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, 1996
-----------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17569
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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
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As of February 18, 1997, the issuer had 25,719,259 shares of Common Stock,
par value $.0001 per share, issued and outstanding.
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
September 30, December 31,
1996 1996
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Current assets:
Cash and cash equivalents $3,065,572 $2,004,779
Accounts receivable, net of allowance for doubtful
accounts of $204,711 as of September 30, 1996
and December 31, 1996 305,473 127,766
Inventories 1,457,135 1,885,933
Other 59,060 74,774
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Total current assets 4,887,240 4,093,252
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Equipment 616,192 711,229
Less accumulated depreciation (483,827) (499,190)
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Net equipment 132,365 212,039
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Other assets:
Patent and technology costs, net of accumulated
amortization of $1,791,252 at September 30, 1996
and $1,859,066 at December 31, 1996 589,226 544,890
Financing costs, net of accumulated amortization of
$49,645 at September 30, 1996 and
$69,929 at December 31, 1996 204,245 183,961
Other 247,383 267,116
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Total other assets 1,040,854 995,967
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$6,060,459 $5,301,258
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See accompanying notes to consolidated financial statements
2
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, December 31,
1996 1996
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Current liabilities:
Current installments of notes payable $7,315 $14,650
Accounts payable 270,503 322,001
Accrued expenses 206,565 210,802
Interest payable 18,016 51,516
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Total current liabilities 502,399 598,969
Senior convertible notes payable 1,675,000 1,675,000
Notes payable, net of current installments 2,551 13,277
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Total liabilities 2,179,950 2,287,246
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Stockholders' equity:
Preferred stock, $.001 par value. Authorized
10,000,000 shares; 215,089 and 228,998
convertible shares issued and outstanding at
September 30, 1996 and December 31, 1996,
respectively; at liquidation value 3,076,335 3,284,970
Common stock, $.0001 par value. Authorized
40,000,000 shares; 25,705,216 and 25,714,834
shares issued and outstanding at September 30,
1996 and December 31, 1996, respectively 2,571 2,571
Additional paid-in capital 28,714,804 28,469,616
Deficit (26,369,551) (27,202,713)
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5,424,159 4,554,444
Notes receivable for exercise of options (1,543,650) (1,540,432)
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Total stockholders' equity 3,880,509 3,014,012
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$6,060,459 $5,301,258
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See accompanying notes to consolidated financial statements
3
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three month period ended
-----------------------------
December 31, December 31,
1995 1996
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Revenues $503,341 $115,574
Cost of revenues 210,436 63,922
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Gross profit 292,905 51,652
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Operating expenses:
Research, development and engineering 272,472 340,806
General and administrative 317,688 301,258
Sales and marketing 261,174 245,172
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Total operating expenses 851,334 887,236
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Loss from operations (558,429) (835,584)
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Other income (expense):
Interest expense (1,640) (55,349)
Interest income 37,796 57,771
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Total other income (expense) 36,156 2,422
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Net loss ($522,273) ($833,162)
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Shares of common stock used in computing loss per share 20,588,080 25,710,323
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Net loss per share ($0.03) ($0.03)
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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 Receivable
----------------------------------------------- Paid-In 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 -- -- 9,618 -- 9,618 -- -- 9,618
Payments received on notes
receivable for exercise
of options -- -- -- -- -- -- 3,218 3,218
Net loss -- -- -- -- -- (833,162) -- (833,162)
--------- ---------- ---------- -------- ---------- ------------ ------------ ----------
Balance at December 31, 1996 218,998 3,284,970 25,714,834 2,571 28,469,616 (27,202,713) (1,540,432) 3,014,012
--------- ---------- ---------- -------- ---------- ------------ ------------ ----------
--------- ---------- ---------- -------- ---------- ------------ ------------ ----------
See accompanying notes to consolidated financial statements
5
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three month period ended
-----------------------------
December 31, December 31,
1995 1996
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Cash flows from operating activities:
Net loss ($522,273) ($833,162)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 14,433 15,363
Amortization of patent and technology costs 69,108 67,814
Amortization of financing costs -- 20,284
Accrued interest on notes receivable for exercise of options (26,854) (26,985)
Common stock issued for services 11,431 --
Reduction in notes receivable for the exercise
of options in exchange for services 11,405 560
Deferred compensation recognized 208 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (158,186) 177,707
Decrease (increase) in inventories 13,471 (428,798)
Increase in other current assets (113,411) (15,714)
Increase in accounts payable 5,169 51,498
Increase in accrued expenses 290,893 4,237
Increase in interest payable -- 33,500
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Net cash used in operating activities (404,606) (933,696)
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Cash flows from investing activities:
Purchase of equipment -- (73,764)
Payments for patents (25,145) (23,478)
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Net cash used in investing activities (25,145) (97,242)
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See accompanying notes to consolidated financial statements
(continued)
6
FIBERCHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three month period ended
-----------------------------
December 31, December 31,
1995 1996
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Cash flows from financing activities:
Payments on notes payable (1,664) (3,212)
Proceeds from the exercise of options and warrants 74,607 9,618
Proceeds from interest and notes receivable for
exercise of options 10,598 9,910
Payment of dividend on preferred stock (23,645) (46,171)
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Net cash provided by (used in) financing activities 59,896 (29,855)
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Net decrease in cash and cash equivalents (369,855) (1,060,793)
Cash and cash equivalents at beginning of period 911,186 3,065,572
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Cash and cash equivalents at end of period $541,331 $2,004,779
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Supplemental Cash Flow Information
Noncash investing and financing activities:
Preferred stock issued as dividends $228,210 $208,635
Equipment purchased through capital lease -- 21,273
Reduction in notes receivable for exercise
of options in exchange for services 11,405 560
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Interest paid $1,640 $1,565
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See accompanying notes to consolidated financial statements
7
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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(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 December 31, 1996 and September 30, 1996, and the results of operations and
cash flows of the Company for the three-month periods ended December 31, 1996
and 1995. 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 $0.80 per share at any time after March 26, 1996 and before the close
of business on February 14, 1999. The Conversion Price will be adjusted if the
average closing bid price of the Common Stock during the 30 business days prior
to February 15, 1997 is 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 December 31, 1996, 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 will 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.
8
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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(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 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 December 31, 1996, 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 will be adjusted if the average closing bid price of
the Common Stock during the 30 business days prior to May 31, 1997 is less than
$1.00 to an exercise price representing a 10% discount from such thirty-day
average closing bid price. These Placement Agent Warrants are exercisable at
any time from November 30, 1996 through May 30, 2001.
During the three-month period ended December 31, 1996 (the "First
Quarter 1997"), the Company received $9,618 from the exercise of 9,618 options
to purchase Common Stock at an exercise price of $1.00 per share and received
$9,910 cash and $560 in services as payments on notes and interest receivable
for the exercise of stock options that were issued during Fiscal 1994.
Also during the First Quarter 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. 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 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 intends to
9
FIBERCHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
restate its financial results for the second fiscal quarter ended March 31, 1996
and the third fiscal quarter ended June 30, 1996.
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. Based on the Company's 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. These amounts
include approximately $1.0 million originally due about January 2, 1997 from
Whessoe Varec. While confirming their commitment to pay this amount, Whessoe
Varec has requested that the Company consider a revised payment schedule
acceptable to both parties.
----------------------------------------------------
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 $3,494,283 at December 31, 1996,
compared with working capital of $4,384,841 at September 30, 1996, a decrease
of $890,558. Also the Company had decreases in cash and cash equivalents of
$1,060,793 and in stockholders' equity of $866,497. These decreases are
primarily a result of the Company's net loss for the First Quarter 1997 of
$833,162. In addition, during the First Quarter 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.
The Company had net cash used in operating activities of $933,696 during
the First Quarter 1997 as compared with net cash used in operating activities of
$404,606 during the First Quarter 1996. The deficit during the First Quarter
1997 is primarily a result of the Company's net loss of $833,162, and by
adjustments to reconcile net loss to net cash used in operating activities
including a decrease in accounts receivable of $177,707, as well as increases in
inventories of $428,798, current assets of $15,714, accounts payable of $51,498,
accrued expenses of $4,237 and interest payable of $33,500. In addition, these
adjustments include depreciation of $15,363, amortization of patent and
technology costs of $67,814, amortization of financing costs of $20,284, accrued
interest of $26,985 on notes receivable for exercise of options, as well as a
reduction in notes receivable of $560 for the exercise of options in exchange
for services.
The deficit during the First Quarter 1996 is primarily a result of the
Company's net loss of $522,273, offset by adjustments to reconcile net loss to
net cash used in operating activities including an increase in accounts
receivable of $158,186, a decrease in inventories of $13,471, an increase in
other current assets of $113,411, as well as increases in accounts payable of
$5,169 and accrued expenses of $290,893. In addition, these adjustments include
$11,431 related to the issuance of Common Stock for services provided to the
Company, a reduction in notes receivable of $11,405 for the exercise of options
in exchange for services, accrued interest of $26,854 on notes receivable for
the exercise of options, amortization of patent and technology costs of $69,108
and depreciation of $14,433.
The Company had net cash used in financing activities of $29,855, during
the First Quarter 1997 as compared with net cash provided by financing
activities of $59,896 during the First Quarter 1996. During the First Quarter
1997 the Company received $9,618 from the exercise of 9,618 options to purchase
Common Stock and $9,910 in cash payments on interest and notes receivable for
the exercise of options. In addition, the Company paid $46,171 in cash
dividends on its Convertible Preferred Stock and made payments of $3,212 on its
notes payable. During the First Quarter 1996, the Company received $74,607 from
the exercise of 73,576 options and 1,031 warrants to purchase shares of Common
Stock and $10,598 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 $1,664 on its note payable to
a bank.
The Company had net cash used in investing activities of $97,242 during
the First Quarter 1997 as compared to net cash used in investing activities of
$25,145 during the First Quarter 1996. During the First Quarter 1997, the
Company made payments in the amount of $23,478 for United States and foreign
patent applications and $73,764 for the purchase of equipment. During the First
Quarter 1996, the Company made payments of $25,145 for patent applications.
11
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 7, 1997 Whessoe Varec has paid for the items
actually shipped, which approximates $59,000. Discussions are continuing
regarding payment schedules for the balance due of approximately $930,000.
On February 12, 1997, Siebe PLC and Whessoe PLC announced an offer by
Siebe PLC to acquire Whessoe PLC. Siebe PLC, with annual sales in excess of $4
billion, is one of the largest diversified engineering groups in the United
Kingdom, and designs and manufactures temperature and appliance controls,
process automation and building control systems, electronic power controls and
engineered industrial equipment. Management does not anticipate a negative
impact on its alliance with Whessoe Varec, since the agreement anticipated such
a possibility; however, no assurances can be given that this acquisition will
not affect the alliance.
Whessoe Varec and its parent company Whessoe PLC manufacture and market
(along with other products) products to AST owners worldwide, claim a
substantial portion of the market for its products, and are highly regarded in
the AST market. Management believes its alliance with Whessoe Varec will
provide its products with Whessoe Varec's name recognition, Whessoe Varec's
substantial sales and marketing capabilities and immediate presence among
Whessoe Varec's customer base, all of which are anticipated to contribute to a
relatively more rapid recognition and acceptance of the Company's products in
the AST market.
The Company also entered into a distribution agreement with Autronica
AS, a Norwegian company within the Whessoe PLC group, for Autronica to
exclusively distribute certain of the Company's products for offshore
applications in regions of the world where there is oil and gas production
offshore, including certain countries in the North Sea, West Africa, the Middle
East and the Southeast Asia areas. The network is expected to be expanded into
Latin America and former Commonwealth of Independent States countries in 1997.
The impact of the proposed Siebe/Whessoe acquisition is not yet clear. An
evaluation system is expected to be installed off French West Africa during the
Second Fiscal Quarter 1997.
Recent revisions in the Florida AST regulations, which were expected to
be promulgated in 1996, are about to be finalized. For a while, it appeared
that very expensive dike liners would be mandatory at all sites except where
tanks were double bottomed. Industry pressure appears to have caused this
proposed regulation to be modified to allow for tank lining and leak detection
equipment as an alternative, and double bottoming as a second alternative. This
maintains the previous cost advantage the Company perceived its products enjoyed
as a solution to the December 1999 deadline.
In addition, a new regulation proposes that operators at contaminated
sites in Florida close down existing monitoring wells and replace them with
approved leak detection equipment. Of the 10,000 sites notified, some are ASTs
and some USTs. The Company believes it has the only Florida certified leak
detection technology for ASTs for such sites. Operators of these sites have to
submit a plan to Florida Department of Environmental Protection this Spring and
be in compliance by December 1998. The
12
penalty for non-compliance is loss of coverage under the Florida Petroleum
Liability and Restoration Insurance Program (FPLRIP).
The Company believes that the delay in finalizing these two regulations
had a serious negative impact on its revenues for the First Quarter 1997.
However, the two regulations, if implemented as proposed, should have a
positive impact on the Company and the impact of the December 1998
implementation date can significantly affect revenues in the second half of
Fiscal 1997 and in 1998, although there can be no assurance that the
regulations will be promulgated as or have the impact expected.
To date spending of capital funds on the Company's products has
proceeded at a slower pace than management had originally anticipated,
primarily due to the extended intervals between purchase and installation of the
Company's products and due to the slow implementation and adoption of
regulations governing the use of the Company's products. However, the Company
remains confident that its FOCS-Registered Trademark- technology will be adopted
by both the offshore production and leak detection marketplaces as the
technology of choice; and that its other business prospects, including its
Sensor-on-a-Chip-TM- technology remain unaffected.
Recent events in the offshore market indicate that the Company's
products are being more widely recognized as more companies in the Gulf of
Mexico complete evaluations. These companies include New Field Energy,
Burlington Resources, B.P. Oil, Oryx Energy, Chevron, Kerr McGee and Marathon.
This coupled with the recent sale through Whessoe Varec of leak detection
systems to two Shell facilities in Florida and the ongoing development of chip
sensors for such diverse applications as breath alcohol (for Alcohol Sensors
International) and gasoline vapor (for Gilbarco) in anticipation of the
California Air Resources Board regulatory process, as well as new opportunities
for high volume, industrial sensors, indicates to Management that the execution
of its strategic plan remains on track.
In response to the growth potential for the global AST market as a
result of the alliance with Whessoe Varec, and the potential of the offshore and
onshore process water markets, the Company restructured its sales and marketing
organization along strategic business unit lines, under the direction of Tom
Collins who joined the Company in March 1996 as Vice President of Sales and
Marketing and is now President of FCI Environmental, Inc.
Strategic business unit (SBU) managers have been appointed for offshore and
AST leak detection, two key market areas. The Company has also added Dr. Mitch
Means to its technical staff as Director of Applications and Development. Dr.
Means previously worked with Nalco Chemical Company, a leading supplier of
chemicals for water treatment use, and for Turner Design, Inc., a private
instrumentation manufacturer active in the water monitoring field. In addition,
the Company recently added two persons to its customer service and support
staff. A regional manager with extensive experience in the Gulf Coast offshore
market has been hired, effective January, 1997.
Revenues during the First Quarter 1997 were $115,574 as compared to
$503,341 during the First Quarter 1996. Revenues for the First Quarter 1996
included significant revenues for development of Sensor-on-a-Chip-TM-
applications, while no such revenue was recorded during the First Quarter 1997.
Also during the First Quarter 1996, several larger dollar purchases of the
Company's products were recorded, while revenues for the First Quarter 1997
primarily consisted of smaller dollar purchases as no large, multiple unit
projects closed during the First Quarter 1997.
Gross profit for the First Quarter 1997 was 45% of revenues as compared
to 58% of revenues for the First Quarter 1996, reflecting the lower level of
sales and the lack of relatively higher margin development revenues during the
First Quarter 1997.
Research, development and engineering expenditures increased by $68,334,
or 25%, during the First Quarter 1997 over the First Quarter 1996. The increase
is primarily attributable to the addition of applications and development
personnel, including a Director of Development and applications
13
technicians, whose primary focus is the development and refinement of
applications for current products. The Company is actively pursuing
commercialization of its electronic semi-conductor chemical sensor ("Sensor-on-
a-Chip-TM-") being developed with Texas Instruments, Inc. ("TI") and
applications of its hydrocarbon Sensor-on-a-Chip-TM- with Gilbarco, Inc.,
Alcohol Sensors International, Ltd. and others.
The Company's 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-TM- technology and dual use
developments with the U.S. Department of Energy (DOE) through Bechtel Nevada
Corporation.
The development of a breath alcohol "Sensor-on-a-Chip-TM-" for use in an
ignition interlock device manufactured by Alcohol Sensors International appears
to be coming to a successful conclusion and has entered the product integration
stage. The next stage will be a preproduction run and would be followed by
production units, although there can be no assurance that this will actually
occur.
Gilbarco has refocused on the Sensor-on-a-Chip-TM- for "on-board vapor
recovery" (ORVRII). After months of delays and hearings concerning the
introduction of ORVRII, the California Air Resources Board (CARB) appears to be
headed towards a decision regarding implementation of ORVRII, 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-TM-. Once testing is completed and once CARB implements
ORVRII, the Company expects to generate significant revenues from this
application, although there is no assurance that this will actually happen.
Recently, the Company entered into a development agreement with a major
supplier of industrial control equipment for a sensor for a specific high volume
application. This agreement is for a short-term evaluation of the applicability
of the sensor in this market. Should it be successful, there is expected to be
a larger product development contract which ultimately could lead to sensor
sales in the million units per year range, although there can be no assurance
that this will occur.
General and administrative expenditures decreased by $16,430, or 5%,
during the First Quarter 1997 from the First Quarter 1996, primarily
attributable to reductions in general corporate costs, including directors'
fees, the cash payment of which have been suspended since September 1996.
Sales and marketing expenditures decreased $16,002, or 6%, during the
First Quarter 1997 from the First Quarter 1996 attributable to decreased
commissions related to the decrease in sales, offset in part by the addition of
technical and other marketing and sales support activities and personnel.
The Company's interest income increased by $19,975, or 53%, during the
First Quarter 1997 over the First Quarter 1996, which is attributable to an
increase in the amount of short-term investments during the First Quarter 1997,
which resulted from the proceeds from the February 1996 and May 1996 Note and
Unit Offering. Interest expense increased by $53,709 during the First Quarter
1997 over the First Quarter 1996 as a result of interest expense accrued on the
Senior Convertible Notes in the amount of $33,500 and amortization of the costs
associated with the sale of the Notes in the amount of $20,284.
As a result of the foregoing, the Company incurred a net loss of
$833,162, or a net loss of $0.03 per share, for the First Quarter 1997 as
compared to a net loss of $522,273, or a net loss of $.03 per share, for the
First 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 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.
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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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1996.
A report on Form 8-K was filed by the Company on January 13, 1997
reporting under "Item 5. Other Events" that the Company, as a result of a review
of its revenue recognition policy with its independent accountants, would report
substantially lower revenues for the fiscal year ended September 30, 1996 than
were previously reported.
A report on Form 8- K was filed by the Company on January 31, 1997
reporting under "Item 4. Changes in Registrant's Certifying Accountant" that
KPMG Peat Marwick LLP had resigned as the Company's principal accountants.
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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 19, 1997 By: /s/ Geoffrey F. Hewitt
- ----------------- --------------------------------
Date Geoffrey F. Hewitt
President and Chief Executive Officer
February 19, 1997 By: /s/ Melvin W. Pelley
- ----------------- --------------------------------
Date Melvin W. Pelley
Chief Financial Officer and Secretary
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