U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR (15D) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 0-25828
Electropharmacology, Inc.
Exact name of small business issuer as specified in its charter
Delaware 95-4315412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2301 N.W. 33rd Court, Suite 102, Pompano Beach, FL 33069
(Address of principal executive offices)
(954) 975-9818
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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:
Number of Shares Outstanding
Class On September 30, 1996
----- ---------------------
Common Stock, $ .01 par value 3,485,931
Transitional Small Business Disclosure Format:
Yes | | No |X|
<PAGE>
ELECTROPHARMACOLOGY, INC.
<TABLE>
<CAPTION>
INDEX TO 10-QSB Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Balance Sheets as of December 31, 1995 and September 30, 1996 2
Statements of Operations for the nine months ended September 30,
1995 and 1996 3
Statements of Operations for the three months ended September 30,
1995 and 1996 4
Statements of Cash Flows for the nine months ended September 30,
1995 and 1996 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the nine months ended September 30,
1995 and 1996 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months ended September 30,
1995 and 1996 9
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K
Signatures 14
</TABLE>
<PAGE>
Item 1. Financial Statements
ELECTROPHARMACOLOGY, INC.
Balance Sheets
(Unaudited with respect to September 30, 1996)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1995 1996
-------------------------------
<S> <C> <C>
Current assets :
Cash $ 3,069,748 $ 840,144
Trade accounts receivable, net of allowance for doubtful accounts of $85,100 256,832 589,136
Current portion of trade notes receivable 269,711 258,294
Prepaid expenses 64,659 58,869
-------------------------------
Total current assets 3,660,950 1,746,443
Deposits 12,091 17,810
Trade notes receivable, less current maturities 273,623 74,412
Property and equipment, net 876,345 1,081,236
Other intangible assets 54,171 51,535
-------------------------------
Total assets $ 4,877,180 $ 2,971,436
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 251,209 $ 196,016
Accrued expenses 266,278 374,219
Accrued commissions 83,154 111,928
Accrued payroll 60,332 47,440
Customer deposits 7,561 7,561
Notes payable to related parties 120,000 --
Current maturities of obligations under capital leases 48,226 33,784
-------------------------------
Total current liabilities 836,760 770,948
Obligations under capital leases, less current maturities 28,033 11,077
-------------------------------
Total liabilities 864,793 782,025
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, issued and
outstanding 421,950 4,220 4,220
Common stock, $0.01 par value; 10,000,000 shares authorized, 3,496,424 shares
issued and 3,485,931 shares outstanding (note 2) 30,745 34,964
Additional paid-in capital 11,227,601 11,227,601
Treasury stock (60,000) (60,000)
Deficit (7,190,179) (9,017,374)
-------------------------------
Total shareholders' equity 4,012,387 2,189,411
-------------------------------
Total liabilities and shareholders' equity $ 4,877,180 $ 2,971,436
===============================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Electropharmacology, Inc.
Statements of Operations
(Unaudited)
For the nine months ended
September 30
--------------------------
1995 1996
---- ----
Revenues:
Rentals $ 1,019,423 $ 1,158,190
Sales 276,981 240,318
--------------------------
Total revenues 1,296,404 1,398,508
Cost of revenues 152,181 195,361
--------------------------
Gross profit 1,144,223 1,203,147
Selling, general and administrative expenses 1,553,932 2,517,792
Research and development expenses 1,277,738 613,903
--------------------------
Loss from operations (1,687,447) (1,928,548)
Interest expense (249,923) (8,175)
Interest and other income (expense) (118,636) 109,528
--------------------------
Net loss $(2,056,005) $(1,827,195)
==========================
Net loss per common share $ (0.92) $ (0.56)
Weighted average common shares outstanding 2,242,082 3,234,917
See accompanying notes to financial statements.
3
<PAGE>
Electropharmacology, Inc.
Statement of Operations
(Unaudited)
For the three months ended
September 30
--------------------------
1995 1996
---- ----
Revenues:
Rentals $ 312,024 $ 439,429
Sales 82,600 184,900
--------------------------
Total revenues 394,624 624,329
Cost of revenues 52,709 82,573
--------------------------
Gross profit 341,915 541,756
Selling, general and administrative expenses 539,348 816,713
Research and development expenses 560,829 142,867
--------------------------
Loss from operations (758,263) (417,824)
Interest expense (26,680) (1,040)
Interest and other income (expense) 45,430 24,916
--------------------------
Net loss $ (739,513) $ (393,948)
==========================
Net loss per common share $ (0.26) $ (0.11)
Weighted average common shares outstanding 2,878,529 3,485,931
See accompanying notes to financial statements.
4
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Electropharmacology, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30
------------------------------
1995 1996
---- ----
<S> <C> <C>
Operating activities
Net loss: $(2,056,006) $(1,827,195)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 168,511 214,658
Amortization of deferred loan costs and accretion of discount
on notes payable 306,818 --
Changes in operating assets and liabilities :
Increase in net trade accounts receivable (38,565) (332,304)
Increase (decrease) in notes receivable - Net of discount (226,273) 210,628
Decrease (increase) in prepaids and other (66,493) 8,426
Decrease (increase) in deposits 135 (5,719)
Increase (decrease) in accounts payable and accrued expenses (251,971) 68,630
------------------------------
Net cash used in operating activities (2,163,844) (1,662,876)
------------------------------
Cash flows from investing activities:
Capital expenditures, net (219,441) (419,549)
------------------------------
Net cash used in investing activities (219,441) (419,549)
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock & warrants 5,103,957 4,219
Decrease in notes payable (1,162,000) (120,000)
Decrease in deferred offering costs 144,543 --
Capital lease payments (35,204) (31,398)
------------------------------
Net cash provided by financing activities 4,051,296 (147,179)
------------------------------
Net increase (decrease) in cash 1,668,011 (2,229,604)
Cash, beginning of period 478,903 3,069,748
------------------------------
Cash, end of period $ 2,146,914 $ 840,144
==============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net $ 61,741 $ 7,855
Income Taxes $ -- $ --
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations incurred for new equipment $ -- $ --
==============================
</TABLE>
See accompanying notes to financial statements.
5
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ELECTROPHARMACOLOGY, INC.
Notes to Financial Statements
(1) Basis of Presentation
These statements do not contain all information required by generally
accepted accounting principles to be included in a full set of financial
statements. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly, the financial
position of Electropharmacology, Inc. (the "Company") at September 30, 1996 and
results of its operations for the nine months and quarter then ended and the
nine months and quarter ended September 30, 1995 and its cash flows for the nine
months ended September 30, 1996 and September 30, 1995. These unaudited
financial statements should be read in conjunction with the financial statements
and notes contained in the Company's Form 10-KSB for the year ended December 31,
1995. Results of operations for the quarters and nine months ended September 30,
1996 and 1995 are not necessarily indicative of results to be expected for the
full year.
Electropharmacology, Inc. is engaged in designing, developing and
marketing proprietary medical devices incorporating pulsed radio frequency
("PRF") therapy. To date, the Company's focus has been the application of PRF
therapy to medical devices used to treat pain and edema (the abnormal
accumulation of fluid in soft tissue resulting in swelling) associated with a
variety of postoperative medical conditions. The Company's initial product,
which is marketed under the sofPulse(TM) name, is a compact, easy to operate,
non-invasive medical device designed to deliver pulsed electromagnetic energy
fields to soft tissue for the treatment of pain and edema. The Company's
principal marketing strategy is to market the sofPulse(TM) to nursing homes and
hospitals with access to substantial numbers of patients. The Company's
objective is to establish the sofPulse(TM) as a standard by which physicians and
other healthcare providers apply postoperative treatment for pain and edema.
(2) Common Stock
On June 11, 1996, the Company issued 421,950 shares of common stock in
connection with an investor's exercise of outstanding warrants issued in
connection with a private placement in November 1995.
6
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(3) Subsequent Event
On November 1, 1996, the Annual Meeting of Stockholders was held in
Deerfield Beach, Florida, after proper notice to its stockholders. The following
three proposals were duly approved at such meeting.
I. Election of Bruce Benner, Murray Feldman, Larry Haimovitch, Steven
Mayer, Joseph Mooibroek and David Saloff to serve as the Company's Board of
Directors until the next Annual Meeting of Stockholders.
II. Amendment of the Company's stock option plan ("the Plan") to increase
the common stock issuable under the Plan from 322,840 to 1,500,000 shares.
III. Amendment of the Company's Certificate of Incorporation to increase
the authorized shares from ten million (10,000,000) to thirty million
(30,000,000) shares of common stock and from one million (1,000,000) to ten
million (10,000,000) shares of preferred stock.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was organized in August 1990 and commenced marketing the
sofPulse(TM) device in early 1992. Losses incurred since inception have been
primarily attributable to costs incurred in connection with the development and
promotion of the Company's products, research and clinical studies and the
hiring of personnel necessary to support the Company's operations. Inasmuch as
the Company will continue to have a high level of operating expenses in the
future (including salaries of executive, research, technical and marketing
personnel) and will be required to make significant expenditures in connection
with research and clinical studies as well as the production of the sofPulse(TM)
devices held for rental, the Company anticipates that it will continue to incur
significant losses until, at the earliest, the Company generates sufficient
revenues to support its operations. There can be no assurance that the Company
will be able to achieve significantly increased revenues or profitable
operations.
Results of Operations
Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995
Revenues for the three months ended September 30, 1996 were $624,329,
compared to $394,624 for the three months ended September 30, 1995, an increase
of $229,705, or 58.2%. This was jointly attributable to an increase in sales
revenue from $82,600 for the three months ended September 30, 1995 to $184,900
for the three months ended September 30, 1996, an increase of $102,300, or
123.9%. During the three months ended September 30, 1996, the Company sold ten
(10) units to a distributor for use in the plastic and reconstructive surgery
markets. As the Company has historically focused its marketing efforts on the
rental of units as opposed to sales, there was limited sale of units during the
three months ended September 30, 1995. Rentals for the three months ended
September 30, 1996 were $439,429, compared with $312,024 for the three months
ended September 30, 1995, an increase of $127,405, or 40.8%. This increase was
due primarily to the expanded geographic coverage of the Company's independent
sales representatives, to a total of twenty states as of September 30, 1996. As
of September 30, 1996, 225 units were in rental placements with customers,
compared to 168 as of September, 1995, an increase of 57, or 33.9%.
Cost of revenues for the three months ended September 30, 1996 was
$82,573, compared to $52,709 for the three months ended September 30, 1995, an
increase of
8
<PAGE>
$29,864, or 56.7%. This increase was attributable primarily to the depreciation
on the increased number of sofPulse(TM) rental units.
Selling, general and administrative expenses were $816,713 for the three
months ended September 30, 1996, compared to $539,348 for the three months ended
September 30, 1995, an increase of $277,365, or 51.4%. This increase was
primarily due to salaries for additional personnel, including marketing,
clinical support services and sales management to support the Company's expanded
operations.
Research and development expenses decreased to $142,867 for the three
months ended September 30, 1996, compared to $560,826 for the three months ended
September 30, 1995, a decrease of $417,962, or 74.5%. This decrease was
primarily attributable to the decreased number of research and clinical studies
in connection with the Company's proposed PMA application.
Interest expense decreased to $(1,040) for the three months ended
September 30, 1996, from $(26,680) for the three months ended September 30,
1995, a decrease of $25,640, or 96.1%. This decrease was due to the Company's
paydown or conversion of all outstanding notes payable since its initial public
offering during May, 1995.
Interest and other income (expense) for the three months ended September
30, 1996, decreased to $24,916, compared to $45,430 for the three months ended
September 30, 1995, a decrease of $(20,514) or 45.2%. This decrease was
attributable primarily to the interest income generated by the Company's cash
balances.
The above resulted in a net loss of $(393,948) for the three months ended
September 30, 1996, compared to a net loss of $(739,513) for the three months
ended September 30, 1995.
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended September
30, 1995
Revenues for the nine months ended September 30, 1996 were $1,398,508,
compared to $1,296,404 for the nine months ended September 30, 1995, an increase
of $102,105, or 7.9%. This was primarily attributable to an increase in rental
revenue from $1,158,190 for the nine months ended September 30, 1996, compared
to $1,019,423 for the nine months ended September 30, 1995, an increase of
$138,767, or 13.6%. This was offset by a decrease in sales revenue from $276,981
for the nine months ended September 30, 1995 to $240,318 for the nine months
ended September 30, 1996, a decrease of $36,663, or 13.2%. During 1995, the
company sold forty (40) units to a distributor, of
9
<PAGE>
which seventeen (17) were sold during the nine months ended September 30, 1995.
As the Company has historically focused its marketing efforts on the rental of
units as opposed to sales, there has been limited sale of units during the nine
months ended September 30, 1996.
Cost of revenues for the nine months ended September 30, 1996 was
$195,361, compared to $152,181 for the nine months ended September 30, 1995, an
increase of $43,180, or 28.4%. This increase was attributable primarily to the
depreciation on the increased number of sofPulse(TM) rental units.
Selling, general and administrative expenses were $2,517,792 for the nine
months ended September 30, 1996, compared to $1,553,932 for the nine months
ended September 30, 1995, an increase of $963,860, or 62.0%. This increase was
primarily due to salaries for additional personnel, including clinical support
services for sales and professional fees including legal counsel to support the
Company's expanded operations.
Research and development expenses decreased to $613,903 for the nine
months ended September 30, 1996, compared to $1,277,738 for the nine months
ended September 30, 1995, a decrease of $663,835, or 52.0%. This decrease was
primarily attributable to the decreased number of research and clinical studies
in connection with the Company's proposed PMA application.
Interest expense for the nine months ended September 30, 1996 decreased to
$(8,175), compared to $(249,923) for the nine months ended September 30, 1995, a
decrease of $241,748, or 96.7%. This decrease was due to the Company's paydown
or conversion of all outstanding notes payable since its initial public offering
during May, 1995.
Interest and other income (expense) for the nine months ended September
30, 1996, increased to $109,528, compared to an expense of $(118,636) for the
nine months ended September 30, 1995. This increase was attributable primarily
to the interest income generated by the Company's cash balances, as well as the
absence of any amortization of any deferred loan costs during the nine months
ended September 30, 1996.
The above resulted in a net loss of $(1,827,195) for the nine months ended
September 30, 1996, compared to a net loss of $(2,056,005) for the nine months
ended September 30, 1995.
The Company adopted a provision of FASB No. 121, "Accounting for the
Impairment of long-lived Assets to be Disposed of", in 1996. The adoption of
FASB
10
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No. 121 did not have a material effect on the carrying value of the Company's
long-lived assets.
The Company does not presently intend to adopt in 1996 the fair value
based method as encouraged by Statement of Financial Accounting Standards (FASB)
No. 123, "Accounting for Stock-Based Compensation". Accordingly, there will be
no effect to the financial statements.
Liquidity and Capital Resources
Since inception, the Company has satisfied its working capital
requirements primarily through the issuance of equity securities and loans from
stockholders. At September 30, 1996, the Company had working capital of
$975,495.
Net Cash used in operating activities for the nine months ended September
30, 1996 was $1,662,876 compared to $2,163,844 for the nine months ended
September 30, 1995. The decrease in cash used in operating activities was
primarily attributable to the reduction of $(210,628) in outstanding notes
receivable during the nine months ended September 30, 1996 as compared to an
increase of $226,273 in outstanding notes receivable during the nine months
ended September 30, 1995.
Net Cash used in investing activities for the nine months ended September
30, 1996 was $419,549 compared to $219,441 for the nine months ended September
30, 1995. The increase in cash used in investing activities was primarily due to
expenditures related to the manufacture of sofPulse(TM) devices during the nine
months ended September 30, 1996.
Net Cash provided by financing activities for the nine months ended
September 30, 1996 was $(147,179) compared to $4,051,296 for the nine months
ended September 30, 1995. This was due primarily to the paydown of $120,000 in
notes payable during the nine months ended September 30, 1996, in contrast to
the receipt of the proceeds of the Company's initial public offering in May
1995.
As of September 30, 1996, the Company had outstanding warrants to purchase
an aggregate to 3,012,707 shares of Common Stock (including warrants to purchase
906,250 shares of Common Stock issued in connection with the Company's initial
public offering) at an exercise price ranging from $1.00 to $9.00 per share. In
addition, the Company had outstanding 421,950 shares of Convertible Preferred
Stock. The terms upon which the Company will be able to obtain additional
financing may be adversely affected since the holders of outstanding convertible
securities can be expected to exercise or convert them at a time when, in all
likelihood, the Company would be able to obtain any needed capital on terms more
favorable to the Company than those provided by such securities.
11
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The Company's capital requirements have been and will continue to be
significant. The Company believes, based on its currently proposed growth plans
and assumptions relating to its operations, that its available cash resources,
together with projected cash flow from operations, will not be sufficient to
satisfy its cash requirements for the foreseeable future. While the Company is
currently exploring potential financing opportunities, the Company has no
agreements with respect to any additional financing. There can be no assurance
that additional financing to fund the Company's ongoing operations will be
available on commercially reasonable terms, or at all. Failure to obtain any
such financing could have a material adverse effect on the Company.
12
<PAGE>
Legal Proceedings
In April of 1996, an individual filed an action against one of the
Company's former customers entitled Vee Cee, et al. vs. Elite Performance
Physical Therapy, et al. in Superior Court of the State of California in the
County of Orange. The defendant filed a cross complaint in the same court naming
the Company as the cross-defendant. The plaintiff alleges sustaining burns
during therapy administered by Elite Performance Therapy, during which the
sofPulse was used adjunctively. The Company believes it has meritorious defenses
which it will vigorously pursue. The Company's general liability insurance
carrier has agreed to assume defense and legal representation in this matter
within the terms of the general liability policy. There can be no assurance of
the outcome of this action or whether it will be resolved favorably to the
Company.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27. Financial Data Schedule.
(b) During the quarter ended September 30, 1996, the Company did not file
any reports on Form 8-K.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ELECTROPHARMACOLOGY, INC.
Registrant
Dated: November 13, 1996 /s/ Joseph Mooibroek
------------------------
Joseph Mooibroek
Chief Executive Officer
Dated: November 13, 1996 /s/ Donald F. Soldatis
------------------------
Donald F. Soldatis
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 840,144
<SECURITIES> 0
<RECEIVABLES> 589,136
<ALLOWANCES> 85,100
<INVENTORY> 0
<CURRENT-ASSETS> 1,746,443
<PP&E> 1,081,236
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,971,436
<CURRENT-LIABILITIES> 770,948
<BONDS> 0
34,964
0
<COMMON> 4,220
<OTHER-SE> 2,150,227
<TOTAL-LIABILITY-AND-EQUITY> 2,971,436
<SALES> 240,318
<TOTAL-REVENUES> 1,398,508
<CGS> 195,361
<TOTAL-COSTS> 195,361
<OTHER-EXPENSES> 3,131,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,175
<INCOME-PRETAX> (1,827,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,827,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,827,195)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
