1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period Commission file number 0-16416
ended JULY 31, 2001
ELECTROPURE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0056212
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(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
23456 South Pointe Drive, Laguna Hills, California 93653
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(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 [ X ] No [ ].
At September 11, 2001, 9,425,341 shares of the Registrant's stock were
outstanding.
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Electropure, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
As of July 31, 2001
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ASSETS
July 31,
2001
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Current assets:
Cash and equivalents $ 82,486
Trade accounts receivable 111,340
Inventories 172,754
Prepaid legal fees 92,500
Other prepaid expenses 21,508
----------
Total current assets 480,588
Property, plant and equipment, net 2,860,412
Acquired technology, net of accumulated amortization 61,945
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TOTAL ASSETS $3,402,945
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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)
AS OF JULY 31, 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY
July 31,
2001
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Current liabilities:
Current portion of obligations under capital leases $ 8,538
Current portion of notes payable to bank 14,781
Trade accounts payable 146,618
Accrued payroll 134,221
Other accrued liabilities 85,024
Customer deposits 60,240
------------
Total current liabilities 449,422
Obligations under capital leases, net of current portion 23,487
Note payable to bank, net of current portion 1,367,027
Note payable to shareholder 1,000,000
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TOTAL LIABILITIES 2,839,936
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Commitments and contingencies --
Redeemable convertible preferred stock, $0.01 par value;
2,600,000 shares authorized, issued and outstanding 26,000
------------
Shareholders' equity:
Series B convertible preferred stock; $1.00 par value;
1,000,000 shares authorized; no shares issued and
outstanding at July 31, 2001 --
Series C convertible preferred stock; $1.00 par value; 250,000
shares authorized, issued and outstanding at July 31,
2001; 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,
2001; liquidation preference of $500,000 250,000
Common stock, $0.01 parvalue; 20,000,000 shares authorized;
9,425,341 shares issued and outstanding at July 31, 2001 94,253
Class B common stock, $0.01 par value; 83,983 shares
authorized, issued and outstanding at July 31, 2001 840
Additional paid-in capital 24,030,434
Accumulated deficit (24,058,107)
Notes receivable on common stock (30,411)
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TOTAL SHAREHOLDERS' EQUITY 537,009
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,402,945
============
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)
FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000
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Three months ended Nine months ended
July 31, July 31,
--------------------------- -------------------------------
2001 2000 2001 2000
--------- --------- ----------- -----------
Net sales $ 470,479 $ 210,605 $ 812,619 $ 653,447
Cost of sales 353,519 214,120 844,402 774,377
--------- --------- ----------- -----------
Gross profit (loss) 116,960 (3,515) (31,783) (120,930)
--------- --------- ----------- -----------
Operating costs and expenses:
Research and development 98,898 129,132 292,714 342,290
Sales, general and administrative 202,872 243,979 969,246 833,348
--------- --------- ----------- -----------
Total operating expenses 301,770 373,111 1,261,960 1,175,638
--------- --------- ----------- -----------
Loss from operations (184,810) (376,626) (1,293,743) (1,296,568)
--------- --------- ----------- -----------
Other income (expense):
Interest income 983 1,966 5,130 11,258
Interest expense (58,474) (3,964) (118,920) (7,536)
Other income (expense), net (2,999) (4,701) (8,975) (9,700)
Gain on disposition of assets (3,108) -- 158,065 --
--------- --------- ----------- -----------
Other income (expense), net (63,598) (6,699) 35,300 (5,978)
--------- --------- ----------- -----------
Loss before provision for income taxes (248,408) (383,325) (1,258,443) (1,302,546)
Provision for income tax -- -- (800) (800)
--------- --------- ----------- -----------
NET LOSS $(248,408) $(383,325) $(1,259,243) $(1,303,346)
========= ========= =========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.03) $ (0.04) $ (0.13) $ (0.15)
========= ========= =========== ===========
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)
FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000
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For the For the
Nine Month Nine Month
Period Ended Period Ended
July 31, 2001 July 31, 2000
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Cash flows from operating activities:
Net loss $(1,259,243) $(1,303,346)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 124,030 101,410
Amortization 30,000 30,000
Gain on disposition of assets (158,065) --
Issuance of options and warrants for services 191,470 150,188
Issuance of warrants to majority shareholder as compensation 115,000 --
Interest on notes receivable for common stock (1,429) --
Write off of accrued interest on notes receivable
for common stock surrendered 918 --
Issuance of shares for services 3,500 --
(Increase) decrease in assets:
Restricted cash 15,000 --
Trade accounts receivable (28,018) 36,453
Prepaid legal and other expenses 99 7,770
Inventories (637) (4,292)
Increase (decrease) in liabilities:
Trade accounts payable 41,246 25,084
Customer deposits 60,240 (143,761)
Accrued payroll and other liabilities 49,877 16,663
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CASH USED IN OPERATING ACTIVITIES (816,012) (1,083,831)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (2,407,301) (70,948)
Proceeds from asset disposition 231,750 --
Purchase of certificate of deposit -- (15,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (2,175,551) (85,948)
----------- -----------
(Continued)
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)
FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000
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(Continued)
For the For the
Nine Month Nine Month
Period Ended Period Ended
July 31, 2001 July 31, 2000
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Cash flows from financing activities:
Principal payments on notes payable (20,804) (14,063)
Proceeds from the issuance of notes payable 1,413,935 15,000
Proceeds from exercise of warrants 1,821
Proceeds from exercise of common stock 1,059,330
Proceeds from issuance of Series D preferred stock 500,000 --
Proceeds from issuance of note payable to a related party 1,000,000 --
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CASH PROVIDED BY FINANCING ACTIVITIES 2,893,131 1,062,088
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NET (DECREASE) IN CASH (98,432) (107,691)
CASH AT BEGINNING OF PERIOD 180,918 204,328
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CASH AT END OF PERIOD $ 82,486 $ 96,637
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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, 2001 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, 2000, included in our Annual Report on Form
10-KSB.
Certain amounts presented within the 2000 financial statements have been
reclassified in order to conform to the 2001 financial statement
presentation.
2. PROPERTIES
On January 31, 2001 we purchased the 30,201 sq. ft. building we currently
occupy for the total purchase price of $2,454,552, including closing costs
and amounts prepaid for the purchase option. We borrowed $1,000,000 from
our majority shareholder at 8% annual interest as a down payment on the
building purchase and financed $1,375,000 through a real estate mortgage
lender at 10.25% annual interest for the balance of the purchase price.
Interest only payments are due on the $1 million loan each quarter
commencing on June 30, 2001, with the principal balance due in full on
January 17, 2004. We are obligated to pay the mortgage lender monthly
mortgage payments of approximately $12,978 through July 2003 at which time
the balance on the mortgage is due in full.
3. SECURITIES TRANSACTIONS
Exchange of Preferred Shares
In January 2001, we exchanged 250,000 shares of Series C preferred stock
for 1,000,000 shares of Series B preferred stock purchased by our majority
shareholder, Anthony M. Frank, in January 1999. Each share of Series C
preferred stock is convertible, at the option of the holder, into four (4)
shares of common stock. The Series C preferred carries no voting rights and
has a preference in liquidation equal to $4.00 per share.
Private Placement Offering - Series D Preferred Stock
On January 17, 2001, we sold 250,000 shares of Series D convertible
preferred stock for $2.00 per share to our majority shareholder. Net
proceeds of $500,000 from the sale were collected through May 2001. The
Series D preferred carries no voting rights and has a liquidation
preference equal to $2.00 per share. Each Series D preferred share is
convertible, at the option of the holder, into two (2) shares of common
stock.
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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Common Shares Issued for Services
On June 1, 2001, we entered into a one year agreement for financing
consulting services and issued 60,000 shares of common stock, valued at
$21,000, in partial consideration for such services. The value of the
shares involved in the transaction will be expensed over the 12-month term
of the agreement.
Notes Receivable for Issuance of Common Stock Surrendered
We cancelled a $6,000 note receivable from an employee for the issuance of
12,000 shares of common stock in July 1998, with an interest rate of 5.51%
per annum. The amount outstanding included accrued interest of $918 through
June 22, 2001, the date on which the shares were surrendered and the note
was cancelled. Accordingly, the note was offset against additional paid-in
capital and the related accrued interest was charged to expense as of July
31, 2001.
Warrants Issued to Non-Employees
On January 11, 2001, the Board of Directors granted 250,000 five-year
warrants to purchase common stock to our majority shareholder, Mr. Anthony
M. Frank, at an exercise price of $0.47 per share. The $115,000 fair value
of such warrants, which were granted in recognition for Mr. Frank's
assistance over the years, was expensed as of the nine months ended July
31, 2001.
The Company granted a total of 250,000 warrants during the nine months
ended July 31, 2001 to purchase common stock to various individuals for
consulting services. The warrants have exercise prices ranging from $0.25
to $0.30 and have contractual lives ranging from 1 to 5 years. The fair
value of the consulting services received was $63,500 for the nine months
ended July 31, 2001 and is being charged to expense over the life of the
consulting arrangements. Consulting expense of $27,400 relating to these
services was recognized for the nine months ended July 31, 2001.
Between August 1997 and October 2000, we issued warrants to purchase the
Company's common stock to various consultants and employees at exercise
prices ranging from $0.28 to $1.00 per share. The value of such warrants is
being expensed over the life of the respective terms of the consulting
arrangements. As of the nine months ended July 31, 2001, we expensed a
total of $164,070 relating to these warrants.
Options Issued to Employees and Consultants
During the nine months ended July 31, 2001, we issued 975,000 options to
purchase common stock at prices ranging from $0.30 to $0.47 per share to
various officers, employees and consultants. The options vest on an annual
pro rata basis over various periods of time and are exercisable, upon
proper notice, in whole or in part at any time upon vesting. Generally,
unvested options terminate when an employee leaves the Company. The options
granted have contractual lives ranging from 5 to 6 years.
The Company continues to account for stock-based compensation to employees
using the intrinsic value method prescribed in APB No. 25 whereby no
compensation cost is recognized for options granted with exercise prices at
or above fair market value.
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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 the computations of net loss per
common share for the periods ended July 31, 2001 and 2000 are as follows:
Three months ended Nine months ended
July 31, July 31,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net loss available to common shareholders:
Net loss $ (248,408) $ (383,325) $(1,259,243) $(1,303,346)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (248,408) $ (383,325) $(1,259,243) $(1,303,346)
=========== =========== =========== ===========
Weighted average shares outstanding 9,429,515 8,713,496 9,394,923 8,409,944
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.04) $ (0.13) $ (0.15)
=========== =========== =========== ===========
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, 2001 and July
31, 2000 as follows:
2001 2000
--------- ---------
Stock options and warrants 6,660,077 5,351,327
Convertible preferred stock 500,000 1,000,000
Contingently issuable common shares 516,479 516,479
5. BUSINESS SEGMENTS
We have four reportable segments: water purification ("EDI"), hydro
components ("HC/membrane"), fluid monitoring (Micro Imaging Technology
["MIT"]) (a start up segment), and real estate holdings ("LLC"). The water
purification segment produces water treatment modules for sale to
manufacturers of high purity water treatment systems. The hydro components
segment sold water and wastewater treatment products to the light
commercial/industrial markets and continues to sell ion exchange membranes
for use in electrodialysis, electrodeionization, electrodeposition and
general electrochemical separations. The fluid monitoring segment is
developing technology that is anticipated will enable real time
identification of contamination in fluids. The sole purpose of the real
estate segment is ownership of the building purchased in January 2001.
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. We evaluate
performance based on results from operations before income taxes and
interest, net, excluding nonrecurring gains and losses.
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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
BUSINESS SEGMENT INFORMATION:
Three months ended Nine months ended
July 31, July 31,
----------------------- ---------------------------
2001 2000 2001 2000
--------- --------- ----------- -----------
Revenue
EDI $ 461,480 $ 138,429 $ 799,949 $ 373,877
HC/Membrane 8,999 72,176 12,670 279,570
MIT -- -- -- --
--------- --------- ----------- -----------
Total Revenue $ 470,479 $ 210,605 $ 812,619 $ 653,447
========= ========= =========== ===========
Operating Loss
EDI $ 56,459 $ (69,240) $ (319,113) $ (281,868)
HC/Membrane (39,467) (46,267) (121,807) (119,020)
MIT (94,141) (112,948) (290,430) (302,546)
LLC 44,630 -- 55,796 --
CORPORATE (152,291) (148,171) (618,189) (593,134)
--------- --------- ----------- -----------
Total operating loss $(184,810) $(376,626) $(1,293,743) $(1,296,568)
========= ========= =========== ===========
Depreciation and Amortization
EDI $ 31,528 $ 81,912 $ 103,175 $ 96,617
HC/Membrane -- 35 77 233
MIT 859 1,095 3,611 3,235
LLC 2,278 -- 22,957 --
CORPORATE 5,498 10,408 24,210 31,325
--------- --------- ----------- -----------
Total depreciation and amortization $ 40,163 $ 93,450 $ 154,030 $ 131,410
========= ========= =========== ===========
Expenditures for Long Lived Assets
EDI $ 26,437 $ 17,527 $ 42,254 $ 58,751
HC/Membrane 373 -- 1,189 --
MIT -- -- 7,161 1,505
LLC -- -- 2,349,552 --
CORPORATE 966 -- 7,145 10,692
--------- --------- ----------- -----------
Total expenditures for long lived assets $ 27,776 $ 17,527 $ 2,407,301 $ 70,948
========= ========= =========== ===========
GEOGRAPHIC INFORMATION:
Revenues
United States $ 238,064 $ 141,901 $ 290,924 $ 360,514
Japan 40 -- 77,280 170,300
China 64,972 -- 110,906 --
Germany 56,526 30,026 106,367 44,676
Hong Kong 2,150 -- 41,672 3,000
Other foreign countries 108,727 38,678 185,470 74,957
--------- --------- ----------- -----------
Total revenues $ 470,479 $ 210,605 $ 812,619 $ 653,447
========= ========= =========== ===========
July 31, October 31,
2001 2000
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Identifiable Assets
EDI $ 181,845 691,570
HC/Membrane 523,507 98,864
MIT 14,148 16,422
LLC 2,431,648 --
ALL OTHERS 251,797 483,879
---------- ----------
Total identifiable assets $3,402,945 $1,290,735
========== ==========
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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. SUBSEQUENT EVENTS
On August 12, 2001, we issued 100,000 warrants to purchase common stock at
$0.30 per share pursuant to a finder's fee arrangement with an individual.
The aggregate fair value of these warrants, which expire on August 12,
2006, is $30,000 and will be expensed in the last quarter of fiscal 2001.
On August 14, 2001, 10,000 options were granted to each of the five
Directors of the Company with a ten-year term at $0.30 per share. Such
options were granted as an annual stipend for services rendered to the
Board.
On August 28, 2001, we sold 333,334 shares of common stock to the majority
shareholder in a private placement transaction for net proceeds of
$100,000.
PART I
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, the
ability to develop and market proposed products and the ability to obtain
needed working capital.
RESULTS OF OPERATIONS
References to fiscal 2000 and fiscal 2001 are for the nine months ended
July 31, 2000 and 2001, respectively.
Net sales increased in fiscal 2001 by $159,172 as compared to fiscal 2000
which included revenues from sales of our hydro components operation that
was discontinued in November 2000. Adjusted to reflect the sale of the
hydro components operation, net sales in fiscal 2001 increased by $438,740
compared to fiscal 2000. For the three months ended July 31, 2001, net
sales increased by $259,874 over the comparable prior year period. These
increases reflects the strong demand for our EDI products and an increased
penetration of the expanding ultrapure water market. These amounts include
net revenues for our ion-exchange membrane products which generally
decreased during fiscal 2001 as compared to fiscal 2000 primarily due to
the cyclical purchasing methods employed by our membrane customers.
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Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 goods as a percentage of sales decreased to 104%
from 119% for the nine months ended July 31, 2001 and 2000, respectively.
The three months ended July 31 showed a more dramatic decrease from 102%
in fiscal 2000 to 75% in 2001. This decrease is predominantly due to
increased unit sales volume, which allowed for fixed costs to be allocated
over a higher number of EDI products produced. Cost of sales in fiscal
2000 and early fiscal 2001 was adversely impacted by expenses related to
the underutilization of manufacturing capacity.
Research and development expenses for the three and nine months periods
ended July 31, 2001 decreased by $30,234 and $49,576, respectively,
compared to fiscal 2000. 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. During
fiscal 2000, we also conducted research and development activities
relating to our ion-exchange membranes, our EDI product, and a power
supply for our EDI product. The decrease in research and development
expense in fiscal 2001 primarily reflects reduced expense related to the
EDI power supply.
Sales, general and administrative expenses increased by $135,898 for the
nine months ended July 31, 2001 as compared to the same period in 2000.
This results primarily from the financing expense of issuing warrants as
compensation and from the costs for services to develop and file for
intellectual property protection. Increases from the prior year were also
due to increased depreciation expense resulting from the purchase in
January 2001 of the building occupied by the Company. During the three
months ended July 31, 2001, sales and general and administrative expenses
decreased by $41,107 compared to the prior year period due mainly from a
reduction in legal, accounting and consulting expenses.
Interest income arose from short-term investments and decreased by $983
and $6,128 for the three and nine months ended July 31, 2001,
respectively, as compared to the prior year periods. These decreases
reflect a reduction in available working capital. Interest expense for the
three and nine months ended July 31, 2001 increased by $54,510 and
$111,384, respectively, compared to the prior period primarily due to
financing activities relating to the purchase of our building in January
2001.
In November 2001, we sold our hydro components assets in a bulk sale
transaction to an unaffiliated third party for $215,000 in cash and
realized a net gain on the sale in the amount of $161,173. In May 2001, we
resold two company vehicles to our president and received $16,750 in
payment. We realized a net loss on the sale in the sum of $3,108.
We recorded the minimum state income tax provision in fiscal 2000 and 2001
as we had cumulative net operating losses in all tax jurisdictions.
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13
Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2001, we had working capital of $31,166. This represents a
working capital decrease of $213,654 compared to that reported at October
31, 2000. The decrease primarily reflects the cost of financing and
depreciating the building we purchased in January 2001, increased accounts
receivable, and accounts payable accrued predominantly for raw materials.
The decrease also reflects the cash used to pay for additional staffing
required for expanded production of our EDI products.
Our primary sources of working capital have been from short-term loans and
from the sale of private placement securities. In January 2001, we borrowed
$1,000,000 from Mr. Anthony Frank, a majority shareholder, at an 8% annual
interest rate which sums were used as a down payment on our building
purchase. We borrowed an additional $1,375,000 from a commercial real
estate lender to finance the balance of the building purchase. During the
nine months ended July 31, 2001, we received $500,000 in cash on the sale
of 250,000 shares of Series D convertible preferred stock to our majority
shareholder.
In November 2000, we realized a gain of $161,173 on the sale of the
majority of our hydro components division assets to an unaffiliated third
party for a total purchase price of $215,000. Sales of our EDI products
during the nine months ended July 31, 2001 amounted to $799,949, which
represents a 114% increase compared to EDI sales in the prior year period.
Additional sales, totaling $12,670 were realized on membrane and hydro
components products during the nine months ended July 31, 2001.
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, 2001, we had accepted firm orders for delivery
of unshipped EDI modules valued at over $450,000.
PLAN OF OPERATION
In the opinion of management, available funds, funds to be realized on the
sale of securities to our majority shareholder, and proceeds to be realized
from the sale of EDI products currently on order, are expected to satisfy
our working capital requirements through December 2001.
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 receives a commission on all EDI orders in the stated
territories. Through August 2001, we have entered into similar business
arrangements with three companies granting non-exclusive commissionable
sales rights in the Northeast United States, the People's Republic of
China, and Mexico.
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14
Electropure, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 financing, 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.
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PART II - OTHER INFORMATION
ITEM 1 OMITTED AS NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES
Stock Options Issued to Employees
On May 9, 2001, the Board of Directors authorized the issuance of 625,000
options to purchase common stock at $0.30 per share to various officers and
employees. The issuances are subject to approval by our shareholders at the
next Annual Meeting of Shareholders to increase the number of outstanding
options available under the 1999 Stock Option Plan. The options granted,
which expire through May 2007, are also subject to achieving a 50% increase
over fiscal 2000 in EDI product sales prior to fiscal year end 2001. This
requirement was met as of the nine months ended July 31, 2001.
Cancellation of Common Stock Surrendered
On June 22, 2001, we cancelled a note receivable in the principal amount of
$6,000 and wrote off $918 in accrued interest in exchange for the surrender
of 12,000 shares of common stock which had been issued pursuant to the
exercise of options by an employee in 1998.
All of these securities issuances were in private direct transactions,
exempt under Section 4(2) of the Securities Act of 1933 or Regulation D
promulgated thereunder.
ITEMS 3 THROUGH 5 OMITTED AS NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Report on Form 8-K.
A report on Form 8-K and Amendment No. One thereto, was filed for
August 6, 2001 to report a change in the Registrant's independent
public accountants.
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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: September 11, 2001
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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