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 March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) 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)
(305) 975-9818
(Issuer's telephone number, including area code)
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: As of May 10, 1996 there were
3,074,474 shares of the issuer's common stock, $.01 par value, outstanding.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
<PAGE>
ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Information
Balance Sheets as of March 31, 1995 and December 31,
1996. 2
Statements of Operations for the three months ended
March 31, 1995 and 1996. 3
Statements of Cash Flows for the three months ended
March 31, 1995 and 1996. 4
Notes to Financial Statements. 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three months
ended March 31, 1996 and 1995. 6
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 6. Exhibits and Reports on Form 8-K 9
Signatures 10
2
<PAGE>
Item 1. Financial Statements
1
<PAGE>
ELECTROPHARMACOLOGY, INC.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS December 31, March 31,
1995 1996
----------------------------
<S> <C> <C>
Current assets :
Cash $ 3,069,748 $ 2,223,548
Trade accounts receivable, net of allowance for doubtful accounts of $85,100 256,832 301,067
Current portion of trade notes receivable 269,711 236,804
Prepaid expenses 64,659 49,779
----------------------------
Total current assets 3,660,950 2,811,198
Deposits 12,091 19,822
Trade notes receivable, less current maturities 273,623 215,512
Property and equipment, net 876,345 973,935
Other intangible assets 54,171 53,293
----------------------------
Total assets $ 4,877,180 $ 4,073,760
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 251,209 $ 303,700
Accrued expenses 266,278 279,981
Accrued commissions 83,154 77,872
Accrued payroll 60,332 51,000
Customer deposits 7,561 7,561
Notes payable to related parties (note 2) 120,000 --
Current maturities of obligations under capital leases 48,226 48,024
----------------------------
Total current liabilities 836,760 768,138
Obligations under capital leases, less current maturities 28,033 20,235
----------------------------
Total liabilities 864,793 788,373
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, 3,074,474 shares
issued and 3,063,981 shares outstanding 30,745 30,745
Additional paid-in capital 11,227,601 11,227,601
Treasury stock (60,000) (60,000)
Deficit (7,190,179) (7,917,179)
----------------------------
Total shareholders' equity 4,012,387 3,285,387
----------------------------
Total liabilities and shareholders' equity $ 4,877,180 $ 4,073,760
============================
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
Electropharmacology, Inc.
Statements of Operations
For the three months ended
March 31,
--------------------------
1995 1996
---------- ----------
Revenues:
Sales $ -- $ 18,560
Rental 364,683 351,863
-------------------------
Total Revenue 364,683 370,423
Cost of revenues 42,075 41,861
-------------------------
Gross Profit 322,608 328,562
Selling, general and administrative expenses 602,719 768,908
Research and development 231,809 324,693
-------------------------
Loss from operations (511,920) (765,039)
Interest expense (176,812) (1,140)
Interest and other income (expense) (76,815) 39,179
-------------------------
Net Loss $ (765,547) $ (727,000)
=========================
Net loss per common share $ (0.47) $ (0.24)
=========================
Weighted average common shares outstanding 1,628,529 3,063,981
See accompanying notes to financial statements
3
<PAGE>
Electropharmacology, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the three months ended
March 31
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities
Net loss $ (765,547) $ (727,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 55,291 56,169
Amortization of deferred loan costs and accretion of discount
on notes payable 198,659 --
Changes in operating assets and liabilities :
Increase in trade accounts receivable (19,074) (44,235)
Decrease in trade notes receivable -- 91,018
(Increase) decrease in prepaid expenses and other assets (16,561) 14,880
Increase in deposits -- (7,731)
Increase (decrease) in accounts payable and accrued expenses 200,499 51,580
-----------------------------
Net cash used in operating activities (346,733) (565,319)
-----------------------------
Cash flows from investing activities
Purchases of property and equipment (56,620) (152,881)
-----------------------------
Net cash used in investing activities (56,620) (152,881)
-----------------------------
Financing activities
Net proceeds from issuance of notes payable 300,000 --
Repayments of notes payable to related parties and others -- (120,000)
Increase in deferred offering costs (158,803) --
Capital lease payments (10,000) (8,000)
-----------------------------
Net cash provided by financing activities 131,197 (128,000)
-----------------------------
Net decrease in cash (272,156) (846,200)
Cash, beginning of period 478,903 3,069,748
-----------------------------
Cash, end of period $ 206,747 $ 2,223,548
=============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net $ 30,407 $ 1,140
Income Taxes $ -- $ --
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
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 March 31, 1996 and results of its
operations and its cash flows for the quarter then ended and the quarter ended
March 31, 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 ended March 31, 1996 and 1995 are not necessarily indicative of results
to be expected for the full year.
The Company 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 MRT(R)
sofPulse(TM) name ("sofPulse"), 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 sofPulse to nursing homes and hospitals with access to
substantial numbers of patients. The Company's objective is to establish
sofPulse as a standard by which physicians and other healthcare providers apply
postoperative treatment for pain and edema.
(2) Notes Payable
The Company repaid the final $120,000 of its outstanding notes payable to
related parties during January 1996.
5
<PAGE>
ITEM 2. 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 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 and the production of the sofPulse devices
held for rental and/or sale, the Company anticipates that it will continue to
incur significant losses until, at the earliest, the Company generates
sufficient revenues to support its operations. The Company believes that
generation of that level of revenues is dependent upon, among other things, the
Company's ability to successfully complete research and clinical studies; build
an effective sales organization; and increase significantly the sale and rental
of sofPulse devices in existing and target markets. There can be no assurance
that the Company will be able to achieve any of the foregoing or that the
Company will achieve significantly increased revenues or profitable operations.
Results of Operations
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995.
Revenues for the quarter ended March 31, 1996 were $370,423, compared to
$364,683 for the quarter ended March 31, 1995, an increase of $5,740, or 1.6%.
At March 31, 1995, there were approximately 129 sofPulse units in rental
placements. Comparatively, as of March 31, 1996, there were approximately 199
units in rental placements; however, a significant number of these units were
recent placements. The Company's rental agreements typically provide that rental
fees per sofPulse unit increase during the early months of the rental period as
usage increases and therefore, it takes several months from the initial rental
date for the Company to recognize a higher average rental price. This factor is
primarily responsible for the decrease in rental revenue from $364,683 for the
quarter ended March 31, 1995 to $351,863 for the quarter ended March 31, 1996, a
decrease of $12,820, or 3.5%. As the company has historically focused its
marketing efforts on the rental of units, there was no revenue from the sale of
units during the quarter ended March 31, 1995; comparatively, the Company sold
two used units to past customers for $18,560 during the quarter ended March 31,
1996.
Cost of revenues for the quarter ended March 31, 1996 was $41,861, compared
to $42,075 for the quarter ended March 31, 1995, a decrease of $214, or 0.5%.
6
<PAGE>
Selling, general and administrative expenses were $768,908 for the quarter
ended March 31, 1996, compared to $602,719 for the quarter ended March 31, 1995,
an increase of $166,189, or 27.6%. This increase is primarily due to salaries
for additional personnel to support the Company's expanded operations.
Research and development expenses increased to $324,693 for the quarter
ended March 31, 1996, compared to $231,809 for the quarter ended March 31, 1995,
an increase of $92,884, or 40.1%. This increase is primarily attributable to an
increased number of research and clinical studies in connection with the
Company's application with the U.S. Food and Drug Administration for premarket
approval (the "PMA application") of the sofPulse unit as well as product
development and testing.
Interest expense for the quarter ended March 31, 1996 decreased to $1,140,
from $176,812 for the quarter ended March 31, 1995, a decrease of $175,672, or
99.4%. This decrease is due to the Company's repayment in full or conversion
into Common Stock of all outstanding notes payable since its initial public
offering during May 1995.
Interest and other income (expense) for the quarter ended March 31, 1996
increased to $39,179, compared to an expense of $(76,815) for the quarter ended
March 31, 1995. This increase was attributable primarily to the interest income
generated by the Company's cash balances.
The above resulted in a net loss of $(727,000) for the quarter ended March
31, 1996, compared to a net loss of $(765,547) for the quarter ended March 31,
1995.
The Company has adopted the provisions of the Statement of the Financial
Accounting Standards Board ("FASB") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of
FASB 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 FASB No. 123, "Accounting for Stock-Based Compensation."
Accordingly, there will be no effect to the financial statements.
Liquidity and Capital Resources
Net cash used in operating activities for the quarter ended March 31, 1996
was $565,319, as compared to $346,733 for the quarter ended March 31, 1995. The
increase in cash used was mainly attributable to more timely payments of
accounts payable.
Net cash used in investing activities was $152,881 for the quarter ended
March 31, 1996, as compared to $56,620 for the quarter ended March 31, 1995.
This increase is attributable exclusively to the purchase of materials used in
the manufacturing of the sofPulse device.
7
<PAGE>
Net cash used in financing activities was $(128,000) for the quarter ended
March 31, 1995, as compared to $131,197 provided by financing activities for the
quarter ended March 31, 1995. Net cash provided by financing activities for the
quarter ended March 31, 1995 was the result of the receipt of the $300,000 in
interim bridge financing from David Saloff, the Company's President and Chief
Executive Officer, partially offset by the increase in deferred offering costs
related to the Company's initial public offering. In contrast, during the
quarter ended March 31, 1996, the Company repaid of the remaining $120,000
balance of its outstanding notes payable due to related parties. At March 31,
1996, the Company had cash of $2,223,548.
The Company's capital requirements have been and will continue to be
significant. Since inception, the Company has satisfied its working capital
requirements primarily through the issuance of equity securities and loans from
stockholders. At March 31, 1996, the Company had working capital of $2,043,060.
As of March 31, 1996, the Company had outstanding warrants to purchase an
aggregate of 3,434,657 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 $.01 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.
The Company believes, based on its currently proposed plans and assumptions
relating to its operations (including the timetable of, and costs associated
with the preparation and filing of the PMA application), that its available cash
resources, together with projected cash flow from operations, will be sufficient
to complete research and clinical studies, prepare and file a PMA application
and otherwise satisfy its contemplated cash requirements. There can be no
assurance that the available cash resources or cash flow from operations will be
sufficient to enable the Company to complete necessary research and clinical
studies and file a PMA application or that additional financing, if required,
will be available to the Company on commercially reasonable terms, or at all.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In March 1996, a former employee of the Company filed an action against the
Company entitled Marchetti v. MRT Therapeutics, Inc. et al in Federal District
Court, Southern District of Florida. The plaintiff alleges sexual harassment
with pendant state
8
<PAGE>
claims. The action is in the preliminary stage and no discovery has been
conducted. There can be no assurance that the outcome of such action 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 March 31, 1996 the Company did not file any
Reports on Form 8-K.
9
<PAGE>
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: May 13, 1996 /s/ David Saloff
-----------------------
David Saloff
President
Chief Executive Officer
Dated: May 13, 1996 /s/ Donald Soldatis
-----------------------
Donald Soldatis
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-QSB AT MARCH 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,223,548
<SECURITIES> 0
<RECEIVABLES> 301,067
<ALLOWANCES> 85,100
<INVENTORY> 0
<CURRENT-ASSETS> 2,811,198
<PP&E> 973,935
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,073,760
<CURRENT-LIABILITIES> 768,138
<BONDS> 0
0
4,220
<COMMON> 30,745
<OTHER-SE> 3,250,422
<TOTAL-LIABILITY-AND-EQUITY> 4,073,760
<SALES> 18,560
<TOTAL-REVENUES> 370,423
<CGS> 41,861
<TOTAL-COSTS> 41,861
<OTHER-EXPENSES> 324,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,140
<INCOME-PRETAX> (727,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (727,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727,000)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
