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 September 30, 1999
---------------
[ ] 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.
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Exact name of small business issuer as specified in its charter
Delaware 95-4315412
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12085 Research Drive, Alachua, FL 32615
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(Address of principal executive offices)
(904) 462-2249
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(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
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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, 1999
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Common Stock, $ .01 par value 16,318,325
Transitional Small Business Disclosure Format:
Yes No X
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ELECTROPHARMACOLOGY, INC.
INDEX TO FORM 10-QSB
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 3
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three and nine months ended
September 30, 1999 and 1998 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 21
ITEM 6. Exhibits and Reports on Form 8-K 22
Signatures
</TABLE>
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Electropharmacology, Inc.
Consolidated Statements of Financial Position
(Unaudited with respect to September 30, 1999)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------------------
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ASSETS
Current assets:
Cash and cash equivalents 25,940 160,011
Accounts receivable, net of allowance for doubtful accounts of $43,794
at September 30, 1999 and $61,184 at December 31, 1998 108,758 83,497
Inventory 7,172 7,172
Prepaid expenses 57,990 133,737
Subscription receivable - current - 900,000
Notes receivable - related parties 15,000 -
Other receivables - 2,769
Investment 454,895 1,400,000
-------------------------------
Total current assets 669,755 2,687,186
Property and equipment, net of accumulated depreciation of $299,481 at
September 30, 1999 and $217,752 at December 31, 1998 273,780 382,347
Patents, net of accumulated amortization of $24,866 at September
30, 78,489 83,048
1999 and $20,306 at December 31, 1998
Other assets 463 8,750
--------------------------------
TOTAL ASSETS 1,022,487 3,161,331
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 397,652 482,643
Accrued expenses 341,403 181,639
Notes payable - short term 1,292,091 1,409,969
Notes payable - related parties 129,580 129,580
Current portion of capital leases 30,316 30,034
-------------------------------
Total current liabilities 2,191,042 2,233,865
Capital leases, long term portion 34,763 45,539
-------------------------------
Total Liabilities 2,225,805 2,279,404
Minority interest - 2,031,429
Mandatorily redeemable convertible preferred stock, $.01 par value,
7,887 shares authorized, issued and outstanding at September 30, 1999, and
7,500 authorized, issued and outstanding at December 31, 1998 8,651,842 7,458,926
Stockholders' Equity & Net Capital Deficiency
Common stock, $.01 par value, 30,000,000 shares authorized, 16,318,325
issued and outstanding at September 30, 1999 and 13,282,687
issued and outstanding at December 31, 1998 163,183 157,180
Additional paid-in capital 21,530,287 21,726,928
Accumulated other comprehensive income (loss) (132,650) 803,279
Dividend Distribution (577,675) -
Retained deficit (31,047,305) (30,795,815)
-------------------------------
(10,064,160) (8,108,428)
Common Stock Reserved 209,000 -
Subscription Receivable - (500,000)
-------------------------------
Net capital deficiency (9,855,160) (8,608,428)
-------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 1,022,487 3,161,331
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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Electropharmacology, Inc.
Consolidated Statements of Operations
(Unaudited with respect to September 30, 1999)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------------
1999 1998
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<S> <C> <C>
Sales Revenue 134,697 62,283
Operating expenses:
Cost of revenue 191,683 66,548
Selling, general and administrative 351,484 570,371
Impairment loss on intangible assets - 7,812,038
Research and development 131,442 7,663,576
-------------------------------
Total operating expenses 674,609 16,112,533
-------------------------------
Loss from operations (539,912) (16,050,250)
Other income (expense)
Interest expense (36,498) (18,072)
Interest and other income 8,113 3,111
Loss on sale of investment (1,310) -
Gain/(loss) on disposal of equipment (82,978) 662,985
Gain on settlement of litigation 1,150,577 -
-------------------------------
Total other income (expense) 1,037,904 648,024
-------------------------------
Income/(loss) from continuing operations 497,992 (15,402,226)
===============================
Minority interest 211,587
2,307,778
Net Income/(loss) 709,579 (13,094,448)
Net Income/(loss) per share - basic and diluted 0.04 (1.83)
===============================
Weighted average number of common shares outstanding -
Basic and diluted 16,295,499 7,501,125
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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Electropharmacology, Inc.
Consolidated Statements of Operations
(Unaudited with respect to September 30, 1999)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------------
1999 1998
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<S> <C> <C>
Revenue:
Rentals - 359,143
Sales 434,772 138,143
-------------------------------
Total revenue 434,772 497,286
Operating expenses:
Cost of revenue 415,334 205,147
Selling, general and administrative 1,631,792 1,353,920
Impairment loss on intangible assets - 7,812,038
Research and development 302,917 7,701,538
-------------------------------
Total operating expenses 2,350,043 17,072,643
-------------------------------
Loss from operations (1,915,271) (16,575,357)
Other income (expense)
Interest expense (104,684) (54,721)
Interest and other income 32,091 5,706
Loss on sale of investment (1,310) -
Gain/(Loss) on disposal of equipment (82,978) 662,120
Gain on settlement of litigation 1,150,577 -
-------------------------------
Total other income (expense) 993,696 613,105
-------------------------------
Loss from continuing operations (921,575) (15,962,252)
===============================
Minority interest 671,852 2,307,778
Net loss (249,723) (13,654,474)
Net loss per share - basic and diluted (0.02) (2.72)
===============================
Weighted average number of common shares outstanding -
Basic and diluted 15,829,749 5,254,905
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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Electropharmacology, Inc.
Consolidated Statements of Cash Flows
(Unaudited with respect to September 30, 1999)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-----------------------------------
1999 1998
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Operating activities
Net Loss $ (249,723) $ (13,654,474)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 80,220 258,280
Amortization of warrants 228,574 -
Issuance of common stock for services 167,822 141,750
Amortization of deferred compensation - 25,429
Compensation expense for related party stock options - 63,654
Write-off of in-process research and development - 7,663,576
Write-off of purchased intangible assets - 7,812,038
Loss attributable to minority interest (671,852) (2,307,778)
Loss/(Gain) on disposal of equipment 82,978 (662,120)
Loss on sale of investment 1,310 -
Gain on settlement of litigation (1,150,577) -
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable (25,261) 138,005
Decrease in trade notes and other receivables 2,706 50,349
Decrease in Inventory - 152,233
Decrease in prepaid expenses 79,723 75,094
Decrease/(increase) in deposits 7,950 (7,561)
Increase in accounts payable and accrued expenses 93,355 95,934
-----------------------------------
Net cash (used in) operating activities (1,352,775) (155,591)
Investing activities
Proceeds from sale of equipment - 164,420
Purchase of technology - (7,500,000)
Purchases of property and equipment (51,610) (98)
Loan to related party (85,000) -
Cash acquired in acquisition - 238,133
Repayment of loan to related party 70,000 -
-----------------------------------
Net cash (used in) investing activities (66,610) (7,097,545)
Financing activities
Proceeds from issuance of common stock 1,400,000 -
Proceeds from issuance of redeemable convertible preferred stock - 7,500,000
Repayment of notes payable and capital lease obligations (114,686) (114,292)
Repayment of notes payable to related parties - (8,000)
-----------------------------------
Net cash provided by financing activities 1,285,314 7,377,708
-----------------------------------
Net increase/(decrease) in cash (134,071) 124,572
Cash at beginning of period 160,011 111,496
-----------------------------------
Cash at end of period $ 25,940 $ 236,068
===================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 40,112 $ 21,867
===================================
5
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Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock for services 167,822 -
Asset recognized and liability incurred for the financing of the directors
and officers liability insurance premiums _ 78,400
Asset recognized and liability incurred for the financing of the commercial
general liability insurance premiums 7,107 _
Asset recognized and liability incurred for the financing of the product
liability insurance premiums _ 6,322
Details of settlement with outside counsel:
Disposal of investment in securities - 650,000
Issuance of common stock - 128,166
Details of disposal of SofPulse business:
Investment in securities - 1,190,980
Net assets disposed - 615,998
Details of acquisition of HealthTech Development, Inc.:
Fair value of assets acquired - 7,245
Liabilities assumed - 48,707
Issuance of common stock - 3,315,297
Details of acquisition of Gemini Biotech, Ltd.:
Fair value of assets acquired - 770,060
Liabilities assumed - 1,316,207
Conversion of preferred stock for common stock - 630,000
Conversion of warrants for common stock - 118,800
</TABLE>
The accompanying notes are an integral part of these financial statements
6
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying 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, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
Nature of business and major suppliers - Electropharmacology, Inc., a
Delaware corporation (the "Company") was incorporated on August 31,
1990 under the laws of the state of California under the name Magnetic
Resonance Therapeutics, Inc., and reorganized through a merger in
February 1995 with and into Electropharmacology, Inc. Until August 24,
1998, the Company designed, manufactured and marketed the SofPulse
device that delivers pulsed electromagnetic signals in the radio
frequency range. The Company concentrated on medical applications for
these devices for the relief of pain and edema in superficial soft
tissues.
The Company consummated a corporate reorganization on August 24, 1998
when it became a biotechnology company through a series of
transactions, including (i) the acquisition of two privately held
business entities engaged in developing molecular technologies that
identify and facilitate the design of drugs combating cancer and
rheumatoid arthritis, and (ii) the sale of the past business operations
related to the manufacturing and marketing of the SofPulse device
product in its then allowed label indication in order to focus on the
biopharmaceutical applications of the underlying technology related to
the use of pulsed electromagnetic signals in increasing blood flow and
promote tissue regeneration. The Company subsequently entered into
agreements with subsidiaries of Elan Corporation, plc. on September 30,
1998, whereby it acquired certain licenses to a flexible patch drug
delivery technology developed by Elan, in exchange for an up-front
payment plus future payments including royalties, and received a
commitment from Elan to invest up to $2,000,000 through the purchase of
the Company's securities. As a result of the corporate reorganization
and the transactions with Elan, the Company intends to pursue the
development of drug delivery technologies to deliver pharmaceutical
drugs and biotechnology products more effectively to diseased tissues,
and drug design technologies to create new drugs aimed at the genes and
proteins that cause or control complex diseases. The Company also uses
its drug design technologies and related expertise to design, produce
and sell custom fragments of genes and proteins for its customers
engaged in genomics research and drug discovery . The Company is
developing, through Gemini Biotech, Ltd., a partnership ("Gemini"), a
web-based platform to market these custom reagents and related services
to academic researchers and biopharmaceutical companies.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company, its wholly-owned
subsidiaries and partnerships. All material intercompany accounts and
transactions have been eliminated in consolidation. Minority interest
consists of the ownership interest of the minority partners of Gemini
Health Technologies, L.P. (the "Partnership").
7
<PAGE>
Revenue recognition - The Company recognizes revenue upon shipment and
the transfer of ownership of the product.
Investments - The Company accounts for marketable securities in
accordance with the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Securities held are classified as
"available for sale" and are carried in the financial statements at
fair value. Realized gains and losses are included in earnings, while
unrealized gains and losses are excluded from earnings and reported as
other comprehensive income, a component of stockholders' equity.
Inventory - Inventory at September 30, 1999, consisted primarily of
supplies used to produce custom reagents and certain materials,
including those acquired in the acquisition of Gemini Biotech, Ltd.,
that are used in molecular research activities. All these materials are
valued at the lower of cost (average cost method) or market.
Patents - Patents are amortized using the straight-line method over 17
years from the date of issuance of the patents, or over the remaining
useful lives.
Property and equipment - Property and equipment are recorded at cost.
Major improvements are capitalized, while maintenance and repairs are
expensed when incurred. The cost and accumulated depreciation for
property and equipment sold, retired, or otherwise disposed of are
relieved from the accounts, and resulting gains or losses are reflected
in income.
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold improvements
is amortized over the lesser of the length of the related leases or the
estimated useful lives of the improvements. Depreciation is computed on
the straight-line method for financial reporting purposes, and on the
declining balance method for income tax purposes.
Asset impairment - The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective
carrying values to the current and expected future cash flows to be
generated from such assets. In accordance with Statements of Financial
Accounting Standards No 121, "Accounting for the Impairment of
Long-lived Assets" (SFAS 121"), the recoverability of property and
equipment, intangible assets and goodwill, are evaluated on a separate
basis for the Company and each acquisition.
Stock based compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for
its employee stock options. Accordingly, no compensation expense has
been recognized for its stock options granted to employees because the
exercise price is equal to the market value of the underlying stock at
the date of the grant.
Income taxes - The Company provides for income taxes under the
provisions of Statement of Financial Accounting Standard No. 109,
"Accounting For Income Taxes" ("SFAS 109"), which requires the asset
and liability method of accounting for income taxes in which deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled.
Advertising costs - Advertising costs are included in selling, general
and administrative expenses, and are expensed as incurred.
8
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Net loss per share -The Company has adopted the Financial Accounting
Standards Board No. 128, "Earnings Per Share" ("SFAS No. 128"), which
established new standards for computing and presenting earnings per
share. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
All loss per share amounts have been presented to conform to the SFAS
No. 128 presentation. For the three and nine month periods ended
September 30, 1999 and 1998, options and warrants were excluded from
the computation of net loss per share because the effect of inclusion
would be anti-dilutive due to the Company's net operating losses.
Use of estimates and concentration of credit risk - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents and trade
receivables. The Company maintains its cash accounts with banks located
primarily in Florida. The total cash balances are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per bank.
As of September 30, 1999, the Company had no cash balances exceeding
the FDIC-insured amount. The Company provides credit to customers based
on an evaluation of the customer's financial condition, generally
without requiring collateral. Exposure to losses on receivables is
principally dependent upon each customer's financial condition. The
Company monitors its exposure for credit losses and maintains an
allowance for anticipated losses.
Major Customers - Sales to two customers during the years ended
September 30, 1999 and 1998, consisted of approximately 24% and 46%,
respectively, of total sales. The accounts receivable balances of these
major customers at September 30, 1999 and 1998 were $19,738 and
$25,834, respectively.
Major Suppliers - The Company acquires approximately 58% of the raw
materials used in its synthesis processing from four different
suppliers. Although there are other suppliers of these materials, a
change would cause a delay in the production process, which could
ultimately affect operating results.
Fair value of financial instruments - The fair value of the Company's
financial instruments such as accounts receivable, accounts payable,
notes payable and capital leases approximate their carrying value.
Business segment - The Company operates principally in one business
segment that develops technology and development stage products for the
health care industry.
New accounting pronouncements - In April 1998, the Accounting Standards
Executive Committee released Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires that
start-up costs, including organizational costs, be expensed as
incurred. The Company has accepted early adoption of SOP 98-5 and has
expensed all start-up costs.
9
<PAGE>
Reclassifications - Certain reclassifications have been made to the
1998 financial statements to conform to the 1999 presentation.
2. LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business.
The Company reported a net loss of $(249,723) for the nine months ended
September 30, 1999 and cumulative net operating losses aggregating
$31,047,305 through September 30, 1999. In addition, at September 30,
1999, the Company had a net capital deficiency of $(9,855,160). The
Company is also in default on a secured note in the principal amount of
$1,163,090 to its major creditor, a life insurance company. The
insurance company has not exercised its rights and remedies under the
note and loan agreement, but there is no assurance the insurance
company will not accelerate payment of the note.
On August 24, 1998, the Company reorganized to better enable the
Company to focus its efforts on research and development activities. In
August 1998, the Company sold substantially all of the assets and
certain liabilities related to the manufacturing, sales and marketing
of its SofPulse device limited to the market for which the SofPulse
device had been cleared for commercial marketing in 1991. The Company
retained rights to the underlying electromagnetic signal technology
applications in drug delivery and tissue repair. This transaction
provided the Company with $150,000 in cash payment, marketable
securities with a value of $596,721 on August 24, 1998 and additional
marketable securities for the satisfaction of $778,166 of notes
payable, accrued interest and accounts payable to a major past creditor
of the Company. Also, on September 30, 1998, the Company received a
commitment from Elan International Services, Ltd. ("Elan"), a
subsidiary of Elan Corporation, plc, to invest $2,000,000 in shares of
the Company's common stock or other equity securities. As of May 17,
1999, the Company had received all such funds.
The Company's 1999 operating plan contemplates stringent cost controls
and a staged commitment to product development until additional funds
are obtained from raising of additional investment capital, revenues
from Gemini's custom DNA and peptide synthesis or Federal research
grants.
Losses from the Gemini operations have consumed significant cash
resources from the Company. While the custom synthesis business of
Gemini grew during the first six months of 1999, the operation
continued to require additional investment in personnel, materials,
facilities and equipment, resulting in substantially higher operating
expenses. Since July 1999, the Company has been implementing plans to
significantly reduce these operating losses and cash outflows while
retaining the value of the custom synthesis business. In accordance
with these plans, the Company recently downsized Gemini's operations,
including a significant reduction in salaries and personnel. The
Company also initiated litigation against a former Company Vice
Chairman and President of Gemini, resulting in the settlement of
certain employment and other contractual obligations of the Company to
this officer that were incurred by the Company in the Gemini
acquisition transaction. See "Note 5. Contingencies and Litigation."
The Company is also attempting to restructure Gemini's balance sheet,
including the compromise and settlement of certain other Gemini
liabilities, including the secured note to a life insurance company in
the approximate principal amount of $1.16 million, trade payables and
equipment lease obligations.
10
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In order to reduce its occupancy expenses, in August 1999, the Company
relocated the Gemini operations from The Woodlands, Texas and its
executive offices from Gainesville, Florida to the Sid Martin
Biotechnology Development Institute in Alachua, Florida. The Company's
Florida-based research laboratories have been located at the Alachua
site since December 1998. In connection with settlement of the Gemini
office lease obligation in The Woodlands, Texas, on November 16, 1999,
Gemini executed a $35,000 note payable bearing an annual interest rate
of 10%, with $1,500 monthly payments payable over 26 months, beginning
December 1, 1999. Other strategies being evaluated for the Gemini
operations include strategic alliances, including mergers and
acquisitions of related or complementary custom molecular businesses
for the medical research market and raising additional investment
capital in order to sustain continuing operations.
The Company cannot predict whether the operating and financing plans
described above, if implemented, will be successful. If the Company is
unable to successfully obtain additional financing, it may not be able
to continue as a going concern and may be unable to meet its
obligations. Additionally, the Company is dependent on certain research
and development assistance from Elan. Should Elan withdraw its support,
the Company may not be able to meet its commitments. The financial
statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
3. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at September 30, 1999 and December 31, 1998 Sept 30, Dec 31,
consisted of the following: 1999 1998
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<S> <C> <C> <C> <C>
Note payable (interest beginning July 1, 1999 @ 12% per annum) to an
accounting firm, due August 30, 1999 98,430 $ 118,430
Note payable to finance insurance premiums with interest
at 8%, due December 1999 25,274 98,144
Note payable to finance insurance premiums, with interest
at 12.75%, due April 2000 5,297 3,586
Variable rate note payable to an insurance company, due
July 1, 2006 1,163,090 1,189,809
----------- -----------
Total Notes Payable 1,292,091 1,409,969
Less current portion (1,292,091) (1,409,969)
---------- -----------
Long term portion of notes payable $ -- $ --
============ ============
</TABLE>
On October 28, 1998, the Company executed a promissory note to its
former accounting firm for audit fees. On May 13, 1999, the Company
amended the note extending the due date to August 30, 1999. The note
was non-interest bearing until June 30, 1999, at which time the note
bears interest of 12% per annum. No payments are due until the due
date. As of December 31, 1998 and September 30, 1999, the balance was
$118,430 and $98,430, respectively.
On June 27, 1997, Gemini entered into a loan agreement (the "Loan")
with an insurance company (the "Lender") in the amount of $1,315,000.
The loan amortizes over 101 payments ending July 1, 2006. Interest is
11
<PAGE>
two points over prime. At December 31, 1998 and September 30, 1999, the
rate was 10.25%. Collateral for the note is Gemini's assets, including
accounts receivable, inventory, and property and equipment owned now or
acquired in the future. On December 22, 1998, the loan was modified to
add as additional collateral the Company's corporate guarantee and 65
SofPulse devices owned by the Company. The former President of Gemini
and his wife have personally guaranteed the repayment of the
indebtedness. In addition, repayment of the loan is guaranteed in part
by the Rural Biological Science Department of the U.S. Department of
Agriculture.
The terms of the Loan include maintaining certain financial covenants,
principally relating to working capital liquidity and net working
capital ratios, and permitted purchases and expenses. The covenants
also include a limitation on compensation and distributions. All of the
amounts outstanding under the Loan become due and payable if an event
of default occurs. As of September 30, 1999, Gemini was not in
compliance with certain ratios relating to net worth and working
capital. In addition, since March 1999, the Company has not made the
required monthly payments.
4. RELATED PARTIES TRANSACTIONS
The Company has transactions in the normal course of business with
Gemini Biotech, Ltd. Most of the purchases consist of lab supplies,
postage and shipping and equipment that are paid by the Company and
subsequently recorded as a receivable from Gemini. These transactions
are correctly eliminated in consolidation.
During October 1997, the Company issued three notes payable to two
officers and a member of the board of directors in exchange for cash
advances of $45,000 and non-payment of salaries of $20,926. The notes
bear interest at prime plus 1% (9.25% at September 30, 1999) and are
due on demand. The balance due under the notes at September 30, 1999
and December 31, 1998 is $65,926.
Effective as of August 24, 1998, as a result of the merger with HTD and
the acquisition of Gemini and in conjunction with certain change of
control provisions in the employment contract of the Company's Chief
Executive Officer, the Company recorded a note payable to the Chief
Executive Officer for $63,654 to be used for his exercise of 244,823
options to purchase common stock at $.26 per share. As of September 30,
1999, the options had not been exercised.
On February 1, 1999, the Company made an unsecured loan to its Chief
Executive Officer, evidenced by a demand note in the amount of $85,000,
bearing interest at prime plus 1% (9.25% at September 30, 1999). As of
September 30, 1999, $70,000 of the note had been repaid and the
remaining $15,000 was paid on October 29, 1999.
5. CONTINGENCIES AND LITIGATION
On September 23, 1999, as a result of litigation initiated by the
Company in September 1999 against a former Company Vice Chairman and
President of Gemini ("Former Gemini President") regarding the Company's
acquisition of Gemini, the Company and the Former Gemini President
entered into a settlement agreement in which, among other things, the
Former Gemini President agreed to resign and the Company agreed to pay
the Former Gemini President certain amounts in order to secure a
release of all the Company's obligations to him, including those
agreements entered into as part of the Gemini acquisition. The
settlement agreement provides the following payments to the Former
Gemini President: the sum of $40,000 payable over eight months, the
issuance of 950,000 shares of common stock of the Company in exchange
for the Former Vice President's minority interests in the Partnership,
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and the issuance of up to an additional $242,000 in value of shares of
common stock of the Company (priced at the greater of $.5022 per share
or the average market price 20 days prior to issuance), payable in two
annual installments, beginning on May 16, 2000, to be reduced by any
amounts earned by the Former Gemini President from other employment or
third party consulting services from the date of the agreement through
May 16, 2001. The Company recognized a gain on the settlement of this
lawsuit in September 1999 in the amount of $1,150,577, representing the
difference between the Company's recorded minority partnership interest
and the fair market value of the common stock of the Company issued in
exchange for the minority interest.
In August 1994, Diapulse Corporation of America, a former competitor of
the Company filed a lawsuit against the Company and certain of its
present and former directors and officers alleging the defendants had
engaged in deceptive acts and practices, false advertising, unfair
competition, breach of contracts of fiduciary duties between the
plaintiff and certain Company employees. They also alleged the Company
was involved in facilitating or participating in the breach of
contracts. The plaintiff is seeking an injunction to rectify the
effects of the misconduct, an unspecified amount of compensatory
damages, disgorgement of profits, treble damages, punitive damages and
attorney's fees. The plaintiff also seeks unspecified injunctive relief
prohibiting the Company from engaging in the alleged acts and ordering
the defendants to take remedial action to rectify the effects on
consumers and the plaintiff caused by the alleged acts. The Company
believes it has meritorious defenses, which it will pursue vigorously
and has filed a counterclaim against the plaintiff and its President.
The parties are currently in settlement negotiations. Management is
unable to make a meaningful estimate of the likelihood or amount or
range of loss that could result from an unfavorable outcome of the
pending litigation. It is possible the Company's results of operations
or cash flows in a particular quarter or annual period or its financial
position could be materially affected by an unfavorable outcome. The
Company's balance sheets at September 30, 1999 and December 31, 1998
included an accrual for this matter.
In July 1999, Copelco Credit Corporation filed suit against the Company
alleging breach of lease agreement in connection with an equipment
lease on a copier. The Plaintiff is seeking to accelerate all sums due
under the lease agreement. Management estimates that the loss that
could result from an unfavorable outcome of this litigation is less
than $40,000. The Company's balance sheet at September 30, 1999
included an accrual for this matter.
6. YEAR 2000 COMPUTER CONSIDERATIONS
The year 2000 issue is the result of possible shortcomings in
electronic data processing systems and other electronic equipment that
may not have been programmed to process data accurately when the last
two digits of the year change from 99 to 00 which could adversely
affect the Company's operations.
The Company has completed an inventory of computer systems and other
electronic equipment that may be affected by the year 2000 issue and
that are necessary to conduct Company operations. Management has
determined that all computer and electronic systems identified during
the inventory are year 2000 compliant.
Because of the unprecedented nature of the year 2000 issue, the effects
and success of related remediation efforts will not be fully
determinable until the year 2000 and thereafter. Management cannot
assure the Company is or will be year 2000 ready, the Company's
remediation efforts will be successful in whole or in part, or that
parties with whom the Company does business will be year 2000
compliant.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward - looking statements about our plans and
business. Actual events and results may differ materially from those anticipated
in these forward- looking statements. The ability to achieve our projections and
business objectives is dependent on a variety of factors, many of which are
outside of management's control. Some of the most significant factors, alone or
in combination, would be the failure to obtain additional equity financing to
fund research and development activities and projected losses from operations;
the inability to grow the revenues and improve the financial performance from
Gemini's custom synthesis business; the failure to successfully restructure a
defaulted loan from Gemini's major creditor, a life insurance company, in the
amount of $1,163,090; unanticipated disagreements with prospective corporate
partners, if any; an unanticipated slowdown in the health care industry (as a
result of cost containment measures, changes in governmental regulation or other
factors), or an unanticipated failure in the commercialization of our
technologies or potential products developed from these technologies.
Accordingly, there can be no assurances that we will achieve our business
objectives.
General
We are a biotechnology company engaged in developing products based on our
proprietary drug delivery and drug design technologies to treat complex diseases
that are not effectively treated by available drugs or treatment methods. We
also generate revenues from a web-based service business that uses our drug
design expertise to design and sell custom molecules for research and drug
discovery based on genomics.
Complex diseases like cancer, tissue degenerative diseases (such as ulcers,
Alzheimer's disease or osteoporosis) or inflammation go through multiple stages
and involve a complex interplay of multiple genes and proteins. We believe that
the future of the biopharmaceutical product market will be based on delivering
the right amount of drug at the right time to diseased tissues (drug delivery)
and using a drug that is designed to attack the right gene or protein target for
the appropriate stage of a complex disease (drug design).
Our strategy is to develop:
(i) drug delivery technologies to non-invasively deliver pharmaceutical
drugs and biotechnology products more effectively to diseased tissues;
and
(ii) drug design technologies to create new drugs aimed at the genes
and proteins that cause or control complex diseases.
Drug Delivery - Improving the delivery of a drug to diseased tissues
can reduce side effects and/or allow patients to take lower doses of toxic
drugs. Examples include delivering topical drugs for skin disorders (psoriasis,
acne, herpes sores, wrinkles), chemotherapeutic drugs to cancerous organs, or
anti-inflammatory drugs to arthritic joints. We use the principle of applying
mild electric currents ("iontophoresis") to improve the delivery of topical
drugs through the skin and pulsed radiofrequency electromagnetic signals
("PREMS") broadcast to increase blood flow in superficial soft tissues and thus
improve the delivery of drugs carried in bloodstream.
Drug Design - We have special expertise in designing and chemically
synthesizing new drugs that are small molecules (like antibiotics or
chemotherapeutic drugs) as compared to large molecule drugs (like the protein
drugs made by the biotechnology industry). Our drug design strategy uses new
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information from biomedical research that is revealing the roles of specific
genes and proteins in complex diseases. Each of our small molecule drugs is
designed to selectively target a specific gene or a protein in order to either
treat or detect a disease (or the stage of a complex disease). Our drug design
program is currently focused on:
o synthesizing novel molecules made from the building blocks of genes
and proteins to build a growing library of proprietary small molecule
drugs for cancer and inflammation; and
o marketing our synthesis capability, as a separate web-based service
business, to generate a revenue stream from the rapidly growing
markets of custom DNA and peptide synthesis for research.
All of our technologies are under development and not commercially marketed. In
addition, our web-based custom service business currently is not profitable.
Accordingly, we need additional capital from financing, corporate partnerships
or federal grants in order to advance our technologies toward commercial
feasibility. If we are unable to obtain sufficient additional funds in a timely
manner, the development of our technologies and our financial condition will be
materially adversely affected.
Our company was originally incorporated under the laws of the State of
California in August 1990 under the name Magnetic Resonance Therapeutics, Inc.
that was reorganized through a merger with and into Electropharmacology, Inc., a
Delaware corporation, in February 1995. During 1998, we concluded a corporate
reorganization into a biotechnology company that included a series of
transactions, including (i) the acquisition of two privately held business
entities engaged in developing new molecular technologies for drugs for cancer
and inflammation and (ii) the divestiture of our past business related to the
manufacturing and renting of our SofPulse device in the nursing home and
physical therapy markets to focus on the biopharmaceutical applications of the
underlying PREMS technology. In the past year, we also acquired an iontophoresis
flexible patch technology for topical dermatology applications and an equity
investment from Elan Corporation, plc. Pending shareholder approval, we will
change our name to Gemini Health Technologies Inc. Our executive offices are
located at 12085 Research Drive, Alachua, Florida 32615 and our telephone number
is (904) 462-2249.
Financial Condition
Current assets declined from $2,687,186 at December 31, 1998 to $1,207,712 at
June 30, 1999, primarily as a result of the Company's use of available current
assets to fund its operating losses and the $923,575 decline in the fair value
of the Company's remaining investment in ADM Tronics Unlimited, Inc. common
stock from December 31, 1998 to June 30, 1999. We received 1,400,000 shares of
ADM Tronics common stock as part of the consideration SofPulse device
manufacturing and marketing business in 1998 corporate reorganization. ADM
Tronics common stock was de-listed by Nasdaq from the Nasdaq Small Cap Market
System in December 1998. In April 1999, Elan International, a subsidiary of Elan
Corporation, plc., completed the remaining $500,000 of its $2 million equity
commitment to the Company, with the purchase of $386,667 of Series A Preferred
Stock, 378,177 shares of common stock valued, and a warrant to purchase up to an
additional 1,520,821 shares of the Company's common stock. Minority interest
declined from $2,031,429 at December 31, 1998 to -0- at September 30, 1999, due
to the acquisition by the Company in September 1999 of the minority interest as
as part of a litigation settlement with the minority partners of the Gemini
Health Technologies Limited Partnership (the "Partnership"), resulting in a gain
to the Company of $1,150,177 in September 1999.
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Results of Operations
Three and Nine Months Ended September 30, 1999 Compared to the Three and Nine
Months Ended September 30, 1998
The Company's revenue for the three and nine months ended September 30, 1999 was
$134,697 and $434,772, respectively, as compared to $62,263 and $497,286,
respectively, for the three and nine months ended June 30, 1998. This variance
was attributable to the Company's change in business in 1998. In May 1998, the
Company sold its SofPulse assets, which had generated sales and rental revenue
in the first five months of 1998. In August 1998, the Company acquired Gemini
which generated revenue from the synthesis sale of custom molecular reagents in
the first nine months of 1999.
Cost of revenue for the three and nine months ended September 30, 1999 increased
to $191,683 and $415,334, respectively, as compared to $66,548 and $205,147,
respectively, for the three and nine months ended September 30, 1998, due to
increased costs associated with supporting potential growth in Gemini's custom
synthesis business, as compared to the winding down of previous SofPulse
marketing business in 1998.
Selling, general and administrative expenses were $351,484 and $1,631,792,
respectively, in the three and nine months ended September 30, 1999, as compared
to $570,371 and $1,353,920, respectively, for the three and nine months ended
September 30, 1998, a decrease of 38.4% and increase of 20.5%, respectively. The
increase in expenses in the comparable nine-month periods is primarily
attributable to additional personnel, sales and marketing, and administrative
expenses associated with supporting the growth of Gemini's custom business in
the first six months of 1999. Decreases in these expenses in the three month
period ending September 30, 1999 resulted from the subsequent downsizing and
relocation of the Gemini operations. Selling, general and administrative
expenses for the nine month period ended September 30, 1999, also included
$228,574 in warrant amortization expense related to the Elan warrants, $268,933
in compensation and benefits for the company's administrative and executive
personnel, and $249,666 in accounting expenses related to the filing of a
registration statement by the Company and the annual audit. Research and
development expenses decreased to $131,442 and $302,917, respectively, in the
three and nine months ended September 30, 1999, as compared to $7,663,578 and
$7,701,538, respectively, in the same periods in 1998. The primary contributors
to the expenses in 1998 were purchased research and development in connection
with the acquisitions of the two biotechnology companies ($1,663,575), and the
cost of licensing of Elan's flexible iontophoresis patch technology ($6,000,000)
totaling $7,663,575. Impairment loss on intangible assets decreased to -0- for
the three and nine months ended September 30, 1999, as compared to $7,812,038
for the three and nine months ended September 30, 1998. This decrease is due to
the one- time charge in the third quarter of 1998 for the permanent impairment
of intangibles acquired in the acquisition of Gemini, HTD and the Elan licensing
technology.
Interest income of $8,113 and $32,091, respectively, for the three and nine
months ended September 30, 1999 was primarily attributable to interest earned on
$1,400,000 received by the Company from Elan's purchase of the Company's common
stock and other equity securities in the first nine months of 1999. In
comparison, interest and other income in the comparable period in 1998 was
$3,111 and $5,706, due to no funds being available for short term investment in
that time period.
Interest expense increased to $36,498 and $104,684, respectively, for the three
and nine months ended September 30, 1999, as compared to $18,072 and $54,721,
respectively, for the three and nine months ended September 30, 1998, primarily
due to the recording by the Company in its acquisition of Gemini in August 1998
of a note payable to finance Gemini's operations in the approximate amount of
$1.2 million.
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Loss on sale of investment of $1,310 in the three and nine month periods ended
September 30, 1999 relates to the difference in the carrying value and the
market value of 21,530 shares of ADM Tronics stock sold by the Company in the
third quarter of 1999.
Loss on disposal of equipment of $82,978 in the three and nine month periods
ended September 30, 1999 primarily relates to the $73,008 write-down of obsolete
and/or surplus office and laboratory equipment, including computers that could
not be upgraded to Year 2000 compliance standards, acquired in the Gemini
transaction.
The Company recorded a one-time gain on settlement of litigation in the three
and nine month periods ending September 30, 1999 in the amount of $1,150,577. As
a result of litigation initiated by the Company in September 1999 against a
former Company Vice Chairman and President of Gemini ("Former Gemini President")
regarding the Company's acquisition of Gemini, the Company and the Former Gemini
President entered into a settlement agreement in Septemer 1999 in which, among
other things, the Former Gemini President agreed to resign and the Company
agreed to pay the Former Gemini President certain amounts in order to secure a
release of all the Company's obligations to him, including those agreements
entered into as part of the Gemini acquisition. Among other payments, the
settlement agreement provided for the issuance of 950,000 shares of common stock
of the Company to the Former Vice President in exchange for the minority
interests in the Partnership, resulting in a gain to the Company.
In the three and nine months ended September 30, 1999, minority interest of
$211,587 and $671,852, respectively, was recorded as a reduction to the
Company's net loss and relates to the minority shareholders' 32% interest in the
Partnership, an operating subsidiary that is 68% controlled by the Company prior
to September 1999. On September 23, 1999, the Company acquired the minority
interests in the Partnership as part of a litigation settlement. Minority
interest of $2,307,778 also was recorded in the three and nine month periods
ended September 30, 1998.
The above resulted in a net income of $709,579 and net loss of $249,723,
respectively, for the three and nine months ended September 30, 1999, as
compared to a net loss of $13,094,448 and $13,654,474, respectively, for the
three and nine months ended September 30, 1998. Losses from the Gemini
operations have consumed significant cash resources from the Company. While the
custom business of Gemini grew during the first six months of 1999, the
operation continued to require additional investment in personnel, materials,
facilities and equipment to support the growth, and resulted in substantially
higher operating expenses. Since July 1999, the Company has been implementing
plans to significantly reduce these operating losses and cash outflows while
retaining the value of Gemini's custom reagents business. In accordance with
these plans, the Company recently downsized Gemini's operations, including a
significant reduction in salaries and personnel. The Company also initiated
litigation against the Former Gemini President, resulting in the settlement of
certain employment and other contractual obligations of the Company to this
officer that were incurred by the Company in the Gemini acquisition transaction.
The Company is also attempting to restructure Gemini's balance sheet, including
the compromise and settlement of certain other Gemini liabilities, including the
secured note to a life insurance company in the approximate principal amount of
$1.16 million, trade payables and equipment lease obligations. In order to
reduce its occupancy expenses, in August 1999, the Company relocated the Gemini
operations from The Woodlands, Texas and its executive offices from Gainesville,
Florida to the Sid Martin Biotechnology Development Institute in Alachua,
Florida. The Company's Florida-based research laboratories have been located at
the Alachua site since December 1998. In connection with settlement of the
Gemini office lease obligation in the Woodlands, Texas, on November 16, 1999,
Gemini executed a $35,000 note payable bearing an annual interest rate of 10%,
with $1,500 monthly payments payable over 26 months, beginning December 1, 1999.
Other strategies being evaluated for the Gemini operations include strategic
alliances, including mergers and acquisitions of related or complementary custom
molecular businesses and raising additional investment capital in order to
sustain continuing operations.
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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 the issuance of equity and debt securities and loans from
stockholders, revenues from rental and sale of SofPulse devices, and, to a
lesser extent, limited revenues from Gemini's custom business. At September 30,
1999, the Company had a working capital deficit of $1,521,287 and a net capital
deficiency of 9,855,180.
Net cash used in operating activities for the nine months ended September 30,
1999 was $1,352,775 as compared to $155,591 for the same period in 1998. Net
cash was used primarily to fund the losses from operations. Net cash used in
investing activities for the nine months ended September 30, 1999 was $66,610,
used primarily to purchase laboratory equipment for research related to the Elan
technology. In comparison, $7,377,708 was used by investing activities in the
comparable period in 1998, which was primarily from the purchase of the Elan
technology. At September 30, 1999, the Company did not have any material
commitments for capital expenditures. Net cash provided by financing activities
of $1,285,314 for the nine months ended September 30, 1999 is primarily
attributable to an investment of $1,400,000 in common stock and other equity
securities by Elan, partially offset by repayments of $114,686 on notes payable.
Under the licensing agreement with Elan, a substantial portion of the proceeds
from Elan's investment must be used by the Company to fund further development
of certain products. Net cash provided in financing activities in the nine
months ended September 30, 1998 of $7,377,708 was primarily due to the
$7,500,000 investment in redeemable convertible preferred stock by Elan.
The Company expects its cash needs will continue to increase in future periods,
primarily because it will incur additional expenses related to the development,
production and marketing of small molecule drugs and the iontophoresis flexible
patch technology licensed from Elan, in addition to its efforts to develop novel
medical applications for its core PREMS technology. The Company will need to
raise substantial additional funds to continue the development and
commercialization of these technologies and products. The future cash needs of
the Company will depend significantly on many factors that relate to the
development of drug delivery and small molecule drug products, including but not
limited to, continued scientific progress in the research and development
programs; the results of research and development; preclinical studies and
clinical trials; acquisition of products and technologies, if any; relationships
with corporate partners, if any; competing technological and market
developments; the time and costs involved in obtaining regulatory approvals; the
costs involved in filing, prosecuting and enforcing patent claims; the time and
costs of manufacturing scale-up and commercialization activities and other
factors.
In connection with the Gemini acquisition, the Company guaranteed Gemini's
secured loan to an insurance company in the current principal amount of
approximately $1.16 million. Required monthly payments on the loan have not been
made since March 1999 and the loan is in default. The Company believes that this
loan must be restructured in order for Gemini's operations to remain
commercially viable. Management is currently conducting settlement negotiations
with the lender in an attempt to reach a mutually acceptable restructuring of
this loan obligation. However, there can be no assurances that the lender will
not accelerate payment on the note or will agree to a restructuring of the loan.
Under the present circumstances, the Company's ability to continue as a going
concern depends on its ability to obtain additional financing. The Company is
exploring alternative sources of additional financing. The Company in November
1998 filed with the Securities and Exchange Commission a registration statement
to register for public sale approximately shares of its common stock in order to
raise approximately $2,000,000; however, the registration statement has not yet
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become effective. The Company also intends to seek additional Small Business
Innovations Research grants, including Phase II grants (common average funding
at about $500,000 for each grant), and Federal Advanced Technology Program
grants. The Company believes that with a successful implementation of its
strategic plan, additional capital also may become available through a
combination of larger federal grants, corporate strategic alliances and
additional public financing. However, no definitive sources of additional
financing has been identified at this time, nor can there be any assurance that
additional financing will be obtained on favorable terms. The Company's ability
to obtain financing through the issuance of its common stock was materially
adversely affected when the Company's stock was de-listed from the Nasdaq
SmallCap Market as of the close of business on September 23, 1997 due to
noncompliance with the requirements related to minimum working capital, minimum
surplus and minimum value of the Company's public market float. The Company is
now quoted on the OTC Bulletin Board, but there can be no assurance a public
trading market for the Company's common stock will continue to exist.
The Company cannot predict whether the operating and financing strategies and
plans described above, if implemented by the Company, will be successful. If the
Company is unable to, improve its operations and ultimately obtain additional
financing, it may be forced to discontinue further development of its
technologies, marketing of Gemini's custom business or to sell its assets.
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $9,967,000 available to offset future taxable income. Such
carryforwards, which may provide future tax benefits, expire in the years 2008
through 2012. During the years 1993, 1995 and 1998 changes in ownership of
greater than 50% occurred as a result of the Company issuing equity securities.
As a result, a substantial limitation will be imposed upon the future
utilization of approximately $9,967,000 of its net operating loss carryforwards.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 23, 1999, as a result of litigation initiated by the Company in
September 1999 in state court in Gainesville, Florida against a former Company
Vice Chairman and President of Gemini ("Former Gemini President") alleging
certain misrepresentations and omissions in connection with the Company's
acquisition of Gemini, the Company and the Former Gemini President entered into
a settlement agreement in which, among other things, the Former Gemini President
agreed to resign and the Company agreed to pay the Former Gemini President
certain amounts in order to secure a release of all the Company's obligations to
him, including those agreements entered into as part of the Gemini acquisition.
The settlement agreement provides the following payments to the Former Gemini
President: the sum of $40,000 payable over eight months, the issuance of 950,000
shares of common stock of the Company in exchange for the Former Vice
President's minority interests in the Partnership, and the issuance of up to an
additional $242,000 in value of shares of common stock of the Company (priced at
the greater of $.5022 per share or the average market price 20 days prior to
issuance), payable in two annual installments, beginning on May 16, 2000, to be
reduced by any amounts earned by the Former Gemini President from other
employment or third party consulting services from the date of the agreement
through May 16, 2001.
In August 1994, Diapulse Corporation of America, a former competitor of the
Company filed a lawsuit against the Company and certain of its present and
former directors and officers alleging the defendants had engaged in deceptive
acts and practices, false advertising, unfair competition, breach of contracts
of fiduciary duties between the plaintiff and certain Company employees, and the
Company's involvement in facilitating or participating in the breach of
contracts. The plaintiff is seeking an injunction to rectify the effects of the
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misconduct, an unspecified amount of compensatory damages, disgorgement of
profits, treble damages, punitive damages and attorney's fees. The plaintiff
also seeks unspecified injunctive relief prohibiting the Company from engaging
in the alleged acts and ordering the defendants to take remedial action to
rectify the effects on consumers and the plaintiff caused by the alleged acts.
The Company believes it has meritorious defenses which it will pursue vigorously
and has filed a counterclaim against the plaintiff and its president, Dr. Jesse
Ross. The parties to the litigation are currently in settlement negotiations.
The Company's future product development, including the development of the
technology underlying the SofPulse product is not likely to be adversely
affected by the outcome. However, there can be no assurance the ultimate outcome
of such action will not have a material adverse effect on the Company's
liquidity, financial condition and results of operations.
In July 1999, Copelco Credit Corporation filed suit against the Company alleging
breach of lease agreement in connection with an equipment lease on a copier. The
Plaintiff is seeking to accelerate all sums due under the lease agreement. The
Company believes that the ultimate outcome of such action will not have a
material adverse effect on the Company's liquidity, financial condition or
results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 1999 through September 30, 1999, the Company issued in private
transactions exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933 (the "Act"), the following securities:
(1) On January 4, 1999, the Company issued to Elan International 2,057,143
shares of common stock of the Company at $.4375 per share, for a cash
payment of $900,000.
(2) On February 9, 1999, the Company issued 52,083 shares of common stock
to its four outside directors as payment for 1998 directors' fees in
the aggregate amount of $22,500.
(3) On May 11, 1999, the Company issued to Elan International 386.667
shares of Series A Convertible Preferred Stock of the Company, a
warrant to purchase 1,520,821 shares of the common stock of the
Company at an exercise price of $.75, and 378,177 shares of common
stock of the Company, for an aggregate cash payment of $500,000.
(4) On April 6, 1999, the Company issued to Kenneth Cornell 106,322 shares
of common stock of the Company as payment for accounting and
consulting fees in the amount of $32,960.
(5) On April 12, 1999, the Company issued to Goodman, Phillips & Vineberg
266,913 shares of common stock of the Company, as payment for legal
fees in the amount of $84,626.
(6) On July 13, 1999, the Company issued to CAP Partners LLC 175,000
shares of common stock of the Company as payment for accounting and
consulting fees in the amount of $55,943.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On June 27, 1997, Gemini entered into a loan agreement (the "Loan") with an
insurance company (the "Lender") in the amount of $1,315,000. The loan amortizes
over 101 payments ending July 1, 2006. The interest rate is two points over
prime, and at December 31, 1998 and September 30, 1999, was 10.25%. Collateral
for the Loan is Gemini's assets, including accounts receivable, inventory, and
property and equipment owned now or acquired in the future. On December 22,
1998, the loan was modified to add as additional collateral the Company's
corporate guarantee and 65 SofPulse devices owned by the Company. The former
President of Gemini and his wife have personally guaranteed the repayment of the
indebtedness. In addition, repayment of the loan is guaranteed in part by the
Rural Biological Science Department of the U.S. Department of Agriculture.
The terms of the Loan include maintaining certain financial covenants,
principally relating to working capital liquidity and net working capital
ratios, and permitted purchases and expenses. The covenants also include a
limitation on compensation and distributions. All of the amounts outstanding
under the Loan become due and payable if an event of default occurs. As of
September 30, 1999, Gemini was not in compliance with certain ratios relating to
net worth and working capital. In addition, since March 1999, the Company has
not made the required monthly principal and interest payments and as of the date
hereof owes $150,883 in arrearages on the Loan. The Lender currently has the
right to accelerate payment of the Loan although it has not yet notified the
Company of its intent to accelerate. Management is currently conducting
settlement negotiations with the Lender in an attempt to reach a mutually
acceptable restructuring of this loan obligation. However, there can be no
assurances that the Lender will not accelerate payment on the Loan or will agree
to a restructuring of the Loan.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
1 Settlement Agreement between Electropharmacology, Inc. and Krishna and
Shashikala Jayaraman dated September 23, 1999
(b) Reports on Form 8-K
None.
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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 November 19, 1999 /s/ Arup Sen
-------------------
Arup Sen
Chairman of the Board, Chief
Executive Officer and President
Dated November 19, 1999 /s/ Arup Sen
-------------------
Arup Sen
Acting Chief Financial Officer
DR. KRISHNA JAYARAMAN
124 GOLDEN SHADOW CIRCLE
THE WOODLANDS, TX 77381
TEL: 281-292-1866
FAX: 281-362-1741
SEPTEMBER 17, 1999
TO THE DIRECTORS OF ELECTROPHARMACOLOGY, INC.
IN FULL SETTLEMENT OF ALL CLAIMS AND DISPUTES BETWEEN THE COMPANY AND THE
JAYARAMANS WE AGREE TO ACCEPT THE FOLLOWING CONSIDERATION IN LIEU OF ANY OTHER
CONSIDERATION DUE UNDER ANY AND ALL AGREEMENTS WITH ELECTROPHARMACOLOGY, INC.,
GEMINI BIOTECH, LTD. OR ANY OTHER AFFILIATED COMPANY:
1. CASH PAYMENTS OF $5,000 ON SIGNING AND ON THE FIRST DAY OF THE MONTH
FOR THE NEXT 7 MONTHS.
2. 950,000 SHARES OF ELECTROPHARMACOLOGY, INC. STOCK WITH REGISTRATION
RIGHTS* AS DEFINED IN THE UNIT EXCHANGE AGREEMENT.
3. STOCK PAYMENTS ON MAY 16, 2000 AND AGAIN ON MAY 16, 2001: EPI WILL
ISSUE TO THE JAYARAMANS $121,000 WORTH OF SHARES OF EPI COMMON STOCK
($242,000 TOTAL VALUE), BASED ON THE HIGHER OF: (I) $0.5022 PER SHARE
(THE AVERAGE BLENDED PER SHARE PRICE PAID BY ELAN PLC FOR ITS COMMON
STOCK INVESTMENT OR (II) THE AVERAGE BID MARKET PRICE AT THE CLOSE OF
BUSINESS ON THE 20 CONSECUTIVE TRADING DAYS IMMEDIATELY PRECEDING,
MINUS ANY AMOUNTS EARNED BY KRISHNA JAYARAMAN FROM OTHER REMPLOYMENT
OR THIRD PARTY CONSULTING SERVICES DURING THE PERIOD FROM THE DATE OF
THIS AGREEMENT UNTIL MAY 16, 2000 AND FROM MAY 17, 2000 TO MAY 16,
2001.
ON ACCEPTANCE OF THIS OFFER BY THE BOARD OF EPI, JAYARAMAN HEREBY RESIGNS FROM
ALL OFFICER AND DIRECTOR POSITIONS WITH EPI, GEMINI AND ANY AFFILIATED ENTITY.
ON ACCEPTANCE OF THIS AGREEMENT BY THE BOARD OF EPI, EPI WILL CAUSE ITS COUNSEL
TO DISMISS WITH PREJUDICE TO ITS REFILING THE PENDING LAW SUIT FILED AGAINST THE
JAYARAMANS, AND REQUEST THE COURT TO SEAL THE RECORD THEREIN.
ALL PARTIES WILL EXECUTE MUTUAL RELEASES INCORPORATING THE LANGUAGE IN THE OFFER
ATTACHED TO WENDY MITCHLER'S AUGUST 30, 1999 LETTER TO JOHN BENNETT.
ALL PARTIES AGREE THAT THE DETAILS OF THE CONTROVERSY THAT IS BEING SETTLED
HEREBY WILL BE KEPT IN CONFIDENCE BY THE PARTIES HERETO.
SIGNATURE:
/s/ Krishna Jayaraman /s/ Shashikala Jayaraman
- --------------------- ------------------------
APPROVED AND ACCEPTED:
BY ELECTROPHARMACOLOGY, INC.
BY /s/ Arup Sen ITS Chairman & CEO
--------------- ------------------
*Attached as Exhibit A.
<PAGE>
Shares Not Registered; Legend on Stock Certificates; Piggyback Registration
Rights: All shares of Epi common stock to be issued pursuant to the terms of
this Agreement will not be registered under the Securities Act of 1933, as
amended (the "Securities Act"), and all stock certificates representing such
shares shall contain a legend reflecting that the stock is not so registered and
is subject to sale or transfer only under an exemption from registration. Epi
agrees that whenever it proposes to file a registration statement (other than a
registration statement on Form S-4 or S-8 or any successor forms) for the
registration of common shares of Epi to be sold by Epi or any other person for
cash, it will, at least 15 days prior to such filing, give written notice to
Jayaraman of its intention to do so and, upon the written request of Jayaraman,
given within 10 days after Epi provides such notice (which request shall state
the number and intended method of disposition of such shares), Epi shall use its
best efforts to cause all such shares requested by Jayaraman to be registered
under the Securities Act to the extent necessary to permit their sale or other
disposition; provided, however, that Epi shall have the right to postpone or
withdraw any registration effected pursuant to this paragraph without any
obligation to Jayaraman whatsoever. In the event of an underwritten public
offering of Epi common shares, if the underwriters of such offering advise Epi
in writing that in their opinion the amount of the registerable shares to be
included in such offering would adversely affect the success of such offering,
then Epi shall include only the amount of registerable shares that in the
opinion of such underwriters, can be sold without any such adverse affect, and
such shares shall be allocated pro rata among all holders of registerable
shares.
EXHIBIT A
<PAGE>
September 17, 1999
Dr. Krishna and Shashikala Jayaraman
124 Golden Shadow Circle
The Woodlands, Texas 77381
Dear Dr. and Mrs. Jayaraman:
As part of the letter agreement dated September 17, 1999 forwarded by
you, you hereby agree that in connection with any negotiated settlement between
Electropharmacology, Inc. (the "Company") and Benefit Life with respect to the
loan obligation of approximately $1.2 million owed by Gemini Biotech Ltd. to
Benefit Life, you will execute any document reasonably required by Benefit Life
to effect such settlement, provided such document does not increase the amount
of your previously existing personal liability.
Please indicate your approval and acceptance of the foregoing by
signing below and returning a facsimile of this letter to the Company at
904-462-0985.
Very truly yours,
Arup Sen, Ph.D.
Chairman & CEO
APPROVED AND ACCEPTED:
BY:/s/ Shashikala Jayaraman
------------------------
Shashikala Jayaraman
BY:/s/ Krishna Jayaraman
---------------------
Krishna Jayaraman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,940
<SECURITIES> 454,895
<RECEIVABLES> 167,615
<ALLOWANCES> (43,794)
<INVENTORY> 7,172
<CURRENT-ASSETS> 214,923
<PP&E> 573,261
<DEPRECIATION> (299,481)
<TOTAL-ASSETS> 1,022,487
<CURRENT-LIABILITIES> 2,191,042
<BONDS> 0
163,183
8,651,842
<COMMON> 0
<OTHER-SE> (10,018,343)
<TOTAL-LIABILITY-AND-EQUITY> 1,022,487
<SALES> 434,772
<TOTAL-REVENUES> 466,863
<CGS> 415,334
<TOTAL-COSTS> 415,334
<OTHER-EXPENSES> 1,934,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,684
<INCOME-PRETAX> (921,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (921,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249,723)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
