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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 endedJuly 31, 2002 | Commission file number 0-16416 |
ELECTROPURE, INC.
(Exact name of registrant as specified in its charter)
California | 33-0056212 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
23456 South Pointe Drive, Laguna Hills, California 92653
(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 September 10, 2002, 11,293,438 shares of the Registrant's common stock were outstanding.
Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
ASSETS
| July 31, 2002 | ||||
---|---|---|---|---|---|
Current assets: | |||||
Cash | $ | 274,072 | |||
Trade accounts receivable | 51,721 | ||||
Inventories | 228,133 | ||||
Prepaid legal fees | 57,813 | ||||
Other prepaid expenses | 30,845 | ||||
Total current assets | 642,584 | ||||
Property, plant and equipment, net | 2,715,872 | ||||
Other assets | 54,581 | ||||
Acquired technology, net of accumulated amortization | 21,945 | ||||
Total assets | $ | 3,434,982 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
| July 31, 2002 | |||||
---|---|---|---|---|---|---|
Current liabilities: | ||||||
Current portion of obligations under capital leases | $ | 10,121 | ||||
Current portion of notes payable to bank | 33,636 | |||||
Current portion of notes payable to shareholder | 150,000 | |||||
Trade accounts payable | 44,106 | |||||
Accrued payroll | 142,573 | |||||
Other accrued liabilities | 79,245 | |||||
Customer deposits | 13,040 | |||||
Total current liabilities | 472,721 | |||||
Obligations under capital leases, net of current portion | 14,588 | |||||
Note payable to bank, net of current portion | 1,897,640 | |||||
Note payable to shareholder | 1,000,000 | |||||
Total liabilities | 3,384,949 | |||||
Commitments and contingencies | — | |||||
Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding at July 31, 2002. | 26,000 | |||||
Shareholders' equity: | ||||||
Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at July 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 July 31, 2002; liquidation preference of $500,000. | 250,000 | |||||
Common stock, $0.01 par value; 20,000,000 shares authorized; 11,293,438 shares issued and outstanding at July 31, 2002 | 112,934 | |||||
Class B common stock, $0.01 par value; 839,825 shares authorized: 83,983 shares issued and outstanding at July 31, 2002 | 840 | |||||
Additional paid-in capital | 24,881,889 | |||||
Notes receivable on common stock | (31,786 | ) | ||||
Accumulated deficit | (25,439,844 | ) | ||||
Total shareholders' equity | 24,033 | |||||
Total liabilities and shareholders' equity | $ | 3,434,982 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| Three months ended July 31, | Nine months ended July 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net sales | $ | 309,691 | $ | 470,479 | $ | 1,093,868 | $ | 812,619 | ||||||
Cost of sales | 299,368 | 329,068 | 950,118 | 797,314 | ||||||||||
Gross profit | 10,323 | 141,411 | 143,750 | 15,305 | ||||||||||
Operating costs and expenses: | ||||||||||||||
Research and development | 107,824 | 94,085 | 301,857 | 281,813 | ||||||||||
Sales, general and administrative | 241,527 | 262,136 | 826,955 | 1,105,235 | ||||||||||
Total operating expenses | 349,351 | 356,221 | 1,128,812 | 1,387,048 | ||||||||||
Loss from operations | (339,028 | ) | (214,810 | ) | (985,062 | ) | (1,371,743 | ) | ||||||
Other income (expense): | ||||||||||||||
Interest income | 999 | 983 | 1,694 | 5,130 | ||||||||||
Interest expense | (83,116 | ) | (58,474 | ) | (194,748 | ) | (118,920 | ) | ||||||
Gain on disposition of assets | — | (3,108 | ) | — | 158,065 | |||||||||
Sublease income | 30,000 | 30,000 | 83,500 | 78,000 | ||||||||||
Other income (expense), net | (2,992 | ) | (2,999 | ) | (10,592 | ) | (8,975 | ) | ||||||
Other income (expense), net | (55,109 | ) | (33,598 | ) | (120,146 | ) | 113,300 | |||||||
Loss before provision for income taxes | (394,137 | ) | (248,408 | ) | (1,105,208 | ) | (1,258,443 | ) | ||||||
Provision for income tax | — | — | (1,600 | ) | (800 | ) | ||||||||
Net loss | $ | (394,137 | ) | $ | (248,408 | ) | $ | (1,106,808 | ) | $ | (1,259,243 | ) | ||
Net loss per share, basic and diluted | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.13 | ) | ||
Shares used in computing basic and diluted net loss per share | 11,252,444 | 9,429,515 | 10,860,411 | 9,394,923 | ||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine months ended July 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,106,808 | ) | $ | (1,259,243 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 145,748 | 124,030 | ||||||
Amortization | 30,000 | 30,000 | ||||||
Gain on disposition of assets | — | (158,065 | ) | |||||
Issuance of shares for services | 22,650 | 3,500 | ||||||
Issuance of options and warrants for services | 82,733 | 191,470 | ||||||
Issuance of warrants to majority shareholder as compensation | — | 115,000 | ||||||
Interest paid with common stock | 60,000 | — | ||||||
Interest on notes receivable for common stock | (1,029 | ) | (1,429 | ) | ||||
Write off of accrued interest on notes receivable for common stock surrendered | — | 918 | ||||||
(Increase) decrease in assets: | ||||||||
Restricted cash | — | 15,000 | ||||||
Trade accounts receivable | (11,225 | ) | (28,018 | ) | ||||
Prepaid legal and other expenses | 58,089 | 99 | ||||||
Inventories | (17,449 | ) | (637 | ) | ||||
Other assets | (54,582 | ) | — | |||||
Increase (decrease) in liabilities: | ||||||||
Trade accounts payable | (153,008 | ) | 41,246 | |||||
Customer deposits | (87,860 | ) | 60,240 | |||||
Accrued payroll and other liabilities | 21,160 | 49,877 | ||||||
Net cash used in operating activities | (1,011,581 | ) | (816,012 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property, plant and equipment | (16,455 | ) | (2,407,301 | ) | ||||
Proceeds from asset disposition | — | 231,750 | ||||||
Net cash used in investing activities | (16,455 | ) | (2,175,551 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on notes payable | (1,361,568 | ) | (20,804 | ) | ||||
Proceeds from the issuance of notes payable | 1,920,000 | 1,413,935 | ||||||
Proceeds from issuance of common stock | 550,000 | — | ||||||
Proceeds from issuance of Series D preferred stock | — | 500,000 | ||||||
Proceeds from issuance of note payable to a related party | 150,000 | 1,000,000 | ||||||
Net cash provided by financing activities | 1,258,432 | 2,893,131 | ||||||
Net increase (decrease) in cash | 230,396 | (98,432 | ) | |||||
Cash at beginning of period | 43,676 | 180,918 | ||||||
Cash at end of period | $ | 274,072 | $ | 82,486 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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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 July 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. Notes Payable
On May 3, 2002, we borrowed $150,000 from Anthony M. Frank, our largest shareholder, and issued a promissory note, payable on July 3, 2002, bearing interest at the rate of 8% per annum. On June 19, 2002, Mr. Frank agreed to extend the due date for payment to July 3, 2003 and was granted the right to convert any or all of the principal and unpaid interest accrued on the note into common stock prior to repayment by the Company. The conversion price will equal the closing bid price of our common stock as of the date of the conversion.
In June 2002, our wholly-owned subsidiary, Electropure Holdings, LLC, received $1,920,000 in net proceeds from refinancing our building through a commercial mortgage lender. The loan is guaranteed by both Electropure, Inc. and by our major shareholder, Anthony M. Frank. Of the proceeds received, $1,444,224 was utilized to satisfy the balance due on the first mortgage loan and for closing costs associated with the new mortgage. The loan terms provide for an adjustable interest rate of no less than 7% and no more than 13.5% per annum, adjustable semi-annually, with an initial interest rate of 7%. The loan, which is collateralized by a deed of trust on the building, is amortized over 25 years and is payable in monthly installments subject to the above semi-annual interest rate adjustment, with the balance due in full on July 1, 2012. The initial monthly mortgage payment on this loan will be $14,135.58.
3. 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.
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On March 15, 2002, Mr. Frank purchased an additional 300,000 shares of common stock and warrants to purchase 50,000 shares of common stock for net proceeds of $150,000. The warrants are exercisable at $0.50 per share and expire in March 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.
On April 3, 2002, we issued an additional 44,445 shares of common stock, with a fair market value of $0.45 per share, in payment of $20,000 in interest accrued on the above loan through March 31, 2002.
An additional 57,143 shares of common stock were issued to Mr. Frank on July 5, 2002 in payment of $20,000 in interest accrued through June 30, 2002 on the above loan. The fair market value of the common stock issued was $0.35 per share.
Common Shares Issued for Services
On April 25, 2002, we issued 10,000 shares of common stock in consideration for services rendered by a real estate broker in relation to refinancing the building we purchased in fiscal 2001. The fair market value of the common stock on the date of this issuance was $0.48 per share.
Warrants Issued to Consultants
In March 2002, we issued warrants to purchase 25,000 shares of common stock to one individual for consulting services. The warrants are exercisable at $0.40 per share and expire in April 2007. The fair value of the consulting services is being charged to expense over the life of the contract. A consulting expense of $1,875 relating to these services was recognized for the nine months ended July 31, 2002.
4. 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
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the computations of net loss per common share for the periods ended July 31, 2002 and 2001 are as follows:
| Three months ended July 31, | Nine months ended July 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net loss available to common shareholders: | ||||||||||||||
Net loss | $ | (394,137 | ) | $ | (248,408 | ) | (1,106,808 | ) | $ | (1,259,243 | ) | |||
Net loss available to common shareholders: | $ | (394,137 | ) | $ | (248,408 | ) | (1,106,808 | ) | $ | (1,259,243 | ) | |||
Weighted average shares outstanding | 11,252,444 | 9,429,515 | 10,860,411 | 9,394,923 | ||||||||||
Basic and diluted net loss per common share | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.13 | ) | ||
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 July 31, 2002 and July 31, 2001 as follows:
| 2002 | 2001 | ||
---|---|---|---|---|
Stock options and warrants | 6,387,703 | 6,660,077 | ||
Convertible preferred stock | 500,000 | 500,000 | ||
Contingently issuable common shares | 516,479 | 516,479 |
5. Business Segments
We have two reportable segments: water purification ("EDI/Membrane"), (formerly reported separately under "EDI" and "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 formerly produced ion exchange 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 July 31, | Nine months ended July 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
Revenues: | |||||||||||||||
EDI/Membrane | $ | 309,691 | $ | 470,479 | $ | 1,093,868 | $ | 812,619 | |||||||
MI | — | — | — | — | |||||||||||
Total revenues | $ | 309,691 | $ | 470,479 | $ | 1,093,868 | $ | 812,619 | |||||||
Operating Income (Loss): | |||||||||||||||
EDI/Membrane | $ | (87,486 | ) | $ | 16,992 | $ | (150,033 | ) | $ | (440,920 | ) | ||||
MI | (105,531 | ) | (94,141 | ) | (295,912 | ) | (290,430 | ) | |||||||
Corporate | (146,011 | ) | (137,661 | ) | (539,117 | ) | (640,393 | ) | |||||||
Total operating loss | $ | (339,028 | ) | $ | (214,810 | ) | $ | (985,062 | ) | $ | (1,371,743 | ) | |||
Depreciation and Amortization: | |||||||||||||||
EDI/Membrane | $ | 38,356 | $ | 31,528 | $ | 118,087 | $ | 103,252 | |||||||
MI | 987 | 859 | 3,069 | 3,611 | |||||||||||
Corporate | 17,962 | 7,776 | 54,592 | 47,167 | |||||||||||
Total depreciation and amortization | $ | 57,305 | $ | 40,163 | $ | 175,748 | $ | 154,030 | |||||||
Expenditures for Long Lived Assets: | |||||||||||||||
EDI/Membrane | $ | 5,114 | $ | 26,810 | $ | 16,455 | $ | 43,443 | |||||||
MI | — | — | — | 7,161 | |||||||||||
Corporate | — | 966 | — | 2,356,697 | |||||||||||
Total expenditures for long lived assets | $ | 5,114 | $ | 27,776 | $ | 16,455 | $ | 2,407,301 | |||||||
GEOGRAPHIC INFORMATION: | |||||||||||||||
Revenues: | |||||||||||||||
United States | $ | 68,540 | $ | 238,064 | $ | 455,010 | $ | 290,924 | |||||||
Japan | 2,600 | 40 | 102,625 | 77,280 | |||||||||||
China | 52,800 | 64,972 | 86,550 | 110,906 | |||||||||||
Germany | 68,034 | 56,526 | 105,806 | 106,367 | |||||||||||
Other foreign countries | 117,717 | 110,877 | 343,877 | 227,142 | |||||||||||
Total revenues | $ | 309,691 | $ | 470,479 | $ | 1,093,868 | $ | 812,619 | |||||||
July 31, 2002 | October 31, 2001 | |||||||
---|---|---|---|---|---|---|---|---|
Identifiable Assets: | ||||||||
EDI/Membrane | $ | 592,890 | $ | 709,589 | ||||
MI | 10,114 | 13,183 | ||||||
Corporate | 2,831,978 | 2,615,941 | ||||||
Total identifiable assets | $ | 3,434,982 | $ | 3,338,713 | ||||
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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 nine months ended July 31, 2001 and 2002, respectively.
Net sales increased in fiscal 2002 by $281,249 as compared to fiscal 2001 which reflects the stronger demand for our EDI products and an increased penetration of the expanding ultrapure water market. For the three months ended July 31, 2002, net sales decreased by $160,788 over the comparable prior year period primarily due, we believe, to quarterly budgeting cycles of the end-user of our products coupled with a general economic downturn.
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 87% from 98% for the nine months ended July 31, 2002 and 2001, respectively. This decrease is predominantly due to increased unit sales volume over the nine months in fiscal 2002, which allowed for fixed costs to be allocated over a higher number of EDI products produced. The three months ended July 31, 2002 showed an increase in costs as a percentage of sales at 97% compared to the comparable three months in 2001 at 70%. The increase over the prior period reflects the Company's decision to avoid downsizing in the face of a what we believe has been a short term lag in sales volume during the current period.
Research and development expenses for the three and nine month periods ended July 31, 2002 increased by $13,739 and $20,044, respectively, 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 increase in research and development expense in fiscal 2002 primarily reflects expenses associated with intellectual property patent filings.
Sales, general and administrative expenses decreased by $278,280 for the nine months ended July 31, 2002 as compared to the same period in 2001. This reflects a decrease in financing expense of issuing options and warrants as compensation and from a reduction in consulting expenses compared to the prior year period. During the three months ended July 31, 2002, sales and general and administrative expenses decreased by $20,609 compared to the prior year period due mainly from a decrease in consulting expenses.
Interest income is generated from short-term investments and increased by $16 for the three months ended July 31, 2002 over the prior year period. For the nine months ended July 31, 2002, interest income decreased by $3,436 compared to fiscal 2001, reflecting a reduction in working capital available for investment purposes. Interest expense for the three and nine months ended July 31, 2002 increased by $24,642 and $75,828, respectively, compared to the comparable prior periods primarily due to financing activities relating to the purchase of our building in January 2001.
Components of other income (expense), other than interest, decreased by $154,182 for the nine months ended July 31, 2002 compared to the prior year period. During fiscal 2001, we realized a net gain of $161,173 on the sale of the assets held in our hydro components division, with no similar
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activity in the current fiscal year, resulting in the decrease reflected. The decrease was partially offset by income from sublease 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.
Liquidity and Capital Resources
At July 31, 2002, we had working capital of $169,863. This represents a working capital increase of $252,581 compared to that reported at October 31, 2001. The increase primarily represents available cash from proceeds received upon refinancing our building in June 2002 with a portion of those proceeds used to pay accounts payable. We also received $150,000 in loan proceeds from our majority shareholder during the current period and cash from the sale of common stock during the nine months ended July 31, 2002 provided $550,000 in net proceeds which was utilized, in part, to reduce other current liabilities.
Our principal sources of working capital are cash generated from operations and from the sale of securities by private placement. During the nine months ended July 31, 2002, we received $550,000 in proceeds from the issuance of 1,214,286 shares of common stock and warrants to purchase 200,000 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 July 31, 2002, we had accepted firm orders for delivery of unshipped EDI modules valued at over $90,000.
Plan of Operation
In the opinion of management, available funds, funds anticipated to be realized on the refinancing of our building, and proceeds to be realized from the sale of EDI products currently on order, are expected to satisfy our working capital requirements through October 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 currently have a similar business arrangement with a second company granting non-exclusive commissionable sales rights in the Northeast United States and we are currently negotiating an arrangement to appoint a sales representative in India.
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
11
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 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.
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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.
On March 15, 2002, we sold 300,000 shares of common stock and warrants to purchase 50,000 shares of common stock to the same major shareholder for proceeds of $150,000. The warrants are exercisable at $0.50 per share and expire in March 2005.
Common Stock Issued for Debt
In January and April 2002, we issued 47,619 and 44,445 shares of common stock, respectively, to our largest shareholder in payment of a total of $40,000 in interest accrued on a $1 million loan we received in January 2001.
In July 2002, we issued an additional 57,143 shares of common stock in payment of $20,000 in accrued interest on the above loan.
Common Stock Issued for Services
On April 25, 2002, we issued 10,000 shares of common stock for services rendered by a real estate broker in connection with the refinancing of our building.
Warrants Issued to Non-Employee
On March 1, 2002, we granted warrants to purchase 25,000 shares of common stock at $0.40 per share to a consultant for services to be rendered. The warrants vest in annual increments over a four-year period commencing on the date of grant and they expire on March 1, 2007.
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.
Issuance of Note with Conversion Feature
On June 19, 2002, we amended the terms of a promissory note issued to our largest shareholder to extend the repayment date on a $150,000 loan to July 5, 2003. We also amended the note to provide the right to convert any unpaid portion of the note, plus interest, into shares of common stock at a fair market value equal to the closing bid price of our common stock as of the conversion date.
Item 4. Submission of Matters to a Vote of Security Holders
Electropure, Inc. participated in a refinancing of real property held by its wholly owned limited liability company, Electropure Holdings, LLC. As part of the June 10, 2002 transaction, Electropure, Inc. guaranteed the loan made to Electropure Holdings, LLC by a commercial mortgage lender. The lender requested that Electropure, Inc.'s shareholders consent to the guaranty. On May 30, 2002, Anthony M. Frank, Floyd Panning, and Harry O'Hare each executed a written consent in their
13
capacity as shareholders of Electropure, Inc. approving the guaranty as requested by the lender. The votes in favor of the guaranty amounted to 7,521,187 votes, or 51.8% of the then outstanding voting power.
Items 3 and 5 omitted as not applicable.
Item 6. Exhibits and Reports on Form 8-K
- (a)
- Exhibits:
10.10.AM | Debt Conversion Agreement with Anthony M. Frank—07/05/02* | |
10.10.AN | Amendment to 8% Sixty-Day Term Note with Anthony M. Frank—06/19/02* |
- *
- Previously filed in connection with Amendment No. 15 to Schedule 13D filed on August 15, 2002 on behalf of Anthony M. Frank.
- (b)
- Report on Form 8-K.
None
14
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: September 10, 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) |
15
I, Floyd H. Panning, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Electropure, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
Date: September 10, 2002
/s/ FLOYD H. PANNING Floyd H. Panning Chief Executive Officer |
I, Catherine Patterson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Electropure, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
Date: September 10, 2002
/s/ CATHERINE PATTERSON Catherine Patterson Chief Financial Officer |
16
Electropure, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited)
Electropure, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited)
Electropure, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Electropure, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
PART I
PART II—OTHER INFORMATION
SIGNATURES
CERTIFICATIONS