U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
{X} Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Quarterly Period ended June 30, 1999
{ } Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act
For the Transition Period from __________ to __________
Commission file Number 0-14266
POLLUTION RESEARCH AND CONTROL CORP.
------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
California 95-2746949
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
506 Paula Avenue, Glendale, California 91201
--------------------------------------------
(Address of Principal Executive Offices)
(818) 247-7601
--------------
(Issuer's telephone number, including area code)
Check whether the Small Business Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements of the past 90
days.
Yes X No _
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Date No. of Shares Outstanding
----- ---- -------------------------
Common August 10, 1999 3,726,770
Traditional Small Business Disclosure Format (check one):
YES X No ___
1
<PAGE>
POLLUTION RESEARCH AND CONTROL CORP.
Form 10-QSB
For the Six-Month Period Ended June 30, 1999
TABLE OF CONTENTS
Page
----
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet 3
Consolidated Statements of Operations 5
Consolidated Statement of Shareholders Equity 7
Consolidated Statement of Cash Flows 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II Other Information 13
Item 1 Legal Proceedings
Item 6(b) Reports on Form 8-K 13
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
As Of
06/30/99
--------
CURRENT ASSETS
Cash $ 147,452
Accounts receivable, trade, less allowance for doubtful 2,207,520
accounts of $4,734
Inventories (Note 2) 1,587,900
Other current assets 14,319
----------
TOTAL CURRENT ASSETS 3,957,191
----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of $196,428 99,046
----------
OTHER ASSETS
Advances to joint venture 203,938
Technical service center 600,000
Other intangible assets 75,176
Other assets 12,140
----------
TOTAL OTHER ASSETS 891,254
----------
TOTAL ASSETS $4,947,491
==========
See notes to financial statements
3
<PAGE>
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
As of
6/30/99
-------
CURRENT LIABILITIES
Notes payable $ 892,177
Accounts payable 319,886
Accrued expenses (Note 3) 496,303
-----------
TOTAL CURRENT LIABILITIES 1,708,366
-----------
DEFERRED RENT 50,869
-----------
LONG TERM DEBT 300,000
-----------
SHAREHOLDERS' EQUITY : (Note 4)
Preferred Stock, no par value; 20,000,000
shares authorized, none issued and outstanding
Common Stock, no par value; 30,000,000 shares
authorized, 3,726,770 issued and outstanding 7,311,520
Other paid in capital 952,081
Accumulated deficit (5,375,345)
-----------
TOTAL SHAREHOLDERS' EQUITY $ 2,888,256
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,947,491
===========
See notes to financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended June 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Net Revenues $2 ,292,976 $ 652,887
Cost of goods sold 1,166,147 578,585
----------- -----------
Gross profit 1,126,829 74,302
----------- -----------
Operating expenses:
Selling, general and administrative expenses 426,007 313,924
Research and development 4,230 8,168
----------- -----------
Total operating expenses 430,237 322,092
----------- -----------
Income (loss) from operations 696,592 (247,790)
Other Income (Expense)
Interest Expense (134,381) (9,530)
Other income (expense) (109,000) 10
----------- -----------
Income (loss) from continuing operations
Before Income Taxes 453,211 (257,310)
Provision for income taxes -- --
----------- -----------
Income (loss) from continuing operations 453,211 (257,310)
Discontinued operations (Note 5)
Income (loss) from discontinued operations -- (84,844)
Loss on disposal -- (668,989)
----------- -----------
-- (753,833)
----------- -----------
Net Income $ 453,211 $(1,011,143)
=========== ===========
Earnings per share
Net Income (loss) per share - basic
Continuing operations $ .13 $ (.12)
=========== ===========
Discontinued operations $ -- $ (.35)
=========== ===========
Net Income (loss) per share - diluted
Continuing operations $ .12 $ (.12)
=========== ===========
Discontinued operations $ -- $ (.35)
=========== ===========
Weighted Average Shares
Basic 3,467,881 2,169,711
=========== ===========
Diluted 3,834,931 2,169,711
=========== ===========
See notes to financial statements
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months
Ended June 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Net Revenues $2 ,941,897 $ 1,229,918
Cost of goods sold 1,708,922 794,683
----------- -----------
Gross profit 1,232,975 435,235
----------- -----------
Operating expenses:
Selling, general and administrative expenses 754,674 676,190
Research and development 5,710 9,128
----------- -----------
Total operating expenses 760,384 685,318
----------- -----------
Income (loss) from operations 472,591 (250,083)
Other Income (Expense)
Interest Expense (160,482) (11,944)
Other income (expense) (101,000) 39
----------- -----------
Income (loss) from continuing operations
Before Income Taxes 211,109 (261,988)
Provision for income taxes -- --
----------- -----------
Income (loss) from continuing operations 211,109 (261,988)
Discontinued operations (Note 5)
Income (loss) from discontinued operations -- (111,262)
Loss on disposal -- (514,414)
----------- -----------
-- (625,676)
----------- -----------
Net Income $ 211,109 $ (887,664)
=========== ===========
Earnings per share
Net Income (loss) per share - basic
Continuing operations $ .06 $ (.12)
=========== ===========
Discontinued operations $ -- $ (.29)
=========== ===========
Net Income (loss) per share - diluted
Continuing operations $ .06 $ (.12)
=========== ===========
Discontinued operations $ -- $ (.29)
=========== ===========
Weighted Average Shares
Basic 3,302,587 2,169,711
=========== ===========
Diluted 3,621,177 2,169,711
=========== ===========
See notes to financial statements
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLLUTION RESEARCH AND CONTROL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999
Other Total
Series A Preferred Stock Series B Preferred Stock Common Stock Paid In Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
12/31/98 220,000 $ 2,200 450,000 $ 4,500 2,368,439 $ 6,704,195 $ 928,831 $(5,586,454) $ 2,053,272
Issuance of
warrants with
note payable 13,250 13,250
Issuance of
common
stock &
warrants under
compromise
agreement 100,000 175,000 10,000 185,000
Conversion of
Series A and
Series B
preferred stock
to common
stock (220,000) (2,200) (450,000) (4,500) 670,000 6,700
Issuance of
common
stock net
of issuance
costs of
$45,625 588,331 425,625 425,625
Net Income for
the six
months -- -- -- -- -- -- -- 211,109 211,109
----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- -----------
Balance
June 30,1999 -0- -0- -0- -0- 3,726,770 $ 7,311,520 $ 952,081 $(5,375,345) $ 2,888,256
=========== =========== ========= =========== =========== =========== =========== =========== ===========
See notes to financial statements
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30
-------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 211,109 $ (887,664)
Adjustments to reconcile net income to net cash
used for operating activities:
Loss on disposal of subsidiary -- 514,415
Losses on disposed subsidiary -- 26,418
Depreciation and amortization 44,032 75,500
Deferred rent 15,746 18,745
Changes in operating assets and liabilities:
Accounts receivable, trade, net (1,910,487) (142,184)
Inventories 39,255 244,587
Other current assets (240) 7,436
Other assets (12,140) 987
Accounts payable 63,194 (7,765)
Accrued liabilities 254,626 (61,977)
Unearned revenue -- (143,695)
----------- -----------
Net cash used for operating activities (1,294,905) (355,197)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan fees (60,000) --
Acquisition of property, equipment and leasehold
improvements -- (1,922)
----------- -----------
Net cash used for investing activities (60,000) (1,922)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placements of stock 425,625 362,070
Advances on notes payable and line of credit 599,177 (70,000)
Increase in amount due under Nutek settlement agreement 118,604 (104,086)
Borrowings under long-term debt 300,000 --
Advances to related parties (5,000) (30,082)
----------- -----------
Net cash provided by financing activities 1,438,406 157,902
----------- -----------
NET INCREASE (DECREASE) IN CASH 83,501 (199,217)
CASH AT BEGINNING OF PERIOD 63,951 514,895
----------- -----------
CASH AT END OF PERIOD $ 147,452 $ 315,678
=========== ===========
Supplemental Disclosure:
Cash paid for:
Interest $ 36,712 $ 27,782
Taxes $ -- $ --
See notes to financial statements
8
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
- ------------------------
The information furnished herein reflects all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of management, necessary
to a fair presentation of the financial statements for the period presented.
Interim results are not necessarily indicative of results for a full year.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1998.
2. Inventories:
- ---------------
Inventories at June 30, 1999 consisted of the following:
Raw Materials $ 821,890
Work-in-Progress 414,227
Finished Goods 351,783
----------
$1,587,900
==========
3. Accrued Expenses:
- --------------------
Accrued expenses at June 30 , 1999 consisted of the following:
Accrued facility fees under China Contract $225,000
Accrued payroll and related taxes 209,548
Accrued vacation 25,013
Current portion of deferred rent 23,012
Other 13,730
--------
$496,303
========
4. Shareholders' Equity:
- ------------------------
During the second quarter of 1999, the Company received $229,500, net of $25,500
of issuance costs, from the issuance of 300,000 shares of common stock under a
private placement.
During the first quarter of 1999, the Company received $196,125, net of $20,125
of issuance costs, from the issuance of 288,331 shares of common stock under a
private placement. As part of the private placement, the Company issued
three-year warrants to purchase 288,331 shares of common stock at $.75 per
share.
During the first quarter of 1999 all of the holders of the Series A & Series B
preferred stock converted their shares to 670,000 shares of common stock in
accordance with the original conversion terms.
5. Discontinued Operations:
- ---------------------------
In April, 1998 and February, 1998 the Company discontinued the operations of two
of its subsidiaries, Nutek, Inc. and Logan Research Limited.
9
<PAGE>
6. Long Term Debt:
- ------------------
During the first quarter of 1999, the Company borrowed $100,000 under a
four-month note, bearing interest at 11% per annum. In conjunction with this
loan, the Company issued the note holder three-year warrants to purchase 48,000
shares of common stock at $.75 per share. The Company paid loan fees of $10,000
plus warrants to purchase an additional 5,000 shares of common stock at $.75 per
share. This note was subsequently increased to $300,000 with interest at 12% per
annum and is due in June, 2000.
7. Notes Payable:
- -----------------
In June, 1999 the Company entered into a compromise settlement agreement with
Fidelity Federal, the major secured lender of Nutek. Under this agreement, the
Company agreed to repay $468,000 through issuance of 100,000 shares of common
stock (valued at $1.75 per share on date of issuance) and payment on December
26, 1999 of the remaining balance due, including interest accruing from the
settlement date at 12% per annum. The Company is required to register the
100,000 shares and sell them on behalf of Fidelity Federal. The net proceeds
from the sale of these shares will be used to reduce the balance owed Fidelity
Federal under the settlement agreement. In addition, the Company issued warrants
to purchase 20,000 shares of the Company's common stock at $.75 per share to
Fidelity Federal as an inducement to enter into this settlement agreement.
On May 28, 1999 the Company entered into an 18% subordinated convertible
debenture agreement for $500,000 due December 1, 1999. The debenture is
convertible into the Company's common stock at any time at the option of the
holder. The conversion price is the lesser of 80% of the market price of the
common stock on the date of conversion or 115% of the market price of the common
stock on May 28, 1999. As part of this agreement, the Company agreed to to repay
$101,000 received from the debenture holder in 1998 that was previously reported
as income in 1998. In addition, the Company paid $50,000 and issued warrants to
purchase 105,000 shares of the Company's common stock at $1.50 per share as loan
fees.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
General
- -------
The Company designs, manufactures and markets automated continuous monitoring
instruments used to detect and measure various types of air pollution through
its wholly-owned subsidiary, Dasibi Environmental Corp.
The Company experienced operating losses during the three quarters ending March
31, 1999 as it geared up operations to manufacture and ship product to the
People's Republic of China pursuant to a contract signed in June 1998 (The
"China Contract"). The Company shipped the first such product in June 1999,
however,complete performance under the China Contract is dependent on the
Company obtaining additional financing. If such financing is not obtained, the
Company may not be able to perform under such contract which, in turn, could
adversely impact the Company's business.
The Company's future operating results also may be affected by a number of
important factors, including: but not limited to uncertainties relative to
global economic conditions; industry factors; the availability and cost of
components; the Company's ability to develop, manufacture and sell its products
profitably; the Company's ability to successfully increase its market share in
its core business while expanding its products base into other markets; the
strength of its distribution channels, and the Company's ability to effectively
manage expense growth relative to revenue growth in anticipation of continued
pressure on gross margins.
10
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 1999, versus Three Months Ended June 30, 1998
- -------------------------------------------------------------------------
Net revenues increased 251% from $652,887 during the second quarter of 1998 to
$2,292,976 during the second quarter of 1999. The increase was primarily due to
shipment of the first product under the China Contract which substantially
exceeded domestic and other international shipments.
Gross profit margin was 49% for the second quarter of 1999 versus 11% for the
second quarter of 1998, primarily because of negotiated, fair product sales
prices allowed until the terms of the China contract. The higher margin has been
considered normal for the Company's business.
Selling, general and administrative expenses increased $112,083, or 35% during
the second quarter of 1999, versus the same period in 1998, principally due to a
larger workforce required to perform the increased manufacturing demands
required by the China contract.
As a result of the foregoing factors, net operating income increased from a net
operating loss of ($257,310) during the three months ended June 30, 1998 to a
net operating income of $453,211 during the three months ended June 30, 1999.
Six Months Ended June 30, 1999, versus Six Months Ended June 30, 1998
- ---------------------------------------------------------------------
Net revenues increased 139% from $1,229,918 during the first half of 1998 to
$2,941,897 during the first half of 1999. The increase was primarily due to
product shipment under the China Contract which substantially exceeded domestic
and other international shipments.
Gross profit margin was 42% for the first half of 1999 versus 35% for the first
half of 1998, primarily because of negotiated, fair, product sales prices
allowed under the terms of the China Contract, based on historical Company
margins.
Selling, general and administrative expenses increased $78,484, or 12% during
the first half of 1999, versus the same period in 1998, principally due to a
larger workforce required to perform the increased manufacturing demands
required by the China Contract.
As a result of the foregoing factors, net operating income increased from a net
operating loss of ($261,988) during the six months ended June 30, 1998 to a net
operating income of $211,109 during the six months ended June 30, 1999.
Liquidity and Capital Resources
- -------------------------------
The Company has historically financed its growth and cash needs primarily
through borrowings, and the public and private sales of its securities. The low
market value of the Company's securities and its unstable operating performance
has severely restricted access to capital.
Net cash used in operating activities in the six months ended June 30, 1999,
amounted to $1,294,905, due to the increase in receivables (primarily from the
shipment of products to China). The Company's cash level increased 131% as
compared to the end of the last quarter of 1998, primarily due to a private
placement of common stock amounting to $425,000 and additional borrowings of net
$953,000 resulting in a net increase of $83,500.
11
<PAGE>
Working capital was $2,248,825 at June 30, 1999.
The Company has no material commitments for capital expenditures as of June 30,
1999. The Company believes it will be able to meet its current obligations with
funds generated from operations during the next twelve months, however, expanded
operations will require additional working capital to be provided by additional
financing.
Inflation
- ---------
The Company believes that inflation has not had a material impact on its
business.
Seasonality
- -----------
The Company does not believe that its business is seasonal.
Year 2000 Compliance
- --------------------
General. The Company believes it has completed all internal efforts to avoid the
adverse effects of the Year 2000 issue.
State of Readiness. The Company received certifications of compliance from all
vendors deemed material to its business operations during the first quarter of
1999.
Contingency Plans. The Company believes it should not rely completely on key
vendor compliance certification. Therefore costs are being incurred to enable
the Company to utilize alternative design procedures to allow alternate vendor
supply. These design changes are on-going and the costs are not expected to be
material.
Risks. The Company presently does not anticipate any material business
disruption will occur as a result of Year 2000 issues. The greatest potential
risk appears to be with federal, state and local governments.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) The Company did not file any reports on Form 8-K during the three
months ended June 30 , 1999.
13
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POLLUTION RESEARCH AND CONTROL CORP.
------------------------------------
(Registrant)
Date: August 10, 1999 By: /s/ Albert E. Gosselin, Jr
- --------------------- ------------------------------
Albert E. Gosselin, Jr., President and
Chief Executive Officer
Date: August 10, 1999 By: /s/ Donald Ford
- --------------------- -------------------
Donald Ford
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 148
<SECURITIES> 0
<RECEIVABLES> 2,212
<ALLOWANCES> (4)
<INVENTORY> 1,588
<CURRENT-ASSETS> 14
<PP&E> 295
<DEPRECIATION> (196)
<TOTAL-ASSETS> 4,947
<CURRENT-LIABILITIES> 1,708
<BONDS> 0
0
0
<COMMON> 8,263
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,947
<SALES> 2,942
<TOTAL-REVENUES> 2,942
<CGS> 1,709
<TOTAL-COSTS> 1,709
<OTHER-EXPENSES> 866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160
<INCOME-PRETAX> 211
<INCOME-TAX> 0
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
