-----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, LzKfQLI+9da8F+We19IsAOuBCAdjuynBxqnj9oBuw9Y18GKAk2RO3BHVc4uv863q FKM8AbGxY9NwOLHHwgTdHA== 0001047469-98-036402.txt : 19981006 0001047469-98-036402.hdr.sgml : 19981006 ACCESSION NUMBER: 0001047469-98-036402 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981005 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/A SEC ACT: SEC FILE NUMBER: 000-17569 FILM NUMBER: 98720679 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/A 1 10QSB/A United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB/A AMENDMENT NO.1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 ------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ______________________ Commission file number 0-17569 --------------------------- FIBERCHEM, INC. (Exact name of small business issuer as specified in its charter) Delaware 84-1063897 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1181 Grier Drive, Suite B, Las Vegas, Nevada 89119 (Address of principal executive offices) (702) 361-9873 (Issuer's telephone number) Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- As of May 12, 1998, the issuer had 26,014,707 shares of Common Stock, par value $.0001 per share, issued and outstanding. FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS (UNAUDITED) September 30, March 31, 1997 1998 ------------ ---------- Current assets: Cash and cash equivalents $ 427,488 $ 87,250 Accounts receivable, net of allowance for doubtful accounts of $240,796 at September 30, 1997 and $104,206 at March 31, 1998 263,947 265,048 Inventories 1,563,191 1,620,317 Financing costs, net of accumulated amortization of $190,406 -- 74,519 Other 56,941 81,515 ---------- ---------- Total current assets 2,311,567 2,128,649 ---------- ---------- Equipment 716,465 706,464 Less accumulated depreciation (549,175) (578,878) ---------- ---------- Net equipment 167,290 127,586 ---------- ---------- Other assets: Patent costs, net of accumulated amortization of $1,678,845 at September 30, 1997 and $1,801,992 at March 31, 1998 287,905 185,508 Technology costs, net of accumulated amortization of $386,373 at September 30, 1997 and $401,998 at March 31, 1998 83,333 67,708 Financing costs, net of accumulated amortization of $148,298 119,625 -- ---------- ---------- Total other assets 490,863 253,216 ---------- ---------- Total assets $2,969,720 $2,509,451 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements 2 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) September 30, March 31, 1997 1998 ------------ ----------- Current liabilities: Senior convertible notes payable $ -- $ 1,600,000 Current installments of notes payable 6,878 8,009 Accounts payable 95,469 158,572 Accrued expenses 307,891 401,951 Interest payable 17,778 22,793 ------------- ----------- Total current liabilities 428,016 2,191,325 Senior convertible notes payable 1,650,000 -- Notes payable to officers, directors and affiliates -- 500,000 Notes payable, net of current installments 7,942 3,448 ------------- ----------- Total liabilities 2,085,958 2,694,773 ------------- ----------- Stockholders' equity: Preferred stock, $.001 par value. Authorized 10,000,000 shares; 218,998 convertible shares issued and outstanding at September 30, 1997 and March 31, 1998; at liquidation value 3,284,970 3,284,970 Common stock, $.0001 par value. Authorized 50,000,000 shares; 25,515,660 and 26,014,707 shares issued and outstanding at September 30 1997 and March 31, 1998, respectively 2,552 2,602 Additional paid-in capital 27,192,749 27,287,677 Deficit (29,596,509) (30,760,571) ------------- ----------- Total stockholders' equity 883,762 (185,322) ------------- ----------- Total liabilities and stockholders' equity $ 2,969,720 $ 2,509,451 ------------- ----------- ------------- -----------
See accompanying notes to consolidated financial statements 3 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three-month period ended Six-month period ended --------------------------- --------------------------- March 31, March 31, March 31, March 31, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ Revenues $619,609 $241,693 $735,183 $466,872 Cost of revenues 323,180 114,726 387,102 207,568 ------------ ------------ ------------ ------------ Gross profit 296,429 126,967 348,081 259,304 ------------ ------------ ------------ ------------ Operating expenses: Research, development and engineering 313,955 204,422 654,761 396,314 General and administrative 311,248 340,547 612,506 580,364 Sales and marketing 267,357 179,126 512,529 328,048 ------------ ------------ ------------ ------------ Total operating expenses 892,560 724,095 1,779,796 1,304,726 ------------ ------------ ------------ ------------ Loss from operations (596,131) (597,128) (1,431,715) (1,045,422) ------------ ------------ ------------ ------------ Other income (expense): Interest expense (55,755) (60,666) (111,104) (120,791) Interest income 17,053 359 74,824 361 Other, net (248,212) 0 (248,212) 1,790 ------------ ------------ ------------ ------------ Total other income (expense) (286,914) (60,307) (284,492) (118,640) ------------ ------------ ------------ ------------ Net loss ($883,045) ($657,435) ($1,716,207) ($1,164,062) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares of common stock used in computing net loss per share 25,718,423 25,668,874 25,714,329 25,606,870 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net loss per share ($0.03) ($0.03) ($0.07) ($0.05) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements 4 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Preferred Stock Common Stock Additional -------------------------------------------------- Paid-In Shares Amount Shares Amount Capital Deficit Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1997 218,998 $3,284,970 25,515,660 $2,552 $27,192,749 ($29,596,509) 883,762 Common stock issued: Exercise of options -- -- 5,000 1 1,099 -- 1,100 For services -- -- 250,000 25 46,850 -- 46,875 Conversion of senior convertible notes payable -- -- 244,047 24 46,979 -- 47,003 Net loss -- -- -- -- -- (1,164,062) (1,164,062) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at March 31,1998 218,998 $3,284,970 26,014,707 $2,602 27,287,677 (30,760,571) (185,322) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements 5 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six month period ended -------------------------- March 31 March 31 1997 1998 ----------- ----------- Cash flows from operating activities: Net loss ($1,716,207) ($1,164,062) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation 34,234 31,369 Amortization of patent and technology costs 136,178 138,772 Amortization of financing costs 35,453 42,109 Accrued interest on notes receivable for exercise of options (26,985) -- Write off of accrued interest on notes receivable for exercise of options 248,212 -- Reduction in notes receivable for the exercise of options in exchange for services 636 -- Common stock issued for services -- 46,875 Gain on sale of fixed assets -- (1,790) Provision for loss on accounts receivable 25,000 Inventory valuation allowance 25,000 Changes in assets and liabilities: Increase in accounts receivable (310,804) (1,101) Increase in inventories (478,673) (57,126) Increase in other current assets (29,681) (18,574) Increase (decrease) in accounts payable (19,521) 63,103 Increase in accrued expenses 10,863 94,060 Increase in interest payable -- 5,015 ----------- ----------- Net cash used in operating activities (2,066,295) (821,350) ----------- ----------- Cash flows from investing activities: (Purchase) sale of equipment (83,504) 10,125 Payments for patents (34,776) (20,750) ----------- ----------- Net cash used in investing activities (118,280) (10,625) ----------- -----------
See accompanying notes to consolidated financial statements (continued) 6 FIBERCHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six month period ended -------------------------- March 31 March 31 1997 1998 ----------- ----------- Cash flows from financing activities: Payments on notes payable (13,257) (3,363) Proceeds from the exercise of options and warrants 14,043 1,100 Proceeds from interest and notes receivable for exercise of options 13,083 -- Payment of dividend on preferred stock (46,171) -- Proceeds from note payable to Privatbank -- 144,000 Proceeds from notes payable to officers and directors -- 350,000 ----------- ----------- Net cash provided by (used in) financing activities (32,302) 491,737 ----------- ----------- Net decrease in cash and cash equivalents (2,216,877) (340,238) Cash and cash equivalents at beginning of period 3,065,572 427,488 ----------- ----------- Cash and cash equivalents at end of period $848,695 $87,250 ----------- ----------- ----------- ----------- Supplemental Cash Flow Information Noncash investing and financing activities: Reduction in additional paid-in capital due to write down of notes receivable for exercise of options $1,229,746 $ -- Preferred stock issued as dividends 208,635 -- Senior convertible notes payable converted to common stock -- 50,000 Unamortized deferred financing costs associated with senior senior convertible notes payable converted to common stock -- 2,997 Deferred financing costs associated with Privatebank note -- 6,000 Equipment purchased through capital lease 21,273 -- Reduction in notes receivable for exercise of options in exchange for services 636 -- ----------- ----------- ----------- ----------- Interest paid $75,651 $73,667 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements 7 FIBERCHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 11998 (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 March 31, 1998 and September 30, 1997, and the results of operations and cash flows of the Company for the three-month and six-month periods ended March 31, 1998 and 1997. 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, 1997. Certain Fiscal 1997 Financial Statement amounts have been reclassified to conform with the presentation in the Fiscal 1998 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 which has been adjusted, in accordance with the original Note agreement, 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. During the six-month period ended March 31, 1998 (the "Six Month Period 1998"), the Company received an unsolicited offer to convert $25,000 of the Notes at a conversion price of $0.21 per share, and another offer to convert $25,000 of the Notes at a conversion price of $0.20 per share, which were approximately the then current market values of the Common Stock. Accordingly, the Company issued 244,047 shares for the conversions. All other Note holders were offered the same temporary conversion price. As of March 31, 1998, an aggregate face amount of $1,225,000 of the Notes had been converted to Common Stock resulting in the issuance of 1,742,851 shares of Common Stock. Based on the adjusted Conversion Price of $0.4078, an aggregate of 3,923,456 shares of Common Stock would be issuable if the remaining $1,600,000 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") which 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, and contain certain piggyback registration rights. During the Six Month Period 1998, certain of the Company's officers and directors provided an aggregate of $250,000 in the form of 5-year 8% notes, convertible into rights to purchase common stock 8 upon registration of an offering to all stockholders and warrant holders of rights to purchase common stock. In addition, certain officers and directors loaned the Company an additional $100,000, which is to be repaid with interest at 8% by July 31, 1998, from proceeds of the rights offering. Also during the Six-Month Period 1998, the Company entered into an agreement with Privatbank Vermag (of which a director of the Company is vice chairman) under which the Company borrowed $150,000, due with interest at 8% on June 27, 1998. An additional $150,000 was advanced to the Company on April 27, 1998, which is due with interest at 8% on July 27, 1998. In accordance with the agreement, Privatbank Vermag will receive 90,000 units, each unit consisting of one share of Common Stock and one warrant to purchase a share of Common Stock exercisable at $0.22 per warrant. The units are valued at $0.22 and the Warrants become exercisable one year from the date of issuance and expire in July 2003. (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 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 1996, the Company paid cash dividends of $46,171 and issued 13,909 shares of Convertible Preferred Stock dividends. 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. As a result, that dividend will accumulate in accordance with the terms of the Convertible Preferred Stock. The Convertible Preferred Stock entitles the holder to a liquidation preference of $15 per share upon liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock is redeemable by the Company when and if the closing bid price of FCI's Common Stock is at least 200% of the conversion price for twenty consecutive trading days. Upon redemption, the Company would issue ten shares of its Common Stock for each share of Convertible Preferred Stock. As of March 31, 1998, 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 which 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. During the Six-Month Period 1998 the Company issued 250,000 shares of its Common Stock, valued at the then current market value of $0.1875 per share, in exchange for legal services rendered by its attorneys in connection with the litigation against a former distributor. During the Six-Month Period 1998, the Company received $1,100 from the exercise of 5,000 options to purchase Common Stock at an exercise price of $0.22 per share. Also during the Six-Month Period 1998, the Company issued options to purchase an aggregate of 25,000 shares of its Common Stock at an exercise price of $0.25 per share. These options were granted to 9 an employee of the Company under its Employee Stock Option Plans and are exercisable at any time for a period ending five years from the date of grant. (4) REVENUES The Company continues to incur substantial losses and Management recognizes that the Company must generate additional revenues or reductions in operating costs and may need additional financing to continue its operations. The Company expects significant revenues during the second half of Fiscal 1998 from its alliance with Whessoe Varec, Inc. in the aboveground storage tank leak detection market, as well as from initial sales of Sensor-on-a-Chip-Registered Trademark- products, and sales in the offshore oil production platform market, although there can be no assurance when or if this will occur. During the last quarter of fiscal 1997, the Company implemented significant reductions in personnel and other spending, and, to further conserve cash, continues to defer payment of a significant portion of management salaries. The Company borrowed $500,000 from certain officers, directors and affiliates during the Six-Month Period 1998 and borrowed an additional $150,000 in April 1998. The Company is currently planning an offering of rights to purchase shares and warrants, to be offered to holders of its Common and Preferred Stock, and to holders of Class D Purchase Warrants and all other outstanding Warrants. Notwithstanding the foregoing, there can be no assurance that forecasted sales levels will be realized to achieve profitable operations, or that additional financing can be obtained on terms satisfactory to the Company, if at all, or 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. The discussions in this Report include forward looking statements that involve risks and uncertainties, including the timely development and acceptance of the Company's products, the timely acceptance of existing products, the impact of competitive products and pricing, the impact of governmental regulations or lack thereof with respect to the Company's markets, timely funding of customers' projects, customer payments to the Company, and other risks detailed from time to time in the Company's SEC reports. MATERIAL CHANGES IN FINANCIAL CONDITION The Company's 8% senior convertible notes payable become due on February 15,1999. The unpaid balance of $1,600,000 is therefore classified in the financial statements as a current liability, and the associated unamortized financing costs as a current asset. The Company had negative working capital of $62,676 at March 31, 1998, compared with positive working capital of $1,883,551 at September 30, 1997, a decrease of $1,946,227. Also the Company had decreases in cash and cash equivalents of $340,238 and in stockholders' equity of $1,069,084. In addition to the reclassification of the notes payable from long term to current liabilities, these decreases are primarily a result of the Company's net loss for the Six-Month Period ended March 31, 1998 (the "Six-Month Period 1998") of $1,164,062, offset in part by the receipt of $494,000 in proceeds from notes payable to officers, directors and affiliates. The Company had net cash used in operating activities of $821,350 during the Six-Month Period 1998 as compared with net cash used in operating activities of $2,066,295 during the six-month period ended March 31, 1997 (the "Six-Month Period 1997"). The deficit during the Six-Month Period 1998 is primarily a result of the Company's net loss of $1,164,062, and adjustments to reconcile net loss to net cash used in operating activities, including increases in accounts receivable of $1,101, inventories of $57,126, other current assets of $18,574, accounts payable of $63,103, accrued expenses of $94,060 and interest payable of $5,015. In addition, these adjustments include depreciation of $31,369, amortization of patent and technology costs of $138,772, amortization of financing costs of $42,109, and the issuance of 250,000 shares of Common Stock, valued at market value of $46,875, in exchange for services. The deficit during the Six-Month Period 1997 is primarily a result of the Company's net loss of $1,716,207, increased by adjustments to reconcile net loss to net cash used in operating activities, including increases in accounts receivable of $310,804, inventories of $478,673, other current assets of $29,681, and accrued expenses of $10,863, and a decrease in accounts payable of $19,521. In addition, these adjustments include accrued interest of $26,985 on notes receivable for the exercise of options, amortization of patent and technology costs of $136,178, amortization of financing costs of $35,453, depreciation of $34,234, and provisions for loss on accounts receivable of $25,000 and inventory valuation allowance of $25,000. Also the Company expensed $248,212 in accrued interest receivable on notes receivable, originated in March 1994, for the exercise of stock options. The Company had net cash provided by financing activities of $491,737 during the Six-Month Period 1998 as compared with net cash used in financing activities of $32,302 during the Six-Month Period 1997. During the Six-Month Period 1998 the Company borrowed $350,000 from certain of its officers and directors, and received net proceeds of $144,000 from a promissory note payable to a bank of which a director is vice chairman. During the Six-Month Period 1997, the Company received $14,043 from the exercise of 14,043 options to purchase Common Stock and $13,083 in cash payments on interest and notes receivable for the exercise of options, paid $46,171 in cash dividends on Convertible Preferred Stock and made payments of $13,257 on its notes payable to a bank and on its capital lease. 11 The Company had net cash used in investing activities of $10,625 during the Six-Month Period 1998 as compared to net cash used in investing activities of $118,280 during the Six-Month Period 1997. During the Six-Month Period 1998, the Company sold unused equipment for $10,125 and made payments in the amount of $20,750 for United States and foreign patent applications. During the Six-Month Period 1997, the Company made payments of $34,776 for patent applications and $83,504 for the purchase of equipment. MATERIAL CHANGES IN RESULTS OF OPERATIONS The Company entered into an OEM Strategic Alliance Agreement (the "Alliance" or the "Agreement") as of June 30, 1996, as amended, 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 Alliance has positioned both Alliance partners to take advantage of the new Florida regulations regarding the requirements for AST leak detection. Internal liners and leak detection is by far the lowest cost option for compliance with the Florida mandates and as of today, the Company's PetroSense-Registered Trademark- line is the only continuous leak detection product certified for use in both contaminated and uncontaminated sites in Florida. Approximately 1,000 tanks have been identified which are already lined and as such are immediate targets for leak detection. An additional population of tanks has been identified and characterized as coastal bulk storage terminal facilities. This has raised the number of targeted tanks from 1,000 to 5,000. The potential market for FCI from the Florida opportunity has now grown to about $50,000,000 ($10,000 per tank to FCI), if the Company was able to capture all of the business in the identified population. It is anticipated that these projects will accelerate from program inception in 1997 to completion at the end of 1999. Many companies have already indicated that they intend to stagger installations over the period. Shell Oil Co. is an example of a company that has initiated a phased-in program of installing the Company's leak detection equipment at its Florida facilities. Based on this level of activity, Whessoe Varec has twice substantially expanded its sales and service capabilities in Florida, and management believes, based on market information gathered by Whessoe Varec, that significant business will be generated by the Alliance although there can be no assurance that this will occur. The Florida regulations require compliance by December 1999 for alternative methods including the Company's leak detection equipment. Florida Power Company recently placed an order with Whessoe Varec to upgrade all of its tanks to include leak detection. Citgo, Dreyfus, Texaco, and GATX among others, have applications pending at the Florida Department of Environmental Protection ("DEP") to install the Company's products. As applications are approved, there is an assumption that there will be a stream of orders to the Alliance, although there can be no assurance that this will be the case. On May 1, 1998, the final review opportunity for input into the Storage Tank Regulations was held. In the absence of any dissenting opinion, the Regulations were passed on to the Attorney General of Florida for incorporation into law on July 2, 1998. The Company believes that there are now no other potential roadblocks to full implementation of the AST regulations, although there can be no assurance that this is the case. The Alliance is also pursuing business with the Department of Defense (DoD). Whessoe Varec's sister company Whessoe Coggins has a significant presence in the military fuel depot market. Recently, the State of California has advised that military facilities in California must be in compliance with the state and federal underground storage tank ("UST") regulation by December 22, 1998. As a result, there is an opportunity to provide leak detection equipment to this market. The Company's products meet all relevant state and federal standards and are compatible with the Whessoe Coggins equipment proposed for the total system upgrade. A system incorporating both Whessoe Coggins and Whessoe Varec/FCI products was successfully demonstrated to the military during April 1998. The data generated at this test was submitted to the local regulatory authority and met their criteria. Revenues from sales to this market are expected to occur prior to the deadline for compliance in December 1998, although there can be no 12 assurance that this will actually happen. This opportunity could represent up to $2,400,000 in revenues for FCI in calendar year 1998, and would be the entrance for the Alliance into the DoD market nationwide. The market for AST leak detection equipment has expanded as the States of Pennsylvania and Wisconsin and the Province of Ontario are in the process of promulgating regulations that are similar to the Florida regulations. Virginia promulgated its own AST rules this spring, opening up a new market for the Alliance. In a recent development, the Company has been advised that Florida DEP announced at its Storage Tank Conference May 11th that the PetroSense-Registered Trademark- PHA-100PLUS has been selected as the instrument of choice for its field inspection program for UST compliance. Multiple units are planned to be used by that state's inspection staff to check monitoring wells for the onset of petroleum hydrocarbons due to leaks from tanks. The Company's unit was selected after a side-by-side test with field instruments based on other technologies. This program is expected to be in place during the third quarter of the Company's fiscal year although there can be no assurance that this will actually occur. 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 illegally 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. During Fiscal 1997, the Company completed successful evaluations for several companies including Marathon, Shell, BP, Chevron and Unocal. 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. Since the beginning of 1998, the Company has been led to believe that certain of these oil companies had budgeted for the Company's products to be installed system wide on their offshore platforms in the Gulf of Mexico in 1998. One Company has already purchased for system-wide installation and other companies have requested quotations for system-wide quantities of the Company's products. This budgetary process may have been temporarily negatively impacted by the lower price of oil in the early part of 1998. Revenues during the Six-Month Period 1998 were $466,872, a decrease of $268,311, or 36%, from revenues of $735,183 for the Six-Month Period 1997. Revenues for the three-month period ended March 31, 1998 ("Second Quarter 1998") were $241,693 compared to revenues of $619,609 for the three-month period ended March 31, 1997 ("Second Quarter 1997"). Revenues for the Second Quarter 1998 consisted primarily of a number of smaller orders and development contract billings; the Second Quarter 1997 included a large multiple unit order in excess of $200,000 from Amoco Production Company, and approximately $263,000 in revenues from Whessoe Varec. Gross profit for the Six-Month Period 1998 was $259,304, or 56% of revenues, compared to $348,081, or 47% of revenues for the Six-Month Period 1997. Gross profit for the Second Quarter 1998 was $126,967, or 53% of revenues, compared to $296,429, or 48% of revenues, for the Second Quarter 1997. The sales to Whessoe Varec in the 1997 periods were at discounted OEM prices, reducing the gross margin percentages in those periods. Except for sales to distributors, the Company's revenues have been from a number of different customers and generally have not been from repeat transactions from the same customers. 13 Research, development and engineering expenditures decreased by $258,447, or 39%, during the Six-Month Period from the Six-Month Period 1997, and by $109,533, or 35%, during the Second Quarter 1998 from the Second Quarter 1997. The decrease is primarily attributable to the reduction, implemented during the second half of Fiscal 1997, of applications and development personnel and associated expenses. 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. 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) announced at a meeting on January 16, 1998 that suppliers of refueling equipment needed to have their products certified to meet ORVR-II, that regulations would be finalized in May 1998 and that certification would be required by November 1998. In April 1998, the Company and Gilbarco signed a "Commercial Agreement for Hydrocarbon ORVR Certification" by which the two companies work together to have the affected Gilbarco products certified to meet the new CARB regulations in the time required. While the target date is November 1998, there can be no assurance that this will be met, hence revenues from this relationship are not expected to impact in Fiscal 1998, but in early 1999, should they in fact occur at all. 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 Company. The successful completion of this project should result in the first consumer, high volume application of the Company's Sensor-on-a-Chip-Registered Trademark- technology. The Company also signed a development agreement with IWACO, a Dutch consulting company acting for a consortium of industry and local authority partners involved in or interested in bioremediation of contaminated sited within Holland. The agreement, the culmination of two-years' work, covered the development of specific monitoring applications to support the bio remediation process. It is worth about $150,000 to the Company over the twenty month life of the contract, and is expected to result in new products for the remediation marketplace. In May 1998, the Company signed a development agreement with Horiba, Ltd., a leading Japanese environmental and analytical instrument manufacturer. The agreement, with $45,000 to the Company, calls for the development of a sensor probe to be incorporated into Horiba's Multi-Parameter Water Quality Instrument product line. Horiba has the option of marketing the developed product globally under exclusivity tied to performance. General and administrative expenditures decreased by $32,142, or 5%, during the Six-Month Period 1998 from the Six-Month Period 1997, and increased by $29,299, or 9%, during the Second 14 Quarter 1998 over the Second Quarter 1997. The Company continues to operate with the reductions in personnel and other expenses and cash expenditures, including the deferral of administrative, as well as other salaries, implemented during the second half of 1997. During the Six-Month Period 1998, approximately $140,000 of accounts receivable were offset against previously recorded reserves for specific doubtful accounts, resulting in a reduction of both gross accounts receivable and reserves with no effect on net receivables or results of operations. During the Six-Month Period 1997, $25,000 was added to the reserve and charged to expense. Sales and marketing expenditures decreased by $184,481, or 36%, during the Six-Month Period 1998 from the Six-Month Period 1997, and by $88,231, or 33%, during the Second Quarter 1998 from the Second Quarter 1997, reflecting reductions in personnel and in other spending as well. The Company's interest income decreased to a minimal amount during the Six- Month Period 1998 and the Second Quarter 1998 from $74,824 during the Six-Month Period 1997 and $17,503 during the Second Quarter 1997, reflecting the difference in cash and cash equivalents during the periods. Interest expense increased by $9,687, or 9%, during the Six-Month Period 1998 over the Six-Month Period 1997, and by $4,911, or 9% during the Second Quarter 1998 over the Second Quarter 1997. As a result of the foregoing, the Company incurred a net loss of $1,164,062, or a net loss of $0.05 per share, for the Six-Month Period 1998 as compared to a net loss of $1,716,207, or a net loss of $0.07 per share, for the Six-Month Period 1997. Net loss for the Second Quarter 1998 was $657,435, or a net loss of $0.03 per share, as compared to a net loss of $883,045, or a net loss of $0.03 per share for the Second Quarter 1997. 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 (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. The Company and QED mediated a final settlement of all claims on January 23, 1998. The terms of the settlement are confidential, and had no material effect on the Company's financial position or results of operations. A former distributor has filed an action in French national courts claiming improper termination by FCI Environmental, Inc. The action seeks monetary damages of approximately $200,000 at current exchange rates. 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. As of May 12, 1998, the French Court has not announced a decision following a January 20, 1998 hearing. The Company does not expect an adverse outcome and believes that even in the event of an adverse outcome, such an outcome would not have a material effect on its financial position or results of operations. 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 six-month period ended March 31, 1998. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the six-month period ended March 31, 1998. 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. October 5, 1998 By: /s/ Geoffrey F. Hewitt - --------------- ---------------------------------- Date Geoffrey F. Hewitt President and Chief Executive Officer October 5, 1998 By: /s/ Melvin W. Pelley - --------------- ---------------------------------- Date Melvin W. Pelley Chief Financial Officer and Secretary 17 -----END PRIVACY-ENHANCED MESSAGE-----