-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D5nKU6mf2hj/9ym8VFWkUqz8ZnZR6JB7SaXzi2YACGgrtZDODJBCKJWCtaRK9la1 6JJRNZbHunRVbTI82wrq+Q== 0000912057-97-028496.txt : 19970820 0000912057-97-028496.hdr.sgml : 19970820 ACCESSION NUMBER: 0000912057-97-028496 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970819 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIBERCHEM INC CENTRAL INDEX KEY: 0000811014 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 841063897 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-17569 FILM NUMBER: 97666322 BUSINESS ADDRESS: STREET 1: 1181 GRIER DR STE B CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 702-361-9873 MAIL ADDRESS: STREET 2: 1181 GRIER DRIVE, SUITE B CITY: LAS VEGAS STATE: NV ZIP: 89119 FORMER COMPANY: FORMER CONFORMED NAME: TIPTON INDUSTRIES INC /IA/ DATE OF NAME CHANGE: 19880401 10QSB 1 FORM 10Q 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, 1997. ------------- [ ] 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 15, 1997, the issuer had 25,449,356 shares of Common Stock, par value $.0001 per share, issued and outstanding. FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (UNAUDITED) September 30, June 30, 1996 1997 ------------- ------------ Current assets: Cash and cash equivalents $3,065,572 $402,264 Accounts receivable, net of allowance for doubtful accounts of $204,711 as of September 30, 1996 and $229,712 as of June 30, 1997 305,473 617,698 Inventories 1,457,135 1,848,760 Other 59,060 52,868 ------------- ------------ Total current assets 4,887,240 2,921,590 ------------- ------------ Equipment 616,192 720,969 Less accumulated depreciation (483,827) (536,449) ------------- ------------ Net equipment 132,365 184,520 ------------- ------------ Other assets: Patent and technology costs, net of accumulated amortization of $1,791,252 at September 30, 1996 and $1,996,215 at June 30, 1997 589,226 430,612 Financing costs, net of accumulated amortization of $49,645 at September 30, 1996 and $105,946 at June 30, 1997 204,245 147,944 Other 247,383 19,374 ------------- ------------ Total other assets 1,040,854 597,930 ------------- ------------ Total assets $6,060,459 $3,704,040 ============= ============= See accompanying notes to consolidated financial statements 2 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) September 30, June 30, 1996 1997 ------------- ------------ Current liabilities: Current installments of notes payable $7,315 $7,191 Accounts payable 270,503 50,078 Accrued expenses 206,565 299,545 Interest payable 18,016 51,516 ------------- ------------ Total current liabilities 502,399 408,330 Senior convertible notes payable 1,675,000 1,675,000 Notes payable, net of current installments 2,551 9,158 ------------- ------------ Total liabilities 2,179,950 2,092,488 ------------- ------------ Stockholders' equity: Preferred stock, $.001 par value. Authorized 10,000,000 shares; 205,089 and 218,998 convertible shares issued and outstanding at September 30, 1996 and June 30, 1997, respectively; at liquidation value 3,076,335 3,284,970 Common stock, $.0001 par value. Authorized 40,000,000 shares at September 30, 1996 and 50,000,000 shares at June 30, 1997; 25,705,216 and 25,449,356 shares issued and outstanding at September 30, 1996 and June 30, 1997, respectively 2,571 2,545 Additional paid-in capital 28,714,804 27,168,656 Accumulated Deficit (26,369,551) (28,844,619) ------------- ------------ 5,424,159 1,611,552 Notes receivable for exercise of options (1,543,650) --- ------------- ------------ Total stockholders' equity 3,880,509 1,611,552 ------------- ------------ Total liabilities & stockholders' equity $6,060,459 $3,704,040 ============= ============= See accompanying notes to consolidated financial statements 3
FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three-month period ended Nine-month period ended ------------------------------------- -------------------------------------- June 30, June 30, June 30, June 30, 1996 1997 1996 1997 (Restated) (Restated) ---------------------------------------------------------------------------- Revenues $123,609 $403,117 $634,814 $1,138,300 Cost of revenues 59,021 285,267 273,160 672,369 ------------- -------------- ------------- -------------- Gross profit 64,588 117,850 361,654 465,931 ------------- -------------- ------------- -------------- Operating expenses: Research, development and engineering 351,649 308,186 876,368 962,947 General and administrative 384,624 287,547 1,117,607 900,053 Sales and marketing 236,679 234,582 680,751 747,110 ------------- -------------- ------------- -------------- Total operating expenses 972,952 830,315 2,674,726 2,610,110 ------------- -------------- ------------- -------------- Loss from operations (908,364) (712,465) (2,313,072) (2,144,179) ------------- -------------- ------------- -------------- Other income (expense): Interest expense (79,467) (55,164) (127,504) (166,268) Interest income 57,535 8,768 138,423 83,591 Other, net -- -- -- (248,212) ------------- -------------- ------------- -------------- Total other income (expense) (21,932) (46,396) 10,919 (330,889) ------------- -------------- ------------- -------------- Net loss $ (930,296) ($758,861) ($2,302,153) ($2,475,068) ================ =============== =============== =============== Shares of common stock used in computing net loss per share 22,094,615 25,816,895 21,130,704 25,748,517 ================ =============== =============== =============== Net loss per share ($0.04) ($0.03) ($0.11) ($0.10) ================ =============== =============== =============== See accompanying notes to consolidated financial statements
4 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Notes Preferred Stock Common Stock Additional Accumu- Receivable ------------------- --------------------- Paid-In lated for Exercise Shares Amount Shares Amount Capital Deficit of Options Total -------- ---------- ----------- --------- ----------- ------------- ------------- ---------- Balance at September 30, 1996 205,089 $3,076,335 25,705,216 $2,571 28,714,804 (26,369,551) (1,543,650) 3,880,509 Preferred stock dividend: In stock 13,909 208,635 -- -- (208,635) -- -- -- In cash -- -- -- -- (46,171) -- -- (46,171) Common stock issued: Exercise of options -- -- 145,496 14 53,972 -- 53,986 Exercise of warrants 103,179 10 30,944 30,954 Write down of notes receivable for exercise of options -- -- -- -- (619,504) -- 619,504 -- Payments received on notes receivable for exercise of options -- -- -- -- -- -- 167,342 167,342 Shares forfeited upon cancellation of notes receivable for exercise of options (504,535) (50) (756,754) 756,804 Net loss -- -- -- -- -- (2,475,068) -- (2,475,068) -------- ---------- ----------- --------- ----------- ------------- ------------- ----------- Balance at June 30, 1997 218,998 $3,284,970 25,449,356 $2,545 27,168,656 (28,844,619) 0 1,611,552 ======== ========== =========== ========= =========== ============= ============= ===========
See accompanying notes to consolidated financial statements. 5 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine-month period ended ---------------------------- June 30, June 30, 1996 1997 (Restated) --------------- ------------ Cash flows from operating activities: Net loss ($2,302,153) ($2,475,068) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation 39,221 52,622 Amortization of patent and technology costs 198,526 204,963 Amortization of financing costs 45,641 56,301 Accrued interest on notes receivable for exercise of options (80,189) (26,985) Write off of accrued interest on notes receivable for exercise of options -- 248,212 Reduction in notes receivable for exercise of options in exchange for services -- 636 Common stock issued for services 43,522 -- Provision for loss on accounts receivable 51,337 25,000 Inventory valuation allowance 118,811 25,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable 150,442 (337,225) Increase in inventories (327,242) (416,625) Decrease in other current assets 12,008 6,192 Decrease in accounts payable (39,570) (220,425) Increase in accrued expenses 26,341 92,980 Increase in interest payable 77,622 33,500 --------------- ------------ Net cash used in operating activities (1,985,683) (2,730,922) --------------- ------------ Cash flows from investing activities: Purchase of equipment (26,788) (83,504) Payments for patents (88,564) (46,349) --------------- ------------ Net cash used in investing activities (115,352) (129,853) --------------- ------------ See accompanying notes to consolidated financial statements continued 6 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine-month period ended ---------------------------- June 30, June 30, 1996 1997 (Restated) --------------- ------------ Cash flows from financing activities: Proceeds from common stock and warrant Units $3,000,000 $ -- Proceeds from senior convertible notes payable $2,825,000 -- Payment of financing costs (773,887) -- Payments on notes payable (5,080) (14,790) Proceeds from the exercise of options and warrants 220,412 84,940 Proceeds from interest and notes receivable for exercise of options 16,387 173,488 Payment of dividend on preferred stock (23,645) (46,171) --------------- ------------ Net cash provided by (used in) financing activities 5,259,187 197,467 --------------- ------------ Net increase (decrease) in cash and cash equivalents 3,158,152 (2,663,308) Cash and cash equivalents at beginning of period 911,186 3,065,572 --------------- ------------ Cash and cash equivalents at end of period $4,069,338 $402,264 =============== ============ Supplemental Cash Flow Information Noncash investing and financing activities: Senior convertible notes payable converted to common stock $1,025,000 -- Preferred stock converted to common stock 203,805 -- Preferred stock issued as dividends 228,210 $208,635 Reduction in additional paid-in capital due to write down of notes receivable for exercise of options -- 619,504 Reduction in common stock and additional paid-in capital upon cancellation of shares held as collateral for notes receivable for the exercise of options -- 756,804 Equipment purchased through capital lease -- 21,273 Reduction in interest and notes receivable for exercise of options in exchange for services 34,054 636 ============ ========== Interest paid $4,242 $76,467 ============ ========== See accompanying notes to consolidated financial statements 7 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (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 June 30, 1997 and September 30, 1996, and the results of operations and cash flows of the Company for the three-month and nine-month periods ended June 30, 1997 and 1996. 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, 1996. Certain Fiscal 1996 Financial Statement amounts have been reclassified to conform with the presentation in the Fiscal 1997 Financial Statements. (2) CONVERTIBLE DEBT On February 15, 1996, the Company completed an offering under Regulation S, promulgated under the Securities Act of 1933, as amended (the "Offering"), of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for $2,825,000. Interest on the Notes is to be paid semi-annually, commencing August 15, 1996, at a rate of 8% per annum. The Notes are convertible into shares of common stock of the Company (the "Common Stock") 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 to be adjusted if the average closing bid price of the Common Stock during the 30 business days prior to February 15, 1997 was less than the Conversion Price. Accordingly, the Conversion Price has been adjusted to $0.4078, a price representing a 10% discount from the thirty-day average closing bid price of the Common Stock for the 30 business days prior to February 15, 1997. As of June 30, 1997, an aggregate face amount of $1,150,000 of the Notes had been converted to Common Stock resulting in the issuance of 1,437,500 shares of Common Stock. Based on the adjusted Conversion Price of $0.4078, an aggregate of 4,107,406 shares of Common Stock would be issuable if the remaining $1,675,000 face amount of Notes were converted. The Company paid fees and expenses associated with the offering amounting to $428,204, which is being amortized as interest expense over the three-year term of the Notes or until conversion, if earlier, when the proportionate unamortized amount is charged to additional paid in capital. Also in connection with the Offering, the Company issued to the Placement Agent for the Offering, for nominal consideration, warrants to purchase 353,125 shares of Common Stock, at an exercise price of $0.80 per share (the "Exercise Price"). The Exercise Price was to be adjusted in the same event and in the same manner as the Conversion Price of the Notes. Accordingly, the Exercise Price has been adjusted to $0.4078 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. (3) CAPITAL STOCK 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 8 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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). In November 1994, the Company paid cash dividends of $53,340 and issued 14,362 shares of Convertible Preferred Stock dividends. Subsequent to the issuance of the Convertible Preferred Stock dividends, the Company reacquired 10,000 shares of the Convertible Preferred Stock dividend for $15 per share. These reacquired shares were retired during fiscal 1996. In November 1995, the Company paid cash dividends of $23,645 and issued 15,214 shares of Convertible Preferred Stock dividends. In November 1996, the Company paid cash dividends of $46,171 and issued 13,909 shares of Convertible Preferred Stock dividends. 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 June 30, 1997, the Company had 218,998 shares of Convertible Preferred Stock outstanding. 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. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock (the "Unit Warrants"). The Unit Warrants are each exercisable at $1.00 at any time from May 31, 1996 through May 30, 2001. The Company paid fees and expenses associated with the Unit offering amounting to $345,683. Also in connection with the Unit offering, the Company issued to the Placement Agent for the offering, for nominal consideration, warrants to purchase 333,333 shares of Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90 per share. This exercise price was to be adjusted if the average closing bid price of the Common Stock during the 30 business days prior to May 31, 1997 was less than $0.90 to an exercise price representing a 10% discount from such thirty-day average closing bid price and the number of shares issuable upon exercise was to be adjusted based on the initial and adjusted exercise prices. Accordingly, the exercise price has been adjusted to $0.2343 per share, 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. Primarily in order to provide a means to raise additional cash through existing outstanding options, warrants and promissory notes receivable, on April 4, 1997, the per share exercise price of all employee stock options, all Unit and other Warrants (except Class D Warrants) were decreased as follows: to $0.32 from April 4, through April 11, 1997, and thereafter adjusted weekly to the average closing bid price for the five prior trading days less a discount of 10% (but never to a price less than $0.30) through May 16, 1997, when the prices reverted to the original prices. As a result, the Company received $39,943 for the exercise of 131,453 options at prices ranging from $0.30 to $0.32 per share. In addition, during the nine-month period ended June 30, 1997, the Company received $14,083 for the exercise of 14,083 options at $1.00 per share. Effective April 17, 1997 the per share exercise price of Class D Warrants was decreased to $0.30 through May 16, 1997 when the exercise price reverted to its prior $1.10 per share. As a result, the Company received approximately $30,954 for the exercise of 103,179 Class D Warrants exercised at $0.30 per share. In March 1994, the Company's Board of Directors approved a plan by which employees and directors of the Company would be eligible to exercise stock options through the execution of promissory notes. As of March 15, 1994, the Company received promissory notes aggregating $1,815,099 for the exercise of 1,210,066 stock options at $1.50 per share. The underlying Common Stock was held in escrow, as collateral, until payment was made on the promissory notes. As of April 4, 1997, an aggregate of $277,916 had been paid on these notes, an aggregate of $47,999 of interest had been paid, and an additional $248,212 of interest had been accrued (through December 31, 1996) but remained unpaid. 9 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- In conjunction with the temporary reduction of the exercise prices of the options and warrants effective April 4, 1997 and Class D Warrants effective April 17, 1997, as described above, the remaining unpaid principal on the promissory notes could be fully paid in an amount determined by multiplying the unpaid balance by a fraction, the numerator of which was the revised exercise price, and the denominator of which was $1.50 (the original exercise price). If the unpaid principal was not so paid by May 16, 1997, the underlying collateral shares would be forfeited and all unpaid principal and accrued interest would be extinguished. As a result, the Company received $160,875 in payment for 520,252 escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount liquidated $780,379 of original note principal. The remaining $756,804 of unpaid note principal was extinguished and the underlying collateral of 504,535 shares were forfeited to the Company and immediately cancelled, thereby, reducing the total number of shares outstanding. During the nine-month period, but prior to April 4, 1997, the Company had received $13,083 in cash and $636 in exchange for services as payments on the notes and accrued interest. Unpaid accrued interest receivable aggregating $248,212 was expensed during the six-month period ended March 31, 1997. Also during the nine-month Period 1997, the Company issued options to purchase an aggregate of 40,000 shares of its Common Stock at exercise prices of $1.00 per share and options to purchase an aggregate of 175,000 shares of its Common Stock at exercise prices of $0.22 per share. These options were granted to employees of the Company under its Employee Stock Option Plans and are exercisable at any time for a period ending five years and ten years, respectively, from the date of grant. (4) REVENUES Subsequent to September 30, 1996, the Company reviewed its revenue recognition policy and determined that contingencies associated with installations, modifications in sales terms or other conditions existed or had arisen with respect to certain sales transactions previously recorded by the Company and concluded that sales transactions aggregating approximately $1,800,000 should not be recorded as revenue in the fiscal year ended September 30, 1996. As a result, the Company has restated its financial results for the second fiscal quarter ended June 30, 1996 and the third fiscal quarter ended June 30, 1996. The restated results for the third fiscal quarter ended June 30, 1996 are included in the accompanying financial statements. As of June 30, 1997, Whessoe Varec had agreed to accept and pay for the remaining $675,000 of products of the $1,000,000 originally due on January 2, 1997. As of August 15, 1997, the Company had received one-half of that amount (or $337,500), as agreed, which is included in sales revenues for the three and nine-month periods ended June 30, 1997. Whessoe Varec has agreed to pay the remaining $337,500 on or before September 30, 1997. As of June 30, 1997, approximately $900,000 of the $1,800,000 in revenue deferred from fiscal 1996 has been recognized in fiscal 1997. Management expects that at least $1,300,000 will have been recognized by September 30, 1997. The Company has incurred substantial losses since its inception and Management recognizes that the Company must generate additional revenues or reductions in operating costs and may need additional financing to continue its operations. The Company continues to review alternatives for raising additional capital, and has received commitments from certain of its officers and directors. Based on these commitments and commitments from Whessoe Varec and others, and the Company's product sales and expected sales and new product developments and development agreements, management believes that it will have adequate resources to continue its operations into the foreseeable future. However, there can be no assurance that forecasted sales levels will be realized to achieve profitable operations, nor that additional financing, if needed, can be obtained on terms satisfactory to the Company, if at all, nor in an amount sufficient to enable the Company to continue its operations. - -------------------------------------------------------------------------------- -------------------------------------- 10 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 $2,513,260 at June 30, 1997, compared with working capital of $4,384,841 at September 30, 1996, a decrease of $1,871,581. Also the Company had decreases in cash and cash equivalents of $2,663,308 and in stockholders' equity of $2,268,957. These decreases are primarily a result of the Company's net loss for the Nine-Month Period ended June 30, 1997 (the "Nine-Month Period 1997") of $2,475,068. In addition, during the Nine-Month Period 1997, the Company paid cash dividends of $46,171 on its Convertible Preferred Stock and issued 13,909 shares, valued at $208,635, of Convertible Preferred Stock dividends. Also, the Company received $84,940 for the exercise of options and warrants, and $167,342 in payments for notes receivable for the exercise of options. The Company had net cash used in operating activities of $2,730,922 during the Nine-Month Period 1997 as compared with net cash used in operating activities of $1,985,683 during the nine-month period ended June 30, 1996 ("Nine-Month Period 1996"). The deficit during the Nine-Month Period 1997 is primarily a result of the Company's net loss of $2,475,068, and adjustments to reconcile net loss to net cash used in operating activities, including increases in accounts receivable of $337,225, inventories of $416,625, accrued expenses of $92,980 and interest payable of $33,500, as well as decreases in accounts payable of $220,425 and other current assets of $6,192. In addition, these adjustments include depreciation of $52,622, amortization of patent and technology costs of $204,963 and amortization of financing costs of $56,301, accrued interest of $26,985 on notes receivable for exercise of options, as well as a reduction of $636 in notes receivable for the exercise of options in exchange for services, and provisions for loss on accounts receivable of $25,000 and inventory valuation allowance of $25,000. Also, as discussed in Note 3 to the Consolidated Financial Statements, the Company expensed $248,212 in accrued interest receivable on notes receivable, originated in March 1994, for the exercise of stock options. The deficit during the Nine-Month Period 1996 is primarily a result of the Company's net loss of $2,302,153, offset by adjustments to reconcile net loss to net cash used in operating activities including increases in inventories of $327,242, accrued expenses of $26,341, and interest payable of $77,622, as well as decreases in accounts receivable of $150,442, other current assets of $12,008, and accounts payable of $39,570. In addition, these adjustments include $43,522 related to the issuance of Common Stock for services provided to the Company, accrued interest of $80,189 on notes receivable for the exercise of options, amortization of patent and technology costs of $198,526 and amortization of financing costs of $45,641, depreciation of $39,221, and provisions for loss on accounts receivable of $51,337 and inventory valuation allowance of $118,811. The Company had net cash provided by financing activities of $197,467 during the Nine-Month Period 1997 as compared with net cash provided by financing activities of $5,259,187 during the Nine-Month Period 1996. During April and May 1997, in order to raise additional capital, the Company reduced temporarily the exercise price of its outstanding options and warrants as discussed in Note 3 to the Consolidated Financial Statements, and as a result received $39,943 for the exercise of 131,453 options and $30,954 for the exercise of 103,179 warrants. In addition, the Company received $14,043 for the exercise of 14,043 options prior to the temporary exercise price reduction. Additionally, during April and May, 1997, in order to supplement the raising of capital as well as to possibly reduce the number of outstanding shares, the Company offered to reduce the principal amounts due the Company on notes 11 receivable for the March 1994 exercise of options, as discussed in Note 3 to the Consolidated Financial Statements. As a result, the Company received $160,875 in payments on the notes receivable and cancelled 514,535 shares of Common Stock which had been held as collateral against the notes. During the Nine-Month Period 1997 and prior to the reduction of principal amounts, the Company had received $12,613 in cash payments of principal and interest. In addition, the Company paid $46,171 in cash dividends on its Convertible Preferred Stock and made payments of $14,790 on its notes payable to a bank and on its capital lease. During the Nine-Month Period 1996, the Company received $2,396,796, net of financing costs paid, from the placement of its 8% Senior Convertible Notes, as discussed in Note 2 to the Consolidated Financial Statements and received $2,654,317 net of financing costs paid, from the placement of its Common Stock and Warrant Units, as discussed in Note 3 to the Consolidated Financial Statements. Also during the Nine-Month Period 1996, the Company received $220,412 from the exercise of 219,381 options and 1,031 warrants to purchase shares of Common Stock and $16,387 in cash payments on interest and notes receivable for the exercise of options. In addition, the Company paid $23,645 in cash dividends on Convertible Preferred Stock, and made payments of $5,080 on its note payable to a bank. The Company had net cash used in investing activities of $129,853 during the Nine-Month Period 1997 as compared to net cash used in investing activities of $115,352 during the Nine-Month Period 1996. During the Nine-Month Period 1997, the Company made payments in the amount of $46,349 for United States and foreign patent applications and $83,504 for the purchase of equipment. During the Nine-Month Period 1996, the Company made payments of $88,564 for patent applications and $26,788 for the purchase of equipment. MATERIAL CHANGES IN RESULTS OF OPERATIONS The Company entered into an OEM Strategic Alliance Agreement as of June 30, 1996 with Whessoe Varec, Inc. ("Whessoe Varec") whereby Whessoe Varec was granted exclusive worldwide right to market the Company's products in the aboveground storage tank (AST) market. The Agreement was accompanied by firm orders for approximately $1.7 million of the Company's products of which approximately $500,000 was to be shipped during June, 1996 and an additional approximately $500,000 was to be shipped during September, 1996. At the request of Whessoe Varec in order to avoid unnecessary duplicate shipping costs, substantially all of the equipment was segregated in the Company's warehouse. Terms of payment were 180 days and 90 days for the orders to be shipped in June and September 1996, respectively. During early January 1997, Whessoe Varec requested that the Company consider a revised payment schedule acceptable to both parties. As of February 25, 1997, Whessoe Varec had paid for the items actually shipped by that date, which approximated $59,000, and during April 1997, paid an additional $250,000 for items shipped in March 1997. In the past several weeks, the Company and Whessoe Varec (the "Alliance") have come to a definitive agreement regarding the satisfactory completion of payments due under the OEM Strategic Alliance Agreement of 1996. In August 1997, the Company received one half of the outstanding amount and has begun to ship the remaining products. The last payment is due on or before September 30, 1997. Both payments are irrevocable and the shipment of inventory is not subject to return except under normal warranty conditions. This combined with the completion of the acquisition of Whessoe plc by Endress + Hauser of Switzerland, has positioned both Alliance partners to take advantage of the new Florida regulations regarding the requirements for AST leak detection. There have been approximately 1,000 tanks identified which are already lined and as such immediate targets for leak detection. Each tank represents an average $35,000 of revenue for the Alliance. It is anticipated that this number will grow in the period before December 1999 when installations have to be completed. The impact of these regulations has been that about $8,000,000 of projects have been identified and proposals generated. It is anticipated that these projects will accelerate from 1997 to 1999. Many companies have already indicated that they intend to stagger installations over the period. Based on this level of activity, management believes that significant business will be generated by the Alliance although there can be no assurance that this will occur. However, internal liners and leak detection is by far the lowest cost option for compliance with the Florida 12 mandates and as of today, FCI's PetroSense-Registered Trademark- line is the only product certified for use in both contaminated and uncontaminated sites in Florida. The development of the offshore market for the Company's OilSense 4000-TM- and PHA-100WL has been somewhat slower than originally anticipated, primarily due to the availability of imported Freon manufactured in Russia, China and elsewhere. Recently, there has been a tightening of enforcement of the ban on importation of Freon and availability and quality has diminished. In the last few weeks, the Company has completed successful evaluations at Chevron and Marathon from whom additional purchases are expected. Exxon has leased an OilSense for an evaluation period. Murphy Oil has begun an evaluation. Based on its current assessment of the competition in the Gulf, Management believes that its FOCS-Registered Trademark- technology is the best of the alternate solutions to the Freon IR method. An incremental tightening of supply of Freon is believed to be the impetus needed to kick start this market and for the Company to generate significant revenues, although there can be no assurance that this will occur. Revenues during the Nine-Month Period 1997 were $1,138,300, an increase of $503,486 over restated revenues for the Nine-Month Period 1996, and were $403,117 for the three-month period ended June 30, 1997 ("Third Quarter 1997"), an increase of $279,508 over restated revenues for the three-month period ended June 30, 1996 ("Third Quarter 1996"). Revenues for the Third Quarter 1997 and Nine-Month Period 1997 include $337,500 from Whessoe Varec, as described above, as well as sales to a number of other customers for use in offshore, AST leak detection, stormwater and process water monitoring, environmental remediation monitoring and other applications. Gross profit for the Nine-Month Period 1997 was $465,931 or 41% of revenues, compared to $361,654 or 57% of restated net revenues, for the Nine- Month Period 1996. Gross profit for the Third Quarter 1997 was $117,850, or 29% of revenues, compared to $64,588 or 52% of restated net revenues for the Third Quarter 1996. Revenues during the 1997 periods included the sales to Whessoe Varec at discounted OEM prices, while revenues during the 1996 periods were primarily at higher, end customer prices. Revenues during the Nine-Month Period 1996 also included relatively higher margin development fees. Gross profit for the Third Quarter and Nine-Month Period 1997 were also reduced by excess manufacturing capacity and inventory valuation adjustments of approximately $110,000. The Company has taken action to reduce manufacturing capacity and associated costs. Research, development and engineering expenditures increased by $86,579, or 10%, during the Nine-Month Period 1997 over the Nine-Month Period 1996 and decreased by $43,463, or 12%, during the Third Quarter 1997 over the Third Quarter 1996. The increase is primarily attributable to the Third Quarter 1996 addition of applications and development personnel, including a Director of Development and applications technicians, whose primary focus was the development and refinement of applications for current products. During the Third Quarter 1997, most of such development and refinement has been completed and consequently expenditures began to decline. Subsequent to June 30, 1997, the Company has significantly reduced spending, including personnel costs, in development and engineering, as well as in marketing and administrative areas. The Company is actively pursuing commercialization of its electronic semi- conductor chemical sensor ("Sensor-on-a-Chip-Registered Trademark-") being developed with Texas Instruments, Inc. ("TI") and applications of its Sensor-on- a-Chip-Registered Trademark- with Gilbarco, Inc., Alcohol Sensors International, Ltd. and others. The Company's engineering, research and development is focused on applications development for the offshore and water monitoring markets, the development of commercial applications for its Sensor-on-a-Chip-Registered Trademark- technology and dual use developments with the U.S. Department of Energy (DOE) through Bechtel Nevada Corporation. In August 1997, the Company received contracts for two new projects from Bechtel Nevada Corporation totalling $40,000 for the development of hardware for use with Sensor-on-a-Chip- Registered Trademark-. The program to develop a breath alcohol Sensor-on-a-Chip-Registered Trademark- for use in an ignition interlock device manufactured by Alcohol Sensors International, Ltd. continues to have high priority for the 13 Company. The successful completion of this project should result in the first commercial, high volume application of the Company's Sensor-on-a-Chip-Registered Trademark- technology. Gilbarco has refocused on the Sensor-on-a-Chip-Registered Trademark- for "on-board refueling vapor recovery" (ORVR). After months of delays and hearings concerning the introduction of ORVR, the California Air Resources Board (CARB) appears to be headed towards a decision regarding implementation of ORVR, however, the time frame is still not defined. The Company and Gilbarco have re- initiated a program designed to test a modified gasoline dispenser which incorporates the Sensor-on-a-Chip-Registered Trademark-. Once testing is completed and once CARB implements ORVR, the Company expects to generate significant revenues from this application, although there is no assurance that this will actually occur, and it is unlikely that it will occur in fiscal 1997. The Company recently entered into a development agreement with a major supplier of industrial control equipment for a sensor for a specific high volume application. This agreement was for a short evaluation, completed in early May 1997. The Company received a second contract worth over $100,000 in August 1997. This contract is designed to develop life time data for the sensor. Concurrent with this contract, it is believed that the client has begun a product development effort which could ultimately result in sensor sales in the million unit per year range although there can be no assurance that this will actually occur. General and administrative expenditures decreased by $217,554, or 19%, during the Nine-Month Period 1997 from the Nine-Month Period 1996, and decreased by $97,077 or 25% during the Third Quarter 1997 from the Third Quarter 1996, primarily attributable to larger inventory valuation allowances during the 1996 periods. The Company has implemented reductions in expenses and cash expenditures, including the deferral of administrative, as well as other salaries. Sales and marketing expenditures increased by $66,359, or 10%, during the Nine-Month Period 1997 over the Nine-Month Period 1996 and decreased by $2,097 or 1% during the Third Quarter 1997 over the Third Quarter 1996. The increase during the Nine-Month Period is attributable primarily to the addition of technical and other marketing and sales support activities and personnel in the offshore market. Marketing personnel and other expenditures have been reduced since June 30, 1997. The Company's interest income decreased by $54,832 or 40% during the Nine- Month Period 1997 from the Nine-Month Period 1996, and decreased by $48,767, or 85%, during the Third Quarter 1997 from the Third Quarter 1996. No interest income was recognized during the Second Quarter and Third Quarter 1997 on the notes receivable for the exercise of options. Interest expense increased by $38,764, or 30% during the Nine-Month Period 1997 over the Nine-Month Period 1996 as a result of interest expense accrued on, and amortization of the costs associated with the sale of, the Senior Convertible Notes for the entire periods of 1997. Interest expense decreased by $24,303 or 31% during the Third Quarter 1997 from the Third Quarter 1996, reflecting the conversion of a significant amount of the Senior Convertible Notes to Common Stock during and subsequent to the Third Quarter 1996. As discussed above, in connection with the temporary reduction of exercise prices of options and warrants and notes receivable, accrued but unpaid interest receivable in the amount of $248,212 was charged to other expense during the Nine-Month Period 1997 As a result of the foregoing, the Company incurred a net loss of $2,475,068, or a net loss of $0.10 per share, for the Nine-Month Period 1997 as compared to a net loss of $2,302,153, or a net loss of $0.11 per share for the Nine-Month Period 1996. Net loss for the Third Quarter 1997 was $758,861 or a net loss of $0.03 per share, as compared to a net loss of $930,296, or a net loss of $0.04 per share for the Third Quarter 1996. The discussions in this Report include forward looking statements that involve risks and uncertainties, including the timely development and acceptance of the Company's products, the timely acceptance of existing products, the impact of competitive products and pricing, the impact of 14 governmental regulations or lack thereof with respect to the Company's markets, timely funding of customers' projects, customer payments to the Company, and other risks detailed from time to time in the Company's SEC reports. 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 20, 1997, FCI Environmental, Inc. ("FCIE") commenced a lawsuit in the State Court of Nevada (No. A370091) (the "State Action") against QED Environmental, Inc. ("QED"). FCIE alleged a breach of a Sales and Distribution contract dated March 29, 1996 between FCIE and QED. FCIE is seeking $123,800 in direct damages and $297,075 in consequential damages. QED filed a motion to remove the State Action to the United States District Court, District of Nevada. On April 10, 1997, the State Action was removed to Federal Court and was assigned the Docket No. CU-S-97-00406 (DWH). QED filed a counterclaim against the Company and brought a third-party complaint against certain officers and employees and former employees of the Company, seeking reimbursement of $62,223 paid by QED pursuant to the subject contract. The Company has responded to the counterclaim denying all of QED's counterclaims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held at the Company's offices on June 23, 1997. At the Meeting, the following directors were re- elected to serve three-year terms or until their successors have been duly elected and qualified: NOMINEE FOR ELECTION AGAINST ELECTION AUTHORITY WITHHELD ------- ------------ ---------------- ------------------ Geoffrey F. Hewitt 18,969,583 -0- 837,506 Irwin J. Gruverman 18,969,583 -0- 837,506 Dale W. Conrad 18,969,583 -0- 837,506 Messrs. Scott J. Loomis, Walter Haemmerli, Gerald T. Owens and Byron A. Denenberg continue to serve the remainder of their terms of office as directors. Also at the Meeting, the Stockholders (1) approved a proposal to authorize, if necessary, reverse stock splits of the Company's Common Stock; (2) approved an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock of the Company by ten million shares to a total of 50,000,000 shares; (3) ratified the adoption of the Company's 1997 Employee Stock Option Plan, which authorizes the granting of options to purchase an aggregate of up to 1,500,000 shares, replacing approximately 675,000 of authorized but ungranted options under previous stock option plans; and (4) ratified the appointment of Goldstein Golub Kessler & Company, P.C. as the Company's auditors for the fiscal year ending September 30, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K. - --------------------- (1) By a vote of 18,050,643 For, 1,438,477 Against, and 325,644 Abstaining (2) By a vote of 18,291,043 For, 1,279,367 Against, and 239,354 Abstaining (3) By a vote of 18,209,376 For, 1,279,629 Against, and 318,759 Abstaining (4) By a vote of 19,341,325 For, 281,350 Against, and 185,389 Abstaining 15 A report on Form 8-K was filed by the Company on April 9, 1997 reporting under "Item 4. Changes in Registrant's Certifying Accountant" that Goldstein Golub Kessler & Company, P.C. has been engaged as the Company's principal accountants. --------------------------------------------- 16 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 18, 1997 By: /s/ Geoffrey F. Hewitt - --------------- ------------------------------------- Date Geoffrey F. Hewitt President and Chief Executive Officer August 18, 1997 By: /s/ Melvin W. Pelley - --------------- ------------------------------------- Date Melvin W. Pelley Chief Financial Officer and Secretary 17 EX-27 2 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE THREE-MONTH AND SIX-MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS SEP-30-1997 JUN-30-1997 402,264 0 847,410 (229,712) 1,848,760 2,921,590 720,969 (536,449) 3,704,040 408,330 1,684,158 0 3,284,970 2,545 (1,675,963) 3,704,040 1,138,300 1,138,300 672,369 3,282,479 0 25,000 166,268 (2,475,068) 0 (2,475,068) 0 0 0 (2,475,068) (.10) 0 Omitted because of antidilutive effect of net loss
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