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: June 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 registrant as specified in its charter)
New Jersey 22-3212190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 Route 46 West, Budd Lake, New Jersey 07828
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(973) 691-6400
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. X Yes No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date: Common Stock, no par value, 7,599,917
shares outstanding at August 8, 1997.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART 1. -- FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations for the three 4
months ended June 30, 1997 and 1996 (unaudited)
Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements
(unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
PART II -- OTHER INFORMATION
Item 5. Other information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Exhibit Index 20
Exhibit 11.1 - Computation of Earnings per Share 21
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1996 1997
Current assets: unaudited
Cash and cash equivalents $ 5,491,857 $ 1,038,981
Short-term investments 1,794,553 1,000,000
Accounts receivable, net 671,503 590,773
Inventories 626,707 1,490,497
Prepaid and other current assets 185,761 338,952
--------- ---------
Total current assets 8,770,381 4,459,203
--------- ---------
Long-term investments 3,001,222 3,200,734
Investment in EchoCath, Inc. -- 1,400,000
Property and equipment, net 181,385 630,525
Intangible assets, net 615,861 581,485
Other assets 31,000 87,697
---------- ----------
Total assets $ 12,599,849 $ 10,359,644
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 238,764 $ 692,559
Payables due to related party 85,035 125,321
Accrued expenses 438,787 301,253
Deferred revenue 42,938 44,125
Customer deposits 103,999 97,113
------- ---------
Total liabilities 909,523 1,260,371
------- ---------
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
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) (7,651,341)
----------- -----------
Total shareholders' equity (deficit) 11,690,326 9,099,273
----------- -----------
Total liabilities and shareholders'
equity (deficit) $ 12,599,849 $ 10,359,644
========== ==========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
June 30, June 30,
1996 1997
------- -------
Product sales $ 569,032 409,914
Revenue from catheter development 250,000 -
------- -------
Total revenues 819,032 409,914
------- -------
Operating costs and expenses:
Cost of products sold 308,547 368,584
Sales and marketing expenses 163,597 784,670
General and administrative expenses 279,791 434,932
Research and development expenses 98,020 594,187
Write-off of other assets 7,500 -
Write-off of value of 1995 Warrants
on retirement of 1995 Debentures 46,497 -
-------- -----------
Loss from operations (84,920) (1,772,459)
-------- -----------
Interest expense 19,933 624
Interest income (10,460) (77,206)
-------- -----------
Net loss $ (94,393) (1,695,877)
======== ===========
Net loss per share $ (0.02) (0.22)
====== ======
Weighted average shares outstanding 5,930,046 7,599,917
========= =========
The accompanying notes are an integral part of these statements.
4
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Six Months Ended
June 30, June 30,
1996 1997
--------- ---------
Product sales $ 1,324,695 $ 1,285,637
Revenue from catheter development 250,000 -
--------- ---------
Total revenues $ 1,574,695 $ 1,285,637
--------- ---------
Operating costs and expenses:
Cost of products sold 665,806 891,408
Sales and marketing expenses 269,189 1,476,026
General and administrative expenses 560,092 793,962
Research and development expenses 159,272 937,640
Write off of other assets 107,500 -
Write-off of value of 1995 Warrants
on retirement of 1995 Debentures 46,497 -
-------- ----------
Loss from operations (233,661) (2,813,399)
------- ---------
Interest expense 38,481 1,248
Interest income (10,460) (223,594)
--------- -----------
Net loss $ (261,682) $ (2,591,053)
========= ===========
Net loss per share $ (0.04) $ (0.34)
====== ======
Weighted average shares outstanding 5,860,229 7,599,917
========= =========
The accompanying notes are an integral part of these statements.
5
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ended
June 30, June 30,
1996 1997
Cash flows from operating activities: --------- -----------
Net loss $ (261,682) $ (2,591,053)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 84,412 93,853
Write-off of other assets 107,500 -
Amortization of premium or discount on
long-term and short-term investments - 28,078
Write-off of value of 1995 Warrants on
retirement of 1995 Debentures 46,497 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (607,015) 80,730
Decrease (increase) in inventories 16,986 (863,790)
Decrease (increase) in prepaid and other
current assets 9,438 (153,191)
Decrease (increase) in intangible and
other assets 26,837 (56,695)
Increase in due to related party 126,378 40,286
Increase in accounts payable 306 453,795
(Decrease) in accrued expenses, deferred
revenue and customer deposits (94,589) (143,233)
--------- -----------
Net cash used in operating activities (544,932) (3,111,220)
--------- -----------
Cash flows from investing activities:
Investment in EchoCath, Inc. - (1,400,000)
Maturities of held to maturity investments - 487,096
Proceeds from sale of available for sale
securities - 79,866
Capital expenditures, net of disposals (20,911) (508,618)
Loan to Falfab (7,500) -
--------- -----------
Net cash used in investing activities (28,411) (1,341,656)
--------- -----------
Cash flows from financing activities:
Repayment of debentures, net (62,500) -
Net proceeds from issuance of common stock 12,843,551 -
Payment of notes payable (8,600) -
---------- -----------
Net cash provided by financing activities 12,772,451 -
----------- ------------
Net increase (decrease) in cash and cash
equivalents 12,199,108 (4,452,876)
Cash and cash equivalents, beginning of period 34,588 5,491,857
---------- -----------
Cash and cash equivalents, end of period $ 12,233,696 $ 1,038,981
========== ===========
The accompanying notes are an integral part of these statements.
6
EP MEDSYSTEMS, INC. AND SUBSIDIARY
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 and
Article 10 of Regulation S-X. 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 EP MedSystems, Inc.'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 and six months ended June 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 June 30, 1996, 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. 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
and applies to publicly traded common stock or potential
common stock. 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 sale 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 six months ended June 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 to purchase 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. Inventories
Inventories consist of the following:
December 31, June 30
1996 1997
------------ -----------
Raw materials $ 173,936 $ 212,617
Work in progress 11,456 10,423
Finished goods 441,315 1,267,457
------- ---------
$ 626,707 $ 1,490,497
------- ---------
5. ProCath Building Purchase
During February, 1997, the Company purchased approximately
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 an
aggregate purchase price of approximately $370,000,
including certain transaction costs. The Company is in the
process of completing improvements to the space to prepare
it for its intended use. The estimate for completion of the
improvements is approximately $72,000. The purchase will
allow for the expansion of the existing manufacturing
operations, provide for additional warehousing, shipping and
quality assurance activities and relocation of ProCath's
administrative offices.
6. 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. EchoCath will also transfer its 510-K
approval on the EchoMark EP catheter to the Company.
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. The
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 security for
impairment and as a result of this review, management
believes that there is no impairment at June 30, 1997.
7. Supplemental Statement of Cash Flow Information:
Supplemental Noncash Investing and Financing Activities:
During the six months ended June 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, $1,248, $19,933, and
$38,481 for the three and six months ended June 30, 1997 and
1996, respectively.
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.
This Report on Form 10-QSB contains certain statements of a
forward looking nature relating to future events or the
future financial performance of the Company. 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. The words
"believe", "expect", "anticipate", and similar expressions
identify forward looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, risks regarding product demand, sales and
marketing, the success of new product developments and
clinical results as well as those discussed in the following
paragraphs and in "Business Considerations" of the Company's
Form 10-KSB filed with the SEC. Readers are cautioned not
to place undue reliance on these forward looking statements,
which speak only as of the date of this report. EP
MedSystems 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 accumulated a deficit of $7.65 million as of
June 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. Although there can be no assurance
of such fact, the Company anticipates that it will make a
limited market release of the ALERT System for European
sales during the second half of 1997. 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 filed a Pre-IDE application with the FDA and
expects to file an IDE during the second half of 1997. Upon
receipt of FDA approval of the IDE submission, the Company
expects to begin clinical trials. 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.
The Company expects its operating losses to continue as it
will expend substantial funds for research and development,
clinical trials in support of regulatory approvals,
increased manufacturing capacity and expansion of sales and
marketing activities.
RESULTS OF OPERATIONS
Three months ended June 30, 1997 compared to three months
ended June 30, 1996
Total revenues decreased $409,118 (or 50.0%) from $819,032
to $409,914 in the three months ended June 30, 1997. The
decrease in sales in the second quarter of 1997 resulted
from lower than expected sales of the EP WorkMate caused,
in part, by a delay in the release of a software update and
a new catheter interface box. Shipments of the new features
are expected to begin during the third quarter of 1997 and
all existing EP WorkMate customers will be upgraded to the
new components. Beginning in September, 1996, the Company
began hiring a domestic direct sales and marketing force to
sell all of the Company's products and has undertaken
efforts to strengthen its international distribution
network. The Company terminated its relationships with all
of its domestic independent distributors. During 1997, the
Company has added several sales representatives, clinical
engineers and support personnel in Europe. The Company
believes that the change over from a distributor based sales
force to a direct sales force has had a temporary adverse
effect on sales. However, the Company also believes that
its domestic direct sales force has the potential to
generate greater sales in the future than the Company had
been experiencing through the use of independent
distributors. The level of 1997 sales will depend
significantly on sales of the EP WorkMate and the ability
of the domestic direct sales force to effectively market the
EP WorkMate and the Company's other products. During the
three months ended June 30, 1996, the Company recorded
revenue of $250,000 from the development of catheter
technology for a third party which was not recurring in
1997.
Cost of products sold increased $60,037 (or 19.5%) from
$308,547 to $368,584. Gross profit on product sales for the
three months ended June 30, 1996 was $260,485 (or 45.8% as a
percentage of product sales), as compared with $41,330 (or
10.0%) for 1997. The decrease in gross profit percentage
was due to lower sales of the EP WorkMate and increased
labor and fixed manufacturing overhead expenses at ProCath
as the Company prepares to commence manufacturing of the
ALERT products. During the three months ended June 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 $621,073 (or 379.6%)
from $163,597 to $784,670 and as a percentage of total
revenues from 20.0% to 191.4%. 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 expects sales and marketing expenses to increase
significantly in 1997, as compared to 1996, as the direct
sales force will be in place for the entire year and as
product promotion associated with the direct sales effort
continues to increase. 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. Further, the Company has filed a
Pre-IDE application with the FDA and expects to file an IDE
and to begin clinical trials for the ALERT System during the
second half of 1997. Although there can be no assurance of
such fact, the Company anticipates that it will make a
limited market release of the ALERT System for European
sales during the second half of 1997. 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.
General and administrative expenses increased $155,141 (or
55.4%) from $279,791 to $434,932 and increased as a
percentage of total revenues from 34.2% to 106.1%. The
dollar increase was due to the hiring of additional
administrative personnel, increased use of professional
services, and increased product liability and directors and
officers insurance expense. 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 $496,167 (or
506.2%) from $98,020 to $594,187 and as a percentage of net
sales from 12.0% to 145.0%. The increase was due to
significant expenses incurred in connection with
preparations for manufacturing of the ALERT products,
including obtaining the CE Mark. 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 1997 and 1998, when clinical trials
are anticipated to commence. 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.
Interest expense decreased $19,309 from $19,933 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 during the three months ended June 30, 1997
was $77,206 due to interest earned on the proceeds of the
June, 1996 initial public offering. The Company expects to
continue earning interest on its excess cash in future
periods, but the amount of interest income will decrease as
proceeds are utilized in the Company's business.
The Company incurred a net loss of $1,695,877 (or $.22 per
share based on 7,599,917 shares outstanding) in the three
months ended June 30, 1997 as compared with $94,363 (or $.02
per share based on 5,930,046 shares outstanding) in the
comparable period in 1996. The increase in net loss was
caused by the factors discussed above.
RESULTS OF OPERATIONS
Six months ended June 30, 1997 compared to six months ended
June 30, 1996
Total revenues decreased $289,058 (or 18.4%) from $1,574,695
to $1,285,637 in the six months ended June 30, 1997. The
decrease in sales for the six month period ended June 30,
1997 resulted from lower than expected sales of the EP
WorkMate caused, in part, by a delay in the release of a
software update and a new catheter interface box. Shipments
of the new features are expected to begin during the third
quarter of 1997 and all existing EP WorkMate customers will
be upgraded to the new components. Beginning in September,
1996, the Company began hiring a domestic direct sales and
marketing force to sell all of the Company's products and
has undertaken efforts to strengthen its international
distribution network. The Company terminated its
relationships with all of its domestic independent
distributors. During 1997, the Company has added several
sales representatives, clinical engineers and support
personnel in Europe. The Company believes that the change
over from a distributor based sales force to a direct sales
force had a temporary adverse effect on sales. However, the
Company also believes that its domestic direct sales force
has the potential to generate greater sales in the future
than the Company had been experiencing through the use of
independent distributors. The level of 1997 sales will
depend significantly on sales of the EP WorkMate and the
ability of the domestic direct sales force to effectively
market the EP WorkMate and the Company's other products.
During the six months ended June 30, 1996, the Company
recorded revenue of $250,000 from catheter development for
a third party which was not recurring in 1997.
Cost of products sold increased $225,602 (or 33.9%) from
$665,806 to $891,408. Gross profit on product sales for the
six months ended June 30, 1996 was $658,889 (or 49.7% as a
percentage of product sales), as compared with $394,229 (or
30.7%) for 1997. The decrease in gross profit percentage
was partially due to lower sales of the EP WorkMate in the
second quarter of 1997 and increased labor and fixed
manufacturing overhead expenses at ProCath as the Company
prepares to commence manufacturing of the ALERT products.
During the six months ended June 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 $1,206,837 (or
448.3%) from $269,189 to $1,476,026 and as a percentage of
total revenues from 17.1% to 114.8%. 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 expects sales and marketing expenses to increase
significantly in 1997, as compared to 1996, as the direct
sales force will be in place for the entire year and as
product promotion associated with the direct sales effort
continues to increase. 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. Further, the Company has filed a
Pre-IDE application with the FDA and expects to file an IDE
and begin clinical trials for the ALERT System during the
second half of 1997. Although there can be no assurance of
such fact, the Company anticipates that it will make a
limited market release of the ALERT System for European
sales during the second half of 1997. 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.
General and administrative expenses increased $233,870 (or
41.8%) from $560,092 to $793,962 and increased as a
percentage of total revenues from 35.6% to 61.8%. The
dollar increase was due to the hiring of additional
administrative personnel, increased use of professional
services, and increased product liability and directors and
officers insurance expense. 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 $778,368 (or
488.7%) from $159,272 to $937,640 and as a percentage of net
sales from 10.1% to 72.9%. The increase was due to
significant expenses incurred in connection with
preparations for manufacturing of the ALERT products,
including obtaining the CE Mark. 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 the EP
WorkMate . The Company expects that expenses related to the
ALERT System will be significant in 1997 and 1998 when
clinical trials are anticipated to commence. The Company
also expects that other research and development expenses
will increase as it continues attempts to develop new
products, including ultrasound guided catheters utilizing
technology licensed from EchoCath in February, 1997 and
catheters utilizing the flexible electrode technology as
well as ongoing improvements to existing products.
Interest expense decreased $37,233 from $38,481 to $1,248.
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 during the six months ended June 30, 1997
was $223,594 due to interest earned on the proceeds of the
June, 1996 initial public offering. The Company expects to
continue earning interest on its excess cash in future
periods, but the amount of interest income will decrease as
proceeds are utilized in the Company's business.
The Company incurred a net loss of $2,591,053 (or $.34 per
share based on 7,599,917 shares outstanding) in the six
months ended June 30, 1997 as compared with $261,682 (or
$.04 per share based on 5,860,229 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 six months
ended June 30, 1997 was $3,111,220 as compared to $544,932
for the six months ended June 30, 1996. The net use of cash
in operations during 1997 was due primarily to the Company's
$2,591,053 net loss from operations. Accounts receivable,
net, decreased by $80,730 in 1997 from $671,503 to $590,773
due to lower second quarter 1997 sales. Inventories
increased by $863,790, from $626,707 to $1,490,497 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.
The Company will be required to provide the ALERT Companion
to clinical centers participating in the trials. Inventory
of EP WorkMate and EP-3 Stimulators increased as a result of
a delay in the release of a software update and a new
catheter interface box. Shipments of the new features are
expected to begin during the third quarter of 1997 and all
existing EP WorkMate customers will be upgraded to the new
components. Prepaid expenses and other current assets
includes new company and product brochures, prepaid trade
show fees, prepaid insurance and value added tax, customs
and duties on the import of EP WorkMate systems into the
United Kingdom for demonstration and evaluation by potential
customers. Accounts payable and accrued expenses increased
by $316,261 from $677,551 to $993,812 due to increased
inventory purchases and accrued liabilities associated with
development activities. Amounts payable to a related party
increased by $40,286 from $85,035 to $125,321 due increased
purchases of products from HiTronics Designs Inc.
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.
EchoCath will also transfer its 510-K approval on the
EchoMark electrophysiology catheter to the Company.
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 is intended to fund
development of the 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.
Capital expenditures, net of disposals, were $508,618 during
the six months ended June 30, 1997 as compared to $20,911 in
the six month period ended June 30, 1996. In February,
1997, ProCath purchased approximately 7,500 square feet of
manufacturing, administrative and warehouse space, including
2,500 square feet of space that was under lease by ProCath,
for an aggregate purchase price of approximately $370,000,
including certain transaction costs. The Company is in the
process of completing improvements to the space to prepare
it for its intended use. The estimate for completion of the
improvements is approximately $72,000. 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 $12,772,451
for the six months ended June 30, 1996 and included
approximately $12,327,000 net proceeds of the initial public
offering (before deducting approximately $536,000 of unpaid
offering expenses classified as current liabilities at June
30, 1996), $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 plans to finance its capital needs principally
from existing capital resources, which the Company believes
will be sufficient to fund its operations through the next
twelve months. The Company expects to incur substantial
expenditures to further the development and
commercialization of its products. To achieve this, the
Company may need to seek additional financing. There can be
no assurance that additional funding will be available when
needed or on terms acceptable to the Company.
PART II. OTHER INFORMATION
Item 5. Other information.
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 filed a Pre-IDE application
with the FDA and expects to file an IDE during the second
half of 1997. Upon receipt of FDA approval of the IDE
submission, the Company expects to begin clinical trials.
Clinical data is needed in order to demonstrate the safety
and efficacy of this products under applicable FDA
regulatory guidelines. There can be no assurance that the
ALERT 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 trial
will be completed by early calendar 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.
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 11.1 * Computation of Earnings Per Share
Exhibit 27 * Financial Data Schedule (SEC only)
* Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during
the quarter ended June 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
EP MEDSYSTEMS, INC.
(Registrant)
Date: August 14, 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)
19
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Method of Filing
* Statement regarding Calculation EDGAR
11.1 of Shares Used in Computing
Net Loss Per Share
* Financial Data Schedule EDGAR
27 (SEC only)
* Filed herewith
20
Exhibit 11.1
EP MEDSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Six Months Ended Three Months Ended
June 30, June 30,
1996 1997 1996 1997
-------- --------- ------- ---------
Net loss $ 261,862 $ 2,591,053 $ 94,393 $ 1,695,877
======= ========= ====== =========
Weighted average shares outstanding:
Common stock (1) 4,589,242 7,599,917 4,659,059 7,599,917
Stock options (2)(3) 909,055 -- 909,055 --
Warrants (2)(3) 361,932 -- 361,932 --
--------- --------- --------- ---------
5,860,229 7,599,917 5,930,046 7,599,917
========= ========= ========= =========
Historical net
loss per share $ (.04) $ (.34) $ (.02) $ (.22)
===== ===== ===== =====
(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 six month periods ended June
30, 1996.
(2) Options and warrants at 909,055 and 361,932,
respectively, were granted at prices below the initial
public offering price. The dilutive effect of these options
have been included in the earnings per share calculation
using the treasury stock method in accordance with SAB No.
83 for the three and six month periods ended June 30, 1996.
Options Warrants
------- --------
Options issued within 1,324,000 568,750
one year --------- -------
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 and six
months ended June 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 JUNE 30, 1997 FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,038,981
<SECURITIES> 4,200,734
<RECEIVABLES> 666,104
<ALLOWANCES> 75,331
<INVENTORY> 1,490,497
<CURRENT-ASSETS> 4,459,203
<PP&E> 865,846
<DEPRECIATION> 235,321
<TOTAL-ASSETS> 10,359,644
<CURRENT-LIABILITIES> 1,260,371
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0
0
<COMMON> 7,600
<OTHER-SE> 16,743,014
<TOTAL-LIABILITY-AND-EQUITY> 10,359,644
<SALES> 1,285,637
<TOTAL-REVENUES> 1,285,637
<CGS> 891,408
<TOTAL-COSTS> 3,207,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,248
<INCOME-PRETAX> (2,591,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,591,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (2,591,053)
<EPS-PRIMARY> (.34)
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