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 period ended: September 30, 2002
------------------
( ) 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.)
575 Route 73 N. Building D, West Berlin, New Jersey 08091
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
100 Stierli Court, Mount Arlington, New Jersey 07856
- ---------------------------------------------- -----
(Former address of principal executive offices) (Zip Code)
(856) 753-8533
--------------
(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 4, 2002
----- -------------------------------
Common Stock, without par value 15,098,736 shares
Transitional Small Business Disclosure Format (check one): Yes X No
--- ---
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB
CONTENTS
PART I -- Financial INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 2002
(unaudited) 3
Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Operations for the nine
months ended September 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-14
Item 2. Management's Discussion and Analysis or Plan of Operation 14-22
Item 3. Controls and Procedures 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26-27
Exhibit Index 28
2
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
2002
---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,979,890
Accounts receivable, net of allowances for
doubtful accounts of $76,000 2,679,938
Inventory, net 2,687,895
Prepaid expenses and other current assets 260,117
------------
Total current assets 7,607,840
Property and equipment, net 1,887,987
Goodwill, net 341,730
Intangible assets, net 18,438
Other assets 112,145
------------
Total assets $ 9,968,140
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,611,489
Accrued expenses and other current liabilities 413,853
Deferred warranty revenue, current 29,479
Customer deposits 30,100
------------
Total current liabilities 3,084,921
Accrued interest on long term debt, non-current 467,406
Deferred warranty revenue, non-current 370,050
Note payable to Medtronic, Inc. 3,200,000
------------
Total liabilities $ 7,122,377
------------
Commitments and contingencies --
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized, 373,779 shares issued and outstanding $ 618,161
Common stock, $.001 stated value, 25,000,000
shares authorized, 15,098,736 shares issued
and outstanding 15,099
Additional paid-in capital 32,357,748
Receivable from officer (100,000)
Accumulated deficit (30,045,245)
------------
Total shareholders' equity 2,845,763
------------
Total liabilities and shareholders' equity $ 9,968,140
============
The accompanying notes are an integral part of this statement.
3
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
Net sales $ 3,410,645 $ 2,482,654
Cost of products sold 1,968,456 1,145,723
------------ ------------
Gross profit 1,442,189 1,336,931
Operating costs and expenses:
Sales and marketing expenses 1,190,091 1,195,310
General and administrative expenses 822,221 544,551
Research and development expenses 812,778 633,551
Offering costs (See Note 4) 1,118,770 --
------------ ------------
Loss from operations (2,501,671) (1,036,481)
Interest expense, net (53,300) (81,510)
Other income, net -- 13,026
------------ ------------
Net loss $ (2,554,971) $ (1,104,965)
============ ============
Basic and diluted loss per share $ (0.17) $ (0.08)
============ ============
Weighted average shares outstanding used
to compute basic and diluted loss per share 14,946,545 13,806,869
============ ============
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,
2002 2001
------------ ------------
Net sales $ 9,494,730 $ 6,964,394
Cost of products sold 4,496,381 3,227,699
------------ ------------
Gross profit 4,998,349 3,736,695
Operating costs and expenses:
Sales and marketing expenses 3,383,547 3,481,580
General and administrative expenses 1,860,919 1,624,759
Research and development expenses 2,370,690 1,931,993
Offering costs (See Note 4) 1,118,770 --
------------ ------------
Loss from operations (3,735,577) (3,301,637)
Interest expense, net (160,446) (251,161)
Other income, net 5,370 2,702
------------ ------------
Net loss $ (3,890,653) $ (3,550,096)
============ ============
Basic and diluted loss per share $ (0.26) $ (0.27)
============ ============
Weighted average shares outstanding used
to compute basic and diluted loss per share 14,764,989 13,197,054
============ ============
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,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(3,890,653) $(3,550,096)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 511,932 638,979
Deferred Income Taxes 474,688 419,031
Bad Debt Expense -- 8,667
Write-off of deferred offering costs 1,042,413 --
Non-cash compensation expense related to employee agreement 42,000 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,117,084 (445,700)
(Increase) in inventories (686,758) (123,964)
Decrease (increase) in prepaid expenses and other
current assets 60,006 (533,537)
(Decrease) in payables due to related parties -- (75)
Increase in accounts payable 1,374,001 329,082
(Decrease) increase in accrued expenses, deferred
revenue and customer deposits (286,374) 297,864
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (241,661) $(2,959,749)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (140,742) (123,353)
Patent Costs (7,311) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $ (148,053) $ (123,353)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 1,600
Net (payments) borrowings under term notes payable (436,111) 1,551,190
Net payments - revolving line of credit -- (761,560)
Net proceeds from issuance of common stock, net of offering
costs 472,336 2,978,445
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 36,225 $ 3,769,675
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES (9,924) (178,624)
Net (decrease) increase in cash and cash equivalents (363,413) 507,949
Cash and cash equivalents, beginning of period 2,343,303 302,279
----------- -----------
Cash and cash equivalents, end of period $ 1,979,890 $ 810,228
=========== ===========
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' (the "Company") Annual Report on Form
10-KSB/A for the year ended December 31, 2001 filed with the Securities and
Exchange Commission ("SEC" or "Commission").
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, 2002
consist of the following:
Raw materials $ 1,495,983
Work in process 294,951
Finished goods 1,008,167
Reserve for obsolescence (111,206)
-----------
$ 2,687,895
===========
NOTE 3. NOTE PAYABLE
On November 15, 2000, EP MedSystems 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 to Medtronic Asset Management, Inc. 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. The note is secured by a pledge by David Jenkins,
EP MedSystems' Chairman of the Board, of shares of common stock of a
privately-held corporation. EP MedSystems received $1.6 million at closing and
$1.6 million on January 17, 2001. For the nine months ended September 30, 2002,
EP MedSystems accrued approximately $160,000 of interest expense related to this
note.
7
EP MedSystems entered into a financing arrangement with a bank in March
1999, 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. EP MedSystems borrowed
approximately $2 million under the revolving line of credit, which was
subsequently repaid with the proceeds of the Medtronic note payable discussed
above. The related term loan was repaid in March 2002.
NOTE 4. SHAREHOLDER'S EQUITY
PREFERRED STOCK
On October 23, 2001, EP MedSystems consummated the private sale and
issuance of newly-designated Series A convertible preferred stock to Medtronic,
Inc. ("Medtronic"), a shareholder and creditor of EP MedSystems, and Century
Medical, Inc. ("CMI"), its Japanese distributor. An aggregate of 1,259,717
preferred shares were issued in the transactions. On December 31, 2001 each
preferred share became convertible into equal shares of EP MedSystems common
stock, at the option of the holder. The transaction with CMI involved the sale
of the shares of preferred stock at a price of $2.048 per share as well as an
amendment to EP MedSystems' 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. The preferred stock is recorded in Shareholders' Equity, net
of issuance costs. In the first quarter of 2002, CMI converted all of its
585,938 shares of preferred stock into an equal number of shares of EP
MedSystems' common stock. In the second quarter of 2002, Medtronic converted
300,000 of its shares of preferred stock into an equal number of EP MedSystems'
common stock. The converted shares of both CMI and Medtronic were registered for
resale by EP MedSystems pursuant to a registration statement on Form S-3, which
was declared effective by the SEC in May 2002.
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 $2.00 per share of
common stock and warrants. The warrants have an exercise price of $4.00 per
share. Among the investors is Cardiac Capital, LLC, a limited liability company,
of which The Chairman of the Board of EP MedSystems' is a 50% owner. EP
MedSystems received $3,250,000 in gross proceeds, which was used for working
capital purposes.
On June 11, 2001, EP MedSystems entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital") whereby at EP
MedSystems' election, Fusion Capital was required to purchase EP MedSystems
common stock at the times and prices set forth in this common stock purchase
agreement (the "Fusion Agreement"). The shares of EP MedSystems common stock
that were subject to the Fusion Agreement were registered on Form SB-2 and
declared effective by the SEC in October 2001. In June 2002, EP MedSystems
amended the Fusion Agreement and, as a result of such amendment, EP MedSystems
was required to file a new registration statement on Form SB-2 with the
Securities and Exchange Commission
8
on July 30, 2002. This new registration statement was declared effective on
August 13, 2002.
In connection with the Fusion Agreement, the Company had recorded deferred
offering costs of approximately $1 million, which were recorded in other assets
and additional paid-in capital, and were to be offset against proceeds as the
common stock was sold to Fusion Capital. During the third quarter, the Company
determined it was no longer probable that shares would be sold under this
agreement, based on new financing opportunities initiated by the Company, and
therefore, the entire amount of the deferred offering costs were written off.
This non-cash charge, as well as $76,000 of additional cash expenditures, were
recorded as a separate line item labeled "Offering costs" within operating
expenses in the Statement of Operations. On October 29, 2002, EP MedSystems
withdrew the registration statement relating to the Fusion Agreement and on
November 13, 2002 the parties mutually agreed to terminate the agreement
effective January 15, 2003. (See Note 12)
On September 5, 2002, EP MedSystems entered into a stock purchase agreement
and license agreement with Boston Scientific Corporation ("BSC") in connection
with a strategic joint development project by EP MedSystems and BSC in the field
of cardiac electrophysiology. It is expected that this development plan will be
completed over the next calendar year. Should EP MedSystems abandon the project
without cause, an abandonment fee of $1 million in cash or EP MedSystems stock
would be due BSC. Following the completion of the development, EP MedSystems
will have marketing rights to the technology and pay royalties to BSC based on
the market value of the technology at the time of sale. This stock purchase
agreement with BSC allows for the sale of up to $3,000,000 of common stock based
on milestones in the development of certain cardiac electrophysiology
technology. The common stock is sold at the lesser of the ten day average
trading price per share prior to the closing of each installment purchase, and
$5.00 per share. Upon signing of the agreement, EPMedSystems received $500,000
for 210,084 shares issued at the ten day average trading price of $2.38 per
share. Pursuant to a registration rights agreement between EP MedSystems and
BSC, BSC has been granted demand registration rights (exercisable on up to two
occasions) and piggyback registration rights with respect to the common stock
purchased pursuant to the stock purchase agreement. The demand registration
rights may not be exercised until the first anniversary of the date of the
registration rights agreement unless certain milestones have been achieved or
the license agreement has been earlier terminated. The piggyback registration
rights may be exercised for a period commencing six months after the date of the
registration rights agreement and ending on the second anniversary of the final
installment purchase under the stock purchase agreement.
NOTE 5. STOCK COMPENSATION
In connection with the hiring of Reinhard Schmidt as EP MedSystems' new
President and Chief Operating Officer during August 2001, Mr. Schmidt purchased
100,000 shares (the "Shares") of EP MedSystems common stock at $2.20 per Share.
EP MedSystems provided a two-year, interest-free, non-recourse loan in the
amount of $220,000 to finance the purchase price of the Shares, which loan was
secured by a pledge to EP MedSystems of the Shares, and the principal balance of
which was to be forgiven ratably over the term of the loan. In July 2002, EP
MedSystems and Mr. Schmidt agreed to rescind the stock purchase transaction with
respect to 75,000 of the Shares (the portion
9
which had not already been paid for through forgiveness of the loan) and to
cancel the unpaid portion of the loan in consideration for the grant to Mr.
Schmidt of an incentive stock option to purchase 75,000 shares of common stock
pursuant to the 2002 Stock Option Plan (subject to shareholder approval of such
plan at the 2002 annual meeting of shareholders) at an exercise price equal to
$2.20 per share (the original purchase price established in connection with Mr.
Schmidt's stock purchase rights and greater than the fair market value of the
common stock on the date of grant of the stock option). This stock option vests
over four years from the date of grant. EP MedSystems recognized a de minimus
compensation charge, related to this stock option as the share price on August
29, 2002 (the date of the 2002 annual meeting of shareholders when the 2002
Stock Option Plan was approved) was greater than $2.20. The compensation charge
is amortized over the vesting period of 4 years.
Until the stock purchase transaction was rescinded in July 2002, EP
MedSystems 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 at the time of issuance, the intrinsic
value of these instruments was zero and, as such, no compensation expense was
recorded. The Shares were re-measured on a quarterly basis and compensation
expense was 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 was adjusted downward in conjunction with the loan amount forgiven on a
quarterly basis as defined in the promissory note. For the nine months ended
September 30, 2002, EP MedSystems recorded $55,000 in compensation expense
related to the forgiven portion of the note and a recorded a fair market value
adjustment of $28,000.
Mr. Schmidt was also granted an option in September 2001 under the 1995
Director Option Plan to purchase 60,000 shares of common stock at an exercise
price of $1.85 per share (the price of the stock on the date of grant); the
option vested 1,000 shares per month. Because Mr. Schmidt was not entitled to
participate in the 1995 Director Option Plan, this option was cancelled in July
2002 in consideration for the grant to Mr. Schmidt of an incentive stock option
to purchase 60,000 shares of common stock pursuant to the 2002 Stock Option Plan
(subject to shareholder approval of such plan at the 2002 annual meeting of
shareholders) at an exercise price equal to $2.10 per share (the fair market
value of the common stock on the date of grant). EP MedSystems recognized a de
minmus compensation charge, related to this stock option as the share price on
August 29, 2002 (the date of the 2002 annual meeting of shareholders when the
2002 Stock Option Plan was approved) was greater than $2.10. The compensation
charge is amortized over the vesting period of 4 years.
NOTE 6. SALE OF STATE NET OPERATING LOSSES
During the nine months ended September 30, 2002 and 2001, EP MedSystems
received approximately $475,000 and $419,000, respectively, related to the sale
of a portion of its cumulative unused New Jersey State Net Operating Loss
("State NOL") carryforwards for its statutory subsidiaries. The sales of the
cumulative net operating losses are a result of a New Jersey State law enacted
January 1, 1999 allowing emerging technology and biotechnology companies to
transfer or "sell" their unused State NOL carryforwards and New Jersey research
and development tax credits to any profitable
10
New Jersey company qualified to purchase them for cash. As of December 31, 2001
and 2000, EP MedSystems had recorded approximately $475,000 and $419,000,
respectively, in deferred tax assets related to these sales. These deferred tax
assets were reversed upon receipt of cash from the sales of these benefits to
third parties in the nine months ended September 30, 2002 and 2001.
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, 2002 and 2001.
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2002 2001
---------- ----------
United States $5,910,000 $4,113,000
Europe/Middle East 1,942,000 1,939,000
Asia and Pacific Rim 1,643,000 912,000
---------- ----------
$9,495,000 $6,964,000
========== ==========
Sales of EP MedSystems' cardiac electrophysiology equipment and related
catheters aggregated approximately $8,676,000 and $819,000 respectively, for the
nine months ended September 30, 2002 and $6,036,000 and $928,000, respectively,
for the comparable period in 2001. EP MedSystems' long-lived assets are located
in the U.S.
Net sales for the nine months ended September 30, 2002 were billed in two
currencies: $9,166,000 in U.S. dollars and 329,000 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 MedSystems does incur
translation gains/losses, which are recorded in Shareholders' Equity. Cumulative
translation losses amounted to approximately $90,000 as of September 30, 2002.
In addition, EP MedSystems had 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. Due to the losses incurred for the quarter,
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
shares of 2,950,294 and 2,515,758 for the nine months ended September 30, 2002
and 2001, respectively, have been excluded from the diluted per share
calculation.
NOTE 9. COMPREHENSIVE INCOME
11
For the nine months ended September 30, 2002 and 2001, EP MedSystems'
comprehensive income approximated net income, except for foreign currency
translation adjustments. The comprehensive losses for the nine months ended
September 30, 2002 and 2001 were approximately $3,900,000 and $3,729,000,
respectively.
NOTE 10. ADOPTION OF SFAS NO. 142
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 are effective
for fiscal years beginning after December 15, 2001, therefore, EP MedSystems
adopted SFAS No.142 on January 1, 2002. 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 is no longer 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.
During the second quarter of 2002, EP MedSystems completed the transitional
goodwill impairment test and, determined that as of January 1, 2002, the fair
value of goodwill exceeds its carrying value. Therefore, EP MedSystems has not
recorded any goodwill transitional impairment loss and step two of the
transitional test is not required.
The following table presents the impact of SFAS No. 142 on net loss and
loss per share had the standard been in effect for the three and nine month
period ended September 30, 2002 and 2001:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Reported net loss $(2,554,971) $(1,104,965) $(3,890,653) $(3,550,096)
Add back: Goodwill amortization -- 12,903 -- 38,707
----------- ----------- ----------- -----------
Adjusted net loss $(2,554,971) $(1,092,062) $(3,890,653) $(3,511,389)
Basic and diluted loss per share:
Reported net loss $(.17) $(.08) $(.26) $(.27)
Goodwill amortization -- -- -- --
----------- ----------- ----------- -----------
Adjusted net loss $(.17) $(.08) $(.26) $(.27)
=========== =========== =========== ===========
At September 30, 2002 and 2001, other intangible assets consist primarily of
patent costs. Accumulated amortization at September 30, 2002 was approximately
$156,000. For the nine months ended September 30, 2002 and 2001, EP MedSystems
recorded approximately $25,000 and $18,000 in amortization expense for other
intangible assets.
12
For the year ended, December 31, 2002 and 2003, amortization expense is
estimated to be approximately $33,000 and $10,000, respectively.
NOTE 11. RECENTLY ISSUED ACCOUNTING STANDARDS
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 MedSystems means the standard will
be adopted on January 1, 2003. EP MedSystems is currently evaluating the impact
the adoption of this statement will have 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, therefore EP MedSystems adopted the standard on January 1,
2002. The adoption had no impact on its results of operations, financial
position or cash flows.
On April 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Recission of FASB Statements No. 4, 44, 64,
Amendment of FASB No. 13 and Technical Corrections". This statement eliminates
the requirement that gains and losses from the extinguishment of debt be
aggregated and classified as an extraordinary item, net of the related income
tax. In addition, SFAS No.145 requires that capital leases that are modified so
that the resulting lease agreement is classified as an operating lease be
accounted for in the same manner as sale-lease back transactions. SFAS No.145 is
generally effective for transactions occurring after May 15, 2002. EP MedSystems
does not expect that the adoption of SFAS No. 145 will have a material impact on
its results of its operations, financial position or cash flows.
13
On July 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit
or Disposal Activities." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. EP MedSystems
does not expect the adoption of SFAS No. 146 to have a material impact on its
results of its operations, financial position or cash flows.
NOTE 12. SUBSEQUENT EVENT
On October 29, 2002, EP MedSystems withdrew the registration statement on
Form SB-2 relating to the Fusion Agreement and on November 13, 2002 the parties
mutually agreed to terminate the agreement effective January 15, 2003 (See Note
4).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
- --------
EP MedSystems ("EP Med") 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. 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 produce, and thereby locate an arrhythmia. For
the nine months ended September 2002, the EP-WorkMate(R) and EP-3(TM) Stimulator
accounted for approximately 78% of 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 4% of
EP Med's total sales revenues for the nine months ended September 2002. The sale
of fluoroscopy units in the third quarter, accounted for 13% of sales for the
nine months ended September, 2002. While we no longer have an agreement to sell
these types of units, we are evaluating strategic opportunities in this area.
We have identified the diagnosis and treatment of atrial fibrillation, a
particular type of arrhythmia, as a primary focus for our ongoing development
efforts. Atrial fibrillation is a condition where erratic electrical signals are
present within the atria, the
14
upper chambers of the heart, causing fibrillation of the atria, which prevents
the atria from providing appropriate blood flow output. 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, low-energy bi-phasic 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 a 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 5% of EP Med's total sales
revenues for the nine months ended September 2002. 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 fourth quarter of 2002 or later, 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 the inside of 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 expect to file our application for
510(k) approval and CE Mark authorization in the fourth quarter of 2002. We do
not anticipate receiving approval to sell the ViewMate(TM) Ultrasound System
until at least the first quarter of 2003, 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.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net sales were $9,495,000 for the nine months ended September 30, 2002 as
compared to $6,964,000 for the comparable period in 2001. This $2,531,000 (or
36%) increase is primarily due to a 13% increase in the number of EP
WorkMates(R) sold in the nine months ended September 30, 2002 compared to the
same period in 2001 due to
15
continued market acceptance of our new NT Platform coupled with improved sales
in our domestic market. In addition, revenue of $1,249,000 was recorded in the
three months ended September 30, 2002 in connection with the sale of fluoroscopy
units. While we no longer have an agreement to sell fluoroscopy units, EP Med is
currently evaluating strategic opportunities in this area.
Net sales for the nine months ended September 2002 were billed in two
currencies: $9,166,000 in U.S. dollars and 329,000 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 in Stockholder's Equity. EP Med incurred a translation loss of
approximately $10,000 for the nine months ended September 30, 2002. EP Med has
not entered into any derivative financial instruments for hedging or other
purposes.
Gross profit on sales for the nine months ended September 30, 2002 was
$4,998,000 as compared with $3,737,000 for the same period in 2001. Gross profit
decreased as a percentage of sales from 54% to 53%, due to a lower margin on the
fluoroscopy units, net of reductions in manufacturing labor costs (primarily
resulting from the cost initiatives initiated in the fourth quarter of 2001) and
lower raw material component costs. We anticipate improvement in EP Med's
overall gross profit percentage as sales of the ALERT(R) System and other
catheter products increase, which should offset the fixed costs associated with
maintaining a catheter manufacturing operation.
Sales and marketing expenses decreased $98,000 (or 3%) to $3,384,000 for
the nine months ended September 30, 2002 as compared to the same period in 2001.
The decrease during this period was primarily due to a reduction in head count
and advertising costs.
General and administrative expenses increased $236,000 (or 15%) to
$1,861,000 for the nine months ended September 30, 2002 as compared to the same
period in 2001. This was primarily due to an increase in legal and accounting
fees in connection with various agreements and business insurance and travel
costs, net of a decrease in foreign exchange changes.
Research and development expenses increased $439,000 (or 23%) to $2,371,000
for the nine months ended September 30, 2002 as compared to the same period in
2001. This is primarily due to professional fees related to our latest
development initiatives around the ALERT(R) System and ViewMate(TM) ultrasound
imaging console and intracardiac imaging catheters and costs relating to
addressing regulatory and submission requirements. 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.
In connection with the stock purchase agreement with Fusion Capital, the
Company had recorded deferred offering costs of approximately $1 million, which
were recorded in other assets and additional paid-in capital, and were to be
offset against proceeds as the common stock was sold to Fusion Capital. During
the third quarter, the Company determined it was no
16
longer probable that shares would be sold under this agreement, based on new
financing opportunities initiated by the Company, and therefore, the entire
amount of the deferred offering costs were written off. This non-cash charge, as
well as $76,000 of additional cash expenditures, were recorded as a separate
line item labeled "Offering costs" within operating expenses in the Statement of
Operations. On October 29, 2002, EP MedSystems withdrew the registration
statement relating to the Fusion Agreement and on November 13, 2002 the parties
mutually agreed to terminate the agreement effective January 15, 2003.
Interest expense decreased $91,000 (or 36%) to $16,000 for the nine months
ended September 30, 2002 as compared to the same period in 2001. This was a
result of a reduction in the prime interest rate in the first nine months as
compared to the same period in 2001 and the paydown of long-term debt in the
first quarter of 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001.
Net sales were $3,411,000 for the three months ended September 30, 2002 as
compared to $2,483,000 for the comparable period in 2001. This $928,000 (or 37%)
increase is the result of revenue of $1,249,000 which was recorded in the three
months ended September 30, 2002 in connection with the sale of a fluoroscopy
units. While we no longer have an agreement to sell fluoroscopy units, EP Med is
currently evaluating strategic opportunities in this area.
Net sales for the three months September 2002 were billed in two
currencies: $3,386,000 in U.S. dollars and 25,000 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. EP Med's translation
loss for the three months ended September 30, 2002 was approximately $4,000.
Gross profit on sales for the three months ended September 30, 2002 was
$1,442,000 as compared to $1,337,000 for the same period in 2001. The gross
profit decreased as a percentage of sales from 54% to 42%, due to a lower margin
on the fluoroscopy units and a higher number of units sold outside the United
States which have a lower overall margin; net of reductions in manufacturing
labor costs (primarily resulting from the cost initiatives initiated in the
fourth quarter of 2001) and lower raw material component costs.
Sales and marketing expenses remained essentially the same at $1,190,000
for the three months ended September 30, 2002 as compared to the same period in
2001. Costs decreased as a percentage of total sales to 35% for the third
quarter of 2002 as compared to 49% for the same period in 2001. This was
primarily due to a reduction of travel, head count and advertising with an
increase in sales as compared to the same period in 2001.
General and administrative expenses increased $278,000 (or 51%) to $822,000
for the three months ended September 30, 2002 as compared to the same period in
2001. This was primarily due to an increase in legal and accounting fees in
connection with various agreements and in business insurance and travel costs
17
Research and development expenses increased $179,000 (or 28%) to $813,000
for the three months ended September 30, 2002 as compared to the same period in
2001. This was primarily due to professional fees related to our latest
development initiatives around the ALERT(R) System and ViewMate(TM) ultrasound
imaging console and intracardiac imaging catheters and costs relating to
addressing regulatory and submission requirements. 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.
In connection with the stock purchase agreement with Fusion Capital, the
Company had recorded deferred offering costs of approximately $1 million, which
were recorded in other assets and additional paid-in capital, and were to be
offset against proceeds as the common stock was sold to Fusion Capital. During
the third quarter, the Company determined it was no longer probable that shares
would be sold under this agreement, based on new financing opportunities
initiated by the Company, and therefore, the entire amount of the deferred
offering costs were written off. This non-cash charge, as well as $76,000 of
additional cash expenditures, were recorded as a separate line item labeled
"Offering costs" within operating expenses in the Statement of Operations. On
October 29, 2002, EP MedSystems withdrew the registration statement relating to
the Fusion Agreement and on November 13, 2002 the parties mutually agreed to
terminate the agreement effective January 15, 2003.
Interest expense decreased $28,000 for the three months ended September 30,
2002 as compared to the same period in 2001. This was the result of a reduction
in the prime interest rate in the third quarter of 2002 as compared with the
second quarter of 2001 and the pay down of long-term debt in the first quarter
of 2002.
LIQUIDITY AND CAPITAL RESOURCES.
Since EP Med's incorporation in January 1993, EP financial performance has
resulted in an accumulated deficit of approximately $26.2 million at December
31, 2001 and approximately $30 million at September 30, 2002.
In November 2000, EP Med Systems completed a debt financing with Medtronic
Asset Management, Inc., an affiliate of Medtronic, Inc., one of EP Med's
shareholders, which provided an aggregate of $3.2 million. 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,
Chairman of the Board 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 amounted to approximately 5% of the
total outstanding common stock of Transneuronix, Inc. EP Med is currently in
negotiations to extend the terms of the agreement.
In October 2001, EP Med consummated the private sale and issuance of
newly-designated Series A convertible preferred stock to Medtronic, Inc., a
shareholder and creditor of EP Med, and Century Medical, Inc. ("CMI"), its
Japanese distributor. An aggregate of 1,259,717 shares was issued in the
transactions. The preferred shares were
18
issued to CMI at a price of $2.048 per share as well as an amendment to EP Med'
Distribution Agreement with CMI, including an extension of the original
Distribution Agreement. The transaction with Medtronic involved the sale of the
shares of preferred stock at a price of $1.781 per share. EP Med received
aggregate gross proceeds of $2.4 million from the two transactions.
CMI converted all of its shares of Series A Preferred Stock into common
shares of EP Med in the first quarter of 2002. Medtronic converted 300,000 of
its shares of Series A Preferred Stock into common stock of EP Med in April
2002. The converted stock of both CMI and Medtronic were registered for resale
by EP Med pursuant to a registration statement on Form S-3, which was declared
effective by the SEC in May 2002.
In January 2002, EP Med received approximately $475,000 in cash related to
the sale of a portion of its unused cumulative New Jersey Net Operating Loss
carryforwards.
We are currently negotiating with an institutional lender regarding a $2
million line of credit facility.
We are negotiating a mortgage on our West Berlin, New Jersey facility. We
expect that this agreement will close in the fourth quarter of 2002.
On September 5, 2002, EP MedSystems entered into a stock purchase agreement
and license agreement with Boston Scientific Corporation ("BSC") in connection
with a strategic joint development project by EP MedSystems and BSC in the field
of cardiac electrophysiology. It is expected that this development plan will be
completed over the next calendar year. Should EP MedSystems abandon the project
without cause, an abandonment fee of $1 million in cash or EP MedSystems stock
would be due BSC. Following the completion of the development, EP MedSystems
will have marketing rights to the technology and pay royalties to BSC based on
the market value of the technology at the time of sale. This stock purchase
agreement with BSC allows for the sale of up to $3,000,000 of common stock based
on milestones in the development of certain cardiac electrophysiology
technology. The common stock is sold at the lesser of the ten day average
trading price per share prior to the closing of each installment purchase, and
$5.00 per share. Upon signing of the agreement, EP MedSystems received $500,000
for 210,084 shares issued at the ten day average trading price of $2.38 per
share. Pursuant to a registration rights agreement between EP MedSystems and
BSC, BSC has been granted demand registration rights (exercisable on up to two
occasions) and piggyback registration rights with respect to the common stock
purchased pursuant to the stock purchase agreement. The demand registration
rights may not be exercised until the first anniversary of the date of the
registration rights agreement unless certain milestones have been achieved or
the license agreement has been earlier terminated. The piggyback registration
rights may be exercised for a period commencing six months after the date of the
registration rights agreement and ending on the second anniversary of the final
installment purchase under the stock purchase agreement.
Net cash used in operating activities in the nine months ended September
30, 2002 amounted to approximately $242,000 as compared with a net cash usage of
$2,960,000 in the same period in 2001. This improvement was primarily due to
non-cash portion of the write off of Fusion costs of approximately $1,042,000
and a decrease in accounts receivable as compared to the third quarter of 2001.
Capital expenditures, net of
19
disposals, were $141,000 for the nine month period ended September 30, 2002 as
compared to $123,000 in 2001. 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
space and certain office equipment under operating leases.
Working capital decreased $2,292,000 from December 31, 2001 to $4,523,000
at September 30, 2002. This is primarily due to (1) a $363,000 reduction in
cash, primarily the result of the repayment of EP Med's term loan balance to
Fleet and current losses; and (2) a $475,000 reduction in deferred tax assets
due to the receipt from the sale of the New Jersey State Net Operating Loss
noted above (3) net of increases in inventory purchasing for the nine months
ended September 30, 2002.
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. To date, EP Med has experienced
insignificant inventory write-downs and the reserve is consistent with
management's expectations.
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, increased manufacturing activity and expansion of
sales and marketing activities. The amount and timing of future losses will
depend upon, among other things, the volume of sales of our existing products,
the timing of regulatory approval and market acceptance of the ALERT(R) and
ultrasound systems and of new products under development as well as EP Med's
ability to establish, preserve and enforce intellectual property rights related
to our 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. We are currently seeking sources of financing. If sources of
financing are not available, we will have to reduce costs or reduce our scope of
operations. Based upon our current plans and projections, together with expected
financings or potential cost reductions, however, we believe that our existing
capital resources will be sufficient to meet our anticipated capital needs for
at least the next twelve months.
ADOPTION OF SFAS NO. 142
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 are effective
for fiscal years beginning after December 15, 2001, therefore, EP MedSystems
adopted SFAS No. 142 on January 1, 2002. 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 Med's unamortized goodwill
20
balance is no longer 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. During the second
quarter of 2002, EP MedSystems completed the transitional goodwill impairment
test and, determined that as of January 1, 2002, the fair value of goodwill
exceeds its carrying value. Therefore, EP MedSystems has not recorded any
goodwill transitional impairment loss and step two of the transitional test is
not required.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 MedSystems means the standard will
be adopted on January 1, 2003. EP MedSystems is currently evaluating the impact
the adoption of this statement will have 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, therefore EP MedSystems adopted the standard on January 1,
2002. The adoption had no impact on its results of operations, financial
position or cash flows.
On April 30, 2002, the FASB issued Statement No. 145, "Recission of FASB
Statements No. 4, 44, 64, Amendment of FASB No. 13 and Technical Corrections"
("SFAS No. 145"). This statement eliminates the requirement that gains and
losses from
21
the extinguishment of debt be aggregated and classified as an extraordinary
item, net of the related income tax. In addition, SFAS No. 145 requires that
capital leases that are modified so that the resulting lease agreement is
classified as an operating lease be accounted for in the same manner as
sale-lease back transactions. SFAS No.145 is generally effective for
transactions occurring after May 15, 2002. EP MedSystems does not expect that
the adoption of SFAS No.145 will have a material impact on its results of its
operations, financial position or cash flows.
On July 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit
or Disposal Activities." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. EP MedSystems
does not expect the adoption of SFAS No. 146 to have a material impact on its
results of its operations, financial position or cash flows.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) On September 5, 2002, EP MedSystems sold 201,084 shares of common stock
to Boston Scientific Corporation for $500,000 (or $2.38 per share, the ten day
average trading price for the common stock preceding the sale. See Note 4. The
sale was effected without registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as no general solicitation was made, only a
single offer and sale was made, and the purchaser was financially sophisticated
and capable of evaluating the merits and risks of its investment.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EP MedSystems held its 2002 Annual Meeting of Shareholders (the "Meeting")
on August 29, 2002. The following were the matters voted upon at the Meeting:
1. Election of Directors. The following directors were elected at the
Meeting: Abhijeet Lele, Paul L. Ray and Richard C. Williams. The number of votes
cast for and withheld from each director are as follows:
Number of Shares
----------------
For Withheld
--- --------
Abhijeet Lele 12,578,528 624,950
Paul L. Ray 12,540,128 663,350
Richard C. Williams 12,576,628 626,850
David A. Jenkins and Reinhard Schmidt continued as directors after the Meeting.
2. Approval of 2002 Stock Option Plan. The 2002 Stock Option Plan was
approved by the following vote of the common stock:
23
Number of Shares
----------------
For Against Abstained
--- ------- ---------
6,997,311 906,646 10,450
3. Approval of Amendment to 1995 Director Option Plan. The amendment to the
1995 Director Option Plan increasing the shares issuable thereunder from 360,000
to 540,000 was approved by the following vote of the common stock:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
6,938,159 963,798 12,450
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits are listed in the Exhibit Index appearing at page 24
herein.
(b) Reports on Form 8-K.
None.
24
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, 2002 By: /s/ Reinhard Schmidt
--------------------------------------------
Reinhard Schmidt
President and Chief Executive Officer and Director
(Principal Executive Officer)
25
CERTIFICATION
I, Reinhard Schmidt, President and Chief Executive Officer of EP
MedSystems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of EP MedSystems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board or directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Reinhard Schmidt
----------------------------------------------
Reinhard Schmidt
President and Chief Executive Officer
(Principal Executive Officer)
26
CERTIFICATION
I, Matthew Hill, Controller of EP MedSystems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of EP MedSystems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board or directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Matthew Hill
----------------------------------------------
Matthew Hill
Controller
(Principal Financial Officer)
27
EXHIBIT INDEX
-------------
Exhibit # Description Location
- --------- ----------- --------
10.1 Stock Purchase Agreement dated September 5, 2002
between EP MedSystems and Boston Scientific
Corporation (without exhibits) Filed herewith
10.2 Registration Rights Agreement dated as of
September 5, 2002 between EP MedSystems and Boston
Scientific Corporation (without exhibits) Filed herewith
99.1 Certification pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 Filed herewith
28