UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001
------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission File Number: 0-28260
EP MEDSYSTEMS, INC.
-------------------
(Exact name of small business issuer as specified in its charter)
New Jersey 22-3212190
- --------------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Stierli Court, Mount Arlington, New Jersey 07856
- ---------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(973) 398-2800
--------------
(Issuer's telephone number)
Check whether the 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. |X| Yes
|_| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at November 12, 2001
----- --------------------------------
Common Stock, without par value 13,861,217 shares
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB
CONTENTS
PART I -- FINANCIAL INFORMATION Page
------
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 2001 (unaudited) 3
Consolidated Statements of Operations for three months
ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Operations for nine months 5
ended September 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows for nine months
ended September 30, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-13
Item 2. Management's Discussion and Analysis or Plan of Operation 13-23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23-25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25-26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures and Exhibit Index 26
2
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2001
-------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 810,228
Accounts receivable, net of allowances for
doubtful accounts of $57,689 2,948,682
Inventory, net 2,237,084
Prepaid expenses and other current assets 646,190
-------------
Total current assets 6,642,184
Property and equipment, net 2,321,759
Intangible assets, net 400,823
Other assets 127,507
-------------
Total assets $ 9,492,273
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,243,182
Accrued expenses 688,231
Deferred warranty revenue and prepaid rent income 147,693
Customer Deposits 42,000
Current portion of long-term debt 33,034
-------------
Total current liabilities 2,154,140
Note Payable to Medtronic, Inc. 3,200,000
Long-term debt, less current portion 412,498
Non-current deferred warranty revenue 129,894
-------------
Total liabilities $ 5,896,532
-------------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $.001 stated value, 25,000,000
shares authorized, 13,861,217 shares issued
and outstanding $ 13,861
Additional paid-in capital 29,849,394
Deferred Offering Costs (333,383)
Receivable from executive officers (320,000)
Accumulated deficit (25,614,131)
-------------
Total shareholders' equity 3,595,741
-------------
Total liabilities and shareholders' equity $ 9,492,273
=============
The accompanying notes are an integral part of these statements.
3
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
September 30, September 30,
2001 2000
------------- -------------
Net sales $ 2,482,654 $ 2,717,092
Cost of products sold 1,145,723 1,252,808
------------- -------------
Gross profit 1,336,931 1,464,284
Operating costs and expenses:
Sales and marketing expenses 1,195,310 1,174,289
General and administrative expenses 544,551 621,708
Research and development expenses 633,551 636,792
------------- -------------
Loss from operations (1,036,481) (968,505)
Interest (expense) income, net (81,510) (12,514)
Other income, net 13,026 4,146
------------- -------------
Net loss $ (1,104,965) $ (976,873)
============= =============
Basic and diluted loss per share $ (0.08) $ (0.08)
============= =============
Weighted average shares outstanding used
to compute basic and diluted loss per share 13,806,869 11,988,808
============= =============
The accompanying notes are an integral part of these statements.
4
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended
September 30, September 30,
2001 2000
------------- -------------
Net sales $ 6,964,394 $ 7,756,310
Cost of products sold 3,227,699 3,727,065
------------- -------------
Gross profit 3,736,695 4,029,245
Operating costs and expenses:
Sales and marketing expenses 3,481,580 3,651,460
General and administrative expenses 1,624,759 1,718,329
Research and development expenses 1,931,993 2,043,744
------------- -------------
Loss from operations (3,301,637) (3,384,288)
Interest (expense) income, net (251,161) 4,553
Other income, net 421,733 221,189
------------- -------------
Net loss $ (3,131,065) $ (3,158,546)
============= =============
Basic and diluted loss per share $ (0.24) $ (0.27)
============= =============
Weighted average shares outstanding used
to compute basic and diluted loss per share 13,197,054 11,705,126
============= =============
The accompanying notes are an integral part of these statements.
5
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
September 30, September 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net loss $ (3,131,065) $ (3,158,546)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 638,979 543,915
Bad Debt Expense 8,667 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (445,700) 525,706
(Increase) in inventories (123,964) (94,664)
(Increase) decrease in prepaid and other current assets (533,537) 28,944
(Decrease) in payables due to related parties (75) (187,320)
Increase (decrease) in accounts payable 329,082 (186,855)
Increase (decrease) in accrued expenses, deferred
revenue and customer deposits 297,864 (283,642)
------------- -------------
Net cash (used in) operating activities $ (2,959,749) $ (2,812,462)
------------- -------------
Cash flows from investing activities:
Capital expenditures (123,353) (1,109,960)
------------- -------------
Net cash (used in) investing activities $ (123,353) $ (1,109,960)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of warrants -- 718,375
Proceeds from exercise of stock options 1,600 929,221
Net borrowings under notes payable 1,551,190 --
Net (payments) borrowings - revolving line of credit (761,560) 1,515,247
Net proceeds from issuance of common stock 2,978,445 --
------------- -------------
Net cash provided by financing activities $ 3,769,675 $ 3,162,843
------------- -------------
Effect of exchange rate changes (178,624) (11,495)
Net increase (decrease) in cash and cash equivalents 507,949 (771,074)
Cash and cash equivalents, beginning of period 302,279 2,006,731
------------- -------------
Cash and cash equivalents, end of period $ 810,228 $ 1,235,657
============= =============
The accompanying notes are an integral part of these statements.
6
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the financial information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (including normal
recurring adjustments) considered necessary for a fair presentation have been
included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The results of operations for the respective interim periods are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in EP MedSystems' Annual Report on Form 10-KSB for the year
ended December 31, 2000 filed with the Securities and Exchange Commission.
As a result of EP MedSystems' limited sources of liquidity, prior
inability to generate significant revenues and expected continued losses, there
is uncertainty as to whether EP MedSystems will be able to continue as a going
concern. Our auditors included a going concern qualification in their report on
our financial statements for the year ended December 31, 2000.
Note 2. Inventories
Inventories are valued at the lower of cost or market with cost being
determined on a first-in, first-out basis. Inventories at September 30, 2001
consist of the following:
Raw materials $ 858,046
Work in process 211,889
Finished goods 1,253,548
Reserve for obsolescence (86,399)
-----------
$ 2,237,084
===========
Note 3. Note payable
On November 15, 2000, EP MedSystems, Inc. completed a debt financing for
$3.2 million with Medtronic Asset Management, Inc., an affiliate of Medtronic,
Inc., one of EP MedSystems' shareholders. Approximately $2.3 million was
utilized to repay outstanding amounts on EP MedSystems' revolving credit
facility with its bank. The note
7
to Medtronic bears interest at the prime rate plus 2%. The principal and all
accrued interest on the note are to be repaid on November 15, 2003 and the note
is secured by a pledge by David Jenkins, EP MedSystems' Chief Executive Officer
and a director and shareholder of EP MedSystems, of shares of common stock of a
privately-held corporation. The debt financing is subordinate to existing rights
of EP MedSystems' senior lender, Fleet National Bank. EP MedSystems received
$1.6 million at closing and $1.6 million on January 17, 2001. EP MedSystems
accrued approximately $252,000 of interest expense included within accrued
expenses as of September 30, 2001.
EP MedSystems entered into a financing arrangement in March 1999 with a
bank consisting of a $2,000,000 revolving line of credit and a $500,000 term
loan secured by a lien on EP MedSystems' facility in West Berlin, New Jersey and
the machinery, equipment and inventory located there. Pursuant to the loan
documentation relating to the term loan and revolving credit facility, EP
MedSystems is required to maintain certain financial ratios and meet certain net
worth and indebtedness tests. At September 30, 2000 and December 31, 2000, EP
MedSystems was not in compliance with certain financial covenants. EP MedSystems
repaid $2.3 million outstanding on the revolving credit facility using funds
obtained from the Medtronic debt financing and as a result received a permanent
waiver from the bank for both violations as of December 31, 2000. The credit
facility, which was originally scheduled to expire on March 2001, was terminated
in January 2001, and was not replaced by another facility. The related term loan
remains in place and is being repaid on a monthly basis through its December 31,
2004 term. Interest on the term note is payable monthly in arrears, at either
the prime rate plus 3/4% or LIBOR plus 3/4% at EP MedSystems' discretion.
Principal became payable beginning in January 2000 in 48 equal monthly
installments under a 15-year amortization schedule with a balloon payment due in
December 2004.
Note 4. Common Stock
On March 28, 2001, EP MedSystems consummated the private sale and issuance
to certain investors of 1,625,000 shares of common stock of EP MedSystems and
warrants for 812,500 additional shares at a purchase price of $1.99 per share of
common stock and $0.02 per warrant share. Included among the investors is
Cardiac Capital, LLC, a limited liability company, of which our Chairman of the
Board and Chief Executive Officer and a shareholder of EP MedSystems is a 50%
owner. The consummation of the transaction has provided EP MedSystems, Inc. with
over $3,000,000 in working capital after expenses.
On June 11, 2001, EP MedSystems entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, under which Fusion Capital has
committed to purchase on each trading day during the 25-month term of the
agreement $20,000 of our common stock, up to an aggregate of $10 million. The
2,700,000 shares of our common stock, which may be issued under this agreement,
which includes 225,000 shares of common stock issued to Fusion Capital as
compensation for its purchase commitment, are the subject of an effective
registration statement. The Company issued 112,250 shares of EP MedSystems
common stock to Fusion Capital as an initial commitment fee under the common
stock purchase agreement as of June 11, 2001, and recorded approximately
$333,000 as a separate line item labeled "Deferred Offering Costs" in
Shareholders' Equity. The registration statement was declared effective by the
8
Securities and Exchange Commission on October 18, 2001, and subsequently, on
October 31, 2001, EP MedSystems issued to Fusion Capital an additional 112,750
shares of common stock reflecting the second tranche of the commitment fee, and
as such recorded approximately $230,010 as "Deferred Offering Costs" in
Shareholders' Equity in addition to the $333,000 previously recorded. EP
MedSystems, Inc. intends to reclassify the balance from "Deferred Offering
Costs" to "Additional Paid-In Capital" ratably as the stock is sold. If any
portion of the $10 million maximum offering amount available from Fusion Capital
is not sold by Fusion Capital, the unamortized amount of Deferred Offering Costs
will be expensed and removed from equity.
The shares were valued using the closing market price of EP MedSystems'
stock at each of June 11, 2001, the date on which the agreement was executed,
and on October 31, 2001, the date on which the second tranche of the commitment
fee was issued, in accordance with paragraph 10(a) of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Note 5. Stock Compensation
In connection with EP MedSystems' hiring of a new President and Chief
Operating Officer in the third quarter of 2001, EP MedSystems entered into
certain employment arrangements with the executive pursuant to which the
executive purchased 100,000 shares of EP MedSystems' common stock at $2.20 per
share, received a five-year warrant, which vested immediately, to purchase an
additional 100,000 shares of EP MedSystems' common stock, at an exercise price
of $2.75 per share, and was granted an option under the Company's Long Term
Incentive program, vesting over four years, to purchase 100,000 shares at an
exercise price of $1.91 per share (the stock price as of grant date). In
connection with the stock purchase, EP MedSystems provided the executive with a
two-year, interest-free, non-recourse loan in the amount of $220,000, which is
secured by a pledge to EP MedSystems of the shares. The principal balance of the
loan is forgiven ratably over the term of the loan. If the executive terminates
his employment prior to August 20, 2003, the remaining principal balance not
forgiven, would be due and payable. The loan is forgiven, in whole, on August
20, 2003.
As prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees"("APB No. 25"), EP MedSystems accounted for the
warrant and option granted as compensation expense using the intrinsic value
method. As the exercise price for the shares under the warrant and option is at
or greater than the fair market value of the underlying stock on the date of
issuance, the intrinsic value is zero and no compensation expense was recorded.
EP MedSystems also determined that the treatment for the valuing and
recording of the restricted shares purchased would be similar to the accounting
for stock options that qualify for variable plan accounting pursuant to footnote
2 of APB No. 25. Based on the purchase price of the shares of common stock at
the time of issuance, the intrinsic value of these instruments was zero and, as
such, no compensation expense was recorded. These shares will be re-measured on
a quarterly basis and any resulting compensation expense will be amortized over
the life of the note. Compensation expense will be determined as the difference
between the fair market value and the purchase price of the stock at the end of
the reporting period. The purchase price is adjusted downward in
9
conjunction with the loan amount forgiven on a quarterly basis as defined in the
promissory note. No compensation expense was recorded as of September 30, 2001.
Note 6. Other Income
Other income includes approximately $420,000 and $217,000 related to the
sale of EP MedSystems' New Jersey cumulative net operating loss sold in the
first quarter of 2001 and 2000, respectively. The sale of the cumulative net
operating loss is allowable under a New Jersey State law enacted in January
1999, pursuant to which emerging technology and bio-technology companies may
transfer, or "sell", their unused New Jersey net operating loss carry forwards
and New Jersey research and development tax credits to any profitable New Jersey
companies qualified to purchase them.
Note 7. Industry Segment and Geographic Information
EP MedSystems manages its business based on one reportable segment, the
manufacture and sale of cardiac electrophysiology products. EP MedSystems' chief
operating decision-makers use consolidated results to make operating and
strategic decisions.
The following table sets forth product sales by geographic segment for the
nine months ended September 30,
2001 2000
---------- ----------
United States $4,113,000 $3,948,000
Europe/Middle East 1,939,000 1,945,000
Asia and Pacific Rim 912,000 1,863,000
---------- ----------
$6,964,000 $7,756,000
========== ==========
Sales of EP MedSystems' cardiac electrophysiology devices and related
catheters aggregated $6,036,000 and $928,000, respectively, for the nine months
ended September 30, 2001 and $6,750,000 and $1,006,000, respectively, for the
comparable period in 2000. EP MedSystems' long-lived assets are located in the
U.S.
Net sales for the nine months ended September 30, 2001 were billed in
three currencies: $5,693,000 in U.S. dollars, 1,371,000 in Euro, and 44,000
pounds sterling. Management has determined the impact of foreign currency risk
on sales to be minimal since a majority of sales are billed in U.S. dollars. EP
MedSystems does incur translation gains/losses which are recorded in
Stockholder's Equity. Stockholder's Equity includes a cumulative translation
loss of $179,000 as of September 30, 2001. As of September 30, 2001, EP
MedSystems has not entered into any derivative financial instruments for hedging
or other purposes.
Note 8. Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential shares of common stock from the
exercise of stock options and warrants are anti-dilutive for all periods
presented. Accordingly, potential common
10
shares of 2,515,758 and 1,508,810 for the nine months ended September 30, 2001
and 2000, respectively, have been excluded from the diluted per share
calculation.
Note 9. Comprehensive Income
Comprehensive income approximated net income for the three months ended
September 30, 2001 and 2000.
Note 10. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 supercedes Accounting Principles Board Opinion No.
16 ("APB No. 16"), "Business Combinations." The primary changes made by SFAS No.
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). EP MedSystems does
not expect that the adoption of SFAS No. 141 will have a material impact on its
results of operations, financial position or cash flows. The adoption of SFAS
No. 141 is required for all business combinations initiated after June 30, 2001.
EP Med will adopt the standard accordingly.
In addition, in June 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 supercedes Accounting Principles Board Opinion No. 17,
"Intangible Assets." SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. The provisions
of SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001. The primary changes made by SFAS No. 142 are: (1) goodwill and indefinite
lived intangible assets will no longer be amortized, (2) goodwill will be tested
for impairment at least annually at the reporting unit level, (3) intangible
assets deemed to have an indefinite life will be tested for impairment at least
annually, and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. In connection with the adoption of
this standard, EP MedSystems' unamortized goodwill balance will no longer be
amortized, but will continue to be tested for impairment. EP MedSystems plans to
test impairment of goodwill, at least annually, using a two-step impairment test
consisting of comparing goodwill fair value and book value of determined
reporting units and, if applicable, measuring the excess of the recorded amount
of goodwill with its implied fair value. EP MedSystems is currently assessing
the impact of the standard on other indefinite lived assets and the total impact
of this standard on our results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." This standard requires that obligations associated with the
retirement of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its present value, and the capitalized cost is
11
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for EP
MedSystems, Inc. means the standard will be adopted on January 1, 2003. EP
MedSystems does not expect that the adoption of this statement will have a
material impact on its results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supercedes Statement of Financial Accounting No.
144 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived
assets, including discontinued operations, and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS
No. 144 develops one accounting model for long-lived assets that are to be
disposed of by sale, as well as addresses the principal implementation issues.
SFAS No. 144 requires that long-lived assets that are to be disposed of by sale
be measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, which for EP MedSystems, Inc. means the standard will be
adopted on January 1, 2002. The Company does not expect that the adoption of
SFAS No. 144 will have a material impact on its results of operations, financial
position or cash flows.
Note 11. Subsequent Events
On October 18, 2001, EP MedSystems' registration statement relating to its
equity line financing transaction with Fusion Capital Fund II, LLC was declared
effective by the Securities and Exchange Commission. On October 31, 2001, EP
MedSystems closed on the $10 million equity line with Fusion Capital under the
common stock purchase agreement previously entered into in June 2001. (See Note
4. Common Stock). EP MedSystems issued a suspension notice under the common
stock purchase agreement to suspend Fusion Capital's purchase obligation until
such time as the Company rescinds the suspension notice thereby reinstating
Fusion Capital's obligation to purchase shares of EP MedSystems common stock.
In addition, as of October 23, 2001, EP MedSystems consummated the private
sale and issuance of newly-designated Series A convertible preferred stock to
Century Medical, Inc. ("CMI"), its Japanese distributor, and Medtronic, Inc.
("Medtronic"), a shareholder and creditor of the Company. An aggregate of
1,259,717 preferred shares were issued in the transactions. Each preferred share
is convertible, at the option of either CMI or Medtronic, at any time from and
after the earlier of, December 31, 2001 and the date of receipt by the United
States Food and Drug Administration ("FDA") of 510K approval of EP MedSystems'
ViewMate(TM) Ultrasound Imaging System device or of pre-market approval of EP
MedSystems' ALERT(R) System device (in either case, an "FDA Event"), or by EP
MedSystems at
12
any time after an FDA Event, into one share of EP MedSystems' common stock. The
transaction with Century Medical, Inc. involved the sale of the shares of
preferred stock at a price of $2.048 per share as well as an amendment to the
Company's Distribution Agreement with CMI. The transaction with Medtronic
involved the sale of preferred stock at a price of $1.781 per share. EP
MedSystems received aggregate gross proceeds of $2,400,000 from the two
transactions.
In July 2001, EP MedSystems received a "warning letter" from the FDA,
which required the investigation and correction of various violations pertaining
to design controls and manufacturing process controls. EP MedSystems has
responded to all issues raised but one relating to validation of the Symix
computer software which validation process is underway. As of the date of this
filing, EP MedSystems is awaiting the FDA's response with respect to the actions
taken and, as such it is not possible at this time to accurately predict the
impact, if any, which the "warning letter" will have on 2001 and future
operations as such will depend on the timing and nature of the resolution of the
FDA's issues.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
EP MedSystems was incorporated in January 1993 and operates in a single
industry segment. We develop, manufacture, market and sell a line of products
for the cardiac electrophysiology market used to diagnose, monitor and treat
irregular heartbeats known as arrhythmias. Since EP Med's inception, we have
acquired technology and marketing rights, have developed new products and have
begun marketing various electrophysiology products, including the EP-WorkMate(R)
computerized electrophysiology workstation, the EP-3(TM) Stimulator, diagnostic
electrophysiology catheters and the ALERT(R) System, including the ALERT(R)
Companion and ALERT(R) internal cardioversion catheters and related disposable
supplies. To date, these products have generated nearly all of EP Med's sales.
EP Med's leading diagnostic product is the EP-WorkMate(R), a computerized
electrophysiology workstation that monitors, displays and stores cardiac
electrical activity and arrhythmia data which, through September 2001,
contributed to approximately 81% of EP Med's sales revenues. The EP-WorkMate(R)
offers, among other features, display and storage of up to 192 intracardiac
signals, real-time analysis and integration with our own proprietary systems,
such as the EP-3(TM) Stimulator, as well as with other technologies and systems.
The EP-3(TM) Stimulator is a computerized signal generator and processor which,
when integrated with the EP-WorkMate(R), is used to stimulate the heart with
electrical impulses in order to locate arrhythmia. As of September 2001, the
EP-3(TM) Stimulator accounted for approximately 4% of EP Med's total sales. EP
Med also markets a line of diagnostic electrophysiology catheters for
stimulation and sensing of electrical signals during electrophysiology studies,
which represented approximately 6% of EP Med's total sales revenues for the nine
months ended September 2001.
13
We have identified the diagnosis and treatment of atrial fibrillation, a
particular type of arrhythmia, as a primary focus for our ongoing development
efforts. In an effort to address this medical condition, we have developed a new
product for internal cardioversion of atrial fibrillation known as the ALERT(R)
System, which uses a patented electrode catheter to deliver measured, variable,
low-energy electrical impulses directly to the inside of the heart to convert
atrial fibrillation to a normal heart rhythm. We have obtained Class III Design
Examination Certification from the European notified body allowing us to label
the ALERT(R) System with a CE Mark, an international symbol of adherence to
quality assurance standards, design reviews and hazard analysis, which permits
us to sell the ALERT(R) System in the European Community. International sales of
the ALERT(R) System and related catheters accounted for approximately 9% of EP
Med's total sales revenues as of September 2001. The ALERT(R) System is not
approved for sale in the United States, but we have completed clinical trials
and have submitted our application for pre-market approval of the device to the
U.S. Food and Drug Administration and have responded to FDA requests for
supplemental information; we are awaiting further action on this application and
on other regulatory matters. As such, approval to market and sell the ALERT(R)
System in the U.S. may take until the fourth quarter of 2001, if approved at
all.
We are also involved in the development of an intracardiac ultrasound
product line including the ViewMate(TM) ultrasound imaging console and
intracardiac imaging catheters. These products offer high-resolution, real-time
ultrasound capability designed to improve a physician's or clinician's ability
to visualize inside the chambers of the heart. We believe that the ViewMate(TM)
Ultrasound System may play an important diagnostic role allowing more effective
treatment options of complex cardiac arrhythmias such as ventricular
tachyarrhythmia and atrial fibrillation. Our ultrasound products currently are
not approved for sale. We are preparing our application for 510(k) approval for
submission to the FDA within approximately 120 days, due to the device's
substantial equivalence to a legally marketed device. We do not anticipate
receiving approval to sell the ViewMate(TM) Ultrasound System until the second
half of 2002, if approved at all.
EP Med has a history of operating losses and we expect to continue to
incur operating losses in the near future as we continue to expend substantial
funds for research and development, clinical trials in support of regulatory
approvals, increased manufacturing activity and expansion of sales and marketing
activities. The amount and timing of future losses will be dependent upon, among
other things, increased sales of our existing products, the timing of regulatory
approval and market acceptance of the ALERT(R) System and ultrasound products
and developmental, regulatory and market success of new products under
development as well as EP Med's ability to establish, preserve and enforce
intellectual property rights to its products. There can be no assurance that any
of our development projects will be successful or that if development is
successful, that the products will generate any sales.
Results of Operations for the Nine-Month Period Ended September 30, 2001
Compared to the Nine-Month Period Ended September 30, 2000.
Net sales were $6,964,000 for the nine months ended September 30, 2001 as
compared to $7,756,000 for the comparable period in 2000. This decrease is
primarily
14
due to lower sales orders in Asia and the Pacific Rim resulting, in part, from a
delay in the roll-out of hardware improvements to the EP-WorkMate(R) to this
region until the fourth quarter 2001.
Net sales for the nine months ended September 2001 were billed in three
currencies: $5,693,000 in U.S. dollars, 1,371,000 in Euro, and 44,000 pounds
sterling. Management has determined the impact of foreign currency risk on sales
to be minimal since a majority of sales are billed in U.S. dollars. EP Med does
incur translation gains/losses, which are recorded in Shareholder's Equity. EP
Med's cumulative translation loss was $179,000 at September 30, 2001.
Cost of products sold decreased $499,000 (or 13%) to $3,228,000 for the
nine months ended September 30, 2001 as compared to the same period in 2000.
This decrease is primarily due to the decrease in sales. Cost of products sold
additionally decreased as a percentage of sales from 48% to 46% primarily due to
increased sales in the U.S. which realizes a higher average selling price than
internationally and decreased raw material costs due to improved buying patterns
and general reductions in manufacturing costs.
Gross profit on sales for the nine months ended September 30, 2001 was
$3,737,000 as compared with $4,029,000 for the same period in 2000. The gross
profit improved as a percentage of sales from 52% to 54%, primarily the result
of cost improvements in manufacturing the EP-WorkMate(R) and increased sales in
the U.S. which realizes a higher average selling price than internationally. We
anticipate improvement in EP Med's overall gross profit percentage due to cost
initiatives particularly in the catheter manufacturing operations area and
increased sales of the ALERT(R) and Ultrasound System once approved for sale in
the U.S.
Sales and marketing expenses decreased $170,000 to $3,482,000 for the nine
months ended September 30, 2001 as compared to the same period in 2000. The
decrease during this period was primarily due to lower travel costs of $96,000
and a $61,000 reduction in trade show expenses.
General and administrative expenses decreased $94,000 to $1,625,000 for
the nine months ended September 30, 2001 as compared to the first nine months of
2000. This was primarily due to a $100,000 decrease in salaries and fringe
benefits due to staff turnover.
Research and development expenses decreased $112,000 to $1,932,000 for the
nine months ended September 30, 2001 as compared to the same period in 2000.
This is primarily due to a decrease in travel-related costs of $51,000 and a
decrease in engineering parts and supplies of $99,000. EP Med expects that
research and development expenses are likely to increase in future periods, in
part due to ongoing expenses related to the ALERT(R) and ViewMate(TM) Ultrasound
Systems, new product development activities and continued costs associated with
the regulatory approval process.
Other income, net, increased $201,000 to $422,000 for the nine months
ended September 30, 2001 as compared to the same period in 2000, primarily due
to the receipt of $420,000 on the sale of a portion of EP Med's New Jersey
cumulative net operating
15
loss. The sale of the cumulative net operating loss is a result of a New Jersey
State law enacted January 1, 1999, allowing emerging technology and
biotechnology companies to transfer "sell" their unused New Jersey net operating
loss carry forwards and New Jersey research and development tax credits to any
profitable New Jersey Company qualified to purchase them for cash.
Interest expense net increased $256,000 primarily due to interest accrued
on the $3.2 million note payable to Medtronic in connection with the November
2000 debt financing.
Results of Operations for the Three-Month Period ended September 30, 2001
Compared to the Three-Month Period ended September 30, 2000
Net sales were $2,483,000 for the quarter ended September 30, 2001 as
compared to $2,717,000 for the prior period in 2000. This decrease is primarily
due to lower sales orders in Asia and the Pacific Rim resulting, in part, from a
delay in the roll-out of hardware improvements to the EP-WorkMate(R) to this
region until the fourth quarter 2001.
Net sales for the three months ended September 30, 2001 were billed in two
currencies: $1,921,000 in U.S. dollars, and 639,000 in Euro. Management has
determined the impact of foreign currency risk on sales to be minimal since a
majority of sales are billed in U.S. dollars. EP Med does incur translation
gains/losses, which are recorded in Shareholder's Equity.
Cost of products sold decreased $107,000 (or 9%) to $1,146,000 for the
three months ended September 30, 2001 as compared to the same period in 2000.
Gross profit on sales for the three months ended September 30, 2001 was
$1,337,000 as compared with $1,464,000 for the same period in 2000. This
decrease was primarily a result of lower sales. The gross profit as a percentage
of sales of 54% was the same for both periods. We anticipate improvement in EP
Med's overall gross profit percentage due to sales of the ALERT(R) and
Ultrasound System once approved for sale in the U.S., coupled with our
continuing cost improvement initiatives.
Sales and marketing expenses increased $21,000 to $1,195,000 for the three
months ended September 30, 2001 as compared to the same period in 2000 primarily
due to a increased travel related costs of $35,000.
General and administrative expenses decreased $77,000 to $545,000 for the
three months ended September 30, 2001 as compared to the same three-month period
in 2000. The decrease during this period was primarily a result of lower
salaries and fringe benefits of $21,000 and lower rent and utility expense of
$20,000.
Research and development expenses decreased $3,000 to $634,000 for the
three months ended September 30, 2001 as compared to 2000. EP Med expects that
research and development expenses are likely to increase in future periods, in
part due to ongoing expenses related to the ALERT(R) and ViewMate(TM) Ultrasound
Systems, new product development activities and continued costs associated with
the regulatory approval process.
16
Other income, net, increased $9,000 for the three months ended September
30, 2001 as compared to the same period in 2000 while interest expense increased
$69,000 primarily due to interest accrued on the $3.2 million note payable to
Medtronic in connection with the November 2000 debt financing.
Liquidity and Capital Resources.
Since EP Med's incorporation in January 1993, EP Med's expenses have
exceeded sales resulting in an accumulated deficit of approximately $22.4
million at December 31, 2000 and approximately $25.6 million at September 30,
2001.
On June 21, 1996, we completed our initial public offering of 2,500,000
shares of common stock at a purchase price of $5.50 per share, for aggregate net
proceeds of approximately $11,786,000 after deducting offering expenses. On
April 9, 1998, we sold and issued 2,250,000 shares of our common stock to 6
institutional investors at a price of $2.25 per share using the gross proceeds
of this offering in the amount of $5,062,500, before deducting offering expenses
approximately $401,000, for working capital purposes.
We entered into a financing arrangement in March 1999 with a bank
consisting of a $2,000,000 revolving line of credit and a $500,000 term loan
secured by a lien on EP Med's facility in West Berlin, New Jersey and the
machinery, equipment and inventory located there. Pursuant to the loan
documentation relating to the term loan and revolving credit facility, EP
MedSystems is required to maintain certain financial ratios and meet certain net
worth and indebtedness tests. At September 30, 2000 and December 31, 2000, EP
MedSystems was not in compliance with certain financial covenants. EP MedSystems
repaid $2.3 million outstanding on the revolving credit facility using funds
obtained from the Medtronic debt financing and as a result received a permanent
waiver from the bank for both violations as of December 31, 2000. The credit
facility, which was originally scheduled to expire on March 2001, was terminated
in January 2001, and was not replaced by another facility. The related term loan
remains in place and is being repaid on a monthly basis through its December 31,
2004 term. Interest on the term note, at either the prime rate plus 3/4% or
LIBOR plus 3/4%, is payable monthly in arrears and principal became payable
beginning in January 2000 in 48 equal monthly installments under a 15-year
amortization schedule with a balloon payment due in December 2004.
In November 2000, EP Med completed a debt financing with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of EP Med's shareholders
and one of the world's leading medical technology companies, which provided an
aggregate of $3.2 million of which approximately $2.3 million was utilized to
repay outstanding amounts on EP Med's revolving credit facility with our bank.
The financing transaction, evidenced by a note purchase agreement and secured
promissory note bearing interest at two percentage points over the prime rate,
provides that principal and all accrued interest on the note are to be repaid on
November 15, 2003 and that the note is secured by a pledge by David Jenkins, EP
Med's Chief Executive Officer and a director and shareholder of EP Med, of
300,000 shares of common stock of Transneuronix, Inc., a privately-held
corporation engaged in the development of neuro-muscular stimulation devices.
The shares pledged amount to approximately 5% of the total outstanding common
stock of Transneuronix, Inc. EP MedSystems received $1.6 million at the
17
closing of the transaction in November 2000 and received the remaining $1.6
million on January 17, 2001.
On March 28, 2001, after receipt of shareholder approval, EP Med
consummated the sale and issuance of 1,625,000 shares of common stock and
warrants for 812,500 additional shares to certain investors. Included among the
investors is Cardiac Capital, LLC, a limited liability company, of which our
Chairman of the Board and Chief Executive Officer and a shareholder of EP Med,
David A. Jenkins, is a 50% owner. The aggregate amount of the new shares which
potentially may be issued in this private placement is in excess of 20% of the
outstanding common stock of EP MedSystems (on a pre-transaction basis) assuming
all warrants are exercised and, as a result of this and of the related-party
nature of the transaction and the view that the transaction possibly could
constitute a change of control under certain Nasdaq Marketplace Rules, in
accordance with the requirements of the Nasdaq National Market, EP Med sought,
and received, shareholder approval. The consummation of the transaction provided
EP Med with over $3,000,000 in working capital after expenses.
On June 11, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC under which Fusion Capital has committed to purchase
on each trading day during the 25-month term of the agreement $20,000 of our
common stock up to an aggregate of $10 million. On October 18, 2001, EP Med's
registration statement covering up to 2,700,000 shares to be purchased and
resold by Fusion Capital under this equity line financing transaction was
declared effective by the Securities and Exchange Commission. The shares offered
consist of up to 2,475,000 shares of common stock that Fusion Capital has agreed
to purchase from EP MedSystems under the common stock purchase agreement and
225,000 shares of common stock issued to Fusion Capital as compensation for its
purchase commitment. A portion of the 225,000 shares issued to Fusion Capital as
compensation for its purchase commitment, specifically 112,250 shares, were
issued as of June 11, 2001 and the remaining 112,750 were issued as of October
31, 2001, the effective date of closing of the equity line financing
transaction.
Under the common stock purchase agreement with Fusion Capital, the
declaration of effectiveness of the registration statement for the resale of the
shares sold to Fusion Capital, and the subsequent closing of the transaction,
triggered Fusion Capital's obligation to make the specified purchases under the
agreement, subject to our right to suspend or terminate the agreement. Assuming
that all sales were to occur at the closing price of our common stock on June
11, 2001 (the date on which the agreement with Fusion Capital was entered into)
of $2.97 we would be able to raise approximately $7,350,750 through the sale of
2,475,000 shares to Fusion Capital over the 25 month term of the agreement
(exclusive of the 225,000 shares issued to Fusion Capital as a commitment fee).
Assuming that all sales were to occur at the closing price of our common stock
on November 12, 2001 of $2.30, we would only be able to raise approximately
$5,692,500 through the sale of the same number of shares to Fusion Capital. As
such, in light of the number of shares currently registered, liquidity to be
afforded to EP MedSystems in connection with the equity line with Fusion Capital
is directly correlated to our common stock price. The lower the price of our
common stock, the greater the number of shares that will need to be sold for us
to obtain the same proceeds and, since a fixed number of shares have been
registered, the price of our
18
common stock will determine how much of the equity line is available to us
absent shareholder approval to issue additional shares.
In order to sell in excess of 19.9% of EP Med's outstanding shares of
common stock on the date that we entered into the common stock purchase
agreement (or 2,716,144), it will be necessary for us to obtain EP Med's
shareholders' approval to such sale as required by the Nasdaq Marketplace Rules
to which EP Med is subject and, perhaps to authorize an amendment to our
certificate of incorporation to increase the number of shares of EP MedSystems
common stock that we are authorized to issue. Assuming we have an adequate
number of shares of common stock to sell, we stay in compliance with the
agreement and, depending on the price at which shares are sold, Fusion Capital
could provide us with sufficient funding to sustain our operations for up to two
years. Alternatively, as described above, a low stock price will limit the
amount of proceeds available to us under the equity line (absent shareholder
approval to issue a greater number of shares) and, thereby, the amount of time
during which our operations will be sustained solely from funds under the equity
line. We cannot predict if the shareholders would approve additional issuances
beyond 19.9% or 2,716,144 or any amendment to our certificate of incorporation.
In light of our current stock price and of our other sources of financing
described below, we have issued a suspension notice to Fusion Capital under the
common stock purchase agreement suspending Fusion Capital's obligation to
purchase shares of our common stock until such time as we rescind such notice
and reinstate the obligation. As a result, to date no funds have been received
from Fusion Capital under the equity line financing arrangement and no shares of
our common stock other than the commitment fee shares have been issued to Fusion
Capital. Accordingly, the entire $10 million remains available to us subject to
the stock price limitations described above.
As of October 23, 2001, we consummated the private sale and issuance of
newly-designated Series A convertible preferred stock to Century Medical, Inc.
("CMI"), its Japanese distributor, and Medtronic, Inc. ("Medtronic"), a
shareholder and creditor of EP Med. An aggregate of 1,259,717 preferred shares
were issued in the transactions. Each preferred share is convertible, at the
option of either CMI or Medtronic, at any time from and after the earlier of,
December 31, 2001 and the date of receipt by the United States Food and Drug
Administration ("FDA") of 510K approval of EP MedSystems' ViewMate(TM)
Ultrasound Imaging System device or of pre-market approval of EP MedSystems'
ALERT(R) System device (in either such case, an "FDA Event"), or by EP
MedSystems at any time after an FDA Event, into one share of EP MedSystems'
common stock. The transaction with Century Medical, Inc. involved the sale of
the shares of preferred stock at a price of $2.048 per share as well as an
amendment to EP Med's Distribution Agreement with CMI. The transaction with
Medtronic involved the sale of preferred stock at a price of $1.781 per share.
EP MedSystems received aggregate gross proceeds of $2.4 million from the two
transactions.
We currently are evaluating a proposal from an institutional lender
regarding a $2 million line of credit facility in order to supplement the
amounts which may be available to us under the Fusion Capital equity line and we
are soliciting additional proposals from banks for consideration.
19
Net cash used in operating activities for the nine months ended September
30, 2001 increased $136,000 as compared to the same period in 2000. The net use
of cash in operations during 2001 was primarily due to EP Med's $3,131,000 net
loss from operations. Payments to related parties are made on terms similar to
those of other suppliers. Capital expenditures, net of disposals, were $123,000
for the nine-month period ended September 30, 2001 as compared to $1,110,000 in
2000. Capital expenditures in 2000 were high primarily due to an increase in
equipment used for demonstration purposes, the cost of purchasing and
implementing an Enterprise Resource Planning software solution for EP Med and
other building improvements. We expect to purchase capital equipment and to
expand our manufacturing and assembly capabilities as we continue to grow,
however, we currently do not have any commitments for purchases. We lease office
and manufacturing space and certain office equipment under operating leases.
Working capital increased $1,544,000 from December 31, 2000 to $4,488,000
at September 30, 2001. This is primarily due to (1) a $508,000 increase in cash
resulting from the private placement with Cardiac Capital and the loan obtained
from Medtronic, both completed in the first quarter, (2) a $446,000 increase in
accounts receivable primarily attributable to an increase in sales, and (3) a
$534,000 increase in prepaid expenses and other current assets due, in part, to
$337,000 in deferred offering costs (in the form of professional fees) incurred
in connection with the $10 million equity line financing transaction with Fusion
Capital (described in this section above). Our working capital situation has
changed subsequent to September 30, 2001 as a result of our placements with two
private investors described above which yielded gross proceeds of $2.4 million.
EP Med evaluates the collectability of its receivables quarterly. The
allowance for bad debts is based upon specific identification of customer
accounts for which collection is doubtful and EP Med's estimate of the
likelihood of potential loss. To date, EP Med has experienced only modest credit
losses with respect to its accounts receivable and has experienced insignificant
inventory write-downs for which the reserve is consistent with management's
expectations.
EP Med's auditors included a going concern qualification in their report
on our financial statements for the year ended December 31, 2000 because it was
uncertain, at that time, whether we would have funds sufficient to continue
operations at our current level for the next 12 months, though during such time
we would have the opportunity to seek further funding transactions.
EP Med's cash position was approximately $810,000 at September 30, 2001,
and our monthly operating expenses are approximately $350,000. However,
subsequent to September 30, 2001 we completed the two placements described above
which yielded gross proceeds of $2.4 million and closed on our equity line
financing transaction with Fusion Capital providing us with the additional fund
availability of up to $10 million. As such, our cash position at October 31,
2001 was approximately $2.8 million in addition to up to $10 million available
under the equity line. While we expect operating losses to continue in the near
future due to continued research and development activities and
20
additional personnel and equipment required to increased manufacturing and
assembly of our products, EP Med is in a stronger financial position than
earlier this year. The amount and timing of future losses will be dependent
upon, among other things, increased sales of our existing products, clinical
approval and market acceptance of the ALERT(R) System and developmental,
regulatory and market success of new products under development. There can be no
assurance that any of our development projects will be successful or that if
development is successful, that the products will generate any sales. Based upon
our current plans and projections, we believe that our existing capital
resources, including the Fusion equity line financing, will be sufficient to
meet our anticipated operational needs through at least calendar year 2002. In
the event that we cannot raise additional capital after that time, we believe
that we can reduce non-core-related expenditures, which will allow EP Med to
continue operations for sometime thereafter. However, that continuation may not
be possible should circumstances outside EP Med's control (including, for
example, changes in general economic conditions or other matters, which
adversely affect EP Med's business) significantly interfere with EP Med's
business. Use of our equity line financing from Fusion Capital and/or a bank
line of credit or other financing may not be sufficient to allow full
implementation of our business plans and we, nevertheless, may require
additional capital. We believe that satisfying our capital requirements over the
long-term will require the approval of the U.S. Food and Drug Administration and
successful commercialization of our ALERT(R) System product line and we are
uncertain whether or not the ALERT(R) System will be approved or will be
commercially successful.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No.141"). SFAS No. 141 supercedes Accounting Principles Board Opinion No.
16, "Business Combinations." The primary changes made by SFAS No. 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). We do not expect
that the adoption of SFAS No. 141 will have a material impact on our results of
operations, financial position or cash flows. The adoption of SFAS No. 141 is
required for all business combination initiated after June 30, 2001. EP Med will
adopt the standard accordingly.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142
supercedes Accounting Principles Board Opinion No.17, "Intangible Assets." SFAS
No. 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. The provisions of SFAS No.142 will be effective
for fiscal years beginning after December 15, 2001. The primary changes made by
SFAS No. 142 are: (1) goodwill and indefinite lived intangible assets will no
longer be amortized, (2)
21
goodwill will be tested for impairment at least annually at the reporting unit
level, (3) intangible assets deemed to have an indefinite life will be tested
for impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years. In connection
with the adoption of this standard, EP Med's unamortized goodwill balance will
no longer be amortized but will continue to be tested for impairment. EP Med
plans to test impairment of goodwill at least annually using a two-step
impairment test consisting of comparing goodwill fair value and book value of
determined reporting units and, if applicable, measuring the excess of the
recorded amount of goodwill with its implied fair value. EP Med currently is
assessing the impact of the standard on other indefinite lived assets and the
total impact of this standard on our results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." This standard requires that obligations associated with the
retirement of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its present value, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, which for EP Med means the standard
will be adopted on January 1, 2003. EP Med does not expect that the adoption of
this statement will have a material impact on its results of operations,
financial position or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supercedes Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including discontinued operations, and consequently amends
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale, as well as addresses the principal
implementation issues. SFAS No. 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, which for EP Med means the standard will be adopted on
January 1, 2002. EP Med does not expect that the adoption of SFAS No. 144 will
have a material impact on its results of operations, financial position or cash
flows.
22
Impact of Introduction of Single European Currency (Euro)
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (Euro). The transition period for the
introduction of the Euro is between January 1, 1999 and January 1, 2002. We are
presently identifying and ensuring that all Euro conversion compliance issues
are addressed. However, for the nine months ended September 30, 2001,
transaction losses recorded by EP MedSystems were not material.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There were no material developments in legal proceedings disclosed by EP
Med in previous reports during the quarterly period ended September 30, 2001.
Item 2. Changes in Securities
(a) On October 22, 2001, in connection with the private financings
described below, we filed a Certificate of Amendment to the Restated and Amended
Certificate of Incorporation of EP MedSystems, designating 1,400,000 shares of
the 5,000,000 shares of preferred stock authorized as Series A convertible
preferred stock. The filing of the Certificate of Amendment was approved by the
Board of Directors on October 22, 2001.
(b) Under the terms of the Certificate of Amendment, each share of the
newly-designated Series A convertible preferred stock is initially convertible,
at the option of its holder, at any time from and after the earlier of, December
31, 2001 and the date of receipt by the United States Food and Drug
Administration of 510K approval of EP Med's ViewMate Ultrasound Imaging System
device or of pre-market approval of EP Med's ALERT(R) System device (in either
case an "FDA Event"), or by EP Med at any time after an FDA Event, into one
share of EP Med's common stock. The conversion ratio is subject to adjustments
under certain circumstances. The holders of Series A convertible preferred stock
are entitled to vote on all matters that the holders of our common stock are
entitled to vote upon on an as-converted basis. The Series A convertible
preferred stock ranks senior to the common stock with respect to dividends and
upon liquidation, dissolution, winding up or upon any disposition event as
defined in the Certificate of Amendment, the holder shall be entitled to receive
an amount per share equal to $2.048 plus all dividends which have been declared
but not paid, if any, prior to any payment to holders of junior securities. No
dividends may be paid or declared upon junior securities, including commons
tock, unless full non-cumulative cash dividends on all outstanding shares of
Series A convertible preferred stock are paid or have been set apart.
(c) During the three months ended September 30, 2001, EP Med issued
securities as follows:
23
In connection with EP MedSystems' hiring of a new President and
Chief Operating Officer in the third quarter of 2001, EP MedSystems entered into
certain employment arrangements with the executive pursuant to which the
executive purchased 100,000 shares of EP MedSystems' common stock at $2.20 per
share, received a five-year warrant, which vested immediately, to purchase an
additional 100,000 shares of EP MedSystems' common stock, at an exercise price
of $2.75 per share, and was granted an option under EP MedSystems' Long Term
Incentive program, vesting over four years, to purchase 100,000 shares at an
exercise price of $1.91 per share (the stock price as of grant date). The
securities were issued in reliance upon the exemption afforded by Section 4(2)
of the Securities Act of 1933, as amended. In connection with the stock
purchase, EP MedSystems provided the executive with a two-year, interest-free,
non-recourse loan in the amount of $220,000, which is secured by a pledge to EP
MedSystems of the shares. The principal balance of the loan is forgiven ratably
over the term of the loan. If the executive terminates his employment prior to
August 20, 2003, the remaining principal balance not forgiven, would be due and
payable. The loan is forgiven, in whole, on August 20, 2003.
Subsequent to September 30, 2001, EP Med issued securities as
follows:
(i) On June 11, 2001, EP MedSystems entered into a common stock
purchase agreement with Fusion Capital Fund II, LLC, under which Fusion Capital
committed to purchase on each trading day during the 25-month term of the
agreement $20,000 of our common stock, up to an aggregate of $10 million,
subject to EP Med's right to suspend or terminate the agreement. The 2,700,000
shares of our common stock, which may be issued under this agreement, which
includes 225,000 shares of common stock issued to Fusion Capital as compensation
for its purchase commitment, are the subject of an effective registration
statement. EP Med issued 112,250 shares of EP Med common stock to Fusion Capital
as an initial commitment fee under the common stock purchase agreement as of
June 11, 2001, and, on October 31, 2001, subsequent to the declaration by the
Securities and Exchange Commission of the effectiveness of the registration
statement, EP Med issued to Fusion Capital additional 112,750 shares of our
common stock reflecting the second tranche of the commitment fee.
EP Med's registration statement relating to its equity line financing
transaction was declared effective by the Securities and Exchange Commission on
October 18, 2001 and, as of October 31, 2001, EP Med closed on the $10 million
equity line with Fusion Capital. EP Med has issued a suspension notice under the
common stock purchase agreement suspending Fusion Capital's obligation to
purchase shares of our common stock until such time as EP Med rescinds the
suspension notice thereby reinstating the obligation of Fusion Capital to
purchase shares. As a result, to date no shares have been sold and issued to
Fusion Capital, other than the commitment fee shares, under the common stock
purchase.
(ii) In October 2001, EP Med paid a portion of its costs for legal
services rendered by issuing 103,747 shares of its common stock to counsel (and
granting incidental registration rights) in payment of approximately $153,000 in
fees, the price of such shares being based upon the average closing stock price
of EP Med's common stock for the ten trading days prior to the date the parties
agreed to this form of payment. The
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issuance was effected in reliance upon the exemption afforded by Section 4(2) of
the Securities Act of 1933, as amended.
(iii) As of October 23, 2001, EP Med consummated the private sale and
issuance of newly-designated Series A convertible preferred stock to Century
Medical, Inc. ("CMI"), its Japanese distributor, and Medtronic, Inc., a
shareholder and creditor of EP Med. An aggregate of 1,259,717 shares were issued
in the transactions. The transaction with Century Medical, Inc. effected in
reliance upon the exemption afforded by Regulation S of the Securities Act of
1933, as amended, involved the sale of the shares of preferred stock at a price
of $2.048 per share, as well as an amendment to EP Med's Distribution Agreement
with CMI. The transaction with Medtronic, effected in reliance upon the
exemption afforded by Regulation D of the Securities Act of 1933, as amended,
involved the sale of the shares of preferred stock at a price of $1.781 per
share. As part of each transaction, EP Med granted demand and incidental
registration rights to each of Century Medical and Medtronic pursuant to
registration rights agreements entered into by the parties. EP MedSystems
received aggregates gross proceeds of $2.4 million from the two transactions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On August 24, 2001, EP MedSystems held its Annual Meeting of
Shareholders.
(b) The matter voted upon at the Annual Meeting was the election of two
(2) Class III director to the Board of Directors to serve a three (3) year term
and until such directors' successors shall be duly elected and qualified. Daryl
A. Jenkins and Nigel K. Roberts were re-elected as Class III directors and
Darryl Fry and John E. Underwood did not stand for election at the Annual
Meeting but their respective terms of office as directors of EP Med continued
after the Annual Meeting.
(c) The matter voted upon at the Annual Meeting and the results thereof
were as follows:
Election of Class III Directors:
NOT
FOR AGAINST ABSTAIN VOTED
------------------------------------
For the election as a Class III Director
David A. Jenkins 11,129,625 -0- -0- 19,600
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Nigel K. Roberts 11,130,625 -0- -0- 18,600
(d) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Form 10-QSB:
Exhibit 3.1 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation
Exhibit 4.1 Preferred Stock Purchase Agreement, dated as of October
23, 2001, between EP MedSystems and Century Medical, Inc.
Exhibit 4.2 Registration Rights Agreement, dated as of October 23,
2001, between EP MedSystems and Century Medical, Inc.
Exhibit 4.3 First Amendment to Distribution Agreement, dated as of
October 23, 2001, between EP MedSystems and Century
Medical, Inc.
Exhibit 4.4 Preferred Stock Purchase Agreement, dated as of October
23, 2001, between EP MedSystems and Medtronic, Inc.
Exhibit 4.5 Registration Rights Agreement, dated as of October
23, 2001, between EP MedSystems and Medtronic, Inc.
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EP MEDSYSTEMS, INC.
(Registrant)
Date: November 14, 2001 By:/s/ David A. Jenkins
------------------ ---------------------
David A. Jenkins
President and Chief Executive Officer
Date: November 14, 2001 By:/s/ Joseph M. Turner
------------------ ---------------------
Joseph M. Turner
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
26