300,000 Class E Warrants for cash in
the aggregate sum of $10,000 to one accredited investor who was an existing
security holder of the Company at the time of the transaction. There was no
placement agent or underwriter and there were no commissions or fees paid in
connection with this transaction. Based on these facts, the offer and sale of
the Class E Warrants to the existing security holder was conducted as a private
transaction, exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereunder.
On May 10, 1999, the Company issued 999,000 shares of Common Stock (the
"Continental Shares"), then valued at $0.15 per share, and warrants (at various
exercise prices) to purchase 600,000 shares of Common Stock (the "Contintental
Warrants") to Continental Capital & Equity Corporation in exchange for investor
relations and other future consulting services through January 2000. The
Continental Warrants are exercisable for a period of three years commencing on
the date of issuance. 200,000 Continental Warrants are exercisable at $0.18 per
share, 200,000 Continental Warrants are exercisable at $0.50 per share and
200,000 Contintntal Warrants are exercisable at $1.00 per share, at the
discretion of Continental Capital & Equity Corporation. In the aggregate, the
Continental Shares and the Continental Warrants were valued at a total of
$203,850. There was no placement agent or underwriter and there were no
commissions or fees paid in connection with this transaction. Based on these
facts, the offers and sales of the Common Stock and the Continental Warrants to
Continental Capital & Equity Corporation was conducted as a private transaction,
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
All of the Class E Warrants issued as described above, as well as the
Continental Shares and the Continental Warrants, as well as the shares of Common
Stock underlying the Class E Warrants and the Continental Warrants, were
registered for resale by the holders thereof, in a Registration Statement on
Form S-2, filed with the Securities and Exchange Commission and declared
effective on May 20, 1999 (File No. 333-78319).
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 nine-month period ended June 30, 1999.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three-month
period ended June 30, 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.
August 23, 1999 By: /s/ Geoffrey F. Hewitt
- ----------------------------- -----------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
August 23, 1999 By: /s/ Melvin W. Pelley
- ----------------------------- -------------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND FOR THE NINE MONTHS
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 45,152
<SECURITIES> 0
<RECEIVABLES> 843,624
<ALLOWANCES> (45,000)
<INVENTORY> 1,032,185
<CURRENT-ASSETS> 1,947,829
<PP&E> 704,964
<DEPRECIATION> (635,844)
<TOTAL-ASSETS> 2,246,511
<CURRENT-LIABILITIES> 1,679,094
<BONDS> 1,721,000
0
3,117,720
<COMMON> 3,611
<OTHER-SE> (4,274,913)
<TOTAL-LIABILITY-AND-EQUITY> 2,246,511
<SALES> 1,318,907
<TOTAL-REVENUES> 1,318,907
<CGS> 644,953
<TOTAL-COSTS> 2,519,535
<OTHER-EXPENSES> 408,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239,650
<INCOME-PRETAX> (1,609,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,609,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,609,121)
<EPS-BASIC> (0.05)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT ON NET LOSS
</FN>
</TABLE>
