-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C5jXt3cQL74xPL1pnCOjqlZoOFdyMxni5GrqozKPAXIlTyhYh/i4tNVFBg/rJClh kt0gyjiKnlVgiDfGTvYV2Q== 0000892569-98-002575.txt : 19980915 0000892569-98-002575.hdr.sgml : 19980915 ACCESSION NUMBER: 0000892569-98-002575 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTROPURE INC CENTRAL INDEX KEY: 0000808015 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 330056212 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16416 FILM NUMBER: 98708801 BUSINESS ADDRESS: STREET 1: 23456 S POINTE DR CITY: LAGUNA HILLS STATE: CA ZIP: 92653-1512 BUSINESS PHONE: 7147709187 MAIL ADDRESS: STREET 1: 23456 S POINTE DR CITY: LAGUNA HILLS STATE: CA ZIP: 92653 FORMER COMPANY: FORMER CONFORMED NAME: HOH WATER TECHNOLOGY CORP DATE OF NAME CHANGE: 19920703 10QSB 1 FORM DOCUMENT QUARTER ENDING JULY 31,1998 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, 1998 ELECTROPURE, INC. (FORMERLY, HOH WATER TECHNOLOGY CORPORATION) (Exact name of registrant as specified in its charter) CALIFORNIA 33-0056212 (State or Other Jurisdiction (IRS Employer Identification No.) of Incorporation or Organization) 23456 South Pointe Drive, Laguna Hills, California 93653 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 770-9347 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. At September 11, 1998, 8,475,497 shares of the Registrant's stock were outstanding. --------------------------------------------------------- 2 ELECTROPURE, INC. BALANCE SHEETS
October 31, July 31, ----------- ------------ Assets 1997 1998 - ---------------------------------------------------- ----------- ------------ (Unaudited) Current assets: Cash $367,680 $ 117,003 Receivables: Trade accounts 14,988 154,221 Due from related parties 115,227 154,536 Allowance for doubtful receivables (85,528) (85,528) -------- ---------- 44,687 223,229 Inventory: Raw materials 7,498 146,491 Other current assets 26,001 48,646 -------- ---------- Total Current Assets 445,865 535,369 -------- ---------- Property and equipment, at cost: Office equipment 3,584 59,745 Leasehold improvements -- 26,858 -------- ---------- 3,584 86,603 Less accumulated depreciation and amortization 172 6,115 -------- ---------- 3,412 80,488 Acquired technology, net 445,676 560,630 -------- ---------- Total Assets $894,953 $1,176,487 ======== ==========
See accompanying notes to financial statements. 2 3 ELECTROPURE, INC. BALANCE SHEETS
October 31, July 31, ------------- ------------- Liabilities and Stockholders' Equity 1997 1998 - --------------------------------------------------------- ------------- ------------- (Unaudited) Current liabilities: Notes payable to stockholders $ 29,736 $ 18,605 Accounts payable 37,843 22,076 Accrued liabilities 23,960 13,773 Allowance for loss on lawsuit settlements 23,331 23,331 ------------ ------------ Total Current Liabilities 114,870 77,785 Litigation, claims, commitments and contingencies Redeemable convertible preferred stock, $.01 assigned par value. Authorized 2,600,000 shares; issued and outstanding 2,600,000 shares in 1997 and 1998 26,000 26,000 Stockholders' equity: Common stock, $.01 assigned par value. Authorized 20,000,000 shares; 7,774,293 shares issued and 7,734,293 shares outstanding in 1997; 8,477,997 shares issued and 8,437,997 shares outstanding in 1998 77,343 84,381 Class B common stock, $.01 assigned par value. Authorized 83,983 shares; issued and outstanding 83,983 shares in 1997 and 1998 840 840 Additional paid-in capital 18,075,947 19,161,131 Accumulated deficit (17,197,281) (17,989,884) Notes receivable on common stock (202,766) (183,766) ------------ ------------ 754,083 1,072,702 ------------ ------------ Total Liabilities and Stockholders' Equity $ 894,953 $ 1,176,487 ============ ============
See accompanying notes to financial statements. 3 4 ELECTROPURE, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended July 31, July 31, ------------------------------ ------------------------------ 1997 1998 1997 1998 ------------------------------ ------------------------------ License fees received $ 29,200 $ -- $ 70,837 $ -- Sales -- 326,835 -- 501,200 --------- --------- --------- --------- 29,200 326,835 70,837 501,200 Cost of goods sold -- 140,325 -- 234,701 --------- --------- --------- --------- Gross margin 29,200 186,510 70,837 266,499 Costs and expenses: Research and development -- 124,992 -- 259,336 Sales and marketing -- 177,122 -- 272,680 General and administrative 48,574 147,516 92,865 443,011 --------- --------- --------- --------- 48,574 449,630 92,865 975,027 --------- --------- --------- --------- Loss from operations (19,374) (263,120) (22,028) (708,528) --------- --------- --------- --------- Other income and (expense): Interest expense (577) (433) (1,364) (4,110) Interest income -- 6,188 -- 6,188 Litigation settlement costs (112,000) -- (112,000) -- Financing costs (614,055) (126,092) (614,055) (126,092) Rental income -- 19,550 -- 39,050 Miscellaneous income -- 889 -- 889 --------- --------- --------- --------- (726,632) (99,898) (727,419) (84,075) --------- --------- --------- --------- Net income (loss) $(746,006) $(363,018) $(749,447) $(792,603) ========= ========= ========= ========= Net loss per share of common stock $ (0.34) $ (0.07) $ (0.34) $ (0.15) ========= ========= ========= =========
See accompanying notes to financial statements. 4 5 ELECTROPURE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Class B Stock Common Stock ---------------------- ----------------------- Amount Amount Notes Number ------------ Number ------------- Additional receivable Net of Per of Per paid-in on common Accumulated stockholders' shares share Total shares share Total capital stock deficit equity ------- ----- ----- ------- ----- ----- ---------- ---------- ----------- ------------- Balance at October 31, 1997 7,734,293 $ -- $77,343 83,983 $ -- $840 $18,075,947 $(202,766) $(17,197,281) $ 754,083 Payment on receivable on common stock -- -- -- -- -- -- -- 25,000 -- 25,000 Issuance of common stock for option on building purchase 60,000 -- 600 -- -- -- 89,400 -- -- 90,000 Issuance of common stock for conversion of debt 206,186 0.97 2,062 -- -- -- 205,155 -- -- 207,217 conversion of debt 136,473 1.48 1,365 -- -- -- 201,265 -- -- 202,630 Issuance of common stock for services rendered 6,579 1.52 66 -- -- -- 9,934 -- -- 10,000 services rendered 4,103 1.83 41 -- -- -- 7,459 -- -- 7,500 services rendered 3,363 2.23 34 -- -- -- 7,466 -- -- 7,500 Issuance of common stock on exercise of options 12,000 0.50 120 -- -- -- 5,880 (6,000) Issuance of common stock for cash 275,000 2.00 2,750 -- -- -- 547,250 -- -- 550,000 Issuance of warrants at below fair market value -- -- -- -- -- -- 11,375 -- -- 11,375 Net Loss -- -- -- -- -- -- -- -- (792,603) (792,603) ---------- ------- ------ --- ----------- --------- ------------ ---------- Balance at July 31, 1998 8,437,997 84,381 83,983 -- 840 19,161,131 (183,766) (17,989,884) 1,072,702 ========== ======= ====== === =========== ========= ============ ==========
See accompanying notes to financial statements. 5 6 ELECTROPURE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended July 31, -------------------------------- 1997 1998 -------------------------------- Cash flows from operating activities: Net loss $(749,447) $ (792,603) --------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 81 90,988 Financing costs related to issuance of common stock 734,055 122,217 Financing costs related to issuance of warrants -- 11,375 Change in assets and liabilities, net of noncash transactions: Decrease (increase) in receivables 177 (178,542) Decrease (increase) in inventory -- (138,992) Decrease (increase) in other assets -- (305,666) Increase (decrease) in notes payable 12,000 (12,610) Increase (decrease) in accounts payable and accrued expenses 3,262 (25,954) Increase in interest payable, net 1,364 4,110 --------- ----------- Total adjustments 750,939 (433,074) --------- ----------- Net cash used in operating activities 1,492 (1,225,677) Cash flows from investing activities: None Cash flows from financing activities: Proceeds from issuance of common stock -- 550,000 Proceeds from notes payable to stockholders -- 400,000 Proceeds from collection of receivables on common stock -- 25,000 --------- ----------- Net cash provided by financing activities -- 975,000 --------- ----------- Net (decrease) in cash 1,492 (250,677) Cash at beginning of period 674 367,680 --------- ----------- Cash at end of period $ 2,166 $ 117,003 ========= ===========
See accompanying notes to financial statements. 6 7 - ------------------------------------------------------------------------------- (1) INTERIM FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The accompanying unaudited condensed financial statements include all adjustments which management believes are necessary for a fair presentation of the results of operations for the periods presented, except those which may be required to adjust assets and liabilities to the net realizable value should the Company not be able to continue operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying condensed financial statements be read in conjunction with the Company's audited financial statements and footnotes as of and for the year ended October 31, 1997. In February, 1996, the Company issued 253,334 shares of Common Stock upon the conversion of $152,000 in loans payable by its former licensee, EDI Components. Although the shares were issued at a below fair market value of $0.60 per share, resulting in an expense of $228,000, the Company mistakenly reflected the expense at $152,000. Pursuant to such error, the Company has made a prior period adjustment to increase additional paid-in capital and the accumulated deficit by $76,000. In addition, the Company has made a prior period adjustment for the fiscal year ended October 31, 1996 to impute a $500 per month rent expense to account for the expense of occupying offices sub-leased by the Company from EDI Components until September, 1997. The expense has been credited toward license fees paid by EDI Components. Similar adjustments have been made for the interim periods ended January 31, 1997, April 30, 1997 and July 31, 1997, respectively. The above prior period adjustments did not materially impact the Company's retained earnings, net shareholders' equity, net loss or net loss per share. The comparative financial statements contained in this report have been adjusted to reflect retroactive application of the prior period adjustments discussed above. - --------- LIQUIDITY - --------- As of July 31, 1998, the Company had current assets in excess of current liabilities of $457,584, an accumulated deficit of $17,989,884 and a stockholders' equity of $1,072,702. In July, 1992, the Company entered into a License Agreement with EDI Components, a California corporation, to grant an exclusive license to manufacture and market the Company's patented Electropure ("EDI") technology. Since entering into such license relationship, the Company funded its working capital needs from license fees paid by EDI Components until the license was terminated in August, 1997. In September, 1997, the Company began limited manufacturing and sales of its patented EDI product. During the nine months ended July 31, 1998, the Company booked $501,200 in gross sales of products and realized therefrom $352,121 in cash and $149,079 in accounts receivable. The Company also collected $7,710 and $19,500 in receivables from trade accounts and related parties, respectively, during the period. The Company received an additional $25,000 payment in January, 1998 on a note receivable on common stock. In addition, the Company received $550,000 in proceeds from the sale of 275,000 shares of Common Stock and 137,500 warrants to purchase Common Stock at an exercise price of $3.00 per share. 7 8 On January 26, 1998, the Company received $200,000 in loans from a principal shareholder. Such proceeds, along with an additional $200,000 in loans received from the same shareholder in February, 1998, were utilized to purchase the rights to certain proprietary membrane technology from Hydro Components, Inc., a Pennsylvania manufacturer of light commercial water and wastewater treatment products. Pursuant to the terms of the loan agreements, the shareholder elected to convert the $400,000 in principal loans, plus accrued interest, into an aggregate of 342,659 shares of Common Stock. See Note (5) - "Stockholders' Equity." The Company received $39,050 between March and July, 1998 as rental income from sub-leasing approximately 10,000 square feet of its current facility to an unaffiliated third party. - ------------------------------------------------------------------------------- (2) DUE FROM RELATED PARTIES - ------------------------------------------------------------------------------- The Company has balances remaining due, including interest, on notes receivable from related parties. The balance includes net amounts remaining on a $30,000 loan made to a former shareholder and an $80,000 loan made to a corporation whose significant stockholder was James E. Cruver, a former officer and director of the Company. The Company received partial payments representing principal and/or interest on these loans, however, due to the fact that they are significantly past due and the uncertainty of when or if they will be collected, interest income was not being recognized until received and the balances at July 31, 1998 are offset by an allowance for doubtful accounts. A total of $23,763 remains due as of July 31, 1998 from former officers and directors, Harry M. O'Hare, Sr. and David C. Kravitz. Such amount is secured by 37,565 shares of the Company's common stock resulting in an unsecured receivable in the amount of $23,351, which has been offset by an allowance for doubtful accounts. Between August, 1997 (when the license relationship with EDI Components was terminated) and October 31, 1997, the Company sold products for which the Company's former licensee, EDI Components, mistakenly received a total of $36,329 in payments. In January, 1998, EDI Components satisfied the receivable in full by paying the Company $19,500 in cash and transferring $16,829 in raw materials it had purchased for the EDI product prior to the license termination. In February, 1998, concurrent with the purchase of certain proprietary membrane technology from Hydro Components, the Company made a 60-day loan to such Pennsylvania-based company in the sum of $200.000. The Company has agreed to accept certain water treatment components (raw materials) valued at $67,429 and $4,900 in capital equipment transferred by Hydro Components in partial payment of the loan. In addition, between March and July, 1998, Hydro Components has provided the Company with services valued at $46,350 and has paid expenses on behalf of the Company totaling $12,186, all of which has been applied to reduce such loan. Consequently, as of July 31, 1998, there remains outstanding, including $6,188 in interest accrued at the annual rate of 8%, a total of $75,323 on such loan. 8 9 - ------------------------------------------------------------------------------- (3) INVENTORY - ------------------------------------------------------------------------------- Inventory, stated at the lower of cost (determined using the first in, first out method) or replacement market, consists of components for EDI water purification modules as well as water and wastewater treatment components transferred by Hydro Components in partial payment of a loan. - ------------------------------------------------------------------------------- (4) COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------- The original cost and accumulated depreciation of assets at July 31, 1998 are as follows. Furniture and fixtures $59,745 Leasehold improvements 26,858 ------- 86,603 Less accumulated depreciation and amortization 6,115 ------- $80,488 ======= - ----------- COMMITMENTS - ----------- On October 1, 1997, the Company assumed the month-to-month lease obligation from EDI Components on its previous facility at 23251 Vista Grande, Laguna Hills, California and vacated such facility in February, 1998. The Company paid an aggregate of $15,955 in lease payments on such facility between November, 1997, and February, 1998. In November, 1997, the Company entered into a three-year lease agreement on a 30,201 sq. ft. facility located at 23456 South Pointe Drive, Laguna Hills, California. The lease commenced on February 1, 1998 at a lease rate of $16,000 per month, with pre-negotiated annual increases in the second and third years of the lease approximating three percent of the then base monthly lease payment. On November 14, 1997, the Company paid the Lessor $48,000, representing the first month's lease payment, plus a $32,000 security deposit which shall be applied to one-half of the monthly lease payments in months 6, 12, 18 and 24 of the initial lease term. Such security deposit was recorded as a prepaid deposit in the sum of $32,000 and is to be credited to rent expense when utilized over the first 24 months of the lease. As of July 31, 1998, $8,000 of such prepaid deposit has been utilized and expensed as rent. The Company paid $112,000 in lease payments on such facility between February and July, 1998, which sum was offset by $39,050 in payments received by the Company during the period from the sub-lease of approximately 10,000 square feet to an unaffiliated third party. 9 10 - ------------------------------------------------------------------------------- (5) STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- On November 12, 1997, the Company issued 60,000 shares of Common Stock to the Lessors of its new facility in exchange for a three-year option to purchase the building for the pre-negotiated purchase price of $2,300,000 through August, 1999. If the option is exercised after August, 1999, the purchase price will be $2,300,000 plus the cumulative change in Consumer Price Index from February 1, 1998 to the date of exercise. The issuance, which was made at a fair market value of $1.50 per share, resulted in an increase in common stock and additional paid in capital and a $90,000 financing expense. On January 29, 1998, Anthony Frank exercised his option to convert, at a 27.5% discount to fair market value(1), a $200,000 principal loan made to the Company on January 26, 1998. The conversion resulted in the issuance of 206,186 shares of Common Stock at $0.97 per share. Accordingly, the difference between conversion price and the fair market value of similar restricted common stock on the date of issuance, aggregating $7,217, has been expensed and added to additional paid-in capital as of the fiscal period ended July 31, 1998. On March 25, 1998, Anthony Frank converted an additional $200,000 loan made to the Company on February 4, 1998. The conversation price was at a 25% discount to the fair market value of the Company's Common Stock and resulted in the issuance of 136,473 shares of Common Stock at $1.48 per share. The conversion price of the shares issued upon conversation of such loan was equal to the fair market value of similar restricted common stock on the date of issuance. Consequently, no expense was reflected for this transaction. Between April and July, 1998, in conjunction with a private placement offering of securities, the Company issued 275,000 shares of Common Stock and 137,500 warrants to purchase Common Stock at $3.00 per share, and received net proceeds of $550,000. The fair market value of the Company's Common Stock in April, 1998 was less than the $2.00 per share offering price and, as a result, no expense has been accrued for the issuance of these shares. However, the Company issued an additional 3,363 shares to an individual as a commission related to the sale of 37,500 of such private placement securities. The fair market value of such commission shares was $7,500 (or $2.23 per share) and has been expensed and added to common stock and additional paid-in capital as of July 31, 1998. In April, 1998, the Company issued 3,363 shares of Common Stock as a commission to the real estate broker who negotiated the lease on the Company's current facility. The fair market value of such shares was $10,000 and has been expensed and added to common stock and additional paid-in capital. In May, 1998, the Company issued 4,103 shares of Common Stock, valued at $7,500, or $1.48 per share, to a consulting firm in partial payment for public relations services to be rendered. The value of the - -------- 1 The loan agreement with Mr. Frank provided that, upon conversion of the note, the "fair market value" of common stock would be determined as the average of the bid and asked prices of such common stock for the thirty consecutive trading days prior to the conversion date. 10 11 transaction has been expensed and added to common stock and additional paid-in capital as of July 31, 1998. In July, 1998, the Company issued 12,000 shares of Common Stock and accepted a $6,000 note receivable on the exercise of options, at $0.50 per share, by an employee of the Company. Such note is payable, with minimal interest, within one year or upon any sale of the shares in question. - ------------------------------------------------------------------------------- (6) NET LOSS PER SHARE OF COMMON STOCK - ------------------------------------------------------------------------------- Net loss per share of common stock is based on the weighted average number of shares outstanding during each of the respective periods. No effect has been given to common stock equivalents as the effect to loss per share would be anti-dilutive. PART I - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - ------------------------------------------------------------------------------- - --------------------- RESULTS OF OPERATIONS - --------------------- References to 1997 and 1998 are for the nine months ended July 31, 1997 and 1998, respectively, and reflect the prior period adjustments discussed in Note (1) - "Interim Financial Statements." License fees received from EDI Components for fiscal 1997 were $70,837 as compared to no activity for fiscal 1998. Pursuant to the August, 1997 License Termination Agreement, the obligation of EDI Components to pay license fees to the Company terminated at that time. The Company realized a gross margin of $266,499 on the sale of products in fiscal 1998, as compared to no sales activities in fiscal 1997. The Company had not initiated manufacturing and marketing operations until September, 1997, after the license agreement with EDI Components had been terminated. Research and development expenses for fiscal 1998 were $259,336 as compared to no activity for fiscal 1997. These expenses arise from the research and development program which the Company initiated in December, 1997 on the drinking water monitoring technology acquired from Wyatt Technology Corporation in late October, 1997. Sales and marketing expenses were $272,680 for fiscal 1998, as compared to no activity for fiscal 1997. These expenses represent the costs associated with marketing the Company's products, which activities began in September, 1997. General and administrative expenses for fiscal 1998 increased by $350,146 as compared to fiscal 1997. The increase is due to various factors, including the expenses associated with hiring additional employees 11 12 in late 1997, the assumption of lease obligations on the facilities occupied by the Company, and legal and accounting fees resulting from the audit conducted on the Company's financial statements for the fiscal year ended October 31, 1997. Interest expense for fiscal 1998 increased by $2,746 as compared to fiscal 1997, due to the additional interest accrued on a note payable issued in settlement of a lawsuit in May, 1997. Such note was paid in full in January, 1998. The Company accrued additional interest expense on a $200,000 loan received in February, 1998 and converted to common stock in March, 1998. Interest income for fiscal 1998 was $6,188 as compared to no activity for fiscal 1997. The Company realized interest income for the period on a $200,000 loan made in February, 1998 to Hydro Components, Inc. Financing costs for fiscal 1998 decreased by $487,963, as compared to fiscal 1997. Financing costs for fiscal 1997 reflects the substantial cost of assuming loans, subsequently converted to common stock, from EDI Components pursuant to the August, 1997 license termination agreement with that entity. Of the financing costs incurred for fiscal 1998, $90,000 resulted from the issuance of 60,000 shares of common stock to the lessor of the Company's current facility in exchange for an option to purchase the building during the term of the three-year lease. An additional $18,592 financing expense was incurred as a result of the issuance of 206,186 common shares and 175,000 warrants to purchase common shares at below fair market value. The balance of $17,500 in financing costs resulted from the issuance of common stock, at fair market value, as commissions. The Company received $39,050 during fiscal 1998 from sub-leasing, beginning in March, 1998, approximately 10,000 square feet of its present facility to an unaffiliated third party at $6,500 per month. Such sub-lessee has executed a one-year sub-lease agreement and has paid the last month's lease payment in advance. No additional provision for loss on lawsuit settlement has been made in fiscal 1998 as the Company believes that adequate provision has been made to settle pending lawsuits. Net loss of $792,603 for fiscal 1998 represents an increase of $43,156 from the prior year level. This increase, which was partially offset by a substantial reduction from prior period financing expenses, is due to the initiation of research and development activities on the Company's proposed drinking water monitoring product and the increase in marketing, administrative and financing activities resulting from production and sales of the Company's EDI product beginning in late 1997. - ------------------------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At July 31, 1998, the Company had net working capital (total current assets less total current liabilities) of $457,584. The increase in working capital, compared to that reported at October 31, 1997, results primarily from financing activities and sales during the period. 12 13 During fiscal 1998, the Company received $352,121 on the sale of products during the period and has accrued an additional $149,079 in receivables pursuant to such product sales. The Company collected $44,039 during the period (including $16,829 in raw materials transferred by EDI Components) on trade accounts and related party receivables accrued in connection with products sold between September and October, 1997. During the fiscal period, Hydro Components reduced its $200,000 liability to the Company, which has accrued $6,118 in interest as of July 31, 1998, by providing a combination of consulting fees, expenses, raw materials and capital equipment aggregating $130,865. Since August 1, 1998, Hydro Components has further reduced its liability with a combination of cash and services rendered totaling $15,319. In February, 1998, the Company relocated to its current 30,201 sq. ft. facility with a view toward expanding its production capabilities for the EDI product. The additional space will also be required if the Company's research program for the drinking water monitoring program proves successful. On March 1, 1998, the Company sub-leased approximately 10,000 sq. ft. of such facility at a monthly rental of $6,500, to offset a portion of its $16,000 monthly lease obligation. The remaining facilities will allow the Company to increase its production capabilities and, in turn, its marketing efforts for sales of the EDI product. In April, 1998, the Company began a private placement offering of units at $25,000 per unit, consisting of 12,500 shares of Common Stock and 6,250 redeemable three-year warrants to purchase Common Stock at $3.00 per share. As of July 31, 1998, the Company had received $550,000 in net proceeds on the sale of 22 units, representing 275,000 shares of Common Stock and 137,500 warrants. The Company will be required to raise substantial amounts of new financing, in the form of additional equity investments or loan financing, in order to carry out its business objectives. There can be no assurance that the Company will be able to obtain such additional financing on terms that are acceptable to the Company and at the time required by the Company, or at all. Further, any such financing may cause dilution of the interests of the current shareholders in the Company. If the Company is unable to obtain such additional equity or loan financing, the Company's financial condition and results of operations will be materially adversely affected. Moreover, the Company's estimates of its cash requirements to carry out its current business objectives are based upon certain assumptions, including assumptions as to the Company's revenues, net income (loss) and other factors, and there can be no assurance that such assumptions will prove to be accurate or that unbudgeted costs will not be incurred. Future events, including the problems, delays, expenses and difficulties frequently encountered by similarly situated companies, as well as changes in economic, regulatory or competitive conditions, may lead to cost increases that could have a material adverse effect on the Company and its plans. If the Company is not successful in obtaining loans or equity financing for future developments, it is unlikely that the Company will have sufficient cash to continue to conduct operations as currently planned. The Company believes that in order to raise needed capital, it may be required to issue debt or equity securities that are significantly lower than the current market price of the Company's Common Stock. 13 14 - ----------------- PLAN OF OPERATION - ----------------- The Company is currently negotiating with various potential strategic partners to obtain the working capital primarily needed to fund further research and development activities for the biological sensor technology acquired from Wyatt Technology Corporation in October, 1997. Such strategic partnership may take the form of a license or joint venture arrangement. In addition, the Company believes that its biological sensor research and development may qualify for funding through various grant subsidies and is currently exploring such funding opportunities. On April 1, 1998, the Company authorized a private placement offering of securities (the "Offering") to raise up to $1,000,000 in working capital to support its current EDI sales activities and research and development on the drinking water monitoring project utilizing the laser light scattering technology acquired from Wyatt Technology Corporation in October, 1997. As of July 31, 1998, the Company had received $550,000 from subscribers to such Offering. In September, 1998, the Company initiated a 30-day private placement offering to reduce the exercise price, to $1.00 per share, on up to 897,749 warrants to purchase Common Stock originally granted at exercise prices ranging from $2.00 to $15.00 per share. As of September 11, 1998, the Company had issued 56,250 shares of Common Stock pursuant to the offering and had received $56,250 in proceeds therefrom. The Company believes that a number of additional warrantholders will take advantage of the offering and anticipates that additional proceeds in excess of $200,000 will be received. Sales of the Company's products is expected to generate increased net revenues with the implementation of the Company's increased marketing efforts. With its current cash assets, projected sales of securities, revenues from the sale of products and collections anticipated on accounts receivable, the Company believes that it will have adequate sources of working capital for up four (4) months, although it may need additional working capital prior to said date, particularly if the Company is not successful in selling sufficient quantities of products. In addition, the Company may require additional funding to implement the development of membrane technology recently acquired from Hydro Components, Inc. The above discussion is based largely on the Company's expectations; contains forward looking statements, and is subject to a number of risks and uncertainties, many of which are beyond the Company's control. Actual results could differ materially as a result of a variety of factors, including market acceptance of the Company's products, the success of the Company's research and development activities, prevailing economic conditions as they effect the water purification industry in general and the ability to raise sufficient working capital. In light of these risks and uncertainties, there can be no assurance that the Company's expectations will, in fact, transpire or prove to be accurate. 14 15 PART II - OTHER INFORMATION - ------------------------------------------------------------------------------- ITEM 1. - ------------------------------------------------------------------------------- In December, 1993, a $20,270 default judgment was rendered in the Los Angeles County Municipal Court against the Company unpaid corporate credit card charges. As of October 31, 1997, the Company had accrued an additional $10,474 in interest on such judgment. In June, 1998, the Company entered into an agreement to settle the judgment in exchange for a total payment of $22,000 to be paid over a three month period. As of July 31, 1998, the Company had paid a total of $14,667 on this settlement and as of August 31, 1998 had paid the remaining balance due. In January, 1998, the Company satisfied the principal and interest due on a $12,000 promissory note issued in May, 1997 to the Economic Development Bank for Puerto Rico (the "Bank") under the terms of a settlement reached on a $3 million default judgment rendered against the Company in June, 1996. The lawsuit, which was brought by the Bank in February, 1993 in the San Juan Superior Court, alleged that the Company, its bankrupt Puerto Rico subsidiary (HOH International, Inc.), and the officers and directors of both, breached their fiduciary duty in entering into a distribution agreement with HOH/CNM2 Enterprises which ultimately led to the dissolution of the subsidiary. With payment of such note, the Company believes that it has satisfied all of its obligations under the settlement and expects to receive a conditional satisfaction of the judgment shortly. As disclosed in the Company's Form 10-KSB for the fiscal year ended October 31, 1997, the Company is party to one other lawsuit (Case No. 92219, Ventura County Municipal Court) claiming a total of $13,007 of past due payments. The status of this matter has not materially changed from that which was previously reported and the Company and its counsel expect the Company to prevail in this lawsuit. No assurances can be given as to the ultimate outcome of any such litigation or legal proceeding. - ------------------------------------------------------------------------------- ITEM 2. - ------------------------------------------------------------------------------- Since November 1, 1997, the Company has issued or sold the following securities: On November 12, 1997, the Company issued 60,000 shares of Common Stock as consideration for an option to purchase the building to which it relocated in February, 1998. The Common Stock was valued at $1.50 per share and resulted in an expense to the Company during the fiscal quarter ended January 31, 1998 in the sum of $90,000. In connection with the above building lease, in April, 1998, the Company issued 6,579 shares of Common Stock as a commission to the Company's real estate broker. The fair market value of such shares was $10,000, or $1.52 per share, and has been expensed by the Company and added to common stock and additional paid-in capital. 15 16 On January 29, 1998, the Company issued 206,186 shares of Common Stock upon the conversion of a $200,000 loan made by principal shareholder, Anthony Frank. The shares were issued at the below fair market value of $0.97 per share, resulting in an expense as of April 30, 1998 in the sum of $7,217. On March 25, 1998, Mr. Frank converted an additional $200,000 loan made to the Company in February, 1998, together with $2,630 interest accrued thereon. The Company issued 136,473 shares of Common Stock pursuant to such conversion at the rate of $1.4848 per share. The fair market value of similar Common Stock was equal to the conversion price of the shares in question, consequently, no financing expense was recorded for this transaction. In March, 1998, the Company issued 175,000 warrants to purchase Common Stock, in partial consideration for a three year consulting arrangement entered into with British Far East Holdings, Ltd of Del Mar, California to provide financial advisory services. Of such warrants, 25,000 vest on the date of grant, with an additional 50,000 vesting each twelve months thereafter. The warrants are exercisable at $1.06 per share for a period of five (5) years from the vesting date. The difference between the fair market value of similar Common Stock and the purchase price of the warrants, aggregating $11,375, was expensed as of the fiscal period ended April 30, 1998. In March, 1998, the Company's Board of Directors authorized the issuance of an aggregate of 500,000 warrants to purchase Common Stock to two consultants to the Company in partial consideration for services to be rendered. The warrants are exercisable at $1.125 per share, in equal increments over a period of five years, commencing one year from the date of grant. The fair market value of the Company's Common Stock was equal to the exercise price of such warrants and no expense was recorded for these transactions. Also in March, 1998, the Company's Board of Directors authorized the issuance of 250,000 and 150,000 ten-year warrants to purchase Common Stock to the Company's President and Chief Financial Officer, respectively, as bonuses. The warrants are exercisable, at $1.125 per share, in 50,000 increments commencing on the date of grant. The fair market value of the Company's Common Stock equaled the purchase price of such warrants, consequently, no expense was recorded for these transactions. In April, 1998, the Company began a private placement offering of units at $25,000 per unit, consisting of 12,500 shares of Common Stock and 6,250 redeemable three-year warrants to purchase Common Stock at $3.00 per share. As of July 31, 1998, the Company had received $550,000 in net proceeds on the sale of 22 units, representing 275,000 shares of Common Stock and 137,500 warrants. The warrants are redeemable by the Company, unless exercised, at $0.05 per warrant at any time that the Common Stock shall equal or exceed $4.00 per share for thirty consecutive trading days. In April, 1998, the Company issued 3,363 shares of Common Stock as a commission related to the sale of one of the above private placement units. The fair market value of the Common Stock was $7,500, or $2.23 per share, and was expensed and added to common stock and additional paid-in capital. 16 17 In May, 1998, the Company issued 4,103 shares of Common Stock in partial payment to a public relations firm for services to be rendered. The fair market value of the Common Stock issued was $7,500, or $1.83 per share, and was expensed and added to common stock and additional paid-in capital for the fiscal period ended July 31, 1998. In July, 1998, the Company issued shares of Common Stock on the exercise of 12,000 options at $0.50 per share and received a note therefor. The transaction has been recorded as an increase both to additional paid-in capital and notes receivable on common stock. As of September 11, 1998, the Company had issued 56,250 shares of Common Stock on the exercise, at a reduced price of $1.00 per share, of 56,250 warrants originally issued at prices ranging from $2.00 to $15.00 per share. The issuance of securities in these transactions were exempt from registration under the Securities Act of 1933, as amended (the "Act"), by virtue of Sections 3(b) and 4(2) of the Act, including Regulation D promulgated thereunder. The Company believes that the recipients in each case acquired the securities for investment only and not with a view to the distribution thereof and legends were affixed to the stock certificates. Except as noted, no underwriters or brokers were involved in any transaction. - ------------------------------------------------------------------------------- ITEMS 3 THROUGH 6 OMITTED AS NOT APPLICABLE. - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: September 11, 1998 ELECTROPURE, INC. By /s/ CATHERINE PATTERSON ---------------------------------------- Catherine Patterson (Secretary and Chief Financial Officer with responsibility to sign on behalf of Registrant as a duly authorized officer and principal financial officer) 17 EX-27 2 FORM DOCUMENT QTR ENDING 07/31/98
5 9-MOS OCT-31-1998 NOV-01-1997 JUL-31-1998 117,003 0 308,757 85,528 146,491 535,369 86,603 6,115 1,176,487 77,785 0 0 26,000 84,381 0 1,176,487 501,200 501,200 234,701 975,027 79,965 0 4,110 (792,603) 0 (792,603) 0 0 0 (792,603) (0.15) (0.15)
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