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, 1998
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.)
100 Stierli Court, Mount Arlington, New Jersey 07856
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 398-2800
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, 9,872,417
shares outstanding at November 2, 1998.
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
ASSETS (unaudited)
-------------- -------------
Current assets:
Cash and cash equivalents $ 2,854,855 $ 752,068
Short-term investments 1,256,631 2,120,084
Accounts receivable, net 1,917,098 1,229,921
Inventories 1,645,026 1,512,528
Prepaid expenses and other current assets 193,843 217,526
--------- ---------
Total current assets 7,867,453 5,832,127
--------- ---------
Investment in EchoCath, Inc. -- 1,400,000
Property and equipment, net 853,715 757,295
Intangible assets, net 558,000 569,705
Other assets 48,601 58,439
--------- ---------
Total assets $ 9,327,769 $ 8,617,566
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 547,156 $ 670,206
Payables due to related parties 144,775 127,859
Accrued expenses 542,549 850,507
Deferred revenue 56,563 34,313
Customer deposits 54,091 108,012
--------- ---------
Total liabilities $ 1,345,134 $ 1,790,897
--------- ---------
Commitments and contingencies
Shareholders' equity:
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,
9,872,417 and 7,599,917 shares
issued and outstanding respectively 9,872 7,600
Additional paid-in capital 21,432,375 16,743,014
Accumulated deficit (13,459,612) (9,923,945)
------------ -----------
Total shareholders' equity 7,982,635 6,826,669
------------ -----------
Total liabilities and shareholders' equity $ 9,327,769 $ 8,617,566
============ ===========
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
September 30, September 30,
1998 1997
-------------- -------------
Product sales $ 2,038,528 $ 1,321,013
Cost of products sold 868,762 654,010
--------- ---------
Gross profit 1,169,766 667,003
Operating costs and expenses:
Sales and marketing expenses 1,036,190 850,563
General and administrative expenses 410,631 340,035
Research and development expenses 427,935 520,468
Write-down of investment in EchoCath 1,400,000 --
----------- -----------
Loss from operations (2,104,990) (1,044,063)
Interest income, net 57,148 65,144
----------- -----------
Net loss $ (2,047,842) $ (978,919)
=========== ===========
Basic loss per share $ (.21) $ (.13)
======== =======
Diluted loss per share $ (.21) $ (.13)
======= =======
Weighted average shares
outstanding used to compute
basic and diluted loss per share 9,872,417 7,599,917
========= =========
The accompanying notes are an integral part of these statements.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended
September 30, September 30,
1998 1997
-------------- -------------
Product sales $ 5,224,809 $ 2,606,650
Cost of products sold 2,658,231 1,545,418
--------- ---------
Gross profit 2,566,578 1,061,232
Operating costs and expenses:
Sales and marketing expenses 2,547,205 2,326,589
General and administrative expenses 1,207,182 1,133,998
Research and development expenses 1,105,474 1,458,109
Write-down of investment in EchoCath 1,400,000 --
----------- -----------
Loss from operations (3,693,283) (3,857,464)
Interest income, net 157,616 287,490
----------- -----------
Net loss $ (3,535,667) $ (3,569,974)
=========== ===========
Basic loss per share $ (.39) $ (.47)
======== ========
Diluted loss per share $ (.39) $ (.47)
======== ========
Weighted average shares
outstanding used to compute
basic and diluted loss per share 9,044,038 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,
1998 1997
Cash flows from operating activities: ------------- -------------
Net loss $ (3,535,667) (3,569,974)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-down of investment in EchoCath 1,400,000 --
Depreciation and amortization 221,160 156,148
Changes in assets and liabilities:
(Increase) in accounts receivable (687,177) (750,425)
(Increase) in inventories (132,498) (867,377)
Decrease (increase) in prepaid and other assets 23,683 (102,021)
Decrease (increase) in other assets 9,838 (102,344)
Increase in payables due to related parties 16,916 67,191
(Decrease) increase in accounts payable (123,050) 325,237
(Decrease) in accrued expenses, deferred
revenue and customer deposits (339,629) (71,374)
----------- -----------
Net cash used in operating activities $ (3,146,424) (4,914,939)
Cash flows from investing activities:
Investment in EchoCath, Inc. -- (1,400,000)
Maturities of held to maturity investments -- 1,487,096
Sale or maturity of available for sale securities 863,453 830,370
Patent costs (37,901) (21,250)
Capital expenditures, net of disposals (267,974) (582,434)
----------- -----------
Net cash provided by investing activities $ 557,578 313,782
Cash flows from financing activities:
Net proceeds from equity offering 4,661,708 --
Proceeds from exercise of stock options 29,925 --
Net cash provided by financing activities $ 4,691,633 --
--------- -----------
Net increase (decrease) in cash and cash equivalents 2,102,787 (4,601,157)
Cash and cash equivalents, beginning of period 752,068 5,491,857
--------- -----------
Cash and cash equivalents, end of period $ 2,854,855 890,700
========= ===========
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, 1997 filed with the Securities and
Exchange Commission.
2. Net Loss Per Common Share
Effective for the year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). The adoption of SFAS 128
requires the presentation of Basic earnings per share and
Diluted earnings per share. Basic earnings per share is
computed based on the weighted average number of common
shares outstanding during the year. Diluted earnings per
share is based on the weighted average number of common
shares outstanding during the year plus the common stock
equivalents related to outstanding stock options and
warrants. As required by SFAS 128, the net loss per share
for the three and nine months ended September 30, 1997 has
been restated to comply with this standard. The Company's
computations of Diluted earnings per share for the three and
nine month periods ended September 30, 1998 and 1997 exclude
the impact of common stock equivalents as their inclusion
would be anti-dilutive.
3. Inventories
Inventories consist of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 320,273 $ 249,018
Work in process 14,236 12,925
Finished goods 1,310,517 1,250,585
----------- -----------
$ 1,645,026 $ 1,512,528
=========== ===========
4. 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" ("SFAS 115"). 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.
All investment securities have been classified as available
for sale. At September 30, 1998, the Company holds a
portfolio made up of corporate bonds with maturities ranging
from October, 1998 to June, 1999. These investments are
stated at market, which approximates their amortized cost.
5. EchoCath License
During February, 1997, the Company licensed the rights to
several ultrasound technologies from EchoCath, Inc.
("EchoCath") for use in the field of electrophysiology. The
agreement calls for the Company to make milestone payments
of up to $700,000, in four installments, as certain
development milestones and initial sales are achieved on the
EchoMark and EchoEye technologies. One of the milestones
calls for a $400,000 payment payable upon the completion of
a development program for the EchoEye. This milestone was
only payable in the event that the development was completed
by September 30, 1998. To the best of the Company's
knowledge, the milestone has not been achieved and no
milestone payments are accrued or payable to EchoCath at
September 30, 1998.
Terms of the license also call for a two percent (2%)
royalty on net sales, including minimum royalties beginning
in 1999 and continuing for the life of the applicable
patents and continuations thereof. The Company may elect to
not make minimum royalty payments and, in such case,
EchoCath may render the license non-exclusive or cancel the
license and return any of the $700,000 milestone payments
which were paid.
The minimum annual royalties under the license are as
follows:
1999 $120,000
2000 160,000
2001 200,000
2002 280,000
2003 320,000
2004 360,000
2005 and thereafter 400,000
In conjunction with the license agreement, the Company
purchased 280,000 shares of 5.4% cumulative convertible
preferred stock of EchoCath for $1,400,000 in cash. 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 EchoCath's
common stock on September 30, 1998 was $2.188 per share.
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 were
stated at historical cost. During September, 1997, the
Company became aware that EchoCath may have been having cash
flow difficulties. During October, 1997, the Company filed
a lawsuit against EchoCath 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. During October, 1998, the
complaint was dismissed by the District Court. The Company
is considering an appeal of the decision. (See Part II --
Item 1. Legal Proceedings).
EchoCath has limited cash reserves and is attempting to
raise additional funds through the issuance of debt or
equity, through licensing agreements or through other
strategic alliances. Additionally, EchoCath could face
delisting of its common stock from the NASDAQ Small Cap
Stock Market if it does not meet the requirements for
continued listing. The Company cannot determine whether
EchoCath will be successful in raising additional funds or
executing additional licensing agreements in order to meet
its long term cash needs, whether EchoCath will recognize
additional revenue or attain profitability or whether
EchoCath will be able to maintain its NASDAQ listing. As of
September 30, 1998, management evaluated the investment and
determined that there has been an other than temporary
impairment. As such, the cost basis of the preferred stock
has been written down to zero representing the estimated
fair value of the investment. The $1,400,000 write-down of
the investment was reflected in loss from operations during
the three months ended September 30, 1998.
6. Common Stock
On April 9, 1998, the Company sold and issued 2,250,000
shares of its common stock to six institutional investors
(the "Investors") at a price of $2.25 per share. The gross
proceeds of the offering were $5,062,500, before deducting
offering expenses of approximately $403,000. The Company
intends to use the net proceeds from the sale of the Shares
for working capital purposes.
The Company granted the Investors certain registration
rights with respect to the Shares pursuant to a Registration
Rights Agreement. The Company filed a shelf registration
statement on Form S-3 covering all of the Shares. During
July, 1998, the registration statement was declared
effective by the Securities and Exchange Commission.
On June 1, 1998, four non-employee holders of non-plan stock
options to purchase 22,500 common stock of the Company
exercised their options at $1.33 per share.
7. Supplemental Statement of Cash Flow Information:
Supplemental Noncash Investing and Financing Activities:
Cash paid for interest was $828, $2,377, $624 and $1,872 for
the three and nine months ended September 30, 1998 and 1997,
respectively.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements based upon current expectations
that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in
these forward-looking statements as a result of certain
factors, that include, but are not limited to, the risks
discussed in the following section as well as those
discussed in the section entitled "Factors That May Impact
Future Operations." These forward-looking statements
include, but are not limited to, the statement in the second
paragraph of "Overview" relating to clinical trials,
anticipated filing and approval time periods for FDA market
clearance and approval for sale of the ALERT System; the
statements in the third paragraph of "Overview" relating to
approval of the Company's ultrasound products and their role
in the diagnosis and treatment of cardiac arrhythmias; the
statements in the fourth paragraph of "Overview" related to
the Company's anticipated results of operations, capital
requirements, development efforts of new products and the
filing of additional patents; the statements in the fifth
paragraph of "Overview" related to milestones for 1998 and
beyond; the forward looking statements contained in the
second, third, fifth, sixth, seventh, eighth and tenth
paragraphs under the discussion of the Results of Operations
for the three months ended September 30, 1998 as compared to
1997; the forward looking statements contained in the fifth
and seventh paragraphs under the discussion of the Results
of Operations for the nine months ended September 30, 1998
as compared to 1997; the forward looking statements in the
third, sixth and last paragraph of "Liquidity and Capital
Resources;" and the section titled "Year 2000 Issues."
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 line of products for the
cardiac electrophysiology market used to diagnose, monitor
and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology and marketing
rights, has developed new products and has begun marketing
various electrophysiology products, including the EP
WorkMate electrophysiology workstation, the EP-3
computerized electrophysiology stimulator, diagnostic
electrophysiology catheters, internal cardioversion
catheters and related disposable supplies. To date, these
products have generated nearly all of the Company's revenue.
The Company has developed a new product for internal
cardioversion of atrial fibrillation known as 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. The ALERT
System is not approved for sale in the United States, but is
currently undergoing clinical trials. At the earliest, the
Company does not anticipate completing the clinical trial
for at least several months. Approval to sell the ALERT
System in the United States may take one or more years, if
approved at all. The Company has received approval from its
notified body to label the ALERT System with a CE Mark.
This designation has allowed the Company to initiate sales
of the ALERT System in the European Community.
During July, 1998, the Company filed for 510(k) approval
with the FDA for marketing clearance for its ViewMate
ultrasound imaging console and U-View deflectable
intracardiac imaging catheter. These products are designed
to improve a physician's ability to visualize inside the
chambers of the heart, including the internal anatomy of the
heart. The Company believes that the ViewMate and U-View
may play an important role as new and effective treatment
options are developed for the treatment of complex cardiac
arrhythmias, including ventricular tachyarrhythmia and
atrial fibrillation. The Company's ultrasound products are
not approved for sale and the Company does not anticipate
receiving approval to sell the ViewMate or U-View for at
least several months, if approved at all.
The Company expects to continue to incur operating losses 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
activity 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, the results of clinical trials,
regulatory approval and market acceptance of the ALERT
System and developmental, regulatory and market success of
new products under development as well as the Company's
ability to establish, preserve and enforce intellectual
property rights to its products. To date, the Company's
products have generated limited revenue and the Company has
an accumulated deficit of approximately $13.5 million at
September 30, 1998.
The Company has set a number of goals for 1998 and beyond,
including continued expansion of its sales and marketing
efforts aimed at achieving increased sales of existing
products, completion of the ALERT clinical trial, increased
market acceptance of the ALERT System in Europe, increased
manufacturing efficiency and lower production costs,
regulatory approval and introduction of several new
products, improvements to existing products and ongoing
research and development activities. The Company believes
that attainment of these goals is important to achieving the
Company's long term objectives.
RESULTS OF OPERATIONS
Three months ended September 30, 1998 compared to three
months ended September 30, 1997
Revenue from product sales increased $717,515 (or 54%) from
$1,321,013 to $2,038,528 in the three months ended September
30, 1998 as compared to the comparable period in 1997. The
increase in revenue in the third quarter of 1998 resulted
primarily from increased sales of the EP WorkMate, which
represented a substantial percentage of product revenues
during the three month period in 1998. The Company also
realized increased sales of certain of its catheter products
during the period.
The level of sales for the fourth quarter of 1998 and fiscal
1999 will continue to depend materially on sales of the EP
WorkMate and diagnostic catheters and the ability of the
Company's direct sales force and network of international
independent distributors to effectively market and sell the
Company's existing products. The ALERT System is currently
undergoing clinical trials and is not approved for sale in
the United States. The ALERT System has been introduced for
sale in Europe. However, the Company cannot accurately
determine the sales level of the ALERT System for the fourth
quarter of 1998 or 1999 at this time nor when it will be
available in the United States. The Company expects the
ALERT System to contribute a greater proportion of revenues
in the fourth quarter of 1998 and beyond.
Cost of products sold increased $214,752 (or 33%) from
$654,010 to $868,762 due to increased sales in the three
months ended September 30, 1998 as compared to the
comparable period in 1997. Gross profit on product sales
for the three months ended September 30, 1998 was $1,169,766
(or 57% as a percentage of product sales), as compared with
$667,003 (or 50% as a percentage of product sales) for the
comparable period in 1997. The Company realized an increase
in gross profit on sales of existing products during 1998
primarily due to increased sales of the EP WorkMate, which
currently yields a higher gross margin than certain of the
Company's other products. The Company hopes to improve its
overall gross profit percentage as sales of the ALERT System
and other catheter products increase which may offset the
fixed costs associated with maintaining a catheter
manufacturing operation.
Sales and marketing expenses increased $185,627 (or 22%)
from $850,563 to $1,036,190 and decreased as a percentage of
revenue from product sales from 64% to 51% in the three
months ended September 30, 1998 as compared to the
comparable period in 1997. The dollar increase during 1998
was due to expansion of the domestic sales force and
international distribution network. The Company's domestic
direct sales force currently includes ten domestic sales and
marketing professionals as well as a team of domestic field
clinical engineers and administrative support personnel.
The Company has expended substantial funds in an effort to
improve its network of international independent
distributors and has added distributors in several
territories not previously covered. The international
distribution network is currently supported by a team of
direct international sales and marketing professionals,
international field clinical engineers and administrative
support personnel. The Company incurs significant expenses
for travel, trade show related expenses, product promotion
and physician educational materials in support of its sales
efforts.
The Company expects to incur substantial additional sales
and marketing expenses as a result of the introduction of
the ALERT System for sale outside of the United States and,
if the clinical trials progress according to expectations,
for the eventual introduction of the ALERT System for sale
in the United States. Examples of the types of expenditures
would be costs associated with attending trade shows,
physician training and education, promotional material,
sample products and expansion of the sales force.
While sales and marketing expenses for the fourth quarter of
1998 and for fiscal 1999 are expected to increase, it is
anticipated that these expenses may continue to decline as a
percentage of revenues in the event that incremental sales
are generated. It is likely that the Company will incur
additional losses as a result of the increased fixed costs
associated with its sales efforts until incremental sales
are generated. The Company cannot determine when or if that
level of sales will be achieved.
General and administrative expenses increased $70,596 (or
21%) from $340,035 to $410,631 and decreased as a percentage
of sales revenue from 26% to 20% in the three months ended
September 30, 1998 as compared to the comparable period in
1997. The dollar increase during 1998 was due to increased
personnel, occupancy and other administrative costs
necessary to support the increased operations. The Company
expects general and administrative expenses to increase in
future periods due to anticipated future growth. It is
anticipated, however, that these expenses may continue to
decline as a percentage of revenues as incremental sales are
generated. The Company cannot determine when or if such
incremental sales will be achieved.
Research and development expenses decreased $92,533 (or 18%)
from $520,468 to $427,935 in the three months ended
September 30, 1998 as compared to the comparable period in
1997. Research and development during the three months
ended September 30, 1997 included significant expenses
incurred in connection with the development and preparation
for manufacturing of the ALERT System which were not
recurring during the corresponding period in 1998. During
the three months ended September 30, 1998, the Company
incurred research and development expenses in connection
with ongoing development efforts on existing products,
including the EP WorkMate, costs associated with the
clinical trials for the ALERT System, development costs and
costs of preparing regulatory submissions for the new
ultrasound imaging product line and costs associated with
several new products under development. The Company expects
that research and development expenses are likely to
increase in future periods, in part due to ongoing expenses
related to the ALERT System clinical trials, new product
development activities and regulatory applications aimed at
gaining approval to sell other new products.
The results of operations for the three months ended
September 30, 1998 included a $1,400,000 write-down of the
Company's investment in 280,000 shares of EchoCath, Inc.
preferred stock.
Interest expense was $828 during the three months ended
September 30, 1998. The Company does not expect to incur
material interest expense during 1998.
Interest income decreased from $65,768 to $57,976 during the
three months ended September 30, 1998 as compared to the
comparable period in 1997. The decrease was due to the
utilization of the cash in the operation of the business.
The net loss for three months ended September 30, 1998 was
$2,047,842 as compared to a net loss of $978,919 during the
comparable period in 1997. The basic and diluted loss per
share for the three months ended September 30, 1998 was $.21
per share as compared to a basic and diluted loss per share
(as restated to comply with the provisions of SFAS 128 -
Earnings Per Share) of $.13 in 1997. Excluding the
$1,400,000 EchoCath write-down, the Company's net loss for
the three months ended September 30, 1998 was $647,842 or a
basic and diluted loss of $.07 per share. The net loss was
caused by the factors discussed above.
RESULTS OF OPERATIONS
Nine months ended September 30, 1998 compared to nine months
ended September 30, 1997
Revenue from product sales increased $2,618,159 (or 100%)
from $2,606,650 to $5,224,809 in the nine months ended
September 30, 1998 as compared to the comparable period in
1997. The increase in revenue during 1998 resulted
primarily from increased sales of the EP WorkMate, which
represented a substantial percentage of product revenues
during the nine month period in 1998, initial sales of the
ALERT System in Europe and increased sales of certain
catheter products.
Cost of products sold increased $1,112,813 (or 72%) from
$1,545,418 to $2,658,231 due to increased sales in the nine
months ended September 30, 1998 as compared to the
comparable period in 1997. Gross profit on product sales
for the nine months ended September 30, 1998 was $2,566,578
(or 49% as a percentage of product sales), as compared with
$1,061,232 (or 41% as a percentage of product sales) for the
comparable period in 1997. The Company realized an increase
in gross profit on sales of existing products during 1998
primarily due to higher sales of the EP WorkMate.
Sales and marketing expenses increased $220,616 (or 9%) from
$2,326,589 to $2,547,205 and decreased as a percentage of
revenue from product sales from 89% to 49% in the nine
months ended September 30, 1998 as compared to the
comparable period in 1997.
General and administrative expenses increased $73,184 (or
6%) from $1,133,998 to $1,207,182 and decreased as a
percentage of revenue from product sales from 44% to 23% in
the nine months ended September 30, 1998 as compared to the
comparable period in 1997.
Research and development expenses decreased $352,635 (or
24%) from $1,458,109 to $1,105,474 in the nine months ended
September 30, 1998 as compared to the comparable period in
1997. Research and development during the nine months ended
September 30, 1997 included significant expenses incurred in
connection with the development, regulatory submission and
preparation for manufacturing of the ALERT System which were
not recurring during the corresponding period in 1998.
During the nine months ended September 30, 1998, the Company
incurred research and development expenses in connection
with ongoing development efforts on existing products,
including the EP WorkMate, costs associated with the
clinical trials for the ALERT System, development costs and
costs of preparing regulatory submissions for the new
ultrasound imaging product line and costs associated with
several new products under development. The Company expects
that research and development expenses are likely to
increase in future periods, in part due to ongoing expenses
related to the ALERT System clinical trials, new product
development activities and regulatory applications aimed at
gaining approval to sell other new products.
The results of operations for the nine months ended
September 30, 1998 included a $1,400,000 write-down of the
Company's investment in 280,000 shares of EchoCath, Inc.
preferred stock.
Interest expense was $2,377 during the nine months ended
September 30, 1998. The Company does not expect to incur
material interest expense during 1998.
Interest income decreased from $289,362 to $159,993 during
the nine months ended September 30, 1998 as compared to the
comparable period in 1997. The decrease was due to the
utilization of cash to fund the Company's operations.
The net loss for nine months ended September 30, 1998 was
$3,535,667 as compared to a net loss of $3,569,974 during
the comparable period in 1997. The basic and diluted loss
per share for the nine months ended September 30, 1998 was
$.39 per share as compared to a basic and diluted loss per
share (as restated to comply with the provisions of SFAS 128
- - Earnings Per Share) of $.47 in 1997. Excluding the
$1,400,000 EchoCath write-down, the Company's net loss for
the nine months ended September 30, 1998 was $2,135,667 or a
basic and diluted loss of $.24 per share. The net loss was
caused by the factors discussed above.
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its
revenues, resulting in an accumulated deficit of
approximately $13.5 million at September 30, 1998. 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. On April 9,
1998, the Company sold and issued 2,250,000 shares of its
common stock to six institutional investors at a price of
$2.25 per share. The gross proceeds of the offering were
$5,062,500, before deducting offering expenses of
approximately $403,000. The Company intends to use the net
proceeds from the sale of the shares for working capital
purposes.
Net cash used in operating activities for the nine months
ended September 30, 1998 was $3,146,424 as compared to
$4,914,939 for the nine months ended September 30, 1997.
The net use of cash in operations during the nine months
ended September 30, 1998 was due primarily to the Company's
$3,535,667 net loss from operations. Accounts receivable,
net, increased by $687,177 in 1998 from $1,229,921 to
$1,917,098 due to higher third quarter 1998 sales.
Inventories increased by $132,498 from $1,512,528 to
$1,645,026 in anticipation of expected future sales
increases. Prepaid expenses and other current assets
includes product brochures, prepaid trade show fees and
prepaid insurance. Accounts payable decreased by $123,050
from $670,206 to $547,156, accrued expenses payable
decreased by $307,958 from $850,507 to $542,549 and amounts
payable to related parties increased by $16,916 from
$127,859 to $144,775. Reductions in accounts payable and
accrued expenses payable were due to the timing of purchases
and payments for development projects and goods and
services.
During February, 1997, the Company licensed the rights to
several ultrasound technologies from EchoCath, Inc.
("EchoCath") for use in the field of electrophysiology. The
agreement with EchoCath calls for the Company to make
payments totaling up to a maximum of $700,000, in four
installments, as certain development milestones and initial
sales are achieved on the EchoMark and EchoEye technologies.
One of the milestones calls for a $400,000 payment payable
upon the completion of a development program for the
EchoEye. This milestone was only payable in the event that
the development was completed by September 30, 1998. To the
best of the Company's knowledge, the milestone has not been
achieved and no milestone payments are accrued or payable to
EchoCath as of September 30, 1998.
The EchoCath license also 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 render the license
non-exclusive or cancel the license and return any milestone
payments to the Company. The Company may also elect to
apply any accrued and unpaid dividends earned on its
investment in EchoCath preferred stock against minimum
royalties.
In conjunction with the license agreement, the Company
purchased 280,000 shares of newly-issued EchoCath Series B
Cumulative Convertible Preferred Stock for $1,400,000 in
cash. The Company's $1,400,000 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 Part II --
Item 1. Legal Proceedings)
Capital expenditures, net of disposals, were $267,974 during
the nine months ended September 30, 1998 as compared to
$582,434 in the nine month period ended September 30, 1997.
Capital equipment purchases during 1998 included
demonstration equipment, computer equipment for use by the
sales force, expansion of the trade show booths and
manufacturing equipment. The Company is currently
negotiating to purchase an additional 7,500 square feet of
space at its catheter facility for approximately $400,000.
The Company does not have any other material capital
commitments at this time.
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 under lease,
for a purchase price of approximately $417,000, including
transaction costs and improvements. The purchase allowed for
the expansion of catheter manufacturing operations, provide
for additional warehousing, shipping and quality assurance
activities and relocation of administrative offices at the
facility.
On June 1, 1998, four non-employee holders of non-plan stock
options exercised their options to purchase 22,500 shares
common stock of the Company at a price of $1.33 per share.
The Company had no financing activities during the period
ended September 30, 1997.
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. Based upon its current plans and
projections, the Company believes that its existing capital
resources will be sufficient to meet its anticipated capital
needs for at least the next twelve months.
Year 2000 Issues
Background. Some computers, software, and other equipment
include programming code in which calendar year data is
abbreviated to only two digits. As a result of this design,
some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900,
rather than 2000. If not corrected, those programs could
cause date-related transaction failures.
Internal Infrastructure. The Year 2000 problem could
affect computers, software, and other equipment used,
operated, or maintained by the Company. The Company has
substantially completed a review of its internal computer
programs and systems to ensure that the programs and systems
will be Year 2000 compliant. In addition to our in-house
efforts, we are asking vendors, major customers, service
providers and banks whose systems failures potentially could
have a significant impact on our operations to verify their
Year 2000 readiness. The Company presently believes that
its computer systems will be Year 2000 compliant in a timely
manner. Based on our current plans and efforts to date, we
do not anticipate that Year 2000 problems will have a
material effect on our results of operations or financial
condition.
Software Sold to Consumers. The Year 2000 problem can also
affect products sold by the Company, particularly the EP
WorkMate and ALERT Companion. The Company has performed a
detailed assessment of its products and, as a result of this
review, believes that it has substantially identified and
resolved all potential Year 2000 problems with the products
which it develops and markets. However, management also
believes that it is not possible to determine with complete
certainty that all Year 2000 problems affecting the
Company's products have been identified or corrected due to
complexity of these products and the fact that these
products interact with other third party vendor products or
operate on computer systems which are not under the
Company's control. Based on our current plans and efforts to
date, we do not anticipate that Year 2000 problems will have
a material effect on our results of operations or financial
condition.
Suppliers. The Company has initiated communications
with third party suppliers of the major computers,
software, and other equipment sold, used, operated, or
maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 problem.
However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the
Company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can
be no assurance that these suppliers will resolve any or
all Year 2000 problems with these systems before the
occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these
third parties to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse
effect on the Company's business, financial condition, and
results of operation.
Conclusion. Costs specifically associated with modifying
software for Year 2000 compliance are expensed as incurred.
To date, the Company has not spent a material amount on this
project. Costs to be incurred in the remainder of 1998 and
1999 to fix Year 2000 problems are not expected to be
material. Such costs do not include normal system upgrades
and replacements. The Company does not expect the total
costs relating to Year 2000 remediation to have a material
effect on our results of operations or financial condition.
The total costs that the Company incurs in connection with
the Year 2000 problems will be influenced by its ability to
successfully identify Year 2000 systems' flaws, the nature
and amount of programming required to fix the affected
programs, the related labor and/or consulting costs for such
remediation, and the ability of third parties with whom the
Company has business relationships to successfully address
their own Year 2000 concerns. These and other unforeseen
factors could have a material adverse effect on our results
of operations or financial condition.
Disclaimer. The discussion of the Company's efforts, and
management's expectations, relating to Year 2000 compliance
are forward-looking statements and, as such, are subject to
uncertainties. The Company's ability to achieve Year 2000
compliance and the level of incremental costs associated
therewith, could be adversely impacted by unanticipated Year
2000 problems. For example, if the Company is unsuccessful
in identifying or fixing all Year 2000 problems in its
operations, or if the Company is affected by the inability
of suppliers or major customers to continue operations due
to a Year 2000 problem, the results of operations or
financial condition could be materially impacted.
Factors That May Impact Future Operations
History of Losses; Future of Profitability Uncertain;
The Company commenced operations in 1993 and has incurred
substantial operating losses in each year since inception.
As of September 30, 1998, the Company's accumulated deficit
was approximately $13.5 million. While the Company is
generating revenues from product sales, the Company
anticipates that losses could continue. The Company's
ability to generate significant revenues or achieve
profitable operations is dependent on, in large part, the
results of the ALERT clinical trials; market acceptance of
existing products, including the EP WorkMate and the ALERT
System; the ability of the Company to increase its catheter
manufacturing capabilities, improve efficiency, control
manufacturing costs and ensure the timely delivery of its
products; the successful development of new products; the
ability to obtain regulatory approvals and reimbursement of
new products on a timely basis; the ability to compete
successfully in the future with companies which have greater
resources than the Company; the ability to establish,
preserve and enforce intellectual property rights; and its
ability to raise sufficient funds to meet its future cash
requirements. There can be no assurance that the Company
will generate significant revenues or attain profitability.
Dependence on the ALERT System.
Although the Company currently markets a broad range of
products, it believes its greatest potential for substantial
long-term growth will depend on the success of the ALERT
System, a new product the Company has developed to treat
atrial fibrillation. The ALERT System has not been approved
by the FDA and is not currently available for commercial
sale in the United States. Before the Company may begin
marketing the ALERT System in the U.S., it must obtain FDA
approval based on, among other things, the results of
clinical trials that demonstrate the safety and
effectiveness of the device. There can be no assurance that
the clinical trials will demonstrate the safety and
effectiveness of the ALERT System, or that the Company will
obtain FDA approval on a timely basis or at all. Further,
if granted, FDA approval may include significant limitations
on the indicated uses for which the product may be labeled
or marketed. Assuming the ALERT System receives FDA
approval, commercial success will depend on acceptance by
physicians as a desirable treatment for atrial fibrillation.
Such acceptance will depend on, among other things,
substantial, favorable clinical experience, advantages over
alternative treatments, including cost-effectiveness, and
favorable reimbursement policies of third party payors such
as insurance companies, Medicare and other governmental
programs. There can be no assurance that the ALERT System
will achieve such market acceptance. The Company's ability
to sell the ALERT System at prices necessary to achieve
profits and the profitability of the system will depend in
part on the Company's ability to manufacture the system
efficiently in commercial quantities. At this time, the
Company has only manufactured the components of the ALERT
System in limited quantities. There can be no assurance
that the Company will be able to develop the manufacturing
processes and capabilities necessary to attain efficient
manufacturing. The Company will also be dependent on sub-
contractors for certain key components of the ALERT
Companion. Failure to obtain FDA approval for, market
acceptance of, efficient manufacturing processes and/or
reliable sub-contractors for the ALERT System would have a
material adverse effect on the Company's business, results
of operations and financial condition.
ALERT Clinical Trials
The Company has commenced human clinical trials of the ALERT
System at seven hospitals in the United States and intends
to expand the trials to include additional leading atrial
fibrillation research centers. Clinical data is needed in
order to demonstrate the safety and efficacy of the ALERT
System under applicable FDA regulatory guidelines. The
Company anticipates that the ALERT System clinical trials
will be completed during the first half of 1999. The
Company plans to file for FDA approval to market the ALERT
System in the United States. Receipt of FDA approval to
sell the ALERT System in the United States may take several
years, if it is received at all.
There can be no assurance that the ALERT System 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.
Dependence on EP WorkMate.
The EP WorkMate is a computerized monitoring and analysis
electrophysiology workstation. Although the Company sells a
broad range of products, it believes its ability to increase
revenues over the next several years will depend
significantly on acceptance of the EP WorkMate by
electrophysiologists. The EP WorkMate accounted for more
than 50% of the Company's revenues from product sales during
the nine months ended September 30, 1998 and the year ended
December 31, 1997 and is expected to account for a
significant portion of fiscal year 1998 and 1999 revenue.
The EP WorkMate has a list price of approximately $129,000
with an integrated EP-3 Clinical Stimulator and, as a
result, each sale of an EP WorkMate can represent a
relatively large percentage of the Company's net sales in a
particular quarter. There can be no assurance that the EP
WorkMate will continue to be accepted by the
electrophysiology market or that sales will be substantial.
Each sale of an EP WorkMate may take a relatively long time
to complete due in part to the high selling price relative
to other types of equipment and to the budgetary processes
of hospitals to which the Company markets the EP WorkMate.
Government Regulation.
United States
In the United States, the development, testing, manufacture,
labeling, marketing, promotion and sale of medical devices
are regulated by numerous governmental authorities,
including the FDA under the Federal Food, Drug, and Cosmetic
Act ("FFDCA"). The FDA has broad discretion in enforcing
the FFDCA, and noncompliance with applicable requirements
can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of
production, failure to grant premarket clearance or
premarket approval for devices, withdrawal of marketing
approvals and criminal prosecution.
In the United States, medical devices are classified into
one of three classes, Class I, II or III, on the basis of
the controls necessary to reasonably ensure their safety and
effectiveness. Class I devices require general controls
such as proper labeling, premarket notification and
adherence to GMP. Class II devices require the use of
special controls such as performance standards, post-market
surveillance by regulatory bodies, patient registries and
FDA guidelines. Class III devices must generally receive a
pre-market approval ("PMA") from the FDA prior to being
marketed in the U.S. in order to ensure their safety and
effectiveness.
Before a new device can be introduced into the market in the
U.S., the manufacturer generally must obtain either FDA
clearance of a premarket notification filing under Section
510(k) of the FDC Act (a "510(k) submission") or FDA
approval of a PMA application under Section 515 of the FDC
Act. A 510(k) submission will be granted clearance by the
FDA if the submitted data and other information establishes
that the proposed device is "substantially equivalent" to a
predicate device legally marketed in the U.S. A predicate
device is a device that was legally marketed in the U.S.
prior to May 28, 1976 or a device marketed since that date
that has been determined by the FDA to be substantially
equivalent pursuant to a 510(k) application and for which a
PMA is not required. Substantial equivalence means that the
device has the same intended use and is as safe and
effective as a legally marketed device and does not raise
questions of safety and effectiveness that are different
than those associated with the legally marketed device. The
FDA has recently been requiring more data and information to
demonstrate substantial equivalence than in the past. Based
upon industry and FDA publications, the Company believes
that it generally takes between 3 to 12 months from the date
of submission to obtain 510(k) premarket clearance, but may
take longer depending upon the circumstances. The FDA may
determine that the proposed device is not substantially
equivalent, or that additional data is needed before a
substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for
additional data, could delay the market introduction of new
products that fall into this category and could have a
materially adverse effect on the Company's business,
financial condition and results of operations. There can be
no assurance that the Company will obtain 510(k) premarket
clearance within the above time frames, if at all, for any
of the devices for which it may file a 510(k) submission in
the future.
A 510(k) submission is also required when the manufacturer
makes a change or modification to a legally marketed device
that could significantly affect the safety or effectiveness
of the device, or where there is a major change or
modification in the intended use of the device. When any
change or modification is made in a device or its intended
use, the manufacturer is expected to make the initial
determination as to whether the change or modification is of
a kind that would necessitate a filing of a new 510(k)
submission. The FDA's regulations provide only limited
guidance for making this determination.
A PMA application must be filed as to a proposed device if
the device is not substantially equivalent to a legally
marketed device or if it is a Class III device for which the
FDA has called for PMAs. The PMA procedure involves a more
rigorous, complex and lengthy review process by the FDA than
the 510(k) premarket clearance procedure. A PMA application
must be supported by extensive data, including pre-clinical
and clinical trial data to demonstrate the safety and
efficacy of the device. If human clinical trials of a
device are undertaken, and the device presents a
"significant risk," the manufacturer or the distributor of
the device must obtain FDA approval of an IDE application
prior to commencing human clinical trials in the U.S.
The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If
the IDE application is approved, human clinical trials may
begin at a specific number of investigational sites with a
maximum specific number of patients, as approved by the FDA.
Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study
provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently
complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently
complete, it will accept the application for filing.
Otherwise, the FDA will request that the sponsor submit
additional information within 180 days. Depending on the
nature and amount of information requested by the FDA, the
PMA review process may be substantially delayed by such a
request. Once the submission is accepted for filing, the
FDA begins a review of the PMA application. The Company
believes that an FDA review of a PMA application generally
takes between one and three years from the date the PMA
application is accepted for filing, but may take
significantly longer. The review time is often
significantly extended if the FDA requests more information
or clarification of information already provided in the
submission. During the review period, an FDA advisory
committee, typically a panel of clinicians, will likely be
convened to review and evaluate the application and provide
recommendations to the FDA as to whether the PMA should be
approved. In addition, the FDA will inspect the
manufacturing facility where the unapproved product is to be
made to ensure compliance with the FDA's GMP requirements
prior to issuance of a PMA.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA may issue
either an approval letter or an "approvable letter," which
usually contains a number of conditions that must be met in
order to secure final approval of the PMA application. When
and if those conditions have been fulfilled to the
satisfaction of the FDA, the agency will issue a PMA,
authorizing commercial marketing of the device for certain
indications. If the FDA evaluation of the PMA application
or manufacturing facilities is not favorable, the FDA will
deny approval of the PMA application or issue a "not
approvable" letter. The FDA may also determine that
additional clinical trials are necessary, in which case the
PMA may be delayed for several years while additional
clinical trials are conducted and submitted in an amendment
to the PMA application.
Modifications to a device that is the subject of an approved
PMA, its labeling, or manufacturing process may require
approval by the FDA of PMA supplements or new PMAs.
Supplements to a PMA often require the submission of the
same type of information required for an initial PMA, except
that the supplement is generally limited to that information
needed to support the proposed change from the product
covered by the original PMA. Although under the FDC Act,
the FDA is required to complete its review of a PMA or PMA
supplement within 180 days, the agency may take a
significantly longer period of time to complete its review.
The Company received FDA approval to begin clinical trials
for the ALERT System under an IDE filing and has commenced
human clinical trials of the ALERT System at seven centers
in the United States. The Company intends to expand the
trials to include additional leading atrial fibrillation
research centers to obtain data needed to support its
application. There can be no assurance that the clinical
trials will demonstrate the safety and effectiveness of the
ALERT System, or that a subsequently filed application will
be accepted by the FDA for filing or approved.
The PMA process can be expensive and a number of devices for
which PMAs have been sought by other companies have never
been approved for marketing. There can be no assurance that
the Company will be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all. Delays
in receipt of or failure to receive such approvals, the loss
of previously received approvals, or failure to comply with
existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial
condition and results of operations.
Following FDA clearance or approval of a device for
commercial distribution, the primary form of government
regulation of medical devices is the FDA's GMP regulations
for medical devices. These regulations, administered by the
FDA, set forth requirements to be observed in the design,
manufacture, packaging, labeling and storage of medical
products for human use, including implementation of a
quality assurance program. These regulations require, among
other things, that manufacturing be controlled by the use of
written procedures and the ability to produce devices that
meet specifications be validated by extensive testing. They
also require inspection and testing of the products produced
and investigation when devices fail to meet specifications.
Failure to adhere to GMP requirements would cause the
products produced to be considered in violation of the FFDCA
and subject to enforcement action. The FDA monitors
compliance with these requirements by requiring
manufacturers to register their manufacturing facilities and
list their products with the FDA. The Company is subject to
routine inspection by FDA for compliance with GMP
requirements, MDR requirements, and other applicable
regulations. ProCath was last inspected by the FDA during
June, 1998. EP MedSystems was last inspected by the FDA
during October, 1996. If an FDA inspector observes
conditions that might be violative of GMP procedures, the
manufacturer must correct those conditions or explain them
satisfactorily, or face potential regulatory action that
might include physical removal of the product from the
market. FDA has proposed changes to the GMP regulations,
including design control requirements, which will likely
increase the cost of compliance with GMP requirements.
Changes in existing requirements or adoption of new
requirements could have a material adverse effect on the
Company's business, financial condition, and results of
operation. There can be no assurance that the Company will
not incur significant costs to comply with laws and
regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's
business, financial condition or results of operation. The
FDA's Medical Device Reporting regulations also require that
the Company provide information to the FDA on the occurrence
of any deaths or serious injuries alleged to have been
associated with the use of the Company's products, as well
as on any product malfunction that would likely cause or
contribute to a death or serious injury if the malfunction
were to recur. FDA law and regulations also prohibit a
device from being labeled or promoted for unapproved or
uncleared indications. If the FDA believes that a company
is not in compliance with any of these regulations, it can
institute proceedings to detain or seize products, issue a
recall, seek injunctive relief or assess civil and criminal
penalties against such a company. Failure on the part of
the Company or by its suppliers of critical components to
comply with GMP could have a material adverse effect on the
Company's business, financial condition and results of
operations.
In summary, the process of obtaining and maintaining
required regulatory approvals can be expensive, uncertain,
and lengthy, and there can be no assurance that the Company
will ever obtain such approvals and that if such approvals
are obtained, there can be no assurance that the Company
will be able to maintain the approvals. There can be no
assurance that the FDA will act favorably or quickly on any
of the Company's submissions to the FDA and significant
difficulties and costs may be encountered by the Company in
its efforts to obtain FDA clearance that could delay or
preclude the Company from selling its products in the United
States. Furthermore, there can be no assurance that the FDA
will not request additional data, require that the Company
conduct further clinical studies, causing the Company to
incur substantial cost and delay. In addition, there can be
no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or
other requirements as a condition of its PMA approval, any
of which could limit the Company's ability to market its
systems. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the
Federal Trade Commission ("FTC"). FDA enforcement policy
strictly prohibits the marketing of FDA cleared or approved
medical devices for unapproved uses. Further, if a company
wishes to modify a product after FDA approval of a PMA,
including changes in indications or other modifications that
could affect safety or efficacy, additional clearances or
approvals will be required from the FDA. Failure to receive
or delays in receipt of FDA clearances or approvals,
including the need for additional clinical trials or data
as a prerequisite to clearance or approval, or any FDA
conditions that limit the ability of the Company to market
its systems, could have a material adverse effect on the
Company's business, financial condition and results of
operations.
International
In order for the Company to market its products in Europe
and certain other foreign jurisdictions, the Company must
obtain required regulatory approvals and clearances and
otherwise comply with extensive regulations regarding safety
and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to
market and the time required for regulatory review, vary
from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may
differ. Many foreign countries generally permit studies
involving humans for medical devices earlier in the product
development cycle than is permitted by regulation in the
U.S. Other countries, such as Japan, have standards similar
to those of the FDA. There can be no assurance that the
Company will obtain regulatory approvals in such countries
or that it will not be required to incur significant costs
in obtaining or maintaining its foreign regulatory
approvals. Delays in the receipt of approvals to market the
Company's products or failure to maintain these approvals
could have a material adverse impact on the Company's
business, financial condition or results of operations.
Foreign countries also often have extensive regulations
regarding safety, manufacturing processes and quality which
differ from those in the United States and must be met in
order to continue sale of a product within the country. The
European Economic Community has instituted the requirement
that all medical products sold into the European Union
comply with the Medical Device Directive (the "MDD"). The
MDD requires that all such products be labeled with the CE
Mark, an international symbol of adherence to quality
assurance standards. The Company has received approval from
its notified body to label its products, including the ALERT
System, with the CE Mark. This designation allowed the
Company to initiate sales of the ALERT System in countries
that are members of the European Union and the European Free
Trade Association. There can be no assurance that the
Company will be successful in maintaining its CE Mark
certification.
In addition to the import requirements of foreign countries,
a company must also comply with U.S. laws governing the
export of FDA regulated products. Devices with a 510(k)
clearance or a PMA generally may be exported without further
FDA authorization, provided certain conditions are met. A
Class III device without a PMA may be exported to a foreign
country for commercial marketing if the exporting firm
obtains an FDA export permit and the following requirements
are satisfied: (i) the device meets the specifications of
the foreign purchaser; (ii) the device is not in conflict
with the laws of the country to which it is intended for
export; (iii) the device is labeled that it is intended for
export; (iv) the device is not sold or offered for sale in
domestic commerce; and (v) the FDA determines that the
exportation of the device is not contrary to the public
health and has the approval of the country to which it is
intended for export.
The FDA Export Reform and Enhancement Act of 1996 relaxed
the exportation requirements governing devices under certain
circumstances. Pursuant to this law, a device that has not
obtained FDA clearance or approval may be exported to any
country in the world without FDA authorization if the
product complies with the laws of that country and has valid
marketing authorization in one of the following countries:
Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa, the European Union or a country in the
European economic area. The FDA is authorized to add
countries to this list in the future. Among other
restrictions, a device may only be exported under the new
law if it is not adulterated, meets the specifications of
the foreign manufacturer, complies with the laws of the
importing country, is labeled for export, is manufactured in
substantial compliance with GMP regulations or recognized
international standards and is not sold in the U.S.
Other
The Company is also subject to numerous federal, state and
local laws relating to such matters as safe working
conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance
that it will not be required to incur significant costs to
comply with such laws and regulations in the future or that
such laws and regulations will not have a materially adverse
effect upon the Company's ability to do business.
Necessity of Product Development and Improvement.
The markets for medical devices in general and
electrophysiology products in particular are characterized
by rapid technological change. The Company's ability to
compete in these markets will depend in part on its ability
to develop new products, improvements to existing products
and processes for cost-effective manufacturing of such
products on a timely basis. Many of the Company's
development efforts will be based on new technologies or new
applications of existing technologies. As a result,
research and development for any potential new product or
product refinement may take longer and require greater
expenditures than expected, and may ultimately prove
unsuccessful. In the event that the Company is successful
in its development efforts, the commercial acceptance of any
new product will depend on the medical community's
acceptance of such product. There can be no assurance that
the Company will be able to develop new products or to
refine existing products that will be commercially accepted.
The Company's inability to successfully develop new
products, to introduce improvements to existing products, to
prove the safety and efficacy of new products or to gain
market acceptance of such products could have a material
adverse impact on the business, financial condition or
results of operations of the Company.
Potential Fluctuations in Operating Results.
Several factors may have a significant impact upon the
Company's revenues, expenses and results of operations from
quarter to quarter and year to year, including but not
limited to a long sales cycle for the EP WorkMate, hospital
budgetary processes with respect to capital equipment
purchases, the success of the ALERT clinical trials, the
success of new product development efforts, the timing of
new product introductions by the Company or its competitors,
development of other treatments for atrial fibrillation and
other heart rhythm disorders, changes in government or third-
party reimbursement policies, foreign currency fluctuations
to the extent the Company has developed significant
international sales, the ability to obtain products to meet
customer demand and increases or fluctuations in sales and
marketing, administrative, manufacturing and research and
development costs. Consequently, quarterly results of
operations should be expected to fluctuate significantly.
Potential Lack of Proprietary Protection.
The Company's success and ability to compete will depend in
part upon its ability to protect its proprietary technology
and other intellectual property. The Company seeks patents
on its important inventions, has acquired patents and has
entered into license agreements to obtain rights under
selected patents of third parties as to technology it
considers important to its business.
There can be no assurance that any of the Company's patent
applications or applications as to which it has acquired
licenses will issue as patents, or that if patents are
issued on the Company's applications or on applications as
to which the Company has acquired licenses, they will be of
sufficient scope and strength to provide meaningful
protection of the Company's technology or any commercial
advantage to the Company, or that such patents will not be
challenged, invalidated or circumvented in the future.
Moreover, there can be no assurance that the Company's
competitors, many of which have substantial resources and
have made substantial investments in competing technologies,
do not presently have or will not seek patents that will
prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the U.S. or in
other countries.
The Company intends to rely on a combination of patents,
trade secrets, copyrights and trademarks to protect its
intellectual property rights. No assurance can be given,
however, that competitors will not independently develop
substantially equivalent proprietary technology, or that the
Company can meaningfully protect its rights in unpatented
proprietary technology.
The Company has not received any notices alleging, and is
not aware of, any infringement by the Company of any patents
or intellectual property of others. However, there can be
no assurance that current and potential competitors and
other third parties have not filed or in the future will not
file applications for patents, or have not received or in
the future will not receive, patents or other proprietary
rights relating to devices, apparatus, materials or
processes used or proposed to be used by the Company.
The Company's software (which is an integrated component in
its EP WorkMate and EP-3 Clinical Stimulator) is not
patented and existing copyright laws offer only limited
practical protection. There can be no assurance that any
legal protection which may be sought and precautions which
may be taken by the Company will be adequate to prevent
misappropriation of the Company's software and trade
secrets.
The medical device industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. While the Company does not believe it is infringing
any patents or other intellectual property rights of others
and has received no notice of infringement, it is possible
that claims in the future may adversely affect the Company's
ability to market certain products. Any such claims, with
or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management
personnel, cause shipment delays or require the Company to
develop alternative technology or to enter into royalty or
licensing agreements. Although patent and intellectual
property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and
could include ongoing royalties. There can be no assurance
that, if required, necessary licenses would be available to
the Company on satisfactory terms or at all, or that the
Company could redesign its products or processes to avoid
alleged infringement. Accordingly, an adverse determination
in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a
material adverse effect on the Company's business, results
of operations and financial condition. Conversely, costly
and time-consuming litigation may be necessary to enforce
the Company's rights under patents, to protect trade secrets
or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights
of others.
Royalty Payment Obligations
The Company has entered into several license agreements
which provide for the Company to pay royalties based upon
net sales of products covered by the licensed technology,
including, in some cases, minimum annual royalties. In the
event that the Company does not pay such royalties, the
Company may lose its rights under the license agreements.
The loss of certain of the Company's technology licenses
could have a material adverse impact on the business,
financial condition and results of operations of the
Company.
Significant Competition.
The medical device market, particularly in the area of
electrophysiology products, is highly competitive. The
Company competes with many companies, many of which have
access to significantly greater financial, marketing and
other resources than the Company. Further, the medical
device market is characterized by rapid product development
and technological change. The present or future products of
the Company could be rendered obsolete or uneconomic by
technological advances by one or more of the Company's
present or future competitors or by other therapies. In
particular, the ALERT System is a new technology that must
compete with established treatments for atrial fibrillation
as well as with new treatments currently under development
by other companies. The Company's future success will
depend upon its ability to remain competitive with other
developers of such medical devices and therapies.
Limitations on Third Party Reimbursement.
The Company's products are generally purchased by physicians
or hospitals. In the U.S., third-party payors are then
billed for the healthcare services provided to patients
using those products. These payors include Medicare,
Medicaid and private insurers. Similar reimbursement
arrangements exist in several European countries. Third-
party payors may deny or limit reimbursement for the
Company's existing products and future products such as the
ALERT System. Third-party payors are increasingly
challenging the prices charged for medical products and
services and are putting pressure on medical equipment
suppliers to reduce prices. Furthermore, substantial
uncertainty exists as to third-party reimbursement for
investigational and newly approved products. The U.S.
Health Care Financing Authority has entered into an
interagency agreement with the FDA pursuant to which the FDA
places all IDEs it approves into one of two categories,
"Category A" or "Category B." Category A devices are
innovative devices that are believed to be in Class III (the
class of medical devices subject to the most stringent FDA
review) and are of a type as to which initial questions of
safety and effectiveness have not been resolved and the FDA
is unsure whether the device type can be safe and effective.
They will not be eligible for Medicare reimbursement.
Category B devices include Class III devices of a type as to
which underlying questions of safety and effectiveness have
been resolved or that is known to be capable of being safe
and effective because other devices of that type have been
approved. Category B devices will be eligible for Medicare
reimbursement if the devices are furnished in accordance
with the FDA-approved protocols governing clinical trials
and all other Medicare coverage requirements are met. The
Company believes the ALERT System may be a Class III device.
There can be no assurance that the ALERT System will be
categorized as a Category B device and thus eligible for
Medicare reimbursement during clinical trials. There can be
no assurance that reimbursement will be or remain available
for the Company's products, or for the ALERT System if it is
approved for marketing in the U.S., or even if reimbursement
is available, that payors' reimbursement policies will not
adversely affect the Company's ability to sell its products
on a profitable basis. Mounting concerns about rising
healthcare costs may cause more restrictive coverage and
reimbursement policies to be implemented in the future.
Changes in government and private third-party payors'
policies toward reimbursement for procedures employing the
Company's products in the U.S. or other countries could
have a material adverse effect on the Company's ability to
market its products.
Ability to Manage Sales Growth.
The Company employs a domestic direct sales and marketing
force to sell and promote the Company's products in the U.S.
market. Previously, the Company relied on third-party
distributors for all sales efforts. There can be no
assurance that the Company will be able to continue to
attract and retain qualified and capable individuals who can
successfully promote the Company's products.
The Company is in the process of expanding its marketing
internationally and will continue to rely on third-party
distributors in foreign markets. The Company operates
pursuant to written or oral agreements with third party
distributors which are often terminable by distributors.
There can be no assurance that distributors will actively
and effectively market the Company's products or that the
Company will be able to replace any existing distributors on
advantageous terms if any of its present relationships are
terminated. Further, there can be no assurance that the
Company will be able to make arrangements with new
distributors to access new international markets.
Healthcare Reform.
The healthcare industry is subject to changing political,
economic and regulatory influences that may affect the
procurement practices and the operation of healthcare
facilities. During the past several years, the healthcare
industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates and
certain capital expenditures. Certain legislators have
introduced legislation or have announced proposals to reform
certain aspects of the U.S. healthcare system, including
proposals that may increase governmental involvement in
healthcare, lower reimbursement rates for both treatment and
capital costs incurred by hospitals, or otherwise change the
operating environment for the Company's customers.
Significant changes in healthcare systems may have a
substantial impact on the manner in which the Company
conducts its business and could have a material adverse
effect on the Company's business, financial condition and
ability to market the Company's products. Changes resulting
from healthcare reform proposals or the enactment thereof
may influence customer purchases and the amount of
reimbursement available from governmental agencies and
private third-party payors for diagnostic and therapeutic
procedures conducted with the Company's products, or could
impose limitations on prices that customers will be able to
pay, or the Company may charge, for its products.
Dependence on Key Personnel; Need to Recruit Additional Key
Management Personnel.
The Company is dependent upon a limited number of key
management and technical personnel, particularly David
Jenkins, Bryan Byrd, Randall Rolston and Joseph Griffin.
The Company's continued growth and long term success will
depend, in part, on its ability to attract and retain highly-
qualified personnel. There can be no assurance that the
Company will be able to attract and retain such personnel.
The Company competes for such personnel with other medical
device companies, academic institutions and other
organizations. The loss of any key personnel, the inability
to hire or retain qualified personnel or the failure of such
personnel to function effectively as a management group
could have a material adverse effect on the Company's
business, results of operations and financial condition.
Product Liability and Insurance.
The manufacture and sale of the Company's products involves
the risk of product liability claims. The Company's
products are highly complex and some are, or will be, used
in relatively new medical procedures and in situations where
there is a potential risk of serious injury, adverse side
effects or death. Misuse or reuse of catheters may increase
the risk of product liability claims. The Company currently
maintains product liability insurance with coverage limits
of $5,000,000 per occurrence and $5,000,000 in the aggregate
per year; however, there can be no assurance that this
coverage will be adequate. Such insurance is expensive and
may not be available in the future on acceptable terms if at
all. A successful claim against or settlement by the
Company in excess of its insurance coverage or the Company's
inability to maintain insurance in the future could have a
material adverse effect on the Company's business, results
of operations and financial condition.
Limited Manufacturing Experience; Dependence on Suppliers
To date, the Company's manufacturing activities have been
limited. The Company must manufacture, or contract for the
manufacturing of, products in commercial quantities in
compliance with regulatory requirements and at acceptable
costs. The Company currently manufactures substantially all
of its catheter products, including the ALERT Catheter.
There can be no assurance that the Company will be able to
manufacture catheters or other products with sufficient
processes and in quantities necessary to achieve and sustain
profitability. In addition, the Company has expanded its
catheter manufacturing facilities and hired and trained
additional personnel. The Company has no experience in
large-scale manufacturing and there can be no assurance that
the Company will be successful in manufacturing catheter
products in significant volume.
The Company relies on outside sources for the manufacture of
critical components of the ALERT Companion, EP WorkMate and
the EP-3 Clinical Stimulator. All components are
manufactured in conformance with the Company's
specifications. Any interruption in the supply from its
suppliers would have a material adverse effect on the
Company's ability to deliver its products until acceptable
arrangements can be made with a qualified alternative source
of supply. There can be no assurance that the Company would
be able to reach an acceptable arrangement with an
alternative source of supply at acceptable prices and
adequate quality levels on a timely basis. If the Company
were unable to do so, such an interruption would have a
material adverse effect on the Company's business, results
of operations and financial condition.
Risks Associated With International Operations.
Approximately 35% of the Company's revenues from product
sales for 1997 were derived from sales of its products
outside the U.S. Since international revenues are expected
to continue to represent a significant percentage of total
revenues, the Company expects to continue to increase its
operations outside of the United States. As such, the
Company will continue to be subject to fluctuations in
currency exchange rates and other risks of foreign
operations, including tariff regulations and export license
requirements, unexpected changes in regulatory requirements,
longer periods to collect accounts receivable, potentially
inadequate protection of intellectual property rights, local
taxes, restrictions on repatriation of earnings and economic
and political instability. There can be no assurance that
such factors will not have a material adverse effect on the
Company's ability to maintain and expand profitable foreign
sales and, consequently, on the Company's business, results
of operations and financial condition.
Possible Volatility of Stock Price.
The market price of shares of the Company's Common Stock,
like that of the common stock of many medical products high
technology companies, has, in the past, been, and is likely
in the future to continue to be, highly volatile. The
Company believes that factors such as quarterly fluctuations
in financial results, announcements of new developments
relating to cardiac care diagnosis and treatment therapies
and developments in third-party reimbursement policy and in
the medical device industry could contribute to the
volatility of the price of its Common Stock, causing it to
fluctuate significantly. These factors, as well as general
economic conditions, such as recessions or high interest
rates, or other events unrelated to the Company or its
products, may adversely affect the market price of the
Common Stock.
Transactions With Affiliates and Potential Conflicts.
Anthony Varrichio, a director and shareholder of the
Company, is an officer, director and shareholder of
HiTronics Designs, Inc. ("HDI"). HDI has sold rights to
various products to the Company, performs research and
development services for the Company and currently
manufactures the EP-3 Stimulator. While the Company
believes its arrangements with HDI have been, and will
continue to be, on terms no less favorable to the Company
than it could obtain from third parties, there can be no
assurance that all arrangements between the Company and HDI
will be as favorable to the Company as they would be in the
absence of its relationships with affiliates of HDI.
The Company purchases certain components for its products
from Mortara Instrument, Inc. ("Mortara Instrument"). Dr.
David W. Mortara, a director and shareholder of the Company,
is also a Director and shareholder of Mortara Instrument.
While the Company believes its arrangements with Mortara
Instrument have been, and will continue to be, on terms no
less favorable to the Company than it could obtain from
third parties, there can be no assurance that all
arrangements between the Company and Mortara Instrument will
be as favorable to the Company as they would be in the
absence of its relationships with affiliates of Mortara
Instrument.
Concentration of Ownership.
As of November 2, 1998, the Company's seven directors and
executive officers and their affiliates beneficially owned
an aggregate of approximately 19.0% of the Company's
outstanding Common Stock, including unexercised vested stock
options. Additionally, six institutional investors who
purchased shares in the Company's private placement on April
9, 1998 own an aggregate of approximately 23% of the
Company's outstanding Common Stock as of November 2, 1998.
As a result, these shareholders, acting together, could have
significant influence over all matters requiring approval by
the shareholders of the Company. This level of ownership
could have an affect on a change in control of the Company
and may adversely affect the voting and other rights of
other holders of Common Stock.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
EchoCath
During October, 1997, the Company filed a lawsuit against
EchoCath 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 prior sale of $1,400,000 of its
preferred stock to the Company.
EchoCath filed an answer to the complaint, denying the
allegations and asserting a counterclaim against the Company
seeking its costs and expenses in the action. EchoCath also
filed a motion to dismiss the complaint. In December, 1997,
EP MedSystems filed an amended complaint and EchoCath filed
an answer thereto again denying the allegations and
asserting a counterclaim seeking reimbursement of its costs
and expenses in the action. EchoCath also filed a motion to
dismiss the amended complaint. During October, 1998, the
complaint was dismissed by the District Court. The Company
is considering an appeal of the decision. The Company
believes that EchoCath's counterclaim and request for
reimbursement of its costs and expenses is without merit.
As a result, the Company has not accrued for such costs and
expenses at September 30, 1998. In the opinion of
management, the ultimate resolution of the counterclaim will
not have a material adverse impact of the Company's
financial condition or results of operations. The Company
cannot determine the outcome of the EchoCath litigation at
this time.
Item 2. Changes in Securities
On April 9, 1998, the Company sold and issued 2,250,000
shares of its common stock to six institutional investors
(the "Investors") at a price of $2.25 per share. The gross
proceeds of the offering were $5,062,500, before deducting
offering expenses of approximately $403,000. The Company
intends to use the net proceeds from the sale of the shares
for working capital purposes. The Company granted the
Investors certain registration rights with respect to the
shares pursuant to a Registration Rights Agreement. The
Company filed a shelf registration statement on Form S-3
covering all of the Shares. During July, 1998, the
Registration Statement was declared effective by the
Securities and Exchange Commission.
On June 1, 1998, four non-employee holders of non-plan stock
options exercised their options to purchase 22,500 shares
common stock of the Company at a price of $1.33 per share.
The Company had no financing activities during the period
ended September 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
On October 28, 1998, the Company held its Annual Meeting of
Shareholders. The matters voted upon by the security
holders were:
(1) To authorize an amendment of the Company's Amended and
Restated Certificate of Incorporation providing for
classification of the Board of Directors into three
classes of directors with staggered terms of office;
Broker
For Against Abstain Non-votes
--------- ------- ------- ---------
For the amendment to the Plan 6,898,493 0 6,200 1,706,783
(2) To elect four (4) directors to the Board of Directors as
follows: (a) two directors to serve a three year term,
one director to serve a two year term and one director
to serve a one year term, and until their respective
successors shall be duly elected and qualified;
For the election of Directors For Withheld Abstain
--------- -------- -------
David A. Jenkins 8,605,476 6,000 0
David W. Mortara 8,605,476 6,000 0
John E. Underwood 8,605,476 6,000 0
Anthony J. Varrichio 8,603,476 8,000 0
(3) To ratify the selection of PricewaterhouseCoopers LLP,
independent public accountants, as auditors for the
Company for the fiscal year ending December 31, 1998:
For Against Abstain
--------- ------- -------
For the ratification of auditors 8,605,476 0 6,000
Item 5. Other Information
The Company currently intends to hold its 1999 Annual
Meeting of Shareholders (the "Annual Meeting") during June,
1999. Shareholders of the Company are entitled to submit
proposals on matters appropriate for shareholder action
consistent with regulations of the Securities and Exchange
Commission ("SEC") and the Company's bylaws. Should a
shareholder wish to have a proposal considered for inclusion
in the Proxy Statement for the Annual Meeting, under Rule
14a-8 of the Securities Act of 1934, as amended (the
"Exchange Act"), such proposal must be received by the
Company on or before February 1, 1999.
In connection with the Annual Meeting and pursuant to
recently amended Rule 14a-4 under the Exchange Act, if the
shareholder's notice is not received by the Company within a
reasonable time prior to the date on which proxy materials
are mailed to shareholders, the Company (through management
proxy holders) may exercise discretionary voting authority
when the proposal is raised at the Annual Meeting without
any reference to the matter in the Proxy Statement.
The above summary, which sets forth only the procedures by
which business may be properly brought before and voted upon
at the Company's Annual Meeting, is qualified in its
entirety by reference to the Company's bylaws.
All shareholder proposals and notices should be directed to
James Caruso, Chief Financial Officer of the Company, at EP
MedSystems, Inc., 100 Stierli Court, Mount Arlington, NJ
07856.
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 27 Financial Data Schedule (SEC filing 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).
(b) Reports on Form 8-K
None
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 6, 1998 By: /s/ David A. Jenkins
---------------------
David A. Jenkins
President and Chief Executive Officer
Date: November 6, 1998 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 27 Financial Data Schedule EDGAR
(SEC filing 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).
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<SALES> 5,225
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<CGS> 2,658
<TOTAL-COSTS> 4,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,400
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<INCOME-PRETAX> (3.536)
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