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: March 31, 2000
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
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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
--------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. |X| Yes |_|
No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value, and
11,738,167 shares outstanding at May 10, 2000.
Transitional Small Business Disclosure Format: Yes |_| No |X|
1
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART I. -- Financial INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2000
(unaudited) 3
Consolidated Statements of Operations for three months
ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for three months
ended March 31, 2000 and 1999(unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis or Plan of
Operation 8-11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Secure 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures and Exhibit Index 13
2
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31,
2000
----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,916,079
Accounts receivable, net of allowances for
doubtful accounts of $94,022 3,067,391
Inventory, net 1,853,824
Prepaid expenses and other current assets 278,772
------------
Total current assets 7,116,066
Property and equipment, net 2,201,805
Intangible assets, net 487,781
Other assets 22,123
------------
Total assets $ 9,827,775
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,085,961
Payables due to related parties 277,220
Accrued expenses 270,174
Deferred warrant revenue and customer deposits 235,268
Current portion of long-term debt 32,567
------------
Total current liabilities 1,901,190
Long-term debt, less current portion 466,667
------------
Total liabilities $ 2,367,857
------------
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, 11,678,167 shares issued
and outstanding 11,678
Additional paid-in capital 25,723,071
Accumulated deficit (18,274,831)
------------
Total shareholders' equity 7,459,918
------------
Total liabilities and shareholders' equity $ 9,827,775
============
The accompanying notes are an integral part of these statements.
3
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
March 31, March 31,
2000 1999
---------- ---------
Net sales $ 2,902,983 $ 2,534,411
Cost of products sold 1,334,382 1,193,166
------------ -----------
Gross profit 1,568,601 1,341,245
Operating costs and expenses:
Sales and marketing expenses 1,240,590 1,070,547
General and administrative expenses 611,853 597,579
Research and development expenses 577,394 444,737
------------ -----------
Loss from operations (861,236) (771,618)
Other income, net 226,401 27,547
------------ -----------
Net loss $ (634,835) $ (744,071)
============ ===========
Basic and diluted loss per share $ (0.06) $ (0.08)
============ ===========
Weighted average shares outstanding used
to compute basic and diluted loss per share 11,380,933 9,872,417
============ ===========
The accompanying notes are an integral part of these statements.
4
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (634,835) $ (744,071)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 188,120 57,974
Changes in assets and liabilities:
Increase in accounts receivable (133,429) (56,937)
Decrease (increase) in inventories 34,279 (27,630)
(Increase) decrease in prepaid and other current assets (24,062) 26,113
(Decrease) increase in payables due to related parties (52,692) 256,955
Increase in accounts payable 90,687 23,598
Decrease in accrued expenses, deferred
revenue and customer deposits (331,635) (150,078)
----------- -----------
Net cash (used in) operating activities $ (863,567) $ (614,076)
----------- -----------
Cash flows from investing activities:
Capital expenditures (320,631) (534,851)
----------- -----------
Net cash (used in) investing activities $ (320,631) $ (534,851)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants 718,375 --
Proceeds from exercise of stock options 388,000 --
Net (payments) borrowings under note payable (12,829) 507,500
----------- -----------
Net cash provided by financing activities $ 1,093,546 $ 507,500
----------- -----------
Net (decrease) in cash and cash equivalents (90,652) (641,427)
Cash and cash equivalents, beginning of period 2,006,731 2,332,931
----------- -----------
Cash and cash equivalents, end of period $ 1,916,079 $ 1,691,504
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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, 1999 filed with the
Securities and Exchange Commission.
Note 2. Inventories
Inventories consist of the following:
March 31,
-----------
Raw materials $ 1,218,182
Work in process 162,479
Finished goods 473,163
-----------
$ 1,853,824
===========
Note 3. Note payable
In March 1999, the Company entered into a term loan agreement in the amount of
$500,000. Principal payments in the first quarter amounted to $10,000.
Principal is payable in 48 equal monthly installments under a 15 year
amortization schedule with a balloon payment due in December 2004. Interest is
payable monthly in arrears at either Prime plus 3/4% or LIBOR plus 3 1/4%.
Note 4. Common Stock
6
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During February 2000, the Company received $718,000 related to warrants that
were issued in conjunction with the private placement in September 1999.
Investors included in the exercise were two of its institutional shareholders
and two members of its board of directors. Common Stock of 205,250 shares were
issued in conjunction with the exercise of the warrants. In addition, the
exercise price of the remaining warrants to purchase 362,250 shares of Common
Stock was increased from $3.50 to $7.50 per share.
Note 5. Other Income
The Company sold its New Jersey cumulative 1998 net operating loss for one of
its statutory subsidiaries for $218,000. This amount is included in other
income.
Note 6. Industry Segment and Geographic Information
The Company manages its business on the basis of one reportable segment--the
manufacture and sale of cardiac electrophysiology products. The Company's chief
operating decision-makers use consolidated results to make operating and
strategic decisions.
The following table sets forth product sales by geographic segment as of March
31,
2000 1999
----------- -----------
United States $ 1,391,000 $ 1,417,000
Europe/Middle East 720,000 564,000
Asia and Pacific Rim 792,000 553,000
----------- -----------
$ 2,903,000 $ 2,534,000
=========== ===========
Sales of the Company's cardiac electrophysiology devices and related catheters
aggregated $2,463,000 and $440,000 in 2000 and $2,188,000 and $346,000 in 1999,
respectively. The Company's long-lived assets are located in the U.S.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
7
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The Company was incorporated in New Jersey in January 1993 and operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of products for the cardiac electrophysiology ("EP") market used to
diagnose, monitor and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology, has developed new products and
has begun marketing various electrophysiology products, including the EP
WorkMate(R) electrophysiology workstation, the EP-3(TM) Stimulator, diagnostic
electrophysiology catheters, internal cardioversion catheters and related
disposable supplies.
The Company has developed a new product for internal cardioversion of atrial
fibrillation known as the ALERT(R) System, which uses a patented 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(R) System is not approved for sale in the United States,
however, on November 1, 1999, the Company submitted the final clinical module
and original Pre Market Approval application with the FDA. The Company intends
to market a full family of internal cardioversion catheters around the ALERT(R)
platform.
The Company has also developed an intracardiac ultrasound product line including
the ViewMate(TM) ultrasound imaging console and 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(TM) System 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(TM) System for at least several months, if approved at all.
Forward-Looking Statements
This report contains certain statements of a forward-looking nature relating to
such matters as anticipated financial and operational performance, business
prospects, technological developments, results of clinical trials, new products,
research and development activities and similar matters. Stockholders are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors effecting the
industry and economy generally, as well as those identified in this report and
in the Company's other reports filed with the Securities and Exchange
Commission, which could cause actual results to differ materially from those
indicated by such forward-looking statements.
RESULTS OF OPERATIONS
Three months ended March 31, 2000 compared to three months ended March 31, 1999
Net Sales increased $369,000 (or 15%) in the three months ended March 31, 2000
as compared to the prior period in 1999. The majority of the increase in revenue
in the quarter
8
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resulted from increased sales of the EP WorkMate(R), which represented a
substantial percentage of sales during the three-month period in 2000. The
Company also realized increased sales of certain of its catheter products during
the period.
The level of sales for the remaining nine months of 2000 will depend materially
on sales of the EP WorkMate(R) 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(R) System is not approved for sale in the United States, however, on
November 1, 1999, the Company submitted the final clinical module and original
Pre Market Approval application with the FDA. The ALERT(R) System has been
introduced for sale in Europe. However, the Company cannot accurately determine
the sales level of the ALERT(R) System for the remaining nine-months in 2000 at
this time or when it will be available if at all in the United States. The
Company expects the ALERT(R) System to contribute a greater proportion of
revenues in 2000 and beyond.
Cost of products sold increased $141,000 (or 12%) due to the 15% increase in
sales for the three months ended March 31, 2000 as compared to the prior period
in 1999. Gross profit on sales for the three months ended March 31, 2000 was
$1,569,000 (or 54% as a percentage of sales), as compared with $1,341,000 (or
53% as a percentage of product sales) for the comparable period in 1999. The
Company realized an increase in gross profit on sales of existing products
during this period primarily due to increased sales of the EP WorkMate(R), 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(R) System and other catheter products increase, which may
offset the fixed costs associated with maintaining a catheter manufacturing
operation.
Sales and marketing expense increased $170,000 (or 16%), in the three months
ended March 31, 2000 as compared to 1999. The dollar increase during this period
was primarily due to the impact of increase in personnel, travel, trade show
related expenses, product promotion and physician educational materials in
support of its sales efforts. 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.
General and administrative expenses increased $14,000 in the three months ended
March 31, 2000 as compared to 1999. The increase during this period was due to
increased personnel and other administrative costs necessary to support the
increased operations worldwide. It is anticipated that these expenses may
decline as a percentage of revenues as incremental sales are generated.
Research and development expenses increased $133,000 (or 30%) in the three
months ended March 31, 2000 as compared to 1999. During this period, the Company
incurred research and development expenses primarily associated with the
clinical trials for the ALERT(R) System, development costs and costs of
preparing regulatory submissions for the new ultrasound imaging product line, as
well as costs associated with several new products under development. In
addition, the Company has ongoing development efforts on existing
9
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products, including the EP WorkMate(R) and the EP-3(TM) Stimulator. 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(R) System clinical
trials, new product development activities and regulatory applications aimed at
gaining approval to sell other new products.
The net loss for the three months ended March 31, 2000 was $635,000 as compared
to a net loss of $744,000 during the comparable period in 1999. The basic and
diluted loss per share for the three months ended March 31, 2000 was $0.06 per
share versus $0.08 per share in 1999.
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated deficit of approximately $18,275,000 at March 31, 2000.
During February 2000, the Company received $718,000 related to warrants that
were issued in conjunction with the private placement in September 1999.
Investors included in the exercise were two of its institutional shareholders
and two members of its board of directors. Common Stock of 205,250 shares were
issued in conjunction with the exercise of the warrants. In addition, the
exercise price of the remaining warrants to purchase 362,250 shares of Common
Stock was increased from $3.50 to $7.50 per share.
The Company intends to use the net proceeds from the sale of the shares for
working capital purposes. Management believes that its current liquidity
position will be sufficient to meet the needs of the Company until at least
March 31, 2001. In the event that it cannot generate additional capital funds
after March 31, 2001, the Company believes that it can reduce non-core-related
expenditures, which will allow it to continue in its operations for a
significant period. However, that continuation may not be possible should
circumstances outside the Company's control (including, for example, changes in
general economic conditions) significantly interfere with the Company's
business.
Net cash used in operating activities for the three months ended March 31,
2000 decreased $91,000 as compared to 1999. The net use of cash in operations
for the three months ended March 31, 2000 was primarily due to the Company's
loss from operations. Payables to related parties decreased $53,000. Payments to
related parties are made on terms similar to those of other suppliers.
Capital expenditures, were $321,000 during the three months ended March 31, 2000
as compared to $535,000 for the same period in 1999. Capital expenditures for
the three months ended March 31, 2000 was primarily due to building
infrastructure improvements.
As of the date of this Report on Form 10-QSB, the Company does not have any
other material commitments for capital expenditures. However, the Company
expects to purchase capital equipment and to expand its manufacturing and
assembly capabilities as it continues to grow. The Company leases office and
manufacturing space and certain office equipment under operating leases.
10
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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(R) 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.
Impact of the Year 2000
As of the date of this filing the Company has not experienced any disturbances
or interruption in its ability to transact business with its suppliers or
customers as a result of the year 2000 transition. The Company, however,
continues to monitor its systems, suppliers, and customers for any unanticipated
issues that have yet to surface.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
EchoCath
During October 1997, the Company filed a lawsuit against EchoCath, Inc.
("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 and EchoCath's counterclaim for attorney fees was denied. The
Company argued an appeal on December 8, 1999 and is awaiting the decision of the
United States Court of Appeals for the Third Circuit. At this time, the Company
cannot determine the outcome of the litigation and as a result, no amount has
been accrued at March 31, 2000.
Item 2. Changes in Securities
During February 2000, the Company received $718,000 related to warrants that
were issued in conjunction with the private placement in September 1999.
Investors included in the exercise were two of its institutional shareholders
and two members of its board of directors. Common Stock of 205,250 shares were
issued in conjunction with the exercise of the warrants. In addition, the
exercise price of the remaining warrants to purchase 362,250 shares of Common
Stock was increased from $3.50 to $7.50 per share.
11
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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 27 Financial Data Schedule (SEC filing only)
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EP MEDSYSTEMS, INC.
-------------------
(Registrant)
Date: May 11, 2000 By: /s/ David A. Jenkins
------------ -------------------------------------------
David A. Jenkins
President and Chief Executive Officer
Date: May 11, 2000 By: /s/ Joseph M. Turner
------------ -------------------------------------------
Joseph M. Turner
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ----------- ----------------------------------------------------------------
Exhibit 27 Financial Data Schedule
(SEC filing only)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS AND UNAUDITED CONSOLIDATED BALANCE
SHEET FOR THE PERIOD ENDED MARCH 31, 2000 FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,916
<SECURITIES> 0
<RECEIVABLES> 3,161
<ALLOWANCES> (94)
<INVENTORY> 1,854
<CURRENT-ASSETS> 7,116
<PP&E> 3,354
<DEPRECIATION> 1,152
<TOTAL-ASSETS> 9,828
<CURRENT-LIABILITIES> 1,901
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 7,447
<TOTAL-LIABILITY-AND-EQUITY> 9,828
<SALES> 2,903
<TOTAL-REVENUES> 2,903
<CGS> 1,334
<TOTAL-COSTS> 2,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10)
<INCOME-PRETAX> (635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (635)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
