<PAGE>
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, 1997
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
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, 1997
----- ----------------------------
Common Stock, $.01 par value 3,802,133
---------
Transitional Small Business Disclosure Format:
YES NO X
---- ----
<PAGE>
ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Balance Sheets as of September 30, 1997 and December 31, 1996 3
Statements of Operations for the three months
ended September 30, 1997 and 1996 4
Statements of Operations for the nine months ended
September 30, 1997 and 1996 5
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures
<PAGE>
ELECTROPHARMACOLOGY, INC.
BALANCE SHEETS
(Unaudited With Respect To September 30, 1997)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
- ------ 1997 1996
----------------------- ---------------------
Current assets:
<S> <C> <C>
Cash $ 12,521 $ 223,523
Trade accounts receivable, net of allowance for doubtful accounts 305,396 572,202
of $55,000 at September 30, 1997 and $134,000 at December 31, 1996
Inventory 231,270 94,164
Trade notes receivable - 248,190
Prepaid expenses 200,470 50,127
------------ ------------
Total current assets 749,657 1,188,206
Rental and other equipment, net 892,834 945,058
Deposits 17,951 17,810
Intangible assets, net 172,685 62,006
------------ ------------
Total assets $ 1,833,127 $ 2,213,080
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 809,403 $ 536,170
Accrued expenses 469,486 324,551
Accrued payroll 28,070 104,701
Customer deposits 7,561 7,561
Note payable to related parties 8,000 -
Current maturities of obligations under capital leases and notes 152,232 22,386
payable ------------ ------------
Total current liabilities 1,474,752 995,369
Note payable to finance company 22,533 -
Obligations under capital leases, less current maturities - 3,336
------------ ------------
Total liabilities 1,497,285 998,705
Shareholders' equity:
Preferred stock, $0.01 par value - 10,000,000 shares authorized; 2,430 4,220
issued and outstanding 242,950
Common stock, $0.01 par value - 30,000,000 shares authorized; 38,021 35,402
3,802,133 shares issued and outstanding
Additional paid-in capital 15,030,672 14,834,010
Unearned compensation (26,662) -
Treasury stock, at cost, 10,493 common shares (60,000) (60,000)
Deficit (14,648,619) (13,599,257)
------------ ------------
Total shareholders' equity 335,842 1,214,375
------------ ------------
Total liabilities and shareholders' equity $ 1,833,127 $ 2,213,080
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
ELECTROPHARMACOLOGY, INC.
Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Revenue:
Rentals $ 327,862 $ 439,429
Sales 143,050 184,900
---------- ----------
Total revenue 470,912 624,329
Operating expenses:
Cost of revenue 128,204 95,581
Selling, general and administrative expenses 604,805 1,015,004
Research and development expenses 37,809 201,727
---------- ----------
Total operating expenses 770,818 1,312,312
---------- ----------
Loss from operations (299,906) (687,983)
Other income (expense)
Interest expense (3,266) (1,040)
Interest and other income 2,473 24,916
Loss on disposal of equipment (29,161) -
---------- ----------
Total other income (expense) (29,954) 23,876
---------- ----------
Net loss $ (329,860) $ (664,107)
========== ==========
Net loss per common share $ (0.09) $ (0.19)
========== ==========
Weighted average number of common shares outstanding 3,747,971 3,485,931
========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
ELECTROPHARMACOLOGY, INC.
Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Revenue:
Rentals $ 1,555,613 $ 1,158,190
Sales 430,050 240,318
----------- -----------
Total revenue 1,985,663 1,398,508
Operating expenses:
Cost of revenue 330,853 208,369
Selling, general and administrative expenses 2,454,805 2,716,083
Research and development expenses 220,982 672,763
----------- -----------
Total operating expenses 3,006,640 3,597,215
----------- -----------
Loss from operations (1,020,977) (2,198,707)
Other income (expense)
Interest expense (8,848) (8,175)
Interest and other income 9,625 109,528
Loss on disposal of equipment (29,161) -
----------- -----------
Total other income (expense) (28,384) 101,353
----------- -----------
Net loss $(1,049,361) $(2,087,354)
=========== ===========
Net loss per common share $ (0.31) $ (0.65)
=========== ===========
Weighted average number of common shares outstanding 3,368,128 3,234,917
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
ELECTROPHARMACOLOGY, INC.
Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
Operating activities
Net loss $(1,049,361) $(2,097,354)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 217,071 222,158
Decrease in provision for doubtful accounts (79,000) -
Loss on disposal of equipment 29,161 -
Liability incurred for severance agreement 128,700 -
Issuance of common stock for services 159,536 -
Changes in operating assets and liabilities
Accounts receivable 345,806 (319,804)
Trade notes receivable 248,190 210,628
Inventory (137,106) (257,088)
Prepaid expenses 19,128 5,588
Rental equipment (SofPulse units) (197,193) -
Accounts payable and accrued expenses 341,537 289,605
----------- -----------
Net cash provided by (used in) operating activities 26,469 (1,946,267)
----------- -----------
Investing Activities
Proceeds from sale of equipment 7,300 -
Purchases of property and equipment (504) (130,439)
Deposits and other assets (114,431) (5,719)
----------- -----------
Net cash used in investing activities (107,635) (136,158)
----------- -----------
Financing Activities
Proceeds from issuance of common stock and warrants 11,293 4,219
Principal payments on capital lease obligations (20,429) (31,398)
Repayment of notes payable to related parties (120,700) (120,000)
----------- -----------
Net cash used in financing activities (129,836) (147,179)
----------- -----------
Net decrease in cash (211,002) (2,229,604)
Cash at beginning of period 223,523 3,069,748
----------- -----------
Cash at end of period $ 12,521 $ 840,144
=========== ===========
Supplemental Disclosures Of Cash Flow Information
Cash paid during the period for interest, net $ 8,848 $ 7,855
=========== ===========
Supplemental Disclosures Of Noncash Financing Activities
Issuance of common stock for services, net of unearned compensation $ 159,536 $ -
Asset recognized and liability incurred for the financing of the $ 169,472 $ -
directors and officers liability and commercial liability insurance
premiums
Liability incurred for execution of severance agreement with related $ 128,700 $ -
party =========== ===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
ELECTROPHARMACOLOGY, INC.
Notes To Financial Statements
(1) Basis Of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete audited financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three- and nine-month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996.
Certain 1996 balances have been reclassified to conform with the
presentation used in 1997.
(2) Notes Payable To Related Party
On April 12, 1997, the Company and the former President entered into a
severance agreement that provides for, among other things, a cash payment by
the Company of $128,700 over approximately five months in settlement of all
rights under his employment agreement with the Company. The balance due under
this agreement at September 30, 1997 was $8,000.
(3) Notes Payable To Finance Company
On April 22, 1997, the Company entered into an insurance premium finance
agreement for the directors and officers liability insurance. Coverage is
effective for the 24-month period from March 15, 1997 to March 15, 1999. In
addition, on July 31, 1997, the Company entered into an insurance premium
finance agreement for the commercial general liability insurance. Coverage is
effective for the 12-month period from July 21, 1997 to July 21, 1998.
A summary of the notes payable is as follows:
SEPTEMBER 30,
1997
------------
7.9% Note payable due in monthly installments of $ 151,628
$11,379 to November 1998; secured by unearned
premiums
9.75% Note payable due in monthly installments of $ 17,844
$2,633 to April 1998; secured by unearned premiums
Less: Current portion (146,939)
---------
$ 22,533
=========
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Electropharmacology, Inc. (the "Company") is developing new medical
applications for pulsed electromagnetic signals ("PEMS") in the radio frequency
range and manufactures and markets SofPulse(TM), a medical device developed by
the Company utilizing PEMS(TM) technology. The Company was incorporated under
the laws of the State of California in August 1990 under the name Magnetic
Resonance Therapeutics, Inc., and was reorganized through a merger with and into
Electropharmacology, Inc., a Delaware corporation, in February 1995. The
Company's executive offices are located at 2301 NW 33rd Court, Suite 102,
Pompano Beach, FL 33069, and its telephone number is (954) 975-9818.
The Company's product, which is marketed under the name SofPulse(TM),
is an easy to operate, noninvasive device that delivers pulsed radio frequency
("PRF") energy fields that are believed to affect superficial soft tissues. To
date, the Company's focus has been the application of PEMS(TM) as an adjunct in
the palliative treatment of pain and edema associated with various medical
conditions that involve superficial soft tissue injury. Edema is localized
tissue swelling resulting from an abnormal accumulation of fluid in the tissue
and frequently represents an obstacle to the achievement of effective healing of
soft tissue damages from conventional medical treatment. Edema can also result
in a permanent loss of range of motion. Since PRF can be administered through
clothing, casts or dressings, the SofPulse(TM) is a cost effective adjunct for
the palliative treatment of pain and edema without any known adverse effects.
PEMS treatment is based on broadcasting pulsed electromagnetic fields
to achieve therapeutic benefits when applied to superficial soft tissue. To
date, the SofPulse(TM) has been used as an adjunct for palliative treatment of
postoperative pain and edema in various superficial soft tissues that suffer
damage in medical conditions such as acute or chronic (non-healing or
recalcitrant) skin ulcers, edema and pain resulting from trauma of hand and
ankle, pain associated with sprains of the lower back, and pain and edema
following reconstructive and plastic surgery. The traditional treatment of pain
and edema generally involves a combination of analgesic and anti-inflammatory
drugs and superficial approaches such as the application of ice packs. PEMS(TM)
has been used by clinicians as an adjunct to these other approaches.
The Company commenced commercially marketing the SofPulse(TM) device
in early 1992. The Company's principal marketing efforts are directed toward
health care professionals and providers engaged in medical and health care
practices. The Company's strategy has been to market the SofPulse(TM) to nursing
homes and hospitals with access to substantial numbers of patients and, to a
lesser extent, to plastic, reconstructive, and orthopedic surgeons. The Company
initially focused its marketing strategy on rentals pursuant to which the user
was billed by the Company, on a monthly basis, for the actual time the SofPulse
was used by the clinicians to treat patients. The Company's objective is to
establish PEMS(TM) delivery by the SofPulse(TM) as a recognized modality used by
physicians and other health care practitioners, including physical therapists,
occupational therapists and other professionals to treat postoperative pain and
edema. Since its introduction in commercial marketing, the SofPulse(TM) has been
used to administer more than 250,000 treatments to thousands of patients.
In order to further expand the use of this non-invasive treatment
modality, the Company has continued to expand its technology base that may
enable it to design proprietary devices suitable for the delivery of various
signals to (i) different anatomical locations of the body, and (ii) facilitate
the healing of damaged tissues. The Company intends to conduct clinical
evaluations of specific PEMS(TM) in medical conditions where the reduction of
pain and edema is desirable for improved patient outcomes as well as in
additional markets that may be addressed by broad use of its proprietary signals
in tissue regeneration. In order to improve its competitive advantage in the
expanded market segments in the future, the Company intends to expand its patent
portfolio, which currently consists of three issued U.S. patents and several
pending patent applications in the U.S. and in certain foreign countries. The
Company also intends to engage in research and development aimed at exploring
the use of PEMS(TM) in tissue regeneration and the delivery of
biopharmaceuticals to target tissues.
The Company's principal sources of revenue have been rental fees
charged to nursing homes and hospitals for the use of the SofPulse(TM) and
revenue generated from sales of the SofPulse(TM) to certain distributors and
surgeons. To date, the Company has generated limited revenue from sales and
rentals of the SofPulse, which has achieved only limited market acceptance. The
Company announced on July 15, 1997 that the U.S. Health Care Financing
Administration ("HCFA") decided to implement, effective as of July 14, a policy
denying Medicare reimbursement for the use of all electrical stimulation,
including pulsed electromagnetic fields, in treating wounds due to lack of
sufficient proof that electrical stimulation promotes the healing of wounds. The
Company's SofPulse(TM) product is currently used as an adjunct for the treatment
of edema and pain associated
8
<PAGE>
with superficial tissue injuries, including wounds, and not to promote wound
healing. HCFA's new policy only relates to the use of SofPulse(TM) in promoting
wound healing. The Company is attempting to obtain clarification from HCFA and
Medicare fiscal intermediaries to define the medical conditions where a
physician's prescription for the use of SofPulse(TM) would be denied as a result
of this new policy. In the meantime, the Company's rental revenues have been
materially adversely affected because wound patients represent a significant
population of patients who currently receive SofPulse(TM) treatment at nursing
homes that customarily do not monitor and bill for the use of SofPulse(TM)
specifically to treat edema or pain. As a result, the Company has now made a
strategic shift to selling its SofPulse(TM) devices at significantly reduced
prices to the facilities that are currently renting them. In order to facilitate
the sale of its devices, the Company has made the purchase more feasible to the
nursing homes by offering them a one-time lease/purchase through third party
leasing arrangements. For those facilities that do not wish to purchase the
devices, an option to enter into an operating lease at a flat monthly rental
rate has been made available. The Company does not know whether these efforts
will result in the sale of an appreciable number of devices.
The Company announced on July 18, 1997 that its purchase-distribution
agreement with National Patient Care Systems, Inc. ("NPCS') was terminated
following the announcement by HCFA of its new policy denying Medicare
reimbursement for the use of all electrical stimulation, including pulsed
electromagnetic fields, in treating wounds. The multi-year distribution
agreement for the sale and rental of SofPulse(TM) devices was initially executed
as of May 1, 1997 and required NPCS to purchase from the Company specified
minimum quotas of SofPulse(TM) devices in exchange for exclusive distribution
rights to three selected market applications of SofPulse(TM) in the U.S. NPCS
was also to assume responsibility for the growth and operation of the Company's
current fleet of rental devices including the Company's sales and marketing
group and was to make monthly payments to the Company for five years and pay
royalties to the Company on NPCS's rental revenues. The Company also "sold"
approximately $270,000 of accounts receivable arising from April 1997 rental
revenues to NPCS for an initial payment from NPCS in the amount of $200,000.
NPCS will remit the balance of $70,000 owed to the Company after deducting
certain interest payments on the initial $200,000 advance when it is collected
from the rental customers. Upon the termination of the NPCS purchase-
distribution agreement, the Company reacquired the marketing rights and control
of its fleet of SofPulse(TM) devices from NPCS. The Company and NPCS may jointly
explore selected market opportunities for SofPulse(TM) in the U.S. under a
separate agreement.
The Company is exploring alternative sources of additional financing
that it intends to use to fund the clinical evaluation of PEMS(TM) technologies
for three clinical applications with large worldwide market potential, engineer
two new models of PEMS(TM) products for domestic and international markets and
initiate basic scientific collaboration to delineate the cellular and
biochemical effects of PEMS(TM), which may lead to new applications of the
Company's technologies, and upgrade its manufacturing facility to meet the needs
of international sales. The Company's marketing efforts will also include
establishing foreign and domestic distributorships for the Company's current and
future products. Expanding market penetration for the SofPulse(TM) is expected
to require substantial marketing efforts and the expenditure of significant
funds in order to demonstrate the technological advantage and clinical benefit
of the PEMS(TM) modality to clinicians.
On September 10, 1997 the Company announced it signed a definitive
agreement to merge with Eurobiotech Group, Inc. ("Eurobiotech"), a privately
held company. Eurobiotech is a "technology incubator" company engaged in the
business of acquiring exclusive licenses to and commercializing biomedical
technologies with large market applications, including cancer, arthritis, gene
therapy and blood cell preservation. Under the terms of the merger agreement,
the equity ownership in the merged entity will be held approximately 30% by
current Company stockholders and 70% by current Eurobiotech stockholders. The
merger is expected to close in the first quarter of 1998. It is a condition to
the proposed merger that $1,000,000 of private equity be raised on behalf of the
Company, Eurobiotech or the combined entity. The proposed merger will create an
international company engaged in the development of products based on a diverse
array of technologies including blood cell preservative for blood and umbilical
cord banking, a chemotherapeutic agent for the treatment of cancer and pulsed
electromagnetic stimulation for tissue healing. The merger is expected to
expedite the ability of the companies to develop the Company's technology in
Europe and Eurobiotech's technologies in the U.S. Additional private placement
will be pursued in the merged entity or specific business opportunities to be
created from the merged entity based on one or more of the technologies.
No definitive sources of additional financing have been identified at
this time. There can be no assurance that additional financing will be obtained
or obtained on favorable terms. Additionally, there can be no assurance that
the therapeutic use of PRF energy underlying the PEMS(TM) modality will become a
generally accepted medical practice for which reimbursement by third party
payors is available. Further, there can be no assurance that the Company's
efforts will result in successful market penetration and increased revenue from
sales and rental of its products, or that the Company will be successful in
expanding its technology base.
9
<PAGE>
Results Of Operations
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Revenue for the three months ended September 30, 1997 was $470,912,
compared to $624,329 for the three months ended September 30, 1996, or a
decrease of $153,417. This 24.6% decrease was primarily attributable to a
decrease in rental revenue to $327,862 for the three months ended September 30,
1997 from $439,429 for the three months ended September 30, 1996, a decrease of
$111,567, or 25.4%. HCFA implemented a policy, which became effective July 14,
1997, to deny reimbursement of a broad range of electrical stimulation devices
(including the PRF modality incorporated in SofPulse(TM)) if the use of such
devices was billed to promote wound healing. Many of the Company's nursing home
customers which utilized the SofPulse(TM) device in treating wound patients
ceased to use the SofPulse(TM) as a result of this announcement. Sales revenue
also decreased for the three months ended September 30, 1997 to $143,500, from
$184,900 for the three months ended September 30, 1996, a decrease of $41,850,
or 22.6%. Subsequent to the HCFA announcement in July, the Company shifted its
marketing strategy from renting the SofPulse(TM) to selling the used SofPulse
devices to the nursing homes at significantly reduced prices. The Company's
logic behind this strategy was based on the assumption the facilities would
purchase the units if they were offered at affordable prices even though
Medicare would not reimburse them for their expenditures. The Company sold 17
used devices at an average selling price of $8,400 for the three months ended
September 30, 1997 compared to 12 new devices at an average selling price of
$15,400 for the three months ended September 30, 1996.
Cost of revenue for the three months ended September 30, 1997 was
$128,204, compared to $95,581 for the three months ended September 30, 1996, or
an increase of $32,623. This 34.1% increase is attributable to the sale of 17
SofPulse(TM) devices during the three months ended September 30, 1997 as
compared to the sale of 12 units during the three months ended September 30,
1996. In addition, the increase also reflects additional depreciation associated
with the expanded SofPulse(TM) rental base.
Selling, general and administrative expenses were $604,805 for the
three months ended September 30, 1997, compared to $1,015,004 for the three
months ended September 30, 1996, a decrease of $410,199, or 40.4%. This cost
decrease reflects the reduction in salaries and related benefits associated with
the resignation of senior management and personnel reductions in the sales and
marketing and clinical support services departments during the first half of
1997.
Research and development expenses decreased to $37,809 for the three
months ended September 30, 1997, compared to $201,727 for the three months ended
September 30, 1996, a decrease of $163,918, or 81.3%. This decrease is
primarily attributable to the reduction of basic scientific research involving
PRF and PEMS(TM) technologies.
Other income (expense) for the three months ended September 30, 1997
decreased to $(29,954), compared to $23,876 for the three months ended September
30, 1996. This decrease is primarily due to a decrease in interest income
attributable to a lack of funds of the Company available for short term
investment and a loss incurred on the disposal of equipment of $29,161.
The above resulted in a net loss of $329,860 for the three months
ended September 30, 1997, compared to a net loss of $664,107 for the three
months ended September 30, 1996.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
30, 1996
Revenue for the nine months ended September 30, 1997 was $1,985,663
compared to $1,398,508 for the nine months ended September 30, 1996, or an
increase of $587,155. This 42.0% increase was primarily attributable to
increased SofPulse(TM) rental revenue. Revenue growth during the first half of
1996 was adversely affected by the reorganization of the Company's sales
organization. That reorganization has been completed and the Company began to
experience improvement from those changes beginning in October 1996. The Company
then expanded its domestic geographic coverage and contracted with four
additional independent representative organizations. As a result, rentals for
the nine months ended September 30, 1997 were $1,555,613 compared with
$1,158,190 for the nine months ended September 30, 1996, an increase of
$397,423, or 34.3%. The Company also experienced an increase in sales to
$430,050 for the nine months ended September 30, 1997 from $240,318 for the nine
months ended September 30, 1996. This increase in sales of $189,732 is primarily
attributable to the purchase-distribution agreement with NPCS which was
initially entered into on May 1, 1997. Under the terms of the agreement, NPCS
was required to purchase a specified minimum monthly quota of SofPulse(TM)
devices in exchange for exclusive distribution rights to three selected market
applications of SofPulse(TM) in the U.S. The agreement was terminated on July
18, 1997 after the HCFA announcement denying Medicare reimbursement for the use
of all electrical stimulation, including pulsed electromagnetic fields, in
treating wounds.
10
<PAGE>
Cost of revenue for the nine months ended September 30, 1997 was
$303,853, compared to $208,369 for the nine months ended September 30, 1996, an
increase of $122,484. This 58.8% increase is attributable to the sale of 43
SofPulse(TM) devices during the nine months ended September 30, 1997 as compared
to the sale of 16 units during the nine months ended September 30, 1996. In
addition, the increase also reflects additional depreciation associated with the
expanded SofPulse(TM) rental base.
Selling, general and administrative expenses were $2,454,805 for the
nine months ended September 30, 1997, compared to $2,716,083 for the nine months
ended September 30, 1996, a decrease of $261,278 or 9.6%. This cost decrease
reflects the reduction in salaries and related benefits associated with the
resignation of senior management and personnel reductions in the sales and
marketing and clinical support services departments during the first half of
1997.
Research and development expenses decreased to $220,982 for the nine
months ended September 30, 1997, compared to $672,763 for the nine months ended
September 30, 1996, a decrease of $451,781, or 67.2%. This decrease is
primarily attributable to the reduction of basic scientific research involving
PRF and PEMS(TM) technologies.
Other income (expense) for the nine months ended September 30, 1997
decreased to $(28,385), compared to $101,353 for the nine months ended September
30, 1996. This decrease is primarily due to a decrease in interest income
attributable to a lack of funds of the Company available for short term
investment.
The above resulted in a net loss of $1,049,361 for the nine months
ended September 30, 1997, compared to a net loss of $2,097,354 for the nine
months ended September 30, 1996.
Liquidity and Capital Resources
The Company's cash requirements have been and will continue to be
significant. Since its inception, the Company has satisfied its operating
requirements primarily through issuance of equity and debt securities and loans
from stockholders. At September 30, 1997, the Company had working capital of
$(725,095).
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $26,469 compared to net cash used in operating activities
of $(1,946,267) for the nine months ended September 30, 1996. Net cash was used
primarily to fund the losses from operations. Net cash used in investing
activities at September 30, 1997 was $107,635 compared to $136,158 at September
30, 1996. The decrease is attributable to fewer purchases of property and
equipment. Net cash used in financing activities was $129,836 for the nine
months ended September 30, 1997, as compared to $147,179 for the nine months
ended September 30, 1996. The decrease is due to a reduction in the principal
payments on capital lease obligations.
At December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of $9,013,000 available to offset future taxable income, if any,
through the year 2011. In July 1993 and in May 1995, two 50% or greater changes
in ownership occurred resulting in a substantial annual limitation on the
utilization of the loss carryforwards. Total cumulative net operating losses
subject to the Internal Revenue Code section 382 limitation for 1993 and 1995
are $595,000 and $3,716,000, respectively. The annual limitations for the 1993
and 1995 net operating losses are $146,000 and $506,000, respectively.
Under the present circumstances, the Company's ability to continue as a
going concern depends on its ability to restructure, improve its operations and,
ultimately, to obtain additional financing. The Company has taken steps that
include reductions in operating costs, including stringent cost controls,
personnel reductions and redeployments, and the deferral of the majority of
research and development activities until after 1997. There can be no assurance
that these measures will be successful. Moreover, deferring research and
development activities will delay the development of new products. The Company
will also defer, until after 1997, conducting definitive clinical studies that
document the effectiveness of the SofPulse(TM) treatment for its intended use.
This deferral of clinical studies may adversely affect the continued acceptance
or use of the SofPulse(TM) device and negatively affect the Company in the
longer term. However, at the present time, the Company believes these actions
are necessary to reduce near term cash requirements and to fund other operating
activities. The Company is also exploring alternative sources of additional
financing. No definitive sources of additional financing have been identified at
this
11
<PAGE>
time, nor can there be any assurance that additional financing will be obtained
or obtained on favorable terms. The Company announced on September 23, 1997
that it received notice from Nasdaq that the Company's stock would be delisted
from the Nasdaq SmallCap Market as of the close of business on September 23,
1997 due to noncompliance with the minimum capital and surplus requirement. The
Company's stock is now trading on the Nasdaq OTC Bulletin Board. In July 1997,
Nasdaq had informed the Company that the Company's stock would be delisted from
the Nasdaq Stock Market. The Company's stock remained listed on the Nasdaq
Stock Market while the Company appealed the decision to delist the Company's
stock. At a hearing held on August 28, 1997 before a Nasdaq Listing
Qualifications Panel, the Company requested continued listing on the Nasdaq
SmallCap Market pursuant to an exception to the total assets, capital and
surplus and market value of public float requirements of the NASD Marketplace
Rules. The Company reasoned that an exception should apply because the proposed
merger with Eurobiotech would strengthen the Company's balance sheet and
provide it with the ability to obtain financing. However, Nasdaq determined
that, notwithstanding that the Company had signed a definitive agreement to
merge with Eurobiotech, subject to certain conditions, such transaction will
likely result in a change of control and a change in the financial structure of
the Company. Therefore, pursuant to NASD Marketplace Rule 4330(f), Nasdaq would
require the Company after the merger to file a new listing application and
satisfy the initial listing standards of the Nasdaq Marketplace Rules. The
Company has filed an appeal of Nasdaq's decision.
The Company cannot predict whether the operating and financing strategies
described above will be successful. If the Company is unable to restructure and
improve its operations and is unable to ultimately obtain additional financing,
it may not be able to continue as a going concern.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In February 1993, Diapulse Corporation of America, Inc. ("Diapulse") filed
a citizen's petition requesting that the FDA revoke the substantial equivalence
finding for the SofPulse(TM) and prevent the Company from making certain
labeling claims. The Company believes, based upon the advice of regulatory
counsel, that Diapulse's petition is without merit. The Company has responded to
the petition. The Company, however, in response to comments received by the
Company from the FDA, has made revisions in its promotional materials to obviate
any claim that such material is inconsistent with FDA regulations. The Company
has received an opinion of regulatory counsel stating that the petition is
lacking in merit and that it is highly unlikely that the FDA will grant the
petition. Nevertheless, in the event that the FDA were to grant the petition,
the Company's business and prospects would be materially adversely affected. In
October 1993, Diapulse submitted additional information to the FDA in support of
its petition and the Company responded. As of the date hereof, the FDA has not
notified the Company as to any action with respect to the petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the State
of New York, Nassau County, captioned Diapulse Corporation of America v.
Magnetic Resonance Therapeutics, Inc. et al., alleging that the defendants
Magnetic Resonance Therapeutics, Inc., a legal predecessor to the Company, Bio-
Sales, Inc., the Company, and certain of the Company's present and former
directors and officers, including Joshua Barnum ("Barnum"), David Mills
("Mills"), Arthur Pilla ("Pilla"), David Saloff ("Saloff"), and David Winer
("Winer"), engaged in deceptive acts and practices, false advertising and unfair
competition in the marketing of a medical device. The complaint also alleges
that Barnum and Mills breached confidentiality and noncompetition agreements
with Diapulse and that the Company, Barnum and Pilla aided in the alleged
tortious breach of the agreements. Diapulse seeks unspecified compensatory
damages, disgorgement of profits realized by the defendants as a result of their
alleged acts, treble damages, punitive damages and reasonable attorneys' fees.
Diapulse also seeks unspecified injunctive relief prohibiting the defendants
from engaging in the alleged acts and ordering the defendants to take remedial
action to rectify the effects on consumers and Diapulse caused by the
defendants' alleged acts. The defendants jointly moved to dismiss the complaint
on jurisdictional and substantive grounds. The Court dismissed Winer from the
case based on lack of personal jurisdiction. The Court also dismissed certain
claims, as to the remaining individual defendants, including deceptive acts and
practices, false advertising and unfair competition. As to the claims remaining
against the individual defendants, certain of such claims may be indemnified by
the Company. As to the Company, the Court denied the motion to dismiss. The
Company answered the complaint, denied all material allegations, asserted
various affirmative defenses and counterclaimed against Diapulse and Jesse Ross,
individually. The counterclaims allege causes of action against Diapulse and
Jesse Ross for federal unfair competition and tortious interference of existing
and contractual business relations. In addition, the Company has asserted
claims against Diapulse for deceptive acts and unfair trade practices, and trade
disparagement. In its counterclaims, the Company seeks compensatory and
punitive damages in an amount to be proved at trial. This lawsuit is in a
preliminary stage and its outcome is uncertain. Although the Company believes
that it has meritorious defenses that it will vigorously pursue, there can be no
assurance that the outcome of such action will be resolved favorably to the
Company or that such litigation will not have an adverse effect on the Company's
liquidity, financial condition and results of operations.
On March 27, 1997, Ancillary Provider Services, Inc. ("APS") filed a
complaint entitled Ancillary Provider Services, Inc. v. Christian Bowman, Hirsch
Medical Services, Inc., Electropharmacology, Inc. and Does 1 through 100 in the
Superior Court in Los Angeles, California against Christian Bowman, a former APS
employee, Hirsch Medical Services, Inc. ("Hirsch") and the Company. The
complaint alleges causes of action for misappropriation of trade secrets, breach
of fiduciary duty, unfair business practices, tortious inducement to breach
contracts, tortious interference with prospective economic advantage, breach of
contract and breach of contract and covenant of good faith and fair dealing and
seeks unspecified actual, consequential, incidental and punitive damages, an
accounting, restitution, and an injunction prohibiting the defendants from
contacting or doing business with APS's customers. The complaint alleges that
beginning in October 1995, APS was the exclusive distributor in Southern
California of the Company's MRT device. The complaint further alleges that in
June 1996, APS hired defendant Bowman, formerly of the Company, to assist APS in
its efforts to distribute the MRT device. According to the complaint Bowman
entered into an employment agreement with APS that included a confidentiality
provision and a non-compete clause. APS asserts that the Company improperly
terminated the APS distributorship agreement and replaced APS with defendant
Hirsch as the MRT distributor in California. Thereafter, APS alleges that
Bowman resigned from APS on March 14, 1997, joined Hirsch and that defendants
misappropriated confidential trade secrets from APS including, among other
things, its proprietary customer lists. The complaint alleges that the
defendants continue to interfere with APS's contractual relations with its
customers and solicit such customers to do business with Hirsch. Simultaneous
with filing the complaint, APS moved by order to show cause for a preliminary
injunction against the defendants to prevent them from contacting or doing
business with
13
<PAGE>
APS's customers. The hearing on the motion for preliminary injunction was on
April 23, 1997. The Court denied the APS motion for a preliminary injunction,
without prejudice, on the grounds that "[t]he Court is unable to conclude that
plaintiff is likely to prevail in the lawsuit." This lawsuit is in the
preliminary stage and, therefore, the outcome of this litigation is uncertain.
The Company believes that it has meritorious defenses which it will pursue
vigorously. Pursuant to a provision in the 1996 distributorship agreement
between APS and the Company requiring all disputes between APS and the Company
be resolved by arbitration, the Company initiated an arbitration proceeding
before the American Arbitration Association ("AAA") in Miami, Florida seeking a
declaration that the 1996 distributorship agreement governs APS and the Company,
that the Company has no continuing obligations to APS pursuant to such
agreement, and that any claims arising out of or relating to the 1996 agreement
or the alleged breach thereof are meritless. APS initially informed AAA that it
declined to participate in the arbitration proceeding initiated by the Company.
On May 12, 1997, the Company filed in the Superior Court a petition to compel
APS to arbitrate the parties' dispute. Under California procedure, the
Company's petition constitutes a response to APS's complaint, and the Company is
not required to answer the complaint. On July 24, 1997, the Court granted the
Company's petition to compel arbitration and the Court also stayed all
proceedings on the case pending the arbitration. On August 1, 1997, APS
selected an arbitrator and stated its intention to proceed with the arbitration.
The date for the arbitration hearing has not yet been set by AAA.
On August 28, 1997, Michelle O'Connell, formerly employed by Kinetech
Medical as the EPi representative, filed a complaint entitled O'Connell v.
Kinetech Medical Inc. and Electropharmacology, Inc. in the County Court in
Dallas County, Texas. The complaint alleges that Kinetech and EPi are jointly
and severally liable for an unspecified amount of commissions earned, but
unpaid. The complaint asserts a cause of action of quantum meruit against EPi. A
motion to transfer venue to Houston was made by Kinetech and such motion is sub
judice. EPi's time to respond to the complaint has been adjourned by Stipulation
between the parties until 10 days after the venue motion is decided.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Quarterly Report on
form 10-QSB:
(27) -- Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 1997:
* Form 8-K dated July 15, 1997 - Item 5 - regarding denial of
Medicare reimbursement for the use of electrical stimulation in
treating wounds, receipt of Nasdaq Stock Market delisting notice
and termination of purchase-distribution agreement with National
Patient Care Systems, Inc.
* Form 8-K dated July 25, 1997 - Item 5 - regarding Company's
request of a review of the Nasdaq staff's determination of
delisting its stock from the Nasdaq SmallCap Market
* Form 8-K dated August 11, 1997 - Item 5 - regarding execution of
Letter of Intent to merge with Eurobiotech Group, Inc.
* Form 8-K dated September 10, 1997 - Item 5 - regarding signature
of a definitive agreement to merge with Eurobiotech Group, Inc.
* Form 8-K dated September 24, 1997 - Item 5 - regarding notice
from Nasdaq of delisting of the Company's stock from the Nasdaq
Stock Market
14
<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: November 14, 1997 /s/ Dr. Arup Sen
--------------------------------------
Dr. Arup Sen
President and Chief Executive Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONATINS SUMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,521
<SECURITIES> 0
<RECEIVABLES> 305,396
<ALLOWANCES> 55,000
<INVENTORY> 231,270
<CURRENT-ASSETS> 749,657
<PP&E> 892,834
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,833,127
<CURRENT-LIABILITIES> 1,474,752
<BONDS> 0
0
2,430
<COMMON> 38,021
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,833,127
<SALES> 430,050
<TOTAL-REVENUES> 1,985,663
<CGS> 330,853
<TOTAL-COSTS> 330,853
<OTHER-EXPENSES> 2,675,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,848
<INCOME-PRETAX> (1,049,361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,049,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,049,361)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
