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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
--------------------------
For the quarterly period Commission file number 0-16416
ended JANUARY 31, 2001
ELECTROPURE, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0056212
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
23456 South Pointe Drive, Laguna Hills, California 93653
(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 March 12, 2001, 9,377,341 shares of the Registrant's stock were
outstanding.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(UNAUDITED)
As of January 31, 2001
- --------------------------------------------------------------------------------
ASSETS
January 31, October 31,
2001 2000
---------- ----------
(UNAUDITED)
Current assets:
Cash and equivalents $ 78,548 $ 180,918
Escrow deposit 15,000 15,000
Trade accounts receivable 4,594 83,322
Inventories 200,960 172,785
Prepaid legal fees 92,500 92,500
Other prepaid expenses 4,007 4,107
Assets held for sale -- 52,163
Amounts due from escrow 33,448 --
---------- ----------
Total current assets 429,057 600,795
Property, plant and equipment, net 2,930,311 492,995
Acquired technology, net of accumulated amortization 81,945 91,945
Building purchase option -- 105,000
---------- ----------
TOTAL ASSETS $3,441,313 $1,290,735
========== ==========
The accompanying notes are an integral part of the financial statements.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(UNAUDITED)
As of January 31, 2001
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
January 31, October 31,
2001 2000
------------ ------------
(UNAUDITED)
Current liabilities:
Trade accounts payable $ 79,022 $ 105,372
Current portion of obligations under capital leases 4,991 2,602
Current portion of notes payable to bank 165,390 11,471
Current portion of note payable to shareholder 76,444 --
Customer deposit 20,252 --
Accrued payroll 135,232 142,680
Other accrued liabilities 30,162 26,688
------------ ------------
Total current liabilities 511,493 288,813
Obligations under capital leases, net of current portion 17,832 6,629
Note payable to bank, net of current portion 1,220,049 --
Note payable to shareholders, net of current portion 926,667 --
------------ ------------
TOTAL LIABILITIES 2,676,041 295,442
------------ ------------
Commitments and contingencies -- --
Redeemable convertible preferred stock, $0.01 par value;
2,600,000 shares authorized, issued and outstanding 26,000 26,000
------------ ------------
Stockholders' equity:
Series B convertible preferred stock; $1.00 par value; 1,000,000 shares
authorized; no shares and 1,000,000 shares issued and outstanding
at January 31, 2001 and October 31, 2000 -- 1,000,000
Series C convertible preferred stock; $1.00 par
value; 250,000 shares authorized; 250,000 and no
shares issued and outstanding at January 31, 2001
and October 31, 2000 250,000 --
Series D convertible preferred stock; $1.00 par
value; 250,000 shares authorized; 250,000 and no
shares issued and outstanding at January 31, 2001
and October 31, 2000 250,000 --
Common stock, $0.01 par value; 20,000,000
shares authorized; 9,377,341 shares issued and
outstanding at January 31, 2001 and October 31, 2000 93,773 93,773
Class B common stock, $0.01 par value; 83,983
shares authorized, issued and outstanding at
January 31, 2001 and October 31, 2000 840 840
Additional paid-in capital 23,960,179 22,709,444
Accumulated deficit (23,378,952) (22,798,864)
Notes receivable on common stock (436,568) (35,900)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 739,272 969,293
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,441,313 $ 1,290,735
============ ============
The accompanying notes are an integral part of the financial statements.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(UNAUDITED)
FOR EACH OF THE THREE MONTH PERIODS ENDED JANUARY 31, 2001 AND 2000
- --------------------------------------------------------------------------------
Three months ended
January 31,
-------------------------
2001 2000
--------- ---------
Net sales $ 123,562 $ 229,269
Cost of sales 247,604 290,230
--------- ---------
Gross profit (loss) (124,042) (60,961)
--------- ---------
Operating costs and expenses:
Research and development 98,416 100,284
Salaries 84,764 111,855
Consulting 207,070 51,575
Other operating expenses 220,983 107,917
--------- ---------
Total operating expenses 611,233 371,631
--------- ---------
Loss from operations (735,275) (432,592)
--------- ---------
Other income (expense):
Interest income 2,266 6,584
Interest expense (4,478) (3,524)
Other income (expense), net (2,974) (3,000)
Gain on sale of assets 161,173 --
--------- ---------
Other income (expense), net 155,987 60
--------- ---------
Loss before provision for income taxes (579,288) (432,532)
Provision for income tax (800) (800)
--------- ---------
NET LOSS $(580,088) $(433,332)
========= =========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.06) $ (0.06)
========= =========
The accompanying notes are an integral part of the financial statements.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(UNAUDITED)
For the Three Month Period Ended January 31, 2001
Series B Series C Series D Series B Series C Series D
Convertible Convertible Convertible Class B Convertible Convertible Convertible
Preferred Preferred Preferred Common Common Preferred Preferred Preferred
Shares Shares Shares Shares Shares Stock Stock Stock
----------- ----------- ----------- --------- ------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 2000 1,000,000 -- -- 9,377,341 83,983 $ 1,000,000 $ -- $ --
Issuance of Series C
convertible preferred
shares in exchange
for Series B
convertible preferred
shares (1,000,000) 250,000 -- -- -- (1,000,000) 250,000 --
Class D convertible
preferred shares issued
in private placement
to related party -- -- 250,000 -- -- -- -- 250,000
Options and warrants
granted to employees and
consultants for services -- -- -- -- -- -- -- --
Warrants granted to
majority shareholder
as bonus -- -- -- -- -- -- -- --
Interest recognized to
notes receivable for
common shares -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ------- ------- --------- ------ ----------- -------- --------
BALANCE, JANUARY 31, 2001 -- 250,000 250,000 9,377,341 83,983 $ -- $250,000 $250,000
========== ======= ======= ========= ====== =========== ======== ========
Note
Class B Additional Receivable
Common Common Paid-in Accumulated Common
Stock Stock Capital Deficit Stock Total
------- -------- ----------- ------------ ---------- ---------
BALANCE, OCTOBER 31, 2000 $93,773 $ 840 $22,709,444 $(22,798,864) $ (35,900) $ 969,293
Issuance of Series C
convertible preferred
shares in exchange
for Series B
convertible preferred
shares -- -- 750,000 -- -- --
Class D convertible
preferred shares issued
in private placement
to related party -- -- 250,000 -- (400,000) 100,000
Options and warrants
granted to employees and
consultants for services -- -- 135,735 -- -- 135,735
Warrants granted to
majority shareholder
as bonus -- -- 115,000 -- -- 115,000
Interest recognized to
notes receivable for
common shares -- -- -- -- (668) (668)
Net loss -- -- -- (580,088) -- (580,088)
------- -------- ----------- ------------ --------- ---------
BALANCE, JANUARY 31, 2001 $93,773 $ 840 $23,960,179 $(23,378,952) $(436,568) $ 739,272
======= ======== =========== ============ ========= =========
The accompanying notes are an integral part of the financial statements.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
FOR EACH OF THE THREE MONTH PERIODS ENDED JANUARY 31, 2001 AND 2000
- --------------------------------------------------------------------------------
For the For the
Three Month Three Month
Period Ended Period Ended
January 31, 2001 January 31, 2000
---------------- ----------------
Cash flows from operating activities:
Net loss $ (580,088) $(433,332)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 40,130 33,577
Amortization 10,000 10,000
Issuance of options and warrants for services 135,735 23,766
Issuance of warrants to majority shareholder as compensation 115,000 --
Interest on notes receivable for common stock (668) (6,380)
(Increase) decrease in assets:
Trade accounts receivable 78,728 6,025
Prepaid legal and other expenses 100 (9,318)
Inventories (28,175) (3,762)
Assets held for sale 52,163 --
Amounts due from escrow (33,448) --
Increase (decrease) in liabilities:
Trade accounts payable (26,350) 78,331
Customer deposit 20,252 (105,300)
Accrued payroll and other liabilities 14,347 30,340
----------- ---------
CASH USED IN OPERATING ACTIVITIES (202,274) (376,053)
----------- ---------
Cash flows used in investing activities
Purchase of property, plant and equipment $(2,372,446) $ (20,098)
----------- ---------
CASH USED IN INVESTING ACTIVITIES (2,372,446) (20,098)
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Cash flows provided by (used in) financing activities:
Principal payments on notes payable (2,650) (880)
Proceeds from the issuance of notes payable 1,375,000 --
Cash deposit on building purchase received 15,000 --
Proceeds from exercise of warrants -- 1,821
Proceeds from issuance of Series D preferred stock 100,000
Proceeds from issuance of note payable to a related party 1,000,000 300,000
----------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 2,487,350 300,941
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NET INCREASE (DECREASE) IN CASH (87,370) (95,210)
CASH AT BEGINNING OF PERIOD 180,918 204,328
----------- ---------
CASH AT END OF PERIOD $ 93,548 $ 109,118
=========== =========
The accompanying notes are an integral part of the financial statements.
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ELECTROPURE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
For Each of the Three Month Periods Ended January 31, 2001 and 2000
- --------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
2001 2000
--------- ------
Interest paid $ 4,478 $3,524
Income taxes paid $ 800 $ 800
Supplemental Schedule of Non-Cash Investing and Financing Activities
Series D Preferred stock isued for a
note receivable:
Increase in note receivable $ 400,000 $ --
Issuance of Series D preferred stock $(400,000) $ --
Exercise of option to purchase building:
Increase in property, plant and equipment $ 105,000 $ --
Decrease in building purchase option $(105,000) $ --
The accompanying notes are an integral part of the financial statements.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated 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 we 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.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The
accompanying 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.
Principles of Consolidation
In February 2000, the Company formed two wholly owned subsidiary,
Electropure EDI, Inc. ("EDI") and Micro Imaging Technology ("MIT") and
transferred related assets and liabilities at cost to these entities in
exchange for common and preferred stock. In January 2001, the Company
formed a limited liability company as a wholly owned subsidiary known as
Electropure Holdings, LLC ("LLC").
The consolidated financial statements of Electropure, Inc. and
Subsidiaries include the accounts of the Company, its wholly owned
subsidiary EDI, its majority owned subsidiary MIT, and the wholly owned
partnership LLC. All significant intercompany transactions have been
eliminated.
Financial Statement Classification
Certain amounts presented within the 2000 financial statements have been
reclassified in order to conform to the 2001 financial statement
presentation.
2. PROPERTIES AND EQUIPMENT
At January 31, 2001 and October 31, 2000, property and equipment consisted
of the following:
January 31, October 31,
2001 2000
----------- -----------
Building $ 2,454,552 $ --
Machinery and equipment 498,968 482,457
Automobiles 46,297 46,297
Furniture and fixtures 121,567 116,190
Leasehold improvements -- 45,954
----------- ---------
3,121,384 690,898
Less: accumulated depreciation (191,073) (197,903)
----------- ---------
TOTAL PROPERTY AND EQUIPMENT, NET $ 2,930,311 $ 492,995
=========== =========
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3. NOTES PAYABLE
At January 31, 2001 and October 31, 2000, notes payable consisted of
the following:
2001 2000
----------- --------
NOTES PAYABLE TO BANK
Note payable to bank, with an
interest rate of 8% per annum,
due in April 2001 and
collateralized by a $15,000
certificate of deposit $ 9,656 $ 11,471
Note payable to a bank,
collateralized by deed of trust
on building purchased, with
interest at 10.25% per annum,
payable in monthly installments
of $12,978 through July 1, 2003,
with balance due on August 1, 2003 1,375,783 --
Less: Current portion (165,390) (11,471)
----------- --------
LONG TERM PORTION OF NOTES
PAYABLE TO BANK $ 1,220,049 $ --
=========== ========
Unsecured note payable to majority
shareholder, with interest at 8%
per annum, interest payable
quarterly beginning on June 30,
2001, with balance due in full
on January 17, 2004 $ 1,003,111 $ --
Less: Current portion (76,444) --
----------- --------
LONG TERM PORTION OF NOTE
PAYABLE TO SHAREHOLDER $ 926,667 $ --
=========== ========
Future maturities of long term debt are as follows as of January 31,
2001:
2002 $ 235,734
2003 $1,537,226
2004 $1,253,556
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TOTAL $3,026,516
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4. CONTINGENCIES
Litigation
In August 1999, Electropure, Inc. and an unaffiliated third party,
Universal Aqua Technologies, Inc. were named as cross defendants in a
cross complaint by Douglas B. Platt doing business as East-West Technic
Group arising from a lawsuit brought by Staar Surgical Company, Inc.
against East-West Technic Group, Douglas B. Platt, and Does 1 through 100.
The cross complaint was filed in the Los Angeles Superior Court, Case No.
GC 023410, and alleged that the Company failed to provide an EDI module
that could be operated as part of the system provided by Platt to Staar.
In April 2000, the lawsuit was settled in its entirety in exchange for the
total payment of $18,000 to the plaintiff, Staar; to be paid in equal
amounts of $6,000 by Platt, Universal and the Company. As of the year
ended October 31, 2000, the Company paid the full amount due in
settlement. As part of the settlement agreement, the Company recovered the
EDI module held by Staar.
Concentration of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Exposure to losses on accounts receivable is principally
dependent on the individual customer's financial condition, as credit
sales are not collateralized. We monitor the Company's exposure to credit
losses and reserve for those accounts receivable that are deemed to be not
collectible.
During the three months ended January 31, 2001 approximately 81% of our
product sales, all of which were EDI products, were made to foreign
customers. One such foreign customer, Mihama Corporation of Tokyo, Japan,
accounted for 29% of product sales.
All sales and payments are in U.S. dollars. No provision has been recorded
for uncollectable trade accounts receivable for the period ended January
31, 2001.
5. SHARE 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 and
received net proceeds of $100,000 and a note in the sum of $400,000
payable in $100,000 monthly installments. 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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6. 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 January 31, 2001 and 2000 are as
follows:
Three months ended
January 31,
---------------------------
2001 2000
----------- -----------
Net loss available to common shareholders:
Net loss $ (580,088) $ (433,332)
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (580,088) $ (433,332)
=========== ===========
Weighted average shares outstanding 9,377,341 7,809,437
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.06) $ (0.06)
=========== ===========
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, 2001 and January 31, 2000
as follows:
2001 2000
--------- ---------
Stock options and warrants 5,858,827 4,026,224
Convertible preferred stock 500,000 1,000,000
Contingently issuance common shares 516,479 516,479
7. BUSINESS SEGMENTS
We have four reportable segments: water purification ("EDI"), hydro
components ("HC/membrane"), fluid monitoring (Micro Imaging Technology
["MI"]) (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 sells water and wastewater treatment products to the light
commercial/industrial markets and 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.
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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.
BUSINESS SEGMENT INFORMATION:
Three months ended
January 31,
--------------------------
2001 2000
----------- -----------
Revenue
EDI $ (124,870) $ (117,614)
HC/membrane 1,308 (70,010)
MI -- (41,646)
----------- -----------
TOTAL REVENUE $ (123,562) $ (229,269)
----------- -----------
Operating Loss
EDI $ (220,575) $ (60,143)
HC/membrane 116,829 --
MI (94,292) (95,476)
LLC (381,043) (10,547)
Corporate (1,007) --
----------- -----------
TOTAL OPERATING LOSS $ (580,088) $ (166,166)
----------- -----------
Depreciation and Amortization
EDI $ 37,499 $ 7,181
HC/membrane -- 24,937
MI 1,313 1,070
LLC 224 --
Corporate 11,095 10,389
----------- -----------
TOTAL DEPRECIATION AND AMORTIZATION $ 50,131 $ 43,577
----------- -----------
Identifiable Assets
EDI $ 650,210 $ 698,126
HC/membrane 8,044 139,973
MI 22,490 17,845
LLC 2,454,328 --
Corporate 306,241 447,707
----------- -----------
TOTAL IDENTIFIABLE ASSETS $ 3,441,313 $ 1,303,651
----------- -----------
Expenditures for Long Lived Assets
EDI $ 9,131 $ 18,302
HC/membrane -- --
MI 6,161 --
LLC 2,349,522 --
Corporate 7,632 1,796
----------- -----------
TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 2,372,446 $ 20,098
----------- -----------
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GEOGRAPHIC INFORMATION:
January 31, January 31,
2001 2000
----------- -----------
Revenues
United States $ 22,433 $ 118,449
Japan 36,000 105,300
Luxembourg -- --
Germany 13,263 --
Ireland 4,600 --
Other foreign countries 47,267 5,521
----------- -----------
TOTAL REVENUES $ 123,563 $ 229,270
----------- -----------
8. SUBSEQUENT EVENTS
In February 2001, we realized $100,000 on the note receivable from our
majority shareholder, leaving a balance due on such note in the sum of
$300,000.
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.
RESULTS OF OPERATIONS
References to fiscal 2000 and fiscal 2001 are for the three months ended
January 31, 2000 and 2001, respectively.
Sales decreased in fiscal 2001 by $105,707 as compared to fiscal 2000
primarily due to the fact that we discontinued sales of our hydro
components products when we sold the assets of that operation in November
2000. In addition, during fiscal 2001 there were no sales of our ion
exchange membrane products which are generally sold in bulk lots with
orders occurring intermittently and spaced over longer periods of time.
Costs of goods sold for fiscal 2001 decreased by $42,626 compared to
fiscal 2000 due to the decrease in the cost of raw materials for fewer
products sold during the current period. This decrease was partially
offset by the fact that there was not a commensurate reduction in fixed
overhead during the period.
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Research and development expenses for fiscal 2001 decreased by $1,868
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 minimal research and development activities
relating to our ion exchange membranes and a power supply component for
our EDI product. The decrease in research and development expense in
fiscal 2001 primarily reflects reduced activities in the ion exchange
membrane and EDI related research activities.
General and administrative expenses for fiscal 2001 increased by $241,470
as compared to fiscal 2000. This results primarily from an increase of
$226,969 in the cost of issuing options and warrants for services and as
compensation to the majority shareholder. We also realized a $70,583
increase in consulting expenses in fiscal 2001 relating to marketing
services in our EDI subsidiary. These increases were partially offset by a
$27,091 decrease in salaries and related expenses during the current
period.
Interest income arose from short-term investments and decreased by $4,318
for the fiscal period ended January 31, 2001 as compared to the prior year
period, reflecting a reduction in available working capital. Interest
expense for fiscal 2001 increased by $954 compared to the prior period
primarily due to financing activities relating to the purchase of our
building in January 2001.
We realized $161,173 in fiscal 2001 from the bulk sale of our hydro
components assets in November 2000.
We realized a net loss before income taxes of $579,288 for fiscal 2001,
representing an increase of $146,756 from the prior year level. The
increase reflects both a reduction in profitable sales and an increase in
operating expenses marked by the costs of warrant and option issuances.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001, we had working capital deficit of $82,436. This
represents a working capital decrease of $394,418 compared to that
reported at October 31, 2000 and primarily reflects the cost of financing
the building we purchased in January 2001 as well as a reduction in sales
revenues.
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 we 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 three months ended January 31, 2001, we received $100,000 in cash and
a note for $400,000 on the sale of 250,000 shares of Series D convertible
preferred stock to our majority shareholder.
In February 2001, we realized a net profit 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 three months ended January 31, 2001, a period which
traditionally shows a reduction in sales activity in the water treatment
industry, amounted to
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$124,870, approximately 78% of sales generated during the prior three
month period. Compared to the three months ended January 31, 2000, sales
of our EDI products increased by approximately 7% in the current period.
PLAN OF OPERATION
In the opinion of management, available funds, funds to be realized on the
collection of accounts receivable from product sales and proceeds from the
sale of Series D preferred stock to our majority shareholder over the next
three months is expected to satisfy our working capital requirements
through May 2001.
In May 2000, we appointed an exclusive representative to sell our EDI
products to original equipment manufacturers 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 expires on May 8, 2001 and provides
that our representative receive a 10% commission on all EDI orders in the
stated territories. In December 2000, we entered into a similar business
arrangement with companies in Connecticut and Canada granting distribution
rights in the Northeast United States and in the People's Republic of
China, respectively.
Currently, we are seeking short term 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
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debt 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, a cross complaint for breach of contract,
misrepresentation and negligence was filed against the Company and other
unaffiliated defendants by Douglas B. Platt d/b/a East-West Technic Group,
the defendant in a Los Angeles Superior Court action, Case No. GC 023410,
brought by Staar Surgical Company, Inc. The cross-complaint charged
Electropure with breach of contract, misrepresentation and negligence in
connection with the sale to Platt of an EDI module subsequently provided
by Platt to Staar Surgical. The matter was settled in April 2000 for equal
payments to Staar Surgical of $6,000 each by Platt, Electropure and
Universal Aqua Technologies, who manufactured the water treatment system
supplied to Staar.
ITEM 2. CHANGES IN SECURITIES
On January 11, 2001, the Board of Directors granted 250,000 five-year
warrants to our majority shareholder, Mr. Anthony Frank, at an exercise
price of $0.47 per share. Such warrants were granted in recognition for
his assistance to us over the years.
On January 17, 2001, Mr. Frank converted 1,000,000 shares of Series B
convertible preferred stock each with four (4) votes per share into
250,000 shares of Series C convertible preferred stock which carry no
voting rights. Each series of preferred stock have an aggregate
liquidation value equal to the $1,000,000 price Mr. Frank paid in January
1999. Each one share of Series C preferred stock is convertible into two
(2) shares of common stock at the option of the holder.
Also in January 2001, we agreed to sell Mr. Frank up to 250,000 shares of
Series D convertible preferred stock for $2.00 per share in 50,000 monthly
increments beginning on January 26, 2001. Each share of Series D preferred
shares has a liquidation value of $2.00 per share and is convertible, at
the option of Mr. Frank, into two (2) shares of common stock.
On January 11, 2001, the Board of Directors authorized the issuance of up
to 850,000 options to purchase common stock at $0.50 per share to certain
officers, directors and key 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 Plan.
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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.
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 19, 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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