<PAGE>
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,
1998
For the transition period from __________ to________
Commission file number 0-28604
-------
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 5,383,507 SHARES
- -------------------------------------------------------------------------------
Class (outstanding at January 26, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES _____ NO __X__
1
<PAGE>
ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements............................................. 3
- Condensed Balance Sheets as of December 31,
1998 and March 31, 1998......................................................... 3
- Condensed Statements of Operations for
the Three Months Ended December 31, 1998 and 1997............................... 4
Condensed Statements of Operations for
the Nine Months Ended December 31, 1998 and 1997................................ 5
- Condensed Statements of Cash Flows for
the Nine Months Ended December 31, 1998 and 1997................................ 6
- Notes to Condensed Interim Financial
Statements...................................................................... 7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations................................ 10
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K................................................... 15
SIGNATURES ........................................................................................ 16
EXHIBIT INDEX ..................................................................................... 17
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
ASSETS ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,023,206 $ 2,525,026
Short-term investments, net 3,718,583 3,674,729
Accounts receivable, net of allowance for doubtful
accounts of $7,500 and $7,500, respectively 269,697 321,150
Inventory, net of reserve for obsolescence of $70,318
and $140,000 respectively 464,512 543,006
Prepaid expenses 93,473 63,259
------------ ------------
Total current assets 5,569,471 7,127,170
------------ ------------
EQUIPMENT, at cost:
Furniture, fixtures and equipment 647,147 621,607
Less- Accumulated depreciation (483,359) (380,659)
------------ ------------
Equipment, net 163,788 240,948
------------ ------------
PATENTS, net of accumulated amortization of $12,792 and $11,830, 120,336 186,454
respectively
OTHER ASSETS 14,077 11,450
------------ ------------
Total assets $ 5,867,672 $ 7,566,022
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 67,571 $ 99,430
Accrued compensation 107,437 150,635
Other accrued liabilities 203,975 191,871
Customer deposits --- 4,376
Other current liabilities 4,224 6,639
------------ ------------
Total current liabilities 383,207 452,951
------------ ------------
LONG-TERM LIABILITIES:
Other long-term liabilities 3,391 5,331
------------ ------------
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,
5,383,507 and 5,383,507 shares outstanding, respectively 16,941,317 16,941,317
Warrants to purchase common stock 290,400 290,400
Accumulated deficit (11,750,643) (10,123,977)
------------ ------------
Total shareholders' equity 5,481,074 7,107,740
------------ ------------
Total liabilities and shareholders' equity $ 5,867,672 $ 7,566,022
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUE, net $ 405,007 $ 266,530
COST OF SALES 262,134 319,360
--------- ---------
Gross profit 142,873 (52,830)
--------- ---------
OPERATING EXPENSES:
Sales and marketing 374,938 396,329
General and administrative 194,621 327,610
Research and development 170,266 122,957
--------- ---------
Total operating expenses 739,825 846,896
--------- ---------
INCOME (LOSS) FROM OPERATIONS (596,952) (899,726)
OTHER INCOME:
Interest income 73,585 101,388
Other income (expense) (1,203) (82)
--------- ---------
NET INCOME (LOSS) $(524,570) $(798,420)
--------- ---------
--------- ---------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $ (0.10) $ (0.15)
--------- ---------
--------- ---------
Basic and diluted weighted average shares used in computing
net income (loss) per common share 5,383,507 5,383,507
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE, net $ 1,087,313 $ 907,274
COST OF SALES 772,039 906,647
----------- -----------
Gross profit 315,274 627
----------- -----------
OPERATING EXPENSES:
Sales and marketing 1,021,430 1,455,635
General and administrative 708,458 1,076,864
Research and development 436,273 512,737
----------- -----------
Total operating expenses 2,166,161 3,045,236
----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,850,887) (3,044,609)
OTHER INCOME:
Interest income 229,904 325,089
Other income (expense) (5,683) (22,668)
----------- -----------
NET INCOME (LOSS) $(1,626,666) $(2,742,188)
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $ (0.30) $ (0.51)
----------- -----------
----------- -----------
Basic and diluted weighted average shares used in computing
net income (loss) per common share 5,383,507 5,375,488
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,626,666) $(2,742,188)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 185,110 153,437
Amortization of discount (133,028) (163,268)
Common stock issued in lieu of cash --- 100,750
Changes in operating assets and liabilities-
Accounts receivable 51,453 10,485
Inventory 78,494 (101,241)
Prepaid expenses and other assets (32,841) 14,100
Accounts payable (31,859) (258,414)
Accrued compensation and other current accrued
liabilities (31,094) (235,881)
Customer deposits (4,376) (11,073)
Other liabilities (1,940) (10,602)
----------- -----------
Net cash used in operating activities (1,546,747) (3,243,895)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (30,014) (181,621)
Patent costs (12,467) (16,449)
Purchases of short-term investments, net (6,564,592) (1,611,743)
Sale of short-term investments 6,652,000 9,023,999
----------- -----------
Net cash provided by investing activities 44,927 7,214,186
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock --- (156,715)
----------- -----------
Net cash provided by / (used in) financing activities --- (156,715)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,501,820) 3,813,576
CASH AND CASH EQUIVALENTS, beginning of period 2,525,026 527,015
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,023,206 $ 4,340,591
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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
a patented monopolar electrosurgical shielding system. The product monitors
for stray electrical energy during laparoscopic surgical procedures and
deactivates the electrosurgical unit when this energy creates potentially
dangerous conditions, thus enhancing patient safety for patients who undergo
laparoscopic surgery. The product can be used with most electrosurgical
instruments available today in the USA. The Company has also developed and is
marketing its own line of integrated, shielded, five-millimeter diameter
electrosurgical instruments that incorporate the Company's proprietary
technology. The Company's sales to date have been made principally in the
United States.
The Company has incurred losses since its inception and has an accumulated
deficit of $11,750,643 at December 31, 1998. 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, in significant volumes, before the Company can attain profitable
operations; the possibility of continued substantial operating losses and
limitations on future capital availability; current and potential competitors
with greater financial, technical and marketing resources; the potential
impact of a failure to comply with or changes in government regulations;
manufacturing being subject to Governmental regulations; dependence on new
product development and intellectual property rights; dependence on single
source suppliers and sub-contractors; the Company's limited manufacturing
experience for large-scale production; potential fluctuations in future
quarterly results; uncertainty of future efforts at health care reform;
product liability risk and limited insurance coverage against such risk;
potential risks associated with the Year 2000 computer software issue; and
dependence on key personnel.
(2) 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.
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 receivables and payables approximate
their fair value.
7
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of presentation in the financial statements, the Company
considers all cash and highly liquid investments with an original maturity of
three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
As required under Statement of Financial Accounts Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS
115) management determines the appropriate classification of its investments
in debt securities at the time of purchase. At December 31, 1998, the
Company's short-term investments consist primarily of government and
corporate securities that the Company classifies as held-to-maturity.
The amortized cost of debt securities classified as held-to-maturity is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion of discounts are included in interest income.
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:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ --------
<S> <C> <C>
Raw materials $383,787 $448,486
Finished goods 151,043 234,520
------------ --------
534,830 683,006
Less- Reserve for obsolescence (70,318) (140,000)
------------ --------
$464,512 $543,006
------------ --------
------------ --------
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred income tax assets
and liabilities for the expected future income tax consequences, based on
enacted tax laws, of temporary differences between the financial reporting
and tax bases of assets and liabilities. SFAS No. 109 requires recognition of
deferred tax assets for the expected future tax effects of all deductible
temporary differences, loss carryforwards and tax credit carryforwards.
Deferred tax assets have been completely offset by a valuation allowance
because the realization criteria set forth in SFAS 109 are not currently
satisfied, primarily due to the Company's history of operating losses.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
This statement establishes standards for computing and presenting earnings
per share. The Company adopted this standard in its fiscal quarter ended
December 31, 1997, and such adoption had no impact on reported loss per share.
The Company adopted the provisions of SFAS 130, "Reporting Comprehensive
Income" as of April 1, 1998. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The adoption of this statement had no
impact on the Company's financial statements as there are no differences
between Net Income and Comprehensive Income.
8
<PAGE>
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per common share and common equivalent share for all fiscal periods
presented is computed using the sum of the weighted average number of shares
of common stock outstanding. Fully diluted shares that would result from the
exercise of common stock options and warrants would be anti-dilutive and thus
are not presented.
(3) 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. The Company received a Quality System Regulation Inspection in
November 1998, with no regulatory follow-up indicated. The Company believes
it has already corrected any points noticed in the inspection.
Because of seasonal and other factors, including the continuing development
of the sales force and the initial sale to the Company's new stocking
distributor, the results of operations for the quarter ended December 31,
1998, should not be taken as indicative of the results of operations for all
or any part of the balance of the year.
(4) MANAGEMENT'S REPRESENTATIONS
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 and notes thereto
should be read in conjunction with the financial statements and the notes
thereto, included in the Company's Annual Report to the Securities Exchange
Commission, for the fiscal year ended March 31, 1998, filed on Form 10-KSB on
June 15, 1998.
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 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.
9
<PAGE>
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 enhance patient safety for patients who undergo
minimally invasive electrosurgery (MIS). The Company believes that its
patented Electroshield(R) Monitoring System offers surgeons significant
advantages compared to other electrosurgical systems in use because of its
ability to dynamically monitor for stray electrical energy out of the view of
the surgeon during MIS procedures. The Company has received five FDA Form
510(k) notifications for its products and obtained patent protection for its
products' basic shielding and monitoring features.
The Company recognizes that market awareness and acceptance of the hazards
inherent in monopolar electrosurgery and acceptance of the Company's products
to address such hazards has been slower to occur than the Company had
believed would be the case. The Company is continuing to develop a sales
force in the U.S. consisting primarily of independent sales representative
organizations. The Company is continuing to modify its marketing strategies
to address the issues of market acceptance of the technology. The Company has
also undertaken efforts to broaden the product line offerings beyond the
original EM-2 product and its accessories. The Company is developing a line
of disposable products and is exploring additional product development and
acquisition opportunities from third parties.
The Company believes that it has sufficient cash resources on hand to attract
and continue to attract the additional human resources necessary to manage
the development of the sales force, the increased marketing efforts, and the
general growth and operation of the business. There can be no assurance
however, that the Company's efforts in this area will result in increased
revenues or the achievement of profitability or positive cash flow. As a
result of several factors, the Company's common stock has been delisted from
the Nasdaq National Market System and trades on the Over the Counter Bulletin
Board. (See Liquidity and Capital Resources)
Statements herein that are not historical facts, including statements about
the Company's strategies and expectations about new and existing products and
market demand and acceptance of new and existing products, technologies and
opportunities, market and industry segment growth, and return on investments
in products and markets are forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward looking
statements involve substantial risks and uncertainties that may cause actual
results to differ materially from those indicated by the forward looking
statements. These forward looking statements should be read in conjunction
with the risk factors discussed in the Form 10-KSB filed by the Company on
June 15, 1998. All forward looking statements are based on information
available to the Company on the date of this document and the Company assumes
no obligation to update such 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. 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-Registered
Trademark- AEM-Registered Trademark- technology was not completed until 1995.
The Company introduced integrated instruments for the Electroshield-Registered
Trademark- Monitoring System (EMS) 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 Company expects
that the sales of electrosurgical instruments and accessories should increase
as additional EM-2 Electronic Monitors are installed. The Company continues
to
10
<PAGE>
devote resources to increasing market awareness of the inherent hazards of
monopolar electrosurgery. There can be no assurance, however, as to the rate
of market acceptance of the EMS. Given the system's short history of usage,
the Company cannot predict the rate of its electrosurgical instrument sales.
As a result of the lack of immediate market acceptance of the EM-2+ EMS, the
Company has diversified its R&D efforts to reduce its dependence on products
involving AEM-Registered Trademark- technology.
The Company believed that the most cost effective way to educate the market
to the hazards of monopolar electrosurgery and to generate significant
revenues for the Company was to supplement a direct sales effort with an
exclusive distribution agreement with Valleylab, Inc., then a division of
Pfizer, Inc. This agreement did not meet its objectives and has been
terminated by the Company. The Company has developed its own direct sales
force, made up of Company employees and independent sales representative
organizations, which together provide market presence in many of the major
market areas in the United States. In addition, in Fiscal Year 1998 the
Company began to sell through independent distributors in Australia, Canada
and Taiwan. The Company continually evaluates the performance of the
independent distributors and representative organizations and made several
changes in the quarter ended December 31, 1998. These changes included the
signing of the Company's new stocking distributor in the US which resulted in
a $70,000 increase in revenue. The Company believes that such measures, along
with increased marketing efforts and the introduction of new products, will
provide the basis for increased revenues and will ultimately lead to
profitable operations. There can be no assurance that these measures, or any
others that the company may adopt, will result in either increased revenues
or profitable operations.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $11,750,643 as of December 31, 1998. Due to the need
to continue the development and training of a sales and distribution network,
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, (including first time stocking orders should those occur) through the
independent sales network and the development of its internal sales force,
resulting in increased sales expenses. Such fluctuations may be significant,
and may result in the Company experiencing significant fluctuations in Gross
Margins and/or operating at a loss in any one period even after a period of
profitability.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 1997.
NET REVENUES. Revenues for the three months ended December 31, 1998 increased
by 52% to $405,007 compared to the three months ended December 31, 1997. The
increase is attributable to the Company continuing to develop its own sales
and marketing efforts, the signing of a new stocking distributor in the US
(which placed initial stocking orders of approximately $70,000) and the
introduction of disposable products at the end of September 1997. While there
can be no assurance that the arrangement with the stocking distributor will
result in recurring business, the Company believes that the distributor will
be an effective marketing partner in its territory. The contract with the
stocking distributor does not provide a right of return for the products sold
to the distributor. The Company anticipates revenue growth for the fiscal
year ended March 31, 1999 ("Fiscal Year 1999"), compared to fiscal year 1998
as the Company's continuing development of an independent sales force and
marketing program mature and result in increased market coverage and
increased sales. The Company also introduced new bipolar products at the end
of the quarter ended December 31, 1998, which are expected to contribute
modest revenue growth in the remainder of fiscal year 1999. There can be no
assurance, however, that the Company's sales and marketing efforts will lead
to increased revenues, or that the new products will find adequate market
acceptance to generate significant revenues.
GROSS PROFIT. Gross profit for the three months ended December 31, 1998 was
$142,873, compared to the three months ended December 31, 1997 in which Costs
of Sales exceeded Sales by $52,830. Gross profit as a percentage of revenue
(Gross Margin) was 35% for the three months ended December 31, 1998. Gross
profit and gross margin can be expected to fluctuate from quarter to quarter,
as a result of product sales mix and sales volume. The increase in gross
profit is partly due to product mix and volumes, and partly to lower overhead
spending levels in the manufacturing facility. Gross margins, while improved,
are expected to be higher at higher levels of production and sales. These
higher gross margins are currently not being achieved
11
<PAGE>
because of the expenses related to manufacturing capacity, which is currently
underutilized and other, generally fixed, manufacturing costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the three
months ended December 31, 1998 decreased by 5% to $374,938 compared to the
three months ended December 31, 1997. In the three months ended December 31,
1997 the Company continued to invest in a significant marketing
communications effort to increase market awareness of the hazards inherent in
monopolar electrosurgery, with no comparable levels of spending in the three
months ended December 31, 1998. Offsetting some of the reductions in
marketing spending was the redeployment of certain employees from
administrative and operations assignments to marketing and customer support
roles. The Company believes that sales and marketing expenses will decrease
as a percentage of net revenue with increasing sales volume. There can be no
assurance, however, that such decrease will occur.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the three months ended December 31, 1998 decreased by 41% to $194,621
compared to the three months ended December 31, 1997. The reduction is due to
expense reduction programs, especially for outside services, the resignation
of the former Chief Executive Officer (who has been replaced at least on an
interim basis by the Vice President of Engineering) and lower spending on
directors fees, plus the transfer of certain personnel to marketing and
customer support functions. In addition, in the three months ended December
1997 the Company was incurring significant legal fees in connection with its
successful defense against the shareholder lawsuit, which was ultimately
dismissed by a Federal Court in March of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
three months ended December 31, 1998 increased by 39% to $170,266 compared to
the three months ended December 31, 1997. The increase was attributable to
the write-off of certain legal fees incurred in connection with the
exploration of a possible patent on a product the Company has decided not to
pursue.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 1997.
NET REVENUES. Revenues for the nine months ended December 31, 1998 increased
by 20% to $1,087,313 compared to the nine months ended December 31, 1997. The
increase is attributable to the Company continuing to develop its own sales
and marketing efforts, the signing of the first stocking distributor in the
US (which placed initial stocking orders of approximately $70,000) and the
introduction of disposable products at the end of September 1997. While
there can be no assurance that the arrangement with the stocking distributor
will result in recurring business, the Company believes that the distributor
will be an effective marketing partner in its territory. The contract with
the stocking distributor does not provide a right of return for the products
sold to the distributor. The Company anticipates revenue growth for the
fiscal year ended March 31, 1999 ("Fiscal Year 1999") compared to fiscal year
1998 as the Company's efforts to develop an independent sales force and
marketing program mature and result in increased market coverage and
increased sales. The Company also introduced new bipolar products at the end
of the quarter ended December 31, 1998, which are expected to contribute
modest revenue growth in the remainder of fiscal year 1999. There can be no
assurance, however, that the Company's sales and marketing efforts will lead
to increased revenues, or that the new products will find adequate market
acceptance to generate significant revenues.
GROSS PROFIT. Gross profit for the nine months ended December 31, 1998 was
$315,274 compared to only minimal Gross Profits in the nine months ended
December 31, 1997. Gross profit as a percentage of revenue (Gross Margin)
increased to 29% for the nine months ended December 31, 1998 compared to 0.1%
for the nine months ended December 31, 1997. The increase in gross profit is
the result of reductions in manufacturing headcount and spending reduction
programs plus the increase in sales. Gross profit and gross margin can be
expected to fluctuate from quarter to quarter, as a result of product sales
mix and sales volume. Gross margins, while improved, are expected to be
higher at higher levels of production and sales. These higher gross margins
are currently not being achieved because of the expenses related to
manufacturing capacity, which is currently underutilized and other, generally
fixed, manufacturing costs.
12
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended December 31, 1998 decreased by 30% to $1,021,430 compared to the
nine months ended December 31, 1997. The decrease is the result of the
Company's change from a primarily direct sales force to one made up of
independent sales representatives who are paid on a commission basis only. In
the nine months ended December 31, 1997 the Company made substantial
investments in a significant marketing communications effort to increase
market awareness of the hazards inherent in monopolar electrosurgery, with no
comparable level of expenditures in the nine months ended December 31, 1998.
Some of the reduced levels of spending were offset by the reassignment of
certain personnel from Administration and Operations to marketing and
customer support roles. The Company believes that sales and marketing
expenses will decrease as a percentage of net revenue with increasing sales
volume. There can be no assurance, however, that such decrease will occur.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the nine months ended December 31, 1998 decreased by 34% to $708,458 compared
to the nine months ended December 31, 1997. In the nine months ended December
31, 1997 the Company incurred significant legal expenses in connection with
its successful defense against the shareholder lawsuit, which was dismissed
by a Federal Court in March 1998. In addition, certain administrative
personnel were reassigned to marketing support functions in the nine months
ended December 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
nine months ended December 31, 1998 decreased by 15% to $436,273 compared to
the nine months ended December 31, 1997. The decrease is the result of a
decrease in headcount, reflecting completion of certain engineering projects,
a reduction in the utilization of outside consulting services and reduced
consumption of inventories and supplies used in testing and modifying
products. Some of the decreases were offset by the write-off of certain legal
fees incurred in connection with the exploration of a possible patent on a
product the Company has decided not to pursue.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements principally
through sales of Common Stock which approximated $17.2 million through
December 31, 1998, and, to a substantially lesser degree, funds provided by
sales of the Company's products. Historically, these funds have been used for
working capital and general corporate purposes including research and
development. 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 sales force and to accommodate anticipated growth.
While the remaining net proceeds from the Company's initial public offering
are currently invested primarily in money market instruments, government and
corporate securities, the Company may also use a substantial portion of those
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
will be sufficient to fund its operations, working capital and capital
requirements for at least the next twelve months.
The Company's Common Stock trades on the Over the Counter Bulletin Board. The
Company's Common Stock formerly traded on the Nasdaq National Market. On
October 12, 1998, the Company's Common Stock was delisted from the Nasdaq
National Market for failure to meet certain listing requirements.
INCOME TAXES
Net operating loss carryforwards totaling approximately $10.2 million are
available to reduce taxable income as of December 31, 1998. 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.
13
<PAGE>
YEAR 2000
Computer programs that rely on two-digit date codes to perform computations
and decision-making functions may cause computer systems to malfunction due
to an inability of such programs to interpret the date code "00" as the year
2000. The Company has determined that none of the products of the Company are
subject to Year 2000 problems. The Company has conducted an audit of the
software and hardware used by the Company to assess the scope of Year 2000
problems, if any. The results of that audit indicate that the hardware and
software used by the Company is in substantial compliance with Year 2000
requirements. The cost to replace hardware and software that was found not to
be Year 2000 compliant is estimated to be less than $10,000. The Company is
also conducting a review of its major suppliers of goods and services to
understand their level of compliance with Year 2000 issues. Responses have
been received from some suppliers indicating their level of compliance with
the Year 2000 issue, however not all responses have been received. The
Company believes that most of its service providers will represent that in
general they are Year 2000 compliant or will be before the year 2000. If in
its survey of significant vendors of materials, the Company becomes concerned
that one or more vendors either are not Year 2000 compliant or have what the
Company believes to be inadequate programs to become Year 2000 compliant to
the extent that the Company believes that such issues may significantly
impact the operations of the Company, the Company will develop additional
programs to reduce or eliminate its reliance on such vendors.
The Company does not have control over many Year 2000 problems. The nature of
its business and the interconnected systems of businesses, utilities,
government agencies and even individuals could affect the Company's ability
to provide products to our customers, and by extension, could affect the
Company's financial position. The Company is making concerted efforts to
evaluate the Year 2000 issue as it may affect the Company, but because of the
interrelationships with its vendors, and their relationships with their
vendors, it will not be possible to certify with 100% assurance that the
Company will not be subject to some problems resulting from the Year 2000
issue. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
14
<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
27 - Financial Data Schedule.
(b) The Registrant did not file any reports on Form
8-K during the quarter ended December 31, 1998.
15
<PAGE>
SIGNATURE
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.
<TABLE>
<CAPTION>
Name Title Date
- ---------------------------- ------------------------------ ----------------
<S> <C> <C>
/s/ Karl D. Hawkins Chief Financial Officer January 26, 1999
- ---------------------------- (Principal Accounting Officer)
Karl D. Hawkins
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ------------------ ------------------------------------- -------------
<S> <C> <C>
27 Financial Data Schedule 18
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ELECTROSCOPE, INC. BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE STATEMENTS OF
OPERATION AND CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,023,206
<SECURITIES> 3,718,583
<RECEIVABLES> 277,197
<ALLOWANCES> 7,500
<INVENTORY> 464,512
<CURRENT-ASSETS> 5,569,471
<PP&E> 647,147
<DEPRECIATION> (483,359)
<TOTAL-ASSETS> 5,867,672
<CURRENT-LIABILITIES> 383,207
<BONDS> 0
0
0
<COMMON> 16,941,317
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 5,867,672
<SALES> 1,087,313
<TOTAL-REVENUES> 1,087,313
<CGS> 772,039
<TOTAL-COSTS> 2,166,161
<OTHER-EXPENSES> (224,221)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,550
<INCOME-PRETAX> (1,626,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,626,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,626,666)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
