<PAGE> 1
----------------------------------------------------------
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 JANUARY 31, 1999
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 [ ] No [ X ].
At May 10, 1999, 8,618,925 shares of the Registrant's stock were
outstanding.
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<PAGE> 2
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
------------ ------------
ASSETS 1998 1999
------ ------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 57,440 $ 919,680
Receivables:
Trade accounts receivable 161,225 75,345
Notes receivable - related party 70,627 76,980
------------ ------------
231,852 152,325
------------ ------------
Inventory 320,532 366,830
------------ ------------
Other current assets 24,505 16,505
------------ ------------
TOTAL CURRENT ASSETS 634,329 1,455,340
------------ ------------
Propery and equipment, at cost:
Furniture and fixtures 94,711 98,091
Automobiles 23,000 23,000
Leasehold improvements 28,443 30,209
------------ ------------
146,154 151,300
Less accumulated depreciation and amortization 12,109 20,531
------------ ------------
Property and equipment, net 134,045 130,769
------------ ------------
Intangible assets, net of accumulated amortization 528,192 495,835
Other assets 90,000 90,000
------------ ------------
$ 1,386,566 $ 2,171,944
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
------------------------------------ ------------ ------------
<S> <C> <C>
(Unaudited)
Current liabilities:
Trade accounts payable $ 126,843 $ 132,416
Note payable to officer 6,216 6,357
Customer deposit 100,000 170,000
Other current liabilities 116,313 92,118
------------ ------------
TOTAL CURRENT LIABILITIES 349,372 400,891
------------ ------------
Note payable to officer, net of current portion 12,315 11,669
Redeemable convertible preferred stock, $.01 assigned par
par value. Authorized 2,600,000 shares; issued and
outstanding 2,600,000 shares in 1998 and 1999 26,000 26,000
Stockholders' equity:
Series B preferred stock, $1.00 assigned par value, 1,000,000 shares
authorized; none issued and outstanding
in 1998; 1,000,000 shares issued and outstanding in 1999 -- 1,000,000
Common stock, $.01 assigned par value. Authorized
20,000,000 shares; 8,618,925 shares issued and
outstanding in 1998 and 1999 86,189 86,189
Class B common stock, $.01 assigned par value, 83,983
shares authorized, issued and outstanding in 1998 and 1999 840 840
Additional paid-in capital 20,032,205 20,052,747
Accumulated deficit (19,059,605) (19,345,642)
Notes receivable on common stock (60,750) (60,750)
------------ ------------
998,879 1,733,384
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,386,566 $ 2,171,944
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
--------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales $ 125,257 $ 279,971
Cost of Sales 104,227 337,605
------------ ------------
Gross profit (loss) 21,030 (57,634)
------------ ------------
Costs and expenses:
Research and Development 43,902 166,939
General and administrative 113,890 62,414
------------ ------------
157,792 229,353
------------ ------------
Loss from operations (136,762) (286,987)
Interest expense, net (264,534) 950
------------ ------------
Loss before provision for income taxes (401,296) (286,037)
Provision for income tax (800) (800)
------------ ------------
NET LOSS $ (402,096) $ (286,837)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.08) $ (0.03)
============ ============
Weighted average common and common
equivalent shares outstanding 5,233,198 9,066,930
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
ELECTROPURE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Series B
Convertible Class B Convertible
Preferred Common Common Preferred Common
Shares Shares Shares Stock Stock
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1998 -- 8,618,925 83,983 -- 86,189
Series B Convertible Preferred shares issued
in private placement offering 1,000,000 -- -- 1,000,000 --
Warrants granted on common stock to
employees and consultants for services -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, January 31, 1999 1,000,000 8,618,925 83,983 $ 1,000,000 $ 86,189
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Note
Class B Additional Receivable
Common Paid-in Accumulated Common
Stock Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1998 840 20,032,205 (19,059,605) (60,750) 998,879
Series B Convertible Preferred shares issued
in private placement offering -- -- -- -- 1,000,000
Warrants granted on common stock to
employees and consultants for services -- 20,542 -- -- 20,542
Net loss -- -- (286,037) -- (286,037)
------------ ------------ ------------ ------------ ------------
Balance, January 31, 1999 $ 840 $ 20,052,747 $(19,345,642) $ (60,750) $ 1,733,384
------------ ------------ ------------ ------------ ------------
</TABLE>
5
<PAGE> 6
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended
January 31,
---------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (401,296) $ (286,037)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 515 8,422
Amortization 22,357 32,357
Issuance of warrants for services -- 20,542
Interest expense arising from issuance of convertible debt 263,919 --
Increase (decrease) in assets:
Trade accounts receivable (62,091) 85,880
Accounts receivable - related party 36,329 (1,353)
Inventories (5,359) (46,298)
Other current assets (42,706) 8,000
Increase (decrease) in liabilities:
Trade accounts payable (1,100) 5,573
Customer deposit -- 70,000
Other current liabilities (15,574) (24,195)
----------- -----------
CASH USED IN OPERATING ACTIVITIES (205,006) (127,109)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment (14,824) (5,146)
Increase in notes receivable, related parties (5,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (14,824) (10,146)
----------- -----------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable (12,429)
Proceeds from issuance of Series B Convertible Preferred Stock -- 1,000,000
Proceeds from notes payable to stockholders converted to equity 200,000 (505)
Proceeds from collection of receivables on common stock 25,000 --
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 212,571 999,495
----------- -----------
Net increase (decrease) in cash (7,259) 862,240
CASH AT BEGINNING OF PERIOD 367,680 57,440
----------- -----------
CASH AT END OF PERIOD $ 360,421 $ 919,680
=========== ===========
</TABLE>
6
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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.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. 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, 1998.
Certain reclassifications have been made to prior period financial statements to
conform with the 1998 presentation.
- --------------------------------------------------------------------------------
(2) INVENTORY
- --------------------------------------------------------------------------------
Inventory, stated at the lower of cost (determined using the first in, first out
method, or replacement market) consists of components for both water
purification and ion exchange membrane products.
- --------------------------------------------------------------------------------
(3) EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share". This pronouncement replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share
("EPS"), respectively. Earnings for the three month periods ended January 31,
1998 and 1999 have been calculated in accordance with this pronouncement.
Basic EPS is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is similar to Basic EPS except that the weighted average of
common shares outstanding is increased to include the number of additional
common shares that would have been outstanding if potentially dilutive common
shares had been issued.
- --------------------------------------------------------------------------------
(4) CONCENTRATIONS OF RISK
- --------------------------------------------------------------------------------
During the three months ended January 31, 1999, $180,299 of the Company's sales
of water and wastewater treatment products were from EDI products, and $99,672
was generated from the sale of ion membrane exchange products. The Company had
$125,257 in sales of its EDI products and no sales of its ion exchange membrane
products during the three months ended January 31, 1998.
Approximately 88% of the Company's sales of EDI products during the three months
ended January 31, 1999 were made to foreign customers. One such foreign customer
accounts for 72% of EDI
7
<PAGE> 8
product sales. The Company makes all sales and receives all payments in U.S.
dollars on all foreign sales. Management believes that trade accounts
receivable, aggregating $75,345 for the period ended January 31, 1999, are fully
collectable, and therefore no provision has been recorded for uncollectable
trade accounts receivable.
- --------------------------------------------------------------------------------
(5) SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
In February, 1999, the Company granted 150,000 warrants to three employees,
exercisable at $0.90 per share. Of such warrants, 25,000 vest immediately and
the balance of warrants vest over five years commencing one year after the date
of grant.
In March, 1999, 175,000 warrants, which vest over five years, were granted at
$1.00 per share for future consulting services.
In May, 1999, the Company granted an additional 235,000 warrants to four
employees, exercisable at $1.00 per share. The warrants vest over a five year
period commencing one year from the grant date. An additional 50,000 warrants,
vesting over five years, were granted at $1.00 per share for future consulting
services.
In May, 1999, the Company authorized the issuance of 100,000 shares of Common
Stock, with a fair market value of $100,000, as a retainer against which fees
and expenses for new patent related work are to be charged by its patent
lawfirm.
8
<PAGE> 9
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 expected by the Company. Potential risks and uncertainties that could
affect the Company's future operating results include, without limitation,
economic, competitive and legislative developments.
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
References to 1998 and 1999 are for the three months ended January 31, 1998 and
1999, respectively.
Sales increased for the fiscal 1999 by $154,714 as compared to fiscal 1998 when
the Company had not yet begun sales of its ion exchange membrane products.
Research and development expenses for fiscal 1999 increased by $123,037 compared
to fiscal 1998. These expenses arise from the program which the Company
initiated in December, 1997 to develop the drinking water monitoring technology
acquired from Wyatt Technology Corporation in late October, 1997. The increase
in such expenses result, primarily, from the additional employees and
consultants engaged by the Company to conduct such research program.
General and administrative expenses for fiscal 1999 decreased by $51,476 as
compared to fiscal 1998. The decrease results primarily from a reduction in
legal and accounting expenses during the current period.
Interest income and expense activity is reflected as a net figure and represents
a decrease of $265,484 in interest expense for the fiscal period ended January
31, 1999 as compared to the prior year period. Interest income for fiscal 1999,
in the sum of $950, arose from a short-term loan. The primary component of
interest expense in fiscal 1998 arose from the conversion of a $200,000
principal loan.
The Company realized a net loss before income taxes of 286,037 for fiscal 1999,
representing a decrease of $115,259 from the prior year level. The decrease was
primarily due, as noted above, to a decrease in interest expense as well as
legal and accounting expenses.
9
<PAGE> 10
- -------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At January 31, 1999, the Company had net working capital (total current assets
less total current liabilities) of $1,054,449. The increase in working capital,
compared to that reported at October 31, 1998, results primarily from the sale
of $1 million in Series B Preferred shares of the Company. The Company accrued
$170,000 pursuant to the prepayment in that amount by a customer for EDI
products to be delivered at a later date.
Sales activities increased during fiscal 1999 as compared to the prior year
period and although the Company incurred a loss from such operations for the
current period, cost-cutting efforts and increased marketing activities are
expected to generate higher sales revenues during the latter part of fiscal
1999. During fiscal 1998, the Company primarily funded its working capital and
other cash needs from the sale of securities. In January, 1999, the Company
received net proceeds of $1,000,000 pursuant to a private placement sale of
Series B Convertible Preferred shares to a major shareholder of the Company. See
Item 2 - "Changes in Securities."
- -----------------
PLAN OF OPERATION
- -----------------
In the opinion of management, available funds will satisfy the Company's working
capital requirements through October, 1999. The Company intends to fund its
working capital requirements by establishing strategic alliances with potential
joint venture partners for specific products under development or now being
produced by the Company. The Company is currently in the preliminary stage of
discussions with a potential strategic partner regarding further development and
use of the membrane technology acquired by the Company from Hydro Components in
February, 1998. The Company further believes that similar opportunities will
become available for other potential products, i.e., the Laserpure monitoring
technology, as successful development efforts are achieved. In an effort to
conserve available working capital, the Company intends to also utilize leasing
arrangements and/or debt financing where available in order to continue its
development programs. This approach will also permit the Company to acquire
capital equipment which will allow for lower production costs of various EDI
module components, particularly, the membranes utilized therein. The Company's
management believes that, if necessary, the Company will be able to raise
additional working capital by the private sale of its securities.
No assurances can be given that currently available funds will satisfy the
working capital needs of the Company for the period estimated, or; that the
Company 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 the Company. 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 the Company.
The Company will be required to raise substantial amounts of new financing, in
the form of additional equity investments, loan financing, or from strategic
partnerships, in order to carry out its business objectives. There can be no
assurance that the Company will be able to obtain such
10
<PAGE> 11
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 certain 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, particularly research and development programs, 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.
11
<PAGE> 12
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
On or about February 15, 1999, the Company filed a complaint against Wyatt
Technology Corporation ("Wyatt Technology") in the Orange County Superior Court
of California, Case No. 805529. The Complaint alleges a cause of action for
breach of contract, specific performance, and reformation, as well as a
temporary restraining order and further injunctive and declaratory relief. The
lawsuit alleges that Wyatt Technology breached the October, 1997 Technology
Transfer Agreement (the "Agreement") by which the Company obtained a license to
use and develop certain laser-based technology and patents held by Wyatt
Technology.
On February 23, 1999, Orange County Superior Court Judge Randell Wilkinson
granted the Company's application for ex parte relief and issued a temporary
order restraining Wyatt Technology, and its officers, agents, and
representatives, from breaching the Technology Transfer Agreement; from taking
any action to rescind the Agreement, or any of the Company's rights thereunder;
and from negotiating with any of the Company's competitors, or any third party,
regarding the licensing, use, dissemination, sale or transfer of any of the
technology which is the subject of the Agreement.
On or about March 9, 1999, Judge Wilkinson vacated the temporary restraining
order and confirmed a stipulation entered into between the parties that, among
other things, pending the final resolution of the Company's lawsuit against
Wyatt Technology, neither Wyatt Technology, nor any of its agents, servants,
employees, representatives or other persons acting in concert or participating
with them, will engage in negotiations with any third party regarding the
licensing, use, dissemination, sale or transfer of any of the technology which
is the subject of the Technology Transfer Agreement; nor provide the use of or
disseminate in any way, any of that technology to any third party.
On or about February 23, 1999, Wyatt Technology filed a cross-complaint against
the Company, Anthony M. Frank, individually; and 25 unnamed "Doe" defendants for
relief based on alleged (1) breach of contract; (2) rescission of contract; (3)
fraud; (4) declaratory relief; and (5) intentional interference with economic
relationship. The Company was unaware of the filing of this cross-complaint
until it was served on the Company on or about March 11, 1999.
The Company and its counsel believe that it will prevail on the merits if this
matter should go to trial and the Company intends to vigorously prosecute this
lawsuit and defend this cross-complaint.
12
<PAGE> 13
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES
- --------------------------------------------------------------------------------
On January 15, 1999, the Company sold one million shares of its Series B
Convertible Preferred Stock ("Series B Preferred Stock") to a single individual
who is a major shareholder of the Company in a private transaction for
$1,000,000. The Series B Preferred Stock is convertible into one million shares
of the Company's common stock in whole or in part at any time by its holder. The
Series B Preferred Stock is automatically convertible on the same basis if
either of two events occur: a) the company makes a public offering of any of its
securities, or b) the Company's securities are admitted for listing on a
national securities exchange market system or the NASDAQ system. In the event
the number of shares of the Company's common stock is increased or decreased as
a result of a stock split, stock dividend, reverse stock split, or otherwise,
the number of shares of common stock into which each share of Series B Preferred
Stock may be converted shall concurrently be proportionately issued or
decreased. The Series B Preferred Stock has no rights for participation in any
new or additional issuances of any Company equity instruments.
Each share of Series B Preferred Stock is entitled to four votes on all matters,
including the election of directors and shall vote as a single class along with
the Common Stock, Class B Common Stock and Convertible Preferred Stock.
In any liquidation or dissolution of the Company, the holders of the Series B
Preferred Stock will be entitled to a liquidation preference of $1 per share.
The issuance of securities was 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
recipient 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 5 OMITTED AS NOT APPLICABLE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
Exhibit Number Description
-------------- -----------------------
27 Financial Data Schedule
(b) Report on Form 8-K.
None.
13
<PAGE> 14
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 10, 1999
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)
14
<PAGE> 15
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 919,680
<SECURITIES> 0
<RECEIVABLES> 152,325
<ALLOWANCES> 0
<INVENTORY> 366,830
<CURRENT-ASSETS> 1,455,340
<PP&E> 151,300
<DEPRECIATION> 20,531
<TOTAL-ASSETS> 2,171,944
<CURRENT-LIABILITIES> 400,891
<BONDS> 0
0
1,026,000
<COMMON> 86,189
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,171,944
<SALES> 279,971
<TOTAL-REVENUES> 279,971
<CGS> 337,605
<TOTAL-COSTS> 229,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 950
<INCOME-PRETAX> (286,037)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (286,837)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (286,837)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
