<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 JUNE 30, 2000
[ ] 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 August 11, 2000, the issuer had 58,730,263 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,
1999 2000
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 21,760 $ 1,206,662
Cash in escrow as security for bridge loan 675,000
Accounts receivable, net of allowance for doubtful
accounts of $92,423 at September 30, 1999
and $36,458 at June 30, 2000 647,402 231,381
Inventories 1,261,437 1,175,218
Prepaid expenses and other 122,153 834,226
----------- -----------
Total current assets 2,052,752 4,122,487
----------- -----------
Equipment 704,964 704,964
Less accumulated depreciation (645,163) (668,166)
----------- -----------
Net equipment 59,801 36,798
----------- -----------
Other assets:
Patent costs, net of accumulated amortization of
$1,958,108 at September 30, 1999 and
$1,997,629 at June 30, 2000 65,734 38,642
Technology costs, net of accumulated amortization
of $469,706 at September 30, 1999 and June 30, 2000 -- --
Note refinancing costs, net of accumulated amortization
of $32,920 at September 30, 1999 and $7,622
at June 30, 2000 125,096 9,145
Other deferred costs 39,147 318,054
----------- -----------
Total other assets 229,977 365,841
----------- -----------
Total assets $ 2,342,530 $ 4,525,126
=========== ===========
</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,
1999 2000
------------ ------------
Current liabilities:
<S> <C> <C>
Bank loan payable 421,949 --
Bridge loan payable 600,000
Other current notes payable 250,000 250,000
Accounts payable 272,906 499,556
Deferred salaries 76,353 56,607
Accrued salaries and benefits 199,221 156,163
Accrued warranty 146,282 92,037
Accrued legal, accounting and consulting 70,600 106,325
Accrued commissions 33,799 13,799
Other accrued expenses 93,856 114,874
Customer deposits 37,775 19,516
Interest payable 55,587 60,162
------------ ------------
Total current liabilities 1,658,328 1,969,039
Senior convertible notes payable $ 1,621,000 $ 172,000
Notes payable to officers, directors and affiliates 265,000 395,000
------------ ------------
Total liabilities 3,544,328 2,536,039
------------ ------------
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized 10,000,000 shares;
207,848 convertible shares issued and outstanding at September
30, 1999 and June 30, 2000; at liquidation value
of $15 per share 3,117,720 3,117,720
Common stock, $.0001 par value. Authorized
150,000,000 shares; 39,831,038 and 58,725,915
shares issued and outstanding at September 30
1999 and June 30, 2000, respectively 3,983 5,873
Additional paid-in capital 29,979,833 34,870,145
Deficit (34,210,476) (35,916,193)
Deferred costs (69,400) --
Stock subscription receivable (23,458) (88,458)
------------ ------------
Stockholders' equity (deficiency) (1,201,798) 1,989,087
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 2,342,530 $ 4,525,126
============ ============
</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,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 264,074 $ 288,287 $ 1,318,907 $ 1,127,533
Cost of revenues 120,665 184,048 644,953 710,399
------------ ------------ ------------ ------------
Gross profit 143,409 104,239 673,954 417,134
------------ ------------ ------------ ------------
Operating expense:
Research, development and
engineering 114,238 104,906 398,399 312,941
General and administrative 348,248 291,197 1,005,159 1,053,780
Sales and marketing 140,674 199,805 471,024 545,029
------------ ------------ ------------ ------------
Total operating expenses 603,160 595,908 1,874,582 1,911,750
------------ ------------ ------------ ------------
Loss from operations (459,751) (491,669) (1,200,628) (1,494,616)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (75,536) (37,420) (239,650) (213,597)
Interest and other income 478 1,896 8,374 2,496
Other expense (177,217) (177,217)
------------ ------------ ------------ ------------
Total other income (expense) (252,275) (35,524) (408,493) (211,101)
------------ ------------ ------------ ------------
Net loss ($712,026) ($527,193) ($1,609,121) ($1,705,717)
============ ============ ============ ============
Shares of common stock used in
computing net loss per share 35,264,117 52,187,056 32,625,841 45,102,244
============ ============ ============ ============
Net loss per share ($0.02) ($0.01) ($0.05) ($0.04)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999 207,848 $ 3,117,720 39,831,038 $ 3,983 29,979,833
Common stock issued:
For cash -- -- 981,540 98 178,807
For exercise of Class E Warrants -- -- -- -- --
For cash -- -- 7,793,103 780 2,714,021
For services -- -- 388,355 39 135,885
For conversion of notes and
interest payable to officers,
directors and affiliates -- -- 337,912 34 118,235
Cashless exercise -- -- 557,814 56 (56)
For exercise of other warrants -- -- 2,173,153 217 241,731
For exercise of options -- -- 182,500 18 45,392
For conversion of senior convertible
8% notes -- -- 6,300,000 630 1,358,764
For conversion of interest payable to
officers, directors and affiliates -- -- 80,500 8 10,038
For services -- -- 100,000 10 26,490
Deferred costs recognized -- -- -- -- --
Warrants issued for services -- -- -- -- 70,750
Redemption of unexercised Class E
Warrants -- -- -- -- (9,745)
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 207,848 $ 3,117,720 58,725,915 $ 5,873 34,870,145
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Receivable
for Exercise
Deferred of Rights
Deficit Costs and Warrants Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1999 (34,210,476) (69,400) (23,458) (1,201,798)
Common stock issued:
For cash -- -- -- 178,905
For exercise of Class E Warrants -- -- -- --
For cash -- -- (65,000) 2,649,801
For services -- -- -- 135,924
For conversion of notes and
interest payable to officers,
directors and affiliates -- -- -- 118,269
Cashless exercise -- -- -- --
For exercise of other warrants -- -- -- 241,948
For exercise of options -- -- -- 45,410
For conversion of senior convertible
8% notes -- -- -- 1,359,394
For conversion of interest payable to
officers, directors and affiliates -- -- -- 10,046
For services -- -- -- 26,500
Deferred costs recognized -- 69,400 -- 69,400
Warrants issued for services -- -- -- 70,750
Redemption of unexercised Class E
Warrants -- -- -- (9,745)
Net loss (1,705,717) -- -- (1,705,717)
----------- ----------- ----------- -----------
Balance at June 30, 2000 (35,916,193) 0 (88,458) 1,989,087
=========== =========== =========== ===========
</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
-------------------------------
1999 2000
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,609,121) ($1,705,717)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 32,178 23,003
Amortization of patent and technology costs 95,005 39,521
Amortization of financing costs 51,903 26,345
Common stock and warrants issued for services 191,761 233,175
Deferred costs recognized -- 69,400
Exchange of warrants and change in exercise price
of warrants 154,708 --
Common stock issued for interest expense 21,001 --
Provisions for loss on accounts receivable and
inventories 45,000 40,773
Gain on sale of fixed assets (750) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (411,322) 358,013
Decrease in inventories 215,822 103,454
Decrease in prepaid expenses and other
current assets 29,393 88,120
Increase (decrease) in accounts payable (193,745) 226,650
Increase (decrease) in accrued expenses 30,625 (98,565)
Increase in interest payable 77,321 32,890
----------- -----------
Net cash used in operating activities (1,270,221) (562,938)
----------- -----------
Cash flows from investing activities:
Sale of equipment 750 --
Payments for patents (19,946) (12,429)
----------- -----------
Net cash used in investing activities (19,196) (12,429)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
6
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cash flows from financing activities:
<S> <C> <C>
Net proceeds from bank loan $ 373,253 $--
Net proceeds from bridge loan -- 206,800
Proceeds from notes payable, officers, directors and affiliates 50,000 230,000
Proceeds from issuance of common stock and warrants 942,946 178,905
Proceeds from the exercise of Class E Warrants -- 2,649,801
Proceeds from the exercise of other warrants -- 241,948
Proceeds from the exercise of options 4,900 45,410
Payments on note payable to bank and others (7,808) (421,949)
Payment of merger costs -- (185,708)
Payment of financing costs (119,716) --
Advances to Intrex -- (500,193)
Redemption of E warrants -- (9,745)
----------- -----------
Net cash provided by financing activities 1,243,575 2,435,269
----------- -----------
Net increase (decrease) in cash and cash equivalents ($46,202) $ 1,859,902
Cash and cash equivalents at beginning of period 91,354 21,760
----------- -----------
Cash and cash equivalents at end of period $ 45,152 $ 1,881,662
=========== ===========
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $ -- $ 1,449,000
Unamortized deferred financing costs associated with senior
convertible notes payable converted to common stock -- 89,606
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 420,987 128,315
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 --
=========== ===========
Interest paid $ 80,888 $ 84,406
=========== ===========
</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, 1999 and June 30, 2000, and the results of operations and cash
flows of the Company for the nine-month periods ended June 30, 1999 and 2000.
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,
1999.
Certain Fiscal 1999 Financial Statement amounts have been reclassified
to conform with the presentation in the Fiscal 2000 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 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 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. As of the maturity
date of the Notes on 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 term of the New Notes.
During the period from February 1, 2000 through June 30, 2000, an
aggregate principal amount of $1,449,000 of the New Notes were converted into
6,300,000 shares of Common Stock, resulting in a principal balance outstanding
at June 30, 2000, of $172,000 of New Notes.
During August 1999, the Company exercised its option to pay interest on
the New Notes in shares of Common Stock. In accordance with the provisions of
the New Notes, 1,296,800 shares of Common Stock were issued, valued at $194,520
($0.15 per share), representing interest at 12% per annum for the period
February 16, 1999 through February
8
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
15, 2000. Interest from February 15, 2000 through August 15, 2000 (or the
conversion date) is being accrued for payment on or about August 15, 2000.
In connection with the 1996 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 were adjusted to $0.4078 per share in
accordance with the original Placement Agent Agreement and has been further
adjusted to $0.23 per share. Also in accordance with the terms of the warrants,
the number of shares exercisable has been adjusted, based on the adjusted
Exercise Price, to 692,742 shares of Common Stock. These warrants were
exercisable at any time on or after August 15, 1996 through February 14, 2001
and contained certain piggyback registration rights. During January 2000, the
Company received offers to convert these and other warrants to Common Stock at
approximately $0.105 per share, which the Company accepted.
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, 2000, the
Company had repaid all borrowings against the line of credit.
On May 19, 2000, the Company obtained bridge loans aggregating $600,000
from two European investors. The bridge loans and accrued interest thereon
formed a part of $2,000,000 in two-year, convertible 12% debentures placed by
the Company on July 28, 2000, in conjunction with the combination of its
business with Intrex Data Communications Corp ("Intrex") on July 27, 2000. The
bridge loans bear interest at the rate of 15% per annum, and the Company paid
approximately $90,000 in placement agent, legal and other fees. The Company also
issued warrants to the lenders and the placement agent to purchase an aggregate
of 70,000 shares of Common Stock at an initial exercise price of $0.50 per
share, subject to adjustment under certain circumstances. The placement, legal,
warrant and other costs are being amortized to interest expense over the life of
the debentures.
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. 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 has been
extended to September 29, 2000.
During Fiscal 1998 and Fiscal 1999, directors and officers of the
Company advanced an aggregate of $265,000 to the Company and an additional
$230,000 during January 2000. These advances bear interest at rates of 8%, 9%
and 12% per annum and are due at various dates between December 14, 2002 and
February 4, 2003 unless converted into Common Stock prior to maturity. On June
19, 2000, $100,000 of these advances and accrued interest of $13,269 were
applied to the exercise of Class E Common Stock Purchase Warrants and converted
to Common Stock. Of the remaining advances, $125,000 is convertible into Common
Stock at $0.13 per share; $40,000 at $0.11 per share; $200,000 at $0.12 per
share and $30,000 is not convertible.
(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 consisted 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
9
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
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 Class E Warrants provided that the Company may call the warrants
for redemption if the closing price of the Common Stock equals or exceeds 200%
of the current exercise price of the warrants for a period of 30 consecutive
trading days. As of March 31, 2000, the closing price of the Common Stock had
exceeded $0.70 for each preceding trading day, and on April 4, 2000, the Company
announced its intent to redeem the warrants on June 16, 2000, (subsequently
extended to June 30, 2000) unless earlier exercised. As of the expiration on
June 30, 2000, an aggregate of 8,519,370 Class E Warrants had been exercised at
$0.35 each, resulting in gross proceeds to the Company of $2,981,780. An
aggregate of an additional 610,109 Class E Warrants with an aggregate market
value of $195,235 were surrendered and cancelled in exchange for the exercise of
an additional 557,814 Class E Warrants.
Of the 8,519,370 Class E Warrants exercised, 7,793,103 were exercised
for cash of $2,727,587 less associated fees and costs of $12,786; 337,912 were
exercised in payment of notes and accrued interest payable to officers and
directors in the amount of $118,269; 214,286 were exercised in payment for
$75,000 of legal and other expenses payable; and 174,069 were exercised in
payment of $60,924 of after-tax deferred salaries payable to members of
management of the Company.
During Fiscal 1993 and Fiscal 1994, the Company conducted a private
placement of convertible preferred stock ("Convertible Preferred Stock"). Each
share of 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. As of March 31, 2000 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 and September 1999, the
Board of Directors determined not to declare the annual dividend payable on
November 1, 1998 and 1999, respectively. As a result, the undeclared dividends,
aggregating $1,028,848 (if elected entirely in cash, or 53,981 additional shares
of Convertible Preferred Stock if elected wholly in additional shares), will
accumulate in accordance with the terms of the Convertible Preferred Stock. In
May 1999, the FiberChem Board of Directors authorized a change in the conversion
rate of the Series A Convertible Preferred Stock from ten (10) shares of Common
Stock to seventy- five (75) shares of Common Stock, at $.20 per share, in
satisfaction of the anti-dilution adjustment obligation and in settlement of
undeclared dividends in arrears in the amount of $1,028,848, if elected entirely
in cash, or 53,981 shares of Series A Convertible Preferred Stock if elected
solely in shares. In order to effect such change, the holders of the Series A
Convertible Preferred Stock will be asked to exchange their class of preferred
stock for a new class of preferred stock with otherwise similar rights and
privileges.
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 the closing of the offer and as of March
31, 2000,
10
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
1,696,333 Unit Warrants had been exchanged for Class E Warrants. 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 were exercisable at
any time from November 30, 1996 through May 30, 2001. During January 2000, the
Company received offers to convert these 1,280,411 warrants and 692,742 other
warrants at an average price of approximately $0.105 per share, along with the
issuance of 75,000 Class E Warrants to certain of the holders. The Company
accepted the offers and issued 1,973,153 shares of common stock and 75,000 new
warrants (with terms similar to the Class E Warrants) for gross proceeds of
$205,948.
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. These warrants are
exercisable for 3 years at exercise prices of $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. During March
2000, the 200,000 warrants exercisable at $0.18 were exercised, resulting in the
issuance of 200,000 shares of Common Stock and the receipt of $36,000 in
proceeds to the Company.
(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 needs additional financing to continue its operations.
During the first nine months of fiscal 2000, the Company has received
proceeds of approximately $3.2 million from the exercise of warrants and
options and the issuance of additional shares of Common Stock. On July 27,
2000, the Company consummated the combination of its business with that of
Intrex Data Communications Corp. In March 2000, the Company entered into an
agreement for a best efforts private placement of $5,000,000 to provide
operating funds and to provide funds to develop market opportunities. On May
19, 2000, the Company obtained a bridge loan in the amount of $600,000 which,
along with an additional $1.4 million, provided gross proceeds of $2.0
million on July 28, 2000, and the Company is pursuing several potential
sources for an additional $3,000,000 or more. However, no assurance can be
given that this or any financing can be obtained on terms satisfactory to the
Company.
-------------------------------------------------------------------------------
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report includes forward-looking statements relating to the
Company's operations that are based on Management's and third parties' current
expectations, estimates and projections. These statements are not guarantees of
future performances and actual results could differ materially. The statements
in this report regarding FCI's business combination with Intrex, the combined
entity's delivery of services over the Internet, the size of the market for the
combined company's services and the financing of ongoing operations, are
forward-looking statements that involve risks and uncertainties. These risks and
uncertainties include: the combined entity's ability to market its services
using the two companies' technologies, the timely development and acceptance of
new products, final promulgation and enforcement of regulations, the impact of
competitive products and pricing, the timely funding of customer's projects,
customer payments to the Company and other risks detailed from time to time in
the Company's SEC reports.
The following discussion and analysis should be read in conjunction
with the Unaudited Consolidated Financial Statements and notes thereto.
MATERIAL CHANGES IN FINANCIAL CONDITION
During the nine-month period ended June 30, 2000 (the "Nine-Month
Period 2000"), the Company received approximately $2,900,000 in gross proceeds
from the exercise of options and Common Stock purchase warrants, and received
approximately $179,000 from other issuances of Common Stock. The Company also
borrowed $230,000 from an officer of the Company in return for a three-year
convertible promissory note. From February through June 30, 2000, $1,449,000 of
the Company's 8% Senior Convertible Notes were converted into Common Stock.
Working capital at June 30, 2000, was $2,153,448, compared to $394,424
at September 30, 1999, an increase of $1,759,024. Cash and cash equivalents
increased by $1,859,902 to $1,881,662 at June 30, 2000 from $21,760 at September
30, 1999. Stockholders' equity improved by $3,190,885 from a deficit of
$1,201,798 at September 30, 1999 to $1,989,087 at June 30, 2000. These changes
are primarily the results of the financing activities outlined above, offset by
the Company's net loss for the Nine-Month Period 2000 of $1,705,717.
Net cash used in operating activities during the Nine-Month Period 2000
was $562,938 compared to net cash used in operating activities during the
nine-month period ended June 30, 1999 (the "Nine-Month Period 1999") of
$1,270,221. The deficit during the Nine-Month Period 2000 is primarily the
result of the Company's net loss of $1,705,717, 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 $88,869, and common stock and
warrants issued for services of $233,175. The deficit during the Nine-Month
Period 1999 was 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 include depreciation and amortization expense of $179,086 and
common stock issued in exchange for services of $191,761. 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.
Net cash used in investing activities during the Nine-Month Period 2000
was $12,429, as compared to net cash used in investing activities of $19,196
during the Nine-Month Period 1999. During the Nine-Month Period 2000, the
Company paid $12,429 for United States and foreign patent applications, and
during the Nine-Month Period 1999, the Company paid $19,946 for patent
applications.
Net cash provided by financing activities during the Nine-Month Period
2000 was $2,435,269 as compared to net cash provided by financing activities
during the Nine-Month Period 1999 of $1,243,575. During the Nine-Month Period
1999, cash proceeds of $942,946 were received from 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 the exchange of the Company's 8%
Senior Convertible Notes paid during the period were $119,716. 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. During January 2000, the Company borrowed $230,000 from an
officer
12
<PAGE>
of the Company, and during December 1999 and January and February 2000, issued
961,540 restricted shares of Common Stock to four directors and officers of the
Company for an aggregate of $178,905. Also during January 2000, the Company
received offers to convert warrants issued in connection with its 1996 placement
of 8% Convertible Notes and Common Stock. The Company received $154,153 from the
exercise of 1,541,526 warrants, and agreed to issue 75,000 Class E Common Stock
Purchase Warrants in exchange for the exercise of the remaining 431,627 1996
warrants outstanding for cash in the amount of $51,795.
During February and March 2000, the trading price of the Company's
Common stock had appreciated substantially from its earlier trading level. As of
March 31, 2000, the closing price of the Common Stock had exceeded $0.70 for
each preceding trading day, and on April 4, 2000, the Company announced its
intent to redeem the warrants on June 16, 2000 (subsequently extended to June
30, 2000), unless earlier exercised. As of the expiration on June 30, 2000, an
aggregate of 8,519,370 Class E Warrants had been exercised at $0.35 each,
resulting in gross proceeds to the Company of $2,981,780. An aggregate of an
additional 610,109 Class E Warrants with an aggregate market value of $195,235
were surrendered and cancelled for the exercise of 557,814 Class E Warrants.
Also as a result of the improved market price for the Company's Common
Stock, holders of the Company's 8% Senior Convertible Notes converted $1,449,000
of their notes into 6,300,000 shares of Common Stock and will receive warrants
exercisable for three years to purchase 6,300,000 additional shares of Common
Stock at $0.23 per share, in accordance with the terms of the notes. Other
options and warrants were exercised at prices of from $0.15 to $1.00 for 382,500
shares of Common Stock resulting in gross and net process to the Company of
$81,410.
During the Nine-Month Period 2000, the Company reduced its trade
accounts receivable by over $358,000 and repaid associated loans from Silicon
Valley Bank of $421,949.
As discussed in Note 4 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and needs additional financing
to continue its operations. During the first nine months of fiscal 2000, the
Company has received proceeds of approximately $3.2 million from the exercise
of warrants and options and the issuance of additional shares of Common
Stock. On July 27, 2000, the Company consummated the combination of its
business with that of Intrex Data Communications Corp. In March 2000, the
Company entered into an agreement for a best efforts private placement of
$5,000,000 to provide operating funds and to provide funds to develop market
opportunities. On May 19, 2000, the Company obtained a bridge loan in the
amount of $600,000 which, along with an additional $1.4 million, provided
gross proceeds of $2.0 million on July 28, 2000, and the Company is pursuing
several potential sources for an additional $3,000,000 or more. However, no
assurance can be given that this or any financing can be obtained on terms
satisfactory to the Company.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
On July 27, 2000, the Boards of FiberChem, Inc. and Intrex Data
Communications Corp. ("Intrex") agreed that the terms of the Amended Arrangement
Agreement dated May 26, 2000, had been met to their satisfaction and that all
regulatory approvals were in place. The combination of the two companies was
therefore made effective on that date.
The proposed name for the surviving entity, DecisionLink Incorporated,
is subject to a vote of the common shareholders. Geoff Hewitt continues as CEO
of FiberChem, Inc. while David Peachey is now President and Chief Operating
Officer. Peter Lagergren is President of the Communications Division and Tom
Collins, President of the Environmental Division. Brian O'Neil is Executive
Vice-President Corporate Development and Mel Pelley continues as CFO. The new
Board of Directors of FiberChem is initially comprised of four FiberChem
representatives Geoffrey Hewitt, Chairman, Byron Denenberg, Irv Gruverman and
Walter Haemmerli; and four Intrex representatives including David Peachey, Peter
Lagergren, Brian O'Neil and Trevor Nelson. A ninth Board member will be
appointed upon the mutual approval of Geoffrey Hewitt and David Peachey.
A FiberChem shareholders meeting will be held early this fall to
seek approval of a change in the Company's name to DecisionLink, Inc., to
approve a new employee stock option plan, and to increase its authorized
share capital. The Company will continue to operate under the FiberChem name
and FOCS symbol until the changes are approved. Operations will remain in
both Las Vegas and Dallas.
13
<PAGE>
FiberChem/DecisionLink's Intrex Division provides proprietary Internet
and communications technology for transmitting data to or from remote or mobile
assets on a real-time basis using ORBCOMM's and Norcom's satellite services and
other wireless data systems. Data is routed through Intrex's global network
which acts as a data gateway and applications service provider. This allows
customers to monitor and control remote or mobile assets such as gas wells,
propane tanks, pipelines, compressors, storage tanks, offshore platforms, or
service vehicles directly from a desktop PC.
FiberChem/DecisionLink's FCI Environmental Division (FCIE) develops,
manufactures, markets and licenses fiber optic chemical sensors that produce
continuous, real-time information on environmental pollutants in the air, water
and soil. The FCIE product line has been re-engineered to incorporate
Intrex-developed communications technology. These new products offer the
environmental monitoring community FiberChem's state-of-the-art sensing
technology. This gives the customer all the benefits of satellite
communications, including dramatically reducing installation and start-up costs,
lowering communications charges, ubiquitous coverage and the ability to receive
data on a customer-specific Web site.
FiberChem/Decisionlink's technologies are currently used in
applications such as propane tank level monitoring, compressors, pipeline leak
detection, aboveground storage tank monitoring, oil production, water quality
monitoring and industrial wastewater compliance monitoring and control.
ORBCOMM recently announced that it has adopted a revised sales and
marketing strategy for its low earth orbit satellite data communications
systems. Under this new strategy, ORBCOMM will focus on its top-tier customers
in a number of key industries and distribute its services through valued added
resellers and licensees rather than through a combination of indirect and direct
sales channels. FiberChem/DecisionLink considers itself to be a key partner to
ORBCOMM and to have a proprietary position with regard to the global propane
market. This was highlighted when ORBCOMM held its Global Solutions Conference
in Atlanta, Georgia, April 9-13, 2000 where Intrex was invited to introduce its
development of SensorFusion(TM) products to its future partners and customers.
In a paper entitled "Seamless Integration of Sensor Data via the Internet using
the ORBCOMM Network," Peter Lagergren, President of Intrex, outlined the
benefits to the ORBCOMM community of the combination of Intrex and FiberChem's
SensorFusion(TM) technology. Intrex, with ORBCOMM's assistance, is developing a
new generation of ORBCOMM satellite communicators married to specialized sensors
in a single monitoring and communications package. These very highly integrated
chip sets reduce the size, power consumption and cost of the application. The
combining of these chip sets with on-board, high technology sensors leads to
changes in industrial market paradigms. It has altered the markets' perception
of what can and should be remotely monitored because costs are reduced by an
order of magnitude compared with current merchant communications
implementations.
The concept of SensorFusion(TM) is to find a large-scale application
where the customer requires the functionality of very high technology sensors,
or controls, and fuse the highly integrated sensors and the communications
engine. This has led to a family of products that are easy to use, reliable and
reduce costs. The final step is to integrate the sensing and messaging engine
seamlessly into the Internet through Intrex's Universal Data Network. By using
the Internet's TCP/IP as the base protocol, it is possible to take advantage of
many powerful existing tools including publish/subscribe topologies that allow
an easy interface with nearly any customer-supplied, data management system. The
end result is the migration of laboratory quality science and engineering such
as FiberChem's Sensor-on-a-Chip(R) into very small, rugged and very low cost
systems.
One important role of the conference was to bring together ORBCOMM
licensees from around the world with solution providers such as Intrex. Senior
management from FiberChem/DecisionLink met with International Partners of
ORBCOMM and several major potential customers over the four-day conference. The
interest in the SensorFusion(TM) concept led to discussions with prospective
customers and business partners from South America, Europe, Africa, the Middle
East, Central Asia, South East Asia, Australia and China. Business arrangements
with these groups are in the process of being concluded and will give
DecisionLink a great launch into the global markets for monitoring and reporting
for the oil and gas, pipelines, storage tanks, utilities, environmental,
transportation and marine industries.
FiberChem, Inc. announced on June 9, 2000, that Intrex had signed a
Memorandum of Understanding with Cornerstone Propane Partners LP (NYSE:CNO) to
form a joint venture to market Intrex's proprietary monitoring
14
<PAGE>
system to the propane industry world-wide. This joint venture will become part
of the combined company upon execution of a definitive agreement.
The joint venture will be equally owned by Cornerstone and
DecisionLink. It will market a product package consisting of DecisionLink's
proprietary sensor and communication system and Cornerstone's dispatch and
delivery software using the ORBCOMM LOW-Earth orbit (LEO) satellite network for
data transmission.
Cornerstone Propane Partners, LP is a master limited partnership with
annual sales of over $2 billion. The Partnership is the nation's fourth largest
retail propane marketer serving over 460,000 customers with annual sales of
approximately 300 million retail gallons, doing business in 34 states through
299 customer service centers. Its North American energy solutions service
division, Coast Energy Group (CEG), supplies, purchases, processes and markets
over 48,000 barrels per day of natural gas liquids to resellers and major end
users. CEG also sells approximately 1.0 Bcf per day of natural gas and 100,000
barrels per day of crude oil in the United States and Canada.
The joint venture will begin operations this fall. The first phase will
be the installation of approximately 6,000 units on propane tanks owned by one
of Cornerstone's business units in California. Cornerstone expects to outfit the
majority of its 460,000 installations with the joint venture package in the
second phase of installations beginning early next year. The joint venture will
begin marketing the propane monitoring system internationally and domestically
this year. Marketing will be through direct contacts in the propane industry and
through ORBCOMM's international service distribution partners. There are
estimated to be over16,000,000 propane tanks in the US with about 14,300,000
used residentially, 1, 000,000 commercially and the balance in other light
industrial use. The Company estimates that there are at least the same number of
propane tanks in international markets.
Revenue will be generated from sales of hardware, together with
recurring revenues from communications charges. Market research indicates that
the global market for propane tank monitors is very large, perhaps as large as
50,000,000 tanks.
On July 12, 2000, FiberChem, Inc. announced that Intrex had signed a
Memorandum of Understanding (MOU) with Mainsborne Communications Inc., of
Vancouver, British Columbia. This MOU is expected to form the basis of an
agreement to integrate Intrex's proprietary and wireless communication products
with Mainsborne's Automated Meter Reading (AMR) modem and its spread spectrum
Power Line Carrier (PLC) products. Any final agreement shall also become part of
the business of FiberChem/DecisionLink.
The Intrex/Mainsborne system, called AMRPowerLink, is being designed to
monitor and control remotely located electric, gas and water utility meters.
FiberChem/DecisionLink will apply its SensorFusionTM hardware, software and
wireless communications technologies as an interface between Mainsborne's PLC
applications and its Universal Data Network. Revenue will be generated by
transmitting data from utilities and their customers via the ORBCOMM low-earth
orbit satellite network to the Company's Communications Hub where the data will
be groomed and distributed via the Internet to the utility. The Company will
have the exclusive marketing rights to the resulting product.
It is believed significant opportunities are being created domestically
as a result of deregulation and internationally from emerging nations.
AMRPowerLink will extend the use of AMR technology to utilities that have a
large rural customer base. This can reduce the cost of data recovery, as well as
assist in locating power outages and optimize repair crew routing efficiencies.
The technology will also be particularly effective in emerging countries with
poor communications infrastructure and where electricity theft is a major
problem for utilities.
FiberChem/DecisionLink's FCI Environmental Division will continue to
pursue its existing aboveground storage tank, offshore and sensor markets. The
Company's new satellite-enabled product line offers a more economical solution
to these markets.
The primary target for the Company's products to date 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 with a compliance date
of December 31, 1999. Management believes that as of today, a significant
population of the regulated community has not taken action to achieve
compliance. To date, Florida DEP has designated about 800 sites as SNCs, sites
in Serious Non-
15
<PAGE>
Compliance. This program is expected to be the motivating factor for compliance,
and therefore installation of the company's systems, although it is difficult to
determine how soon. The result should be ongoing revenues to the Company from
this market. Certain military facilities had been allowed various exemptions
from compliance with the Florida regulations. These exemptions are now expiring
and installations are expected to commence shortly. 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 or enforced.
Recently, the Company and its partner lining company received verbal
approval from the Florida DEP for its PetroSense(R) product line for use as a
leak detection strategy for pipelines, when used in conjunction with an approved
three dimensional exterior coating system. This is expected to open up a new
market with a presently undetermined size potential for the Company's products.
The Company is also in discussions with a third party to replace
obsolete competitive equipment at about 350 government and privately owned tanks
around the nation.
In the UST marketplace, the Company has identified that certain large,
high throughput tanks located at truck stops and convenience stores 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 working with a regional chain of truck stops to
offer a solution for this problem. The Company has also identified an
opportunity in the Japanese retail gasoline marketplace for leak detection
equipment potentially for a large number of urban installations.
While the development of the offshore market for the Company's
OilSense(R)-4000 and PHA-100WL continued to be slower than originally
anticipated, existing customers continue to purchase units for more locations.
Orders came from BP/Amoco, Newfield, Apache and British Borneo.
The Company is continuing its marketing efforts in other major offshore
production areas including the North Sea and the Persian Gulf. It was invited to
present a technical paper on field experiences in the Gulf of Mexico at an
important meeting in Aberdeen, Scotland in July 2000. This has led to a test
program with BP/Amoco in the North Sea which is currently underway. The first
order for a portable unit was received from Kuwait in June 2000.
Revenues for the three-month period ended June 30, 2000 (the "Third
Quarter 2000") were $288,287, compared to revenues of $264,074 for the
three-month period ended June 30, 1999 (the "Third Quarter 1999"); revenues for
the Nine-Month Period 2000 were $1,127,533 compared with revenues of $1,318,907
for the Nine-Month Period 1999. Sales of AST leak detection products were
substantially below expectations in the second and third quarters of fiscal
2000.
Gross profit for the Third Quarter 2000 was $104,339, or 36% of
revenues, compared to $143,409, or 54% of revenues for the Third Quarter 1999.
Gross profit for the Nine-Month Period 2000 was $417,134, or 37% of revenues
compared to $673,954, or 51% of revenues, for the Nine-Month Period 1999. The
decline in gross profits as a percent of revenues from the 1999 periods reflects
a higher proportion of relatively lower margin installation revenues during the
2000 periods versus higher margin equipment sales comprising a substantial part
of revenues during the 1999 periods.
The Company's sensor development project with Gilbarco (now renamed
Marconi Commerce Systems) has moved ahead with the announcement by California
Air Resources Board (CARB) on March 23, 2000, of a timetable for certification
of products to meet Onboard Refueling and Vapor Recovery (ORVR) requirements
beginning April 1, 2001. Certification by CARB to its newly defined test
protocol is expected to lead to introduction by Gilbarco of a full range of
products to meet present and future national regulations and for the Company to
supply its Sensor-on-a-Chip(R) to meet Gilbarco's needs. Gilbarco and the
Company recently signed a support agreement where Gilbarco provides financial
and other support through this period.
The Company also entered into an agreement whereby TNO, Coca-Cola
Enterprises - NL and FCI began cooperation in the development of certain sensors
of interest to the food and beverage industry. The first phase of the program
came to a satisfactory conclusion with TNO reporting that the Company's
proprietary FOCS(R) technology exhibited better sensitivity than anything
currently available. Meetings to initiate phase two of the project were held in
early
16
<PAGE>
summer. TNO committed additional resources to ensure the satisfactory completion
of their part of the development. Further meetings are scheduled to plan product
development and introduction.
During Fiscal 1999, the Company signed a five-year agreement with Bosch
Telecom ("Bosch") whereby the two companies cross license certain proprietary
sensor technologies for certain specified markets. Bosch gets access to
proprietary chemistry technologies owned by FCI for 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 an
agreement for a feasibility study 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 manufacturer estimates the market to be 2,000,000 units
per year in the U.S. alone. Recent results indicate that the goals of the
project are likely to be achieved and development is ongoing.
The first of the Company's Port of Rotterdam projects with the Dutch
engineering firm IWACO, to extend the utility of the Company's detection
technology into the low parts per billion (ppb) range, has been successfully
completed, with the detection limits improved from 200 ppb to 20 ppb. The
Company plans to introduce a new line of products aimed at both the clean and
drinking water markets. The second project, to develop a new concept in
bioremediation, still awaits an assessment of the feasibility of the various
options. 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.
Research, development and engineering expenses decreased by $85,458, or
21%, to $312,941 during the Nine-Month Period 2000 from the Nine-Month Period
1999, and by $9,332, or 8% to, $104,906 during the Third Quarter 2000 from the
Third Quarter 1999. These decreases are primarily a result of lower charges for
amortization of technology costs, which were fully amortized as of September 30,
1999
General and Administrative expenses increased by $48,621, or 5%, to
$1,053,780 during the Nine-Month Period 2000 over the Nine-Month Period 1999,
and decreased by $57,051, or 16%, to $291,197 during the Third Quarter 2000 from
the Third Quarter 1999. The Company incurred non-cash expenses during the Second
Quarter 2000 aggregating approximately $154,000 in legal and financial
consulting services, provisions for inventory obsolescence and loss on
uncollectible accounts receivable, and provision for settlement of claims by a
former distributor of the Company's products. During the Third Quarter 1999, the
Company recorded non-cash charges to expense for Common Stock and warrants
issued for investor relations services.
Sales and marketing expenses increased by $74,005, or 16%, to $545,029
during the Nine-Month Period 2000 over expenses for the Nine-Month Period 1999,
and increased by $59,131, or 42%, to $199,805 during the Third Quarter 2000 over
expenses for the Third Quarter 1999 primarily due to timing of promotional and
sales training costs during the 2000 periods.
Interest expense decreased by $26,053, or 11%, to $213,597 during the
Nine-Month Period 2000 from the Nine-Month Period 1999, and decreased by
$38,116, or 50%, to $37,420 during the Third Quarter 2000 from the Third Quarter
1999, reflecting the conversion of a substantial portion of the 8% Senior
Convertible Notes to Common Stock and reduced borrowing against the line of
credit during the 2000 periods.
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
$527,193, or a net loss of $0.01 per share, for the Third Quarter 2000 as
compared to a net loss of $712,026, or a net loss of $0.02 per share, for the
Third Quarter 1999, and incurred a net loss of $1,705,717, or a net loss of
$0.04 per share, for the Nine-Month Period 2000 as compared to a net loss of
$1,609,121, or a net loss of $0.05 per share, for the Six-Month Period 1999.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former distributor has filed an action in French national courts
claiming improper termination by FCI Environmental, Inc. The Company has
responded that the distribution agreement provides for arbitration, in Nevada,
of any disputes and that therefore, the French courts do not have jurisdiction,
and further that the claims are without merit. The French Court has ruled that
the former distributor may be entitled to approximately $80,000 (approximately
one-half of the original claim); however, either party may appeal the decision.
The Company has appealed the decision, and has accrued a provision for
settlement of the claims. The parties have begun preliminary negotiations to
settle the claims.
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 was based on an alleged breach of warranty for goods purchased from
FCIE. The lawsuit was dismissed without prejudice to either party on January 19,
1999. On February 18, 1999, the Company filed an action in Nevada against OCS to
collect amounts due from OCS for products sold to OCS, fees, expenses and
damages totaling approximately $200,000. The action was subsequently removed to
the U.S. District Court of Nevada, and OCS filed counter claims including an
alleged breach of warranty and claims for incidental and consequential damages
for $750,000. OCS has failed to file verified pleadings and has failed to engage
Nevada counsel as required by the Rules of the U. S. District Court. The
Company's motion to dismiss OCS's counter claims and pleadings has been granted
by the Court. The Company has been granted a default judgment against OCS.
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 June 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed for June 2, 2000, reporting
under "Item 5.0 Other Events" that the Company had entered
into an Amended Arrangement Agreement dated as of May 26,
2000, providing for the combination of its business with that
of Intrex Data Communications Corp.
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 11, 2000 By: /s/ Geoffrey F. Hewitt
--------------- ----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
August 11, 2000 By: /s/ Melvin W. Pelley
--------------- ----------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
18
