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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 APRIL 30, 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 May 31, 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 April 30, 2001
ASSETS
April 30, October 31,
2001 2000
---------- -----------
(UNAUDITED)
Current assets:
Cash and equivalents $ 139,847 $ 180,918
Escrow deposit -- 15,000
Trade accounts receivable 36,085 83,322
Inventories 163,018 172,785
Prepaid legal fees 92,500 92,500
Other prepaid expenses 4,007 4,107
Assets held for sale -- 52,163
Amounts due from escrow -- --
---------- ----------
Total current assets 435,457 600,795
Property, plant and equipment, net 2,884,123 492,995
Acquired technology, net of accumulated amortization 71,945 91,945
Building purchase option -- 105,000
---------- ----------
TOTAL ASSETS $3,391,525 $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 April 30, 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, October 31,
2001 2000
------------ ------------
(Unaudited)
Current liabilities:
Trade accounts payable $ 125,452 $ 105,372
Current portion of obligations under capital leases 4,494 2,602
Current portion of notes payable to bank 14,408 11,471
Customer deposit 25,535 --
Accrued payroll 136,909 142,680
Other accrued liabilities 56,885 26,688
------------ ------------
Total current liabilities 363,682 288,813
Obligations under capital leases, net of current portion 16,869 6,629
Note payable to bank, net of current portion 1,370,865 --
Note payable to shareholder 1,000,000 --
------------ ------------
TOTAL LIABILITIES 2,751,416 295,442
------------ ------------
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 April 30, 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 April 30, 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 April 30, 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 April 30, 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
April 30, 2001 and October 31, 2000 840 840
Additional paid-in capital 23,966,179 22,709,444
Accumulated deficit (23,809,699) (22,798,864)
Notes receivable on common stock (136,984) (35,900)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 614,109 969,293
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,391,525 $ 1,290,735
============ ============
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED APRIL 30, 2001 AND 2000
Three months ended Six months ended
April 30, April 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
--------- --------- ----------- ---------
Net sales $ 218,578 $ 213,573 $ 342,140 $ 442,842
Cost of sales 291,200 270,027 490,883 560,257
--------- --------- ----------- ---------
Gross profit (loss) (72,622) (56,454) (148,743) (117,415)
--------- --------- ----------- ---------
Operating costs and expenses:
Research and development 95,400 112,874 193,816 213,158
Salaries 114,098 150,269 246,783 262,124
Consulting 41,045 117,845 248,115 169,420
Other operating expenses 50,493 49,907 271,476 157,824
--------- --------- ----------- ---------
Total operating expenses 301,036 430,895 960,189 802,526
--------- --------- ----------- ---------
Loss from operations (373,658) (487,349) (1,108,933) (919,941)
--------- --------- ----------- ---------
Other income (expense):
Interest income 1,880 2,708 4,146 9,292
Interest expense (55,969) (47) (60,447) (3,571)
Other income (expense), net (3,000) (2,000) (5,974) (5,000)
Gain on sale of assets -- -- 161,173 --
--------- --------- ----------- ---------
Other income (expense), net (57,089) 661 98,898 721
--------- --------- ----------- ---------
Loss before provision for income taxes (430,746) (486,688) (1,010,035) (919,220)
Provision for income tax -- -- (800) (800)
--------- --------- ----------- ---------
NET LOSS $(430,746) $(486,688) $(1,010,835) $(920,020)
========= ========= =========== =========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.05) $ (0.06) $ (0.11) $ (0.11)
========= ========= =========== =========
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 SIX MONTH PERIOD ENDED APRIL 30, 2001
Series B Series C Series D Series B Series C
Convertible Convertible Convertible Class B Convertible Convertible
Preferred Preferred Preferred Common Common Preferred Preferred
Shares Shares Shares Shares Shares 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 -- -- -- --
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, APRIL 30, 2001 -- 250,000 250,000 9,377,341 83,983 $ -- $250,000
========== ======= ======= ========= ====== =========== ========
Series D Note
Convertible Class B Additional Receivable
Preferred Common Common Paid-in Accumulated Common
Stock 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 -- -- 250,000 -- (100,000) 400,000
Options and warrants granted to
employees and consultants for
services -- -- -- 141,735 -- -- 141,735
Warrants granted to majority
shareholder as bonus -- -- -- 115,000 -- -- 115,000
Interest recognized to notes
receivable for common shares -- -- -- -- -- (1,084) (1,084)
Net loss -- -- -- -- (1,010,835) -- (1,010,835)
-------- ------- -------- ----------- ------------ --------- -----------
BALANCE, APRIL 30, 2001 $250,000 $93,773 $ 840 $23,966,179 $(23,809,699) $(136,984) $ 614,110
======== ======= ======== =========== ============ ========= ===========
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 THE SIX MONTH PERIODS ENDED APRIL 30, 2001 AND 2000
For the For the
Six Month Six Month
Period Ended Period Ended
April 30, 2001 April 30, 2000
-------------- --------------
Cash flows from operating activities:
Net loss $(1,010,834) $(920,020)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 93,818 67,637
Amortization 20,000 20,000
Issuance of options and warrants for services 141,735 150,188
Issuance of warrants to majority shareholder as compensation 115,000 --
Interest on notes receivable for common stock (1,084) 0
(Increase) decrease in assets:
Trade accounts receivable 47,237 25,850
Prepaid legal and other expenses 100 7,162
Inventories 9,767 6,007
Assets held for sale 52,163 --
Amounts due from escrow -- --
Increase (decrease) in liabilities:
Trade accounts payable 20,080 38,862
Customer deposit 25,535 (161,203)
Accrued payroll and other liabilities 24,425 (12,690)
----------- ---------
CASH USED IN OPERATING ACTIVITIES (462,058) (778,207)
----------- ---------
Cash flows used in investing activities
Purchase of property, plant and equipment (2,379,946) (53,421)
Purchase of certificate of deposit (15,000)
----------- ---------
CASH USED IN INVESTING ACTIVITIES (2,379,946) (68,421)
----------- ---------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable 10,934 12,195
Proceeds from the issuance of notes payable 1,375,000 15,000
Proceeds from deposit refund 15,000 --
Proceeds from exercise of warrants -- 1,821
Proceeds from exercise of common stock -- 760,181
Proceeds from issuance of Series D preferred stock 400,000 --
Proceeds from issuance of note payable to a related party 1,000,000 --
----------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 2,800,934 789,197
----------- ---------
NET INCREASE (DECREASE) IN CASH (41,071) (57,431)
CASH AT BEGINNING OF PERIOD 180,918 204,328
----------- ---------
CASH AT END OF PERIOD $ 139,847 $ 146,897
=========== =========
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 THE SIX MONTH PERIODS ENDED APRIL 30, 2001 AND 2000
Supplemental Disclosure of Cash Flow Information
2001 2000
----------- ------
Interest paid $ 60,447 $3,571
Income taxes paid $ 800 $ 800
Supplemental Schedule of Non-Cash Investing and Financing Activities
Conversion of Series B Preferred stock to Series C Preferred stock:
Decrease in Series B Preferred stock $ 1,000,000 $ --
Increase in Series C Preferred stock $ (250,000) $ --
Increase in Additional paid-in capital $ (750,000) $ --
Series D Preferred stock issued for a note receivable:
Increase in note receivable $ 100,000 $ --
Issuance of Series D preferred stock $ (100,000) $ --
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 subsidiaries,
Electropure EDI, Inc. ("EDI") and Micro Imaging Technology ("MI") 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 partnership 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 MI, 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 April 30, 2001 and October 31, 2000, property and equipment consisted
of the following:
April 30, October 31,
2001 2000
----------- ---------
Building $ 2,433,873 $ --
Machinery and equipment 506,471 482,457
Automobiles 46,297 46,297
Furniture and fixtures 121,567 116,190
Leasehold improvements -- 45,954
----------- ---------
3,108,208 690,898
Less: accumulated depreciation (224,085) (197,903)
----------- ---------
TOTAL PROPERTY AND EQUIPMENT, NET $ 2,884,123 $ 492,995
=========== =========
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3. NOTES PAYABLE
At April 30, 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 $ -- $ 11,471
Note payable to a bank, collateralized by
deed of trust on building, 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 1,385,273 --
Less: Current portion (14,408) (11,471)
----------- --------
LONG TERM PORTION OF NOTES PAYABLE TO BANK $ 1,370,865 $ --
=========== ========
Unsecured note payable to majority shareholder,
with only interest at 8% payable quarterly
beginning on June 30, 2001, with balance due
in full on January 17, 2004 $ 1,000,000 $ --
----------- --------
Less: Current portion -- --
----------- --------
LONG TERM PORTION OF NOTE PAYABLE TO SHAREHOLDER $ 1,000,000 $ --
=========== ========
Future maturities of long term debt are as follows as of April 30, 2001:
2002 $ 14,408
2003 $1,370,865
2004 $1,000,000
----------
TOTAL $2,385,273
==========
Interest expense for the three and six month periods ended April 30,
2001 was $55,969 and $60,447, respectively.
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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 six months ended April 30, 2001 approximately 85% of our EDI
product sales were made to foreign customers. One such foreign customer,
Mihama Corporation of Tokyo, Japan, accounted for 23% of product sales.
Sales of membrane products, all to domestic customers, accounted for
approximately 1% of total sales revenues.
All sales and payments are in U.S. dollars. No provision has been
recorded for uncollectable trade accounts receivable for the period
ended April 30, 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. As of
April 30, 2001, we had received net proceeds of $400,000 from the sale
with the balance of $100,000 due on May 29, 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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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 April 30, 2001 and 2000 are
as follows:
Three months ended Six months ended
April 30, April 30,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net loss available to common shareholders:
Net loss $ (430,746) $ (486,688) $(1,010,835) $ (920,020)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (430,746) $ (486,688) $(1,010,835) $ (920,020)
=========== =========== =========== ===========
Weighted average shares outstanding 9,377,341 8,546,011 9,377,341 8,546,011
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.05) $ (0.06) $ (0.11) $ (0.11)
=========== =========== =========== ===========
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 April 30, 2001 and April 30, 2000
as follows:
2001 2000
--------- ---------
Stock options and warrants 5,731,327 5,101,327
Convertible preferred stock 500,000 1,000,000
Contingently issuable 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.
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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BUSINESS SEGMENT INFORMATION:
Three months ended Six months ended
April 30, April 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
--------- --------- ----------- ---------
Revenue
EDI $ 213,600 $ 117,835 $ 338,470 $ 235,449
HC/Membrane 4,978 95,737 3,670 207,393
MI -- -- -- --
--------- --------- ----------- ---------
TOTAL REVENUE $ 218,578 $ 213,572 $ 342,140 $ 442,842
========= ========= =========== =========
Operating Loss
EDI $(154,997) $(108,262) $ (375,572) $(212,628)
HC/Membrane (37,996) (18,432) (82,340) (72,753)
MI (102,193) (103,374) (196,289) (189,598)
LLC 11,390 -- 11,166 --
CORPORATE (89,862) (257,281) (465,898) (444,962)
--------- --------- ----------- ---------
TOTAL OPERATING LOSS $(373,658) $(487,349) $(1,108,933) $(919,941)
========= ========= =========== =========
Depreciation and Amortization
EDI $ 34,148 $ 32,363 $ 71,647 $ 64,382
HC/Membrane -- 99 27 198
MI 1,439 1,070 2,752 2,140
LLC 20,455 -- 20,679 --
CORPORATE 7,618 10,528 18,713 20,917
--------- --------- ----------- ---------
TOTAL DEPRECIATION AND AMORTIZATION $ 63,660 $ 44,060 $ 113,818 $ 87,637
========= ========= =========== =========
Expenditures for Long Lived Assets
EDI $ 6,686 $ 22,922 $ 15,817 $ 41,224
HC/Membrane 816 -- 816 --
MI 1,220 1,505 7,381 1,505
LLC -- -- 2,349,522 --
CORPORATE -- 8,896 6,411 10,692
--------- --------- ----------- ---------
TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 8,722 $ 33,323 $ 2,379,946 $ 53,421
========= ========= =========== =========
GEOGRAPHIC INFORMATION:
Revenues
United States $ 30,427 $ 100,164 $ 52,860 $ 218,613
Japan 41,240 65,000 77,240 170,300
Luxembourg 34,553 -- 45,934 --
Germany 36,578 14,650 49,841 14,650
Ireland 36,322 -- 39,522 3,000
Other foreign countries 39,458 33,758 76,743 36,279
--------- --------- ----------- ---------
TOTAL REVENUES $ 218,578 $ 213,572 $ 342,140 $ 442,842
========= ========= =========== =========
April 30, October 31,
2001 2000
---------- -----------
Identifiable Assets
EDI $ 614,722 $ 691,572
HC/Membrane 10,407 98,864
MI 3,922 16,422
LLC 2,433,918 --
ALL OTHERS 328,556 483,877
---------- ----------
TOTAL IDENTIFIABLE ASSETS $3,391,525 $1,290,735
========== ==========
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8. SUBSEQUENT EVENTS
NONE
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 six months ended
April 30, 2000 and 2001, respectively.
Sales decreased in fiscal 2001 by $100,702 as compared to fiscal 2000
primarily because 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 minimal sales of our ion exchange membrane
products, which are generally sold in bulk lots with orders occurring
intermittently and spaced over longer periods.
Costs of goods sold for fiscal 2001 decreased by $69,374 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.
Research and development expenses for fiscal 2001 decreased by $19,342
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
research activities related to a power supply for our EDI product.
General and administrative expenses for fiscal 2001 increased by
$177,005 as compared to fiscal 2000. This results primarily from an
expense of $115,000 as the cost of issuing warrants as compensation to
the majority shareholder. We also realized a $78,695 increase in
consulting expenses in fiscal 2001 relating to marketing services in our
EDI subsidiary. These increases were partially offset by a $15,342
decrease in salaries and related expenses during the current period.
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Interest income arose from short-term investments and decreased by
$5,146 for the fiscal period ended April 30, 2001 as compared to the
prior year period, reflecting a reduction in available working capital.
Interest expense for fiscal 2001 increased by $56,876 compared to the
prior period primarily due to financing activities relating to the
purchase of our building in January 2001.
We realized a gain of $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 $1,010,835 for fiscal
2001, representing an increase of $90,815 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 April 30, 2001, we had working capital of $71,775. This represents a
working capital decrease of $240,207 compared to that reported at
October 31, 2000. The decrease reflects an increase of $74,869 in
liabilities partly due to the cost of financing the building we
purchased in January 2001. The decrease also reflects a decrease in
sales revenues, a $47,237 reduction in accounts receivable and a
reduction of $52,163 in assets held for sale primarily as a result of
the sale of our hydro components division in November 2000.
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 six months ended April 30, 2001, we received
$400,000 in cash and a note for $100,000 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 six months ended April 30, 2001 amounted to
$338,470, which represents a 44% increase compared to EDI sales in the
prior year period.
Shipments of EDI products are made as promptly as possible after receipt
of firm sales orders in accordance with delivery requirements stipulated
by the customer. As of April 30, 2001, we have accepted firm orders for
delivery of EDI modules valued at approximately $192,400. As of the date
of this report, we have an estimated backlog of $355,000 on EDI orders
scheduled for delivery through the end of July 2001.
PLAN OF OPERATION
In the opinion of management, available funds, funds to be realized on
the collection of accounts receivable from product sales, proceeds from
the sale of Series D preferred stock to our majority
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shareholder, and proceeds to be realized from the sale of EDI products
currently on order, is expected to satisfy our working capital
requirements through September 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 provides that our representative
receives 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 MI research program. This approach is
intended to optimize the value of our EDI technology and the MI 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. 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
Stock Options Issued to Employees
On March 21, 2001, we issued 50,000 options to purchase common stock for
$0.25 per share in partial consideration for consulting services to be
rendered. Such options expire in March 2004.
On April 9, 2001, we issued 50,000 options at $0.25 per share to an
employee. Such options vest over a five-year period and expire in April
2006.
Warrants Issued to Non-Employees
On March 21, 2001, we granted 100,000 options at $0.25 per share to a
consultant for services to be rendered. The warrants vest in quarterly
increments commencing on the grant date. The fair value of the warrants,
$24,000, will be expensed over the one-year term of the consulting
arrangement.
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
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(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: May 31, 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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