U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 2)
(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
of incorporation or organization) Identification No.)
1109 N.W. 13th STREET, GAINESVILLE, FL 32601
--------------------------------------------------------
(Address of principal executive offices)
(352) 367-9088
--------------
(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
--- ---
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ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB/A
Page
PART I. FINANCIAL INFORMATION
<S> <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 six months ended June 30,
1998 and 1997 5
Notes to Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the six months ended June 30,
1998 and 1997 11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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The following information is hereby amended:
1. Statements of Cash Flows, contained in Item 1.
2. Notes to Financial Statements, contained in Item 1.
3. Management's Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2.
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ELECTROPHARMACOLOGY, INC.
Balance Sheets
(Unaudited with respect to June 30, 1998)
ASSETS
- ------- June 30, December 31,
1998 1997
-----------------------------------
Current assets :
<S> <C> <C>
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
===================================
See accompanying notes to financial statements
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ELECTROPHARMACOLOGY, INC.
Statements of Operations
(UNAUDITED)
For the three months ended
June 30,
------------------------------
1998 1997
---- ----
Revenue:
<S> <C> <C>
Rentals $ 143,445 $ 566,923
Sales 42,000 143,000
----------- -----------
Total Revenue 185,445 709,923
Operating expenses:
Cost of revenue 67,064 114,275
Selling, general and administrative 419,874 981,235
Research and development 13,863 73,757
----------- -----------
Total operating expenses 500,801 1,169,267
----------- -----------
Loss from operations (315,356) (459,344)
Other income (expense)
Interest expenses (20,939) (4,941)
Interest and other income 2,561 3,327
----------- -----------
Total other income (expense) (18,378) (1,614)
----------- -----------
Net loss
$ (333,734) $ (460,958)
=========== ===========
Net loss per share - basic and diluted $ (0.08) $ (0.13)
=========== ===========
Weighted average number of common shares outstanding - 4,132,493 3,671,869
basic and diluted =========== ===========
See accompanying notes to financial statements.
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<CAPTION>
Electropharmacology, Inc.
Statements of Operations
(Unaudited)
For the six months ended
June 30,
----------------------------------
1998 1997
---------------- ------------
Revenue:
<S> <C> <C>
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 (36,648) (5,582)
Interest and other income 2,595 7,152
Loss on disposal of equipment (866) -
----------------------------------
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
==================================
See accompanying notes to financial statements.
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Electropharmacology, Inc.
Statements of Cash Flows
(Unaudited)
For the six months ended
June 30,
------------------------------
1998 1997
---------- ----------
(restated)
Operating activities
<S> <C> <C>
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 866 -
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 in prepaid expenses 73,503 52,504
Decrease in deposits 12,926 -
Increase/(Decrease) in accounts payable 129,017 (4,711)
Increase in deferred revenue 75,000
Increase in accrued expenses, commissions & customer deposits 64,193 -
Rental equipment (SofPulse units) - (234,595)
-------------------------------
Net cash provided by (used in) operating activities 17,690 (34,867)
-------------------------------
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
Repayments on long-term notes payable and capital lease
obligations (73,043) (44,693)
Repayments on notes payable to related parties (8,000) (75,700)
-------------------------------
Net cash used in financing activities (81,043) (120,393)
-------------------------------
Net decrease in cash (49,031) (155,799)
Cash at beginning of period 111,496 223,523
-------------------------------
Cash at end of period $ 62,465 $ 67,724
===============================
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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 $ 78,400 $ 212,421
Liability incurred for execution of severance agreement with
related party $ - $ 128,700
===============================
See accompanying notes to financial statements.
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ELECTROPHARMACOLOGY, INC.
Notes to Financial Statements
Unaudited
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared
inaccordance 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. The statement of cash flows for the six-months ended
June 30, 1997 was restated to report the correct amounts as originally reported
in the June 30, 1997 Form 10QSB.
(2) Deferred Revenue
Deferred revenue represents amounts advanced to the Company for the
purchase of certain assets related to the SofPulse device business.
(3) 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
=============
(4) 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
7
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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
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 payables 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 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
GBI remaining as the general partner of Gemini. 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 the Partnership and Gemini will be
dissolved, EPi Sub will be dissolved and all of such businesses will be
conducted by the Company.
(5) Liquidity and Basis of Presentation
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 $560,026 for the six months ended
June 30, 1998 and incurred cumulative losses aggregating $15,865,337 through
June 30, 1998. In addition, at June 30, 1998, the Company had a deficiency in
working capital of $1,181,411 and a net capital deficiency of $612,011.
As more fully described in Note 4, on August 18, 1998 the Company
consummated a corporate reorganization, the purpose of which is to better enable
the Company to focus its efforts on research and development activities. Also
described in Note 3, in August 1998, the Company sold all of its assets and
certain liabilities related to the sales and marketing activities of its
SofPulse device. This transaction immediately resulted in cash proceeds of
$150,000 and the satisfaction of $650,000 of notes payable and accrued expenses.
In addition, the Company's 1998 operating plan contemplates stringent costs
controls, personnel reductions and redeployments, the deferral of product
development and
8
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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 it is unlikely revenues
will increase without incurring additional sales and marketing expenses.
However, at the present time, management believes these actions are necessary to
reduce near term cash requirements and to fund other operating activities. In
addition to the foregoing, management is also exploring alternative sources of
financing.
The Company cannot predict whether the operating and financing plans
described above will be successful. If the Company's recent reorganization and
restructuring is not successful and/or the Company is unable to successfully
improve its operations and obtain additional financing, it may not be able to
continue as a going concern. If the Company is unsuccessful in its efforts, it
may be unable to meet its obligations, making it necessary to undertake such
other actions as may be appropriate to preserve asset values.
(6) Contingencies and Litigation
In August 1994, a 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 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. Although the Company
believes it has meritorious defenses, which it will pursue vigorously and has
filed a counterclaim against the plaintiff, 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. 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.
On March 27, 1997 a former distributor for the Company filed a
complaint against the Company and other defendants alleging, among other things,
misappropriation of trade secrets, breach of fiduciary duty, unfair business
practices, tortious inducement to breach contracts, tortious interference with
prospective economic advantage and breach of contract. The plaintiff sought
unspecified damages, restitution and an injunction prohibiting the defendants
from contacting or doing business with the plaintiff's customers. The matter was
settled on July 15, 1998 with the Company paying a nominal amount to a co-
defendant as part of the settlement.
On August 28, 1997, a former employee ("the plaintiff") of a distributor
of the SofPulse device, filed a complaint against the Company and the
distributor alleging failure to pay commissions owed. In May 1998, the plaintiff
dismissed the complaint against the Company whereupon the distributor
immediately filed a cross-complaint against the Company for breach of the
agreement between the Company and the distributor for failing to pay commissions
owed in excess of
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$30,000. This matter was settled on January 27, 1999, whereby the Company agreed
to pay $9,500 to the distributor. The Company's balance sheets at June 30, 1998
and December 31, 1997 included an accrual for this matter.
On July 14, 1998, a former employee of the Company, filed a complaint
alleging the failure by the Company to make payments of $20,000 due to the
former employee under an agreement pursuant to which the former employee and the
Company had agreed to the terms of the termination of their employer-employee
relationship. In December 1998, the former employee and the Company entered into
a settlement agreement under which the Company is obligated to pay $16,500 in
monthly installments of $1,500 beginning on December 1, 1998. The Company's
balance sheets at June 30, 1998 and December 31, 1997 included an accrual for
this matter.
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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 1109 NW 13th Street, Gainesville, Florida
32601, and its telephone number is (352) 367-9088.
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 revenues, 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 company (Nasdaq:ADMT) engaged in the development and
manufacturing of medical electronic
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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 payables 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 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
GBI remaining as the general partner of Gemini. 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 the Partnership and Gemini will be
dissolved, EPi Sub will be dissolved and all of such businesses will be
conducted by the Company.
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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 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 to 17 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 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.
13
<PAGE>
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 $287,000 in the six months ended June 30, 1997 to $75,860 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, 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.
14
<PAGE>
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 provided by operating activities for the six months ended June
30, 1998 was $17,690, as compared to net cash used in operating activities of
$(34,867) for the six months ended June 30, 1997. Net cash was used primarily to
fund the losses from operations and was offset primarily by cash received in
payment of accounts and notes receivable and from an advance on the sale of the
SofPulse devices, which occurred on August 18, 1998. Net cash used in financing
activities was $(81,043) for the six months ended June 30, 1998, as compared to
$120,393 for the six months ended June 30, 1997 and is the net result of
repayment of long-term notes and notes payable to related parties and additional
long-term borrowings. For the six months ended June 30, 1998, the Company
reported net cash provided by investing activities of $14,322 compared to $(539)
used in investing activities for the six months ended June 30, 1997 due to the
sale of equipment in 1998. At June 30, 1998, the Company had cash of $62,465.
At December 31, 1997, the Company had net operating loss ("NOL") carry
forwards of $10,719,000 available to offset future taxable income, if any,
expiring in the years 2008 through 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 the success of its recent restructuring and its ability
to 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 these measures will be successful. The
Company's management believes it is unlikely revenues will increase without
incurring additional sales and marketing expenses. However, at the present time,
the Company believes these
15
<PAGE>
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 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, 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 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 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 any computer
systems 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 the Year 2000 issue will not pose significant operational problems.
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 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 regulatory counsel,
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 Diapulse's petition is lacking in merit
and
16
<PAGE>
it is highly unlikely the FDA will grant the petition. Nevertheless, in the
event 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 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 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 it has
meritorious defenses it will vigorously pursue, there can be no assurance the
outcome of such action will be resolved favorably to the Company or 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 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 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 matter was settled on January 27, 1999 whereby the Company agreed to pay
$9,500 to Kinetech.
On July 14, 1998, Jack Baxter ("Baxter"), a former employee of the Company
filed a complaint entitled Baxter v. Electropharmacology, Inc. in the Circuit
17
<PAGE>
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. In December 1998, the former employee and the Company
entered into a settlement agreement under which the Company is obligated to pay
$16,500 in monthly installments of $1,500 beginning on December 1, 1998.
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.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ELECTROPHARMACOLOGY, INC.
Registrant
Dated: February 12, 1999 /s/ DR. ARUP SEN
----------------------------------
Dr. Arup Sen
Chief Executive Officer
/s/ DAVID SALOFF
----------------------------------
David Saloff
Chief Financial Officer and Executive
Vice President - Marketing
19
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 62,465
<SECURITIES> 0
<RECEIVABLES> 156,881
<ALLOWANCES> 30,158
<INVENTORY> 159,043
<CURRENT-ASSETS> 512,374
<PP&E> 568,497
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,172,034
<CURRENT-LIABILITIES> 1,693,785
<BONDS> 0
41,325
0
<COMMON> 2,430
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,172,034
<SALES> 75,860
<TOTAL-REVENUES> 435,003
<CGS> 138,599
<TOTAL-COSTS> 138,599
<OTHER-EXPENSES> 821,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,649
<INCOME-PRETAX> (560,026)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560,026)
<EPS-PRIMARY> (0.14)
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