<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-17569
FIBERCHEM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1063897
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1181 Grier Drive, Suite B, Las Vegas, Nevada 89119
(Address of principal executive offices)
(702) 361-9873
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES___X___ NO_______
As of February 10, 2000, the issuer had 41,253,159 shares of Common
Stock, par value $.0001 per share, issued and outstanding.
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1999
----------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,760 $ 8,329
Accounts receivable, net of allowance for doubtful
accounts of $92,423 at September 30 and
December 31, 1999 647,402 611,609
Inventories 1,261,437 1,195,255
Prepaid expenses and other 122,153 79,686
----------------- --------------
Total current assets 2,052,752 1,894,879
----------------- --------------
Equipment 704,964 704,964
Less accumulated depreciation (645,163) (653,338)
----------------- --------------
Net equipment 59,801 51,626
----------------- --------------
Other assets:
Patent costs, net of accumulated amortization of
$1,958,108 at September 30, 1999 and
$1,972,821 at December 31, 1999 65,734 55,811
Technology costs, net of accumulated amortization
of $469,706 at September 30 and December 31, 1999 -- --
Note refinancing costs, net of accumulated amortization of
$32,920 at September 30, 1999 and
$46,088 at December 31, 1999 125,096 111,928
Other deferred costs 39,147 59,767
----------------- --------------
Total other assets 229,977 227,506
----------------- --------------
Total assets $ 2,342,530 $ 2,174,011
================= ==============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1999
-------------------- ------------------
<S> <C> <C>
Current liabilities:
Bank loan payable 421,949 456,001
Other current notes payable 250,000 250,000
Accounts payable 272,906 437,205
Deferred salaries 76,353 111,757
Accrued salaries and benefits 199,221 148,862
Accrued warranty 146,282 140,728
Accrued legal, accounting and consulting 70,600 79,001
Accrued commissions 33,799 40,699
Other accrued expenses 93,856 124,956
Customer deposits 37,775 37,775
Interest payable 55,587 35,977
-------------------- ------------------
Total current liabilities 1,658,328 1,862,961
Senior convertible notes payable $1,621,000 $1,621,000
Notes payable to officers, directors and affiliates 265,000 265,000
-------------------- ------------------
Total liabilities 3,544,328 3,748,961
-------------------- ------------------
Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 207,848 convertible shares issued and
outstanding at September 30, and December 31, 1999;
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 40,121,538
shares issued and outstanding at September 30
and December 31, 1999, respectively 3,983 4,012
Additional paid-in capital 29,979,833 30,038,404
Deficit (34,210,476) (34,694,278)
Deferred costs (69,400) (17,350)
Stock subscription receivable (23,458) (23,458)
-------------------- ------------------
Stockholders' equity (deficiency) (1,201,798) (1,574,950)
-------------------- ------------------
Total liabilities and stockholders' equity $2,342,530 $2,174,011
==================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three month period ended
------------------------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Revenues $ 328,895 $ 596,484
Cost of revenues 183,594 381,422
------------ ------------
Gross profit 145,301 215,062
------------ ------------
Operating expenses:
Research, development and engineering 154,797 117,619
General and administrative 371,935 319,291
Sales and marketing 164,185 156,110
------------ ------------
Total operating expenses 690,917 593,020
------------ ------------
Loss from operations (545,616) (377,958)
------------ ------------
Other income (expense):
Interest expense (81,169) (106,415)
Interest and other income 6,489 571
------------ ------------
Total other expense (74,680) (105,844)
------------ ------------
Net loss $ (620,296) $ (483,802)
============ ============
Shares of common stock used in computing loss per share 27,642,715 39,970,701
============ ============
Basic loss per share $ (0.02) $ (0.01)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCIES
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable
------------------------------------------ Paid-In Deferred for Exercise
Shares Amount Shares Amount Capital Deficit Costs of Rights Total
--------- ---------- ----------- --------- --------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 207,848 $3,117,720 39,831,038 $3,983 29,979,833 (34,210,476) (69,400) (23,458) (1,201,798)
Common stock issued:
For cash -- -- 245,000 24 35,571 -- -- -- 35,595
Conversion of interest payable
to officers, directors and
affiliates -- -- 45,500 5 5,000 -- -- -- 5,005
Deferred costs recognized -- -- -- -- -- -- 52,050 -- 52,050
Warrants issued for services -- -- -- -- 18,000 -- -- -- 18,000
Net loss -- -- -- -- -- (483,802) -- -- (483,802)
--------- ---------- ----------- --------- --------- ----------- ------- -------- ----------
Balance at December 31, 1999 207,848 $3,117,720 40,121,538 $4,012 30,038,404 (34,694,278) (17,350) (23,458) (1,574,950)
========= ========== =========== ========= ========= =========== ======= ======== ==========
</TABLE>
5
<PAGE>
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended December 31
------------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(620,296) $(483,802)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 11,267 8,175
Amortization of patent and technology costs 33,050 14,713
Amortization of financing costs 21,624 13,168
Common stock and warrants issued for services 121,361 70,050
Common stock issued for payment of accrued interest -- 5,005
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (34,946) 35,793
Decrease in inventories 70,394 66,182
Decrease in prepaid expenses and
other current assets 3,474 42,467
Increase (decrease) in accounts payable (65,414) 164,299
Increase (decrease) in accrued expenses (98,739) 25,892
Increase (decrease) in interest payable 42,441 (19,610)
--------- ---------
Net cash used in operating activities (515,784) (57,668)
--------- ---------
Cash flows from investing activities:
Payments for patents (2,927) (4,790)
--------- ---------
(2,927) (4,790)
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
Three-month period ended December 31
------------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net proceeds from bank loan $ 8,791 $ 34,052
Proceeds from issuance of common stock and warrants 922,946 35,595
Payment of financing costs (88,504) --
Payment of merger costs -- (20,620)
Payments on note payable to bank and others (34,362) --
Proceeds from the exercise of options 2,200 --
--------- ---------
Net cash provided by financing activities 811,071 49,027
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 292,360 $ (13,431)
Cash and cash equivalents at beginning of period 91,354 21,760
--------- ---------
Cash and cash equivalents at end of period $ 383,714 $ 8,329
========= =========
Supplemental Cash Flow Information
Noncash investing and financing activities:
Senior convertible notes payable converted to common stock $ -- $ --
Notes and interest payable to officers, directors and
affiliates converted to common stock and warrants 420,987 5,005
Notes payable to others converted to common stock
and warrants 60,000 --
Payment of financing costs with common stock and warrants 50,000 --
========= =========
Interest paid $ 60,615 $ 59,222
========= =========
</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, 1999 and December 31, 1999, and the results of operations
and cash flows of the Company for the three-month periods ended December 31,
1998 and 1999. The results of operations are not necessarily indicative of
results which may be expected for any other interim period or for the year as
a whole. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended September 30, 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 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 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 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 had been adjusted to $0.4078 per
share in accordance with the original
8
<PAGE>
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 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 December 31,
1999, the Company owed $456,001 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. 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 April 15, 2000.
During Fiscal 1998 and Fiscal 1999, directors and officers of the
Company advanced an aggregate of $265,000 to the Company. These advances bear
interest at rates of 8% and 9% per annum and are due at various dates between
December 14, 2002 and February 4, 2003 unless converted into Common Stock
prior to maturity. Of the total advances, $125,000 is convertible into Common
Stock at $0.13 per share; $40,000 at $0.11 per share, and $100,000 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 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.
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
9
<PAGE>
trading days. Upon redemption, the Company would issue ten shares of its
Common Stock for each share of Convertible Preferred Stock. As of December
31, 1999, 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.
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 December 31, 1999, 1,696,333 Unit Warrants had been
exchanged for 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 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. 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.
(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 immediate additional financing to continue its
operations. On December 6, 1999, the Company entered into an agreement
providing for the combination of its business with that of Intrex Data
Communications Corp. The Company is pursuing several potential sources for
$5,000,000 in new financing required as a condition to completion of with the
business combination. However, no assurance can be given that this or any
bridge financing can be obtained on terms satisfactory to the Company,
nor that forecasted sales will be realized to achieve profitable operations.
------------------------------------------------------------
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Unaudited Consolidated Financial Statements and notes thereto.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company had working capital of $31,918 at December 31, 1999,
compared with working capital of $394,424 at September 30, 1999, a decrease
in working capital of $362,506. Also the Company had an increase in
stockholders' deficit of $373,152. These changes are primarily a result of
the Company's net loss for the three month period ended December 31, 1999
(the "First Quarter 2000") of $483,802.
Net cash used in operating activities during the First Quarter 2000
was $57,668 compared to net cash used in operating activities during the
First Quarter 1999 of $515,784. The deficit during the First Quarter 2000 is
primarily the result of the Company's net loss of $483,802, 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
$36,056, and common stock and warrants issued for services of $70,050. The
deficit during the First Quarter 1999 was primarily a result of the Company's
net loss of $620,296, and adjustments to reconcile net loss to net cash used
in operating activities. These adjustments include depreciation and
amortization expense of $65,941 and common stock issued in exchange for
services of $121,361. Members of management of the Company agreed to accept
489,347 shares of Common Stock and 489,347 warrants for the payment of
$173,529 in salaries, less approximately $65,000 in withholding taxes which
the Company remitted in cash. Management had deferred the payment of a
substantial portion of their salaries since June 1997, and continue to do so.
Net cash used in investing activities during the First Quarter 2000
was $4,790, as compared to net cash used in investing activities of $2,927
during the First Quarter 1999. During the First Quarter 2000, the Company
paid $4,790 for United States and foreign patent applications, and during the
First Quarter 1999, the Company paid $2,927 for patent applications.
Net cash provided by financing activities during the First Quarter
2000 was $49,027 as compared to net cash provided by financing activities
during the First Quarter 1999 of $811,071. During the 1999 quarter, cash
proceeds of $922,946 were received for the exercise of Rights issued to
shareholders resulting in the issuance of 4,195,209 shares and warrants.
Costs associated with the Rights offering paid during the quarter were
$88,504. Payments on advances against the Company's line of credit with
Silicon Valley Bank and other notes were $34,362 and the Company borrowed an
additional $8,791 against the line of credit. During the First Quarter 2000,
the Company received cash of $35,595 from an officer of the Company for
245,000 shares of restricted Common Stock, and borrowed an additional $34,052
against the line of credit.
As discussed in Note 4 to the Consolidated Financial Statements, the
Company continues to incur substantial losses and needs immediate additional
financing to continue its operations. On December 6, 1999, the Company
entered into an agreement providing for the combination of its business with
that of Intrex Data Communications Corp. The Company is pursuing several
potential sources for $5,000,000 in new financing required as a condition of
completion of the business combination. However, no assurance can be given
that this or any bridge financing can be obtained on terms satisfactory to
the Company, nor that forecasted sales will be realized to achieve profitable
operations.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The primary target for the Company's products 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 had various options for compliance. The lowest cost
option is believed to be an internal tank liner with
11
<PAGE>
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 all sites.
Marathon/Ashland, Miami International Airport, Tampa Airport,
Orlando Airport, West Palm Beach Airport, City of Lakeland, Coastal Fuels,
Petroleum Fuels and Air Kaman have recently purchased FCI's
PetroSense-Registered Trademark- equipment. Florida Power, GATX and Shell
added additional tanks or locations to their installed base. These orders and
commitments represented over $1.1million in revenue to FCI, spread over the
September and December 1999 quarters. Shell Oil, Texaco, Florida Power
Company, Reedy Creek Energy, Jacksonville Electric and GATX had already
purchased and installed the Company's equipment. Revenue per tank is about
$25,000.
After discussions with Florida DEP, Management believes that through
the compliance date of December 31, 1999, a significant population of the
regulated community had not yet taken action to achieve compliance. An
aggressive inspection program on the part of Florida DEP to inspect every
tank once a year is expected to be the motivating factor for them to comply,
with the result being significant revenues to the Company from this market
through Fiscal 2000. The Company is also aware that certain potential
customers are waiting to identify whether their sites are characterized as
contaminated or uncontaminated prior to a final decision on a compliance
strategy. The US EPA reports that 85% of all AST sites are contaminated.
As occurred with the Federal UST regulations which had a mandatory
compliance date of December 22, 1998, following a ten-year compliance period,
some companies are expected to act later than others, impacting on the timing
of revenues for the Company.
Other States are expected to follow Florida 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. New Jersey, New York,
Minnesota and Wisconsin are the leaders of many states which have promulgated
AST regulations of some kind.
Recently the Company received certification from Florida DEP for its
PetroSense-Registered Trademark- product line for use as a leak detection
strategy for pipe lines at airports and military bases, when used in
conjunction with an approved liner. This is expected to open up a new market
with an as yet undetermined size potential for the Company's products.
FCI and E+H Systems and Gauging Division continue to pursue business
with the US Department of Defense (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. A system incorporating 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 this market were approximately $950,000 from
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 2000. Equipment will initially come from inventories originally
purchased by Whessoe Varec. These installations would complete this phase of
the California compliance effort. There are a similar number of military
tanks in Florida where regulations provide for fewer alternatives to the
Company's products. The military has been allowed a variance for compliance
with the Florida regulations. 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, there are indications that the situation is
improving. The combination of the lack of availability of Freon-Registered
Trademark- and higher oil prices generated new orders for the Company. In
August 1999, CNG Producing Company placed a blanket order for portable units
for twelve of its Gulf of Mexico platforms and took delivery of six units. An
additional four were delivered during the First Quarter 2000. This
12
<PAGE>
brings the number of customers to seventeen and the number of units to well
over 60. Also during the First Quarter 2000, Amoco, Spirit Energy 76 (4
units), Murphy Exploration (4 units) and Santa Fe Resources purchased
additional units for their platforms in the Gulf of Mexico. Spirit Energy has
now installed 19 PHA-100WLs and Amoco has installed the Company's
OilSense-Registered Trademark--4000 and PHA-100WLs at 9 of their more than 25
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 including the North Sea and the Persian Gulf.
Total revenues for the First Quarter 2000 were $596,484 as compared
to $328,895 for the First Quarter 1999. Revenues for the First Quarter 2000
included approximately $360,000 for the installation of the Company's leak
detection products in Florida and approximately $87,000 in sales of equipment
for additional such installations. Sales of such products to the Company's
then alliance partner in the First Quarter 1999 were approximately $230,000.
Revenue also included sales to Spirit Energy, Murphy Exploration, BP
Amoco and other operators of offshore oil and gas production platforms.
Gross profit for the First Quarter 2000 was $215,062 or 36% of
sales, compared to $145,301 or 44% of sales for the First Quarter 1999. The
decrease in gross margin percentage is primarily a result of the high
proportion of revenues from the relatively lower margin installation revenues.
The Company's sensor development project with Gilbarco has moved to
the stage where Gilbarco is expected to submit, by spring of 2000, 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 that 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.
Gilbarco and the Company recently signed a support agreement where Gilbarco
provides financial and other support through this period.
During Fiscal 1999, the Company 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 two IWACO
programs relating to bioremediation and monitoring technologies. The Company
benefits from access to data, technology, resources and personnel of the
programs' member companies that include Shell International Products, Solvay
S.A. and TNO, the Dutch government research organization. In the event one of
the bioremediation technologies is selected for use, there would be a
significant need
13
<PAGE>
for monitoring instrumentation to ensure long-term satisfactory operation.
Evaluation of the various bioremediation technologies will continue into 2000.
The Company also entered into an agreement whereby TNO, Coca-Cola
Enterprises - NL and FCI will cooperate in the development of certain sensors
of interest to the food and beverage industry.
Research, development and engineering expenditures decreased by
$37,178, or 24%, to $117,619 during the First Quarter 2000 from the First
Quarter 1999, primarily as a result of lower technology amortization expense.
General and administrative expenses decreased by $52,644, or 14%,
during the First Quarter 2000 from the First Quarter 1999, primarily as a
result of unusually high expenditures during the 1999 quarter related to
financial planning including travel and legal and consulting fees.
Sales and marketing expenditures decreased by $8,075, or 5%, during
the First Quarter 2000 from the First Quarter 1999.
Interest expense increased by $25,246, or 31%, during the First
Quarter 2000 over the First Quarter 1999 reflecting the payment of interest
on the Company's senior convertible notes at 12% (in Common Stock) rather
than at 8% (in cash).
As a result of the foregoing, the Company incurred a net loss of
$483,802, or a net loss of $0.01 per share for the First Quarter 2000 as
compared to a net loss of $620,296, or a net loss of $0.02 per share, for the
First Quarter 1999.
The Company announced on December 6, 1999 that it had reached an
agreement to combine FiberChem with Intrex Data Communications Group of
Vancouver, British Columbia. FiberChem, the surviving entity, will be renamed
DecisionLink Incorporated.
Intrex is a private company which provides proprietary Internet and
communications technology for communicating data to or from remote or mobile
assets on a real-time basis using wireless, satellite and cellular data
systems. Data is routed through Intrex's global network which acts as a data
gateway and applications service provider allowing customers to monitor and
control remote or mobile assets such as gas wells, pipelines, compressors,
storage tanks, offshore platforms, or service vehicles directly from a
desktop PC.
Intrex is a licensed reseller of the Orbcomm Global LP low earth
orbit or LEO satellite data and messaging communications services. Orbcomm is
a partnership owned by Orbital Sciences Corporation and Teleglobe, Inc. of
Canada. Intrex also has communications agreements that provide satellite
services through Norcom, Inc. as well as digital cellular services.
FiberChem will continue to pursue its existing aboveground storage
tank, offshore and sensor markets and intends, upon completion of the
transaction, to incorporate Intrex's technology where appropriate. FiberChem
also intends to pursue new business in Intrex markets that can incorporate
FiberChem technology.
The completion of the transaction is subject to the satisfaction or
waiver of certain conditions, including, among others: (i) the approval of
the arrangement by Intrex common shareholders and the Supreme Court of
British Columbia, (ii) the accuracy of representations and warranties and
other usual closing conditions and (iii) $5,000,000 in new financing proceeds
being available to FiberChem immediately following the combination on terms
and conditions satisfactory to FiberChem and Intrex.
The Company experienced no disruptions in its operations as a result
of Year 2000 issues.
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.
14
<PAGE>
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 proposed business combination
with Intrex, the combined entity's delivery of services over the Internet and
the size of the market for the combined company's services, are
forward-looking statements that involve risks and uncertainties. These risks
and uncertainties include, FCI's ability to complete the combination, 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.
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 does intend to appeal the decision.
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 Count. The Company
expects to file for 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 December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on December
27, 1999 reporting under "Item 5. Other Events" that the Company had entered
into a definitive agreement dated December 6, 1999 providing for the
combination of its business with that of Intrex Data Communications
Corporation.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIBERCHEM, INC.
February 12, 2000 By: /s/ Geoffrey F. Hewitt
- ----------------- -----------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
February 12, 2000 By: /s/ Melvin W. Pelley
- ----------------- ---------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND FOR THE THREE MONTHS
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 8,329
<SECURITIES> 0
<RECEIVABLES> 704,032
<ALLOWANCES> (92,423)
<INVENTORY> 1,195,255
<CURRENT-ASSETS> 1,894,879
<PP&E> 704,964
<DEPRECIATION> (653,338)
<TOTAL-ASSETS> 2,174,011
<CURRENT-LIABILITIES> 1,862,961
<BONDS> 1,886,000
0
3,117,720
<COMMON> 4,012
<OTHER-SE> (4,696,682)
<TOTAL-LIABILITY-AND-EQUITY> 2,174,011
<SALES> 596,484
<TOTAL-REVENUES> 596,484
<CGS> 381,422
<TOTAL-COSTS> 974,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,415
<INCOME-PRETAX> (483,802)
<INCOME-TAX> 0
<INCOME-CONTINUING> (483,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (483,802)
<EPS-BASIC> (0.01)
<EPS-DILUTED> 0<F1>
<FN>
<F1>OMITTED BECAUSE OF ANTIDILUTIVE EFFECT ON NET LOSS.
</FN>
</TABLE>
