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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-27380
ECHOCATH, INC.
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(Exact Name of Small Business Issuer as specified in its charter)
New Jersey 22-3273101
- ---------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 7224, Princeton, NJ 08543
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(Address of Principal Executive Offices)
Issuer's Telephone Number. . .(609) 987-8400
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Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Check whether Issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
CLASS OF COMMON EQUITY OUTSTANDING AT JANUARY 14, 1998
Class A common stock (No Par Value) 2,300,591
Class B common stock (No Par Value) 1,223,045
Transitional Small Business Disclosure Format (check one)
YES [ ] NO [X]
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PART 1: FINANCIAL INFORMATION
PART 2: OTHER INFORMATION
ECHOCATH, INC.
INDEX
Item 1: Financial Statements Page
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Balance Sheets,
August 31, 1997 and November 30, 1997 (Unaudited) 3
Statements of Operations for the three months ended
November 30, 1996 (Unaudited), and November 30, 1997 (Unaudited) 4
Statements of Cash Flows for the three months ended
November 30, 1996 (Unaudited), and November 30, 1997 (Unaudited) 5
Notes to Financial Statements 6 - 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 7 - 10
Signatures 11
2
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ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1997 November 30, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 788,933 $ 1,811,478
Inventory 200,565 201,784
Prepaid expenses 109,994 90,829
------------ ------------
Total current assets 1,099,492 2,104,091
Furniture, equipment and leasehold improvements, net 324,243 309,315
Intangible assets, net 264,076 283,765
Other assets 27,827 27,827
------------ ------------
$ 1,715,638 $ 2,724,998
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable $ 540,000 $ 540,000
Accounts payable 90,270 48,136
Accrued expenses 373,145 375,581
Obligations under capital leases, less current portion 25,852 26,437
------------ ------------
Total current liabilities 1,029,267 990,154
Obligations under capital leases 28,702 30,351
Other liabilities 87,519 102,950
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Total liabilities 1,145,488 1,123,455
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Capital contribution subject to repayment 750,000 --
------------ ------------
Stockholders' equity (deficit):
Preferred stock, no par value, 5,000,000 shares authorized;
280,000 shares of Series B cumulative convertible issued and
outstanding, senior in liquidation to Class A and
Class B common stock, (liquidation value $1,400,000) 1,393,889 1,393,889
Class A common stock, no par value, 18,500,000 shares
authorized; 2,300,591 issued and outstanding as of
November 30, 1997 and 1,886,955 as of August 31, 1997 6,198,611 7,247,806
Class B common stock, no par value, 1,500,000 shares
authorized; 1,223,045 shares issued and outstanding,
276,955 shares retired and transferred to Class A
shares; convertible into one share of Class A common stock 3,273,470 4,023,470
Accumulated deficit (11,045,820) (11,063,622)
------------ ------------
Total stockholders' equity (deficit) (179,850) 1,601,543
------------ ------------
$ 1,715,638 $ 2,724,998
============ ============
</TABLE>
See accompanying notes to financial statements.
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ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1996 AND
NOVEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
REVENUE:
License fees $ -- $ 800,000
Product sales 12,580 --
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Cost of sales 4,303 --
----------- ----------
Gross profit 8,277 800,000
Operating expenses:
R&D 356,627 341,392
Marketing and G&A 365,706 456,865
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Total operating expenses 722,333 798,257
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Profit (Loss) from operations (714,056) 1,743
Net interest income (expense) 7,952 (645)
----------- ----------
Net income (loss) $ 706,104) $ 1,098
=========== ==========
Net income (loss) per share $ (.31) $ --
Shares and common share equivalent 2,277,000 7,209,502
</TABLE>
See accompanying notes to financial statements.
4
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ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ (706,104) $ 1,098
Adjustments to reconcile net profit (loss) to net
cash used in operating activities:
Depreciation and amortization 26,248 27,931
Change in operating assets & liabilities:
Decrease in accounts receivable 4,366 --
Increase in inventory (55,742) (1,218)
Decrease in prepaid expenses 11,542 19,164
Increase in other assets (8,343) --
Decrease in accounts payable (696) (10,215)
Decrease in accrued expenses and due from
related parties (95,294) (29,483)
Increase in other liabilities -- 15,431
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Net cash (used in) provided by operating activities (824,023) 22,708
----------- -----------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (70,789) (10,248)
Purchase of intangible assets (5,667) (22,444)
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Net cash used in investing activities (76,456) (32,692)
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Cash flows from financing activities:
Principal payments on capital lease obligations (7,305) 2,234
Net proceeds from initial public offering and
over-allotment option (13,838) 195
Issuance of Class A common stock -- 1,049,000
Class B preferred dividends -- (18,900)
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Net cash (used in) provided by
financing activities (21,143) 1,032,529
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Net increase (decrease) in cash and
cash equivalents (921,622) 1,022,545
Cash and cash equivalents, beginning of period 2,387,691 788,933
----------- -----------
Cash and cash equivalents, end of period $ 1,466,069 $ 1,811,478
----------- -----------
Supplemental disclosure of cash flow information:
Interest expense $ 15,712 $ 14,546
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Supplemental disclosure of noncash information:
Equipment acquired under capital lease $ -- $ 8,190
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Capital contribution which was subject to repayment $ $ 750,000
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</TABLE>
5
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ECHOCATH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A: GENERAL AND BUSINESS
The summary financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although EchoCath, Inc. (the "Company") management believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these summary financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-KSB for the fiscal year ending August 31, 1997.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position,
results of operation and cash flows at November 30, 1996 and 1997 have been
made.
The Company does not anticipate being profitable for fiscal year 1998, therefore
a provision for income tax was not established for the first quarter.
NOTE B:
Inventories are summarized as follows:
November 30, 1997
-----------------
Raw Materials $ 59,126
Finished Goods 142,658
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$ 201,784
==========
NOTE C:
On July 7, 1995, the Company entered into an agreement with Alliance Partners
("Alliance") in order to amend its previously existing agreement. In accordance
with the new agreement, the partners of Alliance and certain other entities and
individuals became entitled to receive a 35% equity interest in the Company in
exchange for Alliance's repayment of the Company's $750,000 of outstanding
borrowings under the Company's bank demand note payable, which was paid in full
in August 1995. The payment of such indebtedness is to be treated as a capital
contribution; however, if 75% of the Class B warrants to be issued in connection
with the initial public offering are subsequently exercised providing the
Company with $23,040,000 in proceeds, then $750,000 of such proceeds will be
repaid to Alliance. In addition, the new agreement provides that funds
previously advanced to the Company by the partners of Alliance (aggregating
$1,050,368 as of January 1996) are to be treated as permanent capital. On
September 7, 1995, the partners of Alliance and certain other entities and
individuals received 525,000 shares of Class B common stock pursuant to this
agreement. As of October 31, 1997, Alliance released the $750,000 contingent
payment in exchange for 50,000 shares of Class A common stock and an option to
purchase 50,000 shares of common stock, thereby converting the Company's
contingent liability to equity. The option is exercisable at $2.00 per share of
common stock and such option expires 6 years from the date of grant. This
transaction was treated as a capital contribution, consistent with the original
Alliance transaction.
NOTE D:
LICENSE AGREEMENTS WITH MEDTRONIC, INC.
On December 30, 1996 the Company announced that it entered into an exclusive
license agreement with Medtronic, Inc. for the licensing of EchoMark'r' and
ColorMark'r' proprietary technologies for certain medical procedures. Under
the agreement the Company expects to receive a series of payments totaling
$950,000 after the completion of certain milestones. The Company has received
no licensing revenue to date under this agreement. The total payments to the
Company under the December 1996 Medtronic Agreement are $150,000 as of
December 4, 1997.
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The Company entered into an exclusive license agreement dated February 27,
1997 with EP MedSystems, Inc. (EP MedSystems). The agreement provides that
certain products can be incorporated into the EP MedSystems' diagnostic catheter
line. The Company expects to receive development milestone payments up to
$700,000. The milestones include the testing of a limited series of patients,
system capability demonstration, and the sale of a limited quantity of product.
When products are commercially available the Company will receive royalties
under the terms of the agreement. The Company has received no milestone payment
nor has it earned any royalties to date under this agreement. The agreement
provides that any royalty payment can be reduced, but not to an amount below
zero, by an amount equal to the amount of any dividends under the Company's
Series B cumulative preferred stock which are accrued but not paid as of that
date. As of November 30, 1997 the Company has $56,700 of accrued preferred
stock dividends.
On October 30, 1997, the Company announced it had reached a second definitive
licensing and development agreement with Medtronic, Inc. Pursuant to the terms
of the October 1997 Medtronic Agreement, the Company, among other things: (i)
granted Medtronic a worldwide exclusive license to make, have made, use sell and
have sold products utilizing the Company's ColorMark and EchoMark technologies
in guiding devices during cardiothoracic surgical procedures: and (ii) granted
Medtronic the exclusive right and option at any time within six (6) months of
the effective date of the October 1997 Medtronic Agreement, to acquire a
worldwide exclusive license to the Company's EchoEye and EchoFlow technologies
for use in guiding device during cardiothoracic surgical procedures.
In consideration of the grant of the exclusive rights to Medtronic, Medtronic
agreed to pay to the Company a combined total of $1,800,000 million, which
amount includes, among other things: (i) $800,000 paid to the Company in upfront
licensing fees: (ii) $1,000,000 form the purchase of 363,636 restricted shares
of the Company's Class A common stock, no par value (the "Class A common
stock"), issued to Medtronic Asset Management, Inc. wholly-owned subsidiary of
Medtronic; and (iii) future payments by Medtronic to the Company which include
minimum annual royalties upon product commercialization.
PREFERRED STOCK SUBSCRIPTION AGREEMENT
The Company entered into a subscription agreement dated February 27, 1997 with
EP MedSystems. EP MedSystems purchased 280,000 shares of the Company's Series B
cumulative convertible preferred stock for $1,400,000. The agreement provides
for an annual dividend of $.27 per share. The Company can redeem the preferred
stock if certain performance goals of the Class A common stock are achieved. The
Series B preferred stock is convertible into Class A common stock. The
conversion of Series B cumulative convertible preferred stock to Class A common
stock will be at the conversion rate of 1 share of Class A common stock for each
1.2 shares of Series B cumulative preferred stock through 1999. Thereafter, the
conversion rate shall be 1 share of Class A common stock issuable for each 1.3
shares of Series B cumulative convertible preferred stock (see Part 2:
Other Information - Item 1 Legal Proceedings).
PART 2: OTHER INFORMATION--ITEM 1
NOTE H:
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the quarter ending November 30, 1996. The Company's common
stock equivalents (preferred stock, warrants and stock options) outstanding have
been included for the quarter ended November 30, 1997 as determined by the
Treasury Stock Method. The increase in preferred stock, options, and warrants
for the quarter ending November 30, 1997 was required as a result of the net
income for that period.
7
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Certain statements in this Report on Form 10-QSB ("Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and elsewhere constitute "forward-looking statements" within the
meaning of Private Securities Litigation Reform Act of 1995, including, without
limitation, statements regarding future cash requirements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: limited
commercial operations; no assurances of success; need for additional financing;
uncertainty of market acceptance; reliance on collaborative agreements;
competition and rapid technological change; failure to receive or delays in
receiving regulatory approval; limited manufacturing and assembly experience;
limited manufacturing and assembly experience; limited marketing and sales
experience; dependence upon, and need for, key personnel; uncertain protection
of patent and proprietary rights; lack of reimbursement; general economic and
business conditions; industry capacity; industry trends; demographic changes;
changes in business strategy or development plans; quality of management;
availability, terms and deployment of capital; potential adverse impact of FDA
and other government regulations; limitations on third party reimbursement;
potential adverse impact of anti-remuneration laws; potential product liability;
risk of loss in lawsuit; risk of low prices stocks; and other factors referenced
in this Report. When used in this Report, statements that are not statements of
material fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "anticipates," "plans," "intends," "expects" and
similar expressions are intended to identify such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Three Months Ended November 30, 1997 and 1996
REVENUE:
The Company had revenues of $800,000 for the quarter ended November 30, 1997,
all of which were from license fees, and $12,580 from product sales for the
quarter ending November 30, 1996.
The Company had no cost of sales associated with the license fees for the
quarter ended November 30, 1997 and $4,303 which represented 34% of sales for
the quarter ended November 30, 1996.
RESEARCH AND DEVELOPMENT:
Research and Development expenses decreased $15,235 or 4.2% during the three
months ended November 30, 1997 because of a large decrease in materials
purchased that was partially offset by expenses for a new computer system
necessary to meet FDA requirements. Other factors did not have any material
effect on the quarter to quarter comparisons.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, General and Administrative expenses increased $91,159 or 25.0% during
the three months ended November 30, 1997 because of a large increase in legal
expenses resulting from EP MedSystems litigation, legal expenses associated with
satisfying listing requirements on the NASDAQ Small Cap Market, the license
agreement with Medtronic and an agreement with Alliance Partners to reclassify a
contingent liability to permanent capital. The Company also recognized $49,000
of compensation associated with the issuance of Class
8
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A common stock to Alliance Partners. Other factors did not have any material
effect on the quarter to quarter comparisons.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its current cash, together with revenues expected
to be derived from sales of certain of its products and license fees, should be
sufficient to fund research, development, testing, regulatory requirements,
operating and other capital needs through December 1998. The Company also
believes that additional cash resources should be available either through
financing provided through the completion of license agreements and strategic
alliances or, if necessary, by reducing the level of its operating expenses by
deferring certain research and development or marketing expenses. There can be
no assurance that the Company will be able to complete the aforementioned
license agreements and strategic alliances on acceptable terms or at all. The
Company may need substantial additional financing in order to continue
development of and commercialize certain of its proposed products and other
potential products. The Company has no binding commitments from any third
parties to provide funds to the Company. There can be no assurances that the
Company will be able to obtain financing from any other sources on acceptable
terms or at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128 establishes standards for computing and presenting earnings per share. In
accordance with the effective date of SFAS 128, the Company will adopt SFAS 128
as of February 28, 1998. This statement is not expected to have a material
impact on the Company's financial statements.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
On October 16, 1997, EP MedSystems delivered to the Company a complaint (the
"Complaint") filed in the United States District Court for the District of New
Jersey in connection with the Company's sale of securities to EP MedSystems
pursuant to a Subscription Agreement, dated as of February 27, 1997, by and
between the Company and EP MedSystems. In the Complaint, EP MedSystems alleges
that the Company violated 'SS'10(b) of the Exchange Act and committed common
law fraud in connection with EP MedSystems' purchase of securities from the
Company. EP MedSystems requested unspecified compensatory damages, costs,
attorneys' fees and punitive damages. On November 26, 1997, pursuant to an order
of the Court, the Company filed an Answer, without prejudice to its right to
move to dismiss the Complaint, denying the material allegations of the
Complaint, and asserting a counterclaim against EP MedSystems seeking its costs
and expenses in the action, including its attorneys' fees, based on EP
MedSystems' breach of the Subscription Agreement. On December 3, 1997, EP
MedSystems filed an Amended Complaint, also alleging violations of 'SS'10(b)
of the Exchange Act, and common law fraud. Pursuant to Court order, the
Company's Answer was due December 10, 1997, also without prejudice to the
Company's right to move to dismiss. On December 10, 1997, the Company filed an
Answer to the Amended Complaint, again denying the material allegations of the
complaint, and asserting a counterclaim against EP MedSystems based on EP
MedSystems' breach of the Subscription Agreement. On December 17, 1997, the
Company served on EP MedSystems a motion to dismiss the Complaint. The Company
anticipates that this motion will be fully briefed and submitted to the Court by
January 30, 1998.
The Company believes, after discussion with counsel, that the Complaint is
without merit and intends to defend itself vigorously.
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Item 2: Changes in Securities
A-1) 413,636 new shares of Class A common stock were issued during the
quarter under the same terms and conditions required by the Certificate
of Incorporation. 363,636 shares were issued on October 30, 1997 to
Medtronic, Inc., and 50,000 shares were issued to Alliance Partners.
Additionally, an option to purchase 50,000 shares of Class A common
stock at an exercise price of $2.00 per share was granted to Alliance
Partners as of October 31, 1997. The expiration date is six years after
its issue date.
A-2) A copy of the Subscription Agreement to purchase Class A common stock
was filed pursuant to a report on Form 8-K filed on October 31, 1997.
Item 3: None
Item 4: None
Item 5: None
Item 6: Exhibits and Reports on Form 8-K
A) Exhibits
27) Financial Data Schedule
B) A report on Form 8-K was filed on October 31, 1997, which is
incorporated by reference in the Company's 10-KSB dated August 31, 1997.
Financial Statements and Exhibits.
The following financial statements and exhibits were filed pursuant to
a report on Form 8-K filed on October 31, 1997:
Pro Forma Financial Information
Pro forma condensed balance sheets at September 30, 1997 and August 31,
1997.
Pro forma condensed statement of operation for the 3-month period ended
August 31, 1997 and the month ended September 30, 1997.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: January 14, 1998
EchoCath, Inc.
--------------------
(Registrant)
By: /s/ Frank DeBernardis
-------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
11
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as......... 'r'
The section symbol shall be expressed as...................... 'SS'
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> NOV-30-1997
<PERIOD-TYPE> 3-MOS
<CASH> 1,811,478
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 201,784
<CURRENT-ASSETS> 2,104,091
<PP&E> 670,707
<DEPRECIATION> 361,392
<TOTAL-ASSETS> 2,724,998
<CURRENT-LIABILITIES> 990,154
<BONDS> 0
<COMMON> 11,271,276
0
1,393,889
<OTHER-SE> (11,063,622)
<TOTAL-LIABILITY-AND-EQUITY> 2,724,998
<SALES> 0
<TOTAL-REVENUES> 800,000
<CGS> 0
<TOTAL-COSTS> 798,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645
<INCOME-PRETAX> 1,098
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,098
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
