U.S. Securities and Exchange Commission
Washington, D.C. 2054
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-25828
Electropharmacology, Inc.
-------------------------
Exact name of small business issuer as specified in its charter
Delaware 95-4315412
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12085 Research Drive, Alachua, FL 32615
--------------------------------------------
(Address of principal executive offices)
(904) 462-2249
--------------
(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 September 30, 2000
----- -----------
Common Stock, $ .01 par value 17,550,308
Transitional Small Business Disclosure Format:
Yes____ No X
<PAGE>
ELECTROPHARMACOLOGY, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 2
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 3
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 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 nine months
ended September 30, 2000 and 1999
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
<CAPTION>
Electropharmacology, Inc.
Consolidated Balance Sheets
(Unaudited with respect to September 30, 2000)
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,239 $ 6,577
Accounts receivable, net of allowance for
doubtful accounts of $30,203 at June 30,
2000 and December 31, 1999 4,562 61,544
Other receivable - 32,612
Inventory 3,172 7,172
Investment - 210,182
Prepaid expenses 45,978 30,031
----------------------------
Total current assets 54,951 348,128
Property and equipment, net of accumulated
depreciation of $308,347 at September 30,
2000 and $255,012 at December 31, 1999 212,622 265,956
Patents, net of accumulated amortization of
$30,946 at September 30, 2000 and $26,385
at December 31, 1999 72,409 76,969
Other assets 400 400
----------------------------
TOTAL ASSETS $ 340,382 $ 691,453
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 592,189 $ 403,964
Accrued expenses 421,625 354,606
Accrued expenses - related parties 266,393 63,654
Current portion of long term debt 1,373,882 1,280,890
Current portion of capital leases 13,962 54,504
Total current liabilities 2,668,051 2,157,618
Notes payable - related parties 65,926 65,926
Long term debt, less current portion 25,510 15,503
Long term capital leases, less current
portion 6,247 8,188
Mandatorily redeemable convertible
preferred stock, $.01 par value,
7,887 shares authorized, issued and
outstanding at September 30, 2000 and
December 31, 1999 9,561,209 8,886,544
----------------------------
Total liabilities $12,326,943 $11,133,779
<PAGE>
[RESTUBBED TABLE]
Stockholders' deficit:
Convertible preferred stock, $.01 par
value, 9,992,113 shares authorized, no
shares issued and outstanding - -
Common stock, $.01 par value, 30,000,000
shares authorized; 17,781,292 and
17,268,325 shares issued and outstanding
at September 30, 2000 and December 31,
1999, respectively 177,813 172,683
Additional paid-in capital 21,896,522 21,738,152
Accumulated other comprehensive loss - (88,399)
Accumulated deficit (34,181,896) (32,506,762)
----------------------------
(12,107,561) (10,684,326)
Common stock reserved 121,000 242,000
----------------------------
Total stockholders' deficit (11,986,561) (10,442,326)
----------------------------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 340,382 $ 691,453
============================
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Electropharmacology, Inc.
Consolidated Statements of Operations
(Unaudited)
For the three months ended
September 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Sales revenue $ 44,765 $ 134,697
Grant revenue 15,000 -
Total revenues $ 59,765 $ 134,697
============================
Operating expenses:
Cost of sales 49,652 191,683
Selling, general and administrative 217,891 351,484
Research and development 146,601 131,442
----------------------------
Total operating expenses 414,144 674,609
----------------------------
Loss from operations (354,379) (539,912)
============================
Other income (expense):
Interest income - 8,113
Interest expense (42,883) (36,498)
Loss on sale of investment (6,048) (1,310)
Loss on disposal of equipment - (82,978)
Gain on purchase of minority
interest - 1,150,577
----------------------------
Total other income (expense) (48,931) 1,037,904
----------------------------
Income (loss) from continuing operations (403,310) 497,992
Minority interest - 211,587
Preferred stock dividend (250,891) (193,008)
----------------------------
Net income (loss) $ (654,201) $ (516,571)
============================
Net income (loss) per share - basic and
diluted $ (.04) $ .03
============================
Weighted average number of common shares
outstanding - basic and diluted $17,781,292 $16,295,499
============================
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Electropharmacology, Inc.
Consolidated Statements of Operations
(Unaudited)
For the nine months ended
September 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Sales revenue $ 164,958 $ 434,772
Grant revenue - 111,500
----------------------------
Total revenues 276,458 434,772
============================
Operating expenses:
Cost of revenue 193,285 415,334
Selling, general and administrative 722,425 1,631,792
Research and development 181,415 302,917
----------------------------
Total operating expenses 1,097,125 2,350,043
----------------------------
Loss from operations (820,667) (1,915,271)
============================
Other income (expense):
Interest income 17 32,091
Interest expense (125,468) (104,684)
Loss on sale of investment (54,351) (1,310)
Loss on disposal of equipment - (82,978)
Gain on purchase of minority
interest - 1,150,577
----------------------------
Total other income (expense) (179,802) 993,696
----------------------------
Loss from continuing operations (1,000,469) (921,575)
Minority interest - 671,852
Preferred stock dividend (674,665) (577,675)
----------------------------
Net loss 1,675,134) (827,398)
=============================
Net loss per share - basic and diluted $ (.10) $ (.05)
=============================
Weighted average number of common shares
outstanding - basic and diluted $17,556,339 $15,829,749
=============================
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Electropharmacology, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended
September 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Operating activities
Net Loss $(1,675,134) $ (827,398)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 57,894 80,220
Amortization of warrants - 228,574
Issuance of common stock for services 42,500 167,822
Loss attributable to minority interest - (671,852)
Loss on disposal of equipment - 82,978
Loss on sale of available for sale
securities 54,090 1,310
Accretion of preferred stock dividend 674,665 577,675
Gain on purchase of minority interest - (1,150,577)
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable 56,992 (25,261)
Decrease in trade notes and other
receivables 32,612 2,706
Decrease in inventory 4,000 -
(Increase) decrease in prepaid expenses (15,947) 79,723
Decrease in deposits - 7,950
Increase (decrease) in accounts payable 188,225 (84,991)
Increase in accrued expenses 67,019 178,346
Increase in accrued expenses - related
parties 202,739 -
----------------------------
Net cash used in operating activities (310,345) (1,352,775)
Investing activities
Sales of marketable securities 244,491 -
Purchases of property and equipment - (51,610)
Loan to related party - (85,000)
Repayment of loan to related party - 70,000
Net cash provided by (used in) investing 244,491 (66,610)
activities
<PAGE>
[RESTUBBED TABLE]
Financing activities
Proceeds from notes payable and capital
lease obligations 140,315 -
Repayment of notes payable and capital
lease obligations (79,799) (114,686)
Proceeds from issuance of common stock - 1,400,000
----------------------------
Net cash provided by financing activities 60,516 1,285,314
----------------------------
Net increase (decrease) in cash (5,338) (134,071)
Cash at beginning of period 6,577 160,011
----------------------------
Cash at end of period $ 1,239 $ 25,940
============================
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 8,131 $ 40,112
Income taxes $ - $ -
----------------------------
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock for services $ 42,500 $ 111,879
============================
</TABLE>
<PAGE>
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL INFORMATION
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles
for complete audited financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine-month periods
ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2000.
2. RELATED PARTY TRANSACTIONS
On February 20, 2000, the Company, its President and a third party
provider of Web-site design and marketing services entered into an
agreement. Due to the Company's lack of funds with which to pay
the third party provider, the President agreed to assign the proceeds
of the sale of up to 128,520 shares of Company common stock
owned by the President to the third party provider. The President
agreed to sell up to 18,360 shares per month to meet the Company's
monthly obligation to the third party provider.
As consideration for the advance of funds to the Company by the
President, the Company agreed to issue the President common stock
equal to the current value of (i) that number of shares required to be
sold by the President under the agreement, and (ii) any adverse tax
consequences resulting to the President as a result of the sale of
such shares as repayment for the advance of funds. Prior to the
issuance of any shares to the President, the Company and the
President agreed that repayment would be deferred until six months
after the last date of the sale of all shares. The Company, the
President and the third party provider agreed to extend this
arrangement on a month-to-month basis. The Company recorded an
expense of $22,032 to selling, general and administrative expense
during the three months ended September 30, 2000 and a payable of
$66,096 as of September 30, 2000. When the shares are issued to
the President, the payable will be reversed and common stock
outstanding and additional paid-in capital will be increased.
In September 2000, the Company issued a note to a shareholder in
exchange for $100,000 cash. The note, which is due on February 1,
2001, requires the Company to pay interest at 15% per annum.
Concurrent with the issuance of the note, the Company issued a
warrant to the shareholder allowing for the purchase of up to 50,000
shares of the Company's $.01 par value common stock at $0.20 per
share. The warrant may not be exercised before April 5, 2001 and
terminates on September 7, 2005.
<PAGE>
3. 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 was 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
sought 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 asserted defenses and
filed a counterclaim against the plaintiff and its President. In June
2000, the Company reached a final settlement in a lawsuit that had
been filed in 1994 by a former competitor in which the Company
agreed to pay the plaintiff the amount of $50,000 plus interest over a
thirty-month period which, when paid, will represent full settlement
of the litigation. The balance due under this settlement at
September 30, 2000 was $40,876.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward - looking statements
about our plans and business. Actual events and results may differ
materially from those anticipated in these forward-looking statements. The
ability to achieve our projections and business objectives is dependent on a
variety of factors, many of which are outside of our control. Some of the
most significant factors, alone or in combination, would be our failure to
obtain additional equity financing to fund research and development
activities and projected losses from operations; the inability to grow the
revenues and improve the financial performance of Gemini's custom
products business; our failure to successfully restructure a defaulted loan
from Gemini's major creditor, a life insurance company, in the principal
amount of $1,163,090; unanticipated disagreements with current or
prospective corporate partners, if any; an unanticipated slowdown in the
health care industry, as a result of cost containment measures, changes in
governmental regulation or other factors or an unanticipated failure in the
commercialization of our technologies or potential products developed from
these technologies. Accordingly, there can be no assurances that we will
achieve our business objectives.
General
We are a biotechnology company engaged in developing novel 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. Our primary focus is on products for diseases that affect
superficial tissues such as skin, breasts, brain, prostate and joints. Our
products combine commercially feasible developments of two proprietary
technologies:
DRUG DELIVERY - delivering drugs preferentially to diseased tissues; and
DRUG DESIGN - creating drugs to target specific disease-related
genes and proteins.
<PAGE>
Our drug delivery technologies can be applied from the outside to bring
more drugs to superficial tissues without the use of needles and pumps or
the need to reformulate a drug into a slow release capsule, an implant or an
inhaler. We exclusively licensed from Elan Corporation a flexible patch
technology that applies a mild electrical current to increase the local
delivery of dermatology drugs through and into the skin. This process is
known as iontophoresis. We also developed and commercially marketed
devices that deliver pulsed electromagnetic signals, to increase local blood
flow. We believe treatment through pulsed electromagnetic signals will
increase the delivery, to superficial tissues, orally taken as well as injected
drugs as these travel through the bloodstream to reach the diseased tissues.
Our drug design focuses on small molecule drugs created from
modifications of the building blocks of genes ("gene base modifications").
We intend to build and test a library of small molecule drugs designed to
look like or bind to selected portions of certain genes and proteins that
are being identified by genomics research as drug targets. Each gene base
modification we create can serve as a component of a family of small
molecule drugs. Therefore, we are in a unique position to generate large
drug libraries by combining our gene base modifications with naturally
occurring gene bases to create novel small molecule drugs. We also are
designing gene base modifications that resemble currently approved anti-
cancer and anti-viral drugs that are derived from natural gene bases. While
our small molecule drug library is expected to have broad applications
against many drug targets identified by genomics research, we will initially
focus on drug targets that are identified by clinical research through
collaborations.
We also generate revenues from a Web-based service business that uses our
drug design expertise to design and sell custom products for research and
drug discovery in the genomics field.
All of our technologies are under development and not commercially
marketed. In addition, our Web-based custom products business currently is
not profitable. As a result, we need additional capital from financing,
corporate partnerships or federal grants in order to advance our technologies
toward commercial feasibility. If we are unable to obtain sufficient
additional funds in a timely manner, the development of our technologies
and our financial condition will be materially adversely affected.
Our company was originally incorporated under the laws of the State of
California in August 1990 under the name Magnetic Resonance Therapeutics,
Inc. We reorganized through a merger with and into Electropharmacology, Inc.,
a Delaware corporation, in February 1995. During 1998, we concluded a corporate
reorganization in order to focus on the biopharmaceutical applications of our
proprietary PEMS technology. We sold our previous business of manufacturing
and renting our SofPulse medical device to the nursing home and physical
therapy markets and acquired two businesses engaged in developing new molecular
technologies for drugs for cancer and inflammation. We also acquired in 1998 an
iontophoresis flexible patch technology for topical dermatology applications
from Elan Corporation, plc. and received an equity investment from Elan.
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.
<PAGE>
Results of Operations
Three and Nine Months Ended September 30, 2000 Compared to Three
and Nine Months Ended September 30, 1999
Our revenue for the three and nine months ended September 30, 2000 was
$59,765 and $276,458, as compared to $134,697 and $434,772 for the three
and nine months ended September 30, 1999. This 55.6% and 36.4% decrease
for the three and nine months ended September 30, 2000 was the result of
the relocation of the Gemini operations from The Woodlands, Texas, to
Alachua, Florida in July 1999 in order to reduce operating losses from the
sale of custom products. The decrease in revenues from product sales was
offset by a National Institute of Allergy and Infectious Diseases grant in
the amount of $111,500 awarded in the second and third quarters of 2000
with no such grant revenue recorded in the comparable periods in 1999.
Cost of revenue for the three and nine months ended September 30, 2000
decreased to $49,652 and $193,285, as compared to $191,683 and $415,334
for the three and nine months ended September 30, 1999. Costs declined
with declines in the production volume of Gemini's products and services
in the first nine months of 2000, offset in part by fixed personnel costs
associated with the production.
Selling, general and administrative expenses decreased to $217,891 and
$722,425 in the three and nine months ended September 30, 2000, as
compared to $351,484 and $1,631,792 for the three and nine months ended
September 30, 1999. The 55.7% decrease in these expenses in the first
nine months of 2000 as compared to the same period of 1999 is primarily
attributable to the reduced volume of sales revenue, as well as a decrease
in personnel, sales and marketing, and administrative expenses associated
with the downsizing and relocation of the Gemini operation.
Research and development expenses decreased to $181,415 during the nine
months ended September 30, 2000 as compared to $302,917 for the same
period in 1999 due to the curtailment of basic scientific research resulting
from a lack of available funds. However, during the three months ended
September 30, 2000 research and development expenses increased to
$146,601 as compared to $131,442 for the three months ended September
30, 1999. This three-month increase was the result of expenditures
incurred in research relating to funds received from a grant awarded from
the National Institute of Allergy and Infectious Diseases in the second
and third quarters of 2000.
Interest income for the three and nine months ended September 30, 2000
was $0 and $17, respectively, due to no funds being available for short-term
investment in that time period. In comparison, interest income of $8,113 and
$32,091 for the comparable periods in 1999 was primarily attributable to
interest earned on cash received from Elan's $1.5 million equity investment
in our company in the second quarter of 1999.
Interest expense increased to $42,883 and $125,468 for the three and nine
months ended September 30, 2000 as compared to $36,498 and $104,684
for the three and nine months ended September 30, 1999. The overall
increase of 19.9% in the first nine months of 2000 as compared to the same
period in 1999 was due primarily to the accrual of interest starting in May
1999 on a $98,430 note payable to our company's former audit firm, a
$35,000 note payable entered into by our company in December 1999 in
settlement of a lease obligation for the former Gemini facility in Texas,
interest on a $50,000 litigation settlement obligation beginning May 1, 2000
and interest on a $100,000 note to a related party shareholder beginning
September 7, 2000.
<PAGE>
Loss on sale of investment increased to $6,048 and $54,351 in the three and
nine months ended September 30, 2000 as compared to $1,310 in the three
and nine months ended September 30, 1999. The loss relates to the
difference in the carrying value and the market value of shares of ADM
Tronics stock we sold during these periods to provide working capital.
This investment was liquidated in July 2000.
Loss on disposal of equipment of $82,978 in the three and nine month
periods ended September 30, 1999 primarily relates to the $73,008 write-
down of obsolete and/or surplus office and laboratory equipment, including
computers that could not be upgraded to Year 2000 compliance standards,
acquired in the Gemini transaction.
The Company recorded a one-time gain on purchase of minority interest in
the three and nine month periods ending September 30, 1999 in the amount
of $1,150,577. As a result of litigation initiated by the Company in
September 1999 against a former Company Vice Chairman and President of
Gemini ("Former Gemini President") regarding the Company's acquisition
of Gemini, the Company and the Former Gemini President entered into a
settlement agreement in September 1999 in which, among other things, the
Former Gemini President agreed to resign and the Company agreed to pay
the Former Gemini President certain amounts in order to secure a release
of all the Company's obligations to him, including those agreements entered
into as part of the Gemini acquisition. Among other payments, the settlement
agreement provided for the issuance of 950,000 shares of common stock of the
Company to the Former Vice President in exchange for the minority interests
in the Partnership, resulting in a gain to the Company.
In the three and nine months ended September 30, 1999, minority interest of
$211,587 and $671,852 was recorded as a reduction to our company's income
or loss from continuing operations and relates to the former minority
shareholders' 32% interest in Gemini Health Technologies L.P., an operating
subsidiary that was 68% controlled by our company prior to September 1999.
In September 1999, we acquired the minority interest in the partnership as
part of a litigation settlement, resulting in no related minority interest
in the three and nine months ended September 30, 2000.
The above resulted in a net loss of $654,201 and $1,675,134 for the three
and nine months ended September 30, 2000, as compared to a net income of
$516,571 for the three months ended September 30, 1999 and a net loss of
$827,398 for the nine months ended September 30, 1999.
Since July 1999, we have implemented plans to significantly reduce our
operating losses and cash outflows while retaining the value of Gemini's
custom products business. In accordance with these plans, we downsized
Gemini's operations, including a significant reduction in personnel and
occupancy expenses. In order to reduce our occupancy expenses, in August
1999, we relocated the Gemini operations from The Woodlands, Texas to
Alachua, Florida, where our Florida-based research laboratories have been
located since December 1998. We also initiated litigation against the
Former President of Gemini, resulting in the settlement of certain
employment and other contractual obligations of the Company to this
individual that were incurred in connection with the Gemini acquisition
transaction. As part of this settlement, the Former President of Gemini
received 950,000 shares of our common stock in exchange for his
partnership interest, in lieu of the 6,000,000 shares previously issuable
by us to this individual, resulting in less dilution to the existing
shareholders. We are also attempting to restructure Gemini's balance sheet,
including the compromise and settlement of certain other Gemini liabilities,
including the secured note to a life insurance company in the approximate
principal amount of $1.16 million, trade payables and an equipment lease
obligation in the approximate amount of $52,000.
<PAGE>
Other strategies being evaluated for the Gemini operations include strategic
alliances, including mergers and acquisitions of related or complementary
custom molecular businesses, and raising additional investment capital in
order to sustain continuing operations.
Liquidity and Capital Resources
Our cash requirements have been and will continue to be significant.
From our inception to September 30, 2000, we have financed our operations
primarily through the issuance of equity and debt securities, loans from
stockholders, sales and rentals of products to customers, and sales of
marketable securities. At September 30, 2000, we had a working capital
deficit of $2,613,100 and an accumulated deficit of $34,181,896.
Net cash used in operating activities for the nine months ended September
30, 2000 was $310,345. Net cash was used primarily to fund the losses
from operations.
Net cash provided by investing activities for the nine months ended
September 30, 2000 was $244,491, primarily from the sale of ADM Tronics
common stock. At September 30, 2000, we did not have any material
commitments for capital expenditures.
Net cash provided by financing activities was $60,516 for the nine months
ended September 30, 2000, primarily from financing $90,315 in insurance
premiums and a $50,000 litigation settlement. Under our licensing
agreement with Elan, we must use a substantial portion of the proceeds from
Elan's $1.5 million equity investment to fund further development of certain
products. We are currently in violation of our license agreement with Elan
because we have not made the minimum investment required by Elan for
research and development activities as specified by the agreement. Elan
has not exercised any of its rights regarding the violation.
We expect our cash needs will continue to increase in future periods,
primarily because we will incur additional expenses related to the
development of our drug delivery and drug design technologies prior to
seeking corporate partnerships for future development and marketing of
products based on these technologies. Our company will need to raise
substantial additional funds to continue the development and
commercialization of its technologies and products.
Our long-term debt consists primarily of a secured loan to an insurance
company in the current principal amount of $1,163,090, which our company
guaranteed in connection with the Gemini acquisition. In addition to our
guarantee, other collateral for the loan includes Gemini's assets, including
accounts receivable, inventory, and property and equipment owned now or
acquired in the future, as well as 65 pulsed electromagnetic devices our
company owns. The Former President of Gemini and his wife also have
personally guaranteed the repayment of the indebtedness. The terms of the
loan include maintaining certain financial covenants, principally relating
to working capital liquidity and net working capital ratios, and permitted
purchases and expenses. The covenants also include a limitation on
compensation and distributions. All of the amounts outstanding under the
loan become due and payable if an event of default occurs. Gemini has not
been in compliance with the financial covenants of the loan principally
relating to net worth and working capital. In addition, we stopped making
the required payments in April 1999. The loan is currently in default and
the lender has the right to accelerate payment of the loan, although it has
not yet notified us of its intent to accelerate. We believe that this loan
must be restructured and reduced in order for Gemini's custom products
business to continue. We are currently conducting settlement negotiations
with the lender in an attempt to reach a mutually acceptable restructuring
and reduction of this loan obligation; however, we cannot assure you that
we will be successful in our negotiations.
<PAGE>
Under the present circumstances, our ability to continue as a going concern
depends on our ability to obtain additional financing. We are exploring
alternative sources of financing, including raising additional investment
capital through a private placement and a follow-on public offering, and
seeking federal grants directly (such as Small Business Innovation Research
Grants) or through collaborations. We have not identified any definite
sources of additional financing, and we cannot assure you that additional
financing will be obtained on favorable terms, if at all. Our company's
common stock is quoted on the OTC Bulletin Board, but we cannot assure
you that a public trading market for our common stock will continue to
exist. If additional capital is raised through the issuance of equity or
securities convertible into equity, our stockholders may experience dilution,
and such securities may have rights, preferences or privileges senior to
those of the holders of the common stock.
We cannot predict whether the operating and financing strategies and plans
described above, if implemented by us, will be successful. If we are unable
to improve our operations and ultimately obtain additional financing,
we may be forced to discontinue further development of our technologies,
discontinue marketing of our custom products business or sell our assets.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1994, Diapulse Corporation of America, a former competitor of
our company, filed a lawsuit against our 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 our company was involved in facilitating or
participating in the breach of contracts. The plaintiff was 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 sought unspecified injunctive
relief prohibiting our 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. We asserted defenses
and filed a counterclaim against the plaintiff and its President. We reached
a final settlement of the litigation in June 2000 in which we agreed to pay
the plaintiff the amount of $50,000 plus interest over a thirty-month period,
which, when paid, will represent full settlement of the litigation.
In July 1999, Copelco Credit Corporation filed suit against us 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 in the amount of $58,584. Management estimates that the loss that
could result from an unfavorable outcome of this litigation is less than
$40,000. Our balance sheet at September 30, 2000 included an accrual for
this matter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 27, 1997, Gemini entered into a loan agreement (the "Loan") with
an insurance company (the "Lender") in the amount of $1,315,000. The loan
amortizes over 101 payments ending July 1, 2006. The interest rate is two
points over prime, and at December 31, 1999 and September 30, 2000, was
10.25% and 11.5%, respectively. Collateral for the Loan is Gemini's assets,
including accounts receivable, inventory, and property and equipment
owned now or acquired in the future. On December 22, 1998, the loan was
modified to add as additional collateral our company's corporate guarantee
and 65 pulsed electromagnetic devices owned by our company. The Former
President of Gemini and his wife have personally guaranteed the repayment
of the indebtedness. In addition, repayment of the loan is guaranteed in
part by the Rural Biological Science Department of the U.S. Department of
Agriculture.
The terms of the Loan include maintaining certain financial covenants,
principally relating to working capital liquidity and net working capital
ratios, and permitted purchases and expenses. The covenants also include
a limitation on compensation and distributions. All of the amounts
outstanding under the Loan become due and payable if an event of default
were to occur. As of September 30, 2000, Gemini was not in compliance
with certain ratios relating to net worth and working capital. In addition,
since March 1999, our company has not made the required monthly
principal and interest payments and as of the date hereof owes $377,206 in
arrearages on the Loan. The Lender currently has the right to accelerate
payment of the Loan although it has not yet notified us of its intent to
accelerate. We are currently conducting settlement negotiations with the
Lender in an attempt to reach a mutually acceptable restructuring of the
loan obligation. However, there can be no assurances that the Lender will
not accelerate payment on the Loan or will agree to a restructuring of the
Loan.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
None.
<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 November 13, 2000 /s/ Arup Sen
-------------------
Arup Sen
Chairman of the Board, Chief
Executive Officer and President
Dated November 13, 2000 /s/ Arup Sen
-------------------
Arup Sen
Chief Financial Officer
<PAGE>
Exhibit 27 Financial Data Schedule
Article 5 of Regulation S-X
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-QSB AT SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
PERIOD-TYPE 3-MOS
FISCAL-YEAR-END DEC-31-2000
PERIOD-END SEPT-30-2000
CASH 1,239
SECURITIES 0
RECEIVABLES 34,765
ALLOWANCES (30,203)
INVENTORY 3,172
CURRENT-ASSETS 54,951
PP&E 520,969
DEPRECIATION (308,347)
TOTAL-ASSETS 340,382
CURRENT-LIABILITIES 2,668,051
BONDS 0
PREFERRED-MANDATORY 9,561,209
PREFERRED 0
COMMON 177,813
OTHER-SE (12,164,374)
TOTAL-LIABILITY-AND-EQUITY 340,382
SALES 59,765
TOTAL-REVENUES 59,765
CGS 49,652
TOTAL-COSTS 49,652
OTHER-EXPENSES 364,492
LOSS-PROVISION 0
INTEREST-EXPENSE 42,883
INCOME-PRETAX (654,201)
INCOME-TAX 0
INCOME-CONTINUING (654,201)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (654,201)
EPS-PRIMARY (.04)
EPS-DILUTED (.04)
