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 |
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|
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ELECTROPURE, INC. | ||
(Exact name of registrant as specified in its charter) | ||
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California |
| 33-0056212 |
(State or Other Jurisdiction |
| (IRS Employer Identification No.) |
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23456 South Pointe Drive, Laguna Hills, California 92653 | ||
(Address of principal executive offices) (Zip Code) | ||
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Registrant’s telephone number, including area code: (949) 770-9347 | ||
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Securities registered pursuant to Section 12(b) of the Act: None | ||
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Securities registered pursuant to Section 12(g) of the Act: | ||
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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 8, 2004, 12,189,009 shares of the Registrant’s stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
ASSETS
|
| January 31, |
| |
|
|
|
| |
Current assets: |
|
|
| |
Cash |
| $ | 104,293 |
|
Trade accounts receivable |
| 42,939 |
| |
Inventories |
| 131,173 |
| |
Prepaid expenses |
| 28,555 |
| |
|
|
|
| |
Total current assets |
| 306,960 |
| |
|
|
|
| |
Property, plant and equipment, net |
| 2,464,896 |
| |
|
|
|
| |
Other assets |
| 45,928 |
| |
|
|
|
| |
Total assets |
| $ | 2,817,784 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
| January 31, |
| |
|
|
|
| |
Current liabilities: |
|
|
| |
Current portion of obligations under capital leases |
| $ | 8,557 |
|
Current portion of notes payable |
| 100,000 |
| |
Current portion of notes payable to bank |
| 39,902 |
| |
Current portion of notes payable to shareholder |
| 1,700,000 |
| |
Trade accounts payable |
| 187,699 |
| |
Accrued payroll |
| 144,443 |
| |
Other accrued liabilities |
| 258,621 |
| |
Customer deposits |
| 62,779 |
| |
Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding at January 31, 2004. |
| 26,000 |
| |
|
|
|
| |
Total current liabilities |
| 2,528,001 |
| |
|
|
|
| |
Obligations under capital leases, net of current portion |
| 449 |
| |
Note payable |
| 166,533 |
| |
Note payable to bank, net of current portion |
| 1,837,404 |
| |
|
|
|
| |
Total liabilities |
| 4,532,387 |
| |
|
|
|
| |
Commitments and contingencies |
| — |
| |
|
|
|
| |
Shareholders’ deficit: |
|
|
| |
Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at January 31, 2004; 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, 2004; liquidation preference of $500,000. |
| 250,000 |
| |
Common stock, $0.01 par value; 20,000,000 shares authorized; 12,178,176 shares issued and outstanding at January 31, 2004. |
| 121,782 |
| |
Class B common stock, $0.01 par value; 839,825 shares authorized: 83,983 shares issued and outstanding at January 31, 2004. |
| 840 |
| |
Additional paid-in capital |
| 25,560,997 |
| |
Notes receivable on common stock |
| (33,845 | ) | |
Accumulated deficit |
| (27,864,377 | ) | |
|
|
|
| |
Total shareholders’ deficit |
| (1,714,603 | ) | |
|
|
|
| |
Total liabilities and shareholders’ deficit |
| $ | 2,817,784 |
|
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 |
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|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
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Net sales |
| $ | 171,934 |
| $ | 234,303 |
|
Cost of sales |
| 210,709 |
| 281,941 |
| ||
|
|
|
|
|
| ||
Gross profit |
| (38,775 | ) | (47,638 | ) | ||
|
|
|
|
|
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Operating costs and expenses: |
|
|
|
|
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Research and development |
| 88,857 |
| 97,489 |
| ||
Sales, general and administrative |
| 177,925 |
| 277,079 |
| ||
|
|
|
|
|
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Total operating expenses |
| 266,782 |
| 374,568 |
| ||
|
|
|
|
|
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Loss from operations |
| (305,557 | ) | (422,206 | ) | ||
|
|
|
|
|
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Other income (expense): |
|
|
|
|
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Interest income |
| 420 |
| 358 |
| ||
Interest expense |
| (71,090 | ) | (60,979 | ) | ||
Sublease income |
| 30,000 |
| 30,000 |
| ||
Other income (expense), net |
| 7,775 |
| (3,871 | ) | ||
|
|
|
|
|
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Other income (expense), net |
| (32,895 | ) | (34,492 | ) | ||
|
|
|
|
|
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Loss before provision for income taxes |
| (338,452 | ) | (456,698 | ) | ||
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|
|
|
|
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Provision for income tax |
| (1,600 | ) | (1,600 | ) | ||
|
|
|
|
|
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Net loss |
| $ | (340,052 | ) | $ | (458,298 | ) |
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|
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|
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Net loss per share, basic and diluted |
| $ | (0.03 | ) | $ | (0.04 | ) |
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|
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|
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Shares used in computing basic and diluted net loss per share |
| 12,088,066 |
| 11,563,834 |
|
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)
|
| Three months ended |
| ||||
|
| 2004 |
| 2003 |
| ||
Cash flows from operating activities: |
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|
|
|
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Net loss |
| $ | (340,052 | ) | $ | (458,298 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
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Depreciation |
| 44,047 |
| 47,505 |
| ||
Amortization |
| — |
| 10,000 |
| ||
Interest expense relating to amortization of holdback |
| 2,000 |
| — |
| ||
Inerest expense relating to debt issuance costs |
| 1,376 |
| — |
| ||
Interest paid with common stock |
| 20,000 |
| — |
| ||
Interest on notes receivable for common stock |
| (343 | ) | (344 | ) | ||
|
|
|
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|
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(Increase) decrease in assets: |
|
|
|
|
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Trade accounts receivable |
| (39,731 | ) | 52,646 |
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Prepaid expenses |
| (10,768 | ) | 14,149 |
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Inventories |
| 29,753 |
| (26,267 | ) | ||
Other assets |
| — |
| 1,665 |
| ||
Increase (decrease) in liabilities: |
|
|
|
|
| ||
Trade accounts payable |
| (77,400 | ) | 21,762 |
| ||
Customer deposits |
| 51,879 |
| (12,850 | ) | ||
Accrued payroll and other liabilities |
| 12,504 |
| 26,768 |
| ||
|
|
|
|
|
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Net cash used in operating activities |
| (306,735 | ) | (323,264 | ) | ||
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|
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Cash flows from financing activities: |
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|
|
|
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Principal payments on notes payable |
| (10,350 | ) | (8,796 | ) | ||
Proceeds from issuance of notes payable |
| 100,000 |
| — |
| ||
Principal payments on capital lease obligations |
| (2,837 | ) | — |
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Proceeds from issuance of notes payable to a related party |
| 300,000 |
| 350,000 |
| ||
Proceeds from issuance of common stock |
| — |
| 50,000 |
| ||
|
|
|
|
|
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Net cash provided by financing activities |
| 386,813 |
| 391,204 |
| ||
|
|
|
|
|
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Net increase in cash |
| 80,078 |
| 67,940 |
| ||
|
|
|
|
|
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Cash at beginning of period |
| 24,215 |
| 21,053 |
| ||
|
|
|
|
|
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Cash at end of period |
| $ | 104,293 |
| $ | 88,993 |
|
Supplemental Disclosure of Cash Flow Information
Interest paid |
| $ | 35,589 |
| $ | 17,287 |
|
Income taxes paid |
| $ | 1,600 |
| $ | 1,600 |
|
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 January 31, 2004 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, 2003, included in our Annual Report on Form 10-KSB.
Certain amounts presented within the 2003 financial statements have been reclassified in order to conform to the 2004 financial statement presentation.
2. Summary of Significant Accounting Policies
New Accounting Pronouncements
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for the Company at the beginning of the first interim period beginning after June 15, 2003. We reclassified the redeemable convertible preferred stock to current liabilities as a result of adopting SFAS No. 150.
3. Notes Payable
Between November 4, 2003 and December 19, 2003, we borrowed $300,000 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.
6
On January 22, 2004, we borrowed $100,000 from an unaffiliated lender at an annual interest rate of 15%. The loan was due to be repaid in full by March 1, 2004 although the lender has verbally agreed to an extension on repayment until we conclude a refinancing loan that is currently in process on our building. The terms of this loan provide the lender, Second Source Solutions, the option executing a security interest on our Laguna Hills building at any time until the loan is satisfied.
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 $236,444 in interest accrued on this loan through December 31, 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 January 31, 2004, we had reduced the principal balance on the loan to $166,533 and had paid $2,498 of the total $8,081 in interest accrued on this loan.
4. Securities Transactions
Common Stock Issued for Debt
In January 2004, we issued 100,000 shares of common stock, with a fair market value of $0.20 per share, in payment of $20,000 in accrued interest on a loan due to Anthony M. Frank.
5. Stock Based Compensation
Statement of Financial Accounting Standards No 123, “Accounting for Stock-Based Compensation” (SFAS 123) encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock based compensation using the intrinsic value method prescribed in Accounting Principals Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. Under APB 25 and the intrinsic value method, as the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant or, in the case of the Company’s employee stock purchase plans since the plans are non-compensatory, no compensation expense is recognized.
The following table illustrates the effect on the Company’s net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS 123 to its stock based employee compensation awards, and recognized expense over the applicable award vesting period:
7
|
| Three months ended |
| ||||
|
| 2004 |
| 2003 |
| ||
Net loss, as reported: |
| $ | (340,052 | ) | $ | (458,298 | ) |
Add: Stock-based employee compensation included in reported net loss |
| — |
| — |
| ||
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| — |
| (203,590 | ) | ||
Pro forma net loss: |
| $ | (340,052 | ) | $ | (661,888 | ) |
|
|
|
|
|
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Earnings per share: |
|
|
|
|
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Basic and diluted, as reported |
| $ | (0.03 | ) | $ | (0.04 | ) |
|
|
|
|
|
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Basic and diluted, pro forma |
| $ | (0.03 | ) | $ | (0.06 | ) |
|
|
|
|
|
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Weighted average shares outstanding |
| 12,088,066 |
| 11,563,834 |
|
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, 2004 and January 31, 2003 as follows:
|
| 2004 |
| 2003 |
|
Stock options and warrants |
| 5,580,000 |
| 6,216,603 |
|
Convertible preferred stock |
| 500,000 |
| 500,000 |
|
Contingently issuable common shares |
| 516,479 |
| 516,479 |
|
|
| 6,596,479 |
| 7,233,082 |
|
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 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.
8
Business Segment Information:
|
| Three months ended |
| ||||
|
| 2004 |
| 2003 |
| ||
Revenue: |
|
|
|
|
| ||
EDI/Membrane |
| $ | 171,934 |
| $ | 234,303 |
|
MI |
| — |
| — |
| ||
Total revenues |
| $ | 171,934 |
| $ | 234,303 |
|
Operating Loss: |
|
|
|
|
| ||
EDI/Membrane |
| $ | (132,575 | ) | $ | (166,001 | ) |
MI |
| (74,506 | ) | (81,999 | ) | ||
Corporate |
| (98,476 | ) | (174,206 | ) | ||
Total operating loss |
| $ | (305,557 | ) | $ | (422,206 | ) |
Depreciation and Amortization: |
|
|
|
|
| ||
EDI/Membrane |
| $ | 29,433 |
| $ | 38,895 |
|
MI |
| 1,292 |
| 1,257 |
| ||
Corporate |
| 13,322 |
| 17,353 |
| ||
Total depreciation and amortization |
| $ | 44,047 |
| $ | 57,505 |
|
|
|
|
|
|
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GEOGRAPHIC INFORMATION: |
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|
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Revenues: |
|
|
|
|
| ||
United States |
| $ | 8,914 |
| $ | 49,177 |
|
Asia |
| 109,793 |
| 95,653 |
| ||
Europe |
| 50,022 |
| 89,473 |
| ||
Other foreign countries |
| 3,205 |
| — |
| ||
Total revenues |
| $ | 171,934 |
| $ | 234,303 |
|
Identifiable Assets: |
|
|
|
|
| ||
EDI/Membrane |
| 309,288 |
| $ | 471,961 |
| |
MI |
| 9,906 |
| 13,141 |
| ||
Corporate |
| 2,498,590 |
| 2,569,301 |
| ||
Total identifiable assets |
| $ | 2,817,784 |
| $ | 3,054,403 |
|
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.
9
Results of Operations
References to fiscal 2003 and fiscal 2004 are for the three months ended January 31, 2003 and 2004, respectively.
Net sales in the three months ended January 31, 2004 decreased by $62,369 from $234,303 in fiscal 2003 to $171,934. The decrease is primarily due to continued weak economic conditions, both domestically and internationally, that has resulted in delaying or limiting capital spending for water treatment products in many of our target markets. While sales for the first three months of fiscal 2004 lagged, net sales for the twelve months ended October 31, 2003 did show a moderate increase over the prior fiscal year. Our marketing efforts seek to heighten demand for our EDI products and increase penetration of an expanding ultrapure water market. However, we believe that the overall downturn in the power generation industry since 2001 has been a limiting factor in our sales growth and we anticipate that sales will increase as the power generation industry rebounds.
From a geographic perspective, net sales in the United States declined by $40,263, or 81.9%, in fiscal 2004 compared to the prior fiscal period, as did sales in Europe by approximately 44.1%, or $39,451. In contrast, sales in Asia and other foreign countries increased in fiscal 2004 by $17,345, or by 18.1%.
Cost of sales consists primarily of purchased materials, labor and overhead (including depreciation) associated with product manufacturing, warranties and sustaining engineering expenses pertaining to products sold. Cost of sales increased to 123% of revenue for fiscal 2004 compared to 120% of revenue for the three months ended January 31, 2003. This increase is predominantly due to the higher sales volume during fiscal 2003 which allowed for fixed costs to be allocated over a higher number of EDI products sold.
Research and development expenses for the three month period ended January 31, 2004 decreased by $8,632 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 consulting expenses and a decrease in patent expenses.
Sales, general and administrative expenses decreased by $99,154 for the three months ended January 31, 2004 as compared to the same period in 2003. The decrease represents an overall reduction in operating expenses, with significant reductions in legal and accounting expenses.
Interest income is generated from short-term investments and increased by $62 for the three months ended January 31, 2004 over the prior year period. Interest expense for the three months ended January 31, 2004 increased by $10,111 compared to the comparable prior period. The difference relates to borrowings made by the Company during fiscal 2003 and the first quarter of 2004.
Components of other expense, other than interest, decreased by $11,646 for the three months ended January 31, 2004 compared to the prior year period. The difference primarily relates to a $7,686 gain realized on writing off old debt and the termination in September 2003 of monthly payments made to the Company’s founder under the terms of an agreement which expired.
We recorded the minimum state income tax provision in fiscal 2003 and 2004 as we had cumulative net operating losses in all tax jurisdictions.
10
Liquidity and Capital Resources
At January 31, 2004, we had working capital deficit of $2,221,041. This represents a working capital decrease of $287,608 compared to that reported at October 31, 2003. The primary component of the decrease is a $400,000 increase in current notes payable, offset by a reduction in accounts payable and an increase in accounts receivables.
Aggregate maturities required on capital leases and on notes payable at January 31, 2004 are due in future years as follows:
|
| Payment Due by Fiscal Year |
| |||||||||||||||||||
|
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| Thereafter |
| Total |
| |||||||
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Capital lease obligations |
| $ | 8,557 |
| $ | 449 |
| — |
| — |
| — |
| — |
| $ | 9,006 |
| ||||
Notes payable (1) |
| 100,000 |
| — |
| — |
| — |
| 166,533 |
| — |
| 266,533 |
| |||||||
Notes payable to bank |
| 39,902 |
| 42,787 |
| 45,880 |
| 49,197 |
| 52,753 |
| 1,646,787 |
| 1,877,306 |
| |||||||
Notes payable to shareholder (1) |
| 1,700,000 |
| — |
| — |
| — |
| — |
| — |
| 1,700,000 |
| |||||||
Total contractual obligations: |
| $ | 1,848,459 |
| $ | 43,236 |
| $ | 45,880 |
| $ | 49,197 |
| $ | 219,286 |
| $ | 1,646,787 |
| $ | 3,852,845 |
|
(1) See Part II, Item 3 – “Defaults upon Senior Securities”.
Our primary source of working capital has been from short-term loans. Between November 2003 and December 2003, we borrowed a total of $300,000 from Mr. Anthony Frank, a major shareholder, at an 8% annual interest rate. On January 20, 2004, the Company borrowed $100,000 from an unaffiliated lender at an annual interest rate of 15%.
Sales of our EDI and membrane products during the three months ended January 31, 2004 amounted to $171,934. 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, 2004, 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, funds anticipated to be realized on the sale of securities to or short term loans from our major shareholder, 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 August 2004. Our independent auditors have included an explanatory paragraph in their report on the financial statements for the year ended October 31, 2003 which raises substantial doubt about our ability to continue as a going concern.
We are in the process of refinancing the mortgage on our Laguna Hills facility with a commercial mortgage lender in order to utilize a portion of the equity in the building as working capital. In addition, we are negotiating with a second lender for up to $400,000 in loan proceeds to be secured by a second deed of trust on our building. No assurances can be given that either such financings will be concluded on terms acceptable to the Company or at all.
11
Management believes that a large capital infusion is required to expand marketing and sales of EDI products in order to realize revenues sufficient to sustain the Company’s operations. To this end, 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/or 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. In the alternative, the Company may be required to consider the sale of its EDI or MIT subsidiaries in order to realize the working capital required to continue operations in the remaining subsidiary. 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 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) and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report (the “Evaluation Date”). Based on their evaluation, our
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principal executive officer and our principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.
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 omitted as not applicable.
Item 2. Changes in Securities
On January 22, 2004, we issued 100,000 shares of common stock to our largest shareholder in payment of $20,000 in interest accrued on a $1 million loan.
Item 3. Defaults Upon Senior Securities
The Company is in default of its obligations to pay a total of $1,250,000 in principal loans made by the majority shareholder which have come due through February 23, 2004. We are currently negotiating and anticipate that the majority shareholder will agree to a one-year extension on these loans.
We are also in default of the March 1, 2004 due date for the $100,000 loan received from Second Source Solutions on January 20, 2004. The lender has verbally agreed to a short extension for repayment and we anticipate repaying the loan by no later than March 31, 2004. However, the lender has the right to secure the loan with a deed of trust on our building at any time until the debt is satisfied.
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.BH |
| 8% Convertible Term Note – 11/04/03 (1) |
|
|
|
10.10.BI |
| 8% Convertible Term Note – 11/21/03 – Face Sheet Only (1) |
|
|
|
10.10.BJ |
| 8% Convertible Term Note – 12/19/03 – Face Sheet Only (1) |
|
|
|
10.10.BK |
| Debt Conversion Agreement (Keogh) – 01/22/04 (1) |
|
|
|
10.10.BL |
| Debt Conversion Agreement (Pension) – 01/22/04 – Face Sheet Only (1) |
|
|
|
10.54 |
| Promissory Note Secured by Trust Deed (2) |
|
|
|
31.1 |
| Certification of Chief Executive Officer |
|
|
|
31.2 |
| Certification of Chief Financial Officer |
|
|
|
32 |
| 906 Certification of Principal Executive Officers |
(1) Previously filed on January 26, 2004 in connection with Amendment No. 21 to Schedule 13D filed on behalf of Anthony M. Frank.
(2) Previously filed on March 1, 2004 in connection with Registrant’s Form 10-KSB for the fiscal year ended October 31, 2003.
(b) Report on Form 8-K.
None
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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: March 8, 2004
| 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) |
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