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, 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 June 30, 2000
----- -----------
Common Stock, $ .01 par value 17,268,325
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 June 30,
2000 and December 31, 1999 2
Consolidated Statements of Operations for
the three months ended June 30, 2000 and 1999 4
Consolidated Statements of Operations for
the six months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three
and six months ended June 30, 2000 and 1999 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 3. Defaults Upon Senior Securities 14
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
<TABLE>
Electropharmacology, Inc.
Unaudited Consolidated Balance Sheets
June 30, December 31,
2000 1999
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,386 $ 6,577
Accounts receivable, net of allowance
for doubtful accounts of $30,203 at
June 3, 2000 and December 31, 1999 30,059 61,554
Other receivable - 32,612
Inventory 3,172 7,172
Investment 7,070 210,182
Prepaid expenses 71,056 30,031
------------------------
Total current assets 119,743 348,128
Property and equipment, net of accumulated
depreciation of $290,602 at June 30, 2000
and $255,012 at December 31, 1999 230,367 265,956
Patents, net of accumulated amortization of
$29,426 at June 30, 2000 and $26,385 at
December 31, 1999 73,929 76,969
Other assets 400 400
------------------------
TOTAL ASSETS $ 424,439 $ 691,453
========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 455,891 $ 403,964
Accrued expenses 368,858 354,606
Accrued expenses - related parties 111,327 63,654
Current portion of long term debt 1,392,295 1,280,890
Current portion of capital leases 13,968 54,504
------------------------
Total current liabilities 2,342,339 2,157,618
Notes payable - related parties 65,926 65,926
Long term debt, less current portion 36,297 15,503
Long term capital leases, less current portion 6,983 8,188
Mandatorily redeemable convertible preferred
stock, $.01 par value, 7,887 shares
authorized, ssued and outstanding at
June 30, 2000 and December 31, 1999 9,310,318 8,886,544
------------------------
Total Liabilities 11,761,863 11,133,779
2
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[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; 17,550,308 and 17,268,325 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 175,503 172,683
Additional paid-in capital 21,777,832 21,738,152
Accumulated other comprehensive loss (5,064) (88,399)
Accumulated deficit (33,527,695) (32,506,762)
------------------------
(11,579,424) (10,684,326)
Common Stock Reserved 242,000 242,000
-------------------------
Total stockholders' deficit (11,337,424) (10,442,326)
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 424,439 $ 691,453
========================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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<TABLE>
Electropharmacology, Inc.
Unaudited Consolidated Statements of Operations
For the three months ended
June 30,
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2000 1999
--------------------------
<S> <C> <C>
Sales and Grant Revenue $ 158,781 $ 175,912
Operating expenses:
Cost of revenue 77,731 114,004
Selling, general and administrative 237,125 553,715
Research and development 15,205 83,963
--------------------------
Total operating expenses 330,061 751,682
--------------------------
Loss from operations (171,280) (575,770)
Other income (expense)
Interest expense (42,750) (32,390)
Interest and other income - 13,487
Loss on sale of investment (15,554) -
--------------------------
Total other income (expense) (58,304) (18,903)
--------------------------
Loss from continuing operations (229,584) (594,673)
Minority interest - 192,810
Preferred stock dividend (217,055) (197,167)
--------------------------
Net loss $ (446,639) $ (599,030)
==========================
Net loss per share - basic and diluted ($ .03) ($ .04)
==========================
Weighted average number of common shares
outstanding - basic and diluted 17,497,630 15,608,820
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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<TABLE>
Electropharmacology, Inc.
Unaudited Consolidated Statements of Operations
For the six months ended
June 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Sales and Grant Revenue $ 216,693 $ 300,075
Operating expenses:
Cost of revenue 143,633 222,874
Selling, general and administrative 504,534 1,280,290
Research and development 34,814 172,108
-------------------------
Total operating expenses 682,981 1,675,272
-------------------------
Loss from operations (466,288) (1,375,197)
Other income (expense)
Interest expense (82,585) (68,187)
Interest and other income 17 23,978
Loss on sale of investment (48,303) -
-------------------------
Total other income (expense) (130,871) (44,209)
Loss from continuing operations (597,159) (1,419,406)
Minority interest - 460,213
Preferred stock dividend (423,774) (384,667)
-------------------------
Net loss ($ 1,020,933) ($ 1,343,860)
=========================
Net loss per share - basic and diluted ($ .06) ($ .08)
=========================
Weighted average number of common shares
outstanding - basic and diluted 17,382,977 15,914,053
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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<TABLE>
Electropharmacology, Inc.
Unaudited Consolidated Statements of Cash Flows
For the six months ended
June 30,
------------------------
2000 1999
------------------------
<S> <C> <C>
Operating activities
Net Loss $(1,020,933) $(1,343,860)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 38,629 57,689
Amortization of warrants - 228,574
Issuance of common stock for services 42,500 111,879
Loss attributable to minority interest - (460,213)
Loss on sale of available for sale securities 54,090 -
Accretion of preferred stock dividend 423,774 384,667
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable 31,495 (20,950)
Decrease in trade notes and other receivables 32,612 2,769
Decrease in inventory 4,000 -
(Increase) decrease in prepaid expenses (41,025) 57,226
Decrease in deposits - 7,950
Increase (decrease) in accounts payable 51,927 (19,642)
Increase/(decrease) in accrued expenses 14,252 (11,424)
Increase in accrued expenses - related parties 47,673 -
------------------------
Net cash used in operating activities (321,006) (1,005,335)
Investing activities
Sales of available for sale securities 232,357 -
Purchases of property and equipment - (44,848)
Loan to related party - (85,000)
------------------------
Net cash provided by (used in) investing activities 232,357 (129,848)
Financing activities
Proceeds from note payable and capital lease
obligations 150,315 -
Repayment of notes payable and capital lease
obligations (59,857) (115,850)
Proceeds from issuance of common stock - 1,400,000
------------------------
Net cash provided by financing activities 90,458 1,284,150
------------------------
Net increase in cash 1,809 148,967
Cash at beginning of period 6,577 160,011
-------------------------
Cash at end of period $ 8,386 $ 308,978
=========================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,242 $ 27,750
=========================
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock for services $ 42,500 $ 111,879
</TABLE>
6
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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 six-month periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
2. RELATED PARTY TRANSACTION
On February 20, 2000, the Company, Dr. Sen 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, Dr. Sen agreed to assign the proceeds of the
sale of up to 128,520 shares of Company common stock held by Dr.
Sen to the third party provider. Dr. Sen agreed to sell 18,360 shares
per month in order to pay the monthly obligations of the Company to
the third party provider under the agreement for services rendered by
the provider over the seven-month period from January 2000 to July
2000. As consideration for this advance of funds to the Company by
Dr. Sen, the Company agreed to issue to Dr. Sen on a monthly basis
shares of Company common stock equal to the current value of (i)
that number of shares required to be sold by Dr. Sen under the
agreement, and (ii) any adverse tax consequences resulting to Dr. Sen
as a result of the sale of such shares, subject to the discretion of the
Company's board of directors to modify such timing or formula for
repayment. Prior to the issuance of shares to Dr. Sen, the Company
modified the timing for repayment by deferring the issuance of shares
to Dr. Sen until six months after the last date of sale of shares sold by
Dr. Sen under any agreements by Dr. Sen to advance funds to the
Company. As of June 30, 2000, the Company recorded a related
party accrued expense of $47,673 as a result of this agreement.
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
7
<PAGE>
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. The parties reached a final
settlement of the litigation in June 2000 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.
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 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. The
Company's balance sheets at June 30, 2000 and December 31, 1999
included an accrual for this matter.
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.
8
<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.
9
<PAGE>
Results of Operations
Three and Six Months Ended June 30, 2000 Compared to Three and Six
Months Ended June 30, 1999
Our revenue for the three and six months ended June 30, 2000 was $158,781
and $216,693, as compared to $175,912 and $300,075 for the three and six
months ended June 30, 1999. The 60% decrease in sales of our custom
products in our Gemini operation in the first half of 2000 as compared to the
first half of 1999 resulted from the downsizing of that operation and its
relocation from The Woodlands, Texas, to Alachua, Florida in July 1999 in
order to reduce operating losses. The decrease in sales revenues from custom
products was offset by a National Institute of Allergy and Infectious Diseases
grant in the amount of $96,500 awarded in the second quarter of 2000 with no
such grant revenue recorded in the comparable period in 1999.
Cost of revenue for the three and six months ended June 30, 2000 decreased
to $77,731 and $143,633, as compared to $114,004 and $222,874 for the three
and six months ended March 31, 1999, an overall decrease of 35.6% in the
first half of 2000 as compared to the first half of 1999. Costs declined with
declines in the production volume of Gemini's products and services in the
first half of 2000, offset in part by fixed personnel costs associated with
the production.
Selling, general and administrative expenses decreased to $237,125 and
$504,534 in the three and six months ended June 30, 2000, as compared to
$553,715 and $1,280,290 for the three and six months ended June 30, 1999.
The 60.6% decrease in these expenses in the first half of 2000 as compared to
the first half 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 $15,205 and $34,814 in the
three and six months ended June 30, 2000 as compared to $83,963 and
$172,108 in the comparable periods of 1999. Basic scientific research was
curtailed in the first half of 2000 due to lack of available funds, as compared
to the first half of 1999, when we had the cash resources to conduct research
in connection with our iontophoresis technology we acquired from Elan.
Interest income for the three and six months ended June 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 $13,487 and $23,978 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 first six months of 1999.
Interest expense increased to $42,750 and $82,585 for the three and six
months ended June 30, 2000 as compared to $32,390 and $68,187 for the
three and six months ended June 30, 1999. The overall increase of 17.4% in
the first half of 2000 as compared to the first half of 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 and interest on a $50,000 litigation settlement
obligation beginning May 1, 2000.
10
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Loss on sale of securities of $15,554 and $48,303 in the three and six months
ended June 30, 2000 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.
In the three and six months ended June 30, 1999, minority interest of
$192,810 and $460,213 was recorded as a reduction to our company's net loss
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 six months ended
June 30, 2000.
The above resulted in a net loss of $446,639 and $1,020,933 for the three and
six months ended June 30, 2000, as compared to a net loss of $599,030 and
$1, 343,860 for the three and six months ended June 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.
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 June 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 June 30, 2000, we had a working capital deficit of $2,222,596 and an
accumulated deficit of $33,827,695.
Net cash used in operating activities for the six months ended June 30, 2000
was $321,006. Net cash was used primarily to fund the losses from
operations.
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Net cash provided by investing activities for the six months ended June 30,
2000 was $232,357, primarily from the sale of ADM Tronics common stock.
At June 30, 2000, we did not have any material commitments for capital
expenditures.
Net cash provided by financing activities was $90,458 for the six months
ended June 30, 2000, primarily from financing $100,315 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.
12
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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 can not 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 can not 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.
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. 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. The parties reached
a final settlement of the litigation in June 2000 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.
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 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. The Company's balance sheet at June 30, 2000 included an accrual
for this matter.
13
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 27, 1997, Gemini entered into a loan agreement (the "Loan") with an
insurance company (the "Lender") in the amount of $1,315,000. The loan
amortizes over 101 payments ending July 1, 2006. The interest rate is two
points over prime, and at December 31, 1998 and June 30, 2000, was 10.25%.
Collateral for the Loan is Gemini's assets, including accounts receivable,
inventory, and property and equipment owned now or acquired in the future.
On December 22, 1998, the loan was modified to add as additional collateral
the Company's corporate guarantee and 65 pulsed electromagnetic devices
owned by the Company. The former President of Gemini and his wife have
personally guaranteed the repayment of the indebtedness. In addition,
repayment of the loan is guaranteed in part by the Rural Biological Science
Department of the U.S. Department of Agriculture.
The terms of the Loan include maintaining certain financial covenants,
principally relating to working capital liquidity and net working capital
ratios, and permitted purchases and expenses. The covenants also include a
limitation on compensation and distributions. All of the amounts outstanding
under the Loan become due and payable if an event of default occurs. As of
June 30, 2000, Gemini was not in compliance with certain ratios relating to
net worth and working capital. In addition, since March 1999, the Company
has not made the required monthly principal and interest payments and as of
the date hereof owes $320,626 in arrearages on the Loan. The Lender
currently has the right to accelerate payment of the Loan although it has not
yet notified the Company of its intent to accelerate. Management is currently
conducting settlement negotiations with the Lender in an attempt to reach a
mutually acceptable restructuring of this loan obligation. However, there can
be no assurances that the Lender will not accelerate payment on the Loan or
will agree to a restructuring of the Loan.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
None.
15
<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 August 21, 2000 /s/ Arup Sen
-------------------
Arup Sen
Chairman of the Board, Chief
Executive Officer and President
Dated August 21, 2000 /s/ Arup Sen
-------------------
Arup Sen
Chief Financial Officer
16
<PAGE>
Exhibit 27 Financial Data Schedule
Article 5 of Regulation S-X
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT JUNE 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 JUNE-30-2000
CASH 8,386
SECURITIES 7,070
RECEIVABLES 60,262
ALLOWANCES (30,203)
INVENTORY 3,172
CURRENT-ASSETS 119,743
PP&E 520,969
DEPRECIATION (290,602)
TOTAL-ASSETS 424,439
CURRENT-LIABILITIES 2,342,339
BONDS 0
PREFERRED-MANDATORY 9,310,318
PREFERRED 0
COMMON 175,503
OTHER-SE (11,161,921)
TOTAL-LIABILITY-AND-EQUITY 424,439
SALES 158,781
TOTAL-REVENUES 158,781
CGS 77,731
TOTAL-COSTS 77,731
OTHER-EXPENSES 252,330
LOSS-PROVISION 0
INTEREST-EXPENSE 42,750
INCOME-PRETAX (446,639)
INCOME-TAX 0
INCOME-CONTINUING (446,639)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (446,639)
EPS-PRIMARY (.03)
EPS-DILUTED (.03)
17