10QSB 1 a75729e10qsb.txt FORM 10-QSB QUARTERLY PERIOD ENDED JULY 31, 2001 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, 2001 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 11, 2001, 9,425,341 shares of the Registrant's stock were outstanding. --------------------------------------------------------- 2 Electropure, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited) As of July 31, 2001 -------------------------------------------------------------------------------- ASSETS
July 31, 2001 ---------- Current assets: Cash and equivalents $ 82,486 Trade accounts receivable 111,340 Inventories 172,754 Prepaid legal fees 92,500 Other prepaid expenses 21,508 ---------- Total current assets 480,588 Property, plant and equipment, net 2,860,412 Acquired technology, net of accumulated amortization 61,945 ---------- TOTAL ASSETS $3,402,945 ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 2 3 ELECTROPURE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet (Unaudited) AS OF JULY 31, 2001 -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, 2001 ------------ Current liabilities: Current portion of obligations under capital leases $ 8,538 Current portion of notes payable to bank 14,781 Trade accounts payable 146,618 Accrued payroll 134,221 Other accrued liabilities 85,024 Customer deposits 60,240 ------------ Total current liabilities 449,422 Obligations under capital leases, net of current portion 23,487 Note payable to bank, net of current portion 1,367,027 Note payable to shareholder 1,000,000 ------------ TOTAL LIABILITIES 2,839,936 ------------ Commitments and contingencies -- Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding 26,000 ------------ Shareholders' equity: Series B convertible preferred stock; $1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding at July 31, 2001 -- Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at July 31, 2001; liquidation preference of $1,000,000 250,000 Series D convertible preferred stock; $1.00 par value; 250,000 shares authorized, issued and outstanding at July 31, 2001; liquidation preference of $500,000 250,000 Common stock, $0.01 parvalue; 20,000,000 shares authorized; 9,425,341 shares issued and outstanding at July 31, 2001 94,253 Class B common stock, $0.01 par value; 83,983 shares authorized, issued and outstanding at July 31, 2001 840 Additional paid-in capital 24,030,434 Accumulated deficit (24,058,107) Notes receivable on common stock (30,411) ------------ TOTAL SHAREHOLDERS' EQUITY 537,009 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,402,945 ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 4 ELECTROPURE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000 --------------------------------------------------------------------------------
Three months ended Nine months ended July 31, July 31, --------------------------- ------------------------------- 2001 2000 2001 2000 --------- --------- ----------- ----------- Net sales $ 470,479 $ 210,605 $ 812,619 $ 653,447 Cost of sales 353,519 214,120 844,402 774,377 --------- --------- ----------- ----------- Gross profit (loss) 116,960 (3,515) (31,783) (120,930) --------- --------- ----------- ----------- Operating costs and expenses: Research and development 98,898 129,132 292,714 342,290 Sales, general and administrative 202,872 243,979 969,246 833,348 --------- --------- ----------- ----------- Total operating expenses 301,770 373,111 1,261,960 1,175,638 --------- --------- ----------- ----------- Loss from operations (184,810) (376,626) (1,293,743) (1,296,568) --------- --------- ----------- ----------- Other income (expense): Interest income 983 1,966 5,130 11,258 Interest expense (58,474) (3,964) (118,920) (7,536) Other income (expense), net (2,999) (4,701) (8,975) (9,700) Gain on disposition of assets (3,108) -- 158,065 -- --------- --------- ----------- ----------- Other income (expense), net (63,598) (6,699) 35,300 (5,978) --------- --------- ----------- ----------- Loss before provision for income taxes (248,408) (383,325) (1,258,443) (1,302,546) Provision for income tax -- -- (800) (800) --------- --------- ----------- ----------- NET LOSS $(248,408) $(383,325) $(1,259,243) $(1,303,346) ========= ========= =========== =========== NET LOSS PER SHARE, BASIC AND DILUTED $ (0.03) $ (0.04) $ (0.13) $ (0.15) ========= ========= =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 ELECTROPURE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000 --------------------------------------------------------------------------------
For the For the Nine Month Nine Month Period Ended Period Ended July 31, 2001 July 31, 2000 ------------- ------------- Cash flows from operating activities: Net loss $(1,259,243) $(1,303,346) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 124,030 101,410 Amortization 30,000 30,000 Gain on disposition of assets (158,065) -- Issuance of options and warrants for services 191,470 150,188 Issuance of warrants to majority shareholder as compensation 115,000 -- Interest on notes receivable for common stock (1,429) -- Write off of accrued interest on notes receivable for common stock surrendered 918 -- Issuance of shares for services 3,500 -- (Increase) decrease in assets: Restricted cash 15,000 -- Trade accounts receivable (28,018) 36,453 Prepaid legal and other expenses 99 7,770 Inventories (637) (4,292) Increase (decrease) in liabilities: Trade accounts payable 41,246 25,084 Customer deposits 60,240 (143,761) Accrued payroll and other liabilities 49,877 16,663 ----------- ----------- CASH USED IN OPERATING ACTIVITIES (816,012) (1,083,831) ----------- ----------- Cash flows from investing activities Purchase of property, plant and equipment (2,407,301) (70,948) Proceeds from asset disposition 231,750 -- Purchase of certificate of deposit -- (15,000) ----------- ----------- CASH USED IN INVESTING ACTIVITIES (2,175,551) (85,948) ----------- -----------
(Continued) The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 ELECTROPURE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000 -------------------------------------------------------------------------------- (Continued)
For the For the Nine Month Nine Month Period Ended Period Ended July 31, 2001 July 31, 2000 ------------- ------------- Cash flows from financing activities: Principal payments on notes payable (20,804) (14,063) Proceeds from the issuance of notes payable 1,413,935 15,000 Proceeds from exercise of warrants 1,821 Proceeds from exercise of common stock 1,059,330 Proceeds from issuance of Series D preferred stock 500,000 -- Proceeds from issuance of note payable to a related party 1,000,000 -- ----------- ----------- CASH PROVIDED BY FINANCING ACTIVITIES 2,893,131 1,062,088 ----------- ----------- NET (DECREASE) IN CASH (98,432) (107,691) CASH AT BEGINNING OF PERIOD 180,918 204,328 ----------- ----------- CASH AT END OF PERIOD $ 82,486 $ 96,637 =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 6 7 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include all adjustments which management believes are necessary for a fair presentation of the Company's financial position at July 31, 2001 and results of operations for the periods presented. 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. The accompanying condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended October 31, 2000, included in our Annual Report on Form 10-KSB. Certain amounts presented within the 2000 financial statements have been reclassified in order to conform to the 2001 financial statement presentation. 2. PROPERTIES On January 31, 2001 we purchased the 30,201 sq. ft. building we currently occupy for the total purchase price of $2,454,552, including closing costs and amounts prepaid for the purchase option. We borrowed $1,000,000 from our majority shareholder at 8% annual interest as a down payment on the building purchase and financed $1,375,000 through a real estate mortgage lender at 10.25% annual interest for the balance of the purchase price. Interest only payments are due on the $1 million loan each quarter commencing on June 30, 2001, with the principal balance due in full on January 17, 2004. We are obligated to pay the mortgage lender monthly mortgage payments of approximately $12,978 through July 2003 at which time the balance on the mortgage is due in full. 3. SECURITIES TRANSACTIONS Exchange of Preferred Shares In January 2001, we exchanged 250,000 shares of Series C preferred stock for 1,000,000 shares of Series B preferred stock purchased by our majority shareholder, Anthony M. Frank, in January 1999. Each share of Series C preferred stock is convertible, at the option of the holder, into four (4) shares of common stock. The Series C preferred carries no voting rights and has a preference in liquidation equal to $4.00 per share. Private Placement Offering - Series D Preferred Stock On January 17, 2001, we sold 250,000 shares of Series D convertible preferred stock for $2.00 per share to our majority shareholder. Net proceeds of $500,000 from the sale were collected through May 2001. The Series D preferred carries no voting rights and has a liquidation preference equal to $2.00 per share. Each Series D preferred share is convertible, at the option of the holder, into two (2) shares of common stock. 7 8 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Common Shares Issued for Services On June 1, 2001, we entered into a one year agreement for financing consulting services and issued 60,000 shares of common stock, valued at $21,000, in partial consideration for such services. The value of the shares involved in the transaction will be expensed over the 12-month term of the agreement. Notes Receivable for Issuance of Common Stock Surrendered We cancelled a $6,000 note receivable from an employee for the issuance of 12,000 shares of common stock in July 1998, with an interest rate of 5.51% per annum. The amount outstanding included accrued interest of $918 through June 22, 2001, the date on which the shares were surrendered and the note was cancelled. Accordingly, the note was offset against additional paid-in capital and the related accrued interest was charged to expense as of July 31, 2001. Warrants Issued to Non-Employees On January 11, 2001, the Board of Directors granted 250,000 five-year warrants to purchase common stock to our majority shareholder, Mr. Anthony M. Frank, at an exercise price of $0.47 per share. The $115,000 fair value of such warrants, which were granted in recognition for Mr. Frank's assistance over the years, was expensed as of the nine months ended July 31, 2001. The Company granted a total of 250,000 warrants during the nine months ended July 31, 2001 to purchase common stock to various individuals for consulting services. The warrants have exercise prices ranging from $0.25 to $0.30 and have contractual lives ranging from 1 to 5 years. The fair value of the consulting services received was $63,500 for the nine months ended July 31, 2001 and is being charged to expense over the life of the consulting arrangements. Consulting expense of $27,400 relating to these services was recognized for the nine months ended July 31, 2001. Between August 1997 and October 2000, we issued warrants to purchase the Company's common stock to various consultants and employees at exercise prices ranging from $0.28 to $1.00 per share. The value of such warrants is being expensed over the life of the respective terms of the consulting arrangements. As of the nine months ended July 31, 2001, we expensed a total of $164,070 relating to these warrants. Options Issued to Employees and Consultants During the nine months ended July 31, 2001, we issued 975,000 options to purchase common stock at prices ranging from $0.30 to $0.47 per share to various officers, employees and consultants. The options vest on an annual pro rata basis over various periods of time and are exercisable, upon proper notice, in whole or in part at any time upon vesting. Generally, unvested options terminate when an employee leaves the Company. The options granted have contractual lives ranging from 5 to 6 years. The Company continues to account for stock-based compensation to employees using the intrinsic value method prescribed in APB No. 25 whereby no compensation cost is recognized for options granted with exercise prices at or above fair market value. 8 9 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 4. 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, 2001 and 2000 are as follows:
Three months ended Nine months ended July 31, July 31, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net loss available to common shareholders: Net loss $ (248,408) $ (383,325) $(1,259,243) $(1,303,346) ----------- ----------- ----------- ----------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (248,408) $ (383,325) $(1,259,243) $(1,303,346) =========== =========== =========== =========== Weighted average shares outstanding 9,429,515 8,713,496 9,394,923 8,409,944 =========== =========== =========== =========== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.04) $ (0.13) $ (0.15) =========== =========== =========== ===========
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, 2001 and July 31, 2000 as follows: 2001 2000 --------- --------- Stock options and warrants 6,660,077 5,351,327 Convertible preferred stock 500,000 1,000,000 Contingently issuable common shares 516,479 516,479 5. BUSINESS SEGMENTS We have four reportable segments: water purification ("EDI"), hydro components ("HC/membrane"), fluid monitoring (Micro Imaging Technology ["MIT"]) (a start up segment), and real estate holdings ("LLC"). The water purification segment produces water treatment modules for sale to manufacturers of high purity water treatment systems. The hydro components segment sold water and wastewater treatment products to the light commercial/industrial markets and continues to sell 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. The sole purpose of the real estate segment is ownership of the building purchased in January 2001. 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. 9 10 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) BUSINESS SEGMENT INFORMATION:
Three months ended Nine months ended July 31, July 31, ----------------------- --------------------------- 2001 2000 2001 2000 --------- --------- ----------- ----------- Revenue EDI $ 461,480 $ 138,429 $ 799,949 $ 373,877 HC/Membrane 8,999 72,176 12,670 279,570 MIT -- -- -- -- --------- --------- ----------- ----------- Total Revenue $ 470,479 $ 210,605 $ 812,619 $ 653,447 ========= ========= =========== =========== Operating Loss EDI $ 56,459 $ (69,240) $ (319,113) $ (281,868) HC/Membrane (39,467) (46,267) (121,807) (119,020) MIT (94,141) (112,948) (290,430) (302,546) LLC 44,630 -- 55,796 -- CORPORATE (152,291) (148,171) (618,189) (593,134) --------- --------- ----------- ----------- Total operating loss $(184,810) $(376,626) $(1,293,743) $(1,296,568) ========= ========= =========== =========== Depreciation and Amortization EDI $ 31,528 $ 81,912 $ 103,175 $ 96,617 HC/Membrane -- 35 77 233 MIT 859 1,095 3,611 3,235 LLC 2,278 -- 22,957 -- CORPORATE 5,498 10,408 24,210 31,325 --------- --------- ----------- ----------- Total depreciation and amortization $ 40,163 $ 93,450 $ 154,030 $ 131,410 ========= ========= =========== =========== Expenditures for Long Lived Assets EDI $ 26,437 $ 17,527 $ 42,254 $ 58,751 HC/Membrane 373 -- 1,189 -- MIT -- -- 7,161 1,505 LLC -- -- 2,349,552 -- CORPORATE 966 -- 7,145 10,692 --------- --------- ----------- ----------- Total expenditures for long lived assets $ 27,776 $ 17,527 $ 2,407,301 $ 70,948 ========= ========= =========== =========== GEOGRAPHIC INFORMATION: Revenues United States $ 238,064 $ 141,901 $ 290,924 $ 360,514 Japan 40 -- 77,280 170,300 China 64,972 -- 110,906 -- Germany 56,526 30,026 106,367 44,676 Hong Kong 2,150 -- 41,672 3,000 Other foreign countries 108,727 38,678 185,470 74,957 --------- --------- ----------- ----------- Total revenues $ 470,479 $ 210,605 $ 812,619 $ 653,447 ========= ========= =========== =========== July 31, October 31, 2001 2000 ---------- ----------- Identifiable Assets EDI $ 181,845 691,570 HC/Membrane 523,507 98,864 MIT 14,148 16,422 LLC 2,431,648 -- ALL OTHERS 251,797 483,879 ---------- ---------- Total identifiable assets $3,402,945 $1,290,735 ========== ==========
10 11 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 6. SUBSEQUENT EVENTS On August 12, 2001, we issued 100,000 warrants to purchase common stock at $0.30 per share pursuant to a finder's fee arrangement with an individual. The aggregate fair value of these warrants, which expire on August 12, 2006, is $30,000 and will be expensed in the last quarter of fiscal 2001. On August 14, 2001, 10,000 options were granted to each of the five Directors of the Company with a ten-year term at $0.30 per share. Such options were granted as an annual stipend for services rendered to the Board. On August 28, 2001, we sold 333,334 shares of common stock to the majority shareholder in a private placement transaction for net proceeds of $100,000. 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, the ability to develop and market proposed products and the ability to obtain needed working capital. RESULTS OF OPERATIONS References to fiscal 2000 and fiscal 2001 are for the nine months ended July 31, 2000 and 2001, respectively. Net sales increased in fiscal 2001 by $159,172 as compared to fiscal 2000 which included revenues from sales of our hydro components operation that was discontinued in November 2000. Adjusted to reflect the sale of the hydro components operation, net sales in fiscal 2001 increased by $438,740 compared to fiscal 2000. For the three months ended July 31, 2001, net sales increased by $259,874 over the comparable prior year period. These increases reflects the strong demand for our EDI products and an increased penetration of the expanding ultrapure water market. These amounts include net revenues for our ion-exchange membrane products which generally decreased during fiscal 2001 as compared to fiscal 2000 primarily due to the cyclical purchasing methods employed by our membrane customers. 11 12 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Cost of sales consists primarily of purchased materials, labor and overhead (including depreciation) associated with product manufacturing, royalty costs, warranties and sustaining engineering expenses pertaining to products sold. Cost of goods as a percentage of sales decreased to 104% from 119% for the nine months ended July 31, 2001 and 2000, respectively. The three months ended July 31 showed a more dramatic decrease from 102% in fiscal 2000 to 75% in 2001. This decrease is predominantly due to increased unit sales volume, which allowed for fixed costs to be allocated over a higher number of EDI products produced. Cost of sales in fiscal 2000 and early fiscal 2001 was adversely impacted by expenses related to the underutilization of manufacturing capacity. Research and development expenses for the three and nine months periods ended July 31, 2001 decreased by $30,234 and $49,576, respectively, compared to fiscal 2000. 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. During fiscal 2000, we also conducted research and development activities relating to our ion-exchange membranes, our EDI product, and a power supply for our EDI product. The decrease in research and development expense in fiscal 2001 primarily reflects reduced expense related to the EDI power supply. Sales, general and administrative expenses increased by $135,898 for the nine months ended July 31, 2001 as compared to the same period in 2000. This results primarily from the financing expense of issuing warrants as compensation and from the costs for services to develop and file for intellectual property protection. Increases from the prior year were also due to increased depreciation expense resulting from the purchase in January 2001 of the building occupied by the Company. During the three months ended July 31, 2001, sales and general and administrative expenses decreased by $41,107 compared to the prior year period due mainly from a reduction in legal, accounting and consulting expenses. Interest income arose from short-term investments and decreased by $983 and $6,128 for the three and nine months ended July 31, 2001, respectively, as compared to the prior year periods. These decreases reflect a reduction in available working capital. Interest expense for the three and nine months ended July 31, 2001 increased by $54,510 and $111,384, respectively, compared to the prior period primarily due to financing activities relating to the purchase of our building in January 2001. In November 2001, we sold our hydro components assets in a bulk sale transaction to an unaffiliated third party for $215,000 in cash and realized a net gain on the sale in the amount of $161,173. In May 2001, we resold two company vehicles to our president and received $16,750 in payment. We realized a net loss on the sale in the sum of $3,108. We recorded the minimum state income tax provision in fiscal 2000 and 2001 as we had cumulative net operating losses in all tax jurisdictions. 12 13 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) LIQUIDITY AND CAPITAL RESOURCES At July 31, 2001, we had working capital of $31,166. This represents a working capital decrease of $213,654 compared to that reported at October 31, 2000. The decrease primarily reflects the cost of financing and depreciating the building we purchased in January 2001, increased accounts receivable, and accounts payable accrued predominantly for raw materials. The decrease also reflects the cash used to pay for additional staffing required for expanded production of our EDI products. Our primary sources of working capital have been from short-term loans and from the sale of private placement securities. In January 2001, we borrowed $1,000,000 from Mr. Anthony Frank, a majority shareholder, at an 8% annual interest rate which sums were used as a down payment on our building purchase. We borrowed an additional $1,375,000 from a commercial real estate lender to finance the balance of the building purchase. During the nine months ended July 31, 2001, we received $500,000 in cash on the sale of 250,000 shares of Series D convertible preferred stock to our majority shareholder. In November 2000, we realized a gain of $161,173 on the sale of the majority of our hydro components division assets to an unaffiliated third party for a total purchase price of $215,000. Sales of our EDI products during the nine months ended July 31, 2001 amounted to $799,949, which represents a 114% increase compared to EDI sales in the prior year period. Additional sales, totaling $12,670 were realized on membrane and hydro components products during the nine months ended July 31, 2001. Shipments of EDI products are made as promptly as possible after receipt of firm purchase orders in accordance with delivery requirements stipulated by the customer. As of July 31, 2001, we had accepted firm orders for delivery of unshipped EDI modules valued at over $450,000. PLAN OF OPERATION In the opinion of management, available funds, funds to be realized on the sale of securities to our majority shareholder, and proceeds to be realized from the sale of EDI products currently on order, are expected to satisfy our working capital requirements through December 2001. In May 2000, we appointed an exclusive representative to sell our EDI products to original equipment manufacturers (OEM's) 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 provides that our representative receives a commission on all EDI orders in the stated territories. Through August 2001, we have entered into similar business arrangements with three companies granting non-exclusive commissionable sales rights in the Northeast United States, the People's Republic of China, and Mexico. 13 14 Electropure, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Currently, we are seeking working capital through manufacturing arrangements, strategic partnerships, 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 our EDI technology and the MIT system as we discuss licensing and/or joint venture arrangements with potential candidates. 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 at significantly higher interest rates 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. 14 15 PART II - OTHER INFORMATION ITEM 1 OMITTED AS NOT APPLICABLE. ITEM 2. CHANGES IN SECURITIES Stock Options Issued to Employees On May 9, 2001, the Board of Directors authorized the issuance of 625,000 options to purchase common stock at $0.30 per share to various officers and employees. The issuances are subject to approval by our shareholders at the next Annual Meeting of Shareholders to increase the number of outstanding options available under the 1999 Stock Option Plan. The options granted, which expire through May 2007, are also subject to achieving a 50% increase over fiscal 2000 in EDI product sales prior to fiscal year end 2001. This requirement was met as of the nine months ended July 31, 2001. Cancellation of Common Stock Surrendered On June 22, 2001, we cancelled a note receivable in the principal amount of $6,000 and wrote off $918 in accrued interest in exchange for the surrender of 12,000 shares of common stock which had been issued pursuant to the exercise of options by an employee in 1998. All of these securities issuances were in private direct transactions, exempt under Section 4(2) of the Securities Act of 1933 or Regulation D promulgated thereunder. ITEMS 3 THROUGH 5 OMITTED AS NOT APPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Report on Form 8-K. A report on Form 8-K and Amendment No. One thereto, was filed for August 6, 2001 to report a change in the Registrant's independent public accountants. 15 16 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, 2001 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) 16