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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 December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 0-28604
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ELECTROSCOPE, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1162056
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4828 STERLING DRIVE, BOULDER, COLORADO 80301
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(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 444-2600
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(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
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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 5,389,986 SHARES
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Class (outstanding at February 7, 1997)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 1996
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements........................ 3
- Condensed Balance Sheets as of December 31,
1996 and March 31, 1996..................................... 3
- Condensed Statements of Operations for
the Three Months Ended December 31, 1996 and 1995........... 4
- Condensed Statements of Operations for the
Nine Months Ended December 31, 1996 and 1995................ 5
- Condensed Statements of Cash Flows for
the Nine Months Ended December 31, 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
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PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
December 31, March 31,
ASSETS 1996 1996
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,609,414 $ 538,708
Short-term investments, net of discount
of $232,385 (Note 3) 9,507,615 -
Accounts receivable, net of allowance for doubtful
accounts of $129,340 and $33,428, respectively 192,742 110,465
Inventory, net of reserve for obsolescence of $294
and $65,000, respectively 625,110 803,417
Other current assets 34,616 -
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Total current assets 11,969,497 1,452,590
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EQUIPMENT, at cost:
Furniture, fixtures and equipment 450,093 304,735
Less- Accumulated depreciation (181,787) (111,265)
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Equipment, net 268,306 193,470
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PATENTS, net 127,552 99,161
OTHER ASSETS 60,742 80,739
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Total assets $12,426,097 $ 1,825,960
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 112,955 $ 130,368
Accrued compensation 98,501 94,448
Other accrued liabilities 57,465 93,109
Customer deposits 20,223 116,521
Other current liabilities 6,639 6,639
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Total current liabilities 295,783 441,085
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LONG-TERM LIABILITIES:
Deferred revenue (Note 1) 117,647 135,703
Other long-term liabilities 19,252 19,746
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Total long-term liabilities 136,899 155,449
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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, 5,389,986 and 3,893,402
shares outstanding, respectively 16,998,440 5,255,039
Warrants to purchase common stock 290,400 -
Accumulated deficit (5,295,425) (4,025,613)
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Total shareholders' equity 11,993,415 1,229,426
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Total liabilities and shareholders' equity $12,426,097 $ 1,825,960
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended December 31,
-----------------------
1996 1995
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REVENUE, net $ 378,887 $ 823,000
COST OF SALES 323,613 532,734
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Gross profit 55,274 290,266
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OPERATING EXPENSES:
Sales and marketing 329,305 265,280
General and administrative 272,408 180,348
Research and development 160,565 133,978
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Total operating expenses 762,278 579,606
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INCOME (LOSS) FROM OPERATIONS (707,004) (289,340)
OTHER INCOME:
Interest income 150,162 5,286
Other income (expense) 4,310 (111)
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NET INCOME (LOSS) $(552,532) $(284,165)
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NET INCOME (LOSS) PER SHARE (Note 3):
Net income (loss) per common share and common
equivalent share $ (0.10) $ (0.07)
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Shares used in computing net income (loss) per
common share and common equivalent share 5,340,820 3,788,878
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The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months
Ended December 31,
-----------------------
1996 1995
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REVENUE, net $ 1,151,816 $1,830,716
COST OF SALES 948,459 1,143,978
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Gross profit 203,357 686,738
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OPERATING EXPENSES:
Sales and marketing 750,082 743,281
General and administrative 615,913 424,609
Research and development 446,395 398,311
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Total operating expenses 1,812,390 1,566,201
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INCOME (LOSS) FROM OPERATIONS (1,609,033) (879,463)
OTHER INCOME:
Interest income 323,022 16,165
Other income (expense) 16,199 (423)
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NET INCOME (LOSS) $(1,269,812) $ (863,721)
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NET INCOME (LOSS) PER SHARE (Note 3):
Net income (loss) per common share and common
equivalent share $ (0.26) $ (0.23)
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Shares used in computing net income (loss) per
common share and common equivalent share 4,950,343 3,760,052
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The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended December 31,
--------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,269,812) $ (863,721)
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
Depreciation and amortization 71,587 52,498
Discount amortization (260,141) -
Changes in operating assets and liabilities-
Accounts receivable (82,777) (167,411)
Inventory 178,307 (459,755)
Other current assets (34,616) -
Other assets 19,997 (11,264)
Accounts payable (17,413) (10,853)
Accrued compensation and other accrued liabilities (31,591) (18,977)
Customer deposits (96,298) (11,258)
Deferred revenue (18,056) 150,000
Other liabilities 494 26,042
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Net cash used in operating activities (1,540,319) (1,314,699)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (145,847) (144,006)
Patent costs (29,457) (9,380)
Purchases of short-term investments, net of
discounts (19,212,474) -
Sales of short-term investments 9,965,000 -
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Net cash used in investing activities (9,422,778) (153,386)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 13,437,053 829,419
Proceeds from issuance of warrants 50 -
Stock issuance costs (1,403,300) (3,132)
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Net cash provided by financing activities 12,033,803 826,287
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,070,706 (641,798)
CASH AND CASH EQUIVALENTS, beginning of period 538,708 955,728
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CASH AND CASH EQUIVALENTS, end of period $ 1,609,414 $ 313,930
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The accompanying notes are an integral part of these statements.
6
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ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 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
signal 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 $5,295,425 at December 31, 1996. The Company's operations are
subject to certain risks and uncertainties. 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, the Company's ability to expand
its internal sales force, 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, including minimum purchase
requirements. In the event that Valleylab fails to meet the minimum
requirements, the Distribution Agreement becomes non-exclusive with or
without a breach by the Company.
The Distribution Agreement was exclusive until December 31, 1996, and, if
Valleylab had met its minimum purchase requirements outlined below, would
have continued 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. 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 documentation by Valleylab in accordance with the Distribution
Agreement, Valleylab did not meet these requirements for 1996, and the
relationship has become non-exclusive in 1997.
Valleylab's minimum purchase requirements to retain its exclusivity were 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
As of December 31, 1996, Valleylab had purchased $2,892,897 of system
monitors and electrosurgical instruments under the Distribution Agreement, of
which $1,373,578 related to purchases in calendar year 1996.
During the non-exclusive 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, five-year warrants to purchase up to 120,000 shares
of common stock, exercisable at 120% of the initial
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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 warrants 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 warrants are issued the exercise
price, life of the warrants, current price of the common stock, expected
common stock volatility and the risk-free interest rate for the expected term
of the warrants. Based on this valuation methodology, the Company has
recorded the fair value of the warrants sold at $290,400. The difference
between the fair value of the warrants 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 December 31, 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 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
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December 31, 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:
December 31, March 31,
1996 1996
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Raw materials $300,199 $286,331
Work in process 233,790 437,856
Finished goods 91,415 144,230
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625,404 868,417
Less- Reserve for obsolescence (294) (65,000)
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$625,110 $803,417
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(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 December 31, 1996, been
notified of any deficiencies from that inspection. FDA inspections are
conducted 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 later 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 nine-month period ended December 31, 1996, should
not be taken as an indication of operations for all or any part of the
balance of the year.
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(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 December 31, 1996
and March 31, 1996, and the results of operations and cash flows for the
three and nine-month periods ended December 31, 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.
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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 minimally invasive surgery ("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
documentation necessary in conjunction with the Company's marketing agreement
with Valleylab, Valleylab did not meet the minimum purchase requirements for
1996, and the relationship has become non-exclusive for 1997.
The Company is unable to determine Valleylab's commitment to the development
of the market for the Company's products. As a result, the Company is
expanding its internal sales force which should result in intensified sales
efforts, and thus additional sales in future periods. This effort will also
eliminate the Company's prior dependence on Valleylab for market development
as part of the exclusive Distribution Agreement.
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
12
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technology was not completed until 1995. The Company introduced integrated
instruments for the Electroshield Monitoring System in November 1995.
The installed base of the Company's EM-2 Electronic Monitor has continued to
increase since the introduction of the product in 1994. 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 $5,295,425 as of December 31, 1996. Due to the
Company's prior dependence on Valleylab for market development and the
Company's requirement to expand its internal sales force to generate
additional sales, 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 its distributors 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 DECEMBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1995
NET REVENUES. Revenues for the three months ended December 31, 1996, were
$378,887, compared to $823,000 for the three months ended December 31, 1996,
a decrease of 54%. The decrease is attributable to reduced sales to
Valleylab for the three months ended December 31, 1996. 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 by Valleylab in accordance with the Distribution Agreement.
The Company anticipates revenue growth in fiscal year ended March 31, 1998
("Fiscal Year 1998") as the Company's internal sales force will be developed
and the Company can establish relationships with additional distributors,
however, there is no assurance that revenue growth will occur in that fiscal
year.
GROSS PROFIT. The gross profit for the three months ended December 31, 1996,
of $55,274 decreased by $234,992 (an 81% decrease) from the three months ended
December 31, 1995 gross profits of $290,266. Gross profit as a percentage of
revenue decreased from 35% for the three months ended December 31, 1995 to 15%
for the three months ended December 31, 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 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 market development, as
well as higher manufacturing costs associated with early stage production of
hinged tip instruments.
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SALES AND MARKETING EXPENSES. Sales and marketing expenses of $329,305 for the
three months ended December 31, 1996 increased by $64,025 (a 24% increase)
compared to the three months ended December 31, 1995 of $265,280. The increase
is the result of the hiring of a Director of Market Development and initiating
a marketing and advertising plan during the three months ended December 31,
1996 as a result of Valleylab not maintaining its exclusive distribution rights
and the Company's prior dependence on Valleylab for market development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 51% from $180,348 for the three months ended December 31, 1995 to
$272,408 for the three months ending December 31, 1996. This increase was
primarily due to overall increases 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
$133,978 for the three months ended December 31, 1995 to $160,565 for the three
months ended December 31, 1996, a 20% increase, reflecting the Company's
ongoing product development efforts, which are expected to increase modestly in
Fiscal Year 1997.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 1995
NET REVENUES. Revenues for the nine months ended December 31, 1996, were
$1,151,816 compared to $1,830,716 for the nine months ended December 31, 1995,
a decrease of 37%. The decrease is attributable to reduced sales to Valleylab
for the nine months ended December 31, 1996. 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 in Fiscal 1998 as the Company's internal sales force will be developed
and the Company can establish relationships with additional distributors,
however, there is no assurance that revenue growth will occur in that fiscal
year.
GROSS PROFIT. The gross profit for the nine months ended December 31, 1996, of
$203,357 decreased by $483,381 (a 70% decrease) from the nine months ended
December 31, 1995 gross profit of $686,738. Gross profit as a percentage of
revenue decreased from 38% for the nine months ended December 31, 1995 to 18%
for the nine months ended December 31, 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 market development, as
well as higher manufacturing costs associated with early stage production of
hinged tip instruments.
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SALES AND MARKETING EXPENSES. Sales and marketing expenses of $750,082 for
the nine months ended December 31, 1996 increased by $6,801 (a 1% increase)
compared to the nine months ended December 31, 1995. The Company believes that
sales and marketing expenses will increase with the expansion of the internal
sales force as a result of Valleylab not maintaining its exclusive distribution
rights and the Company's prior dependence on Valleylab for market development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 45% from $424,609 for the nine months ended December 31, 1995 to
$615,913 for the nine months ended December 31, 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
$398,311 for the nine months ended December 31, 1995 to $446,395 for the nine
months ended December 31, 1996, a 12% increase, reflecting the Company's
continued 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 the Company's expanded internal sales
force and distributors 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
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 when orders are received. 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.
15
<PAGE>
INCOME TAXES
Net operating loss carryforwards totaling approximately $5 million are
available to reduce taxable income as of December 31, 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
11(a) and 11(b) - Computation of Net Income (Loss) per
Common Share and Common Equivalent Share.
27 - Financial Data Schedule.
(b) The Registrant did not file any reports on Form 8-K during
the quarter ended December 31, 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 February 7, 1997
- -------------------------- (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 December 31, 1996 20
11(b) Computation of Net Income (Loss) per
Common Share and Common Equivalent Share
for the Nine Months Ended December 31, 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)
For the Three Months Ended
----------------------------
December 31, December 31,
1996 1995
------------ ------------
NET INCOME (LOSS) $ (552,532) $ (284,165)
------------ ------------
------------ ------------
SHARES USED IN SHARE COMPUTATION-
Common stock shares outstanding (weighted average) 5,340,820 3,734,776
Treasury stock effect of common stock and
equivalents issued within one year of the public
offering at prices less than the public offering
price - 54,102
------------ ------------
Shares used in computation 5,340,820 3,788,878
------------ ------------
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ (0.10) $ (0.07)
------------ ------------
------------ ------------
20
<PAGE>
EXHIBIT 11(b)
ELECTROSCOPE, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(UNAUDITED)
For the Nine Months Ended
----------------------------
December 31, December 31,
1996 1995
------------ ------------
NET INCOME (LOSS) $(1,269,812) $(863,721)
------------ ------------
------------ ------------
SHARES USED IN SHARE COMPUTATION-
Common stock shares outstanding (weighted average) 4,893,979 3,686,665
Treasury stock effect of common stock and
equivalents issued within one year of the public
offering at prices less than the public offering
price 56,364 73,387
------------ ------------
Shares used in computation 4,950,343 3,760,052
------------ ------------
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ (0.26) $ (0.23)
------------ ------------
------------ ------------
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Electroscope, Inc. balance sheet as of December 31, 1996 and statements of
operation and cash flows for the nine months ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,609,414
<SECURITIES> 9,740,000
<RECEIVABLES> 322,082
<ALLOWANCES> 129,340
<INVENTORY> 625,110
<CURRENT-ASSETS> 11,969,497
<PP&E> 450,093
<DEPRECIATION> 181,787
<TOTAL-ASSETS> 12,426,097
<CURRENT-LIABILITIES> 295,783
<BONDS> 0
0
0
<COMMON> 16,998,440
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 12,426,097
<SALES> 1,151,815
<TOTAL-REVENUES> 1,151,815
<CGS> 948,459
<TOTAL-COSTS> 1,812,390
<OTHER-EXPENSES> (339,221)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,269,812)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,269,812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,269,812)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
