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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 JANUARY 31, 1997
ELECTROPURE, INC.
(FORMERLY, 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 6, 1997, 3,942,290 shares of the Registrant's stock were
outstanding.
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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
BALANCE SHEETS
October 31, January 31,
Assets 1996 1997
------ ----------- -----------
(Unaudited)
Current assets:
Cash $ 674 $ 454
Receivables:
Trade accounts 7,278 7,278
Due from related parties 78,898 78,898
Allowance for doubtful receivables (85,528) (85,764)
-------- --------
648 412
Other current assets 20,000 20,000
Total Current Assets $ 21,322 $ 20,866
-------- --------
Propery and equipment, at cost:
Office equipment 539 539
-------- --------
539 539
Less accumulated depreciation and amortization 49 76
-------- --------
490 463
Total Assets $ 21,812 $ 21,329
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See accompanying notes to financial statements
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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
BALANCE SHEETS
October 31, January 31,
Liabilities and Stockholders' Equity (Deficiency) 1996 1997
------------------------------------------------- ------------ ------------
(Unaudited)
Current liabilities:
Notes payable to stockholders $ 15,734 $ 16,127
Accounts payable 30,744 30,744
Accrued liabilities 218 3,609
Allowance for loss on lawsuit settlements 23,331 23,331
------------ ------------
Total current liabilities 70,027 73,811
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 1996 and 1997 26,000 26,000
Stockholders' deficit:
Common stock, $.01 assigned par value. Authorized 20,000,000
shares; 1,811,306 shares issued and 1,771,306 shares outstanding
in 1996; 2,264,806 shares issued and 2,224,806
shares outstanding in 1997 22,248 22,248
Class B common stock, $.01 assigned par value. Authorized
83,983 shares; issued and outstanding 83,983 shares in
1996 and 1997 840 840
Additional paid-in capital 16,080,709 16,080,709
Deficit accumulated in the development stage (16,025,246) (16,029,512)
Notes receivable on common stock (152,766) (152,766)
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(74,215) (78,482)
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Total Liabilities and Stockholders' Equity (Deficiency) $ 21,812 $ 21,329
============ ============
See accompanying notes to financial statements.
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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
January 31,
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1996 1997
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License fees received $ 4,200 $ 18,800
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Costs and expenses:
General and administrative 19,576 22,674
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19,576 22,674
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Loss from operations (15,376) (3,874)
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Other income and (expense):
Interest expense (358) (393)
Miscellaneous income (expense) -- --
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(358) (393)
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Net income (loss) $ (15,734) $ (4,267)
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Net income (loss) per share of common stock $ -- $ --
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Weighted average common shares outstanding 1,608,077 1,926,868
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See accompanying notes to financial statements.
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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Common Stock Class B Common Stock
--------------------------------------- ------------------------------------
Amount Amount
Number --------------------- Number -------------------
of Per of Per
shares share Total shares share Total
------------ ----- ------------ ------------ ----- ----------
Balance at October 31, 1996 2,224,806 $ -- $ 22,248 83,983 $ -- $ 840
Net Loss -- -- -- -- -- --
------------ ------------ ------------ -------
Balance at January 31, 1997 2,224,806 22,248 83,983 -- 840
Deficit
Notes accumulated Net
Additional receivable in the stockholders'
paid-in on common development equity
capital stock stage (deficiency)
------------ ------------ ------------ ------------
Balance at October 31, 1996 $ 16,080,709 $ (152,766) $(16,025,246) $ (74,216)
Net Loss -- -- (4,267) (4,267)
------------ ------------ ------------ ------------
Balance at January 31, 1997 16,080,709 (152,766) (16,029,512) (78,482)
See accompanying notes to financial statements.
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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
January 31,
-----------------------
1996 1997
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Cash flows from operating activities:
Net loss $(15,734) $ (4,267)
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Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization -- 27
Financing costs related to issuance of warrants -- --
Financing costs related to issuance of common stock -- --
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables 1,324 236
Decrease (increase) in other assets -- --
Increase (decrease) in accounts payable and accrued expenses (2,393) 3,391
Increase in interest payable, net 358 393
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Total adjustments (711) 4,047
-------- --------
Net cash used in operating activities (16,445) (220)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock 21,886 --
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Net cash provided by financing activities 21,886 --
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Net increase (decrease) in cash 5,441 (220)
Cash (overdraft) at beginning of period 3,743 674
-------- --------
Cash (overdraft) at end of period $ 9,184 $ 454
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See accompanying notes to financial statements.
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(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, 1996.
In May, 1996, the Company's shareholders approved amendments to the Articles of
Incorporation which provided for a corporate name change to "Electropure, Inc."
and a one-for-ten reverse stock split of its Class A and Class B common stock.
Such name change and reverse stock split became effective on July 25, 1996 at
which time the Company's trading symbol on the over-the-counter market was
changed to "ELTP".
LIQUIDITY
As of January 31, 1997, the Company had current liabilities in excess of current
assets of $52,945, a deficit accumulated during the development stage of
$16,029,512 and a stockholders' deficit of $78,482. 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, the Company entered into a Letter of
Intent with EDI Components (formerly 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, 1996, the Company
has funded its working capital needs from license fees paid by EDI Components
totaling $451,554. During the three months ended January 31, 1997, the Company
received an additional $18,800 in such license fees.
The one-for-ten reverse stock split effected by the Company on July 25, 1996,
resulted in a reduction in capital stock as of such date in the amount of
$170,646 for Class A common shares and $7,558 for Class B common shares and an
increase of $178,203 in additional paid-in capital.
(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 the Company. 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
January 31, 1997 are offset by an allowance for doubtful accounts.
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A total of $23,763 remains due as of January 31, 1997 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 $23,351, which has been offset by an allowance for doubtful
accounts.
(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
The original cost and accumulated depreciation of assets at January 31, 1997 are
as follows.
Furniture and fixtures $539
Less accumulated depreciation and amortization 76
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$463
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COMMITMENTS
In June, 1992, the Company entered into a sub-lease with EDI Components 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, the Company has occupied the premises on a
rent-free basis pursuant to an amendment to the license agreements with EDI
Components. Consequently, the Company had no sub-lease expense for the fiscal
period ended January 31, 1997.
(5) STOCKHOLDERS' DEFICIT
Between November 1, 1996 and January 31, 1997, none of the Company's securities
were sold or issued, including common stock and warrants to purchase common
stock.
(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, 1997, the Company and its licensee negotiated a settlement of a $3
million default judgment rendered in June, 1996 against the Company and various
current and former officers and directors. The lawsuit was brought in February,
1993 by the Economic Development Bank for Puerto Rico, the
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preferred shareholder in the Company's Puerto Rico subsidiary, alleging fraud
and misconduct which ultimately led to its dissolution and subsequent bankruptcy
in November, 1993. The settlement, which is subject to final ratification by the
Bank's Board of Directors on or about June 11, 1997, provides for the issuance
to the Bank of 100,000 shares of the Company's Common Stock and 100,000
five-year warrants to purchase Common Stock at $1.00 per share. In addition, the
Company and its licensee, EDI Components, will issue a $12,000 promissory note
to the Bank to cover certain costs and attorneys fees. The settlement is
conditioned upon termination of the current license agreement between the
Company and EDI Components and conveyance of all assets back to the Company.
In May, 1997, the Company's Board of Directors authorized the issuance of 20,000
shares of Common Stock and 20,000 ten-year warrants to purchase Common Stock at
$1.00 per share as a bonus to an individual who assisted in negotiating the
above settlement with the Puerto Rico bank.
Also, in May, 1997, the Company and its licensee entered into an agreement
amending the 1994 Technology Licence Agreement with Glegg Water Conditioning.
Under the amended arrangements, Glegg received a paid-up license to the EDI
technology in exchange for payment to EDI Components in the sum of $125,000.
On June 2, 1997, Anthony Frank exercised his option to convert, at approximately
$0.31 per share, the principal and interest accrued on a $500,000 loan made to
EDI Component on February, 1996. The conversion resulted in the issuance of
1,717,484 shares of Common Stock, 319,202 of which were sold by Mr. Frank to
Floyd Panning, President of EDI Components, at his cost of $100,000, or
approximately $0.31 per share. An additional 319,202 of such shares were sold by
Mr. Frank to his son, Randall Frank, under identical terms.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
References to 1996 and 1997 are for the three months ended January 31, 1996 and
1997, respectively.
License fees received for fiscal 1997 increased by $14,600 compared to 1996. The
increase is primarily due to the fact that the Company's source of revenue was
limited in fiscal 1997 to license fees from EDI Components, which is obligated
to pay the Company's necessary operating expenses. In fiscal 1996, the Company
realized income from the exercise of options which reduced EDI Components'
obligation to cover such costs in that year.
General and administrative expenses for fiscal 1997 increased by $3,098 as
compared to fiscal 1996. This is due, primarily, to an increase in legal
expenses for the period with regard to the settlement of the Puerto Rico
judgment.
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Interest expense for fiscal 1997 increased by $35 as compared to fiscal 1996,
due to the annual compounding of interest accruing on notes payable.
No additional provision for loss on lawsuit settlement has been made in fiscal
1997 as the Company believes that adequate provision has been made to settle
pending lawsuits.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company had a working capital deficit (total current
assets less total current liabilities) of $52,945, representing a decrease of
$131,835 from the prior year period, primarily as a result of writing off over
$127,000 in accrued liabilities in the fourth quarter of fiscal 1996. All funds
have been exhausted and the Company is currently reliant upon license fees from
EDI Components for its working capital requirements. The Company believes,
however, that sufficient working capital is readily available from its licensee
to cover the Company's current administrative-only operations for the next
several months. See Part I - "Plan of Operation".
During fiscal 1996, the Company received $81,559 in license fees and realized
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. During the three
months ended January 31, 1997, the Company received an additional $18,800 in
license fees.
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
The Company is currently negotiating with its licensee, EDI Components (formerly
Electropure, Inc.) to terminate the July, 1992 license agreements and the
security interests provided in the Company's patents. The Company expects to
conclude such negotiations by mid-July, 1997, in keeping with the provisions of
a settlement agreement reached in May, 1997 between the parties and the Economic
Development Bank for Puerto Rico (see Item 3 - Legal Proceedings). It is
anticipated that the Company will pay EDI Components up to $2,950,000 to
terminate the license relationship in some combination of cash and equity over a
period of time. It is also anticipated that the Company will hire the management
and staff of EDI Components and that manufacturing and marketing of the EDI
technology will then be conducted by the Company. Because the Company believes
that its licensee has established a good reputation in the business community
and that its name ("Electropure, Inc.") has become positively associated with
the EDI product, during fiscal 1996, the Company sought and received approval
from shareholders to change its corporate name to Electropure, Inc. in order to
capitalize on the good will established by its licensee. As a result, the
Company's licensee has formally changed its corporate name to "EDI Components".
Once the licensed rights are reacquired, Electropure will return all assets
leased to it by the Company, including all cash reserves and will dissolve its
operations. The Company intends to hire Electropure's
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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
received approval from shareholders and, effective July 25, 1996, has changed
its corporate name to Electropure, Inc. in order to capitalize on the good will
which Electropure has established in the business community.
During the license relationship with EDI Components and until the licensed
rights are reacquired, the Company's primary operations have been and will
continue to be administrative. Once the license arrangement with EDI Components
has been terminated, as anticipated above, the Company 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 obtaining additional
working capital through the sale of common stock or other securities.
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.
PART II - OTHER INFORMATION
ITEM 1.
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,
1996, 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.
ITEMS 2 THROUGH 6 OMITTED AS NOT APPLICABLE.
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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 6, 1997
ELECTROPURE, INC.
By /s/ CATHERINE PATTERSON
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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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ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
INDEX TO EXHIBITS
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SEQUENTIALLY
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27 Financial Data Schedule