U.S. Securities and Exchange Commission
Washington, D.C. 2054
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, 1998
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 June 30, 1998
----- ----------------
Common Stock, $ .01 par value 4,132,493
Transitional Small Business Disclosure Format:
Yes____ No X
<PAGE>
ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C>
ITEM 1. Balance Sheets as of June 30, 1998 and December 31, 1997 2
Statements of Operations for the three months ended June 30,
1998 and 1997 3
Statements of Operations for the six months ended June 30,
1998 and 1997 4
Statements of Cash Flows for the three months ended June 30,
1998 and 1997 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the six months ended June 30,
1998 and 1997 8
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
<PAGE>
ELECTROPHARMACOLOGY, INC.
Balance Sheets
(Unaudited with respect to June 30, 1998)
<TABLE>
<CAPTION>
ASSETS
- ------ June 30, December 31,
1998 1997
-----------------------------------
<S> <C> <C>
Current assets :
Cash $ 62,465 $ 111,496
Trade accounts receivable, net of allowance for doubtful accounts
of $30,158 at 6/30/98 and $26,000 at 12/31/97 126,723 169,404
Inventory 159,043 152,233
Trade notes and other receivables 2,181 32,748
Prepaid expenses 161,962 157,065
-----------------------------------
Total current assets 512,374 622,946
Rental and other equipment, net 568,497 713,466
Patents, net of accumulated amortization of $17,266 at 6/30/98
and $14,226 at 12/31/97 86,088 89,129
Deposits 5,075 18,001
----------------------------------
Total assets $ 1,172,034 $ 1,443,542
===================================
LIABILITIES AND NET CAPITAL DEFICIENCY
- --------------------------------------
Current liabilities:
Notes payable $ 719,276 $ 804,179
Accounts payable 509,330 380,313
Accrued expenses 308,224 187,933
Accrued commissions 14,262 46,181
Accrued payroll 1,767 18,385
Customer deposits - 7,561
Deferred Revenue 75,000 -
Notes payable to related parties 65,926 73,926
-----------------------------------
Total current liabilities 1,693,785 1,518,478
Long-term liabilities:
Notes payable 90,260 -
-----------------------------------
Total Liabilities 1,784,045 1,518,478
Commitments and contingencies
Net capital deficiency:
Convertible preferred stock, $0.01 par value - 10,000,000 shares
authorized; issued and outstanding 242,950 (entitled to
$2,000,043 in liquidation) 2,430 2,430
Common stock, $0.01 par value - 30,000,000 shares authorized;
4,132,493 shares issued and 4,071,194 shares outstanding at
6/30/98 and 12/31/97, respectively 41,325 40,711
Additional paid-in capital 15,277,249 15,254,912
Deferred Compensation (67,678) (67,678)
Deficit (15,865,337) (15,305,311)
-----------------------------------
Net capital deficiency (612,011) (74,936)
-----------------------------------
Total liabilities and net capital deficiency $ 1,172,034 $ 1,443,542
===================================
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
Electropharmacology, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
Revenue:
Rentals $ 215,698 $ 660,828
Sales 33,860 144,000
-------------------------------------
Total revenue 249,558 804,828
Operating expenses:
Cost of revenue 71,534 88,374
Selling, general and administrative 363,664 868,766
Research and development 24,112 109,416
-------------------------------------
Total operating expenses 459,310 1,066,556
-------------------------------------
Loss from operations (209,752) (261,728)
Other income (expense)
Interest expense (15,709) (641)
Interest and other income 35 3,824
Loss on disposal of equipment (865)
-------------------------------------
Total other income (expense) (16,539) 3,183
-------------------------------------
Net loss $ (226,291) $ (258,545)
=====================================
Net loss per share - basic and diluted $ (0.05) $ (0.07)
=====================================
Weighted average number of common shares outstanding -
basic and diluted 4,115,466 3,529,672
=====================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Electropharmacology, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------------
1998 1997
---------------- ------------
<S> <C> <C>
Revenue:
Rentals $ 359,143 $ 1,227,751
Sales 75,860 287,000
----------------------------------
Total revenue 435,003 1,514,751
Operating expenses:
Cost of revenue 138,599 202,649
Selling, general and administrative 783,537 1,850,001
Research and development 37,974 183,173
----------------------------------
Total operating expenses 960,110 2,235,823
----------------------------------
Loss from operations (525,107) (721,072)
Other income (expense)
Interest expense (36,649) (5,582)
Interest and other income 2,595 7,152
Loss on disposal of equipment (865) -
----------------------------------
Total other income (expense) (34,919) 1,570
----------------------------------
Net loss $ (560,026) $ (719,502)
==================================
Net loss per share - basic and diluted $ (0.14) $ (0.20)
==================================
Weighted average number of common shares outstanding -
basic and diluted 4,113,328 3,606,388
==================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Electropharmacology, Inc.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating activities
Net loss $ (560,026) (719,502)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 132,822 145,618
Loss on disposal of equipment 865 -
Decrease in provision for doubtful accounts - (38,235)
Liability incurred for severance agreement - 128,700
Issuance of common stock for services 22,951 64,304
Changes in operating assets and liabilities :
Decrease in accounts receivable 42,681 476,795
Decrease in trade notes and other receivables 30,567 248,190
(Increase) in inventory (6,810) (153,935)
Decrease/(Increase) in prepaid expenses (4,897) 52,504
Decrease in deposits 12,926 -
Increase in accounts payable 129,016 (4,711)
Increase in deferred revenue 75,000
Increase in accrued expenses, commissions & customer deposits 64,193 -
-------------------------------
Net cash provided by (used in) operating activities (60,712) 199,728
-------------------------------
Investing activities
Proceeds from sale of equipment 14,420 -
Purchases of property and equipment (98) (539)
-------------------------------
Net cash provided by (used in) investing activities 14,322 (539)
-------------------------------
Financing activities
Increase/(Decrease) in long-term notes payable and capital lease
obligations 5,359 (44,693)
Increase in notes payable to related parties (8,000) (75,700)
-------------------------------
Net cash used in financing activities (2,641) (120,393)
-------------------------------
Net increase/(decrease) in cash (49,031) 78,796
Cash at beginning of period 111,496 223,523
-------------------------------
Cash at end of period $ 62,465 $ 302,319
===============================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net $ 5,782 $ 5,582
===============================
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock for services $ 22,951 $ 64,304
Asset recognized and liability incurred for the financing of the
directors and officers liability insurance premiums $166,790 $ 212,421
Liability incurred for execution of severance agreement with
related party $ - $ 128,700
===============================
</TABLE>
See accompanying notes to financial statements.
5
<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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
Certain 1997 balances have been reclassified to conform with the
presentation used in 1998.
(2) Note Payable to Finance Company
On April 17, 1998, the Company entered into an insurance premium
finance agreement to refinance and extend for one year the term of its directors
and officers liability insurance. Coverage is effective for the 36 month period
from March 17, 1997 to March 15, 2000.
June 30, 1998
8.0% Note payable due in monthly installments of $8,537 to
December 15, 1999; secured by unearned premiums. $ 136,786
Less: Current portion 46,525
-------------
$ 90,261
=============
(3) Subsequent Events
The Company consummated a corporate reorganization, consisting of five
steps, on August 18, 1998. First, the Company contributed all of its assets and
liabilities (other than those assets and liabilities related to its business of
manufacturing and distributing the SofPulse device (the "SofPulse Business")) to
its wholly-owned subsidiary, EPi HealthTech Inc., a Delaware corporation (EPi
Sub") in exchange for 100 shares of EPi Sub common stock. Second, HealthTech
Development Inc.("HTD"), a privately held company, was merged into EPi Sub, with
the shareholders of HTD receiving an aggregate of 6,172,095 shares of the
Company's common stock (such number of shares being substantially equivalent to
the number of shares of the Company's common stock outstanding at such time, or
6,333,385 shares). Third, EPi Sub contributed all of its assets and liabilities
(including both the assets and liabilities contributed to it by the Company and
the assets and liabilities of HTD) to
6
<PAGE>
Gemini Health Technologies L.P., a newly-formed Delaware limited partnership
(the "Partnership") in exchange for 12,505,480 partnership units of the
Partnership (such number of partnership units corresponding to the number of
shares of the Company's common stock issued and outstanding following the
issuance of shares of the Company's common stock to the shareholders of HTD).
Simultaneously with contribution of EPi Sub's assets and liabilities to the
Partnership, Krishna and Shashikala Jayaraman (the "Jayaramans") transferred all
the limited partnership interests in Gemini Biotech Ltd. ("Gemini"), a privately
held Texas limited partnership and all the stock of its general partner, Gemini
Biotech, Inc. ("GBI"), to the Partnership in exchange for 6,000,000 partnership
units in the Partnership, which partnership units are exchangeable, subject to
certain restrictions, for shares of the Company's common stock, on the basis of
one share of the Company's common stock for each partnership unit (subject to
adjustment in the case of certain events concerning the Company and/or the
Partnership). Fourth, the Company issued 1,872,000 shares of its common stock to
the holders of certain warrants and all outstanding preferred stock of the
Company in exchange for such warrants and preferred stock. Fifth, the Company
sold all of its assets and liabilities relating to the SofPulse Business to a
wholly-owned subsidiary of ADM Tronics Unlimited, Inc. ("ADMT"), a publicly
traded company, in exchange for a combination of $150,000 in cash, 1,400,000
shares of ADMT common stock issued to the Company, an additional 1,525,000
shares of ADMT common stock issued to pay approximately $650,000 of the
Company's payable and a warrant to purchase additional shares of ADMT common
stock if ADMT achieves certain sales objectives with respect to its conduct of
the SofPulse Business.
The effect of the corporate reorganization is that the businesses
previously conducted by the Company (other than the SofPulse Business), HTD and
Gemini are now being conducted by the Partnership and Gemini, with EPi Sub being
the general partner of the Partnership and the Jayaramans being the limited
partner of the Partnership, and the Partnership being the limited partner of
Gemini and Gemini Biotech, Inc. remaining as the limited partner of the
Partnership. At such time as the Jayaramans exchange all of their partnership
units in the Partnership for shares of the Company's common stock, it is
expected that the Partnership and Gemini will be dissolved, EPi Sub will be
dissolved and all of such businesses will be conducted by the Company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Background Electropharmacology, Inc. (the "Company") has been engaged
in the business of developing medical applications for pulsed electromagnetic
signals (PEMS) and, until its recent sale of the business of manufacturing and
marketing a PEMS device called SofPulse. The Company intends to pursue the
application of PEMS in enhancing the delivery of drugs and biologics to selected
tissues and promoting the regeneration of cells in tissues damaged by trauma or
chronic diseases. The Company's strategy also includes the acquisition of other
biotechnologies with potential applications in cancer and autoimmune diseases.
Incorporated under the laws of the State of California in August 1990 under the
name Magnetic Resonance Therapeutics, Inc., the Company reorganized in February
1995 through a merger with and into Electropharmacology, Inc., a Delaware
Corporation. The Company's executive offices are located at 2301 NW 33rd Court,
Suite 102, Pompano Beach, Florida 33069, and its telephone number is (954)
975-9818.
The first embodiment of the Company's PEMS technology was the SofPulse
device ("SofPulse") that was cleared for commercial marketing in January 1991 by
the United States Food and Drug Administration pursuant to a Section 510(k)
premarket notification. SofPulse broadcasts PEMS in the radio frequency range at
27.1 MHZ ("PEMSRF") and was marketed as an adjunct in the palliative treatment
of pain and edema associated with various medical conditions that involve
superficial soft tissue injury.
The Company commenced commercially marketing the SofPulse device in
early 1992. The Company's principal sources of revenue from SofPulse devices
have been rental fees charged to nursing homes and hospitals and sales to
certain distributors and cosmetic surgeons. To date, the Company has generated
only modest revenue from sales and rentals of the SofPulse, which has achieved
only limited market acceptance. As of May 27, 1998, when the Company entered
into a definitive agreement to sell most of its SofPulse device inventory to a
wholly owned subsidiary of ADM Tronics Unlimited, Inc. (see "Subsequent
Events"), the Company had 98 SofPulse devices under rental agreements at nursing
homes. 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, 1996 and 1997. As of June 30, 1998, the Company had an accumulated
deficit of $15,865,337. 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,
manufacturing, marketing literature and advertisement for the SofPulse, 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 and marketing personnel) and will be required to incur significant
expenses in connection with research and clinical studies.
The Company's management concluded that it cannot create shareholder
value by pursuing on its own both the growth of the SofPulse device business and
the PEMS technology business. Accordingly, the Company has implemented a
strategy to create value from each of the two lines of businesses under separate
business structures. The Company recently consummated an asset purchase
agreement with ADM Tronics Unlimited Inc. ("ADMT") pursuant to which ADMT, a
publicly traded
8
<PAGE>
company (Nasdaq:ADMT) engaged in the development and manufacturing of medical
electronic devices and topical dermatological products, has acquired most of the
Company's SofPulse device units and certain other assets specifically related to
the business of SofPulse device manufacturing and marketing (see -- Subsequent
Events). In order to create value from the PEMS technology business, the Company
entered into definitive agreements with HealthTech Development Inc. ("HTD") and
Gemini Biotech, Ltd. ("Gemini") (see -- Subsequent Events). The recent
consummation of the HTD and Gemini transactions will provide the Company with a
broad portfolio of biotechnologies, collaborative affiliations with major
medical institutions and relationships with internationally recognized
scientists.
Subsequent Events The Company consummated a corporate reorganization,
consisting of five steps, on August 18, 1998. First, the Company contributed all
of its assets and liabilities (other than those assets and liabilities related
to its business of manufacturing and distributing the SofPulse device (the
"SofPulse Business")) to its wholly-owned subsidiary, EPi HealthTech Inc., a
Delaware corporation (EPi Sub") in exchange for 100 shares of EPi Sub common
stock. Second, HTD, a privately held company, was merged into EPi Sub, with the
shareholders of HTD receiving an aggregate of 6,172,095 shares of the Company's
common stock (such number of shares being substantially equivalent to the number
of shares of the Company's common stock outstanding at such time, or 6,333,385
shares). Third, EPi Sub contributed all of its assets and liabilities (including
both the assets and liabilities contributed to it by the Company and the assets
and liabilities of HTD) to Gemini Health Technologies L.P., a newly-formed
Delaware limited partnership (the "Partnership") in exchange for 12,505,480
partnership units of the Partnership (such number of partnership units
corresponding to the number of shares of the Company's common stock issued and
outstanding following the issuance of shares of the Company's common stock to
the shareholders of HTD). Simultaneously with contribution of EPi Sub's assets
and liabilities to the Partnership, Krishna and Shashikala Jayaraman (the
"Jayaramans") transferred all the limited partnership interests in Gemini, a
privately held Texas limited partnership and all the stock of its general
partner, Gemini Biotech, Inc. ("GBI"), to the Partnership in exchange for
6,000,000 partnership units in the Partnership, which partnership units are
exchangeable, subject to certain restrictions, for shares of the Company's
common stock, on the basis of one share of the Company's common stock for each
partnership unit (subject to adjustment in the case of certain events concerning
the Company and/or the Partnership). Fourth, the Company issued 1,872,000 shares
of its common stock to the holders of certain warrants and all outstanding
preferred stock of the Company in exchange for such warrants and preferred
stock. Fifth, the Company sold all of its assets and liabilities relating to the
SofPulse Business to a wholly-owned subsidiary of ADM Tronics Unlimited, Inc.
("ADMT"), a publicly traded company, in exchange for a combination of $150,000
in cash, 1,400,000 shares of ADMT common stock issued to the Company, an
additional 1,525,000 shares of ADMT common stock issued to pay approximately
$650,000 of the Company's payable and a warrant to purchase additional shares of
ADMT common stock if ADMT achieves certain sales objectives with respect to its
conduct of the SofPulse Business.
The effect of the corporate reorganization is that the businesses
previously conducted by the Company (other than the SofPulse Business), HTD and
Gemini are now being conducted by the Partnership and Gemini, with EPi Sub being
the general partner of the Partnership and the Jayaramans being the limited
partner of the Partnership, and the Partnership being the limited partner of
Gemini and Gemini Biotech, Inc. remaining as the limited partner of the
Partnership. At such time as the Jayaramans exchange all of their partnership
units in the Partnership for shares of the Company's
9
<PAGE>
common stock, it is expected that the Partnership and Gemini will be dissolved,
EPi Sub will be dissolved and all of such businesses will be conducted by the
Company.
HTD is primarily developing two technologies - one for drugs designed
to treat the spread of cancer without toxic side effects and the other to create
proprietary genetic databases to identify novel molecular targets for future
drugs for chronic diseases such as cancer, arthritis and heart diseases. Gemini
is a leader in the design and chemical synthesis of therapeutic drugs and
diagnostic agents created using "nucleobases", the building blocks of genes, and
has built a library of proprietary and exclusively licensed compounds for the
treatment of cancer and rheumatoid arthritis. The assets being acquired from
Gemini include an inventory of research reagents for product development and
resale, laboratory equipment and other fixed assets, cash and certain
intellectual property rights related to the design of genetic chemistry
products.
The Company intends to conclude a financing in order to provide it with
the capital necessary to pursue the development of the portfolio of proposed
technologies acquired, including technologies in large therapeutic markets such
as cancer and infectious diseases, and uses by the Company's existing
technologies in tissue repair/regeneration through corporate partnerships.
However, there can be no assurance that the Company will be able to conclude the
contemplated financing.
Results of Operations
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Revenue for the three months ended June 30, 1998 was $185,445, compared
to $709,923 for the three months ended June 30, 1997, or a decrease of $524,478.
This 73.9% decrease was primarily attributable to a $423,478, or 74.7%, decrease
in rental revenues in the three months ended June 30, 1998, as compared to the
same period in 1997. The Company's rental revenues were materially adversely
affected as a consequence of the issuance on July 18, 1997 by the Health Care
Financing Administration ("HCFA") of a national policy of non-reimbursement by
Medicare for all forms of electrotherapy for wound healing. HCFA was enjoined
from implementing this national policy under a ruling by a U.S. District Court
in Massachusetts on November 18, 1997; however, monthly rental revenues declined
substantially. Rental revenues in May 1998 were $68,418, as compared to $259,437
in May 1997. At May 27, 1998, the effective date of the transfer of the Sofpulse
rental and sales revenue to a wholly owned subsidiary of ADMT, there were 98
units under rental contracts or monthly fixed fee arrangements, as compared to
391 units at May 1, 1997. In addition, the Company had no rental or sales
revenues in June 1998 due to the transfer of such revenues to ADMT on May 27,
1998. Revenue from the sales of units also decreased from $143,000 in the
quarter ended June 30, 1997 to $42,000 in the comparable period in 1998. During
the three months ended June 30, 1998, the Company sold seven used SofPulse
devices as compared to17 new and used devices in the second quarter of 1997.
Cost of revenue for the three months ended June 30, 1998 was $67,064,
compared to $114,275 for the three months ended June 30, 1997, a decrease of
$47,211. This 41.3% decrease reflects the decreased number of SofPulse devices
sold during the quarter ended June 30, 1998, as compared to the same period in
the prior year.
Selling, general and administrative expenses were $419,874 for the
three months ended June
10
<PAGE>
30, 1998, compared to $981,235 for the three months ended June 30, 1997, a
decrease of $561,361, or 57.2%. This cost decrease reflects a reduction in
consulting expenses, as well as salaries and related benefits associated with
personnel reductions in the sales and marketing, clinical support services and
manufacturing departments.
Research and development expenses decreased to $13,863 for the three
months ended June 30, 1998, compared to $73,757 for the three months ended June
30, 1997, a decrease of $59,894, or 81.2%. This decrease in expense is primarily
attributable to the reduction in basic scientific research involving PEMS
technologies.
Interest and other income (expense) for the three months ended June 30,
1998, decreased to $(18,378), compared to $(1,614) for the three months ended
June 30, 1997, primarily due to a $15,998 increase in interest expense. With the
exception of obligations under capital equipment leases, the Company had
outstanding at June 30, 1997, one note payable in the amount of $182,327 to
finance the Company's directors and officers' liability policy. On June 30,
1998, the Company had debt outstanding to directors of the Company in the
aggregate amount of $73,926, a note payable to the Company's outside law firm
secured by 55 SofPulse devices in the principal amount of $672,751 for legal
services rendered during 1997, and a note payable in the amount of $136,786 to
finance the Company's directors and officers' insurance policy.
Interest income for the three months ended June 30, 1998 decreased by
$766 from the three months ended June 30, 1997 due to the decrease in funds of
the Company available for short term investment in the second quarter of 1998.
The above resulted in a net loss of $(333,734) for the three months
ended June 30, 1998, compared to a net loss of $(460,958) for the three months
ended June 30, 1997.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Revenue for the six months ended June 30, 1998 was $435,003, compared
to $1,514,751 for the six months ended June 30, 1997, or a decrease of
$1,079,748. This 71.3% decrease was primarily attributable to a $868,608, or
70.7%, decrease in rental revenues in the six months ended June 30, 1998, as
compared to the same period in 1997. The Company's rental revenues were
materially adversely affected as a consequence of the issuance on July 18, 1997
by the HCFA of a national policy of non-reimbursement by Medicare for all forms
of electrotherapy for wound healing. In addition, the Company had no rental or
sales revenues in June 1998 due to the transfer of such revenues, effective May
27, 1998, to a wholly owned subsidiary of ADMT. Revenue from the sales of units
also decreased from $143,000 in the six months ended June 30, 1997 to $42,000 in
the comparable period in 1998. During the six months ended June 30, 1998, the
Company sold 12 used SofPulse devices as compared to 29 new and used devices in
the first six months of 1997.
Cost of revenue for the six months ended June 30, 1998 was $138,599,
compared to $202,649 for the six months ended June 30, 1997, a decrease of
$64,050. This 31.6% decrease reflects the decreased number of SofPulse devices
sold during the six months ended June 30, 1998, as compared to the same period
in the prior year.
Selling, general and administrative expenses were $783,537 for the six
months ended June 30,
11
<PAGE>
1998, compared to $1,850,001 for the six months ended June 30, 1997, a decrease
of $1,066,464, or 57.7%. This cost decrease reflects a reduction in consulting
expenses, as well as salaries and related benefits associated with personnel
reductions in the sales and marketing, clinical support services and
manufacturing departments.
Research and development expenses decreased to $37,974 for the six
months ended June 30, 1998, compared to $183,173 for the six months ended June
30, 1997, a decrease of $145,199, or 79.3%. This decrease in expense is
primarily attributable to the reduction in basic scientific research involving
PEMS technologies.
Interest and other income (expense) for the six months ended June 30,
1998, decreased to $(34,919), compared to $1,570 for the six months ended June
30, 1997, primarily due to a $31,067 increase in interest expense.
Interest income for the six months ended June 30, 1998 decreased by
$4,557 from the six months ended June 30, 1997 due to the decrease in funds of
the Company available for short term investment in the six months ended June 30,
1998.
The above resulted in a net loss of $(560,026) for the six months ended
June 30, 1998, compared to a net loss of $(719,502) for the six months ended
June 30, 1997.
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 June 30, 1998, the Company had a working capital deficit
of $1,181,411 and a deficiency in capital of $612,011.
Net cash used in operating activities for the six months ended June 30,
1998 was $60,712, as compared to net cash provided by operating activities of
$199,728 for the six months ended June 30, 1997. Net cash was used primarily to
fund the losses from operations. Net cash used in financing activities was
$2,641 for the six months ended June 30, 1998, as compared to $120,393 for the
six months ended June 30, 1997. At June 30, 1998, the Company had cash of
$62,465.
At December 31, 1997, the Company had a net operating loss ("NOL")
carry forward of $10,719,000 available to offset future taxable income, if any,
through the year 2012. During 1993 and 1995, changes in ownership of greater
than 50% occurred as a result of the Company issuing equity securities.
Accordingly, a substantial limitation will be imposed upon the future
utilization of approximately $2,450,000 of its net operating loss carry
forwards.
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 a reorganization, reductions in operating costs, including stringent
cost controls, personnel reductions and redeployments, the deferral of product
development and clinical studies, and reductions in sales and marketing expenses
until after additional financing is obtained. There can be no assurance that
these measures will be successful. The Company's management believes that it is
unlikely that the Company's revenues will increase without incurring
12
<PAGE>
additional sales and marketing expenses. 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 time, nor can there be any assurance that additional financing will be
obtained on favorable terms. On September 23, 1997, Nasdaq notified the Company
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, surplus and public float requirements. The Company is now
quoted on the Nasdaq OTC Bulletin Board. There can be no assurance, however,
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
improve its operations and is unable to ultimately obtain additional financing,
it may not be able to continue as a going concern.
As a consequence of the Company's deteriorating cash position and the
recent sale of its SofPulse device inventory and related manufacturing and sales
business, the Company has undergone reductions in personnel. The Company
currently has six full-time personnel and with the closing of the reorganization
will have 10 additional employees.
Impact of the Year 2000
The Securities and Exchange Commission, in Staff Legal Bulletin No. 5
(CF/IM), has stated that public operating companies should consider whether they
will be affected by any material expenditures, problems or uncertainties
associated with the Year 2000 issue, which affects many existing computer
systems that use only two digits to identify a year in the date field. The
Company believes that the matters raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its own computer systems and the Company
intends to confirm that any computer systems that the Company may purchase or
lease in the future will have addressed the Year 2000 issue.
The Company is currently determining the extent to which it may be
impacted by third parties' failure to remedy their own Year 2000 issues. The
Company is having, and will continue to have, formal communications with all of
its significant customers, payers, suppliers, and other third parties to
determine the extent, if any, to which the Company's systems could be impacted
by any third party Year 2000 issues and related remedies. The Company presently
believes that the Year 2000 issue will not pose significant operational problems
for the Company. However, Year 2000 issues could adversely impact the Company if
systems operated by its customers or vendors are not Year 2000 compliant.
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 and prevent the Company from making certain
labeling claims. The Company believes, based upon the advice of
13
<PAGE>
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 Diapulse's 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 aforementioned petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the
State of New York, Nassau County ("The Court"), 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 Winter
("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 August 28, 1997, Michelle O'Connell, formerly employed by Kinetech
Medical, Inc. ("Kinetech") as the Company's 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 the Company are jointly and severally liable for an unspecified amount of
commissions earned by O'Connell from Kinetech, but unpaid, and asserts a cause
of action quantum meruit against the Company. O'Connell dismissed the complaint
against the Company in
14
<PAGE>
May, 1998 and Kinetech immediately filed a cross-complaint against the Company
for breach of the agreement between the Company and Kinetech for failing to pay
commissions owed in excess of $30,000. The Company answered the cross-complaint
and asserted several affirmative defenses. The case has not yet been set for
trial and no discovery between the Company and Kientech has taken place.
On July 14, 1998, Jack Baxter ("Baxter"), a former employee of the
Company filed a complaint entitled Baxter v. Electropharmacology, Inc. in the
Circuit Court in Broward County, Florida. The complaint alleges breach of an
agreement, pursuant to which Baxter and the Company had agreed to the terms of
the termination of their employer-employee relationship, by failing to make
payments of $20,000 due Baxter. The Company answered the complaint and asserted
several affirmative defenses. The case has not yet been set for trial and no
discovery between the Company and Baxter has taken place.
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, 1998:
* Form 8-K dated June 15, 1998 - Item 2 - regarding the
execution of an Asset Purchase Agreement with ADM Tronics
Unlimited, Inc.
* Form 8-K dated June 26, 1998 - Item 2 - regarding the
execution of an agreement of Merger and Plan of Reorganization
with HealthTech Development Inc.
SIGNATURES
In accordance with the requirements of the Securities and 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 August 19, 1998 ________________________________
Arup Sen
Chief Executive Officer
15
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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