<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(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 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)
(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
--- ---
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ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB/A
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Balance Sheets as of December 31, 1995 and September 30, 1996 3
Statements of Operations for the three months ended September
30, 1995 and 1996. 4
Statements of Operations for the nine months ended September 30,
1995 and 1996. 5
Statements of Cash Flows for the nine months ended September 30,
1995 and 1996. 6
Notes to Financial Statements. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months ended
September 30, 1995 and 1996. 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the nine months ended September
30, 1995 and 1996. 10
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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ITEM 1. FINANCIAL STATEMENTS
ELECTROPHARMACOLOGY, INC.
BALANCE SHEETS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, SEPTEMBER 30,
- ------ 1995 1996
(RESTATED)
----------------------------
<S> <C> <C>
Current assets :
Cash $ 3,069,748 $ 840,144
Trade accounts receivable, net of allowance for doubtful
accounts of $97,600 at September 30, 1996 and $85,100 at
December 31, 1996 256,832 576,636
Inventory - 257,088
Current portion of trade notes receivable 269,711 258,294
Prepaid expenses 64,659 51,369
--------------------------
Total current assets 3,660,950 1,983,531
Deposits 12,091 17,810
Trade notes receivable, less current maturities 273,623 74,412
Property and equipment, net 876,345 792,126
Other intangible assets 54,171 54,373
--------------------------
Total assets $ 4,877,180 $ 2,922,252
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 251,209 $ 196,016
Accrued expenses 266,278 420,548
Accrued commissions 83,154 111,928
Accrued payroll 60,332 90,702
Customer deposits 7,561 7,561
Due to related parties - 131,384
Notes payable to related parties 120,000 -
Current maturities of obligations under capital leases 48,226 33,784
--------------------------
Total current liabilities 836,760 991,923
Obligations under capital leases, less current maturities 28,033 11,077
--------------------------
Total Liabilities 864,793 1,003,000
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, 421,950 shares issued and outstanding 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 30,745 34,964
Additional paid-in capital 11,227,601 11,227,601
Treasury stock, at cost, 10,493 common shares (60,000) (60,000)
Deficit (7,190,179) (9,287,533)
--------------------------
Total shareholders' equity 4,012,387 1,919,252
--------------------------
Total liabilities and shareholders' equity $ 4,877,180 $ 2,922,252
==========================
</TABLE>
See accompanying discussion of the financial statements
3
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ELECTROPHARMACOLOGY, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1995 1996
(RESTATED)
----------------------------
Revenues:
Rentals $ 312,024 $ 439,429
Sales 82,600 184,900
----------- -----------
Total revenue 394,624 624,329
Cost of Revenues 52,709 95,581
----------- -----------
Gross profit 341,915 528,748
Selling, general and administrative expenses 539,348 1,015,004
Research and development expense 560,829 201,727
----------- -----------
Loss from operations (758,263) (687,983)
Interest expense (26,680) (1,040)
Interest and other income (expense) 45,430 24,916
----------- -----------
Net loss $ (739,513) $ (664,107)
===========================
Net loss per common share $ (0.26) $ (0.19)
Weighted average common shares outstanding 2,878,529 3,485,931
See accompanying notes to the financial statements.
4
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ELECTROPHARMACOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
1995 1996
(RESTATED)
-------------------------------
Revenues:
Rentals $ 1,019,423 $ 1,158,190
Sales 276,981 240,318
------------- -------------
Total revenue 1,296,404 1,398,508
Cost of Revenues 152,181 208,369
------------- -------------
Gross profit 1,144,223 1,190,139
Selling, general and administrative expenses 1,553,932 2,716,083
Research and development expense 1,277,738 672,763
------------- -------------
Loss from operations (1,687,447) (2,198,707)
Interest expense (249,923) (8,175)
Interest and other income (expense) (118,636) 109,528
------------- -------------
Net loss $ (2,056,005) $ (2,097,354)
===============================
Net loss per common share $ (0.92) $ (0.65)
Weighted average common shares outstanding 2,242,082 3,234,917
See accompanying notes to the financial statements
5
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ELECTROPHARMACOLOGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
1995 1996
(RESTATED)
----------------------------
<S> <C> <C>
Operating activities
Net loss: $ (2,056,006) $ (2,097,354)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 168,511 222,158
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) (319,804)
Increase in inventory - (257,088)
Increase (decrease) in notes receivable - Net of discount (226,273) 210,628
Decrease (increase) in prepaids and other (66,493) 5,588
Decrease (increase) in deposits 135 (5,719)
Increase (decrease) in accounts payable and accrued expenses
and due to related party (251,971) 289,605
----------------------------
Net cash used in operating activities (2,163,844) (1,951,986)
----------------------------
Cash flows from investing activities:
Capital expenditures, net (219,441) (130,439)
----------------------------
Net cash used in investing activities (219,441) (130,439)
----------------------------
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 used by financing activities 4,051,296 (147,179)
----------------------------
Net 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.
6
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ELECTROPHARMACOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(RESTATED)
(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.
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
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 as a
result of an investor's exercise of outstanding warrants issued in connection
with a private placement in November, 1995.
(3) SUBSEQUENT EVENT
On November 1, 1996, the Company's Annual Meeting of Stockholders was held
in Deerfield Beach, Florida, after proper notice to its stockholders. The
following three proposals were duly approved by a majority of the outstanding
shares of common stock:
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.
7
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III. Amendment of the Company's certificate of incorporation to increase
the authorized shares from 10,000,000 to 30,000,000 shares of common stock and
from 1,000,000 to 10,000,000 shares of preferred stock.
(4) RESTATEMENT
The Company has restated its financial statements as of and for the three
and nine months ended September 30, 1996, to adjust for transactions that were
improperly recorded during the quarter ended December 31, 1996. The nature and
amount of the adjustments include recording employment related liabilities of
$131,000, accruing professional fees for services rendered of $82,000, recording
payroll related liabilities of $16,000, increasing the allowance for doubtful
accounts by $13,000, reducing the carrying value of obsolete rental equipment by
$13,000 and other miscellaneous adjustments totaling $15,000. These adjustments
resulted in an increase in previously reported September 30, 1996 net loss of
$270,159 and loss per share of $0.09. The Company also reclassified $257,088 to
inventory from property and equipment.
8
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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
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 20 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 $95,581,
compared to $52,709 for the three months ended September 30, 1995, an increase
of $29,864, or 56.7%. This increase was attributable primarily to the
depreciation on the increased number of SofPulse-TM- rent units.
Selling, general and administrative expenses were $1,015,004 for the three
months ended September 30, 1996, compared to $539,348 for the three months ended
September 30, 1995, an increase of $475,656, or 88.2%. This increase was
primarily due to salaries and other employment related expenses for additional
personnel, including new senior management, marketing, clinical support services
and sales management to support the Company's expanded operations.
9
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Research and development expenses decreased to $201,727 for the three
months ended September 30, 1996, compared to $560,829 for the three months ended
September 30, 1995, a decrease of $359,102, or 64.0%. 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 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 $(664,107) 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 $1,296,403 for the nine months ended September 30, 1995, an increase
of $102,105, or 7.9%. This is 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 40 units to a distributor, of which 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 $208,369,
compared to $152,181 for the nine months ended September 30, 1995, an increase
of $56,188, or 36.9%. This increase was attributable primarily to the
depreciation on the increased number of SofPulse-TM- rental units.
Selling, general and administrative expenses were $2,716,083 for the nine
months ended September 30, 1996, compared to $1,553,932 for the nine months
ended September 30, 1995, an increase of $1,162,151, or 74.8%. This increase
was primarily due to salaries and other employment related expenses for
additional personnel, including new senior management, clinical support
services, sales management and professional fees, including legal counsel, to
support the Company's expanded operations.
Research and development expenses decreased to $672,763 for the nine months
ended September 30, 1996, compared to $1,277,738 for the nine months ended
September 30, 1995, a decrease of $604,975, or 47.3%. This decrease was
primarily attributable to the
10
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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 $(2,097,354) for the nine months ended
September 30, 1996, compared to a net loss of $(2,056,006) 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 No. 121 did not have a material effect on the carrying value of the
Company's long-lived assets.
The Company adopted in 1996 the fair value based method as encouraged by
Statement of Financial Accounting Standards (FASB) No. 123, "Accounting for
Stock-Based Compensation," effective as of December 31, 1996. Accordingly,
there will be no effect on 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 $991,608.
Net cash used in operating activities for the nine months ended September
30, 1996 was $1,951,986 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 ending September 30, 1996 as compared to an
increase of $226,273 in outstanding notes receivable during the nine months
ending September 30, 1995. The Company also increased inventory levels for the
manufacture of SofPulse-TM- devices by $257,088 for the nine months ended
September 30, 1996.
Net cash used in investing activities for the nine months ended September
30, 1996 was $130,439 compared to $219,441 for the nine months ended September
30, 1995. The decrease in cash used in investing activities is primarily due to
fewer sofPulse-TM- devices manufactured during the nine month period ended
September 30, 1996.
Net cash used by financing activities for the nine months ended September
30, 1996 was $147,179 compared to net cash provided by financing activities of
$4,051,296 for the nine months ended September 30, 1995. This was due primarily
to the paydown of $120,000
11
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in notes payable during the nine months ended September 30, 1996, in contrast
to the receipt of proceeds from the public offering consummated in May 1995.
As of September 30, 1996, the Company had outstanding warrants to purchase
an aggregate of 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.
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
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ITEM 1. Legal Proceedings
In April of 1996, an action against one of the Company's former customers
entitled Vee Cee, et al. vs. Elite Performance Physical Therapy, et al. was
filed 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 mange 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: July 8, 1997 /s/ DR. ARUP SEN
--------------------------------
Dr. Arup Sen
Chief Executive Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-OSB/A 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> 576,636
<ALLOWANCES> 97,600
<INVENTORY> 257,088
<CURRENT-ASSETS> 1,983,531
<PP&E> 792,126
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,922,252
<CURRENT-LIABILITIES> 991,923
<BONDS> 0
0
4,220
<COMMON> 34,964
<OTHER-SE> 1,977,668
<TOTAL-LIABILITY-AND-EQUITY> 1,919,252
<SALES> 240,318
<TOTAL-REVENUES> 1,398,508
<CGS> 208,369
<TOTAL-COSTS> 208,369
<OTHER-EXPENSES> 3,388,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,175
<INCOME-PRETAX> (2,097,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,097,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,097,354)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
