<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 June 30, 1997
---------------
[ ] 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:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Class On June 30, 1997
----- ----------------
<S> <C>
Common Stock, $ .01 par value 3,732,376
</TABLE>
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 December 31, 1996 and June 30, 1997. 1
Statements of Operations for the three months ended June 30,
1996 and 1997. 2
Statements of Operations for the six months ended June 30,
1996 and 1997. 3
Statements of Cash Flows for the six months ended June 30,
1996 and 1997. 4
Notes to Financial Statements (Unaudited). 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months ended June
30, 1996 and 1997. 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the six months ended June 30,
1996 and 1997. 11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
(i)
<PAGE>
Item 1. Financial Statements
The interim financial statements presented in this report are unaudited,
but in the opinion of management, reflect all adjustments necessary for a
fair presentation of such information. Results for interim periods should
not be considered indicative of results for a full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
(ii)
<PAGE>
ELECTROPHARMACOLOGY, INC.
BALANCE SHEETS
(UNAUDITED WITH RESPECT TO JUNE 30, 1997)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
- ------ 1997 1996
-------------------------------
<S> <C> <C>
Current assets:
Cash $ 67,724 $ 223,523
Trade accounts receivable, net of allowance for doubtful accounts
of $95,765 at June 30, 1997 and $134,000 at December 31, 1996 133,642 572,202
Inventory 248,099 94,164
Trade notes receivable - 248,190
Prepaid expenses 121,569 50,127
-------------------------------
Total current assets 571,034 1,188,206
Rental and other equipment, net 1,036,665 945,058
Prepaid expenses 88,478 -
Deposits and other assets 77,725 79,816
-------------------------------
Total assets $ 1,773,901 $ 2,213,080
-------------------------------
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 588,325 $ 536,170
Accrued expenses 332,022 324,551
Accrued payroll 40,366 104,701
Customer deposits 7,561 7,561
Note payable to related party 53,000 -
Current maturities of obligations under capital leases
and note payable 135,820 22,386
-------------------------------
Total current liabilities 1,157,094 995,369
Note payable to finance company 56,614 -
Obligations under capital leases, less current maturities 1,016 3,336
-------------------------------
Total liabilities 1,214,724 998,705
Shareholders' equity:
Preferred stock, $0.01 par value - 10,000,000 shares
authorized; issued and outstanding 242,950 2,430 4,220
Common stock, $0.01 par value - 30,000,000 shares
authorized; 3,732,376 shares issued and outstanding 37,324 35,402
Additional paid-in capital 11,407,094 11,352,922
Treasury stock, at cost, 10,493 common shares (60,000) (60,000)
Deficit (10,837,671) (10,118,169)
-------------------------------
Total shareholders' equity 559,177 1,214,375
-------------------------------
Total liabilities and shareholders' equity $ 1,773,901 $ 2,213,080
-------------------------------
-------------------------------
</TABLE>
See accompanying notes to financial statements
1
<PAGE>
ELECTROPHARMACOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, 1997
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenue:
Rentals $ 566,923 $ 366,898
Sales 143,000 36,858
----------------------------
Total revenue 709,923 403,756
Operating expenses:
Cost of revenue 114,275 72,106
Selling, general and administrative expenses 981,235 931,064
Research and development expenses 73,757 146,344
----------------------------
Total operating expenses 1,169,267 1,149,514
----------------------------
Loss from operations (459,344) (745,758)
Other income (expense)
Interest expense (4,941) (5,675)
Interest and other income 3,327 45,184
----------------------------
Total other income (expense) (1,614) 39,509
----------------------------
Net loss $ (460,958) $ (706,249)
----------------------------
----------------------------
Net loss per common share $ (0.13) $ (0.23)
----------------------------
----------------------------
Weighted average number of common shares outstanding 3,671,869 3,063,981
----------------------------
----------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
ELECTROPHARMACOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenue:
Rentals $1,227,751 $ 718,761
Sales 287,000 55,418
----------------------------
Total revenue 1,514,751 774,179
Operating expenses:
Cost of revenue 202,649 113,967
Selling, general and administrative expenses 1,850,001 1,699,972
Research and development expenses 183,173 471,037
----------------------------
Total operating expenses 2,235,823 2,284,976
----------------------------
Loss from operations (721,072) (1,510,797)
Other income (expense)
Interest expense (5,582) (6,815)
Interest and other income 7,152 84,363
----------------------------
Total other income (expense) 1,570 77,548
----------------------------
Net loss $ (719,502) $(1,433,249)
----------------------------
----------------------------
Net loss per common share $ (0.20) $ (0.46)
----------------------------
----------------------------
Weighted average number of common shares outstanding 3,606,388 3,108,031
----------------------------
----------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
ELECTROPHARMACOLOGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(719,501) $(1,433,249)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 145,618 135,854
Decrease in provision for doubtful accounts (38,235) -
Liability incurred for severance agreement 128,700 -
Issuance of common stock for services 64,304 -
Changes in operating assets and liabilities:
Accounts receivable 476,795 (73,856)
Trade notes receivable 248,190 149,930
Inventory (153,935) -
Prepaid expenses 52,503 10,697
Deposits and other assets - (5,719)
Rental equipment (SofPulse units) (234,595) -
Accounts payable and accrued expenses (4,711) (75,438)
---------------------------
Net cash used in operating activities (34,867) (1,291,781)
INVESTING ACTIVITIES
Purchases of property and equipment (539) (323,148)
---------------------------
Net cash used in investing activities (539) (323,148)
FINANCING ACTIVITIES
Proceeds from issuance of common stock & warrants - 4,219
Repayment of long-term notes payable and capital lease obligations (44,693) (25,197)
Repayment of notes payable to related parties (75,700) (120,000)
---------------------------
Net cash (used in) financing activities (120,393) (140,978)
---------------------------
Net decrease in cash (155,799) (1,755,907)
Cash at beginning of period 223,523 3,069,748
---------------------------
Cash at end of period $ 67,724 $ 1,313,841
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest, net $ 5,582 $ 6,815
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Issuance of common stock for services $ 64,304 $ -
Asset recognized and liability incurred for the financing
of the directors and officers liability insurance premiums 212,421 -
Liability incurred for execution of severance agreement
with related party 128,700 -
---------------------------
---------------------------
</TABLE>
See accompanying notes to financial statements.
4
<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 six- month periods ended June 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.
5
<PAGE>
(2) NOTE 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 June 30, 1997 was $53,000.
(3) NOTE 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.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
7.9% Note payable due in monthly installments of $11,379 to
November 15, 1998; secured by unearned premiums $ 182,327
Less: Current portion (125,713)
---------
$ 56,614
---------
---------
</TABLE>
(4) SUBSEQUENT EVENTS
The Company announced on July 15, 1997 that the U.S. Health Care Financing
Administration ("HCFA") has 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 with superficial tissue injuries,
including wounds, and not to promote wound healing. HCFA's new policy only
relates to the use SofPulse-TM- in promoting wound healing. The Company is
attempting to
6
<PAGE>
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. However, if
reimbursement is denied for the treatment of edema associated with wounds,
the Company's revenues would be materially adversely affected since wound
patients represent a significant population of patients who currently receive
SofPulse-TM- treatment at nursing homes.
The Company announced on July 18, 1997 that its purchase-distribution
agreement with National Patient Care Systems, Inc. ("NPCS") has been terminated
effective as of July 18, 1997 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 NCPS 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. 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 announced on July 18, 1997 that it received notice from Nasdaq
that the Company's stock would be delisted from the Nasdaq stock market as of
the close of business on July 24, 1997 due to noncompliance with the minimum
capital and surplus requirement. On July 24, 1997, the Company announced it
requested a review of the staff's determination and a stay of delisting pending
such review. A hearing with Nasdaq has been scheduled for August 28, 1997, at
which time the Company will present its strategy to achieve compliance. In the
interim, the Company has been advised that its stock will remain listed on the
Nasdaq stock market pending the outcome of the hearing.
The Company announced on August 11, 1997 the execution of a Letter of
Intent for a plan of merger with Eurobiotech Group Inc. ("Eurobiotech"), a
biotechnology company. Subject to the execution of a definitive agreement,
satisfactory due diligence investigation, and receiving board of directors,
stockholder and other approvals, the Company will issue 9 million shares of
its common stock to Eurobiotech stockholders in connection with merger of
Eurobiotech into the Company and warrants to purchase 4.5 million shares
of the Company's common stock at an exercise price of $3.00 per share
exercisable during the period beginning 24 months and ending 48 months after
the merger date. The Company's stockholders will receive warrants to
purchase 2 million shares of the Company's common stock on the same exercise
terms, provided the combined entity meets certain minimum sales revenues
during fiscal years 1997 and 1998. As a condition to the proposed merger,
the combined company will privately place approximately 2 million shares with
a medical technology investment fund in exchange for a $5 million cash
investment. The name of EPi will be changed to Eurobiotech Group, Inc. in
the merger.
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 blood banking,
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. Eurobiotech is a privately held
"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
preservation.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Electropharmacology, Inc. (the "Company") is engaged in developing,
manufacturing, and marketing medical devices that deliver pulsed electromagnetic
signals ("PEMS-TM-") in the radio frequency range. 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 radiofrequency
("PRF") energy. The Company has focused on PEMS-TM- that combine selected
pulse forms and amplitudes to produce certain radio frequency energy fields that
are believed to affect superficial soft tissues. In January 1991, the FDA
advised the Company of its determination, pursuant to the premarket notification
provisions under Section 510(k) of the FDC Act, to treat the MRT100, the first
model of the SofPulse-TM-, as a class III device. 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-TM- 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-TM- was used by the clinicians to treat patients. As part
of its education, marketing and promotional strategy, the Company
disseminates information it receives from the clinicians to the medical
community through summary case reports, Continuing Educational Unit courses
and advertisements in professional journals.
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) aid in the healing
or regeneration 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 broader 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'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-TM-, which has achieved only limited market
acceptance. As noted in Note 4 - Subsequent Events of the Financial
Statements, the Company announced that HFCA has decided to implement a policy
denying Medicare reimbursement for the use of all electrical stimulations,
including pulsed electromagnetic fields, in treating wounds. 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
policy. If reimbursement is denied for the treatment of edema associated
with wounds, the Company's revenues would be materially adversely affected
since wound patients represent a significant population of patients who
currently receive SofPulse-TM- treatment at nursing homes. The Company is
now making a strategic shift to selling the SofPulse-TM- devices at
significantly reduced prices to the facilities that are currently renting
them. In order to facilitate the sale
8
<PAGE>
of its devices, the Company is making the purchase more feasible for the
nursing homes by offering them a one-time lease/purchase arrangement. All
receivables arising from the sales-type lease agreements will be factored.
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 will be made
available. The Company will no longer bill the user on a monthly basis for
the actual time the SofPulse-TM- device was used by clinicians to treat
patients.
The Company is exploring alternative sources of additional financing
that it intends to use to upgrade its manufacturing facility to meet the
needs for international sales, 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. 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.
No definitive sources of additional financing have been identified at
this time. (See Note 4 - Subsequent Events of Notes to the Financial
Statements). However, there can be no assurance that additional financing
will be obtained or obtained on favorable terms. Moreover, 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.
Since inception, the Company's expenses have exceeded revenue, resulting in
losses of $3,069,586 and $2,927,990 respectively, for the years ended December
31, 1995 and 1996. As of June 30, 1997, the Company had an accumulated deficit
of $10,837,671. Losses incurred since inception have been primarily
attributable to costs incurred in connection with the design and development of
the Company's products, research and clinical studies on the SofPulse-TM-,
manufacturing, marketing literature and advertisement for the SofPulse-TM-, and
the hiring of personnel necessary to support the Company's operations. The
Company continues to have high levels of operating expenses (including salaries
of management, research and development and manufacturing) and will be required
to incur significant expenses in connection with research and clinical studies
and the purchase of materials to manufacture the SofPulse-TM- devices.
Accordingly, the Company anticipates that it will continue to incur significant
losses until, at the earliest, the Company generates sufficient revenue to
support its operations. The Company believes that generation of a level of
revenue sufficient to support operations is dependent upon, among other things,
the Company's ability to successfully and objectively demonstrate SofPulse's-TM-
clinical utility through controlled clinical studies and develop and introduce
new products and enhance existing products. There can be no assurance that the
Company will be able to achieve any of the foregoing, which could have a
material adverse effect on the Company's business, financial condition, cash
flows, results of operations and prospects.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
Revenue for the three months ended June 30, 1997 was $709,923, compared to
$403,756 for the three months ended June 30, 1996, or an increase of $306,167.
This 75.8% increase was jointly attributable to increased SofPulse-TM- sales
and rental revenue. The sales revenue increased because of the Strategic
Alliance Agreement the Company entered into with NPCS on May 1, 1997. Under the
terms of the agreement, NPCS was required to purchase specified minimum monthly
quotas of SofPulse-TM- devices in exchange for exclusive distribution rights to
three selected market applications of SofPulse-TM- in the U.S. As a result,
sales revenue for the three months ended June 30, 1997 was $143,000 compared
with $36,858 for the three months ended June 30, 1996, an increase of $106,142
or 288.0%. Rental revenue for the three months ended June 30, 1997 was $566,923
compared with $366,898 for the three months ended June 30, 1996, an increase of
$200,025 or 54.5%. The increase in rental revenue is primarily attributable to
the increase in the number of units under rental contracts in 1997 compared to
1996. The Strategic Alliance Agreement transferred control of the Company's
current fleet of rental devices to NPCS and required NPCS to make monthly lease
payment and pay royalties on rental revenues received. On May 1, 1997, the date
of the transfer of the SofPulse-TM- devices to NPCS, there were 420 units under
rental contracts compared to 210 as June 30, 1996. See Note 4 - Subsequent
Events of Notes to the Financial Statements regarding termination of the
agreement between the Company and NPCS.
Cost of revenue for the three months ended June 30, 1997 was $114,275,
compared to $72,106 for the three months ended June 30, 1996, an increase of
$42,169. This 58.5% increase reflects additional depreciation associated with
the expanded SofPulse-TM- rental base.
Selling, general and administrative expenses were $981,235 for the three
months ended June 30, 1997, compared to $931,064 for the three months ended June
30, 1996, an increase of $50,171, or 5.4%. This cost increase reflects the
salaries and related benefits for additional personnel to support the Company's
operations.
Research and development expenses decreased to $73,757 for the three months
ended June 30, 1997, compared to $146,344 for the three months ended June 30,
1996, a decrease of $72,587, or 49.6%. This decrease is primarily attributable
to the completion in early 1996 of the Company's PMA application, as well as the
reduction of basic scientific research involving PRF and PEMS-TM- technologies.
Total other income (expense) for the three months ended June 30, 1997,
decreased to $(1,614), compared to $39,505 for the three months ended June 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.
10
<PAGE>
The above resulted in a net loss of $(460,958) for the three months ended
June 30, 1997, compared to a net loss of $(706,249) for the three months ended
June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
Revenue for the six months ended June 30, 1997 was $1,514,751, compared to
$774,179 for the six months ended June 30, 1996, or an increase of $740,572.
This 95.7% 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 six months ended
June 30, 1997 were $1,227,751, compared with $718,761 for the six months ended
June 30, 1996, an increase of $508,990, or 41.5%.
Cost of revenue for the six months ended June 30, 1997 was $202,649,
compared to $113,967 for the six months ended June 30, 1996, an increase of
$88,682. This 77.8% increase reflects additional depreciation associated with
the expanded SofPulse-TM- rental base.
Selling, general and administrative expenses were $1,850,001 for the six
months ended June 30, 1997, compared to $1,699,972 for the six months ended June
30, 1996, an increase of $150,029 or 8.8%. This cost increase reflects the
salaries and related benefits for additional personnel to support the Company's
operations.
Research and development expenses decreased to $183,173 for the six months
ended June 30, 1997, compared to $471,037 for the six months ended June 30,
1996, a decrease of $287,864, or 61.1%. This decrease is primarily attributable
to the completion in early 1996 of the Company's PMA application, as well as the
reduction of basic scientific research involving PRF and PEMS-TM- technologies.
Total other income (expense) for the six months ended June 30, 1997,
decreased to $1,570, compared to $77,548 for the six months ended June 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 $(719,502) for the six months ended
June 30, 1997, compared to a net loss of $(1,433,249) for the six months ended
June 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
11
<PAGE>
issuance of equity and debt securities and loans from stockholders. At
June 30, 1997 the Company had working capital of $(617,172).
Net cash used in operating activities for the six months ended June 30,
1997 was $375,988 compared to $1,291,781 for the six months ended June 30, 1996.
Net cash was used primarily to fund the losses from operations. Net cash used
in investing activities at June 30, 1997 was $539 compared to $323,148 at June
30, 1996. The decrease is attributable to fewer purchases of property and
equipment. Net cash provided by financing activities was $220,728 for the six
months ended June 30, 1997, as compared to $140,978 used in financing activities
for the six months ended June 30, 1997. In 1997 the Company issued a long-term
note payable to finance the directors and officers insurance premiums in the
amount of $212,000 whereas in 1996, the Company repaid notes to related parties
for $120,000 and repaid capital lease obligations for $25,000.
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 additional
financing is obtained. 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 additional financing is obtained, 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. The Company entered into a
letter of intent for a plan of merger with Eurobiotech Group, Inc., which is
conditional, among other things, upon obtaining $5,000,000 of financing. (See
Note 4 - Subsequent Events of Notes to the Financial Statements). There can be
no assurance that this financing or any additional financing will be obtained
or obtained on favorable terms.
As noted in Note 4 - Subsequent Events of Notes to the Financial
Statements, the Company announced on July 18, 1997 that it received notice from
Nasdaq that the Company's stock would be delisted from the Nasdaq stock market
as of the close of business on July 24, 1997 due to noncompliance with the
minimum capital and surplus requirement. On July 24, 1997, the Company
announced it requested a review of the staff's determination and a stay of
delisting pending such review. A hearing with Nasdaq has been scheduled for
August 28, 1997, at which time the Company will present its strategy to achieve
compliance.
12
<PAGE>
In the interim, the Company has been advised that its stock will remain
listed on the Nasdaq stock market pending the outcome of the hearing.
Accordingly, there can be no assurance that a public trading market for the
Company's Common Stock will continue to exist.
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Item 1. Legal Proceedings" in the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1997 for a description of certain pending
litigation. On April 23, 1997, the Superior Court in Los Angeles County,
California denied without prejudice a motion for a preliminary injunction made
by Ancillary Provider Services, Inc. ("APS") in its suit against Christian
Bowman, Hirsch Medical Services, Inc. and the Company, stating that it was
"unable to conclude that the plaintiff is likely to prevail in the lawsuit."
APS initially informed the American Arbitration Association that it
declined to participate in the proceeding initiated by the Company on April
3, 1997 to arbitrate certain matters at issue in this lawsuit. 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' 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
the American Arbitration Association.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Quarterly Report on
form 10-Q:
(27) -- Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 1997:
* Form 8-K dated April 2, 1997 - Item 5 -
regarding resignation of Chairman of the Board, President
and Chief Executive Officer
* Form 8-K dated May 7, 1997 - Item 5 -
regarding execution of Strategic Alliance Agreement
* Form 8-K/A Amendment No. 1 dated May 7, 1997 - Item 7
regarding filing of Exhibit 1 - Strategic Alliance Agreement
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ELECTROPHARMACOLOGY, INC.
REGISTRANT
Dated: August 14, 1997 /s/ Dr. Arup Sen
--- -------------------------------
Dr. Arup Sen
Chief Executive Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 67,724
<SECURITIES> 0
<RECEIVABLES> 229,407
<ALLOWANCES> 95,765
<INVENTORY> 248,099
<CURRENT-ASSETS> 571,034
<PP&E> 1,036,665
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,773,901
<CURRENT-LIABILITIES> 1,157,094
<BONDS> 0
0
2,430
<COMMON> 37,324
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,773,901
<SALES> 287,000
<TOTAL-REVENUES> 1,514,751
<CGS> 202,649
<TOTAL-COSTS> 202,649
<OTHER-EXPENSES> 2,033,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,582
<INCOME-PRETAX> (719,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> (719,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (719,502)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
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