10QSB 1 a70597e10qsb.txt 10QSB 1 ---------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------------- FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------- For the quarterly period Commission file number 0-16416 ended JANUARY 31, 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 March 12, 2001, 9,377,341 shares of the Registrant's stock were outstanding. --------------------------------------------------------- 2 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Balance Sheets (UNAUDITED) As of January 31, 2001 -------------------------------------------------------------------------------- ASSETS
January 31, October 31, 2001 2000 ---------- ---------- (UNAUDITED) Current assets: Cash and equivalents $ 78,548 $ 180,918 Escrow deposit 15,000 15,000 Trade accounts receivable 4,594 83,322 Inventories 200,960 172,785 Prepaid legal fees 92,500 92,500 Other prepaid expenses 4,007 4,107 Assets held for sale -- 52,163 Amounts due from escrow 33,448 -- ---------- ---------- Total current assets 429,057 600,795 Property, plant and equipment, net 2,930,311 492,995 Acquired technology, net of accumulated amortization 81,945 91,945 Building purchase option -- 105,000 ---------- ---------- TOTAL ASSETS $3,441,313 $1,290,735 ========== ==========
The accompanying notes are an integral part of the financial statements. 2 3 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Balance Sheets (UNAUDITED) As of January 31, 2001 -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY
January 31, October 31, 2001 2000 ------------ ------------ (UNAUDITED) Current liabilities: Trade accounts payable $ 79,022 $ 105,372 Current portion of obligations under capital leases 4,991 2,602 Current portion of notes payable to bank 165,390 11,471 Current portion of note payable to shareholder 76,444 -- Customer deposit 20,252 -- Accrued payroll 135,232 142,680 Other accrued liabilities 30,162 26,688 ------------ ------------ Total current liabilities 511,493 288,813 Obligations under capital leases, net of current portion 17,832 6,629 Note payable to bank, net of current portion 1,220,049 -- Note payable to shareholders, net of current portion 926,667 -- ------------ ------------ TOTAL LIABILITIES 2,676,041 295,442 ------------ ------------ Commitments and contingencies -- -- Redeemable convertible preferred stock, $0.01 par value; 2,600,000 shares authorized, issued and outstanding 26,000 26,000 ------------ ------------ Stockholders' equity: Series B convertible preferred stock; $1.00 par value; 1,000,000 shares authorized; no shares and 1,000,000 shares issued and outstanding at January 31, 2001 and October 31, 2000 -- 1,000,000 Series C convertible preferred stock; $1.00 par value; 250,000 shares authorized; 250,000 and no shares issued and outstanding at January 31, 2001 and October 31, 2000 250,000 -- Series D convertible preferred stock; $1.00 par value; 250,000 shares authorized; 250,000 and no shares issued and outstanding at January 31, 2001 and October 31, 2000 250,000 -- Common stock, $0.01 par value; 20,000,000 shares authorized; 9,377,341 shares issued and outstanding at January 31, 2001 and October 31, 2000 93,773 93,773 Class B common stock, $0.01 par value; 83,983 shares authorized, issued and outstanding at January 31, 2001 and October 31, 2000 840 840 Additional paid-in capital 23,960,179 22,709,444 Accumulated deficit (23,378,952) (22,798,864) Notes receivable on common stock (436,568) (35,900) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 739,272 969,293 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,441,313 $ 1,290,735 ============ ============
The accompanying notes are an integral part of the financial statements. 3 4 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Statements of Operations (UNAUDITED) FOR EACH OF THE THREE MONTH PERIODS ENDED JANUARY 31, 2001 AND 2000 --------------------------------------------------------------------------------
Three months ended January 31, ------------------------- 2001 2000 --------- --------- Net sales $ 123,562 $ 229,269 Cost of sales 247,604 290,230 --------- --------- Gross profit (loss) (124,042) (60,961) --------- --------- Operating costs and expenses: Research and development 98,416 100,284 Salaries 84,764 111,855 Consulting 207,070 51,575 Other operating expenses 220,983 107,917 --------- --------- Total operating expenses 611,233 371,631 --------- --------- Loss from operations (735,275) (432,592) --------- --------- Other income (expense): Interest income 2,266 6,584 Interest expense (4,478) (3,524) Other income (expense), net (2,974) (3,000) Gain on sale of assets 161,173 -- --------- --------- Other income (expense), net 155,987 60 --------- --------- Loss before provision for income taxes (579,288) (432,532) Provision for income tax (800) (800) --------- --------- NET LOSS $(580,088) $(433,332) ========= ========= NET LOSS PER SHARE, BASIC AND DILUTED $ (0.06) $ (0.06) ========= =========
The accompanying notes are an integral part of the financial statements. 4 5 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (UNAUDITED) For the Three Month Period Ended January 31, 2001
Series B Series C Series D Series B Series C Series D Convertible Convertible Convertible Class B Convertible Convertible Convertible Preferred Preferred Preferred Common Common Preferred Preferred Preferred Shares Shares Shares Shares Shares Stock Stock Stock ----------- ----------- ----------- --------- ------- ----------- ----------- ----------- BALANCE, OCTOBER 31, 2000 1,000,000 -- -- 9,377,341 83,983 $ 1,000,000 $ -- $ -- Issuance of Series C convertible preferred shares in exchange for Series B convertible preferred shares (1,000,000) 250,000 -- -- -- (1,000,000) 250,000 -- Class D convertible preferred shares issued in private placement to related party -- -- 250,000 -- -- -- -- 250,000 Options and warrants granted to employees and consultants for services -- -- -- -- -- -- -- -- Warrants granted to majority shareholder as bonus -- -- -- -- -- -- -- -- Interest recognized to notes receivable for common shares -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- ---------- ------- ------- --------- ------ ----------- -------- -------- BALANCE, JANUARY 31, 2001 -- 250,000 250,000 9,377,341 83,983 $ -- $250,000 $250,000 ========== ======= ======= ========= ====== =========== ======== ======== Note Class B Additional Receivable Common Common Paid-in Accumulated Common Stock Stock Capital Deficit Stock Total ------- -------- ----------- ------------ ---------- --------- BALANCE, OCTOBER 31, 2000 $93,773 $ 840 $22,709,444 $(22,798,864) $ (35,900) $ 969,293 Issuance of Series C convertible preferred shares in exchange for Series B convertible preferred shares -- -- 750,000 -- -- -- Class D convertible preferred shares issued in private placement to related party -- -- 250,000 -- (400,000) 100,000 Options and warrants granted to employees and consultants for services -- -- 135,735 -- -- 135,735 Warrants granted to majority shareholder as bonus -- -- 115,000 -- -- 115,000 Interest recognized to notes receivable for common shares -- -- -- -- (668) (668) Net loss -- -- -- (580,088) -- (580,088) ------- -------- ----------- ------------ --------- --------- BALANCE, JANUARY 31, 2001 $93,773 $ 840 $23,960,179 $(23,378,952) $(436,568) $ 739,272 ======= ======== =========== ============ ========= =========
The accompanying notes are an integral part of the financial statements. 5 6 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (UNAUDITED) FOR EACH OF THE THREE MONTH PERIODS ENDED JANUARY 31, 2001 AND 2000 --------------------------------------------------------------------------------
For the For the Three Month Three Month Period Ended Period Ended January 31, 2001 January 31, 2000 ---------------- ---------------- Cash flows from operating activities: Net loss $ (580,088) $(433,332) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 40,130 33,577 Amortization 10,000 10,000 Issuance of options and warrants for services 135,735 23,766 Issuance of warrants to majority shareholder as compensation 115,000 -- Interest on notes receivable for common stock (668) (6,380) (Increase) decrease in assets: Trade accounts receivable 78,728 6,025 Prepaid legal and other expenses 100 (9,318) Inventories (28,175) (3,762) Assets held for sale 52,163 -- Amounts due from escrow (33,448) -- Increase (decrease) in liabilities: Trade accounts payable (26,350) 78,331 Customer deposit 20,252 (105,300) Accrued payroll and other liabilities 14,347 30,340 ----------- --------- CASH USED IN OPERATING ACTIVITIES (202,274) (376,053) ----------- --------- Cash flows used in investing activities Purchase of property, plant and equipment $(2,372,446) $ (20,098) ----------- --------- CASH USED IN INVESTING ACTIVITIES (2,372,446) (20,098) ----------- --------- Cash flows provided by (used in) financing activities: Principal payments on notes payable (2,650) (880) Proceeds from the issuance of notes payable 1,375,000 -- Cash deposit on building purchase received 15,000 -- Proceeds from exercise of warrants -- 1,821 Proceeds from issuance of Series D preferred stock 100,000 Proceeds from issuance of note payable to a related party 1,000,000 300,000 ----------- --------- CASH PROVIDED BY FINANCING ACTIVITIES 2,487,350 300,941 ----------- --------- NET INCREASE (DECREASE) IN CASH (87,370) (95,210) CASH AT BEGINNING OF PERIOD 180,918 204,328 ----------- --------- CASH AT END OF PERIOD $ 93,548 $ 109,118 =========== =========
The accompanying notes are an integral part of the financial statements. 6 7 ELECTROPURE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (UNAUDITED) For Each of the Three Month Periods Ended January 31, 2001 and 2000 --------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information 2001 2000 --------- ------ Interest paid $ 4,478 $3,524 Income taxes paid $ 800 $ 800 Supplemental Schedule of Non-Cash Investing and Financing Activities Series D Preferred stock isued for a note receivable: Increase in note receivable $ 400,000 $ -- Issuance of Series D preferred stock $(400,000) $ -- Exercise of option to purchase building: Increase in property, plant and equipment $ 105,000 $ -- Decrease in building purchase option $(105,000) $ --
The accompanying notes are an integral part of the financial statements. 7 8 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. The accompanying 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. Principles of Consolidation In February 2000, the Company formed two wholly owned subsidiary, Electropure EDI, Inc. ("EDI") and Micro Imaging Technology ("MIT") and transferred related assets and liabilities at cost to these entities in exchange for common and preferred stock. In January 2001, the Company formed a limited liability company as a wholly owned subsidiary known as Electropure Holdings, LLC ("LLC"). The consolidated financial statements of Electropure, Inc. and Subsidiaries include the accounts of the Company, its wholly owned subsidiary EDI, its majority owned subsidiary MIT, and the wholly owned partnership LLC. All significant intercompany transactions have been eliminated. Financial Statement Classification Certain amounts presented within the 2000 financial statements have been reclassified in order to conform to the 2001 financial statement presentation. 2. PROPERTIES AND EQUIPMENT At January 31, 2001 and October 31, 2000, property and equipment consisted of the following:
January 31, October 31, 2001 2000 ----------- ----------- Building $ 2,454,552 $ -- Machinery and equipment 498,968 482,457 Automobiles 46,297 46,297 Furniture and fixtures 121,567 116,190 Leasehold improvements -- 45,954 ----------- --------- 3,121,384 690,898 Less: accumulated depreciation (191,073) (197,903) ----------- --------- TOTAL PROPERTY AND EQUIPMENT, NET $ 2,930,311 $ 492,995 =========== =========
8 9 3. NOTES PAYABLE At January 31, 2001 and October 31, 2000, notes payable consisted of the following:
2001 2000 ----------- -------- NOTES PAYABLE TO BANK Note payable to bank, with an interest rate of 8% per annum, due in April 2001 and collateralized by a $15,000 certificate of deposit $ 9,656 $ 11,471 Note payable to a bank, collateralized by deed of trust on building purchased, with interest at 10.25% per annum, payable in monthly installments of $12,978 through July 1, 2003, with balance due on August 1, 2003 1,375,783 -- Less: Current portion (165,390) (11,471) ----------- -------- LONG TERM PORTION OF NOTES PAYABLE TO BANK $ 1,220,049 $ -- =========== ======== Unsecured note payable to majority shareholder, with interest at 8% per annum, interest payable quarterly beginning on June 30, 2001, with balance due in full on January 17, 2004 $ 1,003,111 $ -- Less: Current portion (76,444) -- ----------- -------- LONG TERM PORTION OF NOTE PAYABLE TO SHAREHOLDER $ 926,667 $ -- =========== ========
Future maturities of long term debt are as follows as of January 31, 2001: 2002 $ 235,734 2003 $1,537,226 2004 $1,253,556 ---------- TOTAL $3,026,516 ========== 9 10 4. 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 the Company 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 the Company. As of the year ended October 31, 2000, the Company paid the full amount due in settlement. As part of the settlement agreement, the Company recovered the EDI module held by Staar. Concentration of Risk Financial instruments which potentially subject the Company 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 the Company's exposure to credit losses and reserve for those accounts receivable that are deemed to be not collectible. During the three months ended January 31, 2001 approximately 81% of our product sales, all of which were EDI products, were made to foreign customers. One such foreign customer, Mihama Corporation of Tokyo, Japan, accounted for 29% of product sales. All sales and payments are in U.S. dollars. No provision has been recorded for uncollectable trade accounts receivable for the period ended January 31, 2001. 5. SHARE 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 and received net proceeds of $100,000 and a note in the sum of $400,000 payable in $100,000 monthly installments. 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. 10 11 6. 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 January 31, 2001 and 2000 are as follows:
Three months ended January 31, --------------------------- 2001 2000 ----------- ----------- Net loss available to common shareholders: Net loss $ (580,088) $ (433,332) ----------- ----------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (580,088) $ (433,332) =========== =========== Weighted average shares outstanding 9,377,341 7,809,437 =========== =========== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.06) $ (0.06) =========== ===========
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 January 31, 2001 and January 31, 2000 as follows:
2001 2000 --------- --------- Stock options and warrants 5,858,827 4,026,224 Convertible preferred stock 500,000 1,000,000 Contingently issuance common shares 516,479 516,479
7. BUSINESS SEGMENTS We have four reportable segments: water purification ("EDI"), hydro components ("HC/membrane"), fluid monitoring (Micro Imaging Technology ["MI"]) (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 sells water and wastewater treatment products to the light commercial/industrial markets and 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. 11 12 Reportable segments are strategic business units that offer different products, are managed separately, and require different technology and marketing strategies. The accounting policies of the segments are those described in the summary of significant accounting policies. We evaluate performance based on results from operations before income taxes and interest, net, excluding nonrecurring gains and losses. BUSINESS SEGMENT INFORMATION:
Three months ended January 31, -------------------------- 2001 2000 ----------- ----------- Revenue EDI $ (124,870) $ (117,614) HC/membrane 1,308 (70,010) MI -- (41,646) ----------- ----------- TOTAL REVENUE $ (123,562) $ (229,269) ----------- ----------- Operating Loss EDI $ (220,575) $ (60,143) HC/membrane 116,829 -- MI (94,292) (95,476) LLC (381,043) (10,547) Corporate (1,007) -- ----------- ----------- TOTAL OPERATING LOSS $ (580,088) $ (166,166) ----------- ----------- Depreciation and Amortization EDI $ 37,499 $ 7,181 HC/membrane -- 24,937 MI 1,313 1,070 LLC 224 -- Corporate 11,095 10,389 ----------- ----------- TOTAL DEPRECIATION AND AMORTIZATION $ 50,131 $ 43,577 ----------- ----------- Identifiable Assets EDI $ 650,210 $ 698,126 HC/membrane 8,044 139,973 MI 22,490 17,845 LLC 2,454,328 -- Corporate 306,241 447,707 ----------- ----------- TOTAL IDENTIFIABLE ASSETS $ 3,441,313 $ 1,303,651 ----------- ----------- Expenditures for Long Lived Assets EDI $ 9,131 $ 18,302 HC/membrane -- -- MI 6,161 -- LLC 2,349,522 -- Corporate 7,632 1,796 ----------- ----------- TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 2,372,446 $ 20,098 ----------- -----------
12 13 GEOGRAPHIC INFORMATION:
January 31, January 31, 2001 2000 ----------- ----------- Revenues United States $ 22,433 $ 118,449 Japan 36,000 105,300 Luxembourg -- -- Germany 13,263 -- Ireland 4,600 -- Other foreign countries 47,267 5,521 ----------- ----------- TOTAL REVENUES $ 123,563 $ 229,270 ----------- -----------
8. SUBSEQUENT EVENTS In February 2001, we realized $100,000 on the note receivable from our majority shareholder, leaving a balance due on such note in the sum of $300,000. 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. RESULTS OF OPERATIONS References to fiscal 2000 and fiscal 2001 are for the three months ended January 31, 2000 and 2001, respectively. Sales decreased in fiscal 2001 by $105,707 as compared to fiscal 2000 primarily due to the fact that we discontinued sales of our hydro components products when we sold the assets of that operation in November 2000. In addition, during fiscal 2001 there were no sales of our ion exchange membrane products which are generally sold in bulk lots with orders occurring intermittently and spaced over longer periods of time. Costs of goods sold for fiscal 2001 decreased by $42,626 compared to fiscal 2000 due to the decrease in the cost of raw materials for fewer products sold during the current period. This decrease was partially offset by the fact that there was not a commensurate reduction in fixed overhead during the period. 13 14 Research and development expenses for fiscal 2001 decreased by $1,868 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 minimal research and development activities relating to our ion exchange membranes and a power supply component for our EDI product. The decrease in research and development expense in fiscal 2001 primarily reflects reduced activities in the ion exchange membrane and EDI related research activities. General and administrative expenses for fiscal 2001 increased by $241,470 as compared to fiscal 2000. This results primarily from an increase of $226,969 in the cost of issuing options and warrants for services and as compensation to the majority shareholder. We also realized a $70,583 increase in consulting expenses in fiscal 2001 relating to marketing services in our EDI subsidiary. These increases were partially offset by a $27,091 decrease in salaries and related expenses during the current period. Interest income arose from short-term investments and decreased by $4,318 for the fiscal period ended January 31, 2001 as compared to the prior year period, reflecting a reduction in available working capital. Interest expense for fiscal 2001 increased by $954 compared to the prior period primarily due to financing activities relating to the purchase of our building in January 2001. We realized $161,173 in fiscal 2001 from the bulk sale of our hydro components assets in November 2000. We realized a net loss before income taxes of $579,288 for fiscal 2001, representing an increase of $146,756 from the prior year level. The increase reflects both a reduction in profitable sales and an increase in operating expenses marked by the costs of warrant and option issuances. LIQUIDITY AND CAPITAL RESOURCES At January 31, 2001, we had working capital deficit of $82,436. This represents a working capital decrease of $394,418 compared to that reported at October 31, 2000 and primarily reflects the cost of financing the building we purchased in January 2001 as well as a reduction in sales revenues. 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 we 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 three months ended January 31, 2001, we received $100,000 in cash and a note for $400,000 on the sale of 250,000 shares of Series D convertible preferred stock to our majority shareholder. In February 2001, we realized a net profit 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 three months ended January 31, 2001, a period which traditionally shows a reduction in sales activity in the water treatment industry, amounted to 14 15 $124,870, approximately 78% of sales generated during the prior three month period. Compared to the three months ended January 31, 2000, sales of our EDI products increased by approximately 7% in the current period. PLAN OF OPERATION In the opinion of management, available funds, funds to be realized on the collection of accounts receivable from product sales and proceeds from the sale of Series D preferred stock to our majority shareholder over the next three months is expected to satisfy our working capital requirements through May 2001. 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 receive a 10% commission on all EDI orders in the stated territories. In December 2000, we entered into a similar business arrangement with companies in Connecticut and Canada granting distribution rights in the Northeast United States and in the People's Republic of China, respectively. Currently, we are seeking short term 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 15 16 debt or equity securities that are significantly lower than the current market price of our common stock. No assurances can be given that currently available funds will satisfy our working capital needs for the period estimated, or that we can obtain additional working capital through the sale of common stock or other securities, the issuance of indebtedness or otherwise or on terms acceptable to us. Further, no assurances can be given that any such equity financing will not result in a further substantial dilution to the existing shareholders or will be on terms satisfactory to us. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August 1999, a cross complaint for breach of contract, misrepresentation and negligence was filed against the Company and other unaffiliated defendants by Douglas B. Platt d/b/a East-West Technic Group, the defendant in a Los Angeles Superior Court action, Case No. GC 023410, brought by Staar Surgical Company, Inc. The cross-complaint charged Electropure with breach of contract, misrepresentation and negligence in connection with the sale to Platt of an EDI module subsequently provided by Platt to Staar Surgical. The matter was settled in April 2000 for equal payments to Staar Surgical of $6,000 each by Platt, Electropure and Universal Aqua Technologies, who manufactured the water treatment system supplied to Staar. ITEM 2. CHANGES IN SECURITIES On January 11, 2001, the Board of Directors granted 250,000 five-year warrants to our majority shareholder, Mr. Anthony Frank, at an exercise price of $0.47 per share. Such warrants were granted in recognition for his assistance to us over the years. On January 17, 2001, Mr. Frank converted 1,000,000 shares of Series B convertible preferred stock each with four (4) votes per share into 250,000 shares of Series C convertible preferred stock which carry no voting rights. Each series of preferred stock have an aggregate liquidation value equal to the $1,000,000 price Mr. Frank paid in January 1999. Each one share of Series C preferred stock is convertible into two (2) shares of common stock at the option of the holder. Also in January 2001, we agreed to sell Mr. Frank up to 250,000 shares of Series D convertible preferred stock for $2.00 per share in 50,000 monthly increments beginning on January 26, 2001. Each share of Series D preferred shares has a liquidation value of $2.00 per share and is convertible, at the option of Mr. Frank, into two (2) shares of common stock. On January 11, 2001, the Board of Directors authorized the issuance of up to 850,000 options to purchase common stock at $0.50 per share to certain officers, directors and key 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 Plan. 16 17 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. None. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 19, 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) 17