<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 JULY 31, 2000
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 September 7, 2000, 9,377,341 shares of the Registrant's stock were
outstanding.
================================================================================
<PAGE> 2
ELECTROPURE, INC.
Consolidated Balance Sheets
================================================================================
ASSETS
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents $ 96,637 $ 204,328
Certificate of deposit -- restricted 15,000 --
Trade accounts receivable 61,292 97,745
Inventories 209,180 204,888
Prepaid legal fees 92,500 92,500
Other prepaid expenses 4,237 12,007
---------- ----------
Total current assets 478,846 611,468
Property and equipment, net 536,410 566,872
Acquired technology, net of accumulated amortization 101,945 131,945
Building purchase option 105,000 105,000
---------- ----------
TOTAL ASSETS $1,222,201 $1,415,285
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
ELECTROPURE, INC.
Consolidated Balance Sheets
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 111,628 $ 86,544
Current portion of obligations under capital leases 8,172 9,465
Note payable to bank 13,252 --
Note payable to officer -- 7,632
Customer deposit 24,994 168,755
Accrued payroll 89,197 87,986
Other accrued liabilities 63,060 51,630
------------ ------------
Total current liabilities 310,303 412,012
Obligations under capital leases, net of current portion 6,614 1,298
Note payable to officer, net of current portion -- 4,683
------------ ------------
TOTAL LIABILITIES 316,917 417,993
============ ============
Commitments and contingencies
Redeemable preferred stock; $0.01 par value;
2,600,000 shares authorized, issued and outstanding
at July 31, 2000 and October 31, 1999 26,000 26,000
Shareholders' equity:
Series B convertible preferred stock; $1.00 par value;
1,000,000 shares authorized, issued and outstanding
at July 31, 2000 and October 31, 1999 1,000,000 1,000,000
Common stock; $0.01 par value; 20,000,000 shares
authorized; 8,877,341 and 7,791,425 shares issued
and outstanding at July 31, 2000 and October 31, 1999 88,773 77,914
Class B common stock; $0.01 par value; 83,983
shares authorized, issued and outstanding at
July 31, 2000 and October 31, 1999 840 840
Additional paid-in capital 22,180,080 20,971,537
Accumulated deficit (22,321,595) (21,018,249)
Notes receivable on common stock (68,814) (60,750)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 879,284 971,292
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,222,201 $ 1,415,285
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
ELECTROPURE, INC.
Consolidated Statements of Operations
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 206,361 $ 145,786 $ 657,918 $ 557,240
Cost of sales 247,852 222,985 800,020 671,861
----------- ----------- ----------- -----------
Gross profit (loss) (41,491) (77,199) (142,102) (114,621)
----------- ----------- ----------- -----------
Operating costs and expenses:
Research and development 121,361 218,104 334,519 543,134
Salaries 88,896 70,092 297,999 249,445
Consulting 26,461 80,941 88,642 223,379
Other operating expenses 103,118 99,244 443,006 362,989
----------- ----------- ----------- -----------
Total operating expenses 339,836 468,381 1,164,166 1,378,947
----------- ----------- ----------- -----------
Loss from operations (381,327) (545,580) (1,306,268) (1,493,568)
Other income (expense):
Interest income 1,966 3,795 11,258 12,405
Interest expense (3,964) (2,012) (7,536) (2,012)
----------- ----------- ----------- -----------
Interest income, net (1,998) 1,783 3,722 10,393
----------- ----------- ----------- -----------
Loss before provision for income taxes (383,325) (543,797) (1,302,546) (1,483,175)
Provision for income tax -- -- (800) (800)
----------- ----------- ----------- -----------
NET LOSS $ (383,325) $ (543,797) $(1,303,346) $(1,483,975)
=========== =========== =========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.04) $ (0.06) $ (0.15) $ (0.17)
=========== =========== =========== ===========
Weighted average shares outstanding 8,713,496 8,586,208 8,409,944 8,611,855
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
ELECTROPURE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' 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, 1999 1,000,000 7,791,425 83,983 $1,000,000 $77,914
Common shares issued upon exercise of options -- 18,210 -- -- 182
Common shares and warrants issued in private placement -- 1,065,206 -- -- 10,652
Common shares issued for public relations services -- 2,500 -- -- 25
Options and warrants granted to employees and
consultants for services -- -- -- -- --
Increase in notes receivable on common stock -- -- -- -- --
Net loss -- -- -- -- --
Balance, July 31, 2000 1,000,000 8,877,341 83,983 $1,000,000 $88,773
========= ========= ====== ========== =======
</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, 1999 $840 $20,971,537 (21,018,249) $ (60,750) $ 971,292
Common shares issued upon exercise of options -- 1,639 -- -- 1,821
Common shares and warrants issued in private placement -- 1,054,554 -- -- 1,065,206
Common shares issued for public relations services -- 2,163 -- -- 2,188
Options and warrants granted to employees and
consultants for services -- 150,187 -- -- 150,187
Increase in notes receivable on common stock -- -- -- (8,064) (8,064)
Net loss -- -- (1,303,346) -- (1,303,346)
Balance, July 31, 2000 $840 $22,180,080 $(22,321,595) $ (68,814) $ 879,284
==== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
ELECTROPURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Nine months ended
July 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,303,346) $(1,483,175)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 101,410 32,159
Amortization 30,000 386,247
Issuance of warrants for services 150,188 64,770
(Increase) decrease in assets:
Trade accounts receivable 36,453 (46,122)
Accounts receivable - related party -- (70,627)
Prepaid legal and other expenses 7,770 100,000
Inventories (4,292) (135,380)
Other current assets -- 47,071
Increase (decrease) in liabilities:
Trade accounts payable 25,084 (38,932)
Customer deposit (143,761) 70,160
Accrued payroll and other liabilities 16,663 (12,731)
----------- -----------
CASH USED IN OPERATING ACTIVITIES (1,083,831) (1,086,560)
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment (70,948) (199,874)
Purchase of certificate of deposit (15,000) --
----------- -----------
CASH USED IN INVESTING ACTIVITIES (85,948) (199,874)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
Electropure, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine months ended
July 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows provided by (used in) financing activities:
Principal payments on notes payable (14,063) (4,609)
Proceeds from issuance of note payable 15,000 --
Proceeds from the issuance of common stock 1,059,330 620,000
Proceeds from exercise of warrants 1,821 --
Proceeds from issuance of preferred stock to a
related party -- 1,000,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 1,062,088 1,615,391
----------- -----------
NET INCREASE (DECREASE) IN CASH (107,691) 328,957
CASH AT BEGINNING OF PERIOD 204,328 57,440
----------- -----------
CASH AT END OF PERIOD $ 96,637 $ 386,397
=========== ===========
CASH PAID DURING THE NINE MONTHS ENDED JULY 31 FOR:
Interest $ 3,028 2,012
Income Taxes $ 800 --
Supplemental Schedule of Non-Cash Investing and Financing Activities
Litigation settlement:
Return and cancellation of common stock $ 292,500
Surrender of acquired technology $ (292,500)
Issuance of common stock for prepaid legal fees:
Prepaid legal fees $ 100,000
Issuance of common stock $ (100,000)
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. It is
suggested that the accompanying condensed financial statements be read in
conjunction with our audited financial statements and footnotes as of and
for the year ended October 31, 1999, included in our Annual Report on Form
10-KSB.
Principles of Consolidation
The consolidated financial statements of Electropure, Inc. and
Subsidiaries include the accounts of its wholly-owned subsidiaries,
Electropure EDI, Inc. and Micro Imaging Technology, both of which were
incorporated in February 2000. All significant intercompany balances have
been eliminated in consolidation.
Financial Statement Classification
Certain amounts presented within the 1999 financial statements have been
reclassified in order to conform to the 2000 financial statement
presentation.
2. NOTES PAYABLE
At July 31, 2000 and October 31, 1999, notes payable consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
------ ----
NOTE PAYABLE TO BANK
<S> <C> <C>
Note payable to bank, collateralized by a $15,000 certificate of
deposit, with an interest rate of 8% per annum, payable in 11 monthly
installments of $678 and one final payment on April 25,
2001 of $8,477 13,252 --
Less: Current Portion 13,252 --
------ ----
LONG TERM PORTION OF NOTE PAYABLE TO BANK $ -- $ --
</TABLE>
8
<PAGE> 9
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
NOTE PAYABLE TO OFFICER
Note payable to officer, collateralized by an automobile, with
interest at 9% per annum, payable in monthly installments of $636
through July 15, 2001. Note paid in full on April 26, 2000 -- 12,315
Less: Current portion -- (7,632)
-------- --------
LONG TERM PORTION OF NOTES PAYABLE TO OFFICER $ -- $ 4,683
</TABLE>
3. 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 we 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 us. We paid $3,000 as of
July 31, 2000 and will satisfy the balance due in monthly installments
of $1,000 through October 2000. As part of the settlement agreement, we
are entitled to recover the EDI module held by Staar.
Concentration of Risk
Financial instruments which potentially subject us 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 our exposure to credit losses and reserve for those accounts
receivable that we deem to be not collectible.
During the nine months ended July 31, 2000:
- Approximately 76% of the $364,630 in sales of our EDI products
were made to foreign customers. One such foreign customer,
Mihama Corporation of Tokyo, Japan, accounted for 43% of EDI
product sales. Of the total EDI sales during the period,
approximately 56% represented sales of the redesigned EDI module
which incorporates our proprietary ion exchange membranes.
9
<PAGE> 10
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- Less than 1% of the $224,402 in sales of our Hydro Components
products were made to foreign customers. Two domestic companies
accounted for approximately 53% of Hydro Components sales;
Lenscrafters at 41% and McMaster-Carr Corporation at 12%.
- Our membrane division began selling ion exchange membranes for
use in electrodialysis, electrodeionization, electrodeposition
and general electrochemical separations. One domestic customer,
Purolite Company, accounted for 69% of the total of $68,886 in
membrane product sales.
We make all sales and receive all payments in U.S. dollars. No provision
has been recorded for uncollectable trade accounts receivable for the
period ended July 31, 2000.
4. SHARE TRANSACTIONS
Private Placement Offering - Common Stock
In a February 2000 private placement offering, we sold units consisting
of 25,000 shares of common stock and 12,500 redeemable detachable
three-year warrants to purchase common stock at an exercise price of
$2.00 per share. The warrants are redeemable at $0.05 per warrant if the
price of common stock equals or exceeds $4.00 per share for 30
consecutive business days. We issued units representing 660,000 shares
of common stock for net proceeds of $160,000 and a note receivable in
the amount of $500,000 was also issued to a related party who is our
largest shareholder. This receivable was collected in full as of July
31, 2000.
Common Shares Issued for Debt
Between December 1999 and February 2000, we borrowed $400,000 from a
related party who is the largest shareholder. The terms of the notes
provided for conversion into our securities on terms to be mutually
agreed. On February 24, 2000, the notes were converted into the above
private placement securities. We issued 405,206 shares of common stock
and 202,603 redeemable detachable three-year warrants to purchase common
stock at an exercise price of $2.00 per share at fair market value of
$405,206 in connection with the conversion of convertible notes payable
and accrued interest totalling $5,206.
Common Shares Issued for Warrants Exercised
On November 1, 1999, warrants were exercised resulting in the purchase
of 18,210 shares of common stock and we received net proceeds of $1,821.
10
<PAGE> 11
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Common Shares Issued for Services
On February 23, 2000, we issued 2,500 shares of common stock, valued at
$2,188, to a consulting firm in partial payment for public relations
services to be rendered. The value attributable to the services involved
in the transaction was determined based on the fair value of the 2,500
shares of common stock issued and has been expensed and added to common
stock and additional paid-in capital.
5. 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 July 31, 2000 and 1999 are
as follows.
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss available to common shareholders $ (383,325) $ (543,797) $(1,303,346) $(1,483,975)
=========== =========== =========== ===========
Weighted average shares outstanding: 8,713,496 8,586,208 8,409,944 8,611,855
=========== =========== =========== ===========
Basic and diluted loss per common $ (0.04) $ (0.06) $ (0.15) $ (0.17)
----------- ----------- ----------- -----------
</TABLE>
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 July 31, 2000 and July 31, 1999 as
follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Stock options and warrants 5,351,327 3,525,124
Convertible preferred stock 1,000,000 1,000,000
</TABLE>
6. BUSINESS SEGMENTS
We have four reportable segments: water purification (Electropure, EDI,
Inc. ["EDI"]), hydro components ("HC"), ion exchange membranes ("MEM")
(a start up segment), and fluid monitoring (Micro Imaging Technology
["MIT"]). 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. The
membrane segment sells ion exchange membranes for use in
electrodialysis, electrodeionization, electrodeposition and general
11
<PAGE> 12
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
electrochemical separations. The fluid monitoring segment is developing
technology that is anticipated will enable real time identification of
contamination in fluids.
Our reportable segments are strategic business units that offer
different products, are managed separately, and require different
technology and marketing strategies. The accounting policies of the
segments are those described in the summary of significant accounting
policies. We evaluate performance based on results from operations
before income taxes and interest, net, excluding nonrecurring gains and
losses.
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
EDI $ 132,852 $ 46,114 $ 364,630 $ 243,573
HC 48,469 99,672 224,402 313,667
MEM 25,040 -- 68,886 --
MIT -- -- -- --
----------- ----------- ----------- -----------
TOTAL REVENUE $ 206,361 $ 145,786 $ 657,918 $ 557,240
=========== =========== =========== ===========
Operating Loss
EDI $ (69,204) $ (122,502) $ (281,868) $ (551,249)
HC 7,901 55,303 24,749 (73,359)
MEM 5,419 (10,000) (143,769) (112,500)
MIT (51,686) (218,104) (302,546) (495,484)
Corporate (152,872) (250,277) (602,834) (260,976)
----------- ----------- ----------- -----------
TOTAL OPERATING LOSS $ (381,327) $ (545,580) $(1,306,268) $(1,493,568)
=========== =========== =========== ===========
Depreciation and Amortization
EDI $ 7,397 $ 836 $ 22,102 $ 836
HC 35 -- 233 --
MEM 24,838 10,000 74,515 30,000
MIT 1,095 19,337 3,235 357,161
Corporate 10,408 10,136 31,325 30,409
----------- ----------- ----------- -----------
TOTAL DEPRECIATION AND AMORTIZATION $ 43,773 $ 40,309 $ 131,410 $ 418,406
=========== =========== =========== ===========
Expenditures for Long Lived Assets
EDI $ 16,687 $ 29,034 $ 53,499 $ 39,575
HC -- -- -- --
MEM 840 38,989 5,252 132,117
MIT -- 2,045 1,505 10,373
Corporate -- 1,268 10,692 17,809
----------- ----------- ----------- -----------
TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 17,527 $ 71,336 $ 70,948 $ 199,874
=========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
BUSINESS SEGMENT INFORMATION, CONTINUED:
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Georgraphic Information:
Revenues
<S> <C> <C> <C> <C>
United States $146,372 $133,274 $364,985 $372,019
Japan -- -- 170,300 130,427
Germany 1,254 2,300 44,676 10,235
Other foreign countries 58,735 10,212 77,957 44,559
-------- -------- -------- --------
TOTAL REVENUES $206,361 $145,786 $657,918 $557,240
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
---------- ----------
<S> <C> <C>
Identifiable Assets
EDI $ 404,852 $ 426,103
HC 139,869 634,154
MEM 427,360 --
MIT 79,804 122,374
Corporate 170,316 232,654
---------- ----------
TOTAL IDENTIFIABLE ASSETS $1,222,201 $1,415,285
========== ==========
</TABLE>
7. SUBSEQUENT EVENTS
In August 2000, the Board of Directors authorized an offering of up to
100 Units of securities, each Unit consisting of:
- Fifteen Thousand (15,000) shares of Electropure, Inc. common
stock, plus
- Seven Thousand Five Hundred (7,500) warrants to purchase
Electropure common stock at $1.25/share - exercisable commencing
on July 31, 2001 and expiring on June 30, 2005, plus
- Seven Thousand Five Hundred (7,500) warrants to purchase the
common stock of our wholly-owned subsidiary, Micro Imaging
Technology, common stock at $1.25/share.
MIT warrants are exercisable commencing on July 31, 2001 or at such time
as MIT securities are publicly traded, whichever occurs first. MIT
warrants expire on June 30, 2005.
The purchase price for each Unit is $15,000 and there is no minimum
subscription amount. The offering expires on October 15, 2000.
In August 2000, our largest shareholder subscribed for one-third of the
above private placement offering and received 500,000 shares of common
stock and 250,000 warrants each of Electropure and Micro Imaging
Technology at an exercise price of $1.25 per warrant. We realized net
proceeds of $250,000 on the sale of securities and a note receivable in
the sum of $250,000.
13
<PAGE> 14
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 1999 and fiscal 2000 are for the nine months ended
July 31, 1999 and 2000, respectively.
Sales increased in fiscal 2000 by $100,678 as compared to fiscal 1999
primarily due to enhanced efforts to market the EDI product line and our
ion exchange membrane products. The increase in sales was partially
offset by a decrease in sales of our Hydro Components products due to a
temporary decrease in marketing personnel during the period.
Costs of goods sold for fiscal 2000 increased by $118,159 partly due to
depreciation expense on new manufacturing equipment placed in service in
fiscal 2000 and as a result of writing off obsolete inventory.
Research and development expenses for fiscal 2000 decreased by $208,615
compared to fiscal 1999. 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. The
decrease primarily results from a reduction in non-capitalized equipment
expenditures and consulting expenses related to the program as well as a
reduction in amortization expense relating to proprietary technology
when the net book value of the technology was offset against shares
issued for the technology that were cancelled in the fiscal year ended
October 31, 1999.
General and administrative expenses for fiscal 2000 increased by $3,834
as compared to fiscal 1999. The increase results primarily from a
$48,554 increase in salaries and related expenses and increased
operating expenses of $80,817 due primarily to the cost of issuing
warrants for services. These increases were partially offset by a
decline of $134,737 in consulting expenses.
Interest income arose from short-term investments and decreased by
$1,147 for the fiscal period ended July 31, 2000 as compared to the
prior year period, reflecting a reduction in available working capital.
Interest expense for fiscal 2000 increased by $5,524 compared to the
prior period primarily due to equipment and automobile financing
activities.
14
<PAGE> 15
We realized a net loss before income taxes of $1,302,546 for fiscal
2000, representing a decrease of $180,629 from the prior year level. The
decrease reflects a small increase in sales profitability and a
substantial reduction in research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, we had working capital of $168,543. This represents a
working capital decrease of $30,913 compared to that reported at October
31, 1999 and primarily reflects the cost of writing off obsolete
inventory during the period.
Our primary sources of working capital have been from short term loans
and from the sale of private placement securities. In February 2000, we
borrowed $100,000 from Mr. Anthony Frank, a majority shareholder, at a
10% annual interest rate. During the nine months ended July 31, 2000, we
received $1,065,206 from the sale of 1,065,206 shares of common stock
and 532,603 warrants to purchase common stock at $2.00 per share. Of the
proceeds received, $400,000 represented the conversion of principal
loans, plus $5,206 in accrued interest, on loans we had received between
December 1999 and February 2000 from Mr. Anthony Frank.
In August 2000, we received $250,000 and a note receivable in the sum of
$250,000 on the sale of private placement securities to our majority
shareholder.
During the latter part of fiscal year 1999, we curtailed our marketing
activity on the EDI product while modifications could be effected to the
EDI design and the ion permeable membrane derived from the Hydro
Components acquisition could be developed. Sales began in late December
1999 of the new EDI model called XL, which incorporates the more
cost-effective ion permeable membranes. Sales of EDI products increased
during the three months ended July 31, 2000 by 57% over the two quarters
ended April 30, 2000 and are expected to continue to increase through
the end of fiscal year 2000.
PLAN OF OPERATION
In the opinion of management, available funds and funds to be realized
from the note receivable from private placement subscriptions discussed
above will satisfy our working capital requirements through December
2000 and provides for an increase in marketing efforts. In addition, we
have formed two Nevada corporations which are wholly-owned subsidiaries
of Electropure:
- Micro Imaging Technology was formed in February 2000 and will
conduct research and development operations on the detection and
identification of fluid-borne microorganisms. We filed a patent
application on this technology in February 2000. It is
contemplated that, within the next 60 days, we will enter into
an arrangement with MIT to transfer all patent rights, in
exchange for a combination of stock, options and cash, as well
as a percentage of future revenues.
- We formed Electropure EDI, Inc. in February 2000 to conduct
manufacturing and sales operations for the EDI line of products.
15
<PAGE> 16
In May 2000, we appointed an exclusive representative to sell our EDI
products to original equipment manufacturers in Belgium, Luxembourg,
Germany, Austria, Switzerland, France, Spain, Portugal, Italy, Greece,
Hungary, Bulgaria, Romania, Czech Republic, Slovakia, Poland, Denmark,
Norway, Sweden, and Finland. The arrangement also provides that this
representative may sell EDI products to both end-users and OEM's located
in The Netherlands. The appointment expires on May 8, 2001 and provides
that our representative will receive a 10% commission on all EDI orders
in the stated territories.
Currently, we are seeking short term working capital through loans
and/or the sale of private placement securities so that we may expand
our EDI marketing efforts and further the MIT research program. This
approach is intended to optimize the value of the MIT System when we are
in a position to discuss licensing and/or joint venture arrangements
with potential candidates. Similar arrangements may arise for our EDI
technology although we are not conducting any licensing or joint venture
discussions for either the EDI or MIT technology at the current time.
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 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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<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, a cross complaint for breach of contract,
misrepresentation and negligence was filed against us 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
No reportable transactions occurred during the three months ended July
31, 2000.
ITEMS 3 THROUGH 5 OMITTED AS NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(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: September 7, 2000
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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