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, 2000
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{ } 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
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POLLUTION RESEARCH AND CONTROL CORP.
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(Exact Name of Small Business Issuer as Specified in its Charter)
California 95-2746949
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
506 Paula Avenue, Glendale, California 91201
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(Address of Principal Executive Offices)
(818) 247-7601
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(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 4, 2000 5,075,085
Traditional Small Business Disclosure Format (check one):
YES X No
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1
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POLLUTION RESEARCH AND CONTROL CORP.
Form 10-QSB
For the Six-Month Period Ended June 30, 2000
TABLE OF CONTENTS
Page
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Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet 3
Consolidated Statements of Operations 5
Consolidated Statement of Changes in Shareholders'Equity 7
Consolidated Statement of Changes in 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 14
Item 1 Legal Proceedings
Item 6 Reports on Form 8-K 14
2
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PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
As Of
06/30/00
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CURRENT ASSETS
Cash $ 328,176
Accounts receivable, trade, less allowance for doubtful 454,265
accounts of $ 4,734
Inventories (Note 2) 1,523,075
Prepaid loan fees 573,482
Other current assets 127,340
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TOTAL CURRENT ASSETS 3,006,338
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PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of $219,417 90,864
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OTHER ASSETS
Advances to joint venture 203,938
Deferred tax asset, net 2,659,000
Other intangible assets, net 23,509
Other assets 12,140
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TOTAL OTHER ASSETS 2,898,587
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TOTAL ASSETS $5,995,789
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See notes to financial statements
3
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CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
As of
CURRENT LIABILITIES 6/30/00
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Notes payable $ 575,000
Convertible debt (Note 3) 1,075,000
Accounts payable 166,288
Accrued liabilities 151,288
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TOTAL CURRENT LIABILITIES 1,967,576
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DEFERRED RENT 36,335
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SHAREHOLDERS' EQUITY : (Note 4)
Common Stock, no par value; 30,000,000 shares
authorized, 5,075,085 issued and outstanding 10,187,826
Additional paid in capital 1,331,651
Employee Stock Plan receivable (1,680,000)
Accumulated deficit (5,847,599)
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TOTAL SHAREHOLDERS' EQUITY 3,991,878
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,995,789
============
See notes to financial statements
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended June 30,
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2000 1999
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<S> <C> <C>
Net Revenues $ 1,002,388 $2 ,292,976
Cost of goods sold 780,517 1,166,147
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Gross profit 221,871 1,126,829
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Operating expenses:
Selling, general and administrative expenses 626,399 426,007
Research and development 22,393 4,230
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Total operating expenses 648,792 430,237
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Income (loss) from operations (426,921) 696,592
Other Income (Expense)
Interest Expense (235,020) (134,381)
Other income (expense) 15,000 (109,000)
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Net other income (expense) (220,020) (243,381)
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Income (loss)
Before Income Taxes (646,941) 453,211
Provision for income taxes -- --
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Net Income (loss) $ (646,941) $ 453,211
=========== ===========
Earnings per share
Net Income (loss) per share - basic $ (.15) $ .13
=========== ===========
Net Income (loss) per share - diluted $ (.15) $ .12
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Weighted Average Shares
Basic 4,244,418 3,467,881
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Diluted 4,244,418 3,834,931
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See notes to financial statements
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months
Ended June 30,
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2000 1999
----------- -----------
<S> <C> <C>
Net Revenues $ 1,430,760 $2 ,941,897
Cost of goods sold 1,175,487 1,708,922
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Gross profit 255,273 1,232,975
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Operating expenses:
Selling, general and administrative expenses 1,312,452 754,674
Research and development 23,798 5,710
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Total operating expenses 1,336,250 760,384
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Income (loss) from operations (1,080,977) 472,591
Other Income (Expense)
Interest Expense (321,066) (160,482)
Other income (expense) 15,261 (101,000)
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Net other income (expense) (305,805) (261,482)
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Income (loss)
Before Income Taxes (1,386,782) 211,109
Provision for income taxes -- --
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Net Income (loss) $(1,386,782) 211,109
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Earnings per share
Net Income (loss) per share - basic $ (.35) $ .06
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Net Income (loss) per share - diluted $ (.35) $ .06
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Weighted Average Shares
Basic 3,986,074 3,302,587
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Diluted 3,986,074 3,621,177
=========== ===========
See notes to financial statements
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLLUTION RESEARCH AND CONTROL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2000
(Unaudited)
Additional Employee Total
Common Stock Paid In Stock Plan Accumulated Shareholders'
Shares Amount Capital Receivable (Deficit) Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999 3,672,545 $ 7,840,920 $ 708,167 $(4,460,817) $ 4,088,270
Exercise of
Warrants 429,207 404,406 404,406
Conversion of
debt to common
stock 33,333 75,000
75,000
Increase in amount
realized from stock
issued under settle-
ment agreement 98,949 98,949
Issuance of stock 840,000 1,680,000 $(1,680,000) -0-
under employee
stock plan
Issuance of common
stock to debenture
holder 100,000 187,500 187,500
Issuance of Warrants 524,535
524,535
Net Loss -- -- -- -- (1,386,782) (1,386,782)
----------- ----------- ----------- ----------- ----------- -----------
Balance
June 30, 2000 5,075,085 $10,187,826 $ 1,331,651 $(1,680,000) $(5,847,599) $ 3,991,878
=========== =========== =========== =========== =========== ===========
See notes to financial statements
7
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,386,782) $ 211,109
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 266,570 44,032
Deferred rent (7,267) 15,746
Changes in operating assets and liabilities:
Accounts receivable, trade, net 722,432 (1,910,487)
Inventories (134,364) 39,255
Other current assets (82,340) (240)
Other assets (12,140)
Accounts payable (51,463) 63,194
Accrued liabilities (132,222) 254,626
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Net cash used for operating activities (805,436) (1,294,905)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 404,406 425,625
Advances on notes payable 775,000 599,177
Loan fees (50,000) (60,000)
Increase in amount due under Nutek
settlement agreement -- 118,604
Borrowings under long-term debt -- 300,000
Repayment of Notes Payable (210,000) --
Advances to related parties -- (5,000)
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Net cash provided by financing activities 919,406 1,378,406
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NET INCREASE (DECREASE) IN CASH 113,970 83,501
CASH AT BEGINNING OF PERIOD 214,206 63,951
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CASH AT END OF PERIOD $ 328,176 $ 147,452
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Supplemental Disclosure:
Cash paid for:
Interest $ 154,059 $ 36,712
Taxes $ -- $ --
Non cash transactions:
The Company paid $762,039 of prepaid loan fees through the issuance of
stock and warrants.
See notes to financial statements
8
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions for Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The information furnished herein reflects all material 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 the results of
operations for the full year.
The financial statements and related footnotes should be read in conjunction
with the financial statements and footnotes thereto included in the Company's
annual report on Form 10-KSB filed with the Securities and Exchange Commission
for the year ended December 31, 1999.
2. Inventories:
Inventories at June 30, 2000 consisted of the following:
Raw Materials $ 987,540
Work-in-Progress 153,639
Finished Goods 381,896
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$ 1,523,075
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3. Notes Payable & Convertible Debt:
During the second quarter, the Company negotiated a one-year extension on
$300,000 of notes payable that had matured in exchange for options to purchase
48,000 shares of Common Stock at amounts ranging between $2.13 and $2.28 per
share. The fair value of these options of $68,672 was capitalized as prepaid
loan fees and is being amortized over the one year extension.
During the second quarter, the Company obtained a $200,000 loan which bears
interest at 18% per annum and was due June 28, 2000. As an incentive to make
this loan, the Company issued options to the holder to purchase 15,000 shares of
Common Stock at $2.25 per share. The fair value of these options of $25,230 was
capitalized as prepaid loan fees and fully amortized during the quarter based
upon the term of the debt. The Company has arranged an extension of the due date
on this loan coincident with completion of August, 2000 working capital
financing.
On February 23, 2000 the Company entered into 12% subordinated convertible
debenture agreements for $500,000 due February 23, 2001. The debentures are
convertible into the Company's Common Stock at any time at the option of the
holder. The conversion price is the lesser of 85% of the market price of the
Common Stock on the date of conversion or $2.00. As an incentive to enter into
this agreement, the Company issued 100,000 shares of Common Stock plus warrants
to purchase 100,000 shares and 200,000 shares of Common Stock at $2.25 per share
and $4.50 per share, respectively. The fair market value of the 100,000 shares
of Common Stock of $187,500 and the fair market value of the warrants of
$313,733 were capitalized as prepaid loan fees and are being amortized over the
term of the debt. The Company also paid $50,000 of loan fees related to this
debt.
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On January 21, 2000 the Company obtained a loan for $75,000 for its wholly owned
subsidiary, Dasibi China Corp.. This loan bears interest at 10% per annum, and
was due March 21, 2000 and is being negotiated for conversion to equity in that
subsidiary.
4. Shareholders' Equity:
During the second quarter, the Company issued options to purchase 63,000 shares
of Common Stock in connection with various loans (see Note 3).
The Company entered into an agreement in the second quarter with a firm that
helps companies find financing through loans and investments. Under this
agreement, the Company issued warrants to purchase 100,000 shares of Common
Stock at $5.00 per share. The fair value of these warrants of $116,900 has been
capitalized as prepaid loan fees and will be amortized over the term of this
agreement.
On June 29, 2000 the Company issued 840,000 shares of Common Stock under the
Company's employee stock plan at $2.00 per share in exchange for a non-interest
bearing note of $1,680,000, based on full (46 employees) participation paid by
individual employee payroll deduction.
In March 2000 a holder of $150,000 of convertible debentures elected to convert
$75,000 into 33,333 shares of Common Stock in accordance with the terms of the
debentures.
In February 2000 in connection with the issuance of $500,000 of convertible
debentures, the Company issued 100,000 shares of Common Stock and 300,000
warrants as inducement for the loan. The fair value of these shares has been
capitalized as loan fees and is being amortized over the 1-year terms of the
debentures.
On March 31, 2000, warrants to purchase 50,000 shares of Common Stock at $2.40
per share and 379,207 shares of Common Stock at $.75 per share were exercised.
Common Stock issued to Fidelity Federal under a compromise settlement agreement
in June 1999 was used to pay the related debt. The actual proceeds from the sale
of these shares exceeded the amount recorded by $98,949. This increase has been
recorded as additional paid in capital.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS 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., and, since January 1998
has focused its business primarily on the air pollution market of the People's
Republic of China.
The Company has experienced substantial operating losses during months in which
no product was shipped to China primarily due to high staffing and related
expenses toward maintaining necessary shipment readiness with a non-predictable
manufacturing schedule. The 1999 Phase I contract for $5.2 million was
essentially completed in a 5 month period ending in November 1999.
The Company's future operating results may be affected by a number of important
factors, including but not limited to the ability of the Company to obtain
further contracts for China; uncertainties relative to global economic
10
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conditions; industry factors; the availability and cost of components; the
Company's ability to develop, manufacture and sell its products profitably. In
April 2000 the Company signed a $13.5 million agreement (the Phase II "China
Contract"). In May 2000 the Company's Board of Directors approved signed letters
of intent and a Company proposal for a joint venture to manufacture its product
in China.
11
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2000, versus Three Months Ended June 30, 1999
Net revenues decreased 56% from $2,292,976 during the second quarter of 1999 to
$1,002,388 during the second quarter of 2000. The decrease was primarily due to
the absence of China contract shipments and to ongoing competitive price
pressures in the U.S. and Europe.
Gross profit margin was 22% for the second quarter of 2000 versus 49% for the
second quarter of 1999. Decreases in gross profit percentage remains primarily
attributable to increased staffing and training in anticipation of China
contract work.
Selling, general and administrative expenses increased $200,392, or 47% during
the second quarter of 2000, versus the same period in 1999, primarily due to
commissions paid on China Phase I contract not applicable or paid in the same
period in 1999.
During the second quarter of 2000 accounting charges related to amortization of
loan fees and interest amounted to $195,053. The second quarter of 1999 did not
include this accounting charge. Previously all accounting charges were reported
in the fourth quarter.
As a result of the foregoing factors, the Company incurred a loss of $646,941
during the three months ended June 30, 2000 as compared to net operating income
of $453,211 during the three months ended June 30, 1999.
Six Months Ended June 30, 2000, versus Six Months Ended June 30, 1999
Net revenues decreased 51% from $2,941,897 during the first half of 1999 to
$1,430,760 during the first half of 2000. The decrease was primarily due to the
absence of China contract shipments and to ongoing competition price pressures
in the U.S. and Europe.
Gross profit margin was 18% for the first half of 2000 versus 42% for the first
half of 1999. Decrease in gross profit percentage remains primarily attributable
to increased staffing and training in anticipation of China contract work.
Selling, general and administrative expenses increased $557,778, or 74% during
the first half of 2000, versus the same period in 1999, primarily due to
commissions paid on China Phase I contract not applicable or paid in the same
period in 1999.
During the first six months of 2000 accounting charges related to amortization
of loan fees and interest amounted to $254,283. The first six months of 1999 did
not include this accounting charge. Previously all accounting charges were
reported in the fourth quarter.
As a result of the foregoing factors, the Company incurred a loss of $1,386,782
during the six months ended June 30, 2000 as compared to net operating income of
$211,109 during the six months ended June 30, 1999.
12
<PAGE>
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, and when capital has been obtained it
has been necessarily costly due to high interest costs and related loan fees.
Net cash used in operating activities in the six months ended June 30, 2000,
amounted to $805,436, due to the loss incurred during the period, offset by
collection of accounts receivable. The Company's cash level increased 53% as
compared to the end of the last quarter of 1999, primarily due to issuance of
common stock amounting to $404,406 and additional net borrowings of $565,000
resulting in a net increase of $114,000.
Working capital was $1,038,762 at June 30, 2000.
The Company currently has $200,000 in a term borrowing that is past due but
which has been negotiated into a "rollover" to be paid out of a current
convertible bond loan commitment of approximately $540,000. Whereas management
previously believed that the Phase II China contract improved the Company's
"bankability", it now appears that an effective financing date of the contract
is necessary to improve borrowing capability.
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.
13
<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 , 2000.
14
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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.
POLLUTION RESEARCH AND CONTROL CORP.
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(Registrant)
Date: August 4, 2000 By: /S/ Albert E. Gosselin
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Albert E. Gosselin, Jr., President and
Chief Executive Officer
Date: August 4, 2000 By: /s/ Donald Ford
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Donald Ford
Chief Financial Officer
15
