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 June 30, 2000
For the transaction period from __________ to________
Commission file number 0-28604
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 5,383,507 SHARES
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Class (outstanding at July 18, 2000)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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1
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ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page
Number
------
PART I. UNAUDITED FINANCIAL INFORMATION
-------------------------------
ITEM 1 - Condensed Interim Financial Statements....................... 3
- Condensed Balance Sheets as of June 30,
2000 and March 31, 2000................................... 3
- Condensed Statements of Operations for
the Three Months Ended June 30, 2000 and 1999............. 4
- Condensed Statements of Cash Flows for
the Three Months Ended June 30, 2000 and 1999............. 5
- Notes to Condensed Interim Financial
Statements................................................ 6
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
SIGNATURE............................................................... 18
EXHIBIT INDEX........................................................... 19
2
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PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 2000 2000
------ ---------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,055,463 $ 446,473
Short-term investments 678,712 1,727,480
Accounts receivable, net of allowance for doubtful
accounts of $7,000 and $7,000, respectively 325,151 286,027
Inventory, net of reserve for obsolescence of $100,000
and $145,000, respectively 689,156 594,514
Prepaid expenses 63,164 22,180
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Total current assets 2,811,646 3,076,674
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EQUIPMENT, at cost:
Furniture, fixtures and equipment 749,916 745,527
Less- Accumulated depreciation (596,550) (565,769)
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Equipment, net 153,366 179,758
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PATENTS, net of accumulated amortization of $24,264 and $22,852,
respectively 121,802 121,507
OTHER ASSETS 13,472 13,472
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Total assets $ 3,100,286 $ 3,391,411
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 223,935 $ 179,967
Accrued compensation 103,503 82,530
Other accrued liabilities 211,807 205,388
Other current liabilities 8,060 10,100
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Total current liabilities 547,305 477,985
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COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
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 other comprehensive loss (31,636) (48,642)
Accumulated deficit (14,647,100) (14,269,649)
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Total shareholders' equity 2,552,981 2,913,426
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Total liabilities and shareholders' equity $ 3,100,286 $ 3,391,411
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ELECTROSCOPE, INC.
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CONDENSED STATEMENTS OF OPERATIONS
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AND COMPREHENSIVE INCOME
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
------------------------------
2000 1999
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<S> <C> <C>
REVENUE, NET $ 510,698 $ 459,922
COST OF SALES 286,196 281,047
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Gross profit 224,502 178,875
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OPERATING EXPENSES:
Sales and marketing 324,901 289,781
General and administrative 183,566 186,283
Research and development 93,308 127,360
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Total operating expenses 601,775 603,424
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INCOME (LOSS) FROM OPERATIONS (377,273) (424,549)
OTHER INCOME:
Interest income 14,756 50,986
Other income (expense) (14,934) (2,551)
----------- -----------
NET INCOME (LOSS) $(377,451) $(376,114)
=========== ===========
OTHER COMPREHENSIVE INCOME:
Short-term investment valuation adjustment 17,006 ---
TOTAL COMPREHENSIVE INCOME (LOSS) $(360,445) $(376,114)
=========== ===========
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $ (0.07) $ (0.07)
=========== ===========
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 financial statements.
4
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ELECTROSCOPE, INC.
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CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (377,451) $ (376,114)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 32,193 23,441
Amortization of discount (9,226) (19,321)
Inventory reserves (45,000) 15,000
Changes in operating assets and liabilities-
Accounts receivable (39,124) (118,388)
Inventory (49,642) (86,574)
Other assets (40,984) (19,309)
Accounts payable 43,968 (49,372)
Accrued compensation and other accrued
liabilities 25,352 (81,384)
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Net cash used in operating activities (459,914) (712,021)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (4,389) (32,750)
Patent costs (1,707) -
Purchases of short-term investments, net - (1,058,815)
Sale of short-term investments 1,075,000 964,492
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Net cash provided from (used in) investing activities 1,068,904 (127,073)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 608,990 (839,094)
CASH AND CASH EQUIVALENTS, beginning of period 446,473 1,188,867
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,055,463 $ 349,773
============== == ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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ELECTROSCOPE, INC.
------------------
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
-----------------------------------------------
JUNE 30, 2000
(Unaudited)
(1) ORGANIZATION AND NATURE OF BUSINESS
-----------------------------------
Electroscope, Inc. (the "Company") was founded in 1991 to address product
opportunities created by the increase in minimally invasive surgery ("MIS"). Our
specific focus is on laparoscopy, the most common type of MIS procedure, and the
widespread preference for electrosurgery devices in these procedures.
During laparoscopic surgical procedures, the surgeon operates from outside the
patient's body, introducing cameras and instruments through small access ports
to perform the surgical intervention. MIS has proven to greatly enhance the
patient's post-operative course of recovery and is now the preferred surgical
approach in over 50% of abdominal surgeries.
The market opportunity was created by the surgeons' continued demand for
monopolar electrosurgery tools, which they have preferred using in "open"
procedures, combined with certain inherent risks of this technology in MIS. The
risk of "unintended" electrosurgical burns to the patient in laparoscopic
monopolar electrosurgery has been well documented.
The Company's approach to the market opportunity was to design and develop a
laparoscopic instrument system that helps to prevent unintended electrosurgical
burns. The Company's patented AEM Laparoscopic Instrument System provides
the surgeon with the tissue effects they demand while helping to prevent stray
electrical energy which can cause unintended and unseen tissue injury. The AEM
Instruments incorporate active electrode monitoring technology to dynamically
and continuously monitor the flow of electrosurgical current, thereby helping to
prevent patient injury. With the AEM System, surgeons are able to perform a
broad range of electrosurgical procedures more safely and efficaciously than is
possible using conventional laparoscopic instruments.
The Company has incurred losses since its inception and has an accumulated
deficit of $14,647,100 at June 30, 2000 and its operations have been financed
primarily through issuance of equity. The Company's liquidity has substantially
diminished because of such continuing operating losses and the Company may be
required to seek additional capital to continue operations.
The Company's operations are subject to certain risks and uncertainties,
including that commercial acceptance of the Company's products will have to
occur in the marketplace before the Company can attain profitable operations and
that continued operating losses and use of cash resources will continue during
fiscal year 2001 which will significantly impact the Company's ongoing
operations and business viability.
6
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As of June 30, 2000, the Company had $1,734,175 in cash and cash equivalents and
short-term investments available to fund future operations.
During fiscal year 2000, the Company instituted a cost containment program for
its operations as well as reduced its employee head count to conserve its cash
resources. The Company has also fully implemented its marketing and sales plan
to maintain a certain number of key sales representatives and entered into
exclusive agreements with stocking distributors and independent sales
representatives to sell the Company's products. These efforts are expected to
result in increased sales revenues for fiscal year 2001 and reduced operating
expenses. With increased sales in fiscal year 2001, the Company is expecting an
increase in the gross profit margin that will ultimately reduce the overall net
loss incurred from operations and conserve the Company's cash resources.
The fiscal year 2001 budget anticipates the use of approximately $1.2 million in
cash and cash equivalents on sales of approximately $2.5 million. This forecast
assumes that the Company's gross profit margin will increase from approximately
30% to 50% by the end of the fiscal year with an overall 45% gross profit margin
on sales revenues.
It is uncertain if the Company will be able to meet the operational and
financial requirements of the proposed fiscal year 2001 budget and limit its use
of cash and cash equivalents. The Company can not predict the expected revenues,
gross profit margin, net loss and usage of cash and cash equivalents for fiscal
year 2001.
If the Company is able to manage the business operations in line with the budget
expectations, the Company believes that its cash resources will be sufficient to
fund its operations for the remainder of the fiscal year 2001. If the Company is
unable to manage the business operations in line with the budget expectations,
it could have a material adverse effect on the Company's business viability,
financial position, results of operations and cash flows. If the Company is not
successful by the end of fiscal year 2001 in becoming cash flow break even,
additional capital resources will be required to maintain ongoing operations.
(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.
Cash and 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.
7
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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.
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 June 30, 2000, the Company's short-term investments
consist primarily of government securities that the Company classifies as
available for sale.
Since the Company will be required to sell certain of its debt securities prior
to their maturity, the Company has elected to classify its short-term
investments as available for sale. As a result, for the quarter ending June 30,
2000, the Company has recorded short-term investment valuation adjustment of
$17,006, which is included as a component of Other Comprehensive 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:
June 30, March 31,
2000 2000
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Raw materials $603,396 $526,195
Finished goods 185,760 213,319
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789,156 739,514
Less- Reserve for obsolescence (100,000) (145,000)
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$689,156 $594,514
=========== ===========
Patents
-------
The costs of applying for patents are capitalized and amortized on a
straight-line basis over the lesser of the patent's economic or legal life (17
years in the U.S.). Capitalized costs are expensed if patents are not granted.
The Company reviews the carrying value of its patents periodically to determine
whether the patents have continuing value. In fiscal year 1999 the Company
expensed approximately $50,000 of costs that had been previously capitalized as
patent application costs after it decided not to pursue development of the
related technology in order to focus on the Company's proprietary AEM technology
opportunities.
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
8
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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. The Company's 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.
Revenue Recognition
-------------------
Revenue from product sales is recorded when the Company ships the product and
the earnings process is complete. The Company recognizes revenue from sales to
stocking distributors when there is no right of return, other than for normal
warranty claims.
Stock Based Compensation
------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for stock options granted to employees. The Company has made pro forma
disclosures of what net loss and net loss per common share would have been had
the provisions of SFAS 123, based upon the fair value method, been applied to
the Company's stock option grants.
Comprehensive Income
--------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") 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 components of Other Comprehensive Income are included in the Condensed
Statements of Operations and Comprehensive Income and consist of an adjustment
to the fair value of short-term investments.
Segment Reporting
-----------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") in the Quarter ended December 31, 1999. SFAS 131
established standards for reporting information about the segments of
enterprises' business. The adoption of this statement had no impact on the
Company's financial statements as there are no material differences between
information reported to management and that contained in the financial
statements of the Company.
Basic and Diluted Loss per Common Share
---------------------------------------
Loss per basic and diluted common share for each period 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.
9
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Recently Issued Accounting Standards
------------------------------------
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement
No. 133" ("SFAS 137"). SFAS 137 delays the effective date of SFAS 133 to
financial quarters and financial years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognizes all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. Management believes that the adoption of SFAS
133 will not have a significant impact on the Company's financial condition and
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition ("SAB 101"). SAB 101 provides
guidance on recognition, presentation, and disclosures related to revenue in the
financial statements. The Company is required to adopt this standard as of
January 1, 2001. Management does not believe the adoption of SAB 101 will have a
significant impact on the results of operations or financial position of the
Company.
In March 2000, The Financial Accounting Standards Board Issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44"). FIN No. 44 clarifies the application of APB No. 25
for certain issues related to equity-based instruments issued to employees. FIN
No. 44 is effective on July 1, 2000, except for certain transactions, and will
be applied on a prospective basis. Management believes that FIN No. 44 will not
have a significant impact on its financial statements.
(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. As of June
30, 2000 the Company believes it was in substantial compliance with all known
regulations. The Company was last inspected in November 1998 and has not, at
June 30, 2000, been notified of any deficiencies from that inspection. FDA
inspections are conducted approximately every two years or on a more frequent
basis at the discretion of the FDA.
Because of seasonal and other factors including the continuing development of
the sales force discussed in Item 2, Historical Perspective and Outlook and
Results of Operations, the results of operations for the quarter ended June 30,
2000 should not be taken as an indication of the results of operations for all
or any part of the balance of the year.
The accounts receivable balance at June 30, 2000 of $325,151 included $32,282
(10%) and $26,257 (8%) from two customers. The Company's accounts receivable
balances are primarily domestic.
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(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 and Exchange Commission for the fiscal year
ended March 31, 2000, filed on Form 10-KSB on June 29, 2000.
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 the most
recent interim period are not necessarily indicative of the results to be
expected for the full year.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
-------
The Company was incorporated as a Colorado corporation on February 1, 1991. The
Company designs, develops, manufactures and markets patented electrosurgical
instruments, which are designed to provide greater safety to patients who
undergo minimally-invasive surgery. The products can be used with most
electrosurgical generator systems available today in the U.S. The Company has
developed and is marketing its own line of integrated, shielded five-millimeter
electrosurgical instruments that incorporate the Company's proprietary
technology. These products monitor for stray electrical energy during
laparoscopy and deactivate the electrosurgical unit when this energy is detected
under potentially dangerous conditions. The Company's sales to date have been
made principally in the U.S.
The Company has incurred losses since its inception and has an accumulated
deficit of $14,647,100 at June 30, 2000 and its operations have been financed
primarily through issuance of equity. The Company's liquidity has substantially
diminished because of such continuing operating losses and the Company may be
required to seek additional capital to continue operations.
The Company's operations are subject to certain risks and uncertainties,
including that commercial acceptance of the Company's products will have to
occur in the marketplace before the Company can attain profitable operations and
that continued operating losses and use of cash resources will continue during
fiscal year ended March 31, 2001 ("FY 2001") which will significantly impact the
Company's ongoing operations and business viability.
As of June 30, 2000, the Company had $1,734,175 in cash and cash equivalents and
short-term investments available to fund future operations.
HISTORICAL PERSPECTIVE AND OUTLOOK
----------------------------------
The Company was organized in February 1991 and in the first two years developed
the AEM system and protective sheaths to adapt to traditional electrosurgical
instruments. During this period, the Company applied for patents with the United
States Patent Office and conducted product trials.
As the Company evolved, it was clear that the active electrode monitoring
technology needed to be integrated into the standard laparoscopic instrument
design. As the development program proceeded, it also 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 complex than expected. As a result, instruments with
integrated AEM technology were not completed until many years later. It was not
until fiscal year ended March 31, 2000 ("FY 2000") that a sufficiently broad AEM
instrument line was introduced to provide the operating rooms with a Standard of
Care -- AEM instruments for all of their electrified monopolar instrumentation
in laparoscopic surgery. Prior to offering the full breadth of laparoscopic
instrumentation, it was difficult for hospitals to commit to converting to the
AEM solution, as there were not adequate comparable surgical instrument options
to match what the surgeon demanded.
12
<PAGE>
With the broad array of AEM instruments now available, the surgeon has a full
choice of instrument options and does not have to change surgical technique. The
hospital can now universally convert, thus providing all of their laparoscopic
patients the highest level of safety.
The Company's Plans in FY 2001: In February, 2000 the Company appointed James A.
Bowman as President & CEO and implemented an expense reduction program to take
effect by the start of the new fiscal year, April 1, 2000. The expense
constraints were implemented across all of the Company's operations and resulted
in a 21% reduction in headcount and 20% reduction in the operating expense
budget compared to FY 2000. These budget constraints resulted in an expense
structure appropriate with the ongoing sales achievements while still allowing
the Company to move forward with a progressive plan in the marketplace.
To lay a foundation for future growth within the constraints of the Company's
financial resources, during FY 2000 the Company focused on: expansion of its
product line, expansion of independent clinical endorsements of the Company's
technology and an improved sales infrastructure.
PRODUCT LINE EXPANSIONS - The Company believes that its strategy of
incorporating AEM technology into the standard laparoscopic instrument styles
ensures that surgeons do not have to change their operative techniques. This
strategy advanced forward in late-FY 2000 with new AEM product line extensions.
These new products filled holes in the product line that were very important to
the General and Gynecologic Surgeons.
Management believes that the AEM Laparoscopic Instrument line now, for the first
time, includes a full array of instrument styles to meet the surgeons' demands
and allows them to implement AEM technology without changing their surgical
techniques or operating room protocols.
SALES INFRASTRUCTURE IMPROVEMENTS - In early FY 2000 the Company recognized the
need to improve its sales network of independent distributors by developing
relationships with distributors who represent synergistic products and whose
primary focus is Electrosurgery & MIS. This network was substantially overhauled
during FY 2000 and those new representatives are now trained and active in the
field. The Company believes that having the sales infrastructure efficiently
active for the entire FY 2001 will allow the Company the best opportunity for
sales growth. With the improved network of Independent Distributors, the Company
has also hired an experienced team of Regional Sales Managers to manage,
motivate, educate and direct the individual distributor sales representatives.
These new business managers were hired in mid-FY 2000 to focus on optimizing the
sales function in the field, to accelerate the sales accomplishments and
maximize revenue growth.
CLINICAL ENDORSEMENTS - FY 2000 represented the culmination of a series of
independent clinical endorsements of the Company's proprietary technology. With
its recent recognition as an AORN RECOMMENDED PRACTICE (by the Association of
Operating Room Nurses) the Company's technology is now recommended by sources
representing all groups involved with minimally-invasive surgery: Surgeons,
Nurses, Biomed Engineers, Medicolegal professionals and other electrosurgery
device manufacturers.
The Company believes that gaining broad clinical endorsements is a demonstrated
and successful process for surgical technology to traditionally advance in the
marketplace. From a concern or problem in surgery, the medical device industry
develops a technological solution and this solution evolves to gain the breadth
of endorsements. Once this occurs the technology is then employed by the
hospital to benefit the patient, surgeon and operating room staff. Management
13
<PAGE>
believes that AEM technology is following the same path as previous revolutions
in electrosurgery. As with "Isolated" ESU generators in the 1970s and with "REM"
technology in the 1980s, AEM technology is receiving the broad clinical
endorsements that drove previous new technology to market acceptance.
The Company believes the unique performance of the AEM technology and its
breadth of clinical endorsements provides an opportunity for market growth.
Management feels that the market visibility and awareness of the AEM technology
and its independent surgical endorsements was substantially improved in late FY
2000 and that this will benefit the sales efforts in FY 2001.
In addition to the above, the Company has been informed that CE accreditation is
expected in mid-fiscal year 2001 and this allows the Company to launch into new
markets in Europe. The market for the Company's products internationally
represents incremental sales opportunities during FY 2001.
Management believes that the Company heads into FY 2001 having achieved
improvements in expense controls, sales infrastructure, product line expansion
and the clinical credibility of its technology. Management's focus and
commitment in FY 2001 is to maintain expense controls while optimizing sales
execution in the field, developing widespread market awareness of the technology
and expanding into the International market.
RESULTS OF OPERATIONS
---------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999.
NET REVENUES. Revenues for the quarter ended June 30, 2000, were $510,698,
compared to $459,922 for the quarter ended June 30, 1999, an increase of 11%.
The increase is attributable to the Company continuing to develop the
effectiveness of the independent distributor sales network and a visible
marketing campaign. The Company has developed a number of relationships with
"stocking" distributors. While there can be no assurance that the arrangement
with the stocking distributors will result in recurring business, the Company
believes that the distributors will be effective marketing partners in their
territories.
GROSS PROFIT. The gross profit for the quarter ended June 30, 2000, of $224,502
increased by 26% from the quarter ended June 30, 1999, gross profit of $178,875.
Gross profit as a percentage of revenue (gross margin) increased from 39% for
the quarter ended June 30, 1999, to 44% in the quarter ended June 30, 2000. The
increase in gross profit is due to the reduced impact of fixed operations costs
at the higher revenue, the increasing margins on the core AEM products and a
reversal of an inventory reserve. 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.
SALES AND MARKETING EXPENSES. Sales and marketing expenses of $324,901 for the
quarter ended June 30, 2000, increased by 12% compared to $289,781 for the
quarter ended June 30, 1999. The increase is primarily the result of increased
headcount in Sales Management.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$183,566 for the quarter ended June 30, 2000, decreased by 2% compared to
$186,283 for the quarter ended June 30, 1999. This decrease is the result of
lower headcount and other spending constraints.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of $93,308
for the quarter ended June 30, 2000, decreased by 27% compared to $127,360 for
the quarter ended June 30, 1999. This decrease is the result of reduced
development projects and the costs associated with them.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has historically satisfied its cash requirements principally through
sales of Common Stock which approximated $17.3 million through June 30, 2000,
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 and 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 will be
sufficient to fund its operations, working capital and capital requirements
until it reaches break-even cash flow, but no assurances can be made that this
will be the case, or that break-even cash flow will be achieved.
During late fiscal year 2000, the Company instituted a cost containment program
for its operations as well as reduced its employee head count to conserve its
cash resources. The Company has also fully implemented its marketing and sales
plan to maintain a certain number of key sales representatives and entered into
exclusive agreements with stocking distributors and independent sales
representatives to sell the Company's products. These efforts are expected to
result in increased sales revenues for fiscal year 2001 and reduced operating
expenses. With increased sales in fiscal year 2001, the Company is expecting an
increase in the gross profit margin that will ultimately reduce the overall net
loss incurred from operations and conserve the Company's cash resources.
The fiscal year 2001 budget anticipates the use of approximately $1.2 million in
cash and cash equivalents on sales of approximately $2.5 million. This forecast
assumes that the Company's gross profit margin will increase from approximately
30% to 50% by the end of the fiscal year with an overall 45% gross profit margin
on sales revenues.
It is uncertain if the Company will be able to meet the operational and
financial requirements of the proposed fiscal year 2001 budget and limit its use
of cash and cash equivalents to approximately $1.2 million out of the
approximately available $2.2 million. The Company used $459,914 in cash and cash
equivalents for its operations for the quarter ending June 30, 2000. The
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Company can not predict the expected revenues, gross profit margin, net loss and
usage of cash and cash equivalents for fiscal year 2001.
If the Company is able to manage the business operations in line with the budget
expectations, the Company believes that its cash resources will be sufficient to
fund its operations until it reaches break-even cash flow. If the Company is
unable to manage the business operations in line with the budget expectations,
it could have a material adverse effect on the Company's business viability,
financial position, results of operations and cash flows. If the Company is not
successful by the end of fiscal year 2001 in becoming cash flow break-even
additional capital resources will be required to maintain ongoing operations.
There can be no assurance such resources will be available in sufficient amounts
or on terms acceptable to the Company. Such additional capital resources may
result in substantial dilution to existing shareholders.
The Company has not yet pursued the possibility of obtaining additional
financing to fund its future operations. It is uncertain that the Company will
be able to obtain additional funding through a private placement of its common
stock or loans from financial institutions or other third parties. If additional
capital is unavailable, it could have a material adverse effect on the Company's
business viability, financial position, results of operations and cash flows. As
a result of the above factors, the report of independent public accountants
which accompany the Fiscal Year 2000 Financial Statements expresses substantial
doubt regarding the Company's ability to continue as a going concern.
The Company's common stock is traded on the Over The Counter Bulletin Board (OTC
Bulletin Board: ESCP.OB).
INCOME TAXES
------------
Net operating loss carryforwards totaling approximately $14.6 million are
available to reduce taxable income as of June 30, 2000. The net operating loss
carryforwards expire, if not previously utilized, at various dates beginning in
the year 2011. 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.
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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.
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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.
Name Title Date
------------------------- ---------------------------- -------------------------
/s/ Marcia McHaffie Controller July 18, 2000
------------------------ (Principal Accounting Officer)
Marcia McHaffie
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
-------------------- ---------------------------------------- -----------------
27 Financial Data Schedule 17
19
