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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from __________ to________
Commission file number 0-28604
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ELECTROSCOPE, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1162056
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4828 STERLING DRIVE, BOULDER, COLORADO 80301
---------------------------------------------------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 444-2600
-------------------------------------------------------------------------
(Issuer's telephone number)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OF 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.
YES X 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 5,304,986 SHARES
- ----------------------------------- ----------------------------------
Class (outstanding at October 30, 1996)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements . . . . . . . . 3
- Condensed Balance Sheets as of September 30,
1996 and March 31, 1996. . . . . . . . . . . . . . . 3
- Condensed Statements of Operations for
the Three Months Ended September 30, 1996 and 1995 . 4
- Condensed Statements of Operations for
the Six Months Ended September 30, 1996 and 1995.. . 5
- Condensed Statements of Cash Flows for
the Six Months Ended September 30, 1996 and 1995 . . 6
- Notes to Condensed Interim Financial
Statements . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . 12
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
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PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 827,916 $ 538,708
Short-term investments 10,469,748 -
Accounts receivable, net of allowance for doubtful
accounts of $33,428 and $33,428, respectively 187,767 110,465
Accrued interest 172,536 -
Inventory, net of reserve for obsolescence of $68,599
and $65,000, respectively 705,532 803,417
Other current assets 53,427 -
------------ ------------
Total current assets 12,416,926 1,452,590
------------ ------------
EQUIPMENT, at cost:
Furniture, fixtures and equipment 348,334 304,735
Less- Accumulated depreciation (153,322) (111,265)
------------ ------------
Equipment, net 195,012 193,470
------------ ------------
PATENTS, net 112,876 99,161
OTHER ASSETS 55,780 80,739
------------ ------------
Total assets $ 12,780,594 $ 1,825,960
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 98,360 $ 130,368
Accrued compensation 60,760 94,448
Other accrued liabilities 61,555 93,109
Customer deposits 31,161 116,521
Other current liabilities 6,639 6,639
------------ ------------
Total current liabilities 258,475 441,085
------------ ------------
LONG-TERM LIABILITIES:
Deferred revenue (Note 2) 122,794 135,703
Other long-term liabilities 16,226 19,746
------------ ------------
Total long-term liabilities 139,020 155,449
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized,
no shares outstanding - -
Common stock, no par value, 100,000,000 shares authorized,
5,304,986 and 3,893,402 shares outstanding, respectively 16,842,428 5,255,039
Warrants to purchase common stock 290,400 -
Accumulated deficit (4,749,729) (4,025,613)
------------ ------------
Total shareholders' equity 12,383,099 1,229,426
------------ ------------
Total liabilities and shareholders' equity $12,780,594 $ 1,825,960
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended September 30,
------------------------
1996 1995
--------- ---------
REVENUE, net $ 359,287 $ 479,350
COST OF SALES 315,330 166,311
--------- ---------
Gross profit 43,957 313,039
--------- ---------
OPERATING EXPENSES:
Sales and marketing 237,550 283,759
General and administrative 187,937 120,669
Research and development 159,128 141,548
--------- ---------
Total operating expenses 584,615 545,976
--------- ---------
INCOME (LOSS) FROM OPERATIONS (540,658) (232,937)
OTHER INCOME:
Interest income 164,065 5,846
Other income 4,630 (280)
--------- ---------
NET INCOME (LOSS) $(371,963) $(227,371)
--------- ---------
--------- ---------
NET INCOME (LOSS) PER SHARE (Note 3):
Net income (loss) per common share and common
equivalent share $(0.07) $(0.06)
--------- ---------
--------- ---------
Shares used in computing net income (loss) per
common share and common equivalent share 5,295,253 3,774,388
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months
Ended September 30,
-------------------------
1996 1995
----------- ----------
REVENUE, net $ 772,929 $1,007,716
COST OF SALES 624,846 611,244
----------- ----------
Gross profit 148,083 396,472
----------- ----------
OPERATING EXPENSES:
Sales and marketing 420,777 478,001
General and administrative 343,505 244,261
Research and development 285,830 264,333
----------- ----------
Total operating expenses 1,050,112 986,595
----------- ----------
INCOME (LOSS) FROM OPERATIONS (902,029) (590,123)
OTHER INCOME:
Interest income 172,860 10,879
Other income 11,889 (312)
----------- ----------
NET INCOME (LOSS) $ (717,280) $ (579,556)
----------- ----------
----------- ----------
NET INCOME (LOSS) PER SHARE (Note 3):
Net income (loss) per common share and common
equivalent share $(0.15) $(0.15)
----------- ----------
----------- ----------
Shares used in computing net income (loss) per
common share and common equivalent share 4,753,035 3,745,652
----------- ----------
----------- ----------
The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (717,280) $(579,556)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 42,757 29,230
Changes in operating assets and liabilities-
Accounts receivable (77,302) (45,068)
Inventory 97,885 (572,228)
Accrued interest and other current assets (225,963) -
Other assets 24,959 (19,193)
Accounts payable (32,008) 88,731
Accrued compensation and other accrued
liabilities (65,242) 2,296
Customer deposits (85,360) 158,813
Deferred revenue (12,909) 150,000
Other liabilities (3,520) -
------------ ---------
Net cash used in operating activities (1,053,983) (786,975)
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (50,436) (100,860)
Patent costs (14,415) (5,274)
Purchases of Short-term investments (10,469,748) -
------------ ---------
Net cash used in investing activities (10,534,599) (106,134)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 13,224,552 722,583
Proceeds from issuance of warrants 50 -
Stock issuance costs (1,346,812) (3,132)
------------ ---------
Net cash provided by financing activities 11,877,790 719,451
------------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 289,208 (173,658)
CASH AND CASH EQUIVALENTS, beginning of period 538,708 955,728
------------ ---------
CASH AND CASH EQUIVALENTS, end of period $ 827,916 $ 782,070
------------ ---------
------------ ---------
</TABLE>
The accompanying notes are an integral part of these statements.
6
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ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(1) ORGANIZATION AND NATURE OF BUSINESS
Electroscope, Inc. (the "Company") was incorporated as a Colorado corporation
on February 1, 1991. The Company designs, develops, manufactures and markets
an innovative, patented monopolar electrosurgical shielding system and
integrated surgical instruments, which are designed to provide greater safety
to patients who undergo laparoscopic surgery. The Company has developed and
is selling a monitoring system which can be used with most electrosurgical
instruments available today. It has also developed and is selling its own
line of integrated shielded five millimeter electrosurgical instruments.
These products monitor for stray electrical energy during laparoscopy and
signals the electrosurgical generator to deactivate when this energy is
detected. The Company's sales to date have been made principally in the
United States. Prior to fiscal year 1994, the Company was in the development
stage.
The Company has incurred losses since its inception and has an accumulated
deficit of $4,749,729 at September 30, 1996. The Company's operations are
subject to certain risks and uncertainties, which include the following.
Commercial acceptance of the Company's products will have to occur in the
marketplace before the Company can attain successful operations. Other risks
and uncertainties include the possibility of substantial operating losses,
dependence on the Company's distributor, current and potential competitors
with greater financial, technical and marketing resources, management's plan
for growth and expansion, and the Company's limited manufacturing experience
for large-scale production.
The condensed interim financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures made are adequate to make the information presented not
misleading. The condensed interim financial statements should be read in
conjunction with the financial statements and the notes thereto, included in
the Company's Registration Statement on Form SB-2 as filed with the
Securities and Exchange Commission on June 25, 1996, for the fiscal year
ended March 31, 1996.
The accompanying condensed interim financial statements have been prepared,
in all material respects, in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and
reflect, in the opinion of management, all adjustments, which
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are of a normal recurring nature, necessary to summarize fairly the financial
position and results of operations for such periods. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
DISTRIBUTION AGREEMENT
On September 8, 1995, the Company signed a distribution agreement (the
"Distribution Agreement") with Valleylab Inc., a part of the Hospital
Products Group of Pfizer Inc. ("Valleylab"), pursuant to which Valleylab paid
a non-refundable fee of $150,000, placed a non-cancelable purchase order for
$400,000 of integrated electrosurgical instruments, and agreed to other terms
and conditions, some of which are discussed below. In exchange, the Company
granted to Valleylab the exclusive right to promote, sell and distribute its
products worldwide, subject to certain conditions.
The Distribution Agreement is exclusive until December 31, 1996, and, if
Valleylab meets its minimum purchase requirements outlined below, continues
to be exclusive during its term, ending June 30, 1999. Valleylab met the
purchase requirement for the period ended May 31, 1996, and accordingly, the
Distribution Agreement retains its exclusivity through December 31, 1996.
Valleylab's past and future minimum purchase requirements to retain its
exclusivity are as follows:
June 30, 1995 through May 31, 1996 . . . . . . . .$1,000,000
1996 calendar year . . . . . . . . . . . . . . . .$1,750,000
1997 calendar year . . . . . . . . . . . . . . . .$3,750,000
1998 calendar year . . . . . . . . . . . . . . . .$6,250,000
If, in any calendar year, Valleylab's actual purchases exceed the minimum
purchase requirements for that year, the increment will be added to the above
requirements for all subsequent calendar years. In the event that Valleylab
fails to meet the minimum requirements set forth, and as adjusted, the
Distribution Agreement becomes non-exclusive. As of September 30, 1996,
Valleylab had purchased $2,312,987 of system monitors and electrosurgical
instruments under the Distribution Agreement, of which $1,108,387 related to
purchases in calendar year 1996.
As a result of the Company's transition to a new generation of products
designed to deal with human engineering issues and a delay in the completion
of documentation necessary in conjunction with the Distribution Agreement,
Valleylab will not meet its minimum purchase requirements for calendar year
1996, and the relationship will become non-exclusive in 1997. The Company
and Valleylab plan to work jointly to develop the market for the Company's
products, with the Company planning to expand its internal sales force.
Under the Distribution Agreement, Valleylab is responsible for direct sales
of the Company's electrosurgical products and accessories. The Company
maintains its own marketing and sales specialists, and is entitled to expand
its own sales force as needed to support the Valleylab sales effort.
During the exclusive phase of the Distribution Agreement, Valleylab has the
right to terminate on 60 days notice only if the Company has breached any
term or condition of the Distribution Agreement and fails to cure such breach
within such 60-day period. During the non-exclusive
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phase of the Distribution Agreement, Valleylab has the right to terminate
(with or without a breach of the Company) on 60 days written notice.
(2) INITIAL PUBLIC OFFERING
In June 1996, the Company completed an initial public offering of 1,200,000
shares of its common stock at a price per share of $10.50, of which all
shares were sold by the Company. After underwriting discounts, commissions
and other expenses, net proceeds to the Company from the offering were
approximately $11.4 million.
In connection with the initial public offering, the Company sold, for a
nominal purchase price, a five-year warrant to purchase up to 120,000 shares
of common stock, exercisable at 120% of the initial offering price, or $12.60
per share. In accordance with Statement of Financial Accounting Standards No.
123 (SFAS No. 123), "Accounting for Stock-Based Compensation," the fair value
of the warrant sold is estimated using an option-pricing model. In
accordance with SFAS No. 123, the option-pricing model takes into account as
of the date the warrant is issued the exercise price, life of the warrant,
current price of the common stock, expected common stock volatility and the
risk-free interest rate for the expected term of the warrant. Based on this
valuation methodology, the Company has recorded the fair value of the warrant
sold at $290,400. The difference between the fair value of the warrant and
the nominal purchase price has been recorded as a deduction from the net
proceeds to the Company from the offering.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all cash
and highly liquid investments with an original maturity of three months or
less to be cash equivalents. As of September 30, 1996, the Company's cash
and cash equivalents consisted of demand deposits and money market accounts
in banks and other financial institutions, which approximated market value.
LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Loss per common share and common equivalent share for all periods presented
is computed using the sum of the weighted average number of shares of common
stock and common stock equivalent shares from common stock options and
warrants. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by
the Company at prices significantly below the assumed public offering price
during the
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twelve month period prior to the offering date (using the treasury stock
method and an initial offering price of $10.50 per share), have been included
in the calculation as if they were outstanding for all periods presented
regardless of whether they are antidilutive. Options and warrants for the
Company's common stock issued prior to this one-year period have been
excluded as they are antidilutive. Subsequent to the offering date, the
Company has reported earnings per share in accordance with Accounting
Principles Board Opinion No. 15, "Earnings per Share."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, short-term investments
and short-term trade receivables and payables. The carrying values of cash,
short-term investments and short-term trade receivables and payables
approximate their fair value. The short-term investments, as of September
30, 1996, consist primarily of government securities which the Company
classifies as hold-to-maturity.
INVENTORY
Inventory consists primarily of component parts and raw materials, and is
valued at the lower of cost (first-in, first-out basis) or market. Inventory
consists of the following:
September 30, March 31
1996 1996
-------------- ----------
Raw materials $326,492 $286,331
Work in process 365,914 437,856
Finished goods 81,725 144,230
------- -------
774,131 868,417
Less- Reserve for obsolescence (68,599) (65,000)
------- -------
$705,532 $803,417
------- -------
------- -------
(4) COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation by the United States Food and Drug
Administration ("FDA"). The FDA provides regulations governing the
manufacture and sale of the Company's products and regularly inspects the
Company and other manufacturers to determine their compliance with these
regulations.
As a result of one such inspection, the FDA issued a Warning Letter on March
4, 1994 to the Company, noting certain deficiencies of its Good Manufacturing
Practices ("GMP"). The Company believes it has adequately addressed such
deficiencies. The Company has hired an experienced manager to supervise its
compliance with FDA requirements and address such deficiencies. The Company
was last inspected in April 1995, and has not, at September 30, 1996, been
notified of any deficiencies from that inspection. FDA inspections are
conducted
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approximately every two years after approval is obtained or on a more
frequent basis, at the discretion of the FDA.
Under the terms of the Distribution Agreement, after termination, Valleylab
may sell for a period of six months, any inventory of products held by it at
the date of termination. In the event of termination, the Company has the
obligation to purchase from Valleylab products held in Valleylab's inventory,
if any, to the extent such products are salable and non-obsolete and have
been received by Valleylab within nine months of the latter of the date of
termination or the post-termination sales period.
Because of seasonal and other factors, the results of operations for the
three-month period and the six-month period ended September 30, 1996, should
not be taken as an indication of operations for all or any part of the
balance of the year.
(5) MANAGEMENT'S REPRESENTATIONS
In the opinion of the Company, the accompanying unaudited condensed interim
financial statements include all adjustments necessary for the fair
presentation of the financial position of the Company at September 30, 1996
and March 31, 1996, and the results of operations and cash flows for the
three and six month periods ended September 30, 1996 and 1995. The condensed
interim financial information and notes thereto should be read in conjunction
with the financial statements and notes for the fiscal years ended March 31,
1996 and 1995 included in the Company's Registration Statement, as amended,
dated June 25, 1996, filed with the Securities and Exchange Commission on
Form SB-2.
11
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company manufactures and markets a line of proprietary electrosurgical
products that are designed to provide greater safety to patients who undergo
minimally invasive electrosurgery. The Company believes that its patented
Electroshield Monitoring System offers surgeons significant advantages
compared to other electrosurgical systems in use because of its ability to
monitor dynamically for stray electrical energy out of the view of the
surgeon during MIS procedures. The Company has received three FDA Form
510(k) notifications for its products and obtained patent protection for its
products' basic shielding and monitoring features. In September 1995, the
Company entered into an exclusive worldwide Distribution Agreement with
Valleylab, part of the Hospital Products Group of Pfizer, Inc., pursuant to
which Valleylab was required to make certain minimum purchases through
calendar year 1998 in order to retain its exclusive rights. As a result of
the Company's transition to a new generation of products designed to deal
with human engineering issues and a delay in the completion of documentation
necessary in conjunction with the Distribution Agreement, Valleylab will not
meet the minimum purchase requirements for calendar year 1996, and the
relationship will become non-exclusive in 1997. The Company and Valleylab
plan to work jointly to develop the market for the Company's products, with
the Company planning to expand its internal sales force. This decision will
result in added sales expense in the near term. However, the Company
believes that a joint effort with Valleylab will result in intensified sales
efforts, and thus additional sales in future periods.
Statements herein that are not historical facts, including statements about
the Company's strategies and expectations about new and exhibiting products,
technologies and opportunities, demand and acceptance of the Company's
products and future sales of these products, both by the Company directly and
by Valleylab, are forward looking statements that involve several risks as
described in the Company's Registration Statement No. 333-4118-D on Form SB-2
on file with the Securities and Exchange Commission. Actual results could
differ materially from those described in said forward looking statements.
HISTORICAL PERSPECTIVE AND OUTLOOK
The Company was organized in February 1991. During its first two years, the
Company developed the EM-2 Electronic Monitor and adaptive sheaths to work
with traditional electrosurgical instruments. During this period, the
Company applied for patents with the United States Patent Office and
conducted clinical trials. In 1993, the Company hired a vice president of
sales and marketing and recruited clinical sales specialists. The Company
also continued work on its patent applications and formulated development
plans for shielded hinged tip and fixed tip electrosurgical instruments. As
this development program proceeded it became apparent that the merging of
electrical and mechanical engineering skills in the instrument development
process for the Company's patented, integrated electrosurgical instruments
was more difficult than was expected at first. As a result, the development
of the instruments with the Electroshield AEM technology was not completed
until 1995. The Company introduced integrated instruments for the
Electroshield Monitoring System in November 1995.
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The installed base of the Company's EM-2 Electronic Monitor has continued to
increase since the introduction of the product in 1994. The Company believes
such installed base has the potential for increasing rapidly as the Valleylab
sales representatives become familiar with the Electroshield Monitoring
System and sell the system to their customers. The approximate number of
EM-2 Electronic Monitors sold were 138, 321 and 567 in each of the fiscal
years ended March 31, 1994, 1995 and 1996, respectively. The Company expects
that the sales of electrosurgical instruments and accessories should increase
as additional EM-2 Electronic Monitors are installed.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $4,749,729 as of September 30, 1996. Due to the early
stage of marketing efforts by Electroscope's worldwide distributor,
Valleylab, the Company believes that it may continue to operate at a net loss
for several quarters. The Company believes its results of operations may
fluctuate on a quarterly basis as a result of the size and frequency of sales
to Valleylab, the timing of which are solely of the discretion of Valleylab
and the expansion of its internal sales force resulting in added sales
expense. Such fluctuations may be significant, and may result in the Company
operating at a loss in any one period even after a period of profitability.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
NET REVENUES. Revenues for the three months ended September 30, 1996, were
$359,287, compared to $479,350 for the three months ended September 30, 1995,
a decrease of 25%. The decrease is attributable to reduced sales to
Valleylab for the three months ended September 30, 1996 resulting from
Valleylab making significant stocking purchases prior to March 31, 1996, to
develop an inventory of finished goods. In addition, the Company experienced
a delay in the transition to a new generation of products designed to deal
with human engineering issues as the necessary documentation was not
completed in accordance with the Distribution Agreement. The Company
anticipates revenue growth for the remainder of the fiscal year ended March
31, 1997 ("Fiscal Year 1997") as the Company's arrangement with Valleylab
continues and the Company's internal sales force is developed to expand its
installed base of Electroshield Monitoring Systems with resulting increases
in sales of electrosurgical instruments and adaptive sheaths used by this
installed equipment.
GROSS PROFIT. The gross profit for the three months ended September 30,
1996, of $43,957 decreased by $269,082 (an 86% decrease) from the three
months ended September 30, 1995 gross profit of $313,039. Gross profit as a
percentage of revenue decreased from 65% for the three months ended September
30, 1995 to 12% in the three months ended September 30, 1996. Gross profit
and gross profit as a percentage of revenue can be expected to fluctuate from
quarter to quarter, as a result of product sales mix and sales volume. Gross
margins are expected to be approximately 50% at higher levels of production
and sales. These gross margins are currently not being achieved because of
the costs incurred and expenses related to the enlarged manufacturing
capacity, which resulted from expansions in facilities and manufacturing
staff in anticipation of higher future production requirements in support of
Valleylab's sales efforts, as well as higher manufacturing costs associated
with early stage production of hinged tip instruments.
SALES AND MARKETING EXPENSES. Sales and marketing expenses of $237,550 for
the three months ended September 30, 1996 decreased by $46,209 (a 16%
decrease) compared to the three months ended
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September 30, 1995 of $283,759. The decrease is the result of a reduction of
one Company sales representative for the three months ended September 30,
1996 as compared to the same period the previous year. In addition, the
exclusive distribution agreement with Valleylab reduced the Company's
requirements for direct sales activities, for which it was responsible for
the majority of the September 30, 1995 quarter. The Company believes that
sales and marketing expenses will increase as a result of the expansion of
its internal sales force which is necessary since Valleylab will not maintain
its exclusive distribution rights.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 56% from $120,669 for the three months ended September 30, 1995 to
$187,937 for the three months ended September 30, 1996. This increase was
primarily due to overall increase in the number of personnel and the
expansion of the Company's quality assurance department, which is responsible
for maintaining the Company's compliance with the FDA's manufacturing
requirements.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$141,548 for the three months ended September 30, 1995 to $159,128 for the
three months ended September 30, 1996, an 12% increase, reflecting the
Company's ongoing product development efforts, which are expected to increase
modestly in Fiscal Year 1997.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1995
NET REVENUES. Revenues for the six months ended September 30, 1996, were
$772,929, compared to $1,007,716 for the six months ended September 30, 1995,
a decrease of 23%. The decrease is attributable to reduced sales to
Valleylab for the six months ended September 30, 1996 resulting from
Valleylab making significant stocking purchases prior to March 31, 1996, to
develop an inventory of finished goods. In addition, the Company experienced
a delay in the transition to a new generation of products designed to deal
with human engineering issues as the necessary documentation was not
completed in accordance with the Distribution Agreement. The Company
anticipates revenue growth for the remainder of Fiscal Year 1997 as the
Company's arrangement with Valleylab continues and the Company's internal
sales force is developed to expand its installed base of Electroshield
Monitoring Systems with resulting increases in sales of electrosurgical
instruments and adaptive sheaths used by this installed equipment.
GROSS PROFIT. The gross profit for the six months ended September 30, 1996,
of $148,083 decreased by $248,389 (a 63% decrease) from the six months ended
September 30, 1995 gross profit of $396,472. Gross profit as a percentage of
revenue decreased from 39% for the six months ended September 30, 1995 to 19%
in the six months ended September 30, 1996. Gross profit and gross profit as
a percentage of revenue can be expected to fluctuate from quarter to quarter,
as a result of product sales mix and sales volume. Gross margins are
expected to be approximately 50% at higher levels of production and sales.
These gross margins are currently not being achieved because of the costs
incurred and expenses related to the enlarged manufacturing capacity, which
resulted from expansions in facilities and manufacturing staff in
anticipation of higher future production requirements in support of
Valleylab's sales efforts, as well as higher manufacturing costs associated
with early stage production of hinged tip instruments.
14
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses of $420,777 for
the six months ended September 30, 1996 decreased by $57,224 (a 12% decrease)
compared to the six months ended September 30, 1995 of $478,001. The
decrease is the result of a reduction of one Company sales representative for
the six months ended September 30, 1996 as compared to the same period the
previous year. In addition, the exclusive distribution agreement with
Valleylab reduced the Company's requirements for direct sales activities, for
which it was responsible for five months in the September 30, 1995 interim
period. The Company believes that sales and marketing expenses will increase
as a result of the expansion of its internal sales force which is necessary
since Valleylab will not maintain its exclusive distribution rights.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 41% from $244,261 for the six months ended September 30, 1995 to
$343,505 for the six months ended September 30, 1996. This increase was
primarily due to overall increase in the number of personnel and the
expansion of the Company's quality assurance department, which is responsible
for maintaining the Company's compliance with the FDA's manufacturing
requirements.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$264,333 for the six months ended September 30, 1995 to $285,830 for the six
months ended September 30, 1996, an 8% increase, reflecting the Company's
ongoing product development efforts, which are expected to increase modestly
in Fiscal Year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements principally
through sales of Common Stock which totaled $5,304,051 through March 31,
1996, and, to a lesser degree, funds provided by sales of the Company's
products. In the first quarter of Fiscal Year 1997, the Company completed
its initial public offering, raising net proceeds of $11.4 million, and
raised an additional $585,000 in cash from the exercise of warrants issued in
connection with previous sales of Common Stock. Historically, these funds
have been used for working capital and general corporate purposes. The
Company may use working capital to build inventories, to ensure that orders
can be filled in a timely manner, to support the sales efforts of Valleylab,
to develop its internal sales force to support and to accommodate anticipated
growth. While net proceeds from the Company's initial public offering are
currently invested in government securities, the Company may also use a
substantial portion of the net proceeds for the acquisition or development of
complementary products or businesses, if such acquisition or development
opportunities arise. The Company currently has no understanding, commitment
or agreement with respect to any such acquisition or development program.
Capital expenditures historically have been relatively minor, and have
consisted of specialized equipment, manufacturing equipment, office equipment
and leasehold improvements. The Company anticipates that its cash on hand,
the proceeds from the warrant exercise discussed in the foregoing paragraph,
net cash provided by its sales, and the proceeds from the offering will be
15
<PAGE>
sufficient to fund its operations, working capital and capital requirements
for at least twelve months following the offering.
The Company believes that to be successful in rapidly penetrating the market
for electrosurgical products, it must be able to deliver quickly all its
products to its distributor, Valleylab, when orders are received. The
Distribution Agreement provides that Valleylab will submit non-binding
forecasts of sales to the Company by product to facilitate manufacturing
operations. Given the relatively short time the Distribution Agreement has
been in force, however, it is not yet clear what the customer ordering
patterns are likely to be. For this reason, the Company has chosen to build
an inventory of its products, based on its own experience to date, somewhat
ahead of the orders placed thus far, and in anticipation of increasing end
user orders. This decision accounts for the higher level of finished goods,
work in progress and raw materials than might be expected at this stage of
the Company's development.
INCOME TAXES
Net operating loss carryforwards totaling approximately $4.5 million are
available to reduce taxable income as of September 30, 1996. The net
operating loss carryforwards expire, if not previously utilized, at various
dates beginning in the year 2006. The Company has not paid income taxes
since its inception. The Tax Reform Act of 1986 and other income tax
regulations contain provisions which may limit the net operating loss
carryforwards available to be used in any given year, if certain events
occur, including changes in ownership interests. The Company has established
a valuation allowance for the entire amount of its deferred tax asset since
inception due to its history of operating losses.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - Not Applicable
ITEM 2 - Not Applicable
ITEM 3 - Not Applicable
ITEM 4 - Not Applicable
ITEM 5 - Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Distribution Agreement dated September 8, 1995 between
Electroscope, Inc. and Valleylab Inc.*
10.2 - Lease Agreement dated September 11, 1995 between
Electroscope, Inc. and Sterling Partnership.*
10.3 - Electroscope, Inc. Stock Option Plan, as amended.*
11(a) and 11(b) - Computation of Net Income (Loss) per Common
Share and Common Equivalent Share.
27 - Financial Data Schedule.
* Similarly denoted as an Exhibit to Registration Statement No. 333-4118-D
on Form SB-2 and incorporated herein by reference.
(b) The Registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Electroscope has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Name Title Date
- ------------------------- --------------------------- ------------------------
/s/ Vern D. Kornelsen Chief Financial Officer October 30, 1996
- ------------------------- (Principal Accounting Officer)
Vern D. Kornelsen Secretary/Treasurer and Director
18
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ------------- ------------------------------------------------ -------------
11(a) Computation of Net Income (Loss) per
Common Share and Common Equivalent Share
for the Three Months Ended September 30, 1996 20
11(b) Computation of Net Income (Loss) per
Common Share and Common Equivalent Share
for the Six Months Ended September 30, 1996 21
27 Financial Data Schedule 22
19
<PAGE>
EXHIBIT 11(a)
ELECTROSCOPE, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
September 30, September 30,
1996 1995
------------ -------------
<S> <C> <C>
NET INCOME (LOSS) $ (371,963) $ (227,371)
----------- -----------
----------- -----------
SHARES USED IN SHARE COMPUTATION-
Common stock shares outstanding (weighted average) 5,295,253 3,700,036
Treasury stock effect of common stock and
equivalents issued within one year of the public
offering at prices less than the public offering price - 74,352
----------- -----------
Shares used in computation 5,295,253 3,774,388
----------- -----------
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $(0.07) $(0.06)
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
EXHIBIT 11(b)
ELECTROSCOPE, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
-----------------------------
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
NET INCOME (LOSS) $ (717,280) $ (579,556)
----------- -----------
----------- -----------
SHARES USED IN SHARE COMPUTATION-
Common stock shares outstanding (weighted average) 4,724,850 3,662,658
Treasury stock effect of common stock and
equivalents issued within one year of the public
offering at prices less than the public offering price 28,185 82,994
----------- -----------
Shares used in computation 4,753,035 3,745,652
----------- -----------
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $(0.15) $(0.15)
----------- -----------
----------- -----------
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Electroscope, Inc. balance sheet as of September 30, 1996 and statements of
operation and cash flows for the six months ended September 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 827,916
<SECURITIES> 10,469,748
<RECEIVABLES> 225,165
<ALLOWANCES> 33,428
<INVENTORY> 705,532
<CURRENT-ASSETS> 12,416,926
<PP&E> 195,012
<DEPRECIATION> (153,322)
<TOTAL-ASSETS> 12,780,594
<CURRENT-LIABILITIES> 258,475
<BONDS> 0
0
0
<COMMON> 16,842,428
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 12,780,594
<SALES> 772,929
<TOTAL-REVENUES> 772,929
<CGS> 624,846
<TOTAL-COSTS> 1,050,112
<OTHER-EXPENSES> (184,749)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (717,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (717,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (717,280)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
