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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJanuary 31, 2002 | Commission file number 0-16416 |
ELECTROPURE, INC.
(Exact name of registrant as specified in its charter)
California (State or Other Jurisdiction of Incorporation or Organization) | 33-0056212 (IRS Employer Identification No.) |
23456 South Pointe Drive, Laguna Hills, California 93653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 770-9347
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý No o.
At March 14, 2002, 10,881,850 shares of the Registrant's common stock were outstanding.
Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
As of January 31, 2002
ASSETS
| January 31, 2002 | |||||
---|---|---|---|---|---|---|
Current assets: | ||||||
Cash | $ | 109,354 | ||||
Trade accounts receivable | 104,140 | |||||
Inventories | 222,588 | |||||
Prepaid legal fees | 80,937 | |||||
Other prepaid expenses | 10,741 | |||||
Total current assets | 527,760 | |||||
Property, plant and equipment, net | 2,796,652 | |||||
Acquired technology, net of accumulated amortization | 41,945 | |||||
Total assets | $ | 3,366,357 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
Condensed Consolidated Balance Sheet
(Unaudited)
As of January 31, 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
| January 31, 2002 | ||||||
---|---|---|---|---|---|---|---|
Current liabilities: | |||||||
Current portion of obligations under capital leases | $ | 9,481 | |||||
Current portion of notes payable to bank | 16,897 | ||||||
Trade accounts payable | 142,945 | ||||||
Accrued payroll | 142,125 | ||||||
Other accrued liabilities | 67,141 | ||||||
Customer deposits | 13,040 | ||||||
Total current liabilities | 391,629 | ||||||
Obligations under capital leases, net of current portion | 19,814 | ||||||
Note payable to bank, net of current portion | 1,345,217 | ||||||
Note payable to shareholder | 1,000,000 | ||||||
Total liabilities | 2,756,660 | ||||||
Commitments and contingencies | — | ||||||
Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding at January 31, 2002 | 26,000 | ||||||
Shareholders' equity: | |||||||
Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at January 31, 2002; liquidation preference of $1,000,000 | 250,000 | ||||||
Series D convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at January 31, 2002; liquidation preference of $500,000 | 250,000 | ||||||
Common stock, $0.01 par value; 20,000,000 shares authorized; 10,881,850 shares issued and outstanding at January 31, 2002 | 108,818 | ||||||
Class B common stock, $0.01 par value; 839,825 shares authorized; 83,983 shares issued and outstanding at January 31, 2002 | 840 | ||||||
Additional paid-in capital | 24,636,055 | ||||||
Prepaid consulting fees | (10,200 | ) | |||||
Notes receivable on common stock | (31,182 | ) | |||||
Accumulated deficit | (24,620,634 | ) | |||||
Total shareholders' equity | 583,697 | ||||||
Total liabilities and shareholders' equity | $ | 3,366,357 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Month Periods Ended January 31, 2002 and 2001
| Three months ended January 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
Net sales | $ | 537,643 | $ | 123,562 | ||||
Cost of sales | 416,688 | 197,089 | ||||||
Gross profit (loss) | 120,955 | (73,527 | ) | |||||
Operating costs and expenses: | ||||||||
Research and development | 89,995 | 98,416 | ||||||
Sales, general and administrative | 282,309 | 563,332 | ||||||
Total operating expenses | 372,304 | 661,748 | ||||||
Loss from operations | (251,349 | ) | (735,275 | ) | ||||
Other income (expense): | ||||||||
Interest income | 432 | 2,266 | ||||||
Interest expense | (56,381 | ) | (4,478 | ) | ||||
Gain on disposition of assets | — | 161,173 | ||||||
Sublease income | 23,500 | — | ||||||
Other income (expense), net | (2,200 | ) | (2,974 | ) | ||||
Other income (expense), net | (34,649 | ) | 155,987 | |||||
Loss before provision for income taxes | (285,998 | ) | (579,288 | ) | ||||
Provision for income tax | (1,600 | ) | (800 | ) | ||||
Net loss | $ | (287,598 | ) | $ | (580,088 | ) | ||
Net loss per share, basic and diluted | $ | (0.03 | ) | $ | (0.06 | ) | ||
Shares used in computing basic and diluted net loss per share | 10,277,716 | 9,377,341 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Month Periods Ended January 31, 2002 and 2001
| Three months ended January 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (287,598 | ) | $ | (580,088 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 52,875 | 40,130 | ||||||
Amortization | 10,000 | 10,000 | ||||||
Issuance of shares for services | 7,650 | — | ||||||
Issuance of options and warrants for services | 27,583 | 135,735 | ||||||
Issuance of warrants to majority shareholder as compensation | — | 115,000 | ||||||
Interest paid with common stock | 20,000 | — | ||||||
Interest on notes receivable for common stock | (432 | ) | (668 | ) | ||||
(Increase) decrease in assets: | ||||||||
Trade accounts receivable | (63,644 | ) | 78,728 | |||||
Prepaid legal and other expenses | 54,799 | 100 | ||||||
Inventories | (11,904 | ) | (28,175 | ) | ||||
Assets held for sale | — | 52,163 | ||||||
Amounts due from escrow | — | (33,448 | ) | |||||
Increase (decrease) in liabilities: | ||||||||
Trade accounts payable | (53,900 | ) | (26,350 | ) | ||||
Customer deposits | (87,860 | ) | 20,252 | |||||
Accrued payroll and other liabilities | 8,608 | 14,347 | ||||||
Net cash used in operating activities | (323,823 | ) | (202,274 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property, plant and equipment | (4,361 | ) | (2,372,446 | ) | ||||
Net cash used in investing activities | (4,361 | ) | (2,372,446 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on notes payable | (6,138 | ) | (2,650 | ) | ||||
Proceeds from the issuance of notes payable | — | 1,375,000 | ||||||
Cash deposit on building purchase received | — | 15,000 | ||||||
Proceeds from issuance of common stock | 400,000 | — | ||||||
Proceeds from issuance of Series D preferred stock | — | 100,000 | ||||||
Proceeds from issuance of note payable to a related party | — | 1,000,000 | ||||||
Net cash provided by financing activities | 393,862 | 2,487,350 | ||||||
Net (decrease) in cash | 65,678 | (87,370 | ) | |||||
Cash at beginning of period | 43,676 | 180,918 | ||||||
Cash at end of period | $ | 109,354 | $ | 93,548 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include all adjustments which management believes are necessary for a fair presentation of the Company's financial position at January 31, 2002 and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.
The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended October 31, 2001, included in our Annual Report on Form 10-KSB.
Certain amounts presented within the 2001 financial statements have been reclassified in order to conform to the 2002 financial statement presentation.
2. Securities Transactions
Private Placement Offering—Common Stock and Warrants
On November 1, 2001, we sold 200,000 shares of Common Stock and warrants to purchase 50,000 shares of common stock to Anthony M. Frank, our largest shareholder, for net proceeds of $100,000. The warrants are exercisable at $0.51 per share and expire on November 1, 2004.
In January 2002, Mr. Frank purchased a total of 714,286 shares of common stock and warrants to purchase 100,000 shares of common stock for net proceeds of $300,000. The warrants are exercisable at $0.42 per share and expire in January 2005.
Common Stock Issued for Debt
On January 2, 2002, we issued 47,619 shares of common stock, with a fair market value of $0.42 per share, in payment of $20,000 in accrued interest on a loan due to Anthony M. Frank.
3. Loss Per Common Share
In accordance with the disclosure requirements of SFAS No. 128,Earnings Per Share, a reconciliation of the numerator and denominator of the basic and diluted loss per share calculation and the computations of net loss per common share for the periods ended January 31, 2002 and 2001 are as follows:
| | Three months ended January 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | ||||||
Net loss available to common shareholders: | |||||||||
Net loss | $ | (287,598 | ) | $ | (580,088 | ) | |||
Net loss available to common shareholders: | $ | (287,598 | ) | $ | (580,088 | ) | |||
Weighted average shares outstanding | 10,277,716 | 9,377,341 | |||||||
Basic and diluted net loss per common share | $ | (0.03 | ) | $ | (0.06 | ) | |||
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The following securities and contingently issuable shares are excluded in the calculation of diluted shares outstanding as their effects would be antidilutive for the periods ended January 31, 2002 and January 31, 2001 as follows:
| | 2002 | 2001 | |||
---|---|---|---|---|---|---|
Stock options and warrants | 6,677,703 | 5,858,827 | ||||
Convertible preferred stock | 500,000 | 500,000 | ||||
Contingently issuable common shares | 516,479 | 516,479 |
4. Business Segments
We have three reportable segments: water purification ("EDI"), ion permeable membranes ("Membrane", formerly "HC/Membrane") and fluid monitoring ("MI", a start up segment). The EDI segment produces water treatment modules for sale to manufacturers of high purity water treatment systems. The Membrane segment produces ion exchange membranes for use with our EDI products as well as membranes for outside customers for use in electrodialysis, electrodeionization, electrodeposition and general electrochemical separations. The MI segment is developing technology that is anticipated to enable real time identification of contamination in fluids.
Reportable segments are strategic business units that offer different products, are managed separately, and require different technology and marketing strategies. The accounting policies of the segments are those described in the summary of significant accounting policies in our audited financial statement included in our annual report on Form 10-KSB. We evaluate performance based on results from operations before income taxes and interest, net, excluding nonrecurring gains and losses.
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| Three months ended January 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||||
Revenues: | ||||||||||
EDI | $ | 483,643 | $ | 124,870 | ||||||
Membrane | 83,940 | 1,896 | ||||||||
MI | — | — | ||||||||
Intersegment | (29,940 | ) | (3,204 | ) | ||||||
Total revenues | $ | 537,643 | $ | 123,562 | ||||||
Operating Income (Loss): | ||||||||||
EDI | $ | 49,166 | $ | (220,575 | ) | |||||
Membrane | (23,698 | ) | (44,344 | ) | ||||||
MI | (88,146 | ) | (94,096 | ) | ||||||
Corporate | (188,671 | ) | (376,260 | ) | ||||||
Total operating loss | $ | (251,349 | ) | $ | (735,275 | ) | ||||
Depreciation and Amortization: | ||||||||||
EDI | $ | 42,397 | $ | 37,499 | ||||||
Membrane | 59 | — | ||||||||
MI | 1,127 | 1,313 | ||||||||
Corporate | 19,292 | 11,319 | ||||||||
Total depreciation and amortization | $ | 62,875 | $ | 50,131 | ||||||
Identifiable Assets: | ||||||||||
EDI | $ | 673,077 | $ | 650,210 | ||||||
Membrane | 30,225 | 8,044 | ||||||||
MI | 12,056 | 22,490 | ||||||||
Corporate | 2,650,999 | 2,760,569 | ||||||||
Total identifiable assets | $ | 3,366,357 | $ | 3,441,313 | ||||||
Expenditures for Long Lived Assets: | ||||||||||
EDI | $ | 4,361 | $ | 9,131 | ||||||
Membrane | — | — | ||||||||
MI | — | 6,161 | ||||||||
Corporate | — | 2,357,154 | ||||||||
Total expenditures for long lived assets | $ | 4,361 | $ | 2,372,446 | ||||||
GEOGRAPHIC INFORMATION: | ||||||||||
Revenues | ||||||||||
United States | $ | 279,841 | $ | 22,433 | ||||||
Japan | 94,575 | 36,000 | ||||||||
Luxembourg | 54,000 | — | ||||||||
Germany | 22,100 | 13,263 | ||||||||
Other foreign countries | 87,127 | 51,866 | ||||||||
Total revenues | $ | 537,643 | $ | 123,562 | ||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Certain of the statements contained herein, other than statements of historical fact, are forward-looking statements. Such forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results we expect. Potential risks and uncertainties that could affect our future operating results include, without limitation, economic, competitive and legislative developments.
Results of Operations
References to fiscal 2001 and fiscal 2002 are for the three months ended January 31, 2001 and 2002, respectively.
Net sales increased in fiscal 2002 by $414,081 as compared to fiscal 2001 which reflects the strong demand for our EDI products and an increased penetration of the expanding ultrapure water market.
Cost of sales consists primarily of purchased materials, labor and overhead (including depreciation) associated with product manufacturing, royalty costs, warranties and sustaining engineering expenses pertaining to products sold. Cost of sales as a percentage of sales decreased to 78% from 160% for the three months ended January 31, 2002 and 2001, respectively. This decrease is predominantly due to increased unit sales volume, which allowed for fixed costs to be allocated over a higher number of EDI products produced. Cost of sales in fiscal 2001 was adversely impacted by expenses related to the underutilization of manufacturing capacity.
Research and development expenses for the three months ended January 31, 2002 decreased by $8,421 compared to fiscal 2001. These expenses primarily arise from the program, which we initiated in December 1997, to develop the micro imaging technology for detecting and identifying contaminants in fluids. The decrease in research and development expense in fiscal 2002 primarily reflects the reduced allocated rent expense since we purchased our current facility in January 2001.
Sales, general and administrative expenses decreased by $281,023 for the three months ended January 31, 2002 as compared to the same period in 2001. This reflects a decrease in financing expense of issuing warrants as compensation and from the costs for services to develop and file for intellectual property protection incurred during fiscal 2001. The decrease also reflects a reduction in consulting expenses compared to the prior year period.
Interest income is generated from short-term investments and decreased by $1,834 for the three months ended January 31, 2002 as compared to the prior year period. These decreases reflect a reduction in working capital available for investment purposes. Interest expense for the three months ended January 31, 2002 increased by $51,903 compared to the prior period primarily due to financing activities relating to the purchase of our building in January 2001.
Components of other income (expense) in fiscal 2002 decreased by $136,899 compared to the prior year period and consisted primarily of the $161,173 net gain on sale of hydro components assets in November 2000. The increase was partially offset by $23,500 in income from the sublease of a portion of the building we purchased in January 2001.
We recorded the minimum state income tax provision in fiscal 2002 and 2001 as we had cumulative net operating losses in all tax jurisdictions.
9
Liquidity and Capital Resources
At January 31, 2002, we had working capital of $136,131 compared to an $82,718 working capital deficit at October 31, 2001. This working capital increase includes a $63,644 increase in receivables, principally due to the sales volume experienced near the end of the fiscal first quarter. Cash from the sale of common stock during the three months ended January 31, 2002 provided $400,000 in net proceeds which was utilized, in part, to increase inventories by $11,904 and reduce accounts payable and other current liabilities by $133,152.
Our principal sources of working capital are cash generated from operations and from the sale of securities by private placement. During the three months ended January 31, 2002, we received $400,000 in proceeds from the issuance of 914,286 shares of common stock and warrants to purchase 150,000 shares of common stock.
Shipments of EDI products are made as promptly as possible after receipt of firm purchase orders in accordance with delivery requirements stipulated by the customer. As of January 31, 2002, we had accepted firm orders for delivery of unshipped EDI modules valued at over $136,000.
Plan of Operation
In the opinion of management, available funds, funds anticipated to be realized on the sale of securities to our major shareholder, and proceeds to be realized from the sale of EDI products currently on order, are expected to satisfy our working capital requirements through March 2002. Our independent auditor has included an explanatory paragraph in its report on the financial statements for the year ended October 31, 2001 which raises substantial doubt about our ability to continue as a going concern.
In May 2000, we appointed an exclusive representative to sell our EDI products to original equipment manufacturers (OEM's) in Belgium, Luxembourg, Germany, Austria, Switzerland, France, Spain, Portugal, Italy, Greece, Hungary, Bulgaria, Romania, Czech Republic, Slovakia, Poland, Denmark, Norway, Sweden, and Finland. The arrangement also provides that this representative may sell EDI products to both end-users and OEM's located in The Netherlands. The appointment provides that our representative receive a commission on all EDI orders in the stated territories. We have entered into similar business arrangements with three companies granting non-exclusive commissionable sales rights in the Northeast United States, Mexico and the People's Republic of China, the latter of which expires in April 2002.
Currently, we are seeking working capital through manufacturing arrangements, strategic partnerships, loans and/or the sale of private placement securities so that we may expand our EDI marketing efforts and further the MIT research program. This approach is intended to optimize the value of our EDI technology and the MIT System as we discuss licensing and/or joint venture arrangements with potential candidates. The implementation of these strategies will be dependent upon our ability to secure sufficient working capital in a timely manner.
We will be required to raise substantial amounts of new financing in the form of additional equity investments, loan financings, or from strategic partnerships, to carry out our business objectives. There can be no assurance that we will be able to obtain additional financing on terms that are acceptable to us and at the time required by us, or at all. Further, any financing may cause dilution of the interests of our current shareholders. If we are unable to obtain additional equity or loan financing, our financial condition and results of operations will be materially adversely affected. Moreover, estimates of our cash requirements to carry out our current business objectives are based upon various assumptions, including assumptions as to our revenues, net income or loss and other factors, and there can be no assurance that these assumptions will prove to be accurate or that unbudgeted costs will not be incurred. Future events, including the problems, delays, expenses
10
and difficulties frequently encountered by similarly situated companies, as well as changes in economic, regulatory or competitive conditions, may lead to cost increases that could have a material adverse effect on us and our plans. If we are not successful in obtaining loans or equity financing for future developments, it is unlikely that we will have sufficient cash to continue to conduct operations, particularly research and development programs, as currently planned. We believe that in order to raise needed capital, we may be required to issue debt at significantly higher interest rates or equity securities at selling prices that are significantly lower than the current market price of our common stock.
No assurances can be given that currently available funds will satisfy our working capital needs for the period estimated, or that we can obtain additional working capital through the sale of common stock or other securities, the issuance of indebtedness or otherwise or on terms acceptable to us. Further, no assurances can be given that any such equity financing will not result in a further substantial dilution to the existing shareholders or will be on terms satisfactory to us.
11
Item 1 omitted as not applicable.
Item 2. Changes in Securities
Common Stock and Warrants Issued in Private Placement Transactions
In November 2001, we sold 200,000 shares of common stock and warrants to purchase 50,000 shares of common stock to our largest shareholder for net proceeds of $100,000. The warrants are exercisable at $0.51 per share and expire in November 2004.
In January 2002, we sold an additional 714,286 shares of common stock and warrants to purchase 100,000 shares of common stock to our largest shareholder for proceeds of $300,000. The warrants are exercisable at $0.42 per share and expire in January 2005.
Common Stock Issued for Debt
On January 2, 2002, we issued 47,619 shares of common stock to our largest shareholder in payment of $20,000 in interest accrued on a $1 million loan we received in January 2001.
All of these securities issuances were in private direct transactions, exempt under Section 4(2) of the Securities Act of 1933 or Regulation D promulgated thereunder.
Items 3 through 5 omitted as not applicable.
Item 6. Exhibits and Reports on Form 8-K
| | | | |||
---|---|---|---|---|---|---|
(a) | Exhibits previously filed on January 29, 2002 in connection with Registrant's Form 10-KSB for the fiscal year ended October 31, 2001. | |||||
10.10.AG | Stock Purchase Agreement with Anthony M. Frank—11/01/01 | |||||
10.10.AH | Debt Conversion Agreement with Anthony M. Frank—01/02/02 | |||||
10.10.AI | Stock Purchase Agreement with Anthony M. Frank—01/02/02 | |||||
10.10.AJ | Stock Purchase Agreement with Anthony M. Frank—01/15/02 | |||||
(b) | Report on Form 8-K. | |||||
None |
12
Pursuant to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 14, 2002
ELECTROPURE, INC. | ||||
By: | /s/ CATHERINE PATTERSON Catherine Patterson (Secretary and Chief Financial Officer with responsibility to sign on behalf of Registrant as a duly authorized officer and principal financial officer) |
13
Electropure, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited) As of January 31, 2002
Condensed Consolidated Balance Sheet (Unaudited) As of January 31, 2002
Condensed Consolidated Statements of Operations (Unaudited) For the Three Month Periods Ended January 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Month Periods Ended January 31, 2002 and 2001
Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
PART I
PART II—OTHER INFORMATION
SIGNATURES