U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 29, 2000
-----------------
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission File Number : 0-27380
EchoCath, Inc.
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(Exact Name of Small Business Issuer as specified in its charter)
New Jersey 22-3273101
- ---------------------------------------------------------- --------------------------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
P.O. Box 7224, Princeton, NJ 08543
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(Address of Principal Executive Offices)
Issuer's Telephone Number. . .(609) 987-8400
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Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Check whether Issuer (1) has 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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
CLASS OF COMMON EQUITY OUTSTANDING AT APRIL 3, 2000
- ---------------------- ----------------------------
Class A common stock (No Par Value) 5,308,036
Transitional Small Business Disclosure Format (check one)
YES NO X
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1
PART 1: FINANCIAL INFORMATION
PART 2: OTHER INFORMATION
ECHOCATH, INC.
INDEX
Item 1: Financial Statements Page
----
Balance Sheets,
August 31, 1999 and February 29, 2000 (Unaudited) 3
Statements of Operations for the three months ended
February 28, 1999 (Unaudited), and February 29, 2000 (Unaudited) 4
Statements of Operations for the six months ended
February 28, 1999 (Unaudited), and February 29, 2000 (Unaudited) 5
Statements of Cash Flows for the six months ended
February 28, 1999 (Unaudited), and February 29, 2000 (Unaudited) 6
Notes to Financial Statements 7 - 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 9 - 14
Signatures 15
2
Item 1: Financial Statements
ECHOCATH, INC.
BALANCE SHEETS
ASSETS
August 31, 1999 February 29, 2000
--------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 26,264 $ 21,984
Inventory 44,325 47,524
Prepaid expenses 71,903 50,504
---------- ----------
Total current assets 142,492 120,012
Furniture, equipment and leasehold improvements, net 184,575 144,558
Intangible assets, net 287,384 301,052
Debt issuance cost, net 340,642 1,045,228
Other assets 61,403 61,842
---------- ----------
$1,016,496 $1,672,692
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable $ 540,000 $150,000
6.5% Convertible Debentures-IPA 525,000 --
Deferred income -- 40,000
Accounts payable 177,066 120,856
Accrued expenses 943,390 675,343
Obligations under capital leases 17,863 17,863
---------- ----------
Total current liabilities 2,203,319 1,004,062
6.5% Convertible notes, less current portion 850,000 2,525,000
Note payable, less current portion -- 468,322
Obligations under capital leases, less current portion 19,271 10,869
Other liabilities 136,750 97,478
---------- ----------
Total liabilities 3,209,340 4,105,731
---------- ----------
Stockholders' deficit:
Preferred stock, no par value, 5,000,000 shares authorized; 280,000 shares of
Series B cumulative convertible issued and outstanding, senior in
liquidation to Class A common stock,
(liquidation value $1,400,000) 1,393,889 1,393,889
Class A common stock, no par value, 18,500,000 shares authorized;
3,524,036 issued and outstanding as of February 29, 2000 and 2,352,018
as of August 31, 1999 7,473,834 12,296,098
Class B common stock, no par value, 1,500,000 shares authorized;
1,172,018 shares issued and outstanding as of August 31, 1999
and zero issued and outstanding as of Feburary 29, 2000 4,023,470 --
Accumulated deficit (15,084,037) (16,123,026)
---------- ----------
Total stockholders' deficit (2,192,844) (2,433,039)
---------- ----------
$1,016,496 $1,672,692
========== ==========
See accompanying notes to financial statements.
3
ECHOCATH, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1999 AND
FEBRUARY 29, 2000
(UNAUDITED)
1999 2000
REVENUE:
Royalty and license fees $ 165,000 $ 36,666
Product sales 8,040 --
--------- ----------
Total revenue 173,040 36,666
Cost of sales 7,574 --
--------- ----------
Gross profit 165,466 36,666
Operating expenses:
R&D 329,086 336,539
Marketing and G&A 272,697 264,346
--------- ----------
Total operating expenses 601,783 600,885
--------- ----------
Loss from operations (436,317) (564,219)
Net interest expense (21,066) (146,136)
Tax benefit -- 447,956
--------- ----------
Net loss (457,383) (262,399)
--------- ----------
Preferred dividends 18,900 18,900
---------- ----------
Net loss to common stockholders $ (476,283) $ (281,299)
========== ==========
Basic and diluted net loss per common share $ (.18) $ (.10)
Weighted average shares outstanding 2,691,000 2,691,000
See accompanying notes to financial statements.
4
ECHOCATH, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1999 AND
FEBRUARY 29, 2000
(UNAUDITED)
1999 2000
REVENUE:
Royalty and license fees $ 165,000 $ 66,666
Product sales 23,759 --
----------- -----------
Total revenue 188,759 66,666
Cost of sales 15,299 --
----------- -----------
Gross profit 173,460 66,666
Operating expenses:
R&D 718,820 701,861
Marketing and G&A 556,252 540,913
----------- -----------
Total operating expenses 1,275,072 1,242,774
----------- -----------
Loss from operations (1,101,612) (1,176,108)
Net interest expense (37,546) (273,037)
Tax benefit -- 447,956
----------- -----------
Net loss (1,139,158) (1,001,189)
----------- -----------
Preferred dividends 37,800 37,800
----------- ------------
Net loss to common stockholders $(1,176,958) $(1,038,998)
=========== ============
Basic and diluted net loss per common share $ (.44) $ (.39)
Weighted average shares outstanding 2,691,000 2,691,000
See accompanying notes to financial statements.
5
EchoCath, Inc.
Statements of Cash Flows
Six Months ended February 28, 1999 and February 29, 2000
(Unaudited)
1999 2000
Cash flows from operating activities:
Net loss $(1,139,158) $(1,001,189)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 56,219 57,643
Noncash interest expense and amortization of debt issuance costs -- 209,208
Change in operating assets & liabilities:
Increase in trade accounts receivable (60,095) --
Decrease (increase) in inventory 14,248 (3,199)
Decrease in prepaid expenses and other current assets 34,547 21,399
Decrease (increase) in other assets 409 (439)
Increase (decrease) in accounts payable 86,587 (56,210)
Increase (decrease) in accrued expenses 384,283 (70,256)
Deferred income -- 40,000
Decrease in other liabilities (3,469) (39,272)
----------- -----------
Net cash used in operating activities (626,429) (842,315)
----------- -----------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements (19,393) (3,589)
Purchases of intangible assets (8,890) (27,705)
----------- -----------
Net cash used in investing activities (28,283) (31,294)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations 4,954 (8,402)
Principal payments on C.R. Bard note -- (119,469)
Proceeds from employee stock purchase plan 615 --
Proceeds from IPA notes 525,000 --
Class B preferred dividends (37,800) (37,800)
Debt issuance costs -- (115,000)
Proceeds from 6.5% convertible notes -- 1,150,000
----------- -----------
Net cash provided by financing activities 482,861 869,329
----------- -----------
Net decrease in cash and cash equivalents (171,851) (4,280)
Cash and cash equivalents, beginning of year 256,234 26,264
----------- -----------
Cash and cash equivalents, end of period $ 84,383 $ 21,984
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 2,000 $ 2,195
=========== ===========
Supplemental disclosure of noncash information:
Equipment acquired under capital lease $ 13,337 $ --
Issuance of warrants in connection with private placements $ 225,000 $ 991,718
=========== ===========
See accompanying notes to financial statements.
6
ECHOCATH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A: GENERAL AND BUSINESS
The summary financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the management of EchoCath, Inc. (the "Company") believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these summary financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Form 10-KSB for the fiscal year ended August 31, 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business (see Note J).
The financial statements do not include any adjustments that might result from
the outcome of this certainty. In the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at February 28,
1999 and February 29, 2000 have been made.
NOTE B:
Inventories are summarized as follows:
August 31, 1999 February 29, 2000
--------------- -----------------
Raw Materials $ 44,325 $ 47,524
Work in Process -- --
Finished Goods -- --
----------- -------------
$ 44,325 $ 47,524
=========== =============
NOTE C:
Private Placement Offering
On October 29, 1999 the Company completed a private placement offering. The
offering consisted of Units of (i) a $25,000 convertible promissory note and
(ii) a three-year warrant to purchase 33,333 shares of Class A Common Stock. A
total of 3,366,633 warrants were issued. The notes bear interest at 6.5% per
annum and mature three-years from the date of the final closing October 29,
1999, unless previously converted into Class A Common Stock. A total of
$2,525,000 of notes were issued through the private placement, of which
$1,250,000 are convertible into shares of Common Stock at the option of the
holder, at any time prior to the maturity date, at a rate of one share of Class
A Common Stock for each $0.75 of debt (plus accrued and unpaid interest) and
$1,275,000 of which are convertible at the market price on the date of
conversion, but not less than $0.25 (plus accrued and unpaid interest); the
notes are also convertible at the option of the Company, on the maturity date,
at a conversion price equal to the lesser of $0.75 or the average closing sale
price of the share of Class A Common Stock over the five day period immediately
prior to the maturity date, but not less than $0.25 per share. Each warrant
entitles the holder to purchase one share of Class A Common Stock at an exercise
price of $0.75 per share. The offering resulted in net proceeds of $2,209,358,
and the conversion of $525,000 of 6.5% convertible debentures into the same
convertible debt offered under the private placement described above. In
connection with the warrants issued, the Company recorded debt issuance costs
totaling $673,327, plus $30,642 of other debt issuance costs. The warrants were
valued at $.20 per share using the Black-Scholes pricing model. The debt
issuance costs will be amortized over the life of the debt.
The holders of the Company's Class B Common Stock maintained "super voting"
rights, whereby they were entitled to 5 votes per Class B Common Share. As a
condition to the offering, holders of a minimum of 900,000 shares of the
Company's Class B Common Stock were required to convert their shares into Class
A Common Stock at a ratio of 1 to 1. Additionally, each Class B Common
shareholder converting their shares received a five-year warrant to purchase
shares of Class A Common Stock for an equal number of shares, exercisable at
$.75 per share. A total of 1,172,018 warrants were issued. As of November 30,
1999, all shares of Class B Common Stock have been converted into Class A Common
Stock. In connection with the warrants issued, the Company recorded issuance
costs totaling $234,000. The warrants were valued at $.20 per warrant using the
Black-Scholes pricing model. The issuance cost will be amortized over the life
of the debt.
7
The Placement Agents for the private placement offering are entitled to cash
compensation equal to 10% of the gross proceeds of the offering and 400,000
five-year warrants to purchase up to 400,000 shares of Class A Common Stock at
$0.75 per share. In connection with the warrants issued, the Company recorded
issuance costs totaling $80,000, plus $200,000 for the placement agent fees. The
warrants were valued at $0.20 per warrant using the Black-Scholes pricing model.
The issuance costs will be amortized over the life of the debt.
Pursuant to the terms of the private placement, the Company has agreed to offer
(a "Rights Offering") to its Class A Common Shareholders as soon as is
practicable and efficacious (i) a right to purchase one share of Class A Common
Stock at a price per share equal to the market price immediately prior to the
effective date of a registration statement covering the Rights Offering and (ii)
a three-year warrant to purchase one share of Class A Common Stock at such
market price. The Placement Agents are entitled to a commission equal to 11.25%
of the gross proceeds of the Rights Offering and five-year warrants to purchase
a number of shares of Class A Common Stock equal to 11.25% of the number of
shares sold in the Offering, at an exercise price of $.75 per share. The Rights
Offering, if and when made, will be made only by means of a prospectus.
Pursuant to the terms of the private placement the Company filed a Form S-3
Registration Statement with the U.S. Securities and Exchange Commission in
February 2000 registering the underlying Class A common shares.
NOTE D:
Private Placement Offering in lieu of Rights Offering
On February 23, 2000, the Company offered its 6.5% convertible promissory
noteholders the opportunity to purchase four shares at $.75 per share for every
warrant they exercise at the same price. The Company issued a total of 1,500,000
million shares in this offering. The number of shares that was purchased was
proportional to the number of units purchased in the 6.5% convertible promissory
note offering. For each unit purchased in the 6.5% convertible promissory note
offering, the noteholder purchased up to 14,850 new shares at $.75 per share
plus exercising warrants for 3,712 shares at $.75 per share. If a noteholder did
not purchase the shares available to them, those shares were made available to
the other noteholders participating in this offering. The Company received
proceeds of $1,406,205 as of April 10, 2000, including the exercise warrants of
375,000. All of these funds were received after February 29, 2000.
The Company has asked the 6.5% convertible promissory noteholders to release it
from any obligation it may have for a rights offering described in Note C.
NOTE E:
Development and License and Distribution Agreements
On December 30, 1996 the Company announced that it entered into an exclusive
license agreement with Medtronic, Inc. for the licensing of EchoMark(R) and
ColorMark(R) proprietary technologies for certain medical procedures. The total
payments to the Company under the December 1996 Medtronic Agreement have been
$265,000, including a payment of $65,000 pursuant to a termination agreement in
February 1999.
8
The Company entered into an exclusive license agreement dated February 27, 1997
with EP MedSystems, Inc. (EP MedSystems). The agreement provides that certain
products can be incorporated into the EP MedSystems' diagnostic catheter line.
The Company may potentially receive development milestone payments of up to
$150,000. Milestones include the sale of a limited quantity of product. When
products are commercially available the Company will receive royalties under the
terms of the agreement. The Company has received no milestone payment but it has
earned minimum royalties of $30,000 per quarter starting with calendar quarter
beginning January 1999 under this agreement. The agreement provides that any
royalty payment can be reduced, but not to an amount below zero, by an amount
equal to the amount of any dividends under the Company's Series B cumulative
preferred stock which are accrued but not paid as of that date. As of February
29, 2000, $146,666 of royalties due have been used to reduce accrued dividends.
As of February 29, 2000 the Company has $80,134 of accrued preferred stock
dividends, which is included as a component of other liabilities on the
accompanying Balance Sheet.
The Company entered into an option agreement on January 11, 1999 with another
company for the licensing of certain technology. The term of the option was
three months and the non-refundable consideration received for the option was
$100,000. The Company extended the option to June 11, 1999 for additional
consideration of $60,000, but did not renew the option beyond June 11, 1999. The
option has now expired.
The Company entered into an option agreement on April 16, 1999 with another
company for the licensing of certain technology. The term of the option was
three months, and the non-refundable consideration received for the option was
$35,000. The option has been extended at the election of the holder for up to
three one-month periods upon payment of a non-refundable fee to the Company of
$10,000 per month. As of September 20, 1999 a new agreement was reached
extending the term of the option for four additional months starting November 1,
1999 upon monthly payments of $10,000 per month.
NOTE F:
Preferred Stock Subscription Agreement
The Company entered into a subscription agreement dated February 27, 1997 with
EP MedSystems. EP MedSystems purchased 280,000 shares of the Company's Series B
cumulative convertible preferred stock for $1,400,000. The agreement provides
for an annual dividend of $.27 per share. The Company can redeem the preferred
stock if certain performance goals of the Class A common stock are achieved. The
Series B preferred stock is convertible into Class A common stock. The
conversion of Series B cumulative convertible preferred stock to Class A common
stock will be at the conversion rate of 1 share of Class A common stock for each
1.3 of series B cumulative convertible preferred stock.
NOTE G:
Net Loss Per Share
Basic and diluted net loss per common share for the relevant period is
calculated based upon net loss after cumulative Series B preferred stock
dividends of $37,800 and $18,900 for the six and three month periods ended
February 29, 2000 and February 28,1999, respectively, divided by the weighted
average number of shares of common stock outstanding during that period. For
purposes of the diluted loss per share calculation, the exercise or conversion
of all potential common shares is not included since their effect would be
antidilutive for all periods presented.
NOTE H:
Comprehensive Income
The net loss of $457,383 and $262,399 recorded for the three months ended
February 28, 1999 and February 29, 2000 and $1,139,158 and $1,001,189 recorded
for the six months ended February 28, 1999 and February 29, 2000, respectively,
is equal to the comprehensive loss for those periods.
9
NOTE I:
Bard Debt
On September 24, 1993, the Company entered into an exclusive worldwide
development, supply and license agreement with Bard Radiology, C.R. Bard, Inc.
(Bard). As part of this agreement, Bard provided to the Company an advance of
$540,000 in order to assist the Company with its manufacturing obligations. This
advance was evidenced by a note payable issued by the Company to Bard, which is
secured by virtually all of the Company's inventory, furniture and equipment.
The development, supply and license agreement was terminated on October 28,
1996. The note bears interest of prime plus 1% and was due December 31, 1998.
The carrying amount of this note approximates its fair value due to the variable
nature of interest rates. The principal and accrued interest due as of February
29, 2000 is $618,322.
On November 23, 1999, the Company reached an agreement to refinance its Bard
debt. In order to satisfy the Bard debt obligation, the Company was required to
make principal payments of $75,000 immediately, 10% of net funds that are
received from subsequent financing, licensing and royalty activity beginning
January 1, 2000 with a minimum payment of $150,000, and beginning with the first
quarter of 2001 and continuing thereafter 7.5% of net revenue and financing
received in that quarter, with a minimum payment of $75,000 every six months
until the indebtedness is repaid. Interest on the unpaid balance of the debt
shall accrue at the rate of prime plus1% and continue to accrue until full
payment of all principal and interest outstanding.
NOTE J:
Need for Additional Financing
At February 29, 2000, the Company had a working capital deficiency of $844,738.
The report of the Company's independent auditors on the Company's fiscal year
ended August 31, 1999 financial statements included an explanatory paragraph
which stated that the Company's recurring losses from operations, its net
capital deficiency, and negative working capital raises substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustment that might result from the outcome of this
uncertainty. The Company is in need of additional financing and does not expect
its existing cash, together with funds anticipated to be generated through
operations, to be sufficient to meet the Company's cash requirements beyond June
30, 2000.
The Company's ability to continue with its plans is contingent upon its ability
to obtain sufficient cash flow from operations or to obtain additional financing
from external sources. The Company expects that additional cash resources will
be available either through financing provided by the completion of license
agreements and strategic alliances, a rights offering or, if necessary, by
reducing the level of its operational expenses by deferring certain research and
development or marketing expenses. There can be no assurances that the Company
will be able to complete the aforementioned license agreements and strategic
alliances on acceptable terms or at all. The Company will need substantial
additional financing in order to continue development of and commercialize
certain of its proposed products and other potential products. The Company has
no binding commitments from any third parties to provide funds to the Company.
While the Company anticipates funding from private equity placements and other
sources, there can be no assurances that the Company will be able to obtain
financing from any other sources on acceptable terms or at all.
NOTE K:
Sale of Tax Benefits
As of December 20, 1999, The Company sold its tax benefits under the New Jersey
Corporation Business Tax Benefit Certificate Transfer Program for $447,956. Such
amount was recorded as tax benefit in the Statement of Operations. The Company
sold approximately $6,600,000 of its State net operating loss carryforwards
during the second quarter of fiscal 2000. Historically, the Company had
recognized a 100% valuation allowance against these net operating losses.
10
NOTE L:
Segment Information
The Company is managed and operated as one business. The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer. The Company does not operate separate lines of business or
separate business entities with respect to any of its products. In addition, the
Company does not directly conduct any of its operations outside of the United
States. Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have separate
reportable segments as defined by SFAS No. 131.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Certain statements in this Report on Form 10-QSB ("Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and elsewhere constitute "forward-looking statements" within the
meaning of Private Securities Litigation Reform Act of 1995, including, without
limitation, statements regarding future cash requirements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: limited
commercial operations; no assurances of success; need for additional financing;
uncertainty of market acceptance; reliance on collaborative agreements;
competition and rapid technological change; failure to receive or delays in
receiving regulatory approval; limited manufacturing and assembly experience;
limited marketing and sales experience; dependence upon, and need for, key
personnel; uncertain protection of patent and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; potential adverse impact of FDA and other government regulations;
limitations on third party reimbursement; potential adverse impact of
anti-remuneration laws; potential product liability; risk of loss in lawsuit;
risk of low prices stocks; and other factors referenced in this Report. When
used in this Report, statements that are not statements of material fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "anticipates," "plans," "intends," "estimates," "projects," "believes,"
"expects" and similar expressions are intended to identify such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Six Months Ended February 29, 2000 and February 28, 1999
Revenue:
The Company had revenues of $66,666 from royalty fees for the six months ended
February 29, 2000 as compared with license fees of $165,000 and product sales of
$23,759 for the six months ended February 28, 1999.
11
Research and Development:
Research and development expenses decreased $16,959, or 2.4%, during the six
months ended February 29, 2000 primarily attributable to the costs associated
with the reallocation of payroll and facilities costs that were partially offset
by increased material costs related to the development of the Company's
products.
Marketing, General and Administrative:
Marketing, general and administrative expenses decreased $15,339, or 2.8%,
primarily attributable to a reduction in consultant fees in the current year.
The consultant fees in fiscal 1999 related to the private placement activity.
This was partially offset by an increase in legal expenses in the current six
months related to the Form S-3 registration and the new private placement
described in Note C of the Notes to Condensed Financial Statements.
Interest Expense:
Interest expense increased $235,491, primarily attributable to the amortization
of debt issuance costs after the completion of the private placement in October
1999.
Tax Benefit:
The Company sold New Jersey tax benefits (see note K of the Notes to Condensed
Financial Statements) for $447,956 during the second quarter of fiscal 2000.
RESULTS OF OPERATIONS
Three Months Ended February 28, 1999 and February 29, 2000
Revenue:
The Company had revenues of $36,666 from royalties for the quarter ended
February 29, 2000, and revenues of $8,040 from product sales and $165,000 from
license fees for the quarter ended February 28, 1999.
Research and Development:
Research and development expenses increased $7,453, or 2.3%, during the three
months ended February 29, 2000. This is primarily attributable to the increased
purchasing activity and consultant activity related to the development of the
Company's products that was partially offset by costs associated with the
reallocation of facilities space and payroll costs.
Marketing, General and Administrative:
Marketing, general and administrative expenses decreased $8,351, or 3.1%,
primarily attributable to a reduction in consultants fees in the current year.
The consultant fees in fiscal 1999 related to the private placement activity.
This was partially offset by increases in legal expenses in the current fiscal
quarter relating to the Form S-3 registration, and the new private placement
described in Note D of the Notes to Condensed Financial Statements.
Interest Expense:
Interest expense increased $125,070, primarily attributable to the amortization
of debt issuance costs after the completion of the private placement in October
1999.
Tax Benefit:
The Company sold New Jersey tax benefits (see note K of the Notes to Condensed
Financial Statements) for $447,956 during the second quarter of fiscal 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
Need For Additional Financing
At February 29, 2000, the Company had a working capital deficiency of $844,738.
The report of the Company's independent auditors on the Company's fiscal year
ended August 31, 1999 financial statements included an explanatory paragraph
which stated that the Company's recurring losses from operations, its net
capital deficiency, and negative working capital raises substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustment that might result from the outcome of this
uncertainty. The Company is in immediate need of additional financing and does
not expect its existing cash, together with funds anticipated to be generated
through operations, to be sufficient to meet the Company's cash requirements
beyond June 30, 2000.
The Company's ability to continue with its plans is contingent upon its ability
to obtain sufficient cash flow from operations or to obtain additional financing
from external sources. The Company expects that additional cash resources will
be available either through financing provided by the completion of license
agreements and strategic alliances, a rights offering or, if necessary, by
reducing the level of its operational expenses by deferring certain research and
development or marketing expenses. There can be no assurances that the Company
will be able to complete the aforementioned license agreements and strategic
alliances on acceptable terms or at all. The Company will need substantial
additional financing in order to continue development of and commercialize
certain of its proposed products and other potential products. The Company has
no binding commitments from any third parties to provide funds to the Company.
While the Company anticipates funding from private equity placements and other
sources, there can be no assurances that the Company will be able to obtain
financing from any other sources on acceptable terms or at all.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
On October 16, 1997, EP MedSystems delivered to the Company a complaint
subsequently amended (the "Complaint") filed in the United States District Court
for the District of New Jersey (the "Court") in connection with the Company's
sale of securities to EP MedSystems pursuant to a Subscription Agreement, dated
as of February 27, 1997, by and between the Company and EP MedSystems. In the
Complaint, EP MedSystems alleges that the Company violated Section 10(b) of the
Exchange Act and committed common law fraud in connection with EP MedSystems'
purchase of securities from the Company. EP MedSystems requested unspecified
compensatory damages, costs, attorneys' fees and punitive damages. On November
26, 1997, pursuant to an order of the Court, the Company filed an Answer,
without prejudice to its right to move to dismiss the Complaint, denying the
material allegations of the Complaint, and asserting a counterclaim against EP
MedSystems seeking its costs and expenses in the action, including its
attorneys' fees, based on EP MedSystems' breach of the Subscription Agreement.
On October 20, 1998, the Court dismissed the suit with prejudice, but did not
decide on the Company's outstanding counterclaims against EP MedSystems. On June
9, 1999 EP MedSystems filed an appeal of that dismissal. If the appeal is
successful, the suit will be reinstated. The appellate court on December 7, 1999
heard oral arguments of the appeal. A decision on the matter is expected during
the next quarter.
Item 2: Private Placement Offering in lieu of Rights Offering
On February 23, 2000, the Company offered the convertible promissory noteholders
the opportunity to purchase four shares for every warrant they exercise at $.75
per share. The Company may issue a total of 1,500,000 million shares in this
offering. The number of shares that can be purchased is proportional to the
number of units purchased in the 6.5% convertible promissory note offering. For
each unit purchased in the 6.5% convertible promissory note offering, the
noteholder may purchase up to 14,850 new shares at $.75 plus exercising warrants
for 3,712 shares. If a noteholder does not purchase the shares available to
them, those shares will be made available to the noteholders participating in
such offering.
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The Company has asked the noteholders to release it from any obligation it may
have for a rights offering described in Note D.
If successful, the maximum proceeds received by the Company, including the
exercise warrants, will be $1,406,205. As of April 3, 2000 the Company has
received subscriptions for $1,337,657. None of these funds were received prior
to February 29, 2000.
Item 3: Defaults Upon Senior Securities - None
Item 4: Submission of Matters to a Vote of Security Holders - None
Item 5: Other Information - None
Item 6: Exhibits and Reports on Form 8-K
a) 27) Financial Data Schedule
b) None
10.29: Subscription Agreement, dated February 22, 2000 by and between the
Company and purchasers of 6.5% Convertible Promissory Notes
10.30: Escrow Agreement, dated February 22, 2000 by and among the Company and
Buchanan Ingersoll Professional Corporation
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 14, 2000
EchoCath, Inc.
----------------------------
(Registrant)
By: /s/ Frank DeBernardis
----------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
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