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 28, 1997
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
P.O. Box 7224, Princeton, NJ 08543
- ---------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code. . . (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 14, 1997
- ---------------------- -----------------------------
Class A Common Stock (No Par Value) 1,610,000
Class B Common Stock (No Par Value) 1,500,000
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, 1996 and February 28, 1997 (Unaudited) 3
Statements of Operations for the three months ended
February 29, 1996 (Unaudited), and February 28, 1997 (Unaudited) 4
Statements of Operations for the six months ended
February 29, 1996 (Unaudited) and for the period from
February 14, 1990 (date of inception) to February 28, 1997 (Unaudited) 5
Statements of Cash Flows for the three months ended February 29, 1996
(Unaudited), and February 28, 1997 (Unaudited) and for the period
from February 14, 1990 (date of inception) to
February 28, 1997 (Unaudited) 6 & 7
Notes to Financial Statements and Exhibits 8 & 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 9, 10 & 11
Part II: Other Information 11 & 12
Signatures 13
2
ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
August 31, 1996 February 28, 1997
--------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,387,691 $ 2,360,427
Trade receivable 6,125 --
Shareholder advance 101,899 --
Inventory 141,903 208,716
Prepaid expenses 150,288 109,618
----------- ------------
Total current assets 2,787,906 2,678,761
Furniture, equipment and leasehold improvements, net 254,604 342,434
Intangible assets, net 228,912 233,752
Other assets 29,862 29,686
----------- ------------
$ 3,301,284 $ 3,284,633
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 149,175 $ 135,923
Accrued expenses 352,286 346,632
Obligations under capital leases, current portion 23,015 22,447
----------- -----------
Total current liabilities 524,476 505,002
Obligations under capital leases 55,191 42,817
Note payable 540,000 540,000
Other liabilities 63,594 62,198
----------- -----------
Total liabilities 1,183,261 1,150,017
----------- -----------
Capital contribution subject to repayment 750,000 750,000
----------- -----------
Stockholders' equity:
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 and Class B Common Stock, (liquidation value
$1,400,000) -- 1,400,000
Class A Common Stock, no par value, 18,500,000 shares
authorized; 1,610,000 issued and outstanding 6,211,661 6,197,388
Class B Common Stock, no par value, 1,500,000 shares
authorized; 1,500,000 shares issued and outstanding, convertible into
one share of Class A Common Stock 3,348,470 3,348,470
Deficit accumulated during the development stage (8,192,108) (9,561,242)
----------- -----------
Total stockholders' equity 1,368,023 1,384,616
----------- -----------
$ 3,301,284 $ 3,284,633
=========== ===========
See accompanying notes to financial statements.
3
ECHOCATH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997
(UNAUDITED)
1996 1997
---- ----
REVENUE:
LICENSE FEES $ -- $ 150,000
COST OF SALES -- --
----------- -----------
GROSS PROFIT -- 150,000
OPERATING EXPENSES:
R&D 274,113 381,414
REPURCHASE OF TECHNOLOGY RIGHTS (SEE NOTE C) 575,000 --
MARKETING AND G&A 349,610 439,724
----------- -----------
TOTAL OPERATING EXPENSES 1,198,723 821,138
----------- -----------
LOSS FROM OPERATIONS (1,198,723) (671,138)
NET INTEREST INCOME (EXPENSE) (2,418) 8,108
----------- -----------
NET LOSS $(1,201,141) $ (633,030)
=========== ===========
NET LOSS PER SHARE $ (.93) $ (.28)
SHARES AND COMMON SHARE EQUIVALENT 1,287,270 2,277,000
4
ECHOCATH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997
(UNAUDITED)
1996 1997 FEBRUARY 14,
1990 (DATE OF
INCEPTION) TO
FEBRUARY 28,
1997
REVENUE:
SBIR GRANT INCOME $ -- $ -- $ 98,000
LICENSE FEES -- 150,000 425,000
PRODUCT SALES 12,580 100,452
--------- ------------ ------------
TOTAL REVENUE -- 162,580 623,452
COST OF SALES 4,303 258,600
--------- ----------- ------------
GROSS PROFIT -- 158,277 364,852
OPERATING EXPENSES:
R&D 437,487 738,041 7,170,302
REPURCHASE OF TECHNOLOGY RIGHTS
(SEE NOTE C) 575,000 -- 575,000
MARKETING AND G&A 560,152 805,430 5,300,791
---------- ----------- ------------
TOTAL OPERATING EXPENSES 1,572,639 1,543,471 13,046,093
LOSS FROM OPERATIONS (1,572,639) (1,385,194) (12,681,241)
NET INTEREST INCOME (EXPENSE) (32,690) 16,060 (83,270)
----------- ------------ ------------
NET LOSS $(1,605,329) $(1,369,134) $(12,764,511)
=========== ============ ============
NET LOSS PER SHARE $ (1.50) $ (.60)
SHARES AND COMMON SHARE EQUIVALENT 1,069,530 2,277,000
5
EchoCath, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
Six Months ended February 29, 1996,
February 28, 1997 and the period from
February 14, 1990 (date of inception)
to February 28, 1997
(unaudited)
1996 1997 February 14, 1990
(date of inception) to
February 28, 1997
Cash flows from operating activities:
Net loss $ (1,605,329) $(1,369,134) $ (12,764,511)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 32,247 57,046 317,669
Loss on write-off of intangible assets -- -- 2,000
Change in operating assets & liabilities:
(Increase) decrease in accounts receivable -- 7,192 (1,933)
(Increase) decrease in inventory (8,396) (66,813) (170,079)
(Increase) decrease in prepaid expenses (65,719) 39,603 (107,686)
(Increase) decrease in other assets -- (8,343) (29,686)
(Increase) decrease in deferred offering costs 328,236 -- --
Increase (decrease) in accounts payable (172,657) 30,594 137,775
Increase (decrease) in accrued
expenses and due to (from) related parties (605,515) (42,376) 303,048
---------- ----------- ----------
Net cash used in operating activities (2,097,133) (1,352,231) (12,313,403)
========== =========== ==========
Cash flows from investing activities:
Purchase of furniture, equipment and
leasehold improvements (60,000) (136,135) (512,687)
Purchase of intangible assets 13,473 (13,581) (269,437)
---------- ----------- ----------
Net cash used in investing activities (46,527) (149,716) (782,124)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from partner borrowings -- -- 840,000
Principal payments on partner borrowings -- -- (840,000)
Proceeds from borrowings of notes payable -- -- 1,925,000
Principal payments on borrowings of notes payable (370,000) -- (1,385,000)
Advance to shareholder (101,899) -- (101,899)
Repayment from shareholder -- 101,899 101,899
Additions to capital lease obligations -- -- 50,000
Principal payment on capital lease obligations (5,623) (12,943) (75,370)
Capital contribution for repurchase
of technology rights 75,000 -- 75,000
Proceeds from obligation to issue common stock -- -- 1,725,368
Net proceeds from issuance of capital stock -- -- 2,826,268
Capital increase from settlement of
prior obligations -- -- 17,200
Proceeds from partner capital contributions -- -- 2,700,100
Net proceeds from initial public
offering and over-allotment option 6,219,878 (14,273) 6,197,388
Proceeds from issuance of preferred stock -- 1,400,000 1,400,000
---------- ----------- ----------
Net cash provided by financing activities 5,817,356 1,474,683 15,455,954
---------- ----------- ----------
Net increase (decrease) in cash 3,673,696 (27,264) 2,360,427
Cash, beginning of period 14,186 2,387,691 --
---------- ----------- ----------
Cash, end of period $ 3,687,882 $ 2,360,427 $ 2,360,427
---------- ----------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 32,690 $ 31,712 $ 252,951
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6
( continued)
Supplemental disclosure of noncash transactions:
Equipment transferred from partner $ -- $ -- $ 48,604
------------ ----------- ------------
Inventory transferred from partner $ -- $ -- $ 38,635
------------ ---------- ------------
Capital lease obligation transferred from partner $ -- $ -- $ 25,506
------------ ---------- ------------
Equipment acquired under capital lease $ -- $ -- $ 115,128
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7
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ECHOCATH, INC. (A DEVELOPMENT STAGE ENTERPRISE)
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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 EchoCath, Inc. (the "Company") management 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 ending August 31, 1997.
In the opinion of Management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position,
results of operation and cash flows at February 29, 1996 and February 28, 1997
have been made.
NOTE B:
In January 1996, the Company completed its initial public offering consisting of
1,400,000 units. Each unit consists of one share of Class A Common Stock, one
Class A Redeemable Warrant, and one Class B Redeemable Warrant. The proceeds
from the offering before expenses were $7,000,000.
In February 1996, the over-allotment option to purchase 210,000 units was
exercised by the underwriter and this resulted in additional proceeds of
$1,050,000 before expenses.
NOTE C:
In January 1996, the Company entered into an agreement to repurchase, for
$575,000, certain technology rights. Of such amount, $500,000 was paid from
proceeds of the initial public offering and $75,000 was reflected as a capital
contribution. The Company recognized a $575,000 charge to operations relating to
this agreement to repurchase.
NOTE D:
Inventories are summarized as follows:
February 28, 1997
Raw Materials 76,316
Finished Goods 132,400
--------
208,716
========
NOTE E:
On July 7, 1995, the Company entered into an agreement to amend its previously
existing agreement with Alliance Partners (Alliance). In accordance with the new
agreement, the partners of Alliance and certain other entities and individuals
became entitled to receive a 35% equity interest in the Company in exchange for
Alliance's repayment of the Company's $750,000 of outstanding borrowings under
the Company's bank demand note payable, which was paid in full in August 1995.
The payment of such indebtedness is to be treated as a capital contribution;
however, if a portion of the Class B warrants to be issued in connection with
the initial public offering are subsequently exercised providing the Company
with $23,040,000 in proceeds, then $750,000 of such proceeds will be repaid to
Alliance. Accordingly, the $750,000 received from Alliance is reflected as
"Capital contribution subject to repayment" in the accompanying balance sheet.
8
NOTE F:
The Company entered into an agrement dated December 30, 1996 with Medtronic,
Inc. for the licensing of EchoMark'r' and ColorMark'r' proprietary technologies
for certain medical procedures. Under the agreement the Company will receive a
series of payments totaling $950,000 after the completion of certain milestones.
When commercially available the Company will receive royalties under the terms
of the agreement.
NOTE G:
LICENSE AGREEMENT
The Company entered into an agreement dated February 27, 1997 for an exclusive
license agreement with EP MedSystems, Inc. (EP MedSystems). The agreement
provides that certain products can be incorporated into the EP MedSystems'
diagnostic catheter line. The Company expects to receive development milestone
payments totaling $700,000. The milestones include the testing of a limited
series of patients, system capability demonstration, and the sale of a limited
quantity of product. When commercially available the Company will receive
royalties under the terms of the agreement. The agreement provides that any
royalty payment can be offset by an amount equal to the amount of any dividends
under the Series B Cumulative Convertible Preferred Stock which are accrued but
not paid as of a certain date.
PREFERRED STOCK SUBSCRIPTION AGREEMENT
The Company entered into a subscription agreement dated February 27, 1997, EP
MedSystems purchased 280,000 shares of 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 1.2 shares of Series B
Cumulative Preferred Stock through 1999. Thereafter, the conversion rate shall
be 1 share of Class A Common Stock issuable for each 1.3 shares of Series B
Cumulative Convertible Preferred Stock.
NOTE H:
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the respective periods. The Company's common stock
equivalents (preferred stock, warrants and stock options) outstanding have not
been included, as the computation would not be diluted.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Certain statements in this quarterly Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
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: delays in product development;
problems or delays with clinical trials; failure to
9
receive or delays in receiving regulatory approval; lack of enforceability
of patents and proprietary rights; lack of reimbursement; general economic and
business conditions; industry capacity; industry trends; demographic changes;
competition; material costs and availability; the loss of any significant
customers; changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; changes in, or
the failure to comply with, government regulations; and other factors referenced
in this Report.
RESULTS OF OPERATION
Six Months Ended February 28, 1997 and February 29, 1996
REVENUE:
The Company had revenue of $162,580 for the six months ended February 28, 1997
and no revenue for the six months ended February 29, 1996. License fees
represented 92.3% of the revenue and the balance of 7.7% was product sales. Cost
of sales represents 2.7% of total revenue.
RESEARCH AND DEVELOPMENT:
Research and Development (R&D) expenses increased 68.7% during the six months
ended February 28, 1997 because of Food and Drug Administration compliance
reviews, new hires, additional material purchases, and increased rent as a
result of an extended lease agreement for the building that the Company
occupies. R & D expenses for 1996 were net of the repurchase of certain
technology rights for $575,000 that is set out in a separate line in the
Statement of Operations when making the comparisons.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, General and Administative (S,G, & A) expenses increased 43.8% during
the six months ended February 28, 1997 because of salary and related cost
as a result of a new hire, employment contracts with senior management and
classification of more management time to administration. Other factors of less
significance were increases in insurance expenses, a new building lease
agreement, an increase in consultant expenses, and costs associated with the
Company's first meeting of shareholders since its initial public offering.
RESULTS OF OPERATION
Three Months Ended February 28, 1997 and February 29, 1996
REVENUE:
The Company had revenue of $150,000 for the three months ended February 28, 1997
and no revenue for the three months ended February 29, 1996. License fees
represented 100% of such revenue.
RESEARCH AND DEVELOPMENT:
R & D expenses increased 39.1% during the three months ending February 28, 1997
because of Food and Drug Administration compliance reviews, new hires,
additional material purchases, and increased rent as a result of an extended
lease agreement for the building that the Company occupies. R & D expenses for
1996 were net of the repurchase of certain technology rights for $575,000 that
is set out in a separate line in the Statement of Operations when making the
comparisons.
SELLING, GENERAL AND ADMINISTRATIVE:
S, G & A expenses increased 25.8% during the three months ended February 28,
1997 because of salary and related cost as a result of a new hire, employment
contracts with senior management and classification of more management time to
administration. Other factors of less significance were increases in insurance
10
expenses, a new building lease agreement, an increase in consultant expenses,
and costs associated with the Company's first meeting of shareholders since its
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its current cash, together with revenues expected
to be derived from sales of certain of its products and license fees, should be
sufficient to fund research, development, testing, regulatory requirements,
operating and other capital needs through the next twelve months. The Company
may need substantial additional financing in order to continue development of
and commercialize certain of its proposed products and other potential products
after March 1998. The Company has no binding commitments from any third parties
to provide funds to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128 establishes standards for computing and presenting earnings per share. In
accordance with the effective date of SFAS 128, the Company will adopt SFAS 128
as of February 28, 1998. This statement is not expected to have a material
impact on the Company's financial statements.
PART II: OTHER INFORMATION
Item 2: Changes in Securities
AI) The most significant effect of the issuance of Series B Preferred
Stock on the registered Class A Common Stock is as follows:
1) An annual dividend of $.27 per share is provided for the
Series B Preferred Shareholder.
2) The holder of Series B Preferred Stock is entitled to vote the
number of votes equal to the number of Class A Common Stock
into which such shares of Series B Preferred Stock is
convertible.
3) The holder of Series B Preferred Stock has certain optional
conversion rights to Class A Common Stock. The conversion rate
is 1 share of Class A Common Stock for each 1.2 shares of
Series B Preferred Stock through 1999 and 1.3 shares of
Series B Preferred Stock to 1 share of Class A Common Stock
thereafter.
4) Series B Preferred Stock precedes any Common Stock in
liquidation.
Copy of Certificate of Amendment to the Certificate of
Incorporation of the Company attached as Exhibit 3.
AII) Copy of Subscription Agreement to purchase Series B Cumulative
Convertible Preferred Stock attached as Exhibit 4 (see
description in Note G).
Item 4: Submission of Matters to a Vote of Security Holders
A) The Company held its annual meeting of shareholders on February 7, 1997.
B) The shareholders elected a board of seven directors to serve until the
next annual meeting of shareholders. The following directors were
elected:
Frank A. DeBernardis................ Chief Executive Officer, President and Director
David Vilkomerson................... Executive Vice President, Director of Research
and Development, Assistant Secretary and Director
Terence D. Wall..................... Co-Chairman of the Board of Directors
Daniel M. Mulvena................... Co-Chairman of the Board of Directors
Anthony J. Dimun.................... Director
Irwin M. Rosenthal.................. Secretary and Director
Herbert Moskowitz................... Director
11
C) The following matters were voted upon by the stockholders:
1) The election of seven directors as follows:
6,356,595 votes were cast in favor of and 1,300 abstained for
Frank A. DeBernardis, David Vilkomerson, Terence D. Wall, Daniel
M. Mulvena, and Anthony J. Dimun. 5,417,705 votes were cast in
favor of and 940,190 abstained for Irwin M. Rosenthal and Herbert
Moskowitz.
2) The Company's 1995 Stock Option Plan was amended to increase the
number of shares of Class A Common Stock for which options may be
granted from 220,000 to 620,000. The vote was 5,406,605 for and
951,290 votes against.
3) The Company's Investment Plan was approved by a vote of 5,414,505
for and 943,390 against.
4) KPMG Peat Marwick was selected as independent public accountants
for the fiscal year 1997 by a vote of 5,417,805 for, 1,200
against and 938,890 abstained.
Item 6: Exhibits and Reports on Form 8-K
A) Exhibits
3 Certificate of Amendment of Incorporation
4 Subscription Agreement to Purchase Series B Preferred Stock
27 Financial Data Schedule
B) There were no reports on Form 8-K filed during the quarter ended
February 28, 1997.
12
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, 1997
EchoCath, Inc.
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(Registrant)
By: /s/ Frank DeBernardis
--------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
13