<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 APRIL 30, 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 June 12, 2000 8,877,341 shares of the Registrant's stock were
outstanding.
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<PAGE> 2
ELECTROPURE, INC.
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents $ 131,896 $ 204,328
Certificate of deposit - restricted 15,000 --
Trade accounts receivable 71,895 97,745
Inventories 198,881 204,888
Prepaid legal fees 92,500 92,500
Other prepaid expenses 4,845 12,007
---------- ----------
Total current assets 515,017 611,468
Property and equipment, net 552,656 566,872
Acquired technology, net of accumulated amortization 111,945 131,945
Building purchase option 105,000 105,000
---------- ----------
TOTAL ASSETS $1,284,618 $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>
April 30, October 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 125,406 $ 86,544
Current portion of obligations under capital leases 11,847 9,465
Note payable to bank 15,000 --
Note payable to officer -- 7,632
Customer deposit 7,552 168,755
Accrued payroll 88,902 87,986
Other accrued liabilities 39,368 51,630
------------ ------------
Total current liabilities 288,075 412,012
Obligations under capital leases, net of current portion 7,083 1,298
Note payable to officer, net of current portion -- 4,683
------------ ------------
TOTAL LIABILITIES 295,158 417,993
------------ ------------
Commitments and contingencies
Redeemable preferred stock; $0.01 par value;
2,600,000 shares authorized, issued and outstanding 26,000 26,000
Shareholders' equity:
Series B convertible preferred stock; $1.00 par value;
1,000,000 shares authorized, issued and outstanding 1,000,000 1,000,000
Common stock; $0.01 par value; 20,000,000
shares authorized; 8,877,341 and 7,791,415
shares issued and outstanding 88,773 77,914
Class B common stock; $0.01 par value; 83,983
shares authorized, issued and outstanding 840 840
Additional paid-in capital 22,180,080 20,971,537
Accumulated deficit (21,938,270) (21,018,249)
Notes receivable on common stock (367,963) (60,750)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 963,460 971,292
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,284,618 $ 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 Six months ended
April 30, April 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 226,987 $ 131,483 $ 451,557 $ 411,454
Cost of sales 261,552 202,693 542,302 455,439
----------- ----------- ----------- -----------
Gross profit (loss) (34,565) (71,210) (90,745) (43,985)
----------- ----------- ----------- -----------
Operating costs and expenses:
Research and development 112,874 73,272 213,158 240,211
Salaries 101,668 61,915 217,930 94,484
Consulting 34,371 126,736 62,180 179,282
Other operating expenses 205,872 192,437 340,929 254,595
----------- ----------- ----------- -----------
Total operating expenses 454,785 454,360 834,197 768,572
----------- ----------- ----------- -----------
Loss from operations (489,350) (525,570) (924,942) (812,557)
Other income (expense):
Interest income 2,708 10,099 9,292 11,049
Interest expense (47) -- (3,571) --
----------- ----------- ----------- -----------
Interest income, net 2,661 10,099 5,721 11,049
----------- ----------- ----------- -----------
Loss before provision for income taxes (486,689) (515,471) (919,221) (801,508)
Provision for income tax (800) (800) (800) (800)
----------- ----------- ----------- -----------
NET LOSS $ (487,489) $ (516,271) $ (920,021) $ (802,308)
=========== =========== =========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.06) $ (0.06) $ (0.11) $ (0.09)
=========== =========== =========== ===========
Weighted average shares outstanding 8,546,011 8,631,060 8,173,677 8,624,892
</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, April 30, 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 -- (300,000) 765,206
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 -- -- (7,213) (7,213)
Net loss -- -- (920,021) -- (920,021)
Balance, April 30, 2000 $ 840 $ 22,180,080 $(21,938,270) $ (367,963) $ 963,460
------------ ------------ ------------ ------------ ------------
</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>
Six months ended
April 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (920,021) $ (802,308)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 67,637 17,680
Amortization 20,000 64,715
Issuance of warrants for services 150,188 41,084
(Increase) decrease in assets:
Trade accounts receivable 25,850 113,656
Accounts receivable - related party -- 66,058
Prepaid legal and other expenses 7,162 --
Inventories 6,007 33,075
Other current assets -- (85,185)
Increase (decrease) in liabilities:
Trade accounts payable 38,862 (92,850)
Customer deposit (161,203) 70,000
Accrued payroll and other liabilities (12,690) (18,083)
----------- -----------
CASH USED IN OPERATING ACTIVITIES (778,208) (592,158)
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment (53,421) (38,502)
Purchase of certificate of deposit (15,000) --
CASH USED IN INVESTING ACTIVITIES (68,421) (38,502)
----------- -----------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable 12,195 (2,816)
Proceeds from issuance of note payable 15,000 --
Proceeds from the issuance of common stock 760,181 120,000
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 789,197 1,117,184
----------- -----------
NET INCREASE (DECREASE) IN CASH (57,432) 486,524
CASH AT BEGINNING OF PERIOD 204,328 57,440
----------- -----------
CASH AT END OF PERIOD $ 146,896 $ 543,964
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
ELECTROPURE, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Supplemental Schedule of Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
Six months ended
April 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Issuance of common stock for note receivable:
Notes receivable received $ 307,213 --
Issuance of common stock $(307,213) --
</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 April 30, 2000 and 1999, notes payable consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
NOTE PAYABLE TO BANK
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 $ 15,000 --
-------- --------
</TABLE>
8
<PAGE> 9
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE PAYABLE TO OFFICER
<TABLE>
<S> <C> <C>
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 -- 15,715
Less: Current portion -- (4,039)
-------- --------
LONG TERM PORTION OF NOTES PAYABLE TO OFFICER $ -- 11,676
</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 $1,000 in May 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 six months ended April 30, 2000:
- Approximately 89% of the $231,778 in sales of our EDI products were
made to foreign customers. One such foreign customer, Mihama
Corporation of Tokyo, Japan, accounted for 65% of EDI product sales.
Of the total EDI sales during the period, approximately 31%
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 $175,933 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 94% of the total of $43,846 in membrane product sales.
We make all sales and receive all payments in U.S. dollars on all foreign
sales. No provision has been recorded for uncollectable trade accounts
receivable for the period ended April 30, 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 by a related party who is our largest shareholder. Of this
receivable, $200,000 was collected and the balance is recorded as a
reduction of shareholders' equity as of April 30, 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 of the services involved in the
transaction 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 April 30, 2000 and 1999 are as follows.
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net loss available to common shareholders:
Loss before extraordinary gain $ (920,021) $ (802,308)
Extraordinary gain -- --
----------- -----------
Net loss available to common shareholders $ (920,021) $ (802,308)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,173,677 8,624,892
=========== ===========
Basic and diluted loss per common share:
Loss before extraordinary gain $ (0.11) $ (0.09)
Extraordinary gain -- --
----------- -----------
NET LOSS $ (0.11) $ (0.09)
=========== ===========
</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 April 30, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Stock options and warrants 5,101,327 3,349,834
Convertible preferred stock 1,000,000 1,000,000
</TABLE>
6. BUSINESS SEGMENTS
11
<PAGE> 12
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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, not
including nonrecurring gains and losses.
Business Segment Information:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
EDI $ 116,868 $ 20,703 $ 231,778 $ 201,001
HC 68,604 110,780 175,933 210,453
MEM 41,515 -- 43,846 --
MIT -- -- -- --
----------- ----------- ----------- -----------
TOTAL REVENUE $ 226,987 $ 131,483 $ 451,557 $ 411,454
=========== =========== =========== ===========
Operating Loss
EDI $ (108,262) $ (165,265) $ (212,628) $ (275,079)
HC 43,585 41,464 19,330 93,644
MEM (62,017) (99,685) (92,083) (99,685)
MIT (103,374) (182,507) (189,598) (349,446)
Corporate (260,082) (120,377) (450,763) (182,791)
----------- ----------- ----------- -----------
TOTAL OPERATING LOSS $ (490,150) $ (526,370) $ (925,742) $ (813,357)
=========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Business Segment Information, Continued:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Depreciation and Amortization
EDI $ 7,524 $ 41 $ 14,705 $ 41
HC 100 245 198 490
MEM 24,839 10,000 49,677 20,000
MIT 1,099 22,819 2,140 45,176
Corporate 10,564 8,511 20,917 16,688
----------- ----------- ----------- -----------
TOTAL DEPRECIATION AND AMORTIZATION $ 44,126 $ 41,616 $ 87,637 $ 82,395
=========== =========== =========== ===========
Identifiable Assets
EDI $ 339,855 $ 320,591 $ 339,855 $ 320,591
HC 139,406 255,451 139,406 255,451
MEM 465,398 346,424 465,398 346,424
MIT 67,101 430,638 67,101 430,638
Corporate 272,857 348,490 272,857 348,489
----------- ----------- ----------- -----------
TOTAL IDENTIFIABLE ASSETS $ 1,284,617 $ 1,701,594 $ 1,284,617 $ 1,701,593
=========== =========== =========== ===========
Expenditures for Long Lived Assets
EDI $ 22,978 $ 2,200 $ 36,812 $ 2,200
HC -- 4,900 -- 4,900
MEM -- 79,685 4,412 79,685
MIT 1,505 4,773 1,505 4,773
Corporate 8,906 21,483 10,692 26,629
----------- ----------- ----------- -----------
TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 33,389 $ 113,041 $ 53,421 $ 118,187
=========== =========== =========== ===========
Geographic Information:
Revenues
United States $ 113,684 $ 119,520 $ 218,613 $ 244,593
Japan 65,000 -- 170,300 130,427
Ireland 12,518 -- 18,758 10,235
Other foreign countries 35,785 11,963 43,886 26,199
----------- ----------- ----------- -----------
TOTAL REVENUES $ 226,987 $ 131,483 $ 451,557 $ 411,454
=========== =========== =========== ===========
</TABLE>
13
<PAGE> 14
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
As of June 12, 2000, we received $200,000 of the $300,000 note receivable
on common stock due from Anthony Frank, our majority shareholder.
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.
In May 2000, the Board of Directors authorized an offering of up to
1,000,000 shares of our common stock in conjunction with a private
placement offering of 200 Units of the Series A convertible preferred stock
of Micro Imaging Technology, our wholly-owned Nevada subsidiary. Each Unit
consists of 10,000 shares of MIT Series A convertible preferred stock and a
right to purchase up to 5,000 shares of our common stock at $1.00 per
share. The Units are being offered in two distinct stages. In the first
stage, the purchase price for each Unit is $30,000, plus $1.00 for each
share of our common stock, up to 5,000 shares. In the second stage, the
purchase price for each Unit is $40,000, plus $1.00 for each share of our
common stock, up to 5,000 shares. Either stage of the offering may be
closed at any time before selling the maximum number of Units allocated to
that stage. The offering expires on October 15, 2000. There is no minimum
subscription amount and as of June 12, 2000, no Units of the private
placement offering have been subscribed.
14
<PAGE> 15
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 1999 and 2000 are for the six months ended April 30, 1999 and
2000, respectively.
Sales increased in fiscal 2000 by $40,103 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 $86,863 as a result of
increases in sales activity in the newly operational membrane division as
well as due to the allocation of depreciation expense on new manufacturing
equipment placed in service in fiscal 2000.
Research and development expenses for fiscal 2000 decreased by $27,053
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 equipment expenditures and consulting
expenses related to the program as well as a reduction in amortization
expense relating to proprietary technology which was fully amortized as of
the fiscal year ended October 31, 1999.
General and administrative expenses for fiscal 2000 increased by $111,337
as compared to fiscal 1999. The increase results primarily from an increase
of $123,446 in salaries and an increase of $104,993 in operating expenses
such as in legal and accounting fees and rent expense. These increases were
partially offset by a $117,102 decrease in consulting expenses in fiscal
2000.
15
<PAGE> 16
ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Interest income arose from short-term investments and decreased by $1,760
for the fiscal period ended April 30, 2000 as compared to the prior year
period, reflecting a reduction in available working capital. Interest
expense for fiscal 2000 was $3,571, with no comparable activity during the
prior period. Interest expense arises, primarily, from equipment and
automobile financing activities.
We realized a net loss before income taxes of $919,221 for fiscal 2000,
representing an increase of $117,713 from the prior year level. The
increase was primarily due, as noted above, to increases in salaries,
operating expenses and costs of goods sold.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, we had working capital of $223,521. This represents a
working capital increase of $12,486 compared to that reported at October
31, 1999 and reflects the fact that we substantially offset our customer
deposits with the delivery of EDI products during the period while
maintaining comparable inventory levels.
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. Between February and April 2000, we received $765,206
and a $300,000 note receivable 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.
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
redesigned EDI product which incorporates the more cost-effective ion
permeable membranes. Sales of EDI products increased in the second quarter
of fiscal 2000 by 6% and are expected to continue to increase through the
latter part of fiscal 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 August 2000. We
intend to fund our working capital requirements by increasing marketing
efforts for all of our products. In addition, we have taken
16
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ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the initial steps to form two Nevada corporations which are wholly-owned
subsidiaries of Electropure:
- Micro Imaging Technology was formed in February 2000 and will conduct
our 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 certain assets, including 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 our EDI line of products.
Initially, we are seeking to establish a business arrangement with a
potential candidate for licensing of our Micro Imaging Technology system.
We have proposed an arrangement which involves an exclusive license for the
ASEAN countries. Discussions are in the preliminary stages. Similar
arrangements may arise for our EDI technology, although there are no
current discussions underway and we have no current plans to seek potential
licensing candidates. We believe that, if necessary, we will be able to
raise additional working capital by the private sale of our securities.
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.
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 such additional financing on terms
that are acceptable to us and at the time required by us, or at all.
Further, any such financing may cause dilution of the interests of our
current shareholders. If we are unable to obtain such 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 certain
assumptions, including certain assumptions as to our revenues, net income
or 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
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ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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 Starr
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 Starr Surgical.
The matter was settled in April 2000 for equal payments to Staar Surgical
of $6,000 each by Platt, Electropure and Universal Aqua Technologies, who
manufactured the water treatment system supplied to Staar.
ITEM 2. CHANGES IN SECURITIES
On February 23, 2000, we issued 2,500 shares of common stock, valued at
$2,188, as partial payment for public relations services to be rendered.
In February 2000, the Board of Directors authorized a private placement
offering of Units of Electropure's securities, each Unit consisting of
25,000 shares of common stock and 12,500 three-year warrants to purchase
common stock at $2.00 per share. The warrants are redeemable by us at any
time that the common stock of Electropure equals or exceeds $4.00 per share
for thirty consecutive trading days. The following issuances occurred with
regard to the private placement offering:
- On February 25, 2000, Mr. Anthony Frank, a majority shareholder,
converted $400,000 in principal and $5,206 in interest on loans made
to us between December 1999 and February 2000 into the above private
placement Units. Mr. Frank received 405,206 shares of common stock and
202,603 two-year warrants to purchase common stock at $2.00 per share
as a result of such conversion.
- On March 6, 2000, Mr. Frank purchased an additional 20 Units of the
above-described private placement offering for the sum of $500,000.
Mr. Frank received 500,000 shares of common stock and 250,000 warrants
to purchase common stock at $2.00 per share with regard to this
purchase.
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ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
- In March 2000, we realized an additional $160,000 on the sale of
160,000 shares of common stock and 80,000 warrants from the above
private placement offering.
In February 2000, we entered into a one-year agreement for administrative
and financial consulting services for which we pay $1,000 per month for the
first six months and $1,500 per month for the last six months of the
agreement. We also granted 75,000 warrants to purchase common stock at
$0.625 per share. The warrants vest in 25,000 annual increments commencing
on February 1, 2000 and will expire on February 1, 2006. The fair value of
the warrants, totaling $46,500, is being recorded as a consulting expense
over the period we receive the services.
On March 14, 2000, we granted 100,000 warrants at $0.875 per share in
connection with the appointment of an individual as our EDI business
development representative in certain European countries. The warrants vest
over a four-year period and expire on March 14, 2005. The fair value of the
warrants, totaling $86,000, is being recorded as a consulting expense over
the period we receive the services.
On March 24, 2000, in exchange for consulting services rendered, we granted
25,000 warrants which expire on March 24, 2003 and are exercisable at
$0.9375 per share. The fair value of the warrants was $22,000 and has been
recorded as a consulting expense in fiscal 2000.
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. We
believe that the recipients 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
<TABLE>
<CAPTION>
Exhibit Number Description
------------------- -------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Report on Form 8-K.
None.
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ELECTROPURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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: June 12, 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)
20
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
------------------- -------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
