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 |
| Commission file number 0-16416 |
ELECTROPURE, INC.
(Exact name of registrant as specified in its charter)
California |
| 33-0056212 |
(State or Other Jurisdiction |
| (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, 2003, 11,989,009 shares of the Registrant’s stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
ASSETS
|
| July 31, |
| |
|
|
|
| |
Current assets: |
|
|
| |
Cash |
| $ | 70,076 |
|
Trade accounts receivable |
| 48,269 |
| |
Inventories |
| 200,798 |
| |
Prepaid legal fees |
| 14,063 |
| |
Other prepaid expenses |
| 10,269 |
| |
|
|
|
| |
Total current assets |
| 343,475 |
| |
|
|
|
| |
Property, plant and equipment, net |
| 2,549,352 |
| |
|
|
|
| |
Other assets |
| 48,391 |
| |
|
|
|
| |
Total assets |
| $ | 2,941,218 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| July 31, |
| |
Current liabilities: |
|
|
| |
Current portion of obligations under capital leases |
| $ | 10,748 |
|
Current portion of notes payable to bank |
| 36,520 |
| |
Current portion of notes payable to shareholder |
| 1,600,000 |
| |
Trade accounts payable |
| 290,454 |
| |
Accrued payroll |
| 145,587 |
| |
Other accrued liabilities |
| 114,503 |
| |
Customer deposits |
| 43,023 |
| |
|
|
|
| |
Total current liabilities |
| 2,240,835 |
| |
|
|
|
| |
Obligations under capital leases, net of current portion |
| 3,839 |
| |
Note payable |
| 166,533 |
| |
Note payable to bank, net of current portion |
| 1,854,706 |
| |
|
|
|
| |
Total liabilities |
| 4,265,913 |
| |
|
|
|
| |
Commitments and contingencies |
| — |
| |
|
|
|
| |
Redeemable convertible preferred stock; $0.01 par value; 2,600,000 shares authorized, issued and outstanding at July 31, 2003. |
| 26,000 |
| |
|
|
|
| |
Shareholders’ equity (deficit): |
|
|
| |
Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at July 31, 2003; 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, 2003; liquidation preference of $500,000. |
| 250,000 |
| |
Common stock; $0.01 par value; 20,000,000 shares authorized; 11,989,009 shares issued and outstanding at July 31, 2003. |
| 119,890 |
| |
Class B common stock; $0.01 par value; 839,825 shares authorized: 83,983 shares issued and outstanding at July 31, 2003. |
| 840 |
| |
Additional paid-in capital |
| 25,049,265 |
| |
Notes receivable on common stock |
| (33,159 | ) | |
Accumulated deficit |
| (26,987,531 | ) | |
|
|
|
| |
Total shareholders’ deficit |
| (1,350,695 | ) | |
|
|
|
| |
Total liabilities and shareholders’ deficit |
| $ | 2,941,218 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 494,457 |
| $ | 309,691 |
| $ | 1,101,013 |
| $ | 1,093,868 |
|
Cost of sales |
| 316,520 |
| 295,983 |
| 850,450 |
| 939,360 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 177,937 |
| 13,708 |
| 250,563 |
| 154,508 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
| ||||
Research and development |
| 102,421 |
| 122,511 |
| 297,207 |
| 345,588 |
| ||||
Sales, general and administrative |
| 244,153 |
| 230,225 |
| 800,322 |
| 793,982 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total operating expenses |
| 346,574 |
| 352,736 |
| 1,097,529 |
| 1,139,570 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loss from operations |
| (168,637 | ) | (339,028 | ) | (846,966 | ) | (985,062 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense): |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| 412 |
| 999 |
| 1,183 |
| 1,694 |
| ||||
Interest expense |
| (71,404 | ) | (83,116 | ) | (200,246 | ) | (194,748 | ) | ||||
Sublease income |
| 30,000 |
| 30,000 |
| 90,015 |
| 83,500 |
| ||||
Other income (expense), net |
| (2,976 | ) | (2,992 | ) | (9,835 | ) | (10,592 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
| (43,968 | ) | (55,109 | ) | (118,883 | ) | (120,146 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Loss before provision for income taxes |
| (212,605 | ) | (394,137 | ) | (965,849 | ) | (1,105,208 | ) | ||||
Provision for income tax |
| — |
| — |
| (1,600 | ) | (1,600 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (212,605 | ) | $ | (394,137 | ) | $ | (967,449 | ) | $ | (1,106,808 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Net loss per share, basic and diluted |
| $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.10 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Shares used in computing basic and diluted net loss per share |
| 11,898,792 |
| 11,252,444 |
| 11,699,817 |
| 10,860,411 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Electropure, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| Nine months ended |
| ||||
|
| 2003 |
| 2002 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (967,449 | ) | $ | (1,106,808 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| ||
Depreciation |
| 139,185 |
| 145,748 |
| ||
Amortization |
| 11,945 |
| 30,000 |
| ||
Issuance of shares for services |
| — |
| 22,650 |
| ||
Issuance of options and warrants for services |
| 26,511 |
| 82,733 |
| ||
Interest paid with common stock |
| 60,000 |
| 60,000 |
| ||
Interest on notes receivable for common stock |
| (1,030 | ) | (1,029 | ) | ||
|
|
|
|
|
| ||
(Increase) decrease in assets: |
|
|
|
|
| ||
Trade accounts receivable |
| 52,417 |
| (11,225 | ) | ||
Inventories |
| (45,808 | ) | (17,449 | ) | ||
Prepaid legal and other expenses |
| 39,376 |
| 58,089 |
| ||
Other assets |
| 4,371 |
| (54,582 | ) | ||
Increase (decrease) in liabilities: |
|
|
|
|
| ||
Trade accounts payable |
| 142,771 |
| (153,008 | ) | ||
Accrued payroll and other liabilities |
| (52,817 | ) | 21,160 |
| ||
Customer deposits |
| 8,678 |
| (87,860 | ) | ||
|
|
|
|
|
| ||
Net cash used in operating activities |
| (581,850 | ) | (1,011,581 | ) | ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of property, plant and equipment |
| (7,520 | ) | (16,455 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (7,520 | ) | (16,455 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Principal payments on notes payable |
| (61,607 | ) | (1,361,568 | ) | ||
Proceeds from issuance of notes payable |
| 200,000 |
| 1,920,000 |
| ||
Proceeds from issuance of notes payable to a related party |
| 450,000 |
| 150,000 |
| ||
Proceeds from issuance of common stock |
| 50,000 |
| 550,000 |
| ||
|
|
|
|
|
| ||
Net cash provided by financing activities |
| 638,393 |
| 1,258,432 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash |
| 49,023 |
| 230,396 |
| ||
|
|
|
|
|
| ||
Cash at beginning of period |
| 21,053 |
| 43,676 |
| ||
|
|
|
|
|
| ||
Cash at end of period |
| $ | 70,076 |
| $ | 274,072 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Forward-Looking Statements
This Quarterly Report on Form 10-QSB, including the Notes to the Condensed Consolidated Financial Statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “intends,” “projects,” and similar expressions identify forward-looking statements. Such statements may include, but are not limited to, projections regarding demand for the Company’s products, the impact of the Company’s development and manufacturing process on its research and development costs, future research and development expenditures, and the Company’s ability to obtain new financing as well as assumptions related to the foregoing. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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, 2003 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.
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, 2002, included in our Annual Report on Form 10-KSB.
Certain amounts presented within the 2002 financial statements have been reclassified in order to conform to the 2003 financial statement presentation.
2. Summary of Significant Accounting Policies
New Accounting Pronouncements
In December 2002, the FASB issued Statements of Financial Accounting Standards No.148, “Accounting for Stock-Based compensation – Transition and Disclosure – an amendment of FASB Statement 123” (SFAS 123). For entities that change their accounting for stock-based compensation from the intrinsic method to the fair value method under SFAS 123, the fair value method is to be applied prospectively to those awards granted after the beginning of the period of adoption (the prospective method). The amendment permits two additional transition methods for adoption of the fair value method. In addition to the prospective method, the entity can choose to either (i) restate all periods presented (retroactive restatement method) or (ii) recognize compensation cost from the beginning of the fiscal year of adoption as if the fair value method had been used to account for awards (modified prospective method). For fiscal years beginning after December 15, 2003, the prospective method will no longer be allowed. The Company currently accounts for its stock-based compensation using the intrinsic value method as proscribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and plans on continuing using this method to account for stock options; therefore, it does not currently intend to adopt the transition requirements as specified in SFAS 148 until it is required to do so.
6
3. Notes Payable
Between December 2, 2002 and February 23, 2003, we borrowed $450,000 from Anthony M. Frank, our largest shareholder. The principal amounts borrowed are payable, with interest at 8%, one year from the loan date. Mr. Frank also has the option to convert any or all of the principal and interest into common stock at fair market value as of the conversion date.
In January 2001, Mr. Frank loaned us $1,000,000 through his personal Keogh Plan for three years at 8% annual interest as the down payment to purchase the building we currently occupy. Interest on the loan is payable each calendar quarter beginning on June 30, 2001, with the principal balance due on January 17, 2004. In September 2002, Mr. Frank assigned $400,000 of the principal balance of this loan from his Keogh account to his Pension Plan. The interest rate, maturity date and payment terms remain the same. Mr. Frank has converted a total of $196,444 in interest accrued on this loan through June 30, 2003 into common stock. In April 2003, the Company granted Mr. Frank a security interest in the building, subordinated to the first mortgage lender, to the extent of the principal and interest remaining due on this loan.
During April 2003, we obtained a $200,000 loan with principal and interest at prime plus 2% due on April 23, 2008. We are required to apply certain proceeds from the sale of certain EDI products to reduce the outstanding principal and interest during the term of the loan. Pursuant to such requirement, as of July 31, 2003, we had reduced the principal balance on the loan to $166,533 and had paid $2,533 of the total $3,081 in interest accrued on this loan.
4. Securities Transactions
Private Placement Offering - Common Stock
On November 8, 2002, we sold 227,273 shares of Common Stock to Anthony M. Frank, our largest shareholder, for net proceeds of $50,000, or $0.22 per share.
Common Stock Issued for Debt
In April 2003, we issued 307,692 shares of common stock, with a fair market value of $0.13 per share, in payment of $40,000 in accrued interest on a loan due to Anthony M. Frank.
We issued an additional 100,000 shares of common stock to Mr. Frank on July 22, 2003, with a fair market value of $0.20 per share, in payment of $20,000 in interest accrued on the above loan through June 30, 2003.
Options Issued to Employees
On January 20, 2003, the Company granted options to purchase a total of 500,000 shares of common stock to two employees for services to be rendered. The options are exercisable at $0.29 per share, vest in four equal annual increments of 125,000 commencing on the grant date, and expire in January 2013.
On June 20, 2003, we granted options to purchase 25,000 shares of common stock to a new employee at an exercise price of $0.24 per share. The options vest in equal installments over a five-year period commencing on the date of grant and expire on June 20, 2008.
Warrants Issued to Employees
On July 31, 2003, the Company’s subsidiary, Micro Imaging Technology (MIT), granted a total of 585,000 warrants to purchase its common stock to various employees of the Company and MIT at an exercise price of $0.10 per share. The options are exercisable at the date of grant through July 31, 2008 and exercise is subject to continued engagement by the Company.
7
Warrants Issued to Consultants
In March 2003, we issued warrants to purchase 60,000 shares of common stock to one individual for consulting services. The warrants are exercisable at $0.13 per share and expire in March 2008. A consulting expense of $7,200 relating to these services was recognized for the nine months ended July 31, 2003.
On July 31, 2003, MIT granted five-year warrants to purchase 75,000 shares of its common stock to a consultant for services to be rendered. The warrants are exercisable at $0.10 per share, vest in equal installments and expire on July 31, 2008.
5. Stock Compensation
The Company’s stock option plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company uses the disclosure requirements of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). Under APB No. 25, the Company does not recognize compensation expense on stock options granted to employees, because the exercise price of each option is equal to the market price of the underlying stock on the date of the grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 123, the Company’s net loss and loss per share would have been increased to the following pro forma amounts:
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Net loss, as reported: |
| $ | (212,605 | ) | $ | (394,137 | ) | $ | (967,449 | ) | $ | (1,106,808 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Deduct: Total stock-based employee compensation determined under fair value method for all awards, net of related tax effects |
| (51,920 | ) | (137,933 | ) | (136,190 | ) | (258,203 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Pro forma net loss: |
| $ | (264,525 | ) | $ | (532,070 | ) | $ | (1,103,639 | ) | $ | (1,365,011 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Basic and diluted, as reported |
| $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.10 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted, pro forma |
| $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.13 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
| 11,898,792 |
| 11,252,444 |
| 11,699,817 |
| 10,860,411 |
|
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, 2003 and July 31, 2002 as follows:
|
| 2003 |
| 2002 |
|
Stock options and warrants |
| 4,830,000 |
| 6,387,703 |
|
Convertible preferred stock |
| 500,000 |
| 500,000 |
|
Contingently issuable common shares |
| 516,479 |
| 516,479 |
|
|
| 5,846,479 |
| 7,404,182 |
|
6. 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
8
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.
The Company’s 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. The Company evaluates performance based on results from operations before income taxes not including nonrecurring gains and losses.
Business Segment Information:
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||
EDI/Membrane |
| $ | 494,457 |
| $ | 309,691 |
| $ | 1,101,013 |
| $ | 1,093,868 |
|
MI |
| — |
| — |
| — |
| — |
| ||||
Total revenues |
| $ | 494,457 |
| $ | 309,691 |
| $ | 1,101,013 |
| $ | 1,093,868 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Loss: |
|
|
|
|
|
|
|
|
| ||||
EDI/Membrane |
| $ | 65,048 |
| $ | (87,486 | ) | (109,781 | ) | $ | (150,033 | ) | |
MI |
| (84,721 | ) | (105,531 | ) | (248,107 | ) | (295,912 | ) | ||||
Corporate |
| (148,964 | ) | (146,011 | ) | (489,078 | ) | (539,117 | ) | ||||
Total operating loss |
| $ | (168,637 | ) | $ | (339,028 | ) | $ | (846,966 | ) | $ | (985,062 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
| ||||
EDI/Membrane |
| $ | 29,133 |
| $ | 38,356 |
| $ | 97,988 |
| $ | 118,087 |
|
MI |
| 1,257 |
| 987 |
| 3,730 |
| 3,069 |
| ||||
Corporate |
| 15,921 |
| 17,962 |
| 49,412 |
| 54,592 |
| ||||
Total depreciation and amortization |
| $ | 46,311 |
| $ | 57,305 |
| $ | 151,130 |
| $ | 175,748 |
|
|
|
|
|
|
|
|
|
|
| ||||
Expenditures for Long Lived Assets: |
|
|
|
|
|
|
|
|
| ||||
EDI/Membrane |
| $ | 7,520 |
| $ | 5,114 |
| 7,520 |
| $ | 16,455 |
| |
MI |
| — |
| — |
| — |
| — |
| ||||
Corporate |
| — |
| — |
| — |
| — |
| ||||
Total expenditures for long lived assets |
| $ | 7,520 |
| $ | 5,114 |
| $ | 7,520 |
| $ | 16,455 |
|
|
|
|
|
|
|
|
|
|
| ||||
GEOGRAPHIC INFORMATION: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 271,928 |
| $ | 68,540 |
| $ | 437,613 |
| $ | 455,010 |
|
Asia |
| 90,486 |
| 153,698 |
| 320,495 |
| 330,854 |
| ||||
Europe |
| 132,043 |
| 73,933 |
| 335,705 |
| 239,467 |
| ||||
Other foreign countries |
| — |
| 13,520 |
| 7,200 |
| 68,537 |
| ||||
Total revenues |
| $ | 494,457 |
| $ | 309,691 |
| $ | 1,101,013 |
| $ | 1,093,868 |
|
|
| July 31, |
| October 31, |
| ||
Identifiable Assets: |
|
|
|
|
| ||
EDI/Membrane |
| $ | 440,163 |
| $ | 537,238 |
|
MI |
| 10,668 |
| 14,398 |
| ||
Corporate |
| 2,490,387 |
| 2,534,525 |
| ||
Total identifiable assets |
| $ | 2,941,218 |
| $ | 3,086,161 |
|
9
7. Subsequent Events
On August 4, 2003, the Company reacquired 450,000 shares of the Common Stock of MIT stock from a former consultant who purchased 500,000 shares of the subsidiary for $0.01 each under the terms of a September 2000 consulting agreement. To reacquire the shares, the Company issued 22,500 shares of its Common Stock, with a fair market value of $4,500 or $0.20 per share, and five-year warrants to purchase 100,000 shares of Electropure, Inc. common stock exercisable at $0.20 per share. The Company also extended the expiration date on previously issued warrants to purchase 200,000 shares of Electropure, Inc. common stock at $0.78125 per share for a period of two years to September 11, 2007. The fair market value of this transaction will be recorded as a reduction in minority interest in the MIT subsidiary.
On August 19, 2003, the Board of Directors authorized an offering of up to 1,500,000 shares of the Common Stock of Micro Imaging Technology in conjunction with a private placement offering of 60 Units of the combined securities of Electropure, Inc. and its Nevada subsidiary, MIT. Each Unit consists of 25,000 shares of MIT Common Stock, a four-year warrant to purchase 12,500 shares of MIT Common Stock at $2.00 per share, and a four-year warrant to purchase 12,500 shares of Electropure, Inc. Common Stock at $1.00 per share. The purchase price for each Unit is $25,000 and the offering expires on September 30, 2003.
Our largest shareholder, Anthony M. Frank, purchased 16 Units of the above private placement offering on September 9, 2003 for $200,000 in cash proceeds and the conversion of $200,000 in principal loans he made to the Company between December 18, 2002 and January 9, 2003.
On August 5, 2003, the Company signed an agreement with America China Technology Systems LLC (ACTS) for the development of business opportunities in China for the rapid microbe detection and identification technology created by Electropure’s subsidiary, MIT. ACTS will seek to develop relationships with one or more Chinese companies to market MIT technology-based products in China, most likely involving license payments to MIT for selected hardware and software components.
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 2002 and fiscal 2003 are for the nine months ended July 31, 2002 and 2003, respectively.
Net sales in the nine months ended July 31, 2003 increased by $7,145 from $1,093,868 in fiscal 2002 to $1,101,013. The increase signals a slow revival of the economic environment and in capital spending for water treatment products in many of our target markets. Slow to recover, however, has been the power generation industry which marked deteriorating sales beginning in 2002 from delays and cancellations of new generation plants being constructed. While sales for the first six months of fiscal 2003 lagged, net sales for the three month period ended July
10
31, 2003 increased by $184,766, or 60%, compared to the prior year period, indicating a stronger demand for our EDI products as industry sales appear to be on the rise.
From a geographic perspective, net sales in the United States declined by $17,397, or 3.8%, in fiscal 2003 compared to the prior fiscal period, as did sales in Asia by approximately 3.1%, or $10,359. In contrast, sales in Europe increased in fiscal 2003 by $96,238, or by 40%. The rise in net sales during the three months ended July 31, 2003 reflected a 297% increase in domestic sales and an net decrease of 63% in sales to foreign customers compared to the prior year three month period.
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 decreased to 77% of revenue for fiscal 2003 compared to 86% of revenue for the nine months ended July 31, 2002. This decrease is primarily due to a reduction in inventory-related charges for warranty repairs and replacements of EDI products. The three months ended July 31, 2003 showed a decrease in cost of sales as a percentage of sales at 64% compared to the comparable three months in 2002 at 96%. This decrease is predominantly due to increased unit sales volume during the relevant three months which allowed for fixed costs to be allocated over a higher number of EDI products sold.
Research and development expenses for the three and nine month periods ended July 31, 2003 decreased by $20,090 and $48,381, respectively, compared to the prior year. 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 was primarily due to a reduction in personnel related expenses and a decrease in patent expenses.
Sales, general and administrative expenses increased by $13,928 and $6,340 for the three and nine months ended July 31, 2003 as compared to the same periods in 2002. Overall, these increases represent a rise in legal and insurance costs, as well as marketing expenses and sales commissions paid on an increased number of products sold in the current period. The increase was significantly offset, however, by reductions in the expense related to options and warrants issued to employees and consultants.
Interest income is generated from short-term investments and decreased by $587 and $511 for the three and nine months ended July 31, 2003 over the prior year periods. Interest expense for the three months ended July 31, 2003 decreased by $11,712 compared to the comparable prior period and increased by $5,498 for the nine months ended July 31, 2003 over the prior year. The difference relates to expenses tied to the refinancing of the mortgage on the building we occupy which occurred in June 2002. Interest accrued on a lower principal mortgage through the June 2002 refinancing event accounted for the swing in interest expenses during the three and nine months periods.
Components of other income (expense), other than interest, increased by $16 and $7,272 for the three and nine months ended July 31, 2003 compared to the prior year periods and primarily relates to an increase in sublease income.
We recorded the minimum state income tax provision in fiscal 2002 and 2003 as we had cumulative net operating losses in all tax jurisdictions.
11
Liquidity and Capital Resources
At July 31, 2003, we had working capital deficit of $1,897,360. This represents a working capital decrease of $1,547,107 compared to that reported at October 31, 2002. Including a $142,771 increase in accounts payable, the working capital decrease includes a $451,513 net increase in notes payable and accrued interest of $28,548 as well as the reclassification of a $1,000,000 loan due in January 2004 to a current liability. The working capital decrease in fiscal 2003 was partially offset by a $45,808 increase in inventories and a $44,139 reduction of other current liabilities.
Our primary sources of working capital have been from short-term loans and from the sale of private placement securities. During fiscal 2003, we received $50,000 in net proceeds from the sale of 227,273 shares of common stock to our largest shareholder. We also received $450,000 in short term loans from this shareholder and a $200,000 loan from an unaffiliated third party during the nine months ended July 31, 2003.
Sales of our EDI and membrane products during the nine months ended July 31, 2003 amounted to $1,101,013. 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, 2003, we had accepted firm orders for delivery of unshipped EDI modules valued at $94,874.
Plan of Operation
In the opinion of management, available funds, accounts receivable, and proceeds to be realized from the sale of EDI products currently on order, are expected to satisfy our working capital requirements through September 2003. Our independent auditors have included an explanatory paragraph in their report on the financial statements for the year ended October 31, 2002 which raises substantial doubt about our ability to continue as a going concern.
In January 2004, a $1 million loan from our largest shareholder will become due and payable. Currently, this loan is secured by a second deed of trust on the building which we purchased in January 2001. We anticipate that if we are not in a position to satisfy the loan when it comes due, that we will seek to refinance the note either directly with the noteholder or with a third party which has not yet been identified.
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 and will require the approval of our shareholders if any arrangement involves the sale or encumbrance of our assets .
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
12
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 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.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes in Internal Controls
In addition, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken.
PART II - - OTHER INFORMATION
Item 1. Legal Proceedings
On February 21, 2003, we filed a Complaint in Superior Court for the County of Orange, California, Case No. 03 CC 03606, against Omexell, Inc. of Houston, Texas, for unfair business practices, trade libel and other related causes of action. The lawsuit alleged that the defendants disparaged the Company’s business in an attempt to disrupt its business relationships by using unfair business practices. The lawsuit sought to enjoin the defendant from further unfair business practices and sought $10 million in compensatory and punitive damages.
13
On July 18, 2003, the California Court granted Omexell’s motion to quash service and dismissed the Complaint ruling that it had no jurisdiction over the Texas-based company. Electropure is considering further action if it should become necessary.
Item 2. Changes in Securities
Common Stock and Warrants Issued in Private Placement Transactions
On November 8, 2002, in a private placement offering, our largest shareholder purchased 227,273 shares of common stock for net proceeds of $50,000.
On January 20, 2003, the Company granted options to purchase a total of 500,000 shares of common stock to two employees for services to be rendered. The options are exercisable at $0.29 per share, vest in four equal annual increments of 125,000 commencing on the grant date, and expire in January 2013.
In March 2003, the Company granted warrants to purchase 60,000 shares of common stock to a consultant for services to be rendered. The warrants are exercisable at $0.13 per share and expire in March 2008.
On April 15, and July 22, 2003, we issued 307,692 and 100,000 shares of common stock to our largest shareholder in payment of $40,000 and $20,000 in interest accrued on a loan, respectively.
On June 20, 2003, we granted options to purchase 25,000 shares of common stock to a new employee for services to be rendered. The options are exercisable at $0.24 per share and expire in June 2008.
On July 31, 2003, the Company’s MIT subsidiary issued warrants to purchase a total of 660,000 shares of MIT common stock at $0.10 per share to various employees and one consultant of the Company. The warrants expire on July 31, 2008 and vest in equal annual increments over a five-year period commencing on the date of grant.
Item 3. Defaults Upon Senior Securities
We are currently in default on the payment of a $150,000 loan, at 8% annual interest, made to the Company by the Anthony M. Frank Defined Benefit Pension Plan on May 3, 2002. The principal and interest accrued on the loan, for a total sum of $164,000, was due on July 3, 2003. No provision has been made as of the date of this report to pay this obligation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Items 3 and 5 omitted as not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) |
| Exhibits: | ||
|
|
|
|
|
|
| 10.10.AQ |
| Stock Purchase Agreement with Anthony M. Frank - 11/08/02 * |
|
|
|
|
|
|
| 10.10.AR |
| Debt Conversion Agreement (Keogh) - 04/15/03 ** |
|
|
|
|
|
|
| 10.10.AS |
| Debt Conversion Agreement (Pension) - 04/15/03 ** |
|
|
|
|
|
|
| 10.10.AT |
| Second Deed of Trust and Security Agreement (Keogh) - 05/12/03 ** |
14
|
| 10.10.AU |
| Second Deed of Trust and Security Agreement (Pension) - 05/12/03 ** |
|
|
|
|
|
|
| 10.10.AV |
| 8% Convertible Term Note - 12/02/02 ** |
|
|
|
|
|
|
| 10.10.AW |
| 8% Convertible Term Note - 12/18/02 ** |
|
|
|
|
|
|
| 10.10.AX |
| 8% Convertible Term Note - 01/09/03 ** |
|
|
|
|
|
|
| 10.10.AY |
| 8% Convertible Term Note - 01/23/03 ** |
|
|
|
|
|
|
| 10.10.AZ |
| 8% Convertible Term Note - 02/23/03 ** |
|
|
|
|
|
|
| 10.10.BA |
| Debt Conversion Agreement (Keogh) - 07/22/03 **** |
|
|
|
|
|
|
| 10.10.BB |
| Debt Conversion Agreement (Pension) - 07/22/03 **** |
|
|
|
|
|
|
| 10.10.BC |
| Subscription Agreement, September 9, 2003 ***** |
|
|
|
|
|
|
| 10.10.BD |
| Debt Conversion Agreement (Keogh) - 09/09/03 ***** |
|
|
|
|
|
|
| 10.55 |
| Amended and Restated Loan and Supply Agreement with Ecolochem - 04/24/03 *** |
|
|
|
|
|
|
| 31.1 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
| 31.2 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
| 32.1 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
| 32.2 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
| * |
| Previously filed on November 12, 2002 in connection with Amendment No. 17 to Schedule 13D filed on behalf of Anthony M. Frank. |
|
|
|
|
|
|
| ** |
| Previously filed on May 15, 2003 in connection with Amendment No. 18 to Schedule 13D filed on behalf of Anthony M. Frank. |
|
|
|
|
|
|
| *** |
| Previously filed on June 16, 2003 in connection with Registrant’s Form 10-QSB for the fiscal quarter ended April 30, 2003. |
|
|
|
|
|
|
| **** |
| Previously filed on July 24, 2003 in connection with Amendment No. 19 to Schedule 13D filed on behalf of Anthony M. Frank. |
|
|
|
|
|
|
| **** |
| Previously filed on September 10, 2003 in connection with Amendment No. 20 to Schedule 13D filed on behalf of Anthony M. Frank. |
|
|
|
|
|
(b) |
| Report on Form 8-K. | ||
|
|
| ||
|
| None |
SIGNATURES
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, 2003
| ELECTROPURE, INC. | |
|
| |
| By | /S/ CATHERINE PATTERSON |
|
| Catherine Patterson |
15