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This was files yesterday, April 14, at 3:11 PM...
Results of Operations - Nine- and Three-months Ended February 28, 1997 and February 29, 1996
The Company generated revenues from the sale and lease of its EECP(R) (Enhanced External
Counterpulsation) device of $1,643,000 and $373,000 for the nine- and three-month periods ended
February 28, 1997 as compared with $399,000 and $55,000 for the comparable prior periods.
The Company incurred net losses of $3,097,000 and $1,275,000 for the nine- and three-month
periods ended February 28, 1997 as compared with $2,762,000 and $1,116,000 for the
comparable prior periods. Quarterly revenues did not continue at the level achieved in the last
quarter of fiscal 1996, which the Company believes is a result of the continuing absence of blanket
reimbursement coverage for EECP(R) and the inability or unwillingness of certain patients to pay for
treatment. Moreover, quarterly results in fiscal 1997 were adversely affected by the mix favoring
rentals over sales and the non-performance of certain leases.
Gross margins from the EECP(R) are dependent on a number of factors, particularly the number of
units sold or leased during the period, and by certain fixed period costs including facilities, payroll
and insurance. Gross margins are furthermore affected by the location of the Company's customers
and the amount and nature of training and other initial costs required to place the EECP(R) in service
for customer use. Accordingly, the gross margin realized during the current period may not be
indicative of future margins.
Selling, general and administrative (SGA) expenses for the nine- and three-month periods ended
February 28, 1997 and February 29, 1996 were approximately $3,293,000 and $1,057,000, and
$2,358,000 and $856,000, respectively. The $935,000 increase in SGA expenses for the
comparable nine-month period resulted primarily from a $622,000 increase in payroll, commissions
and related costs associated with the addition of a direct national sales force and other operating
personnel, an increase of $235,000 in marketing and related costs associated with the
commercialization of EECP(R) and a $200,000 reserve against uncollectable accounts, offset by
$168,000 in costs reported in this category in the prior year, the nature of which are currently
allocable to cost of sales since the onset of revenues. The $201,000 increase in SGA expenses for
the comparable three-month period resulted primarily from a $178,000 increase in payroll,
commissions and related costs associated with a direct national sales force and other operating
personnel, and an increase of $61,000 in marketing and related costs associated with the
commercialization of
EECP(R).
Research and development (R&D) expenses increased $394,000 and $242,000 for the nine- and
three-months ended February 28, 1997 compared to the prior periods. The increase is a result of
the timing of commitments and expenses related to the Company's multi-center clinical study for
EECP(R). Such commitments and expenses are expected to continue in fiscal 1997.
The decrease in interest and financing costs is directly attributable to the conversion of debt in June
1996.
Liquidity and Capital Resources
Working capital at February 28, 1997 decreased $1,554,000 to $3,405,000 as compared to
$4,959,000 at May 31, 1996 due to continuing operating losses, offset by proceeds from the
exercise of warrants and the cancellation of $239,000 of interest due as a result of the conversion of
Notes. During the nine-months ended February 28, 1997, the Company generated net proceeds of
$919,000 from the exercise of common stock purchase warrants.
In June 1996, the $3,725,000 outstanding principal amount of Notes were converted into
3,725,000 shares of the Company's common stock. The first quarter effect of this conversion was
to increase stockholders' equity by approximately $3,335,000, consisting of the debt conversion
($3,725,000) and accrued interest ($239,000), net of unamortized loan costs and conversion fees
($629,000).
In March 1996, the Company entered into an exclusive agreement with a third party whereby such
third party will purchase, subject to credit approval, the EECP(R) system on a non-recourse basis
and lease the system to the Company's customers. During the nine-months ended February 28,
1997, approximately 65% of the Company's revenues were derived through such transactions.
Although there can be no certainty about future revenues generated through these transactions, the
Company believes that these transactions will contribute to expected growing revenues and working
capital in the future.
Management believes that its present working capital position at February 28, 1997 and the ongoing
commercialization of EECP(R), some units of which will be purchased by the aforementioned
medical equipment finance company, will make it possible for the Company to support its internal
overhead expenses and to implement its business plans at least through February 28, 1998.
Except for historical information contained herein, the matters discussed are forward looking
statements that involve risks and uncertainties. Among the factors that could cause actual results to
differ materially are the following: the effect of the dramatic changes taking place in the healthcare
environment; the impact of competitive procedures and products and their pricing; unexpected
manufacturing problems in foreign supplier facilities; unforeseen difficulties and delays in the conduct
of clinical trials and other product development programs; the actions of regulatory authorities and
third-party payers in the United States and overseas; uncertainties about the acceptance of a novel
therapeutic modality by the medical community; and the risk factors reported from time to time in the
Company's SEC reports.
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