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 September 30, 2000
------------------
{ } 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.
------------------------------------
(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
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(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 November 14, 2000 5,091,752
Traditional Small Business Disclosure Format (check one):
YES X No
----- -----
<PAGE>
POLLUTION RESEARCH AND CONTROL CORP.
Form 10-QSB
For the NineMonth Period Ended September 30, 2000
TABLE OF CONTENTS
Page
----
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 Statements of Cash Flows .............. 8
Notes to Financial Statements ...................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 11
Part II Other Information ............................................ 14
Item 1 Legal Proceedings .................................. 14
Item 4 Submission of Matters To A Vote of Security Holders 14
Item 6 Reports on Form 8-K ................................ 14
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
As Of
09/30/00
----------
CURRENT ASSETS
Cash $ 164,755
Accounts receivable, trade, less allowance for doubtful 363,070
accounts of $4,734
Inventories (Note 2) 1,883,075
Prepaid loan fees 535,739
Other current assets 87,340
----------
TOTAL CURRENT ASSETS 3,033,979
----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of $ 225,645 84,636
----------
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
----------
TOTAL ASSETS $6,017,202
==========
See notes to consolidated financial statements
3
<PAGE>
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
As of
9/30/00
------------
CURRENT LIABILITIES
Notes payable $ 575,000
Convertible debt (Note 3) 1,415,000
Accounts payable 339,308
Accrued liabilities 205,005
------------
TOTAL CURRENT LIABILITIES 2,534,313
------------
DEFERRED RENT 32,701
------------
SHAREHOLDERS' EQUITY : (Note 4)
Common Stock, no par value; 30,000,000 shares
authorized, 5,091,752 issued and outstanding 10,212,826
Additional paid in capital 1,516,651
Employee Stock Plan receivable (1,673,400)
Accumulated deficit (6,605,889)
------------
TOTAL SHAREHOLDERS' EQUITY 3,450,188
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,017,202
============
See notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended September 30,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net Revenues $ 824,918 $2 ,814,886
Cost of goods sold 630,616 1,504,944
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Gross profit 194,302 1,309,942
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Operating expenses:
Selling, general and administrative expenses 663,501 860,319
Research and development 12,551 49,866
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Total operating expenses 676,052 910,185
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Income (loss) from operations (481,750) 399,757
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Other Income (Expense)
Interest Expense (285,540) (141,096)
Other income (expense) 9,000 (5,020)
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Net other income (expense) (276,540) (146,116)
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Income (loss)
Before Income Taxes (758,290) 253,641
Provision for income taxes -- 1,600
----------- -----------
Net Income (loss) $ (758,290) $ 252,041
=========== ===========
Earnings per share
Net Income (loss) per share - basic $ (.15) $ .06
=========== ===========
Net Income (loss) per share - diluted $ (.15) $ .06
=========== ===========
Weighted Average Shares
Basic 5,080,455 3,893,770
=========== ===========
Diluted 5,080,455 4,572,578
=========== ===========
See notes to consolidated financial statements
5
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months
Ended September 30,
------------------------------------
2000 1999
----------- -----------
Net Revenues $ 2,255,678 $ 5,756,783
Cost of goods sold 1,806,103 3,213,866
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Gross profit 449,575 2,542,917
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Operating expenses:
Selling, general and administrative expenses 1,975,953 1,614,993
Research and development 36,349 55,576
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Total operating expenses 2,012,302 1,670,569
----------- -----------
Income (loss) from operations (1,562,727) 872,348
Other Income (Expense)
Interest Expense (606,606) (293,578)
Other income (expense) 24,261 (114,020)
----------- -----------
Net other income (expense) (582,345) (407,598)
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Income (loss)
Before Income Taxes (2,145,072) 464,750
Provision for income taxes -- 1,600
----------- -----------
Net Income (loss) $(2,145,072) 463,150
=========== ===========
Earnings per share
Net Income (loss) per share - basic $ (.49) $ .13
=========== ===========
Net Income (loss) per share - diluted $ (.49) $ .12
=========== -----------
Weighted Average Shares
Basic 4,350,868 3,499,648
=========== ===========
Diluted 4,350,868 3,997,402
=========== ===========
See notes to consolidated financial statements
6
<PAGE>
POLLUTION RESEARCH AND CONTROL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000 (Unaudited)
Additional Employee Total
Common Stock Paid In Stock Plan Accumulated Shareholders'
Shares Amount Capital Receivable (Deficit) Equity
--------- ----------- ----------- ----------- ----------- ------------
Balance 12/31/99 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 50,000 100,000 100,000
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
Receipts from
employees under
employee stock
plan 6,600 6,600
Issuance of common
stock to debenture
holder 100,000 187,500 187,500
Issuance of Warrants 709,535 709,535
Net Loss -- -- -- -- (2,145,072) (2,145,072)
----------- ----------- ----------- ------------- ----------- -----------
Balance 9/30/00 5,091,752 $10,212,826 $ 1,516,651 $ (1,673,400) $(6,605,889) $ 3,450,188
=========== =========== =========== ============= =========== ===========
See notes to consolidated financial statements
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30
-------------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(2,145,072) $ 463,150
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 495,541 100,156
Deferred rent (10,901) 12,112
Changes in operating assets and liabilities:
Accounts receivable, trade, net 813,623 (2,225,008)
Inventories (494,364) (156,858)
Other current assets (42,340) (458,679)
Other assets -- (12,140)
Accounts payable 121,561 86,095
Accrued liabilities (78,505) 79,316
----------- -----------
Net cash used for operating activities (1,340,457) (2,111,856)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment -- (9,748)
-----------
Net cash used for investing activities -- (9,748)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 411,006 731,375
Advances on notes payable 1,140,000 1,237,303
Loan fees (50,000) (50,000)
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 -- --
----------- -----------
Net cash provided by financing activities 1,291,006 2,337,282
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NET INCREASE (DECREASE) IN CASH (49,451) 215,678
CASH AT BEGINNING OF PERIOD 214,206 63,951
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CASH AT END OF PERIOD $ 164,755 $ 279,629
=========== ===========
Supplemental Disclosure:
Cash paid for:
Interest $ 186,589 $ 291,745
Taxes $ -- $ 1,600
Non cash transactions:
The Company paid $947,039 of prepaid loan fees through the issuance of stock and warrants.
See notes to consolidated financial statements
8
</TABLE>
<PAGE>
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 September 30, 2000 consisted of the following:
Raw Materials $ 888,788
Work-in-Progress 199,731
Finished Goods 794,556
-----------
$ 1,883,075
===========
3. Notes Payable & Convertible Debt:
On July 18, 2000 the Company entered into a 9% convertible debenture agreement
for $365,000 due July 17, 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 80% of the market price on the date of conversion or
$2.34. As an incentive to enter into this agreement, the Company issued warrants
to purchase 109,500 shares of Common Stock at $2.2875 per share. The Company
also issued warrants to purchase 21,900 shares of Common Stock at $2.2875 as a
finders fee. The fair market value of all warrants issued in connection with
this agreement of $185,000 was capitalized as prepaid loan fees and is being
amortized over the term of the 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 October, 2000 working capital
financing.
9
<PAGE>
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.
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.
On October 19, 2000, the Company entered into a "refinancing plan" intended to
pay off all convertible and related convertible debt. This "plan" is in the form
of an escrow account which has not closed as of this date and contains
components which require ratification and/or approval at a special shareholders'
meeting set for December 19, 2000. Management, however, expects redemption of
the above debt to occur before November 10, 2000, if the escrow is successfully
completed.
4. Shareholders' Equity:
On September 1, 2000 a holder of $75,000 of convertible debentures elected to
convert $25,000 into 16,667 shares of Common Stock in accordance with the terms
of the debenture.
During the third quarter, the Company issued warrants to purchase 131,400 shares
of Common Stock in connection with the issuance of convertible debentures (see
Note 3).
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.
10
<PAGE>
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, but required
a year time period between signing and shipping.
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
conditions; industry factors; the availability and cost of components; the
Company's ability to develop, manufacture and sell its products profitably and
the Company's ability to obtain working capital. 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. On September
6, 2000, the Company signed a joint venture contract with Dongyu Shenyang Group
which was approved by China government agencies on September 20, 2000.
On October 19, 2000 the Company opened an escrow for funding with an
unaffiliated corporation whose primary end purpose is to seek control of the
Comapny. The primary purpose of the Company in the escrow is to obtain working
capital for its China projects after redeeming outstanding convertible bonds and
their related loans. No escrow instructions have been completed by November 2,
2000 although the convertible bond holders have agreed to "pay-off" terms. The
escrow is arranged in stages of which the first is release of working capital to
the Company. Other stages involve shareholder ratification and/or approval at a
special shareholders' meeting tentatively scheduled for December 19, 2000. At
this date, no release of working capital has been made to the Company.
11
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000, versus Three Months Ended
September 30, 1999
Net revenues decreased 71% from $2,814,886 during the third quarter of 1999 to
$824,918 during the third 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 24% for the third quarter of 2000 versus 46% for the
third quarter of 1999. Low gross profit percentage remains primarily
attributable to increased staffing and training in anticipation of China
contract work, of which there was none in the third quarter of 2000.
Selling, general and administrative expenses decreased $196,818, or 23% during
the third quarter of 2000, versus the same period in 1999, primarily due to the
absence of commissions paid in this quarter as opposed to $150,000 paid in the
third quarter of 1999. Other expenses decreased due to the inactivity of China
sales in 2000.
During the third quarter of 2000 accounting charges related to amortization of
loan fees and interest amounted to $184,201. The third 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 $758,290
during the three months ended September 30, 2000 as compared to net operating
income of $252,041 during the three months ended September 30, 1999.
Nine Months Ended September 30, 2000, versus Nine Months Ended
September 30, 1999
Net revenues decreased 61% from $5,756,783 during the nine months ended
September 30, 1999 to $2,255,678 during the nine months ended September 30,
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 20% for the nine months ended September 30, 2000 versus
44% for the nine months ended September 30, 1999. Low gross profit percentage
remains primarily attributable to increased staffing and training in
anticipation of China contract work, of which there was essentially none in the
nine months of 2000.
Selling, general and administrative expenses increased $360,990, or 22% during
the nine months ended September 30, 2000 versus the same period in 1999,
primarily due to increased commissions to date of $232,000 over the same period
in 1999. Commissions were paid in the third and fourth quarters of 1999 and the
first and second quarters of 2000 pertaining to the Phase I China contract. In
addition, expenditures increased for legal and accounting relating to China
contracts plus the setting up of the China office which accounted for the
remainder.
During the nine months ended September 30, 2000 accounting charges related to
amortization of loan fees and interest amounted to $438,484. The same period of
1999 did not include this accounting charge. Previously all accounting charges
were reported in the fourth quarter.
12
<PAGE>
As a result of the foregoing factors, the Company incurred a loss of $2,145,072
during the nine months ended September 30, 2000 as compared to net operating
income of $463,150 during the nine months ended September 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
trading price of the Company's Common Stock 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 nine months ended September 30,
2000, amounted to $1,340,457, due to the loss incurred during the period, offset
by collection of accounts receivable. The Company's cash only decreased $49,451
as compared to the end of the last quarter of 1999, despite the large loss,
primarily due to issuance of common stock amounting to $411,006 and additional
net borrowings of $880,000.
Working capital was $499,666 at September 30, 2000. As a result of the Company's
low working capital, the Company has entered into the transaction discussed
above under the caption "General." If such transaction is not consummated, the
Company may be unable to fulfill the Phase II China contract, which in turn,
could have a material adverse impact on its results of operations.
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 October, 2000 working capital
financing. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On August 30, 2000 the Company's Annual Meeting of Shareholders
was held. The following members of the Board of Directors were
re-elected with the following vote:
Name Votes
Albert E. Gosselin 4,143,865
Gary L. Dudley 4,143,937
Craig E. Gosselin 4,141,435
Marcia Smith 4,143,937
Donald R. Ford 4,143,287
Additionally, the firm of AJ. Robbins, P.C. was elected as the
Company's auditors for the fiscal year ending December 31, 2000
with the following vote:
For 4,148,138
Against 6,487
Abstain 2,402
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 September 30 , 2000.
14
<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: November 14, 2000 By: /s/ Albert E. Gosselin, Jr.
------------------------------------------
Albert E. Gosselin, Jr., President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Donald R. Ford
------------------------------------------
Donald R. Ford
Chief Financial Officer
15
