U.S. Securities and Exchange Commission
Washington, D.C. 2054
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
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[ ] 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 ______
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, 1999
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Common Stock, $ .01 par value 16,143,325
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 June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998 3
Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six months ended June 30,
1999 and 1998 13
PART II. OTHER INFORMATION 17
ITEM 1. Legal Proceedings 17
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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Electropharmacology, Inc.
Consolidated Balance Sheets
(Unaudited with respect to June 30, 1999)
June 30, December 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents 308,978 160,011
Accounts receivable, net of allowance for doubtful accounts of $35,049 104,447 83,497
at June 30, 1999 and $61,184 at December 31, 1998
Inventory 7,172 7,172
Prepaid expenses 80,487 133,737
Subscription receivable - current - 900,000
Notes receivable - related parties 85,000 -
Other receivables - 2,769
Investment 621,628 1,400,000
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Total current assets 1,207,712 2,687,186
Property and equipment, net of accumulated depreciation of $272,401 at 368,419 382,347
June 30, 1999 and $217,752 at December 31, 1998
Patents, net of accumulated amortization of $23,346 at June 30, 1999 80,008 83,048
And $20,306 at December 31, 1998
Other assets 400 8,750
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TOTAL ASSETS 1,656,539 3,161,331
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 328,238 482,643
Accrued expenses 274,905 181,639
Notes payable - short term 1,303,365 1,409,969
Notes payable - related parties 129,580 129,580
Current portion of capital leases 29,230 30,034
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Total current liabilities 2,065,318 2,233,865
Capital leases, long term portion 40,179 45,539
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Total Liabilities 2,105,497 2,279,404
Minority interest 1,571,216 2,031,429
Mandatory redeemable convertible preferred stock, $.01 par value, 8,458,834 7,458,926
7,887 authorized, issued and outstanding
Stockholders' Equity & Net Capital Deficiency
Convertible preferred stock, $.01 par value, 9,992,113 shares - -
authorized, none issued and outstanding
Common stock, $.01 par value, 30,000,000 shares authorized, 13,282,687 161,433 157,180
issued and outstanding at December 31, 1998 and 16,143,325 issued
and outstanding at June 30, 1999
Additional paid-in capital 21,476,094 21,726,928
Accumulated other comprehensive income 24,907 803,279
Dividend Distribution (384,667) -
Retained deficit (31,756,775) (30,795,815)
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(8,108,428)
Subscription Receivable - (500,000)
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Net capital deficiency (10,479,008) (8,608,428)
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 1,656,539 3,161,331
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The accompanying notes are an integral part of these financial statements
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Electropharmacology, Inc.
Unaudited Consolidated Statements of Operations
For the three months ended
June 30,
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1999 1998
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Revenue:
Rentals - 143,445
Sales 175,912 42,000
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Total revenue 175,912 185,445
Operating expenses:
Cost of revenue 114,004 67,064
Selling, general and administrative 553,715 419,874
Research and development 83,963 13,863
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Total operating expenses 751,682 500,801
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Loss from operations (575,770) (315,356)
Other income (expense)
Interest expense (32,390) (20,939)
Interest and other income 13,487 2,561
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Total other income (expense) (18,903) (18,378)
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Loss from continuing operations (594,673) (333,734)
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Minority interest 192,810 -
Net Loss (401,863) (333,734)
Net loss per share - basic and diluted (0.03) (0.08)
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Weighted average number of common shares outstanding -
Basic and diluted 15,914,053 4,132,493
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The accompanying notes are an integral part of these financial statements
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Electropharmacology, Inc.
Unaudited Consolidated Statements of Operations
For the six months ended
June 30,
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1999 1998
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Revenue:
Rentals - 359,143
Sales 300,075 75,860
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Total revenue 300,075 435,003
Operating expenses:
Cost of revenue 222,874 138,599
Selling, general and administrative 1,280,290 783,537
Research and development 172,108 37,974
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Total operating expenses 1,675,272 960,110
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Loss from operations (1,375,197) (525,107)
Other income (expense)
Interest expense (68,187) (36,648)
Interest and other income 23,978 2,595
Loss on disposal of equipment - (866)
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Total other income (expense) (44,209) (34,919)
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Loss from continuing operations (1,419,406) (560,026)
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Minority interest 460,213 -
Net Loss (959,193) (560,026)
Net loss per share - basic and diluted (0.06) (0.14)
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Weighted average number of common shares outstanding -
Basic and diluted 15,608,820 4,113,328
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The accompanying notes are an integral part of these financial statements
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Electropharmacology, Inc.
Unaudited Consolidated Statements of Cash Flows
For the six months ended
June 30,
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1999 1998
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Operating activities
Net Loss $ (959,193) $ (560,026)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 57,689 132,822
Amortization of warrants 228,574 -
Issuance of common stock for services 111,879 22,951
Loss attributable to minority interest (460,213) -
Loss on disposal of equipment - 866
Changes in operating assets and liabilities:
Decrease(increase) in accounts receivable (20,950) 42,681
Decrease in trade notes and other receivables 2,769 30,567
(Increase) in Inventory - (6,810)
Decrease in prepaid expenses 57,226 73,503
Decrease in deposits 7,950 12,926
Increase (decrease) in accounts payable (19,642) 129,017
Increase (decrease) in accrued expenses (11,424) 64,193
Increase in deferred revenue - 75,000
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Net cash provided by (used in) operating activities (1,005,335) 17,690
Investing activities
Proceeds from sale of equipment - 14,420
Purchases of property and equipment (44,848) (98)
Loan to related party (85,000) -
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Net cash provided by (used in) investing activities (129,848) 14,322
Financing activities
Proceeds from issuance of common stock 1,400,000 -
Repayment of notes payable and capital lease obligations (115,850) (73,043)
Repayment of notes payable to related parties - (8,000)
---------------------------------
Net cash provided by (used in) financing activities 1,284,150 (81,043)
---------------------------------
Net increase (decrease) in cash 148,967 (49,031)
Cash at beginning of period 160,011 111,496
---------------------------------
Cash at end of period $ 308,978 $ 62,465
=================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 27,750 $ 5,782
=================================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock for services $ 111,879 $ 22,951
Asset recognized and liability incurred for the financing of the directors $ - $ 78,400
and Officers liability insurance premiums
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The accompanying notes are an integral part of these financial statements
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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 six-month periods ended June 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 SofPulse devices
that delivered pulsed electromagnetic signals in the radio frequency
range. The Company concentrated on medical applications for these
devices.
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 leasing of SofPulse devices in order
to focus on the biopharmaceutical applications of the underlying
SofPulse technology. 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, the Company is engaged in developing 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 is further engaged in
the custom synthesis of fragments of genes and proteins for its
customers.
The research activities of the Company focus on the design and
synthesis of therapeutic drugs and diagnostic agents using nucleic acid
based compounds. The Company has built a library of proprietary and
exclusively licensed compounds for the treatment of cancer and
rheumatoid arthritis. The Company, through its partnership, Gemini
Biotech, Ltd. ("Gemini"), also produces and markets custom DNA and
peptides 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").
Revenue recognition - The Company recognizes revenue upon shipment and
the transfer of ownership of the product.
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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
comprehensive income, a component of stockholders' equity.
Inventory - Inventory at June 30, 1999, consisted primarily of supplies
used in research activities and is 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 included in selling, general and
administrative expenses, and are expensed as incurred.
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.
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All loss per share amounts have been presented to conform to the SFAS
No. 128 presentation. For the three and six month periods ended June
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 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 three customers during the years ended June
30, 1999 and 1998, consisted of approximately 27% and 55%,
respectively, of total sales. The accounts receivable balances of these
major customers at June 30, 1999 and 1998 were $33,774 and $6,852,
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.
Reclassifications - Certain reclassifications have been made to the
1998 financial statements to conform to the 1999 presentation.
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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 $959,193 for the six months ended
June 30, 1999 and cumulative net operating losses aggregating
$31,756,775 through June 30, 1999. In addition, at June 30, 1999, the
Company had a net capital deficiency of $10,479,008. 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 in under the note and loan
agreement, but there is no assurance that 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, while
retaining rights to the underlying electromagnetic signal technology
applications in drug delivery and tissue repair. This transaction
resulted in cash of $150,000, the acquisition of marketable securities
with a value of $596,721 on August 24, 1998 and the satisfaction of
$778,166 of notes payable, accrued interest and accounts payable. Also,
on September 30, 1998, the Company received a commitment from Elan
International Services, Ltd. ("Elan International"), 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 and clinical studies
until additional funds are obtained from revenues from Gemini's custom
DNA and peptide synthesis, Federal research grants, or the raising of
additional investment capital.
Losses from the Gemini operations have consumed significant cash
resources from the Company. While the custom DNA synthesis business of
Gemini grew considerably during the first six months of 1999, the
operation has continued to require additional investment in personnel,
materials, facilities and equipment, resulting in substantially higher
operating expenses. Since May 1999, the Company has been evaluating and
implementing plans to significantly reduce these operating losses and
cash outflows while retaining the value of the custom DNA synthesis
services. In accordance with these plans, the Company recently
downsized Gemini's operations, including a significant reduction in
salaries and personnel. The Company is also attempting to restructure
Gemini's balance sheet, including the compromise and settlement of
certain Gemini liabilities, including trade payables, office and
laboratory equipment lease obligations, employment agreements and the
secured note to a life insurance company in the approximate amount of
$1.16 million. 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. Other strategies being evaluated for
the Gemini operations include strategic alliances, including mergers
and acquisitions of related or complementary custom
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molecular businesses for the medical research market, the outsourcing
of a portion of the custom DNA synthesis business to reduce operating
expenses 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 International. Should Elan
International 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.
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3. NOTES PAYABLE
Notes payable at June 30, 1999 and December 31, 1998 June 30, December 31,
consisted of the following: 1999 1998
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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 November 1999 41,845 98,144
Note payable to finance insurance premiums, with interest
at 12.75%, due April 1999 - 3,586
Variable rate note payable to an insurance company, due
July 1, 2006 1,163,090 1,189,809
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Total Notes Payable 1,303,365 1,409,969
Less current portion (1,303,365) (1,409,969)
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Long term portion of notes payable $ - $ -
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On October 28, 1998, the Company executed a promissory note to the 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 June 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 in the amount of $1,315,000. The loan
amortizes over 101 payments ending July 1, 2006. Interest is two points
over prime. At December 31, 1998 and June 30, 1999, the rate was 10.25%
and 10%, respectively, 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 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.
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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 agreement become due and payable if an
event of default occurs. As of June 30, 1999, Gemini was not in
compliance with certain ratios relating to net worth and working
capital. Additionally, since March 1999 the Company has not made the
required monthly payments. Accordingly, the entire amount has been
shown as a current liability at June 30, 1999. The insurance company
currently has the right to accelerate payment of the note.
4. RELATED PARTIES TRANSACTIONS
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% at June 30, 1999) and are due on
demand. The balance due under the notes at June 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 June 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% at June 30, 1999). The entire
balance was outstanding at June 30, 1999.
5. CONTINGENCIES AND LITIGATION
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 June 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
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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 June
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 the plans and
business of the Company. Actual events and results may differ materially from
those anticipated in these forward- looking statements. The Company's ability to
achieve its 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
successfully restructure an approximate $1.16 million loan from the Company's
major creditor, the failure to successfully integrate the businesses acquired by
the Company; 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 the company's technologies
and potential products developed therefrom. Accordingly, there can be no
assurances that the Company will achieve its 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.
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 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
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:
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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 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.
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 the financial condition of the
Company 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 $778,372 decline in the fair value
of the Company's investment in ADM Tronics Unlimited, Inc. common stock from
December 31, 1998 to June 30, 1999 and the Company's use of available current
assets to fund its operating losses. The 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 at $109,551, and a warrant to purchase up to an additional 1,520,821
shares of the Company's common stock.
Results of Operations
Three and Six Months Ended June 30, 1999 Compared to the Three and Six Months
Ended June 30, 1998
The Company's revenue for the three and six months ended June 30, 1999 was
$175,912 and $300,075, respectively, as compared to $185,445 and $435,003,
respectively, for the three and six months ended June 30, 1998. This decrease
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 and sale of gene probes in the first
six months of 1999.
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Cost of revenue for the three and six months ended June 30, 1999 increased to
$114,004 and $222,874, respectively, as compared to $67,064 and $138,599,
respectively, for the three and six months ended June 30, 1998, due to increased
costs associated with Gemini's products and services, as compared to the
previous SofPulse business.
Selling, general and administrative expenses increased to $553,715 and
$1,280,290, respectively, in the three and six months ended June 30, 1999, as
compared to $419,874 and $783,537, respectively, for the three and six months
ended June 30, 1998, an increase of 24.2% and 38.8%, respectively. This increase
in expenses is primarily attributable to $227,631 and $518,116, respectively, in
additional personnel, sales and marketing, and administrative expenses
associated with the growth of Gemini's custom DNA and peptide synthesis, and
drug design business in the three and six months ended June 30, 1999. Selling,
general and administrative expenses for the six month period ended June 30, 199,
also included $228,574 in warrant amortization expense related to the Elan
warrants, $192,829 in compensation and benefits for the company's administrative
and executive personnel, and $178,307 in accounting expenses related to the
filing of a registration statement by the Company and the annual audit. Research
and development expenses increased to $83,963 and $172,108, respectively, in the
three and six months ended June 30, 1999, as compared to $13,863 and $37,974,
respectively, in the same periods in 1998. Basic scientific research was
curtailed in the first six months of 1998 due to lack of available funds, as
compared to the same period in 1999, when the Company had both the cash
resources and certain contractual obligations to Elan for research and
development pertaining to acquired Elan technology.
Interest income of $13,487 and $23,978, respectively, for the three and six
months ended June 30, 1999 was primarily attributable to interest earned on cash
received from Elan's $1,400,000 investment in the Company's common stock and
other equity securities in the first six months of 1999. In comparison, interest
and other income in the comparable period in 1998 was $2,545 and $2,561, due to
no funds being available for short term investment in that time period.
Interest expense increased to $32,390 and $68,187, respectively, for the three
and six months ended June 30, 1999, as compared to $20,939 and $36,648,
respectively, for the three and six months ended June 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.
In the three and six months ended June 30, 1999, minority interest of $401,863
and $460,213, respectively, was recorded as a reduction to the Company's net
loss and relates to the minority shareholders' 32% interest in Gemini Health
Technologies L.P., an operating subsidiary 68% controlled by the Company.
The above resulted in a net loss of $401,863 and $959,193, respectively, for the
three and six months ended June 30, 1999, as compared to a net loss of $333,734
and $560,026, respectively, for the three and six months ended June 30, 1998.
Losses from the Gemini operations have consumed significant cash resources from
the Company. While the custom DNA synthesis business of Gemini grew considerably
during the first two quarters of 1999, as compared to the prior quarter, the
operation has continued to require additional investment in personnel,
materials, facilities and equipment, resulting in substantially higher operating
expenses. Since May 1999, the Company has been evaluating and implementing plans
to significantly reduce these operating losses and cash outflows while retaining
the value of the custom DNA synthesis services. As part of these plans, the
Company recently downsized Gemini's operations, including a significant
reduction in salaries and personnel. The Company is also attempting to
restructure Gemini's balance sheet, including the compromise and settlement of
certain Gemini liabilities, including trade payables, office and laboratory
equipment lease obligations, employment agreements and a secured loan to a life
insurance company in the approximate amount of $1.16 million. 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. 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, the outsourcing of a portion of the custom DNA
synthesis business to reduce operating expenses 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 DNA and peptide synthesis
business. At June 30, 1999, the Company had a working capital deficit of
$857,606 and an accumulated deficit of $10,479,008.
Net cash used in operating activities for the six months ended June 30, 1999 was
$1,005,335 as compared to net cash provided by operating activities of $17,690
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 three months ended
June 30, 1999 was $129,848, which was used primarily to make an $85,000 loan to
the Company's chief executive officer and purchase laboratory equipment for
research related to the Elan technology. In comparison, $14,322 was provided by
investing activities in the comparable period in 1998, which was primarily from
the sale of equipment. At June 30, 1999, the Company did not have any material
commitments for capital expenditures. Net cash provided in financing activities
was $1,284,150 for the six months ended June 30, 1998 as compared to $81,043 of
cash used by these activities for the same period in 1998. This increase funds
from financing activities is primarily attributable to an investment of
$1,400,000 in common stock and other equity securities by Elan, partially offset
by repayments of $115,850 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.
The Company expects its cash needs will continue to increase in the future
periods, primarily because it will incur additional expenses related to the
development 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 $1.163
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
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raise approximately $2,000,000; however, the registration statement has not yet
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, other than funds remaining from Elan's
investment of $2.0 million, which was completed in May 1999, a substantial
portion of which must be used for specified research and development activities,
and potential proceeds from the sale of common stock of ADM Tronics, which sale
is restricted until September 1999, 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. The Company's ability
to obtain financing through the issuance of its common stock was materially
adversely affected when Nasdaq notified the Company in September 1997 the
Company's stock would be 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 its service 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
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
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.
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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.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
4.5 Form of Warrant to Elan International Services, Ltd. to purchase up to
1,520,821 Shares of Company Common Stock
10.9 Promissory Note to the Company from Dr. Arup Sen dated February 1, 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 August 16, 1999 /s/ Arup Sen
-------------------
Arup Sen
Chairman of the Board, Chief
Executive Officer and President
Dated August 16, 1999 /s/ David Saloff
-------------------
David Saloff
Chief Financial Officer
20
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. WITHOUT SUCH
REGISTRATION, NO TRANSFER OF THESE SHARES OR ANY INTEREST THEREIN MAY BE MADE
UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT SUCH TRANSFER DOES NOT REQUIRE SUCH
REGISTRATION.
ELECTROPHARMACOLOGY, INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, Elan International
Services, Ltd., a Bermuda corporation, or its permitted assigns (each, a
"Holder"), is entitled to subscribe for and purchase up to 1,520,821 shares (as
adjusted pursuant to Section 4 hereof, the "Shares") of the fully paid and
nonassessable common stock, par value $.01 (the "Common Stock"), of
Electropharmacology, Inc., a Delaware corporation (the "Company"), at the price
of $0.75 per share (such price, and such other prices as shall result from time
to time, from the adjustments specified in Section 4 below, the "Warrant
Price"), subject to the provisions and upon the terms and conditions hereinafter
set forth.
1. Term. Subject to the limitations set forth in Section 3 and
4 below, the purchase right represented by this Warrant is exercisable, in whole
or in part, at any time, and from time to time, from and after the date that is
210 days after the date hereof and until 5:00 p.m. Eastern Daylight Time
November 14, 2005. To the extent not exercised at 5:00 p.m. Eastern Daylight
Time on November 14, 2005, this Warrant shall completely and automatically
terminate and expire, and thereafter it shall be of no force or effect
whatsoever.
2. Method of Exercise; Payment; Issuance of New Warrant. (a)
The purchase right represented by this Warrant may be exercised by the Holder,
in whole or in part and from time to time, by the surrender of this Warrant
(with the notice of exercise form attached hereto as Annex A duly executed) at
the principal office of the Company and by the payment to the Company of an
amount, in cash or other immediately available funds, equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased.
(b) The person or persons in whose name(s) any certificate(s)
representing shares of Common Stock shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall be
treated for all purposes as the record holder(s) of, the Shares represented
thereby (and such Shares shall be deemed to have been issued) immediately prior
to the close of business on the date or dates upon which this Warrant is
properly exercised and full payment for the Shares acquired pursuant to such
exercise is made. Upon any exercise of the rights represented by this Warrant,
certificates for the Shares purchased shall be delivered to the holder hereof as
soon as possible and in any event within 30 days of receipt of such notice and
payment, and unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to the holder
hereof as soon as possible and in any event within such 30-day period.
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3. Stock Fully Paid, Reservation of Shares. All Shares that
may be issued upon the exercise of the rights represented by this Warrant will,
upon issuance, be duly authorized, fully paid and nonassessable, and will be
free from all taxes, liens and charges with respect to the issue thereof. During
the period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized, and reserved for the purpose of
the issue upon the exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Warrant Price shall be subject to the adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Reclassification, Etc. In case of any reclassification,
reorganization, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value) of other shares or securities of the Company, or (ii) any
consolidation of the Company with or into another corporation (other than a
merger or consolidation with another corporation in which the Company is the
acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or (iii) any sale of all or substantially all of the assets of
the Company, then the Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and deliver to the holder of this Warrant a
new Warrant or a supplement hereto (in form and substance reasonably
satisfactory to the holder of this Warrant), so that the holder of this Warrant
shall have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and in
lieu of the shares of Common Stock theretofore issuable upon the exercise of
this Warrant, the kind and amount of shares of stock and other securities,
receivable upon such reclassification, reorganization, change or conversion by a
holder of the number of shares of Common Stock then purchasable under this
Warrant. Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
4. The provisions of this Section 4(a) shall similarly attach to successive
reclassifications, reorganizations, changes, and conversions.
(b) Subdivision or Combination of Shares. If the Company at
any time during which this Warrant remains outstanding and unexpired shall
subdivide or combine its Common Stock, (i) in the case of a subdivision, the
Warrant Price shall be proportionately decreased and the number of Shares
purchasable hereunder shall be proportionately increased, and (ii) in the case
of a combination, the Warrant Price shall be proportionately increased and the
number of Shares purchasable hereunder shall be proportionately decreased.
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(c) Below Market Issuance; Stock Dividends; Etc. If the
Company at any time while this Warrant is outstanding and unexpired shall (i)
issue or sell any shares of Common Stock at a price below average of the closing
bid prices for the Common Stock, as reported by the principal exchange upon
which the Common Stock trades, for the 20 consecutive trading days ending with
the day which is two trading days prior to the date of issuance (the "Market
Price"), other than shares issued pursuant to the exercise of warrants
outstanding as of the date hereof, (ii) issue, sell or fix a record date for the
issuance of rights, options, warrants or other securities exercisable,
convertible or exchangeable into Common Stock (collectively, "Options"), at a
price per share (or exercise, conversion or exchange price per share) which is
below Market Price, (iii) pay a dividend with respect to Common Stock payable in
Common Stock or Options, (iv) issue any Options to officers, directors,
employees or consultants to the Company, other than up to 2,250,000 shares of
Common Stock pursuant to a duly authorized and constituted stock option plan,
having an exercise price (on a per-share basis) below the Market Price, or (v)
make any other distribution with respect to Common Stock (except any
distribution specifically provided for in Sections 4(a) and (b) above), the
price at which the holder of this Warrant shall be able to purchase Shares shall
be adjusted by multiplying the Warrant Price in effect immediately prior to such
date of determination of the holders of securities entitled to receive such
distribution, by a fraction (A) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution, and (B) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution, as if all of such Options had been exercised and the Company
received the consideration payable in respect thereof. Upon each adjustment in
the Warrant Price pursuant to this Section 4(c), the number of Shares of Common
Stock purchasable hereunder shall be adjusted, to the nearest whole share, to
the product obtained by multiplying the number of Shares purchasable immediately
prior to such adjustment in the Warrant Price by a fraction, the numerator of
which shall be the Warrant Price immediately prior to such adjustment and the
denominator of which shall be the Warrant Price immediately thereafter.
(d) Repurchases or Redemptions of Common Stock or Options. If
the Company at any time while this Warrant is outstanding and unexpired shall
repurchase or redeem any outstanding shares of Common Stock, or any Options, the
Warrant Price shall thereupon be adjusted by multiplying the Warrant Price in
effect immediately prior to such repurchase or redemption by a fraction (i) the
numerator of which shall be Warrant Price in effect immediately prior to such
repurchase or redemption and (ii) the denominator of which shall be the per
share fair market value of the consideration paid for each of the shares of
Common Stock and/or Options at the time of purchase or redemption. Upon each
adjustment in the Warrant Price pursuant to this Section 4(d), the number of
Shares of Common Stock purchasable hereunder shall be adjusted, to the nearest
whole share, to the product obtained by multiplying the number of Shares
purchasable immediately prior to such adjustment in the Warrant Price by a
fraction, the numerator of which shall be the Warrant Price immediately prior to
such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter. For purposes of this section, "Market Price" shall mean
the average of the closing bid prices of the Common Stock for 10 consecutive
trading days, ending with the trading day which is two days prior to the date of
the relevant Repurchase or Redemption, as reported by the principal exchange or
over the counter market upon which the Common Stock is traded; or if not so
reported, a price per share determined in good faith by the Board of Directors
of the Company as being equal to the fair market value of a share of Common
Stock.
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(e) No Impairment. The Company will not, by amendment of its
charter or bylaws or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holder of this Warrant against
impairment.
(f) Notice of Adjustments. Whenever the Warrant Price or the
number of Shares purchasable hereunder shall be adjusted pursuant to this
Section 4, the Company shall prepare a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated. Such certificate shall be signed
by its chief financial officer and shall be delivered to the holder of this
Warrant.
(g) Fractional Shares. No fractional shares of Common Stock
will be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
fair market value of the Common Stock on the date of exercise as reasonably
determined in good faith by the Company's Board of Directors.
(h) Cumulative Adjustments. No adjustment in the Warrant Price
shall be required under this Section 4 until cumulative adjustments result in a
concomitant change of 1% or more of the Warrant Price or in the number of shares
of Common Stock purchasable upon exercise of this Warrant as in effect prior to
the last such adjustment; provided, however, that any adjustments which by
reason of this Section 4 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 4 shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be.
5. Compliance with Securities Act; Disposition of Warrant or
Shares of Common Stock. (a) The holder of this Warrant, by acceptance hereof,
agrees that this Warrant and the Shares to be issued upon exercise hereof are
being acquired for investment and that such holder will not offer, sell or
otherwise dispose of this Warrant or any Shares to be issued upon exercise
hereof except under circumstances which will not result in a violation of
applicable securities laws. Upon exercise of this Warrant, unless the Shares
being acquired are registered under the Securities Act of 1933, as amended
(the?"Act"), or an exemption from the registration requirements of such Act is
available, the holder hereof shall confirm in writing, by executing an
instrument in form reasonably satisfactory to the Company, that the Shares so
purchased are being acquired for investment and not with a view toward
distribution or resale. This Warrant and all Shares issued upon exercise of this
Warrant (unless registered under the Act) shall be stamped or imprinted with a
legend in substantially the following form:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. WITHOUT SUCH
REGISTRATION, NO TRANSFER OF THESE SHARES OR ANY INTEREST THEREIN MAY BE MADE
UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT SUCH TRANSFER DOES NOT REQUIRE SUCH
REGISTRATION.
(b) (i) With respect to any offer, sale or other disposition
of this Warrant or any Shares acquired pursuant to the exercise of this Warrant
prior to registration of such Shares, the holder hereof and each subsequent
holder of this Warrant agrees to give written notice to the Company prior
thereto, describing briefly the manner thereof, together with a written opinion
of such holders counsel, if requested by the Company, to the effect that such
offer, sale or other disposition may be effected without registration or
qualification (under the Act as then in effect or any federal or state law then
in effect) of this Warrant or such Shares and indicating whether or not under
the Act certificates for this Warrant or such Shares to be sold or otherwise
disposed of require any restrictive legend as to applicable restrictions on
transferability in order to ensure compliance with the Act. Promptly upon
receiving such written notice and reasonably satisfactory opinion, if so
requested, the Company, as promptly as practicable, shall notify such holder
that such holder may sell or otherwise dispose of this Warrant or such Shares,
all in accordance with the terms of the notice delivered to the Company.
Notwithstanding the foregoing, this Warrant or such Shares may be offered, sold
or otherwise disposed of in accordance with Rule 144 as promulgated under the
Act ("Rule 144"), provided that the Company shall have been furnished with such
information as the Company may reasonably request to provide a reasonable
assurance that the provisions of Rule 144 have been satisfied. Each certificate
representing this Warrant or the Shares thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to insure compliance with the Act, unless in the
aforesaid opinion of counsel for the holder such legend is not required in order
to insure compliance with the Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
(ii) The shares of Common Stock underlying this Warrant are
entitled to the benefit of certain registration rights as set forth in a
Registration Rights Agreement dated as of the date hereof between the Company
and the initial Holder named herein.
(c) Notwithstanding any other provision in this Warrant, the
Holder may transfer this Warrant in whole and only if the transferee is an
affiliate of the Holder.
6. Rights as Shareholders. No holder of this Warrant, as such,
shall be entitled to vote or receive dividends or be deemed the holder of Shares
or any other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any right to vote
for the election of directors or upon any matter submitted to shareholders at
any meeting thereof, or to receive notice of meetings, or to receive dividends
or subscription rights or otherwise until this Warrant shall have been exercised
and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
5
<PAGE>
7. Representations and Warranties. The Company represents
and warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms;
(b) The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable; and
(c) The execution and delivery of this Warrant are not, and
the issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's charter or bylaws, as
amended, and do not and will not constitute a default under, any indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound.
8. Miscellaneous. (a) This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by both the Company and the holder of this Warrant.
(b) Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall (i)
be in writing, (ii) be delivered personally or sent by mail or overnight courier
to the intended recipient to each such holder at its address as shown on the
books of the Company or to the Company at the address indicated therefor on the
signature page of this Warrant, unless the recipient has given notice of another
address, and (iii) be effective on receipt if delivered personally, two business
days after dispatch if mailed, and one business day after dispatch if sent by
overnight courier service.
(c) The Company covenants to the holder hereof that upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon receipt of a bond or indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company will make and deliver a
new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant.
(d) The descriptive headings of the several sections and
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
(e) This Warrant shall be governed by and construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the State of New York, without giving effect to the choice of law
rules thereof.
[Signature page follows]
6
<PAGE>
IN WITNESS WHEREOF, Electropharmacology, Inc. has executed
this Warrant as of the date set forth below.
Electropharmacology, Inc.
By:/s/ Arup Sen
---------------
Arup Sen
Chairman, President and
Chief Executive Officer
Dated: May __, 1999
7
<PAGE>
Annex A
-------
NOTICE OF EXERCISE
To: Electropharmacology, Inc.
1. The undersigned hereby elects to purchase _____ shares of Common Stock of
Electropharmacology, Inc. pursuant to the terms of the attached Warrant, and
tenders herewith full payment of the purchase price of such shares, in cash or
other immediately available funds.
2. Please issue a certificate or certificates representing said shares in the
name of the undersigned or in such other name or names as are specified below:
_____________________________________(Name)
(Address)
3. The undersigned represents that the aforesaid shares are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares.
Signature:_______________________
Name:____________________________
Address:_________________________
---------------------------
---------------------------
Social Security or taxpayer identification number:
- ----------------------------------
PROMISSORY NOTE
February 1, 1999
$85,000.00 City of Gainesville
State of Florida
FOR VALUE RECEIVED, Arup Sen ("Borrower"), promises to pay to the order
of ELECTROPHARMACOLOGY, INC. ("Lender") the principal amount of EIGHTY-FIVE
THOUSAND AND 00/100 DOLLARS ($85,000.00). The note shall bear interest at the
prime rate of interest plus one percent per annum and is due on demand.
This Note shall be paid in full on or before March 31, 1999. This Note
may be prepaid at any time without premium or fee.
Upon the occurrence of any Default under this Note, the unpaid
principal of this Note and any part thereof, shall bear interest at a rate of
eighteen (18) per cent after Default until paid (the "Default Rate"). In any
action to collect upon this Note, the Lender or its designee shall be entitled
to all costs of collection, including reimbursement of reasonable attorney's
fees including any appeals.
All payments on this Note shall be payable in lawful currency of the
United States of America to Electropharmacology, Inc., 1109 NW 13th Street,
Gainesville, Florida 32601 in immediately available funds.
Borrower hereby (a) waives demand, presentment for payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suite and
diligence in collecting this Note; and (b) agrees that Electropharmacology, Inc.
shall not be required first to institute any suit, or to exhaust its remedies
against Borrower or any other person or party to become liable hereunder in
order to enforce payment of this Note.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected in
excess of such maximum lawful rate shall be applied as a credit against the
unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified
or waived only by written agreement executed by Borrower and Lender.
This Note is made under and governed by the laws of the State of
Florida, without regard to conflict of laws or principles.
1
<PAGE>
WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
IN ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE COMPANY'S ACCEPTING THIS NOTE FROM BORROWER.
BORROWER:
By: /s/ Arup Sen
-------------
Arup Sen
Date:February 1, 1999
WITNESS:
/s/ Ken Cornell
- ---------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT JUNE 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> JUN-30-1999
<CASH> 308,978
<SECURITIES> 621,628
<RECEIVABLES> 224,497
<ALLOWANCES> (35,049)
<INVENTORY> 7,172
<CURRENT-ASSETS> 1,207,712
<PP&E> 368,419
<DEPRECIATION> (272,401)
<TOTAL-ASSETS> 1,656,539
<CURRENT-LIABILITIES> 2,065,318
<BONDS> 0
161,433
8,458,834
<COMMON> 0
<OTHER-SE> (10,640,441)
<TOTAL-LIABILITY-AND-EQUITY> 1,656,539
<SALES> 300,075
<TOTAL-REVENUES> 324,053
<CGS> 222,874
<TOTAL-COSTS> 222,874
<OTHER-EXPENSES> 1,452,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,187
<INCOME-PRETAX> (1,419,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,419,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (959,193)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
