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 first quarter period ended: March 31, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
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: (201)
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 April 28, 1997.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
ASSETS 1996 1997
Current assets: (unaudited)
Cash and cash equivalents $ 5,491,857 $ 3,287,698
Short-term investments 1,794,553 1,227,591
Accounts receivable, net 671,503 744,198
Inventories 626,707 778,762
Prepaid expenses and other current assets 185,761 157,378
Total current assets 8,770,381 6,195,627
Long-term investments 3,001,222 2,995,250
Investment in EchoCath, Inc. -- 1,400,000
Property and equipment, net 181,385 603,896
Intangible assets, net 615,861 608,432
Other assets 31,000 31,000
Total assets $ 12,599,849 $ 11,834,205
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 238,764 $ 410,062
Payables due to related party 85,035 161,571
Accrued expenses 438,787 341,605
Deferred revenue 42,938 43,000
Customer deposits 103,999 82,816
Total liabilities 909,523 1,039,054
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 shares issued and
outstanding 7,600 7,600
Additional paid-in capital 16,743,014 16,743,014
Accumulated deficit (5,060,288) (5,955,463)
Total shareholders' equity (deficit) 11,690,326 10,795,151
Total liabilities and shareholders equity $ 12,599,849 $ 11,834,205
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
March 31, March 31,
1996 1997
Product sales $ 755,663 $ 875,723
Revenue from catheter development -- --
Total revenues 755,663 875,723
Operating costs and expenses:
Cost of products sold 357,259 522,824
Sales and marketing expenses 105,592 691,356
General and administrative expenses 280,301 359,029
Research and development expenses 61,252 343,453
Write-off of other assets 100,000 --
Loss from operations (148,741) (1,040,939)
Interest expense (18,548) (624)
Interest income -- 146,388
Net loss $ (167,289) $ (895,175)
Net loss per share $ (.03) $ (.12)
Weighted average shares outstanding 5,789,654 7,599,917
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Three Months Ended
March 31, March 31,
1996 1997
Cash flows from operating activities:
Net loss $ (167,289) $ (895,175)
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 43,410 34,111
Write-off of other assets 100,000 --
Amortization of premium or discount
on long-term and short-term investment -- 5,972
Changes in assets and liabilities:
(Increase) in accounts receivable (168,562) (72,695)
Decrease (increase) in inventories 3,785 (152,055)
Decrease in prepaid expenses and other current assets 8,433 28,383
Decrease (increase) in intangible and other assets 22,499 (9,758)
(Decrease) increase in due to related party (2,145) 76,536
(Decrease) increase in accounts payable (24,910) 171,298
(Decrease) in accrued expenses, deferred
revenue and customer deposits (107,382) (118,303)
Net cash used in operating activities (292,161) (931,686)
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 (18,245) (439,435)
Net cash used in investing activities (18,245) (1,272,473)
Cash flows from financing activities:
Proceeds from debentures 50,000 --
Proceeds from issuance of common stock 500,000 --
Payment of notes payable (8,600) --
Net cash provided by financing activities 541,400 --
Net increase (decrease) in cash and cash equivalents 230,994 (2,204,159)
Cash and cash equivalents, beginning of period 34,588 5,491,857
Cash and cash equivalents, end of period $ 265,582 $ 3,287,698
</TABLE>
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
reflect all adjustments (including normal recurring
adjustments) that management considers necessary to present
fairly the Company's financial position as of March 31,
1997; the results of operations for the three months ended
March 31, 1997 and 1996; and the cash flows for the three
months then ended. The results of operations for the
respective interim periods are not necessarily indicative of
the results to be expected for the full year. The 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 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 March 31, 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 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.
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.
4. Inventories
Inventories consist of the following:
December March 31
31,
1996 1997
Raw materials $ 173,936 $ 281,459
Work in progress 11,456 10,289
Finished goods 441,315 487,014
$ 626,707 $ 778,762
5. ProCath Building Purchase
During February, 1997, ProCath purchased approximately 7,500
square feet of manufacturing, administrative and warehouse
space, including 2,500 square feet of space that was leased
by ProCath, for an aggregate purchase price of approximately
$364,000, including certain transaction costs. 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. The lease on ProCath's remaining
2,500 square feet of space expires in November, 1997 and
will not be renewed.
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. This
investment is stated at cost which approximates fair value
at March 31, 1997.
7. Supplemental Statement of Cash Flow Information:
Supplemental Noncash Investing and Financing Activities:
Cash paid for interest was $624 and $17,062 for the three
months ended March 31, 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. 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 "Business
Considerations" of the Company's Form 10-KSB.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared to three months
ended March 31, 1996
Total revenues increased $120,120 (or 15.9%) from $755,663
to $875,723 in the three months ended March 31, 1997. Sales
of the EP WorkMate increased by approximately $127,000 from
$361,000 to $488,000 as the product continues to gain market
acceptance
after its introduction in late 1995. The Company has
recently hired 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 has also terminated its relationships
with all of its domestic independent distributors. 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 during the third and fourth quarters
of 1996. 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.
Cost of products sold increased $165,565 (or 46.3%) from
$357,259 to $522,824. Gross profit on product sales for
1996 was $398,404 (or 52.7% as a percentage of product
sales), as compared with $352,899 (or 40.3%) for 1997. The
decrease in gross profit percentage was partially due to
increased labor and manufacturing overhead expenses at
ProCath as the Company prepares to commence manufacturing of
the ALERT products and due to discounts on sales of the EP
WorkMate offered to electrophysiology research centers which
the Company considered important in establishing reference
accounts for future sales of the EP WorkMate. During the
three months ended March 31, 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 $585,764 (or 554.7%)
from $105,592 to $764,765 and as a percentage of total
revenues from 14.0% to 78.9%. 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 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 begin
clinical trials for the ALERT System during the second
quarter of 1997. Although there can be no assurance of such
fact, the Company anticipates that international sales of
the ALERT System will begin in 1997. The Company expects to
incur additional expenses as a result of the introduction of
the ALERT System for sale outside of the United States.
General and administrative expenses increased $85,036 (or
35.0%) from $242,872 to $327,908 and increased as a
percentage of total revenues from 32.1% to 37.4%. The
dollar increase was due to the hiring of additional
administrative personnel, increased use of professional
services, including legal fees associated with several
patent filings, 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 $282,201 (or
460.7%) from $61,252 to $343,453 and as a percentage of net
sales from 8.1% to 39.2%. 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 the Spire technology for placement of a
flexible metallic coating on its electrophysiology
catheters, 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
Spire technology as well as ongoing improvements to existing
products.
Interest expense decreased $17,924 (or 96.6%) from $18,548
to $624. The decrease was due to the Company's repayment of
$1,137,500 face amount of 1995 Debentures in June, 1996 and
the repayment of the $96,350 balance plus accrued interest
payable on a note incurred in connection with the
acquisition of ProCath. The Company does not expect to
incur material interest expense in 1997.
Interest income during the three months ended March 31, 1997
was $146,388 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 $895,175 (or $.12 per share
based on 7,599,917 shares outstanding) in the three
months ended March 31, 1997 as compared with $167,289 (or
$.03 per share based on 5,789,654 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 three months
ended March 31, 1997 was $931,686 as compared to $292,161
for the three months ended March 31, 1996. The net use of
cash in operations during 1997 was due primarily to the
Company's $895,175 net loss from operations. Accounts
receivable, net, increased by $72,695 in 1997 from $671,503
to $744,198 and inventories increased by $152,055, from
$626,707 to $778,762 due to increased operating volume and
activity. Accounts payable and accrued expenses increased
by $74,116 from $677,551 to $751,667 primarily due to
increased inventory purchases and liabilities associated
with development activities. Amounts payable to a related
party increased by $173,685 from $85,035 to $161,571 due to
the receipt of a shipment of products close to the end of
the quarter.
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 $439,435 during
the three months ended March 31, 1997 as compared to $18,245
in the three month period ended March 31, 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
$386,000, including certain transaction costs. 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 lease on ProCath's remaining
2,500 square feet of space expires in November, 1997 and
will not be renewed. The Company also purchased a new
exhibition booth for use at industry trade shows during
1997.
In 1995, the Company purchased a $100,000 note receivable
payable by Falfab L.L.C., a United Kingdom angioplasty
catheter manufacturer ("Falfab"), accruing interest at 8%
and maturing on July 15, 1996. The Company became aware
that Falfab would be unable to repay such indebtedness and
wrote-off the $100,000 note receivable in March, 1996.
During the three months ended March 31, 1996, the Company
issued 166,667 shares of common stock for $500,000 in cash,
or $3.00 per share, and collected a $50,000 note receivable.
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 1997. 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 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 March 31, 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: May 8, 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 Method of
Number Description of Exhibit Filing
11.1 * Statement regarding Calculation EDGAR
of Shares Used in Computing
Net Loss Per Share
27 * Financial Data Schedule (SEC only) EDGAR
* Filed herewith
Exhibit 11.1
EP MEDSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
March 31,
1996 1997
Net loss $ 167,289 $ 895,175
Weighted average shares outstanding:
Common stock (1) 4,518,667 7,599,917
Stock options (2) (3) 909,055 --
Warrants (2) (3) 361,932 --
5,789,654 7,599,917
Historical net loss per share $ (.03) $ (.12)
(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 month periods ended March 31,
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 month period ended March 31, 1996.
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
March 31, 1997, because they are anti-dilutive.
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS AND
CONSOLIDATED BALANCE SHEET FOR THE PERIOD ENDED MARCH 31,
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,287,698
<SECURITIES> 4,222,841
<RECEIVABLES> 826,907
<ALLOWANCES> (82,709)
<INVENTORY> 778,762
<CURRENT-ASSETS> 6,195,627
<PP&E> 796,663
<DEPRECIATION> (192,767)
<TOTAL-ASSETS> 11,834,205
<CURRENT-LIABILITIES> 1,039,054
<BONDS> 0
0
0
<COMMON> 7600
<OTHER-SE> 16,743,014
<TOTAL-LIABILITY-AND-EQUITY> 11,834,205
<SALES> 875,723
<TOTAL-REVENUES> 875,723
<CGS> 522,824
<TOTAL-COSTS> 1,393,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 624
<INCOME-PRETAX> (895,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (895,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (895,175)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
