10QSB 1 0001.txt 10QSB 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 ------------- { } 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 4, 2000 5,075,085 Traditional Small Business Disclosure Format (check one): YES X No ---- ---- 1 POLLUTION RESEARCH AND CONTROL CORP. Form 10-QSB For the Six-Month Period Ended June 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 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 PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET ASSETS (Unaudited) As Of 06/30/00 ---------- 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 ---------- TOTAL CURRENT ASSETS 3,006,338 ---------- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, less accumulated depreciation of $219,417 90,864 ---------- 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 ---------- TOTAL OTHER ASSETS 2,898,587 ---------- TOTAL ASSETS $5,995,789 ========== See notes to financial statements 3 CONSOLIDATED BALANCE SHEET LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) As of CURRENT LIABILITIES 6/30/00 ------------ Notes payable $ 575,000 Convertible debt (Note 3) 1,075,000 Accounts payable 166,288 Accrued liabilities 151,288 ------------ TOTAL CURRENT LIABILITIES 1,967,576 ------------ DEFERRED RENT 36,335 ------------ 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) ------------ TOTAL SHAREHOLDERS' EQUITY 3,991,878 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,995,789 ============ See notes to financial statements 4
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, --------------- 2000 1999 ----------- ----------- Net Revenues $ 1,002,388 $2 ,292,976 Cost of goods sold 780,517 1,166,147 ----------- ----------- Gross profit 221,871 1,126,829 ----------- ----------- Operating expenses: Selling, general and administrative expenses 626,399 426,007 Research and development 22,393 4,230 ----------- ----------- Total operating expenses 648,792 430,237 ----------- ----------- Income (loss) from operations (426,921) 696,592 Other Income (Expense) Interest Expense (235,020) (134,381) Other income (expense) 15,000 (109,000) ----------- ----------- Net other income (expense) (220,020) (243,381) ----------- ----------- Income (loss) Before Income Taxes (646,941) 453,211 Provision for income taxes -- -- ----------- ----------- 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 =========== =========== Weighted Average Shares Basic 4,244,418 3,467,881 =========== =========== Diluted 4,244,418 3,834,931 =========== =========== See notes to financial statements 5
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Six Months Ended June 30, --------------- 2000 1999 ----------- ----------- Net Revenues $ 1,430,760 $2 ,941,897 Cost of goods sold 1,175,487 1,708,922 ----------- ----------- Gross profit 255,273 1,232,975 ----------- ----------- Operating expenses: Selling, general and administrative expenses 1,312,452 754,674 Research and development 23,798 5,710 ----------- ----------- Total operating expenses 1,336,250 760,384 ----------- ----------- 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) ----------- ----------- Net other income (expense) (305,805) (261,482) ----------- ----------- Income (loss) Before Income Taxes (1,386,782) 211,109 Provision for income taxes -- -- ----------- ----------- Net Income (loss) $(1,386,782) 211,109 =========== =========== Earnings per share Net Income (loss) per share - basic $ (.35) $ .06 =========== =========== Net Income (loss) per share - diluted $ (.35) $ .06 =========== ----------- Weighted Average Shares Basic 3,986,074 3,302,587 =========== =========== Diluted 3,986,074 3,621,177 =========== =========== See notes to financial statements 6
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 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
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 2000 1999 ----------- ----------- 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 ----------- ----------- Net cash used for operating activities (805,436) (1,294,905) ----------- ----------- 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) ----------- ----------- Net cash provided by financing activities 919,406 1,378,406 ----------- ----------- NET INCREASE (DECREASE) IN CASH 113,970 83,501 CASH AT BEGINNING OF PERIOD 214,206 63,951 ----------- ----------- CASH AT END OF PERIOD $ 328,176 $ 147,452 =========== =========== 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 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 ----------- $ 1,523,075 =========== 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. 9 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 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 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 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 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 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 4, 2000 By: /S/ Albert E. Gosselin ------------------------- -------------------------------- Albert E. Gosselin, Jr., President and Chief Executive Officer Date: August 4, 2000 By: /s/ Donald Ford -------------------------- -------------------------------- Donald Ford Chief Financial Officer 15