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 May 31, 2001
------------
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
- -------------------------------------------------------------------------------
(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 July 13, 2001
- ---------------------- ----------------------------
Class A common stock (No Par Value) 10,213,609
Transitional Small Business Disclosure Format (check one)
YES NO X
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1
PART I: FINANCIAL INFORMATION
PART II: OTHER INFORMATION
ECHOCATH, INC.
INDEX
Item 1: Financial Statements Page
----
Balance Sheets,
August 31, 2000 and May 31, 2001 (Unaudited) 3
Statements of Operations for the three months ended
May 31, 2000 (Unaudited), and May 31, 2001 (Unaudited) 4
Statements of Operations for the nine months ended
May 31, 2000 (Unaudited), and May 31, 2001 (Unaudited) 5
Statements of Cash Flows for the nine months ended
May 31, 2000 (Unaudited), and May 31, 2001 (Unaudited) 6
Notes to Financial Statements 7 - 10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 10 - 13
Signatures 14
2
Item 1: Financial Statements
ECHOCATH, INC.
BALANCE SHEETS
ASSETS
August 31, 2000 May 31, 2001
--------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 822,704 $ 274,491
Inventory 115,392 72,416
Prepaid expenses and other current assets 68,024 41,374
------------ ------------
Total current assets 1,006,120 388,281
Furniture, equipment and leasehold improvements, net 133,795 72,652
Intangible assets, net 325,528 334,560
Debt issuance cost, net 693,807 361,654
Other assets 26,393 25,421
------------ ------------
Total assets $ 2,185,643 $ 1,182,568
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable-shareholder-net of unamortized discount of $69,000 $ -- $ 131,000
Notes payable-other 150,000 150,000
Obligations under capital leases 14,119 6,350
Accounts payable 127,423 66,038
Accrued expenses 709,864 796,235
Deferred revenue 50,000 --
------------ ------------
Total current liabilities 1,051,406 1,149,623
Note payable, less current portion 126,000 --
Convertible notes 2,112,500 1,763,500
Obligations under capital leases, less current portion 6,566 2,408
Other liabilities 261,146 131,096
------------ ------------
Total liabilities 3,557,618 3,046,627
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 5,000,000 shares authorized; 280,000 shares of
Series B cumulative convertible issued and
outstanding, (liquidation value $1,400,000) 1,393,889 1,393,889
Class A common stock, no par value, 50,000,000 shares authorized;
10,213,609 issued and outstanding as of May 31, 2001 and 7,809,731 as
of August 31, 2000 14,993,092 16,332,950
Accumulated deficit (17,758,956) (19,590,898)
------------ ------------
Total stockholders' deficit (1,371,975) (1,864,059)
------------ ------------
Total liabilities and stockholders' deficit $ 2,185,643 $ 1,182,568
============ ============
See accompanying notes to financial statements.
3
ECHOCATH, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2000 AND
MAY 31, 2001
(UNAUDITED)
2000 2001
---- ----
Revenues:
Royalty and license fees $ 40,000 $ 278,900
Product sales 7,500 --
----------- -----------
47,500 278,900
Cost of sales 5,767 --
----------- -----------
Gross profit 41,733 278,900
Operating expenses:
Research and development 402,817 389,574
Marketing, general and administrative 219,525 210,343
----------- -----------
Total operating expenses 622,342 599,917
----------- -----------
Loss from operations (580,609) (321,017)
Net interest expense 139,812 95,034
----------- -----------
Net loss (720,421) (416,051)
Preferred stock dividends 18,900 18,900
----------- -----------
Net loss to common stockholders $ (739,321) $ (434,951)
=========== ===========
Basic and diluted net loss per share $ (.17) $ (.05)
Weighted average shares outstanding 4,339,000 9,495,000
See accompanying notes to financial statements.
4
ECHOCATH, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 2000 AND
MAY 31, 2001
(UNAUDITED)
2000 2001
---- ----
Revenues:
License and development fees and royalties $ 106,666 $ 354,634
Product sales 7,500 --
----------- -----------
Total revenue 114,166 354,634
Cost of sales 5,767 --
----------- -----------
Gross profit 108,399 354,634
Operating expenses:
Research and development 1,104,678 1,366,454
Marketing, general and administrative 760,438 736,736
----------- -----------
Total operating expenses 1,865,116 2,103,190
----------- -----------
Loss from operations (1,756,717) (1,748,556)
Net interest expense 412,849 309,737
----------- -----------
Loss before tax benefit (2,169,566) (2,058,293)
Tax benefit 447,956 283,051
----------- -----------
Net loss (1,721,610) (1,775,242)
Preferred stock dividends 56,700 56,700
----------- -----------
Net loss to common stockholders $(1,778,310) $(1,831,942)
=========== ===========
Basic and diluted net loss per share $ (.55) $ (.21)
Weighted average shares outstanding 3,245,000 8,696,000
See accompanying notes to financial statements.
5
EchoCath, Inc.
Statements of Cash Flows
Nine Months ended May 31, 2000
and May 31, 2001
(Unaudited)
2000 2001
---- ----
Cash flows from operating activities:
Net loss $(1,721,610) $(1,775,242)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 86,896 89,879
Amortization of debt issuance costs 192,249 224,342
Change in operating assets and liabilities:
Increase in royalties receivable -- (56,700)
(Increase) decrease in inventory (92,062) 42,976
Decrease in prepaid expenses and other current assets 37,654 26,650
Decrease in other assets 32,951 972
Decrease in accounts payable (71,845) (61,385)
(Decrease) increase in accrued expenses (260,706) 86,371
Decrease in other liabilities (58,714) (100,380)
Increase (decrease) in deferred revenue 50,000 (50,000)
----------- -----------
Net cash used in operating activities (1,805,187) (1,572,517)
----------- -----------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements (10,350) (5,782)
Purchases of intangible assets (62,019) (31,987)
----------- -----------
Net cash used in investing activities (72,369) (37,769)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (12,308) (11,927)
Principal payments on note payable (119,469) (126,000)
Gross proceeds from convertible notes 1,150,000 --
Proceeds from issuance of shares of and warrants for Class A
common stock 1,405,888 1,000,000
Proceeds from shareholder loan -- 200,000
----------- -----------
Net cash provided by financing activities 2,424,111 1,062,073
----------- -----------
Net increase(decrease) in cash and cash equivalents 546,555 (548,213)
Cash and cash equivalents, beginning of year 26,264 822,704
----------- -----------
Cash and cash equivalents, end of period $ 572,819 $ 274,491
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 3,863 $ 1,597
=========== ===========
Supplemental disclosure of non-cash information:
Issuance of warrants in connection with private placements 991,718 --
----------- -----------
Issuance of warrants in connection with notes payable-shareholder -- 69,000
----------- -----------
Class B dividend payable offset against royalties receivable 56,700 56,700
----------- -----------
Converted Convertible Promissory Notes into Class A common stock -- 349,000
----------- -----------
Converted interest payable into Class A common stock -- 29,669
----------- -----------
Debt issuance costs applicable to convertible promissory note $ -- $ 107,811
----------- -----------
See accompanying notes to financial statements.
6
ECHOCATH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
NOTE A: General and Business
- -----------------------------
The interim 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 interim financial statements are 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, 2000.
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 I
for discussion of the Company's Need for Additional Financing. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly the
financial position as of May 31, 2001 and the results of operations for the
three months ended May 31, 2000 and May 31, 2001 and the statement of operations
and cash flows for the nine months ended May 31, 2000 and May 31, 2001 have been
made.
NOTE B:
- -------
Inventory
- ---------
Inventory as of August 31, 2000 and May 31, 2001 consists entirely of raw
materials.
NOTE C:
- -------
Sale of Units
- -------------
On November 15, 2000 a Director of the Company, Joseph Prischak, purchased
1,333,333 units for $0.75 per unit for which the Company received $1,000,000 in
net proceeds. Each unit consisted of a share of Class A common stock and a
three-year warrant to purchase an additional share of Class A common stock at
$0.75 per share.
NOTE D:
- -------
Recently Issued Accounting Standards
- ------------------------------------
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 requires the Company to adopt its guidance not later than the fourth
quarter of its fiscal year 2001 with a cumulative effect of change in accounting
principle calculated as of September 1, 2000. We are evaluating SAB 101 and the
effect it may have on our financial statements and its current revenue
recognition policy.
NOTE E:
- -------
Net Loss Per Share
- ------------------
Basic and diluted net loss per common share for the relevant periods is
calculated based upon net loss after cumulative Series B preferred stock
dividends of $18,900 for the three months ended May 31, 2000 and May 31, 2001
and $56,700 for the nine month period ended May 31, 2000 and May 31, 2001,
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 the three and nine month
periods presented.
7
NOTE F:
- -------
Short-Term Secured Note Agreement
- ---------------------------------
On May 29, 2001, the Company entered into a secured loan agreement with Joseph
Prischak, a Director of the Company. The terms of the transaction provided for a
six-month loan of $200,000 bearing interest at 6.5%. In connection with the loan
a warrant for the purchase of 575,000 shares of Class A Common Stock was issued
as of June 1, 2001 at an exercise price of $0.14. The fair value of the warrant
amounted to $69,000, it is accounted for as a discount on the debt which will be
amortized over the six-month term of the debt. The loan is secured by the
Company's patent portfolio.
NOTE G:
- -------
Notes Payable
- -------------
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.
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 for calendar 2000, 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 plus 1% and
continue to accrue until full payment of all principal and interest outstanding.
The note is secured by virtually all of the Company's inventory, furniture and
equipment. The principal and accrued interest due as of May 31, 2001 is
$278,783. As of June 30, 2001, the Company is in default of its refinancing
agreement, but it is currently in negotiations to extend the terms of the
agreement.
NOTE H:
- -------
Need for Additional Financing
- -----------------------------
At May 31, 2001 the Company had a working capital deficit of $761,342. The
report of the Company's independent auditors on the Company's fiscal year ended
August 31, 2000 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 July
2001.
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, sale of Class A common stock 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.
8
NOTE I:
- -------
Segment Information
- -------------------
The Company is managed and operated as one business. A single management team
that reports to the Chief Executive Officer comprehensively manages the entire
business. 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, Disclosure about Segments of an
Enterprise and Related Information.
NOTE J:
- -------
Sale of Tax Benefits
- --------------------
As of January 5, 2001, the Company sold certain of its state net operating loss
carryforwards under the New Jersey Corporation Business Tax Benefit Certificate
Transfer Program for $283,051. As of December 20, 1999, the Company sold
$447,956 of similar benefits under the program.
NOTE K:
- -------
ColorMark License Agreement
- ---------------------------
On April 24, 2001, the Company entered into an exclusive license agreement with
Critical Care Innovations, Inc. ("CCI") for its ColorMark technologies. The
terms of the agreement requires CCI to pay a non-refundable license fee of
$1,100,000. This fee includes prior payments of $115,000 and $210,000 upon
signing of the agreement, $400,000 upon the first anniversary and $375,000 upon
the second anniversary. During the quarter ended May 31, 2001, revenue of
$260,000 was recognized.
NOTE L:
- -------
Subsequent Event
- ----------------
The Company announced on July 7, 2001 that it was required to furlough without
pay all of its employees because of a lack of cash reserves. Operations continue
with senior executives who are not receiving compensation and a few consultants,
during its efforts to seek bridge financing and new equity and or debt
financing.
NOTE M:
- -------
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 December 3, 1997, EP MedSystems filed an amended complaint, also alleging
violations of ss.10(b) of the Exchange Act, and common law fraud. Pursuant
to Court order, the Company's answer was due December 10, 1997, also without
prejudice to the Company's right to move to dismiss. On December 10, 1997, the
Company filed an answer to the amended complaint; again denying the material
allegations of the complaint, and asserting a counterclaim against EP MedSystems
based on EP MedSystems' breach of the Subscription Agreement. On December 17,
1997, the Company served on EP MedSystems a motion to dismiss the Complaint. On
October 20, 1998, the Court dismissed the suit with prejudice, but did not
9
decide on the Company's outstanding counterclaims against EP MedSystems. On June
9, 1999 EP MedSystems filed an appeal of that dismissal. The appellate court on
December 7, 1999 heard oral arguments of the appeal. On December 26, 2000, the
third circuit court of appeals reversed in part the Court's orders dismissing
the action. There can be no assurance that the Company will prevail in this
matter, which could have a material adverse effect on the Company's operations,
financial position and cash flows.
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
- ---------------------
Nine Months Ended May 31, 2001 and May 31, 2000.
Revenue:
- --------
The Company had revenues of $354,634 from royalty fees for the nine months ended
May 31, 2001 as compared with $106,666 from royalty fees and $7,500 from product
sales as of May 31, 2000. In fiscal year 2001, the Company recognized $260,000
from a license agreement.
Research and Development:
- -------------------------
Research and Development expenses increased $261,776 or 23.7% during the nine
months ended May 31, 2001.This was primarily attributable to costs related to
development work on EchoFlow such as payroll, consultants and materials.
10
Marketing, General and Administrative:
- --------------------------------------
Marketing, General and Administrative expenses decreased $23,701 or 3.2%
primarily attributable to a decrease in legal expenses from the private
placement and rights offering in the nine month period ended May 31, 2000.
Interest Expense:
- -----------------
Interest expense decreased $103,313 or 25%, primarily attributable to a
reduction in the amortization of debt issuance costs because of a significant
amount of conversions from Convertible Notes to Class A common stock in the nine
months ending May 31, 2001.
Tax Benefit:
- ------------
The Company sold New Jersey tax benefits (see Note K of the Notes to Financial
Statements) for $283,051 for the nine months ending May 31, 2001 and $447,956 of
similar benefits for the nine months ending May 31, 2000.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended May 31, 2001 and May 31, 2000.
Revenue:
- --------
The Company had revenues of $278,900 from royalty fees for the quarter ended May
31, 2001, as compared with $40,000 from royalty fees and $7,500 from product
sales for the quarter ended May 31, 2000. In fiscal year 2001, the Company
recognized $260,000 from a second license agreement.
Research and Development:
- -------------------------
Research and Development expenses decreased $13,243 or 3.3% during the quarter
ended May 31, 2001. This was primarily attributable to costs related to the
rental of ultrasound equipment during the quarter ended May 31, 2000.
Marketing, General and Administrative:
- --------------------------------------
Marketing, General and Administrative expenses decreased $9,182 or 4.2% during
the quarter ended May 31, 2001. This was primarily attributable to an increase
in shows and exhibits related to EchoFlow during the quarter ended May 31, 2000.
Interest Expense:
- -----------------
Interest expense decreased $44,778 or 32%during the Quarter ended May 31, 2001.
This was primarily attributable to a reduction in the amortization of debt
issuance costs because of a significant amount of conversions from Convertible
Notes to Class A Common Stock in the nine months ended May 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Need For Additional Financing
- -----------------------------
At May 31, 2001 the Company had a working capital deficit of $761,342. The
report of the Company's independent auditors on the Company's fiscal year ended
August 31, 2000 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 July 2001.
11
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, sale of Class A common stock 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 December 3, 1997, EP MedSystems filed an amended complaint, also alleging
violations of ss.10(b) of the Exchange Act, and common law fraud. Pursuant
to Court order, the Company's answer was due December 10, 1997, also without
prejudice to the Company's right to move to dismiss. On December 10, 1997, the
Company filed an answer to the amended complaint; again denying the material
allegations of the complaint, and asserting a counterclaim against EP MedSystems
based on EP MedSystems' breach of the Subscription Agreement. On December 17,
1997, the Company served on EP MedSystems a motion to dismiss the Complaint. 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. The appellate court on
December 7, 1999 heard oral arguments of the appeal. On December 26, 2000, the
third circuit court of appeals reversed in part the Court's orders dismissing
the action. There can be no assurance that the Company will prevail in this
matter, which could have a material adverse effect on the Company's operations,
financial position and cash flows.
Item 2: Changes in Securities and Use of Proceeds - Short-Term Secured Note
Agreement
On May 29, 2001, the Company entered into a secured loan agreement with Joseph
Prischak, a Director of the Company. The terms of the transaction provided for a
six-month loan of $200,000 bearing interest at 6.5%. A warrant for the purchase
of 575,000 shares of Class A Common Stock was issued as of June 1, 2001 at an
exercise price of $0.14. The loan is secured by the Company's patent portfolio.
Item 3: Defaults Upon Senior Securities - Bard Note
The principal and accrued interest due as of May 31, 2001 is $278,783. As of
June 30, 2001, the Company is in default of its refinancing agreement, as a
result of not making a $54,000 payment due on that date. The Company is
currently in negotiations to extend the terms of the agreement.
12
Item 4: Submission of Matters to a Vote of Security Holders - None
Item 5: Other Information
The Company announced on July 7, 2001 that it was required to furlough without
pay all of its employees because of a lack of cash reserves. Operations continue
with senior executives who are not receiving compensation and a few consultants,
during its efforts to seek bridge financing and new equity and or debt
financing.
Item 6: Exhibits and Reports on Form 8-K
10.30 Amended and Restated License and Development Agreement
10.31 Shareholder Note and Warrant
13
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: July 16, 2001
EchoCath, Inc.
----------------------------
(Registrant)
By: /s/ Frank DeBernardis
----------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
14