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__________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 0-16416
ended APRIL 30, 1996
HOH WATER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0056212
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
23251 Vista Grande, Suite A, Laguna Hills, California 93653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 770-9187
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 June 28, 1996, 18,960,695 shares of the Registrant's stock were
outstanding.
_________________________________________________________
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HOH WATER TECHNOLOGY CORPORATION
BALANCE SHEETS
October 31, April 30,
Assets 1995 1996
------ ----------- -----------
(Unaudited)
Current assets:
Cash $ 3,743 $ 8,275
Receivables:
Trade accounts 7,278 7,278
Due from related parties 81,198 79,698
Allowance for doubtful receivables (84,480) (84,480)
-------- --------
3,996 2,496
Total Assets $ 7,739 $ 10,771
======== ========
See accompanying notes to financial statements.
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HOH WATER TECHNOLOGY CORPORATION
BALANCE SHEETS
October 31, April 30,
Liabilities and Stockholders' Equity (Deficiency) 1995 1996
------------- ------------
(Unaudited)
Current liabilities:
Notes payable to stockholders $ 14,304 $ 15,020
Accounts payable 158,207 158,207
Accrued liabilities 2,828 1,523
Allowance for loss on lawsuit settlements 23,331 23,331
------------- ------------
Total current liabilities 198,670 198,081
Litigation, claims, commitments and contingencies
Redeemable convertible preferred stock, $.01 assigned par
value. Authorized 2,600,000 shares; issued and outstanding
2,600,000 shares in 1995 and 1996 26,000 26,000
Stockholders' deficit:
Common stock, $.01 assigned par value. Authorized 20,000,000
shares; 17,979,097 shares issued and 17,579,097 shares
outstanding in 1995; 19,360,695 shares issued and 18,960,695
shares outstanding in 1996 175,791 189,606
Class B common stock, $.01 assigned par value. Authorized
839,825 shares; issued and outstanding 839,825 shares in
1995 and 1996 8,398 8,398
Additional paid-in capital 15,485,809 15,634,166
Deficit accumulated in the development stage (15,734,163) (15,892,715)
Notes receivable on common stock (152,766) (152,766)
------------- ------------
(216,931) (213,311)
------------- ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 7,739 $ 10,771
============= ============
See accompanying notes to financial statements.
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HOH WATER TECHNOLOGY COROPRATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
April 30, April 30,
------------------------- -------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
License fees received $ 8,250 $ 5,500 $ 31,500 $ 9,700
---------- ---------- ---------- ----------
Costs and expenses:
General and administrative 16,911 71,673 290 91,249
---------- ---------- ---------- ----------
16,911 71,673 290 91,249
---------- ---------- ---------- ----------
Loss from operations (8,661) (66,173) 31,210 (81,549)
---------- ---------- ---------- ----------
Other income and (expense):
Interest expense (325) (358) (650) (716)
Financing costs - (76,287) (41,070) (76,287)
Patent litigation rights (4,000) - (74,375) -
Miscellaneous income (expense) - - - -
---------- ---------- ---------- ----------
(4,325) (76,645) (116,095) (77,003)
---------- ---------- ---------- ----------
Net loss $ (12,986) $ (142,818) $ (84,885) $ (158,552)
========== ========== ========== ==========
Net income (loss) per share of common stock $ - $ (0.01) $ (0.01) $ (0.01)
========== ========== ========== ==========
Weighted average common shares outstanding 15,772,103 16,332,863 15,772,103 16,332,863
========== ========== ========== ==========
See accompanying notes to financial statements.
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HOH WATER TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Common Stock Class B Common Stock
----------------------------- ------------------------ Deficit
Amount Amount Notes accumulated
Number ---------------- Number --------------- Additional receivable in the
of Per of Per paid-in on common development
shares share Total shares share Total capital stock stage
---------- ----- -------- ------- ------ ------ ----------- ---------- ------------
Balance at October 31, 1995 17,579,097 $ - $175,791 839,825 $ - $8,398 $15,485,809 $(152,766) $(15,734,163)
Issuance of common stock on
exercise of options 5,000 0.05 50 - - - 200 - -
exercise of options 83,130 0.15 831 - - - 11,638 - -
exercise of options 45,832 0.20 458 - - - 8,708 - -
Issuance of common stock for cash 200,000 0.20 2,000 - - - 38,000 - -
Issuance of common stock for
services rendered 200,000 0.12 2,000 - - - 22,000 - -
Issuance of common stock for
conversion of debt 847,636 0.09 8,476 - - - 67,811 - -
Net Loss - - - - - - - - (158,552)
---------- ----- -------- ------- ------ ------ ----------- --------- ------------
Balance at April 30, 1996 18,960,695 $189,607 839,825 $8,398 $8,398 $15,634,166 $(152,766) $(15,892,715)
========== ======== ======= ====== ====== =========== ========= ============
See accompanying notes to financial statements.
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HOH WATER TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
April 30,
---------------------
1995 1996
-------- ---------
Cash flows from operating activities:
Net loss $(71,899) $(158,552)
-------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 306 -
Financing costs related to issuance of warrants 41,070 -
Financing costs related to issuance of common stock - 76,287
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables (3,500) 1,500
Decrease (increase) in other assets 1,500 -
Increase (decrease) in accounts payable and accrued expenses (33,263) (1,305)
Increase in interest payable, net - 716
-------- ---------
Total adjustments 6,113 77,198
-------- ---------
Net cash used in operating activities (65,786) (81,354)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock 68,125 85,886
-------- ---------
Net cash provided by financing activities 68,125 85,886
-------- ---------
Net increase (decrease) in cash 2,339 4,532
Cash (overdraft) at beginning of period 370 3,743
-------- ---------
Cash (overdraft) at end of period $ 2,709 $ 8,275
======== =========
See accompanying notes to financial statements.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
(1) Interim Financial Statements
The accompanying unaudited condensed financial statements include all
adjustments which management believes are necessary for a fair
presentation of the results of operations for the periods presented,
except those which may be required to adjust assets and liabilities to
the net realizable value should the Company not be able to continue
operations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that the accompanying condensed financial statements be read in
conjunction with the Company's audited financial statements and footnotes
as of and for the year ended October 31, 1995.
Liquidity
As of April 30, 1996, the Company had current liabilities in excess of
current assets of $187,310, a deficit accumulated during the development
stage of $15,892,715 and a stockholders' deficit of $213,311. The
Company has never generated a positive cash flow from operations and, as
a result of a severe lack of working capital, in January, 1992 was forced
to suspend operations while it sought additional financing. In May,
1992, HOH entered into a Letter of Intent with Electropure, Inc. (a
California corporation) to grant an exclusive license to manufacture and
market the Company's patented Electropure ("EDI") technology. From May,
1992, since entering into such license relationship, through October 31,
1995, the Company has funded its working capital needs from license fees
paid by Electropure totaling $369,995. During the six months ended April
30, 1996, the Company received an additional $9,700 in license fees and
the Company also received net proceeds of $21,886 from the exercise of
133,962 warrants to purchase common stock at prices ranging from $0.05 to
$0.20 per share. During the period, the Company also received $40,000 in
net proceeds from the sale of 200,000 shares of common stock at $0.20 per
share.
(2) Due from Related Parties
The Company has balances remaining due, including interest, on notes
receivable from related parties. The balance includes net amounts
remaining on a $30,000 loan made to a former shareholder and an $80,000
loan made to a corporation whose significant stockholder was James E.
Cruver, a former officer and director of HOH. The Company received
partial payments representing principal and/or interest on these loans,
however, due to the fact that they are significantly past due and the
uncertainty of when or if they will be collected, interest income was not
being recognized until received and the balances at April 30, 1996 are
offset by an allowance for doubtful accounts.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
A total of $23,763 remains due as of April 30, 1996 from former officers
and directors, Harry M. O'Hare, Sr. and David C. Kravitz. Such amount is
secured by 37,565 shares of the Company's common stock resulting in an
unsecured receivable in the amount of $17,978, which has been offset by
an allowance for doubtful accounts.
As of April 30, 1996, there remained $800 principal due and owing from
the current officer of the Company on a $5,000 loan made during fiscal
1995 at 6% simple interest.
(3) Inventory
Inventory, stated at the lower of cost (determined using the first in,
first out method) or replacement market, consists of components for water
purification systems. As of October 31, 1994, the Company had sold all
of its inventory.
(4) Commitments and Contingencies
All of the Company's assets were fully depreciated and written off during
the fiscal year ended October 31, 1995.
Commitments
In June, 1992, the Company entered into a sub-lease with Electropure,
Inc. for the rental of space at its current location in Laguna Hills,
California. The Company paid $500 per month through July, 1995 pursuant
to such sub-lease agreement, which includes the use of all utilities,
equipment and facilities on the premises. Since August 1, 1995, HOH has
occupied the premises on a rent-free basis pursuant to an amendment to
the license agreements with Electropure. Consequently, the Company had
no sub-lease expense for the fiscal period ended April 30, 1996.
(5) Stockholders' Deficit
Common Stock Activity
Between November 1, 1995 and April 30, 1996, the Company received $21,886
in net proceeds from the exercise of 113,962 warrants to purchase common
stock at prices ranging from $0.05 to $0.20 per share.
In February, 1996, the Company sold 200,000 shares of common stock to two
individuals in a private placement offering at $0.20 per share, resulting
in net proceeds to the Company in the sum of $40,000.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
Pursuant to provisions of the July, 1992 agreements with Electropure,
Inc., the Company issued 847,636 shares of common stock at $0.09 per
share to four individuals to convert a total of $76,287 in loans and
interest accrued thereon, resulting in a $76,287 finance expense for the
period.
Also in February, 1996, the Company issued 200,000 shares of common stock
for services rendered by a company for a business plan. The transaction
resulted in an increase in common stock and additional paid in capital
and a $24,000 general and administrative expense.
Option and Warrant Activity
Between December, 1995 and January, 1996, the Company issued 25,000
one-year warrants to purchase common stock at $0.05 per share. Such
warrants were issued pursuant to the agreements with Electropure, Inc. as
partial consideration for $50,000 in loans made to that company.
On February 23, 1996, the Company and its licensee, Electropure, Inc.
entered into a Convertible Loan agreement with a shareholder in both
entities, whereby Electropure was loaned the sum of $500,000 for a period
of two years at 10% interest. As additional consideration for the loan,
the Company has granted the lender a first security interest in all of
the Company's patents and future patents during the term that the loan
remains outstanding. As further consideration for the loan, the Company
granted the lender 300,000 five-year warrants to purchase Common Stock at
$2.25 per share. No adjustment in the number or exercise price of such
warrants will be made pursuant to the one-for-ten reverse stock split
which the Company's shareholders approved in May, 1996. See Part I -
"Plan of Operation".
(6) Net Loss per Share of Common Stock
Net loss per share of common stock is based on the weighted average
number of shares outstanding during each of the respective periods. No
effect has been given to common stock equivalents as the effect to loss
per share would be anti-dilutive.
(7) Subsequent Events
In May, 1996, the Company solicited and received the consent of
shareholders to amend its Articles of Incorporation to change the name
of the Company to "Electropure, Inc." and to effect a one-for-ten
reverse stock split of the Company's Class A and Class B Common Stock.
The Company anticipates effecting such amendments within the next thirty
(30) days.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
In June, 1996, the Company negotiated an arrangement with its former
lawfirm to pay $25,000 over a four month period, beginning July 1, 1996,
to settle over $125,000 in accounts payable for past services rendered.
The Company's licensee has agreed to make the payments required by this
agreement.
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
References to 1995 and 1996 are for the six months ended April 30, 1995
and 1996, respectively.
License fees received for fiscal 1996 decreased by $22,800 compared to
1995. However, the Company received $40,000 and $21,886 in proceeds
from the sale of common stock and upon the exercise of warrants,
respectively. Consequently, Electropure's obligation to pay all
necessary expenses was decreased significantly for the period.
General and administrative expenses for fiscal 1996 increased by $90,959
as compared to fiscal 1995. The increase is due to an increase in legal
and accounting expenses and for outside services for the 1996 period
combined with the fact that Company wrote off $33,815 in accrued payable
during the 1995 fiscal period.
Financing costs for fiscal 1996 increased by $35,217 as compared to
fiscal 1995, due to the expense of issuing 847,636 common shares to in
exchange for loans made by Electropure investors.
Patent litigation rights for 1995 was $74,375 as compared to no activity
for 1996. This expense resulted from an agreement to pay the Company's
licensee the proceeds from certain warrant exercises and stock purchases
during 1995 in exchange for a portion of such licensee's rights to any
recovery in the patent infringement action being litigated by the
parties.
No additional provision for loss on lawsuit settlement has been made in
fiscal 1996 as the Company believes that adequate provision has been
made to settle pending lawsuits.
Loss before extraordinary item of $158,552 for fiscal 1996 represents an
increase of $73,667 from the prior year level. This is primarily due to
increases in general administrative expense and financing costs related
to the issuance of common stock.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
Liquidity and Capital Resources
At April 30, 1996, the Company had a working capital deficit (total
current assets less total current liabilities) of $187,310, representing
a decrease of $217,946 from the prior year period, primarily as a result
of writing off over $244,000 in accrued liabilities in the fourth
quarter of fiscal 1995. All funds have been exhausted and the Company
is currently reliant upon license fees from Electropure, Inc. for its
working capital requirements. The Company believes, however, that
sufficient working capital is readily available from Electropure, Inc.
to cover the Company's current administrative-only operations for the
next six (6) months. See Part I - "Plan of Operation".
During fiscal 1995, the Company received $72,550 in license fees and
realized net proceeds of $68,125 on the exercise of 1,362,500 warrants
at $0.05 per share. During the six months ended April 30, 1996, the
Company received an additional $9,700 in license fees from Electropure
and had received net proceeds of $40,000 and $21,886 from the sale of
common stock and from the exercise of warrants to purchase common stock,
respectively.
No assurances can be given that the Company will obtain any significant
revenues from sales or that the Company can obtain additional working
capital through the sale of Common Stock, the sale of other securities,
the issuance of indebtedness or otherwise or on terms acceptable to the
Company. Further, no assurances can be given that any such equity
financing will not result in a further dilution to the existing
shareholders.
Plan of Operation
In May, 1995, the Company and its licensee, Electropure, Inc., entered
into a Technology License Agreement with Polymetrics, Inc. Such
agreement is similar to the license agreement entered into with Glegg
Water Conditioning in fiscal 1994, wherein Polymetrics was granted a
non-exclusive worldwide license to use and commercially exploit the
Electropure ("EDI") electrodeionization technology owned by the Company.
The Company is currently negotiating with Electropure to reacquire the
rights licensed to it in May, 1992 in exchange for the issuance of
certain common stock in an amount equal to the original purchase price
of $2,750,000 plus up to $370,000 (including accrued interest) in loans
made to Electropure by various individuals. Such common stock is
planned to be issued in four increments as follows:
1. Shares with an aggregate value of up to $725,000 to be issued at
Market Value on the date upon which the Company has effected the
proposed one-for-ten reverse stock split of its outstanding classes
of Common Stock;
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
2. Shares with an aggregate value of up to $725,000, $700,000 and
$600,000 to be issued at Market Value upon the Common Stock of the
Company first having a per share Market Value for thirty consecutive
trading days equal to or in excess each of $3.75, $5.00 and $7.00
per share, respectively.
Generally, Market Value per share of Common Stock of the Company shall
be the mean of the last reported bid and asked prices reported by the
Electronic Bulletin Board or National Quotation Bureau, Inc. on each
trading day.
The Company will grant a security interest in all of its patents,
current and future, until all of the above shares have been issued.
Such security interest will be subordinate to a security interest
granted to the individual who loaned Electropure $500,000 in February,
1996. See Note (7) - "Subsequent Events".
Once the licensed rights are reacquired, Electropure will turn over all
assets to the Company, including all cash reserves and will dissolve its
operations. The Company intends to hire Electropure's current
management as well as its technical and clerical staff. The Company
believes that, during the period that Electropure has been in existence,
it has established a good reputation in the business community and its
name has become associated with the Company's EDI product. For this
reason, the Company has sought and received approval from shareholders
to change its corporate name to Electropure, Inc. and capitalize on the
good will which Electropure has established in the business community.
During the license relationship with Electropure, Inc. and until the
licensed rights are reacquired, the Company's primary operations have
been and will continue to be solely administrative. Once the Company
has reacquired the licensed rights, it intends to initiate operations
with a view toward implementing a production and marketing program.
However, no assurances can be given that production and sales will begin
in significant quantities since such sales may be dependent on a
successful resolution of the litigaton brought by the Company and its
licensee against Millipore, et al. See Part II, Item 1. - "Other
Information".
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which
adopts significant changes that apply to all taxable companies.
Although the ultimate impact is unknown, it is the opinion of the
Company's management that adoption of this Statement will not have a
material effect on financial results in the year of adoption. The
Company adopted the new Standard for the fiscal year beginning November
1, 1993.
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HOH WATER TECHNOLOGY CORPORATION
Notes to Condensed Financial Statements
April 30, 1996
(Unaudited)
PART II - OTHER INFORMATION
Item 1.
In March, 1996, the Company and its licensee, Electropure, Inc., filed a
lawsuit for declaratory judgment to invalidate and hold unenforceable
two patents held by Massachusetts-based Millipore Corporation relating
to electrodeionization technology. The lawsuit was filed in the United
States Central District Court in Los Angeles and alleges that the two
patents covering Millipore's CDI products were each obtained by fraud on
the U.S. Patent Office in that Millipore "misrepresented material facts
to the U.S. Patent and Trademark Office which, if known, would not have
resulted in their issuance [U.S. Patent No. 4,632,745, issued on
December 30, 1986, and U.S. Patent No. 4,925,541, issued on May 15,
1990
In April, 1996, the Company and its licensee settled the 1993 lawsuit
brought against Millipore and its licensee, Ionpure Technologies, for
infringement of HOH's EDI patent. While, the terms of the license
(issued to Millipore) and settlement are confidential, Millipore and US
Filter/Ionpure agreed to the entry of a consent judgment of patent
validity which has been entered by the U.S. District Court for the
Central District (Los Angeles) of California.
In December, 1993, a default judgment was rendered against the Company
in the sum of $20,270 for unpaid corporate credit card charges the
majority of which accrued from 1989. The lawsuit was brought in the Los
Angeles County Municipal Court. During the fiscal year ended October
31, 1994, the Company paid $250 on this judgment, however, the Company
has made no arrangements to satisfy this obligation as of this writing.
As disclosed in the Company's Form 10-KSB for the fiscal year ended
October 31, 1995, the Company is party to three other lawsuits claiming
a total of $38,889 of past due payments. The status of these matters
has not materially changed from that which was previously reported and
the Company and its counsel expect the Company to prevail in these
lawsuits.
No assurances can be given as to the ultimate outcome of any such
litigation or legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
The shareholders, by written consent, have approved a name change to
"Electropure, Inc." by a vote of 9,982,310 for and 283,707 against, and
a one-for-ten reverse stock split by a vote of 9,983,080 for and
283,707 against.
Items 2, 3 and 5 omitted as not applicable.
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Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27 - Financial Data Schedule.
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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: June 28, 1996
HOH WATER TECHNOLOGY CORPORATION
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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