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 March 31, 1999
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-25828
Electropharmacology, Inc.
-------------------------
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)
1109 N.W. 13th Street, Gainesville, FL 32601
--------------------------------------------
(Address of principal executive offices)
(352) 367-9088
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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 ___ No X
---
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 March 31, 1999
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Common Stock, $ .01 par value 15,391,913
Transitional Small Business Disclosure Format:
Yes____ No X
---
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ELECTROPHARMACOLOGY, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended March 31,
1999 and 1998 12
PART II OTHER INFORMATION 16
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
1
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Electropharmacology, Inc.
Unaudited Consolidated Balance Sheets
March 31, December 31,
------------------------------
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 181,711 160,011
Accounts receivable, net of allowance for doubtful accounts of $60,471 122,910 83,497
at March 31, 1999 and $61,184 at December 31, 1998
Subscription receivable - current 500,000 900,000
Other receivables 2,769 2,769
Inventory 11,404 7,172
Investment 687,236 1,400,000
Prepaid expenses 109,926 133,737
Notes receivable - related parties 85,000 -
------------------------------
Total current assets 1,700,956 2,687,186
Property and equipment, net of accumulated depreciation of $245,216 at 375,278 382,347
March 31, 1999 and $217,752 at December 31, 1998
Patents, net of accumulated amortization of $21,826 at March 31, 1999 81,528 83,048
And $20,306 at December 31, 1998
Other assets 13,750 8,750
------------------------------
TOTAL ASSETS 2,171,512 3,161,331
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - short term 1,327,814 1,409,969
Notes payable - related parties 129,580 129,580
Current portion of capital leases 21,847 30,034
Accounts payable 274,289 482,643
Accrued expenses 316,526 181,639
------------------------------
Total current liabilities 2,070,056 2,233,865
Capital leases, long term portion 47,848 45,539
------------------------------
Total Liabilities 2,117,904 2,279,404
Minority interest 1,825,126 2,031,429
Mandatory redeemable convertible preferred stock, $.01 par value, 7,646,426 7,458,926
7,500 authorized, issued and outstanding
Stockholders' Equity & Net Capital Deficiency
Convertible preferred stock, $.01 par value, 9,992,500 shares - -
authorized, none issued and outstanding
Common stock, $.01 par value, 30,000,000 shares authorized, 13,282,687 157,701 157,180
issued and outstanding at December 31, 1998 and 15,391,913 issued
and outstanding at March 31, 1999, 378, 177 shares subscribed
Additional paid-in capital 21,748,907 21,726,928
Accumulated other comprehensive income 90,514 803,279
Dividend Distribution (187,500) -
Retained deficit (31,227,566) (30,795,815)
------------------------------
(8,108,428)
Subscription Receivable (500,000)
------------------------------
Net capital deficiency (9,417,944) (8,608,428)
------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 2,171,512 3,161,331
==============================
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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Electropharmacology, Inc.
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Revenue:
Rentals - 215,698
Sales 124,163 33,860
-----------------------------------
Total revenue 124,163 249,558
Operating expenses:
Cost of revenue 104,638 71,534
Selling, general and administrative 543,795 363,664
Research and development 88,047 24,112
-----------------------------------
Total operating expenses 736,480 459,310
-----------------------------------
Loss form operations (612,317) (209,752)
Other income (expense)
Interest expense (34,476) (15,709)
Interest and other income 10,506 35
Loss on disposal of equipment - (865)
-----------------------------------
Total other income (expense) (23,970) (16,539)
-----------------------------------
Loss from continuing operations (636,287) (226,291)
===================================
Minority interest 206,303 -
Net Loss (429,984) (226,291)
Net loss per share - basic and diluted (0.03) (0.05)
===================================
Weighted average number of common shares outstanding -
Basic and diluted 15,276,758 4,115,466
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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Electropharmacology, Inc.
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the three months ended
March 31,
1999 1998
<S> <C> <C>
Operating activities
Net Loss $ (429,984) $ (226,291)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Depreciation and amortization 28,984 66,569
Issuance of common stock for services 12,500 22,950
Loss attributable to minority interest (206,303) -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (39,413) (17,626)
Decrease in trade notes and other receivables - 13,831
(Increase) in Inventory (4,232) (3,848)
Decrease in prepaid expenses 27,788 36,600
Decrease (Increase) in deposits (5,000) 3,896
Decrease in rental equipment - 6,884
Increase (Decrease) in accounts payable (59,204) 81,278
(Decrease) in accrued expenses (7,359) (25,591)
---------------------------------
Net cash (used in) operating activities (682,223) (41,348)
---------------------------------
Investing activities
Purchases of property and equipment (23,044) -
Loan to related party (85,000) -
---------------------------------
Net cash (used in) investing activities (108,044) -
---------------------------------
Financing activities
Proceeds from issuance of common stock 900,000 -
Repayment of notes payable and capital lease obligations (88,033) (40,450)
Repayment of notes payable to related parties - (8,000)
---------------------------------
Net cash provided by (used in) financing activities 811,967 (48,450)
---------------------------------
Net increase (decrease) in cash 21,700 (89,798)
Cash at beginning of period 160,011 111,496
---------------------------------
Cash at end of period $ 181,711 $ 21,698
=================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 23,862 $2,424
=================================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock for services $ 22,500 $ 22,950
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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ITEM 1. UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete audited financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three- and nine-month periods ended March 31, 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 through radio
frequencies. 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 oligonucleotides, peptides, genes and novel
nucleosides.
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 when products are
shipped to the customer.
5
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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 March 31, 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 stated 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, 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.
6
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All loss per share amounts have been presented to conform to the SFAS
No. 128 presentation. For the three months ended March 31, 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.
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.
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 $429,984 for the three months ended
March 31, 1999 and cumulative net operating losses aggregating
$31,227,566 through March 31, 1999. In addition, at March 31, 1999, the
Company had a net capital deficiency of $9,417,944. The company is also
in default on a note for $1,163,090 to its major creditor, an insurance
company. The insurance company has not exercised its rights and
remedies in its agreement, but there is no assurance that the insurance
company will not call 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
7
<PAGE>
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 of 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 Biotech has grown considerably during the first quarter of 1999,
the operation has continued to require additional investment in
personnel, materials, facilities and equipment, resulting in
substantially higher operating expenses. During May 1999, the Company
has been evaluating plans to significantly reduce these operating
losses and cash outflows while retaining the value of the custom DNA
synthesis services business. Among the options being evaluated are
strategic alliances, including mergers and acquisition of related or
complementary molecular services business for the medical research
market; downsizing Gemini's operations, including a reduction in
salaries and personnel; 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 plans
for the restructuring include the compromise and settlement of certain
Gemini liabilities, including trade payables, lease obligations,
employment agreements and the $1,163,090 secured loan to the life
insurance company.
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.
8
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3. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at March 31, 1999 and December 31, 1998
consisted of the following: March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Note payable (non-interest bearing) 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 66,294 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
---------- --------------
1,327,814 1,409,969
Less current portion (1,327,814) (1,409,969)
---------- --------------
Long term portion of notes payable $ -- $ --
========== ==============
</TABLE>
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 March 31, 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 March 31, 1999, the rate was
10.25% and 9.75%, 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.
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 March 31, 1999, Gemini was not in
compliance with certain ratios relating to net worth and working
capital. Additionally, subsequent to March 31, 1999, the Company has
not made the required payments for April and May of 1999. Accordingly,
the entire amount has been shown as a current liability at March 31,
1999. The insurance company currently has the right to accelerate
payment of the note.
9
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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% (8.75% at March 31, 1999) and are due on
demand. The balances due under the notes at December 31, 1998 were
$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 March 31,
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% (8.75% at March 31, 1999). The entire
balance was outstanding at March 31, 1999.
5. 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. 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, disengorgement 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. However, no liability has been recorded in
the financial statements.
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.
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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 that the Company is or will be year 2000 ready, that 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.
11
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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 after the completion of its corporate reorganization and
consummation of the transactions with Elan Corporation, plc. 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 integrate the businesses acquired by the
Company successfully, 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 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 - Our scientists 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:
> 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
12
<PAGE>
> 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.
We are a development stage company and 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. We also concluded agreements with Elan Corporation,
plc, to acquire an iontophoresis flexible patch technology for topical
dermatology applications and obtain an equity investment by Elan. Pending
shareholder approval, we will change our name to Gemini Health Technologies Inc.
Our executive offices are located at 1109 NW 13th Street, Gainesville, Florida
32601 and our telephone number is (352) 367-9088.
Financial Condition
Current assets declined from $2,687,186 at December 31, 1998 to $1,700,956,
primarily as a result of the $712,764 decline in market value of the Company's
investment in ADM Tronics Unlimited, Inc. common stock from December 31, 1998 to
March 31, 1999.The ADM Tronics common stock was de-listed by Nasdaq from the
Nasdaq Small Cap Market System in December 1998. The reduction in the current
subscription receivable of $400,000 is due to the Company's receipt of Elan's
year end cash commitment of $900,000 in January 1999, and the subsequent
recording of Elan's commitment to invest an additional $500,000 in equity
securities of the Company at March 31, 1999.
Results of Operations
The Company's revenue for the three months ended March 31, 1999 was $124,163, as
compared to $249,558 for the three months ended March 31, 1998. This 50.3%
decrease was attributable to the Company's change in business in August 1998,
when the Company sold its SofPulse assets, which had generated sales and rental
revenue in the first quarter of 1998 and acquired Gemini, which generated
revenue from the synthesis and sale of gene probes in the first quarter of 1999.
Cost of revenue for the three months ended March 31, 1999 increased to $104,638,
as compared to $71,534 for the three months ended March 31, 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 $543,795 in the three
months ended March 31, 1999, as compared to $363,664 for the three months ended
March 31, 1998, an increase of 49.5%. This 49.5% increase in expenses is
primarily attributable to $251,271 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.
Research and development expenses increased to $88,047 in the first quarter of
1999 as compared to $24,112 in the first quarter of 1998. Basic scientific
research was curtailed in the first quarter of 1998 due
13
<PAGE>
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 $10,506 for the three months ended March 31, 1999 was
primarily attributable to interest earned on cash received from Elan's $900,000
investment in the Company's common stock in January 1999. In comparison,
interest income in the comparable period in 1998 was $35 due to no funds being
available for short term investment in that time period.
Interest expense increased to $34,476 for the three months ended March 31, 1999
as compared to $15,709 for the three months ended March 31, 1998, primarily due
to the recording by the Company in its acquisition of Gemini in 1998 of a note
payable to finance Gemini's operations in the approximate amount of $1.2
million.
In the three months ended March 31, 1999, minority interest of $206,303 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 $429,984 for the three months ended March
31, 1999, as compared to a net loss of $226,291 for the three months ended March
31, 1998. Losses from the Gemini operations have consumed significant cash
resources from the Company. While the custom DNA synthesis business of Gemini
has grown considerably during the first quarter 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. During May 1999, the Company has been evaluating
plans to significantly reduce these operating losses and cash outflows while
retaining the value of the custom DNA synthesis services business. Among the
options being evaluated are strategic alliances, including mergers and
acquisition of related or complementary molecular services business for the
medical research market; downsizing Gemini's operations, including a reduction
in salaries and personnel; 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 plans for the
restructuring include the compromise and settlement of certain Gemini
liabilities, including trade payables, lease obligations, employment agreements
and a secured loan to a life insurance company in the approximate amount of $1.2
million.
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, Gemini's custom DNA and peptide synthesis business. At March 31,
1999, the Company had a working capital deficit of $369,100 and an accumulated
deficit of $9,417,944.
Net cash used in operating activities for the three months ended March 31, 1999
was $682,223 as compared to $41,348 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 March 31, 1999 was $108,044, 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, no cash was used in investing activities in the comparable period
in 1998. At March 31, 1999, the Company did not have any material commitments
for capital expenditures. Net cash provided in financing activities was $811,967
for 1998 as compared to $48,450 of cash used by these activities for the same
period in 1998. This increase is primarily attributable to an investment of
$900,000 in common stock by Elan, partially offset by repayments of $88,033 on
notes payable. Subsequent to March 31, 1999, Elan has invested an additional
$500,000 in the Company's common stock, additional redeemable preferred stock
14
<PAGE>
and warrants to purchase common stock. 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
withcorporate 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.
Under the present circumstances, the Company's ability to continue as a going
concern depends on its ability to obtain additional financing. The Company is
exploring alternative sources of additional financing. The Company in November
1998 filed with the Securities and Exchange Commission a registration statement
to register for public sale approximately shares of its common stock in order to
raise approximately $2,000,000; however, the registration statement has not yet
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
$2.0 million financing, 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 through August 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.
We 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. 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
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(b) The following reports on Form 8-K were filed during the quarter ended March
31, 1999:
*Form 8-K dated March 18, 1999 - Item 4 - regarding
the termination of Ernst & Young, LLP as the
Company's independent accountants and the engagement
of Sweeney, Gates & Company as the Company's new
independent accountants.
17
<PAGE>
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 May 20, 1999 /s/ Arup Sen
-------------------
Arup Sen
Chairman of the Board, Chief
Executive Officer and President
Dated May 20, 1999 /s/ David Saloff
-------------------
David Saloff
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT MARCH 31, 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> MAR-31-1999
<CASH> 181,711
<SECURITIES> 687,236
<RECEIVABLES> 686,150
<ALLOWANCES> (60,471)
<INVENTORY> 11,404
<CURRENT-ASSETS> 1,700,956
<PP&E> 623,494
<DEPRECIATION> (267,042)
<TOTAL-ASSETS> 2,171,512
<CURRENT-LIABILITIES> 2,070,056
<BONDS> 0
157,701
7,646,426
<COMMON> 0
<OTHER-SE> (9,575,645)
<TOTAL-LIABILITY-AND-EQUITY> 2,171,512
<SALES> 124,163
<TOTAL-REVENUES> 124,163
<CGS> 104,638
<TOTAL-COSTS> 104,638
<OTHER-EXPENSES> 631,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,476
<INCOME-PRETAX> (636,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (636,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (429,984)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
