<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------
For the quarterly period Commission file number 0-16416
ended JULY 31, 1998
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)
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 September 11, 1998, 8,475,497 shares of the Registrant's stock were
outstanding.
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<PAGE> 2
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
----------- ------------
Assets 1997 1998
- ---------------------------------------------------- ----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $367,680 $ 117,003
Receivables:
Trade accounts 14,988 154,221
Due from related parties 115,227 154,536
Allowance for doubtful receivables (85,528) (85,528)
-------- ----------
44,687 223,229
Inventory:
Raw materials 7,498 146,491
Other current assets 26,001 48,646
-------- ----------
Total Current Assets 445,865 535,369
-------- ----------
Property and equipment, at cost:
Office equipment 3,584 59,745
Leasehold improvements -- 26,858
-------- ----------
3,584 86,603
Less accumulated depreciation and amortization 172 6,115
-------- ----------
3,412 80,488
Acquired technology, net 445,676 560,630
-------- ----------
Total Assets $894,953 $1,176,487
======== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
------------- -------------
Liabilities and Stockholders' Equity 1997 1998
- --------------------------------------------------------- ------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to stockholders $ 29,736 $ 18,605
Accounts payable 37,843 22,076
Accrued liabilities 23,960 13,773
Allowance for loss on lawsuit settlements 23,331 23,331
------------ ------------
Total Current Liabilities 114,870 77,785
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 1997 and 1998 26,000 26,000
Stockholders' equity:
Common stock, $.01 assigned par value. Authorized
20,000,000 shares; 7,774,293 shares issued and
7,734,293 shares outstanding in 1997; 8,477,997
shares issued and 8,437,997 shares outstanding
in 1998 77,343 84,381
Class B common stock, $.01 assigned par value.
Authorized 83,983 shares; issued and outstanding
83,983 shares in 1997 and 1998 840 840
Additional paid-in capital 18,075,947 19,161,131
Accumulated deficit (17,197,281) (17,989,884)
Notes receivable on common stock (202,766) (183,766)
------------ ------------
754,083 1,072,702
------------ ------------
Total Liabilities and Stockholders' Equity $ 894,953 $ 1,176,487
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
------------------------------ ------------------------------
1997 1998 1997 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
License fees received $ 29,200 $ -- $ 70,837 $ --
Sales -- 326,835 -- 501,200
--------- --------- --------- ---------
29,200 326,835 70,837 501,200
Cost of goods sold -- 140,325 -- 234,701
--------- --------- --------- ---------
Gross margin 29,200 186,510 70,837 266,499
Costs and expenses:
Research and development -- 124,992 -- 259,336
Sales and marketing -- 177,122 -- 272,680
General and administrative 48,574 147,516 92,865 443,011
--------- --------- --------- ---------
48,574 449,630 92,865 975,027
--------- --------- --------- ---------
Loss from operations (19,374) (263,120) (22,028) (708,528)
--------- --------- --------- ---------
Other income and (expense):
Interest expense (577) (433) (1,364) (4,110)
Interest income -- 6,188 -- 6,188
Litigation settlement costs (112,000) -- (112,000) --
Financing costs (614,055) (126,092) (614,055) (126,092)
Rental income -- 19,550 -- 39,050
Miscellaneous income -- 889 -- 889
--------- --------- --------- ---------
(726,632) (99,898) (727,419) (84,075)
--------- --------- --------- ---------
Net income (loss) $(746,006) $(363,018) $(749,447) $(792,603)
========= ========= ========= =========
Net loss per share of
common stock $ (0.34) $ (0.07) $ (0.34) $ (0.15)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
ELECTROPURE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Class B
Stock Common Stock
---------------------- -----------------------
Amount Amount Notes
Number ------------ Number ------------- Additional receivable Net
of Per of Per paid-in on common Accumulated stockholders'
shares share Total shares share Total capital stock deficit equity
------- ----- ----- ------- ----- ----- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31,
1997 7,734,293 $ -- $77,343 83,983 $ -- $840 $18,075,947 $(202,766) $(17,197,281) $ 754,083
Payment on receivable
on common stock -- -- -- -- -- -- -- 25,000 -- 25,000
Issuance of common
stock for option
on building purchase 60,000 -- 600 -- -- -- 89,400 -- -- 90,000
Issuance of common
stock for
conversion of debt 206,186 0.97 2,062 -- -- -- 205,155 -- -- 207,217
conversion of debt 136,473 1.48 1,365 -- -- -- 201,265 -- -- 202,630
Issuance of common
stock for
services rendered 6,579 1.52 66 -- -- -- 9,934 -- -- 10,000
services rendered 4,103 1.83 41 -- -- -- 7,459 -- -- 7,500
services rendered 3,363 2.23 34 -- -- -- 7,466 -- -- 7,500
Issuance of common
stock on
exercise of options 12,000 0.50 120 -- -- -- 5,880 (6,000)
Issuance of common
stock for cash 275,000 2.00 2,750 -- -- -- 547,250 -- -- 550,000
Issuance of warrants at
below fair market
value -- -- -- -- -- -- 11,375 -- -- 11,375
Net Loss -- -- -- -- -- -- -- -- (792,603) (792,603)
---------- ------- ------ --- ----------- --------- ------------ ----------
Balance at July 31,
1998 8,437,997 84,381 83,983 -- 840 19,161,131 (183,766) (17,989,884) 1,072,702
========== ======= ====== === =========== ========= ============ ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
July 31,
--------------------------------
1997 1998
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(749,447) $ (792,603)
--------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 81 90,988
Financing costs related to issuance of common
stock 734,055 122,217
Financing costs related to issuance of
warrants -- 11,375
Change in assets and liabilities, net of
noncash transactions:
Decrease (increase) in receivables 177 (178,542)
Decrease (increase) in inventory -- (138,992)
Decrease (increase) in other assets -- (305,666)
Increase (decrease) in notes payable 12,000 (12,610)
Increase (decrease) in accounts payable and
accrued expenses 3,262 (25,954)
Increase in interest payable, net 1,364 4,110
--------- -----------
Total adjustments 750,939 (433,074)
--------- -----------
Net cash used in operating activities 1,492 (1,225,677)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock -- 550,000
Proceeds from notes payable to stockholders -- 400,000
Proceeds from collection of receivables on
common stock -- 25,000
--------- -----------
Net cash provided by financing activities -- 975,000
--------- -----------
Net (decrease) in cash 1,492 (250,677)
Cash at beginning of period 674 367,680
--------- -----------
Cash at end of period $ 2,166 $ 117,003
========= ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
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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, 1997.
In February, 1996, the Company issued 253,334 shares of Common Stock upon the
conversion of $152,000 in loans payable by its former licensee, EDI Components.
Although the shares were issued at a below fair market value of $0.60 per share,
resulting in an expense of $228,000, the Company mistakenly reflected the
expense at $152,000. Pursuant to such error, the Company has made a prior period
adjustment to increase additional paid-in capital and the accumulated deficit by
$76,000. In addition, the Company has made a prior period adjustment for the
fiscal year ended October 31, 1996 to impute a $500 per month rent expense to
account for the expense of occupying offices sub-leased by the Company from EDI
Components until September, 1997. The expense has been credited toward license
fees paid by EDI Components. Similar adjustments have been made for the interim
periods ended January 31, 1997, April 30, 1997 and July 31, 1997, respectively.
The above prior period adjustments did not materially impact the Company's
retained earnings, net shareholders' equity, net loss or net loss per share. The
comparative financial statements contained in this report have been adjusted to
reflect retroactive application of the prior period adjustments discussed above.
- ---------
LIQUIDITY
- ---------
As of July 31, 1998, the Company had current assets in excess of current
liabilities of $457,584, an accumulated deficit of $17,989,884 and a
stockholders' equity of $1,072,702. In July, 1992, the Company entered into a
License Agreement with EDI Components, a California corporation, to grant an
exclusive license to manufacture and market the Company's patented Electropure
("EDI") technology. Since entering into such license relationship, the Company
funded its working capital needs from license fees paid by EDI Components until
the license was terminated in August, 1997. In September, 1997, the Company
began limited manufacturing and sales of its patented EDI product. During the
nine months ended July 31, 1998, the Company booked $501,200 in gross sales of
products and realized therefrom $352,121 in cash and $149,079 in accounts
receivable. The Company also collected $7,710 and $19,500 in receivables from
trade accounts and related parties, respectively, during the period. The Company
received an additional $25,000 payment in January, 1998 on a note receivable on
common stock. In addition, the Company received $550,000 in proceeds from the
sale of 275,000 shares of Common Stock and 137,500 warrants to purchase Common
Stock at an exercise price of $3.00 per share.
7
<PAGE> 8
On January 26, 1998, the Company received $200,000 in loans from a principal
shareholder. Such proceeds, along with an additional $200,000 in loans received
from the same shareholder in February, 1998, were utilized to purchase the
rights to certain proprietary membrane technology from Hydro Components, Inc., a
Pennsylvania manufacturer of light commercial water and wastewater treatment
products. Pursuant to the terms of the loan agreements, the shareholder elected
to convert the $400,000 in principal loans, plus accrued interest, into an
aggregate of 342,659 shares of Common Stock. See Note (5) - "Stockholders'
Equity."
The Company received $39,050 between March and July, 1998 as rental income from
sub-leasing approximately 10,000 square feet of its current facility to an
unaffiliated third party.
- -------------------------------------------------------------------------------
(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 July
31, 1998 are offset by an allowance for doubtful accounts.
A total of $23,763 remains due as of July 31, 1998 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.
Between August, 1997 (when the license relationship with EDI Components was
terminated) and October 31, 1997, the Company sold products for which the
Company's former licensee, EDI Components, mistakenly received a total of
$36,329 in payments. In January, 1998, EDI Components satisfied the receivable
in full by paying the Company $19,500 in cash and transferring $16,829 in raw
materials it had purchased for the EDI product prior to the license termination.
In February, 1998, concurrent with the purchase of certain proprietary membrane
technology from Hydro Components, the Company made a 60-day loan to such
Pennsylvania-based company in the sum of $200.000. The Company has agreed to
accept certain water treatment components (raw materials) valued at $67,429 and
$4,900 in capital equipment transferred by Hydro Components in partial payment
of the loan. In addition, between March and July, 1998, Hydro Components has
provided the Company with services valued at $46,350 and has paid expenses on
behalf of the Company totaling $12,186, all of which has been applied to reduce
such loan. Consequently, as of July 31, 1998, there remains outstanding,
including $6,188 in interest accrued at the annual rate of 8%, a total of
$75,323 on such loan.
8
<PAGE> 9
- -------------------------------------------------------------------------------
(3) INVENTORY
- -------------------------------------------------------------------------------
Inventory, stated at the lower of cost (determined using the first in, first out
method) or replacement market, consists of components for EDI water purification
modules as well as water and wastewater treatment components transferred by
Hydro Components in partial payment of a loan.
- -------------------------------------------------------------------------------
(4) COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
The original cost and accumulated depreciation of assets at July 31, 1998 are as
follows.
Furniture and fixtures $59,745
Leasehold improvements 26,858
-------
86,603
Less accumulated depreciation and amortization 6,115
-------
$80,488
=======
- -----------
COMMITMENTS
- -----------
On October 1, 1997, the Company assumed the month-to-month lease obligation from
EDI Components on its previous facility at 23251 Vista Grande, Laguna Hills,
California and vacated such facility in February, 1998. The Company paid an
aggregate of $15,955 in lease payments on such facility between November, 1997,
and February, 1998.
In November, 1997, the Company entered into a three-year lease agreement on a
30,201 sq. ft. facility located at 23456 South Pointe Drive, Laguna Hills,
California. The lease commenced on February 1, 1998 at a lease rate of $16,000
per month, with pre-negotiated annual increases in the second and third years of
the lease approximating three percent of the then base monthly lease payment. On
November 14, 1997, the Company paid the Lessor $48,000, representing the first
month's lease payment, plus a $32,000 security deposit which shall be applied to
one-half of the monthly lease payments in months 6, 12, 18 and 24 of the initial
lease term. Such security deposit was recorded as a prepaid deposit in the sum
of $32,000 and is to be credited to rent expense when utilized over the first 24
months of the lease. As of July 31, 1998, $8,000 of such prepaid deposit has
been utilized and expensed as rent. The Company paid $112,000 in lease payments
on such facility between February and July, 1998, which sum was offset by
$39,050 in payments received by the Company during the period from the sub-lease
of approximately 10,000 square feet to an unaffiliated third party.
9
<PAGE> 10
- -------------------------------------------------------------------------------
(5) STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
On November 12, 1997, the Company issued 60,000 shares of Common Stock to the
Lessors of its new facility in exchange for a three-year option to purchase the
building for the pre-negotiated purchase price of $2,300,000 through August,
1999. If the option is exercised after August, 1999, the purchase price will be
$2,300,000 plus the cumulative change in Consumer Price Index from February 1,
1998 to the date of exercise. The issuance, which was made at a fair market
value of $1.50 per share, resulted in an increase in common stock and additional
paid in capital and a $90,000 financing expense.
On January 29, 1998, Anthony Frank exercised his option to convert, at a 27.5%
discount to fair market value(1), a $200,000 principal loan made to the Company
on January 26, 1998. The conversion resulted in the issuance of 206,186 shares
of Common Stock at $0.97 per share. Accordingly, the difference between
conversion price and the fair market value of similar restricted common stock on
the date of issuance, aggregating $7,217, has been expensed and added to
additional paid-in capital as of the fiscal period ended July 31, 1998.
On March 25, 1998, Anthony Frank converted an additional $200,000 loan made to
the Company on February 4, 1998. The conversation price was at a 25% discount to
the fair market value of the Company's Common Stock and resulted in the issuance
of 136,473 shares of Common Stock at $1.48 per share. The conversion price of
the shares issued upon conversation of such loan was equal to the fair market
value of similar restricted common stock on the date of issuance. Consequently,
no expense was reflected for this transaction.
Between April and July, 1998, in conjunction with a private placement offering
of securities, the Company issued 275,000 shares of Common Stock and 137,500
warrants to purchase Common Stock at $3.00 per share, and received net proceeds
of $550,000. The fair market value of the Company's Common Stock in April, 1998
was less than the $2.00 per share offering price and, as a result, no expense
has been accrued for the issuance of these shares. However, the Company issued
an additional 3,363 shares to an individual as a commission related to the sale
of 37,500 of such private placement securities. The fair market value of such
commission shares was $7,500 (or $2.23 per share) and has been expensed and
added to common stock and additional paid-in capital as of July 31, 1998.
In April, 1998, the Company issued 3,363 shares of Common Stock as a commission
to the real estate broker who negotiated the lease on the Company's current
facility. The fair market value of such shares was $10,000 and has been expensed
and added to common stock and additional paid-in capital.
In May, 1998, the Company issued 4,103 shares of Common Stock, valued at $7,500,
or $1.48 per share, to a consulting firm in partial payment for public relations
services to be rendered. The value of the
- --------
1 The loan agreement with Mr. Frank provided that, upon conversion of the
note, the "fair market value" of common stock would be determined as the
average of the bid and asked prices of such common stock for the thirty
consecutive trading days prior to the conversion date.
10
<PAGE> 11
transaction has been expensed and added to common stock and additional paid-in
capital as of July 31, 1998.
In July, 1998, the Company issued 12,000 shares of Common Stock and accepted a
$6,000 note receivable on the exercise of options, at $0.50 per share, by an
employee of the Company. Such note is payable, with minimal interest, within one
year or upon any sale of the shares in question.
- -------------------------------------------------------------------------------
(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.
PART I
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
- -------------------------------------------------------------------------------
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
References to 1997 and 1998 are for the nine months ended July 31, 1997 and
1998, respectively, and reflect the prior period adjustments discussed in Note
(1) - "Interim Financial Statements."
License fees received from EDI Components for fiscal 1997 were $70,837 as
compared to no activity for fiscal 1998. Pursuant to the August, 1997 License
Termination Agreement, the obligation of EDI Components to pay license fees to
the Company terminated at that time.
The Company realized a gross margin of $266,499 on the sale of products in
fiscal 1998, as compared to no sales activities in fiscal 1997. The Company had
not initiated manufacturing and marketing operations until September, 1997,
after the license agreement with EDI Components had been terminated.
Research and development expenses for fiscal 1998 were $259,336 as compared to
no activity for fiscal 1997. These expenses arise from the research and
development program which the Company initiated in December, 1997 on the
drinking water monitoring technology acquired from Wyatt Technology Corporation
in late October, 1997.
Sales and marketing expenses were $272,680 for fiscal 1998, as compared to no
activity for fiscal 1997. These expenses represent the costs associated with
marketing the Company's products, which activities began in September, 1997.
General and administrative expenses for fiscal 1998 increased by $350,146 as
compared to fiscal 1997. The increase is due to various factors, including the
expenses associated with hiring additional employees
11
<PAGE> 12
in late 1997, the assumption of lease obligations on the facilities occupied by
the Company, and legal and accounting fees resulting from the audit conducted on
the Company's financial statements for the fiscal year ended October 31, 1997.
Interest expense for fiscal 1998 increased by $2,746 as compared to fiscal 1997,
due to the additional interest accrued on a note payable issued in settlement of
a lawsuit in May, 1997. Such note was paid in full in January, 1998. The Company
accrued additional interest expense on a $200,000 loan received in February,
1998 and converted to common stock in March, 1998.
Interest income for fiscal 1998 was $6,188 as compared to no activity for fiscal
1997. The Company realized interest income for the period on a $200,000 loan
made in February, 1998 to Hydro Components, Inc.
Financing costs for fiscal 1998 decreased by $487,963, as compared to fiscal
1997. Financing costs for fiscal 1997 reflects the substantial cost of assuming
loans, subsequently converted to common stock, from EDI Components pursuant to
the August, 1997 license termination agreement with that entity. Of the
financing costs incurred for fiscal 1998, $90,000 resulted from the issuance of
60,000 shares of common stock to the lessor of the Company's current facility in
exchange for an option to purchase the building during the term of the
three-year lease. An additional $18,592 financing expense was incurred as a
result of the issuance of 206,186 common shares and 175,000 warrants to purchase
common shares at below fair market value. The balance of $17,500 in financing
costs resulted from the issuance of common stock, at fair market value, as
commissions.
The Company received $39,050 during fiscal 1998 from sub-leasing, beginning in
March, 1998, approximately 10,000 square feet of its present facility to an
unaffiliated third party at $6,500 per month. Such sub-lessee has executed a
one-year sub-lease agreement and has paid the last month's lease payment in
advance.
No additional provision for loss on lawsuit settlement has been made in fiscal
1998 as the Company believes that adequate provision has been made to settle
pending lawsuits.
Net loss of $792,603 for fiscal 1998 represents an increase of $43,156 from the
prior year level. This increase, which was partially offset by a substantial
reduction from prior period financing expenses, is due to the initiation of
research and development activities on the Company's proposed drinking water
monitoring product and the increase in marketing, administrative and financing
activities resulting from production and sales of the Company's EDI product
beginning in late 1997.
- -------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 1998, the Company had net working capital (total current assets less
total current liabilities) of $457,584. The increase in working capital,
compared to that reported at October 31, 1997, results primarily from financing
activities and sales during the period.
12
<PAGE> 13
During fiscal 1998, the Company received $352,121 on the sale of products during
the period and has accrued an additional $149,079 in receivables pursuant to
such product sales. The Company collected $44,039 during the period (including
$16,829 in raw materials transferred by EDI Components) on trade accounts and
related party receivables accrued in connection with products sold between
September and October, 1997. During the fiscal period, Hydro Components reduced
its $200,000 liability to the Company, which has accrued $6,118 in interest as
of July 31, 1998, by providing a combination of consulting fees, expenses, raw
materials and capital equipment aggregating $130,865. Since August 1, 1998,
Hydro Components has further reduced its liability with a combination of cash
and services rendered totaling $15,319.
In February, 1998, the Company relocated to its current 30,201 sq. ft. facility
with a view toward expanding its production capabilities for the EDI product.
The additional space will also be required if the Company's research program for
the drinking water monitoring program proves successful. On March 1, 1998, the
Company sub-leased approximately 10,000 sq. ft. of such facility at a monthly
rental of $6,500, to offset a portion of its $16,000 monthly lease obligation.
The remaining facilities will allow the Company to increase its production
capabilities and, in turn, its marketing efforts for sales of the EDI product.
In April, 1998, the Company began a private placement offering of units at
$25,000 per unit, consisting of 12,500 shares of Common Stock and 6,250
redeemable three-year warrants to purchase Common Stock at $3.00 per share. As
of July 31, 1998, the Company had received $550,000 in net proceeds on the sale
of 22 units, representing 275,000 shares of Common Stock and 137,500 warrants.
The Company will be required to raise substantial amounts of new financing, in
the form of additional equity investments or loan financing, in order to carry
out its business objectives. There can be no assurance that the Company will be
able to obtain such additional financing on terms that are acceptable to the
Company and at the time required by the Company, or at all. Further, any such
financing may cause dilution of the interests of the current shareholders in the
Company. If the Company is unable to obtain such additional equity or loan
financing, the Company's financial condition and results of operations will be
materially adversely affected. Moreover, the Company's estimates of its cash
requirements to carry out its current business objectives are based upon certain
assumptions, including assumptions as to the Company's revenues, net income
(loss) and other factors, and there can be no assurance that such 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 the Company and its plans. If the Company is not
successful in obtaining loans or equity financing for future developments, it is
unlikely that the Company will have sufficient cash to continue to conduct
operations as currently planned. The Company believes that in order to raise
needed capital, it may be required to issue debt or equity securities that are
significantly lower than the current market price of the Company's Common Stock.
13
<PAGE> 14
- -----------------
PLAN OF OPERATION
- -----------------
The Company is currently negotiating with various potential strategic partners
to obtain the working capital primarily needed to fund further research and
development activities for the biological sensor technology acquired from Wyatt
Technology Corporation in October, 1997. Such strategic partnership may take the
form of a license or joint venture arrangement. In addition, the Company
believes that its biological sensor research and development may qualify for
funding through various grant subsidies and is currently exploring such funding
opportunities.
On April 1, 1998, the Company authorized a private placement offering of
securities (the "Offering") to raise up to $1,000,000 in working capital to
support its current EDI sales activities and research and development on the
drinking water monitoring project utilizing the laser light scattering
technology acquired from Wyatt Technology Corporation in October, 1997. As of
July 31, 1998, the Company had received $550,000 from subscribers to such
Offering.
In September, 1998, the Company initiated a 30-day private placement offering to
reduce the exercise price, to $1.00 per share, on up to 897,749 warrants to
purchase Common Stock originally granted at exercise prices ranging from $2.00
to $15.00 per share. As of September 11, 1998, the Company had issued 56,250
shares of Common Stock pursuant to the offering and had received $56,250 in
proceeds therefrom. The Company believes that a number of additional
warrantholders will take advantage of the offering and anticipates that
additional proceeds in excess of $200,000 will be received.
Sales of the Company's products is expected to generate increased net revenues
with the implementation of the Company's increased marketing efforts.
With its current cash assets, projected sales of securities, revenues from the
sale of products and collections anticipated on accounts receivable, the Company
believes that it will have adequate sources of working capital for up four (4)
months, although it may need additional working capital prior to said date,
particularly if the Company is not successful in selling sufficient quantities
of products. In addition, the Company may require additional funding to
implement the development of membrane technology recently acquired from Hydro
Components, Inc.
The above discussion is based largely on the Company's expectations; contains
forward looking statements, and is subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially as a result of a variety of factors, including market
acceptance of the Company's products, the success of the Company's research and
development activities, prevailing economic conditions as they effect the water
purification industry in general and the ability to raise sufficient working
capital. In light of these risks and uncertainties, there can be no assurance
that the Company's expectations will, in fact, transpire or prove to be
accurate.
14
<PAGE> 15
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1.
- -------------------------------------------------------------------------------
In December, 1993, a $20,270 default judgment was rendered in the Los Angeles
County Municipal Court against the Company unpaid corporate credit card charges.
As of October 31, 1997, the Company had accrued an additional $10,474 in
interest on such judgment. In June, 1998, the Company entered into an agreement
to settle the judgment in exchange for a total payment of $22,000 to be paid
over a three month period. As of July 31, 1998, the Company had paid a total of
$14,667 on this settlement and as of August 31, 1998 had paid the remaining
balance due.
In January, 1998, the Company satisfied the principal and interest due on a
$12,000 promissory note issued in May, 1997 to the Economic Development Bank for
Puerto Rico (the "Bank") under the terms of a settlement reached on a $3 million
default judgment rendered against the Company in June, 1996. The lawsuit, which
was brought by the Bank in February, 1993 in the San Juan Superior Court,
alleged that the Company, its bankrupt Puerto Rico subsidiary (HOH
International, Inc.), and the officers and directors of both, breached their
fiduciary duty in entering into a distribution agreement with HOH/CNM2
Enterprises which ultimately led to the dissolution of the subsidiary. With
payment of such note, the Company believes that it has satisfied all of its
obligations under the settlement and expects to receive a conditional
satisfaction of the judgment shortly.
As disclosed in the Company's Form 10-KSB for the fiscal year ended October 31,
1997, the Company is party to one other lawsuit (Case No. 92219, Ventura County
Municipal Court) claiming a total of $13,007 of past due payments. The status of
this matter has not materially changed from that which was previously reported
and the Company and its counsel expect the Company to prevail in this lawsuit.
No assurances can be given as to the ultimate outcome of any such litigation or
legal proceeding.
- -------------------------------------------------------------------------------
ITEM 2.
- -------------------------------------------------------------------------------
Since November 1, 1997, the Company has issued or sold the following securities:
On November 12, 1997, the Company issued 60,000 shares of Common Stock as
consideration for an option to purchase the building to which it relocated in
February, 1998. The Common Stock was valued at $1.50 per share and resulted in
an expense to the Company during the fiscal quarter ended January 31, 1998 in
the sum of $90,000.
In connection with the above building lease, in April, 1998, the Company issued
6,579 shares of Common Stock as a commission to the Company's real estate
broker. The fair market value of such shares was $10,000, or $1.52 per share,
and has been expensed by the Company and added to common stock and additional
paid-in capital.
15
<PAGE> 16
On January 29, 1998, the Company issued 206,186 shares of Common Stock upon the
conversion of a $200,000 loan made by principal shareholder, Anthony Frank. The
shares were issued at the below fair market value of $0.97 per share, resulting
in an expense as of April 30, 1998 in the sum of $7,217.
On March 25, 1998, Mr. Frank converted an additional $200,000 loan made to the
Company in February, 1998, together with $2,630 interest accrued thereon. The
Company issued 136,473 shares of Common Stock pursuant to such conversion at the
rate of $1.4848 per share. The fair market value of similar Common Stock was
equal to the conversion price of the shares in question, consequently, no
financing expense was recorded for this transaction.
In March, 1998, the Company issued 175,000 warrants to purchase Common Stock, in
partial consideration for a three year consulting arrangement entered into with
British Far East Holdings, Ltd of Del Mar, California to provide financial
advisory services. Of such warrants, 25,000 vest on the date of grant, with an
additional 50,000 vesting each twelve months thereafter. The warrants are
exercisable at $1.06 per share for a period of five (5) years from the vesting
date. The difference between the fair market value of similar Common Stock and
the purchase price of the warrants, aggregating $11,375, was expensed as of the
fiscal period ended April 30, 1998.
In March, 1998, the Company's Board of Directors authorized the issuance of an
aggregate of 500,000 warrants to purchase Common Stock to two consultants to the
Company in partial consideration for services to be rendered. The warrants are
exercisable at $1.125 per share, in equal increments over a period of five
years, commencing one year from the date of grant. The fair market value of the
Company's Common Stock was equal to the exercise price of such warrants and no
expense was recorded for these transactions.
Also in March, 1998, the Company's Board of Directors authorized the issuance of
250,000 and 150,000 ten-year warrants to purchase Common Stock to the Company's
President and Chief Financial Officer, respectively, as bonuses. The warrants
are exercisable, at $1.125 per share, in 50,000 increments commencing on the
date of grant. The fair market value of the Company's Common Stock equaled the
purchase price of such warrants, consequently, no expense was recorded for these
transactions.
In April, 1998, the Company began a private placement offering of units at
$25,000 per unit, consisting of 12,500 shares of Common Stock and 6,250
redeemable three-year warrants to purchase Common Stock at $3.00 per share. As
of July 31, 1998, the Company had received $550,000 in net proceeds on the sale
of 22 units, representing 275,000 shares of Common Stock and 137,500 warrants.
The warrants are redeemable by the Company, unless exercised, at $0.05 per
warrant at any time that the Common Stock shall equal or exceed $4.00 per share
for thirty consecutive trading days. In April, 1998, the Company issued 3,363
shares of Common Stock as a commission related to the sale of one of the above
private placement units. The fair market value of the Common Stock was $7,500,
or $2.23 per share, and was expensed and added to common stock and additional
paid-in capital.
16
<PAGE> 17
In May, 1998, the Company issued 4,103 shares of Common Stock in partial payment
to a public relations firm for services to be rendered. The fair market value of
the Common Stock issued was $7,500, or $1.83 per share, and was expensed and
added to common stock and additional paid-in capital for the fiscal period ended
July 31, 1998.
In July, 1998, the Company issued shares of Common Stock on the exercise of
12,000 options at $0.50 per share and received a note therefor. The transaction
has been recorded as an increase both to additional paid-in capital and notes
receivable on common stock.
As of September 11, 1998, the Company had issued 56,250 shares of Common Stock
on the exercise, at a reduced price of $1.00 per share, of 56,250 warrants
originally issued at prices ranging from $2.00 to $15.00 per share.
The issuance of securities in these transactions were exempt from registration
under the Securities Act of 1933, as amended (the "Act"), by virtue of Sections
3(b) and 4(2) of the Act, including Regulation D promulgated thereunder. The
Company believes that the recipients in each case acquired the securities for
investment only and not with a view to the distribution thereof and legends were
affixed to the stock certificates. Except as noted, no underwriters or brokers
were involved in any transaction.
- -------------------------------------------------------------------------------
ITEMS 3 THROUGH 6 OMITTED AS NOT APPLICABLE.
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 11, 1998
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)
17
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<PERIOD-START> NOV-01-1997
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