UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-28260
EP MEDSYSTEMS, INC.
(Exact name of small business issuer as specified in its
charter)
New Jersey 22-3212190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Stierli Court, Mt. Arlington, New Jersey 07856
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code:(973)398-2800
58 Route 46 West, Budd Lake, NJ 07828
(Former address of issuer)
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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. X Yes No
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date: Common Stock, no par value, 7,599,917
shares outstanding at October 31, 1997.
Transitional Small Business Disclosure Format
Yes No X
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30
ASSETS 1996 1997
Current assets: (unaudited)
Cash and cash equivalents $ 5,491,857 $ 890,700
Short-term investments 1,794,553 2,478,309
Accounts receivable, net 671,503 1,421,928
Inventories 626,707 1,494,084
Prepaid expenses and other current assets 185,761 287,782
--------- ---------
Total current assets 8,770,381 6,572,803
Long-term investments 3,001,222 --
Investment in EchoCath, Inc. -- 1,400,000
Property and equipment, net 181,385 662,177
Intangible assets, net 615,861 582,604
Other assets 31,000 133,344
---------- ---------
Total assets $ 12,599,849 $ 9,350,928
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 238,764 $ 564,001
Payables due to related party 85,035 152,226
Accrued expenses 438,787 399,964
Deferred revenue 42,938 39,063
Customer deposits 103,999 75,322
------- ---------
Total liabilities 909,523 1,230,576
------- ---------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, no par value,
5,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, $.001 stated value,
25,000,000 shares authorized,
7,599,917 and 7,599,917
shares issued and outstanding 7,600 7,600
Additional paid-in capital 16,743,014 16,743,014
Accumulated deficit (5,060,288) (8,630,262)
----------- -----------
Total shareholders' equity 11,690,326 8,120,352
----------- -----------
Total liabilities and shareholders'
equity $ 12,599,849 $ 9,350,928
========== =========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended
September 30, September 30,
1996 1997
Product sales $ 433,461 $ 1,321,013
Revenue from catheter development - -
------- ---------
Total revenues 433,461 1,321,013
------- ---------
Operating costs and expenses:
Cost of products sold 270,959 654,010
Sales and marketing expenses 178,372 850,563
General and administrative expenses 273,665 340,035
Research and development expenses 211,537 520,468
--------- -----------
Loss from operations (501,072) (1,044,063)
Interest expense (5,757) (624)
Interest income 173,488 65,768
--------- ---------
Net loss $ (333,341) $ (978,919)
========= =========
Net loss per share $ (.04) $ (.13)
===== =====
Weighted average shares outstanding 7,581,167 7,599,917
========== =========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
September 30, September 30,
1996 1997
------------ --------------
Product sales $ 1,758,156 $ 2,606,650
Revenue from catheter development 250,000 -
--------- ---------
Total revenues $ 2,008,156 $ 2,606,650
--------- ---------
Operating costs and expenses:
Cost of products sold 936,765 1,545,418
Sales and marketing expenses 447,560 2,326,589
General and administrative expenses 831,021 1,133,998
Research and development expenses 370,809 1,458,109
Write off of other assets 107,500 -
Write-off of value of 1995 Warrants
on retirement of 1995 Debentures 49,232 -
--------- -----------
Loss from operations (734,731) (3,857,464)
Interest expense (44,238) (1,872)
Interest income 183,948 289,362
--------- -----------
Net loss $ (595,021) $ (3,569,974)
========= ===========
Net loss per share $ (.09) $ (.47)
===== =====
Weighted average shares outstanding 6,491,235 7,599,917
========= =========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30, September 30,
1996 1997
-------------- -------------
Cash flows from operating activities:
Net loss $ (595,021) $ (3,569,974)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 124,670 156,148
Write-off of other assets 107,500 -
Amortization of premium or discount on investments - 32,225
Write-off of value of 1995 Warrants on
retirement of 1995 Debentures 49,232 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (544,308) (750,425)
(Increase) in inventories (63,471) (867,377)
Increase in prepaid and current assets (24,738) (102,021)
Decrease (increase) in intangible and other assets 26,837 (123,594)
(Decrease) increase in due to related party (185,903) 67,191
(Decrease) increase in accounts payable (94,843) 325,237
(Decrease) in accrued expenses, deferred
revenue and customer deposits (62,025) (71,374)
----------- -----------
Net cash used in operating activities $ (1,262,070) $ (4,903,964)
----------- -----------
Cash flows from investing activities:
Investment in EchoCath, Inc. - (1,400,000)
Purchase of investments (9,975,031) -
Maturities of held to maturity investments - 1,487,096
Proceeds from sale of marketable securities - 798,145
Capital expenditures, net of disposals (46,706) (582,434)
Loan to Falfab (7,500) -
------------ ---------
Net cash used in investing activities $ (10,029,237) $ 302,807
------------ ---------
Cash flows from financing activities:
Repayment of debentures, net (62,500) -
Net proceeds from issuance of common stock 12,415,175 -
Payment of notes payable (109,250) -
---------- ---------
Net cash provided by financing activities $ 12,243,425 $ -
---------- ---------
Net increase (decrease) in cash and cash 952,118 (4,601,157)
equivalents
Cash and cash equivalents, beginning of period 34,588 5,491,857
------- ----------
Cash and cash equivalents, end of period $ 986,706 $ 890,700
======= ==========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the financial
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (including normal
recurring adjustments) considered necessary for a fair
presentation have been included.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The results of operations for the respective interim periods
are not necessarily indicative of the results to be expected
for the full year. The accompanying unaudited consolidated
financial statements should be read in conjunction with the
audited consolidated financial statements and the notes
thereto included in the Company's Form 10-KSB for the year
ended December 31, 1996 filed with the Securities and
Exchange Commission.
2. NET LOSS PER COMMON SHARE
Net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock and common
stock equivalents outstanding during the periods presented.
For the three months ended September 30, 1996 and the three
and nine months ended September 30, 1997, common stock
equivalents are excluded from the computation of net loss
per share since their inclusion would be antidilutive. For
periods prior to the Company's initial public offering, the
weighted average number of shares is based upon Securities
and Exchange Commission Staff Accounting Bulletin No. 83
("SAB 83"). In applying SAB 83, common stock, stock options
and warrants issued during the twelve months preceding the
initial public offering at prices below the initial public
offering price, have been included in the Company's loss per
share computation, using the treasury stock method, even
though they were antidilutive. For the nine month period
ended September 30, 1996, the dilutive effect of these
options has been included in the loss per share calculation
through June 30, 1996, the period during which the initial
public offering became effective, using the treasury stock
method in accordance with SAB No. 83, even though they were
anti-dilutive. Stock options issued prior to the twelve
months preceding the initial filing of the initial public
offering are excluded as they are antidilutive.
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128). This Statement establishes
standards for computing and presenting earnings per share
("EPS") and applies to publicly traded common stock or
potential common stock. SFAS replaces the presentation of
primary EPS with a presentation of basic EPS and also
requires dual presentation of basic and diluted EPS on the
face of the statement of operations. Under the new
standard, basic EPS is computed based on weighted average
shares outstanding and excludes any potential dilution.
Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other
contracts to issue common stock, and is similar to the
currently required fully diluted EPS. SFAS 128 is effective
for financial statements for both interim and annual periods
ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company
will adopt this statement for its year ended December 31,
1997. The impact of SFAS 128 on the calculation of net loss
per share is not expected to be material.
3. ISSUANCE OF COMMON STOCK
During January, 1996, the Company sold an aggregate of
166,667 shares of Common Stock to two investors at a
purchase price of $3.00 per share. The net proceeds from
the sales were $500,000.
On June 21, 1996, the Company completed its initial public
offering of 2,500,000 shares of Common Stock at a purchase
price of $5.50 per share. The net proceeds from the
offering were approximately $11,786,000 net of offering
costs.
During the nine months ended September 30, 1996, the holders
of $1,025,000 face amount of long term debt (the "1995
Debentures") elected to exercise warrants (the "1995
Warrants") to purchase 512,500 shares of common stock at
$2.00 per share in lieu of receiving cash repayment of the
debentures. On June 30, 1996, the Company repaid the
remaining outstanding 1995 Debentures in the face amount of
$112,500 in cash. During July and August, 1996, the holders
of the remaining 1995 Warrants purchased 56,250 shares of
common stock at $2.00 per share. Upon repayment of the 1995
Debentures, the Company recorded a write-off of $46,497,
representing the unamortized value placed on the 1995
Warrants issued in connection with the 1995 Debentures.
4. LONG TERM INCENTIVE PLAN
During July, 1997, the Board of Directors approved an
amendment to increase the number of shares of common stock
issuable under the 1995 Long Term Incentive Plan by 300,000
shares from 400,000 to 700,000. This amendment was approved
by the shareholders at the Annual Meeting of Shareholders
held on October 30, 1997.
5. INVENTORIES
Inventories consist of the following:
December 31, September 30
1996 1997
--------- ---------
Raw materials $ 173,936 $ 210,006
Work in progress 11,456 12,388
Finished goods 441,315 1,271,690
--------- -----------
$ 626,707 $ 1,494,084
========= ===========
6. INVESTMENT SECURITIES
The Company accounts for its investment securities in
accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This Statement requires the
classification of debt and equity securities based on
whether the securities will be held to maturity, are
considered trading securities or are available for sale.
Classification within these categories may require the
securities to be reported at their fair market value with
unrealized gains and losses included in current earnings or
reported as a separate component of stockholders' equity.
As of September 30, 1997, all of the Company's investments
have been classified as available for sale. These
investments are stated at market, which approximates their
amortized cost, and consist of corporate bonds. The
maturities of the investments range from August, 1998 to
September, 2000. At December 31, 1996, certain of these
investment securities were classified as held to maturity
and as such, were stated at amortized cost, which
approximated market.
Short-term and long-term investments held to maturity are as
follows:
December 31, September 30,
1996 1997
----------- ------------
Held to maturity securities:
Short-term investments
U.S government agency obligations $ $1,496,725 $ -
Long-term investments
Corporate bonds $ $3,001,222 $ -
--------------- ------------
Total held to maturity securities $ $4,497,947 $ -
--------------- ------------
The Company's available for sale securities are as follows:
Available for sale securities: December 31, September 30
1996 1997
------------ ------------
Corporate preferred stocks $ 297,828 $ -
Corporate bonds - 2,478,309
------- ---------
Total available for sale securities 297,828 2,478,309
======= =========
7. PROCATH BUILDING PURCHASE
During February, 1997, the Company purchased 7,500 square
feet of manufacturing, administrative and warehouse space,
including 2,500 square feet of space that was leased by the
Company's ProCath subsidiary, for a purchase price of
approximately $370,000, including transaction costs. The
Company completed improvements to the space to prepare it
for its intended use at an aggregate cost of approximately
$85,000. The purchase provides for expansion of the
existing manufacturing operations, additional warehousing,
shipping and quality assurance activities and relocation of
ProCath's administrative offices.
8. ECHOCATH LICENSE
During February, 1997, the Company licensed certain
technologies from EchoCath, Inc. ("EchoCath") in order to
attempt to develop products which allow visualization of the
heart's anatomy and visualization of catheters inside the
heart through the use of ultrasound rather than by using
fluoroscopy, or x-ray imaging. The license includes all
rights to the EchoMark, EchoEye and ColorMark technologies
for use in the field of electrophysiology. The license
excludes use on permanently implantable defibrillators and
pacemaker leads.
The agreement calls for the Company to make payments
totaling $700,000, in four installments, as certain
development milestones and initial sales are achieved on the
EchoMark and EchoEye technologies. Terms of the license
call for a royalty on net sales, including minimum royalties
of $120,000 beginning in 1999 and increasing to $400,000 in
2005 and thereafter for the life of the applicable patents
and continuations. The Company may elect to not make
minimum royalty payments and in such case, EchoCath can make
the license non-exclusive or cancel the license and return
the $700,000 milestone payments.
The Company also purchased 280,000 shares of newly issued
5.4% cumulative convertible preferred stock of EchoCath for
$1.4 million in cash. During September, 1997, the Company
became aware that EchoCath may have been having cash flow
difficulties and that EchoCath could face delisting of its
common stock from the NASDAQ Small Cap Stock Market if it
did not maintain net equity in excess of $1,000,000.
On October 7, 1997, the Company filed a lawsuit in the United
States District Court for the District of New Jersey
alleging, among other things, that EchoCath made fraudulent
misrepresentations and omissions in connection with the sale
of $1.4 million of its preferred stock to the Company.
EchoCath has not yet filed a response to the lawsuit.
On October 30, 1997, EchoCath announced that it had entered
into a license and development agreement with Medtronic,
Inc. which included a $1,000,000 investment by Medtronic in
Class A common stock of EchoCath and an $800,000 prepayment
of license fees. The Company believes that the Medtronic
investment will allow EchoCath to meet the requirements for
continued listing on the NASDAQ Small Cap Stock Market at
this time. The agreement also provides EchoCath with $1.8
million of new working capital and may provide an
opportunity to earn additional royalty or licensing income.
The Company cannot determine whether this cash infusion will
be sufficient to meet EchoCath's long term cash needs or
whether EchoCath will recognize additional revenue or attain
profitability.
The EchoCath preferred stock is not a registered security
traded on a public exchange and therefore its fair value is
not readily determinable. Accordingly, the shares are
stated at historical cost. Management has evaluated the
investment for permanent impairment and as a result of this
review, management believes that there is no permanent
impairment at this time. However, management will continue
to evaluate the investment and may determine that a
permanent impairment has occurred and that such impairment
should be recorded in the future. The preferred stock is
convertible, at the option of the Company, into shares of
EchoCath common stock at a conversion price of $6.00 per
share through 1999 and $6.50 per share thereafter. The
market price for the common stock on November 7, 1997 was
$4.00 per share. The Company does not anticipate converting
its shares in the near future.
9. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION:
Supplemental Noncash Investing and Financing Activities:
During the nine months ended September 30, 1996, the holders
of $1,025,000 face amount of long term debt (the "1995
Debentures") elected to exercise warrants (the "1995
Warrants") to purchase 512,500 shares of common stock at
$2.00 per share in lieu of receiving cash repayment of the
debentures.
Cash paid for interest was $624 and $1,872 for the three and
nine months ended September 30, 1997, respectively, and
$5,757, and $60,969 during the comparable period in 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion of significant
factors that affected the Company's interim financial
condition and results of operations. This should be read in
conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in
the Company's Form 10-KSB filed with the Securities and
Exchange Commission.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this
Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this Form 10-QSB, the
words or phrases "believes," "anticipates," "expects,"
"intends," "will likely result," "estimates," "projects" or
similar expressions are intended to identify such forward-
looking statements, but are not the exclusive means of
identifying such statements. Such forward-looking statements
are only predictions, and the actual events or results may
differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute
to such differences include, but are not limited to the
following: the Company's history of losses and uncertainty
of profitability; the possibility that the Company may not
have sufficient capital, and if additional capital is
needed, that the Company may not be able to raise sufficient
new capital; risks regarding demand for new and existing
products, particularly the EP WorkMate and the ALERT System;
the success of new product development efforts; clinical
results of the ALERT System; the uncertainty as to whether
the Company's products will receive approval for sale in the
United States and in the event that they do receive
approval, the risk that there will not be third party
reimbursement available; the Company's highly competitive
industry and rapid technological change within the industry
and the fact that the industry is dominated by large
companies with much greater resources than the Company; the
reliance on key personnel; the uncertainty of patent or
proprietary technology protection, particularly with respect
to the ALERT System; other factors discussed in the
following paragraphs; and in the Company's Form 10-KSB filed
with the Securities and Exchange Commission.
The Company cautions investors and others to review the
cautionary statements set forth in this report and in the
Company's other reports filed with the Securities and
Exchange Commission and cautions that other factors may
prove to be important in affecting the Company's business
and results of operations. Readers are cautioned not to
place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company
undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of anticipated
events.
OVERVIEW
The Company was formed in January, 1993 to develop,
manufacture, market and sell a range of electrophysiology
products used to diagnose, monitor and treat certain cardiac
disorders. Since inception, the Company has acquired
certain technology and related assets as well as certain
marketing rights, has developed new products and has
introduced or begun marketing various electrophysiology
products, including the EP WorkMate electrophysiology
workstation, the EP-3 computerized electrophysiology
stimulator and diagnostic electrophysiology catheters. To
date, these products have generated limited revenue and the
Company has an accumulated deficit of $8.6 million at
September 30, 1997.
The Company has also developed the ALERT System, which uses
a proprietary electrode catheter to deliver measured,
variable, low energy electrical impulses directly to the
inside of the heart in order to convert atrial fibrillation
to a normal heart rhythm. In order for the Company to
market the ALERT System in the United States, the Company
must obtain clearance approval from the FDA. The Company has
received conditional approval from the FDA to begin clinical
trials of the ALERT and expects to begin trials of the ALERT
System at three U.S. centers in the fourth quarter of 1997.
At the earliest, the Company does not anticipate filing a
PMA application for the ALERT System for at least six
months, and does not anticipate receiving a PMA for any such
system until at least one to three years after such PMA
application is accepted for filing, if at all. During
September, 1997, the Company received approval from its
notified body to label the ALERT System with a CE Mark.
This designation allows the Company to initiate sales of the
ALERT System in the European Community and the Company
expects to make a limited market release of the ALERT System
for European sales.
The Company has identified the diagnosis and treatment of
atrial fibrillation ("atrial fib") as a primary focus for
its ongoing development efforts. Atrial fib is the most
prevalent type of abnormal heart rhythm, estimated to
afflict up to 2,500,000 people in the United States and an
estimated 160,000 new cases develop each year. Although not
immediately life threatening, atrial fib has now been linked
to a significantly increased risk of stroke. The American
Heart Association estimates that 15% of all strokes in
the United States occur in people with atrial fib, with
published reports that stroke is twice as likely to be fatal
in patients with atrial fib. In patients over the age of 65,
atrial fib is reported to quadruple the risk of stroke.
Although treatment of atrial fib varies from patient to
patient, the treatment goals remain constant: (1) restore
and maintain normal heart rhythm, (2) control the
ventricular heart rate and (3) prevent stroke. The Company
believes that the ALERT System provides numerous advantages
over current therapies for cardioversion or restoring normal
heart rhythm.
There can be no assurance that any of the Company's
development projects will be successful or that if
development is successful, that the products will generate
any sales. The Company expects its operating losses to
continue in the near future as it will continue to expend
substantial funds for research and development, clinical
trials in support of regulatory approvals, increased
manufacturing capacity and expansion of sales and marketing
activities. The amount and timing of future losses will be
dependent upon, among other things, increased sales of the
Company's existing products, clinical trials, regulatory
approval and market acceptance of the ALERT System and
developmental, regulatory and market success of new products
under development.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1996
Total revenues increased $887,552 (or 205%) from $433,461 to
$1,321,013 in the three months ended September 30, 1997 as
compared to the comparable period in 1996. The increase in
sales in the third quarter of 1997 resulted primarily from
increased sales of the EP WorkMate, which represented 70% of
total revenues during the three month period. Shipments of
the EP WorkMate incorporating several improved features
began during the third quarter of 1997 which may have
contributed to the increased level of sales. Delays in the
introduction of these features may have contributed to lower
than expected sales in the quarter ended June 30, 1997.
Accordingly, the Company believes that a portion of the
increase in sales for the three months ended September 30,
1997 was attributable to the unavailability of the upgrades
in the second quarter. The Company believes that the EP
WorkMate is the most technologically advanced and easy to
use EP workstation on the market. Sales of the EP WorkMate
represented 38% of total revenue during the three month
period ended September 30, 1996.
The level of sales during the fourth quarter of 1997, as
well as fiscal 1998 and beyond, will depend materially on
the ability of the Company's domestic direct sales force and
network of international independent distributors to
effectively market and sell the EP WorkMate and the
Company's other products.
Cost of products sold increased $383,051 (or 141%) from
$270,959 to $654,010. Gross profit on product sales for the
three months ended September 30, 1997 was $667,003 (or 50.5%
as a percentage of product sales), as compared with $162,502
(or 37.5%) for 1996. The increase in gross profit
percentage was due to increased sales of the EP WorkMate
during 1997 which has yielded a higher gross margin than
other product lines. During the three months ended September
30, 1996, the Company realized high gross margins on the
sale of certain disposable products which were not recurring
in 1997.
Sales and marketing expenses increased $672,191 (or 376.8%)
from $178,372 to $850,563 and as a percentage of total
revenues from 41.1% to 65.3%. Beginning in September, 1996,
the Company began hiring a domestic direct sales force,
including several salaried sales and marketing managers and
personnel. The effort also involved increased base
commissions for direct sales representatives, increased
travel and convention related expenses and increased
promotion expenses related to existing products. The
Company believes that a domestic direct sales force will
generate higher sales in the future than the Company would
have generated through the use of a domestic network of
independent distributors. During this period, the Company
also expended substantial funds in an effort to improve its
network of international independent distributors.
Although there can be no assurance of such fact, the Company
expects to make a limited market release of the ALERT System
for European sales. The Company expects to incur additional
sales and marketing expenses as a result of the introduction
of the ALERT System for sale outside of the United States.
The Company expects sales and marketing expenses to increase
significantly in the fourth quarter of 1997, as compared to
fourth quarter of 1996, as the direct sales force will be in
place for the entire year and as product promotion
associated with the direct sales effort and international
independent distribution network continues. Sales and
marketing expenses for 1998 are also expected to increase,
but not by as much as the increase realized in 1997. It is
likely that the Company will incur additional losses as a
result of the increased fixed costs associated with direct
sales until such time as sufficient incremental sales are
generated to cover such costs. The Company cannot determine
when or if that level of sales will be achieved.
General and administrative expenses increased $66,370 (or
24.3%) from $273,665 to $340,035 and decreased as a
percentage of total revenues from 63.1% to 26.1%. The
dollar increase was due to, among other things, the hiring
of additional administrative personnel and increased product
liability and directors and officers insurance expense
incurred during 1997. The Company expects general and
administrative expense to increase in future periods due to
anticipated future growth. It is anticipated, however, that
these expenses may decline as a percentage of total revenues
at such time as sufficient incremental sales are generated
to cover such costs. The Company cannot determine when or
if such incremental sales will be achieved.
Research and development expenses increased $308,931 (or
146%) from $211,537 to $520,468 and decreased as a
percentage of net sales from 48.8% to 40.0%. The dollar
increase was due to significant expenses incurred in
connection with preparations for manufacturing of the ALERT
products, including obtaining the CE Mark and preparing
submissions to the FDA. The Company also realized research
and development expenses related to the licensing and
development of technology for placement of a flexible
metallic coating on its electrophysiology catheters,
preliminary development efforts of ultrasound guided
products, hiring of additional in-house engineering and
technical support personnel and increased development work
on existing products, including the EP WorkMate. The
Company expects that expenses related to the ALERT System
will be significant in the fourth quarter of 1997 and during
1998, when clinical trials are expected to be ongoing. The
Company also expects that other research and development
expenses will increase as it continues attempts to develop
new products, including ultrasound guided catheters and
catheters utilizing the flexible electrode technology as
well as ongoing improvements to existing products and other
development projects which may arise.
Interest expense decreased from $5,757 to $624. The decrease
was due to the Company's repayment of $1,137,500 face amount
of 1995 Debentures in June, 1996, the repayment of the
balance of a note incurred in connection with the
acquisition of ProCath and the balance of a $50,000 short
term note. The Company does not expect to incur material
interest expense in 1997.
Interest income decreased from $173,488 to $65,768. The
decrease was due to the utilization of the proceeds of the
Company's June, 1996 initial public offering. The Company
expects to continue earning interest on its investments in
future periods, but the amount of interest income will
decrease as proceeds of the initial public offering continue
to be utilized in the operation of the Company's business.
The Company incurred a net loss of $978,919 (or $.13 per
share based on 7,599,917 shares outstanding) in the three
months ended September 30, 1997 as compared with $333,341
(or $.04 per share based on 7,581,167 shares outstanding) in
the comparable period in 1996. The increase in net loss was
caused by the factors discussed above.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996
Total revenues increased $598,494 (or 29.8%) from $2,008,156
to $2,606,650 in the nine months ended September 30, 1997.
The increase in sales for the nine month period ended
September 30, 1997 resulted primarily from increased sales
of the EP WorkMate, which represented 59% of total revenues
during the period. Shipments of the EP WorkMate
incorporating several improved features began during the
third quarter of 1997, which may have contributed to the
increased level of sales. The Company believes that the EP
WorkMate is the most technologically advanced and easy to
use EP workstation on the market. Sales of the EP WorkMate
represented 34% of total revenue during the nine months
ended September 30, 1996. During the nine months ended
September 30, 1996, the Company recorded revenue of $250,000
from catheter development for a third party which was not
recurring in 1997.
The level of sales during the fourth quarter of 1997, as
well as fiscal 1998 and beyond, will depend materially on
sales of the EP WorkMate and the ability of the Company's
direct sales force and network of international independent
distributors to effectively market and sell the EP WorkMate
and the Company's other products.
Cost of products sold increased $608,653 (or 65.0%) from
$936,765 to $1,545,418 in the nine months ended September
30, 1997. Gross profit on product sales for the nine months
ended September 30, 1996 was $821,391 (or 46.7% as a
percentage of product sales), as compared with $1,061,232
(or 40.7% as a percentage of product sales) for 1997. The
Company realized an increase in gross profit during 1997 due
to higher sales of the EP WorkMate which has yielded a
higher gross margin than other product lines. This increase
was offset by increased labor and manufacturing overhead
expenses at ProCath incurred as the Company prepares to
commence manufacturing of the ALERT System. During the nine
months ended September 30, 1996, the Company realized high
gross margins on the sale of certain disposable products
which were not recurring in 1997.
Sales and marketing expenses increased $1,879,029 (or
419.8%) from $447,560 to $2,326,589 and as a percentage of
total revenues from 22.2% to 89.9%. Beginning in September,
1996, the Company began hiring a domestic direct sales
force, including several salaried sales and marketing
managers and personnel. The effort also involved increased
base commissions for direct sales representatives, increased
travel and lodging and convention related expenses and
increased promotion expenses related to existing products.
The Company believes that a domestic direct sales force will
generate higher sales in the future than the Company would
have generated through the use of a network of domestic
independent distributors. During this period, the Company
also expended substantial funds in an effort to improve its
network of international independent distributors.
Although there can be no assurance of such fact, the Company
expects to make a limited market release of the ALERT System
for European sales. The Company expects to incur additional
sales and marketing expenses as a result of the introduction
of the ALERT System for sale outside of the United States.
The Company expects sales and marketing expenses to increase
significantly in the fourth quarter of 1997, as compared to
fourth quarter of 1996, as the direct sales force will be in
place for the entire year and as product promotion
associated with the direct sales effort and international
independent distribution network continues. Sales and
marketing expenses for 1998 are also expected to increase,
but not by as much as the increase realized in 1997. It is
likely that the Company will incur additional losses as a
result of the increased fixed costs associated with direct
sales until such time as sufficient incremental sales are
generated to cover such costs. The Company cannot determine
when or if that level of sales will be achieved.
General and administrative expenses increased $302,977 (or
36.5%) from $831,021 to $1,133,998 and increased as a
percentage of total revenues from 41.4% to 43.4%. The
dollar increase was due to the hiring of additional
administrative personnel, increased product liability and
directors and officers insurance expense and other costs
associated with operating as a publicly traded company. The
Company expects general and administrative expense to
increase in future periods due to anticipated future growth.
It is anticipated, however, that these expenses will decline
as a percentage of total revenues at such time as sufficient
incremental sales are generated to cover such costs. The
Company cannot determine when or if such incremental sales
will be achieved.
Research and development expenses increased $1,087,300 (or
293%) from $370,809 to $1,458,109 and as a percentage of net
sales from 18.5% to 56.4%. The increase was due to
significant expenses incurred in connection with
preparations for manufacturing of the ALERT products,
including obtaining the CE Mark and filings with the FDA.
The Company also realized research and development expenses
related to the technology for placement of a flexible
metallic coating on its electrophysiology catheters,
preliminary development efforts of ultrasound guided
products, hiring of additional in-house engineering and
technical support personnel and increased development work
on existing products, including EP WorkMate. The Company
expects that expenses related to the ALERT System will be
significant in the fourth quarter of 1997 and during 1998,
when clinical trials are expected to be ongoing. The
Company also expects that other research and development
expenses will increase as it continues attempts to develop
new products, including ultrasound guided catheters and
catheters utilizing the flexible electrode technology as
well as ongoing improvements to existing products and other
development projects which may arise.
Interest expense decreased from $44,238 to $1,872. The
decrease was due to the Company's repayment of $1,137,500
face amount of 1995 Debentures in June, 1996, the repayment
of the balance of a note incurred in connection with the
acquisition of ProCath and the balance of a $50,000 short
term note. The Company does not expect to incur material
interest expense in 1997.
Interest income increased from $183,948 to $289,362 due to
interest earned on the proceeds of the Company's June, 1996
initial public offering for a nine month period during 1997
as compared to a three month period following completion of
the offering in June, 1996. The Company expects to continue
earning interest on its cash investments in future periods,
but the amount of interest income will decrease as proceeds
continue to be utilized in the operation of the Company's
business.
The Company incurred a net loss of $3,569,974 (or $.47 per
share based on 7,599,917 shares outstanding) in the nine
months ended September 30, 1997 as compared with $595,021
(or $.09 per share based on 6,491,235 shares outstanding) in
the comparable period in 1996. The increase in net loss was
caused by the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On June 21, 1996, the Company completed its initial public
offering of 2,500,000 shares of Common Stock at a purchase
price of $5.50 per share, for aggregate net proceeds of
approximately $11,786,000 after deducting offering expenses.
Net cash used in operating activities for the nine months
ended September 30, 1997 was $4,903,964 as compared to
$1,262,070 for the nine months ended September 30, 1996.
The net use of cash in operations during 1997 was due
primarily to the Company's $3,569,974 net loss from
operations. Accounts receivable, net, increased by $750,425
in 1997 from $671,503 to $1,421,928 due to higher third
quarter 1997 sales. Inventories increased by $867,377 from
$626,707 to $1,494,084 due to the purchase of components to
manufacture the ALERT Companion and ALERT Catheter in
preparation for clinical trials and the expected limited
market release in Europe. Inventory of EP WorkMate and EP-3
Stimulators also increased in 1997. Prepaid expenses and
other current assets includes new product brochures, prepaid
trade show fees, prepaid insurance and costs associated with
the importation of EP WorkMate systems into the United
Kingdom for demonstration and evaluation by potential
customers. Accounts payable and accrued expenses increased
by $286,414 from $677,551 to $963,965 due to increased
inventory purchases and accrued liabilities associated with
development activities. Amounts payable to a related party
increased by $67,191 from $85,035 to $152,226 due to a large
purchase of products from HiTronics Designs Inc. near the
end of the third quarter of 1997.
During February, 1997, the Company licensed certain
technologies from EchoCath in order to attempt to develop
products which allow visualization of the heart's anatomy
and visualization of catheters inside the heart through the
use of ultrasound rather than by using fluoroscopy, or x-
ray imaging. The license includes all rights to the
EchoMark, EchoEye and ColorMark technologies for use in the
field of electrophysiology. The license excludes use on
permanently implantable defibrillators and pacemaker leads.
The agreement calls for the Company to make payments
totaling $700,000, in four installments, as certain
development milestones and initial sales are achieved on the
EchoMark and EchoEye technologies. The EchoCath license
provides for a royalty on net sales, including minimum
royalties of $120,000 beginning in 1999 and increasing to
$400,000 in 2005 and thereafter for the life of the
applicable patents and continuations.
The Company may elect not to make minimum royalty payments
and, in such case, EchoCath has the option to make the
license non-exclusive or cancel the license and return the
$700,000 milestone payments. The Company also purchased
280,000 shares of newly-issued EchoCath 5.4% cumulative
convertible preferred stock for $1.4 million in cash. The
Company's $1.4 million investment was intended to fund
continuing development of EchoCath products, including the
EchoMark and EchoEye technology. Upon successful completion
of its development projects, the Company may introduce
ultrasound technology into its electrophysiology catheter
line although there can be no assurance that the Company
will be successful in this effort. See Note 8 to the
Consolidated Financial Statements and Part II. Item 1. Legal
Proceedings for additional discussion of the EchoCath
investment.
Capital expenditures, net of disposals, were $582,434 during
the nine months ended September 30, 1997 as compared to
$46,706 in the nine month period ended September 30, 1996.
In February, 1997, ProCath purchased 7,500 square feet of
manufacturing, administrative and warehouse space, including
2,500 square feet of space that was under lease by ProCath,
for a purchase price of approximately $370,000, including
transaction costs. The Company completed improvements to
the space to prepare it for its intended use at an
approximate cost of $85,000. The purchase will allow for the
expansion of ProCath's manufacturing operations, provide for
additional warehousing, shipping and quality assurance
activities and relocation of ProCath's administrative
offices. The Company also purchased a new exhibition booth
for use at industry trade shows during 1997. The Company
does not have any material capital commitments at this time.
In 1995, the Company purchased a $100,000 note receivable
payable by Falfab L.L.C., a United Kingdom catheter
manufacturer ("Falfab"), accruing interest at 8% and
maturing on July 15, 1996. During 1996, the Company
advanced an additional $7,500 to Falfab. Falfab was unable
to repay such indebtedness and the Company wrote-off the
$107,500 note receivable in 1996.
Net cash provided by financing activities was $12,243,425
for the nine months ended September 30, 1996 and included
approximately $11,786,000 net proceeds of the initial public
offering, $500,000 from the sale of 166,667 shares of common
stock at $3.00 per share in January, 1996 and the proceeds
of the exercise of 12,500 common stock options. During
June, 1996, the Company repaid $112,500 face amount of 1995
Debentures. The holders of $1,025,000 face amount of 1995
Debentures elected to exercise 1995 Warrants to purchase
512,500 shares of common stock at $2.00 per share in lieu of
receiving cash repayment of the debentures.
The Company expects its operating losses to continue in the
near future as it will continue to expend substantial funds
for research and development, clinical trials in support of
regulatory approvals, increased manufacturing capacity and
expansion of sales and marketing activities. The amount and
timing of future losses will be dependent upon, among other
things, increased sales of the Company's existing products,
clinical approval and market acceptance of the ALERT System
and developmental, regulatory and market success of new
products under development. There can be no assurance that
any of the Company's development projects will be successful
or that if development is successful, that the products will
generate any sales.
The Company plans to finance its capital needs principally
from existing capital resources for the next twelve months.
However, in the event that sufficient additional sales are
not generated to offset increased operating costs, the
Company may be required to raise additional funds through
public or private financing or other arrangements to
supplement existing capital resources. There can be no
assurance that such additional funds, if needed, will be
available on terms acceptable to the Company, or at all.
Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may be
costly and involve restrictive covenants. The failure of
the Company to raise capital when needed could have a
material adverse effect on the Company's business, financial
condition and results of operations.
ADDITIONAL FACTOR THAT MAY IMPACT FUTURE OPERATIONS -
CLINICAL TRIALS
In order for the Company to market the ALERT System in the
United States, the Company must obtain clearance approval
from the FDA. The Company has received conditional approval
from the FDA of its IDE to begin clinical trials in the
United States. The Company expects to begin clinical trials
in the fourth quarter of 1997. Clinical data is needed in
order to demonstrate the safety and efficacy of this product
under applicable FDA regulatory guidelines. There can be no
assurance that the ALERT System or any of the Company's
other products under development will prove to be safe and
effective in clinical trials under applicable United States
or international regulatory guidelines or that additional
modifications to the Company's products will not be
necessary. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome
prior to obtaining necessary regulatory or reimbursement
approvals.
If the ALERT System does not prove to be safe and effective
in clinical trials or if the Company is otherwise unable to
commercialize the product successfully, the Company's
business, financial condition and results of operations
could be materially adversely affected.
The Company anticipates that the ALERT System clinical
trials will be completed by early to mid calendar year 1998.
At the conclusion of the clinical trials, the Company plans
to file a PMA application for approval to market the ALERT
System in the United States. At the earliest, the Company
does not anticipate receiving a PMA for any such system
until at least one to three years after such PMA application
is accepted for filing, if at all.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 7, 1997, the Company filed a lawsuit in the
United States District Court for the District of New Jersey
alleging, among other things,that EchoCath made fraudulent
misrepresentations and omissions in connection with the sale
of 280,000 shares of 5.4% cumulative convertible preferred
stock to the Company in February, 1997. EchoCath has not yet
filed its response to the lawsuit. For a further discussion of
the Company's investment in EchoCath, see Note 8 to the
consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Effective date of the Company's
registration statement June 21, 1996
Commission file number 333-3642
Date the offering commenced June 21, 1996
Name of managing underwriter Pacific Growth Equities
Class of securities registered Common Stock
Number of shares registered and sold 2,500,000
Aggregate price of offering amount
registered and sold $13,750,000
Underwriter's discounts and $962,500
commissions
Finder's fees 0
Expenses paid to or for underwriters $50,000
Other expenses (1) $951,500
Total expenses $1,964,000
Net offering proceeds $11,786,000
Use of net offering proceeds:
Purchase of plant and equipment 659,000
Investment in EchoCath, Inc. 1,400,000
Product development (2) 2,155,000
Sales, marketing & administration (2) 4,465,000
Working capital (2) 344,000
Repayment of indebtedness 285,000
Short term investments 2,478,000
(1) Does not include any direct or indirect payments
to directors or officers of the issuer or their
associates; to persons owning ten (10) percent or
more of any class of equity securities of the issuer;
or to affiliates of the issuer.
(2) This amount represents a reasonable estimate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1997, the Company held its Annual Meeting of
Shareholders for the year ended December 31, 1996. The
matters voted upon by the security holders were:
(1) To elect five directors of the Company to serve until
the next Annual Meeting of Shareholders or until their
respective successors shall have been duly
elected and qualified:
For the election of Directors For Against Abstain
--------- ------- -------
David A. Jenkins 5,600,176 0 6,000
David W. Mortara 5,600,176 0 6,000
Lestor J. Swenson 5,600,176 0 6,000
Jon A. Tietbohl 5,600,176 0 6,000
Anthony J. Varrichio 5,600,176 0 6,000
(2) To approve an amendment to the 1995 Long Term Incentive
Plan to increase the number of shares which may be issued
thereunder by 300,000 from 400,000 to 700,000:
For Against Abstain
--------- ------- -------
For the amendment to the Plan 4,886,026 503,850 6,000
(3) To ratify the selection of Arthur Andersen LLP,
independent public accountants, as auditors for the
Company for the fiscal year ending December 31, 1997:
For Against Abstain
--------- ------- -------
For the ratification of auditors 5,600,176 0 6,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits will be filed as part
of this Form 10-QSB:
Exhibit 3.1 Amended and Restated Certificate of Incorporation (1)
Exhibit 3.2 Bylaws, as amended (1)
Exhibit 11.1 Statement of Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule (SEC only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended September 30, 1997.
(1) Previously filed and incorporated by
reference to the exhibit of the same number
filed with the Company's Form SB-2 Registration
Statement(Registration No. 333-3642).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act,
the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EP MEDSYSTEMS, INC.
(Registrant)
Date: November 13,1997 By: /s/ David A. Jenkins
David A. Jenkins
President and Chief Executive Officer
By: /s/ James J. Caruso
James J. Caruso
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Method of Filing
- ----------- -------------------------------- ----------------
Exhibit 3.1 Amended and Restated Certificate
of Incorporation (1)
Exhibit 3.2 Bylaws, as amended (1)
Exhibit 11.1 Statement of Computation of
Earnings per Share EDGAR
Exhibit 27 Financial Data Schedule EDGAR
(SEC only)
(1)Previously filed and incorporated by reference
to the exhibit of the same number filed
with the Company's Form SB-2 Registration
Statement (Registration No. 333-3642).
Exhibit 11.1
EP MEDSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1997 1996 1997
----------- ------------- ----------- -----------
Net loss $ (595,021) $ (3,569,974) $ (333,341) $ (978,919)
Weighted average shares outstanding:
Common stock (1) 5,648,566 7,599,917 7,581,167 7,599,917
Options (2)(3) 602,707 -- -- --
Warrants (2) (3) 239,962 -- -- --
--------- --------- --------- ----------
6,491,235 7,599,917 7,581,167 7,599,917
========= ========= ========= ==========
Historical net
loss per share $ (.09) $ (.47) $ (.04) $ (.13)
===== ===== ===== =====
(1) 260,167 shares of common stock were issued within 12
months preceding the filing of the registration statement at
prices lower than the initial public offering price.
Pursuant to Staff Accounting Bulletin No. 83 such shares
have been included in the weighted average number of shares
outstanding for the three and nine month periods ended
September 30, 1996.
(2) Options and warrants at 909,055 and 361,932,
respectively, were granted at prices below the initial
public offering price. For the nine month period ended
September 30, 1996, the dilutive effect of these options
have been included in the loss per share calculation through
June 30, 1996, the period during which the initial public
offering became effective, using the treasury stock method
in accordance with SAB No. 83, even though they were anti-
dilutive.
Options Warrants
Options issued within one year 1,324,000 568,750
Proceeds from exercise $ 2,282,200 $ 1,137,500
Public offering price / $5.50 / $5.50
--------- ---------
Treasury stock 414,945 206,818
--------- ---------
Incremental shares 909,055 361,932
========= =========
(3) Options and warrants have been excluded from the
calculation of earnings per share for the three months ended
September 30, 1996 and the three and nine months ended
September 30, 1997, because they are anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED STATEMENT OF
EARNINGS AND UNAUDITED CONSOLIDATED BALANCE SHEET FOR THE
PERIOD ENDED SEPTEMBER 30, 1997 FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION ON FORM 10-QSB AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 890,700
<SECURITIES> 2,478,309
<RECEIVABLES> 1,496,040
<ALLOWANCES> (74,112)
<INVENTORY> 1,494,084
<CURRENT-ASSETS> 4,074,492
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0
<COMMON> 7,600
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<TOTAL-LIABILITY-AND-EQUITY> 9,350,928
<SALES> 2,606,650
<TOTAL-REVENUES> 2,606,650
<CGS> 1,545,418
<TOTAL-COSTS> 4,918,696
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,872
<INCOME-PRETAX> (3,569,974)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,569,974)
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