** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10–Q**

**ý****                                ****Quarterly Report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 for the quarterly period ended September 30, 2002**

o                                  **Transition Report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 for the transition period from        to       .**

**CommissionFile No. 0–22233**

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**EndocardialSolutions, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                   |                                                     | **41-1724963**                       |
|----------------------------------------------------------------|----------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization |                                                     | (IRS Employer Identification Number) |
| **1350 Energy Lane  Suite 110   Saint Paul, Minnesota 55108**  |                                                     | **(651) 523-6900**              |
| (Address of principal executive offices and zip  code)         | (Registrant’s telephone number including area code) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) Securities Exchange Act of 1934 during the preceding twelve (12) months (or forsuch shorter period that theRegistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.Yes ý  No o

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Common  Stock, $.01 par value** |   | **16,616,473**                                          |
|-----------------------------------|--------|---------------------------------------------------------|
| (Class)                           |   | (Number of Shares Outstanding at November 6,  2002 |

 

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**INDEXEndocardial Solutions, Inc.**
|                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
| **PART I.  FINANCIAL INFORMATION**                                                                             |   |
|                                                                                                                |   |
| Item 1.  Financial Statements (Unaudited)                                                                      |   |
| Consolidated Balance Sheets–September  30, 2002 and December 31, 2001                                          |   |
| Consolidated  Statements of Operations– Three and nine months ended September 30,  2002 and September 30, 2001 |   |
| Consolidated  Statements of Cash Flows–Three and nine months ended September 30, 2002  and September 30, 2001  |   |
| Notes to  Consolidated Financial Statements                                                                         |   |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations.         |   |
| Item  3.  Qualitative and Quantitative  Disclosures about Market Risk.                                         |   |
| Item 4.  Controls and Procedures                                                                               |   |
|                                                                                                                |   |
| **PART II.  OTHER INFORMATION**                                                                                |   |
|                                                                                                                |   |
| Items 1 through  5 have been omitted since all items are inapplicable or answers negative.                          |   |
| Item 6.  Exhibits and Reports on Form 8-K                                                                 |   |

 

 

1

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**PART I —FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

** **

**EndocardialSolutions, Inc.**

 

**Consolidated Balance Sheets**

 
|                                                                                                       |   | **September  30,** |       | **December  31,** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|--------|
|                                                                                                       |   | **2002**           |       | **2001**          |   |
|                                                                                                       |   | **(Unaudited)**    |       | **(Note)**        |   |
| **ASSETS**                                                                                                 |   |               |       |              |   |
| Current Assets:                                                                                            |   |               |       |              |   |
| Cash and cash  equivalents                                                                                 |   | $                  | 3,894,724  |              | $      | 4,550,059 |   |
| Short-term  investments                                                                                    |   | —             |       | —            |   |
| Accounts  Receivable, net of reserve for doubtful accounts (2002 - $60,000; 2001 -  $60,000)               |   | 6,799,114          |       | 5,084,412         |   |
| Inventories                                                                                                |   | 3,837,976          |       | 2,733,145         |   |
| Prepaid expenses  and other current assets                                                                 |   | 1,026,328          |       | 554,202           |   |
| Total current  assets                                                                                      |   | 15,558,142         |       | 12,921,818        |   |
|                                                                                                       |   |               |       |              |   |
| Furniture and  equipment                                                                                   |   | 8,404,666          |       | 7,329,598         |   |
| Less accumulated  depreciation                                                                             |   | (5,622,176         | )          | (4,721,350        | )      |
|                                                                                                       |   | 2,782,490          |       | 2,608,248         |   |
|                                                                                                       |   |               |       |              |   |
| Deposits                                                                                                   |   | 49,452             |       | 49,947            |   |
| Patents, net of  accumulated amortization (2002 - $118,426; 2001 - $111,489)                               |   | 12,872             |       | 19,809            |   |
| Software  development costs, net of accumulated amortization (2002 - $1,088,292; 2001 -  $891,107)         |   | —             |       | 197,185           |   |
| Total assets                                                                                               |   | $                  | 18,402,956 |              | $      | 15,797,007 |   |
|                                                                                                       |   |               |       |              |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                             |   |               |       |              |   |
| Current  Liabilities:                                                                                      |   |               |       |              |   |
| Accounts payable  and accrued expenses                                                                     |   | $                  | 3,670,156  |              | $      | 4,650,538 |   |
| Bank line of  credit                                                                                       |   | 1,000,000          |       | 750,000           |   |
| Current portion  of capital lease obligations                                                              |   | 572,786            |       | 594,010           |   |
| Current portion  of deferred revenue                                                                       |   | 877,527            |       | 586,104           |   |
| Total current  liabilities                                                                                 |   | 6,120,469          |       | 6,580,652         |   |
|                                                                                                       |   |               |       |              |   |
| Long-term  Liabilities:                                                                                    |   |               |       |              |   |
| Capital lease  obligations                                                                                 |   | 469,053            |       | 301,187           |   |
| Deferred revenue                                                                                           |   | 325,296            |       | 199,368           |   |
| Total long-term  liabilities                                                                               |   | 794,349            |       | 500,555           |   |
|                                                                                                       |   |               |       |              |   |
| Stockholders’  equity:                                                                                |   |               |       |              |   |
| Undesignated  Preferred Stock, par value $.01 per share:                                                   |   |               |       |              |   |
| Authorized  shares—10,000,000                                                                         |   |               |       |              |   |
| Issued and  outstanding shares—none                                                                   |   | —             |       | —            |   |
| Common Stock,  $.01 par value                                                                              |   |               |       |              |   |
| Authorized  shares—40,000,000                                                                         |   |               |       |              |   |
| Issued and  outstanding shares—September 30, 2002—16,616,473; December 31,  2001—14,934,624 |   | 166,165            |       | 149,346           |   |
| Additional  paid-in capital                                                                                |   | 89,081,623         |       | 79,707,845        |   |
| Less notes  receivable from officer                                                                        |   | (371,250           | )          | (371,250          | )      |
| Accumulated  deficit                                                                                       |   | (77,328,682        | )          | (70,486,214       | )      |
| Accumulated  other comprehensive income/(loss)                                                             |   | 161,810            |       | (9,556            | )      |
| Deferred  compensation                                                                                     |   | (221,528           | )          | (274,371          | )      |
| Total  stockholders’ equity                                                                           |   | 11,488,138         |       | 8,715,800         |   |
| Total liabilities  and stockholders’ equity                                                           |   | $                  | 18,402,956 |              | $      | 15,797,007 |   |

 

Note: The balance sheet at December 31, 2001 has been derived from theaudited financial statements at that date but does not include all of the informationand footnotes requird by accounting principles generally accepted in the UnitedStates.

 

 

2

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**EndocardialSolutions, Inc.**

 

**ConsolidatedStatements of Operations**

(Unaudited)

 

 
|                                    |   | **For the  Three Months Ended** |       | **For the  Nine Months Ended** |   |
|-----------------------------------------|--------|---------------------------------|------------|--------------------------------|--------|
|                                    |   | **September  30,**              |       | **September  30,**             |   | **September  30,** |   | **September  30,** |   |
|                                    |   | **2002**                        |       | **2001**                       |   | **2002** |   | **2001** |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Revenue                                 |   | $                               | 5,508,414  |                           | $      | 5,817,633 |   | $ | 20,148,536 |   | $ | 15,997,504 |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Cost of goods  sold                     |   | 2,040,840                       |       | 2,287,088                      |   | 7,431,206 |   | 6,588,261 |   |
| Gross profit                            |   | 3,467,574                       |       | 3,530,545                      |   | 12,717,330 |   | 9,409,243 |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Operating  expenses:                    |   |                            |       |                           |   |   |   |   |   |
| Research and  development               |   | 1,399,066                       |       | 1,446,492                      |   | 3,993,034 |   | 3,916,334 |   |
| General and  administrative             |   | 744,531                         |       | 556,996                        |   | 2,036,108 |   | 1,750,402 |   |
| Sales and  marketing                    |   | 4,417,833                       |       | 3,551,849                      |   | 13,495,235 |   | 10,791,782 |   |
| Operating loss                          |   | (3,093,856                      | )          | (2,024,792                     | )      | (6,807,047 | ) | (7,049,275 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Other income  (expense):                |   |                            |       |                           |   |   |   |   |   |
| Interest income                         |   | 15,740                          |       | 56,275                         |   | 65,102 |   | 231,689 |   |
| Interest expense                        |   | (39,557                         | )          | (25,046                        | )      | (100,522 | ) | (129,567 | ) |
|                                    |   | (23,817                         | )          | 31,229                         |   | (35,420 | ) | 102,122 |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Net loss for the  period                |   | $                               | (3,117,673 | )                              | $      | (1,993,563 | ) | $ | (6,842,467 | ) | $ | (6,947,153 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Net loss per  share - basic and diluted |   | $                               | (0.19      | )                              | $      | (0.13 | ) | $ | (0.42 | ) | $ | (0.50 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Weighted average  shares outstanding    |   | 16,616,195                      |       | 14,810,271                     |   | 16,239,211 |   | 14,028,730 |   |

* *

*See accompanying notes.*

 

 

 

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**EndocardialSolutions, Inc.**

 

**ConsolidatedStatements of Cash Flows**

(Unaudited)

 

 
|                                                                         |   | **For the  Three Months Ended** |       | **For the  Nine Months Ended** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|--------------------------------|--------|
|                                                                         |   | **September  30,**              |       | **September  30,**             |   | **September  30,** |   | **September  30,** |   |
|                                                                         |   | **2002**                        |       | **2001**                       |   | **2002** |   | **2001** |   |
| **Operating  activities**                                                    |   |                            |       |                           |   |   |   |   |   |
| Net loss                                                                     |   | $                               | (3,117,673 | )                              | $      | (1,993,563 | ) | $ | (6,842,467 | ) | $ | (6,947,153 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            |       |                           |   |   |   |   |   |
| Depreciation and  amortization                                               |   | 356,593                         |       | 405,375                        |   | 1,103,119 |   | 1,251,571 |   |
| Amortization of  deferred compensation                                       |   | 22,814                          |       | 21,914                         |   | 67,243 |   | 39,498 |   |
| Loss on disposal  of equipment                                               |   | —                          |       | —                         |   | — |   | 6,344 |   |
| Changes in  operating assets and liabilities:                                |   |                            |       |                           |   |   |   |   |   |
| Accounts  Receivable                                                         |   | 1,841,371                       |       | (1,080,565                     | )      | (1,484,006 | ) | (498,563 | ) |
| Inventory                                                                    |   | (161,726                        | )          | (39,106                        | )      | (1,141,184 | ) | 580,279 |   |
| Prepaid expenses  and other assets                                           |   | (390,080                        | )          | 118,239                        |   | (429,489 | ) | (455,037 | ) |
| Accounts payable  and accrued expenses                                       |   | (572,583                        | )          | 8,661                          |   | (1,220,548 | ) | 560,487 |   |
| Deferred revenue                                                             |   | 243,450                         |       | 50,670                         |   | 397,420 |   | 78,178 |   |
| Net cash (used  in) operating activities                                     |   | (1,217,834                      | )          | (2,508,375                     | )      | (9,549,912 | ) | (5,384,396 | ) |
|                                                                         |   |                            |       |                           |   |   |   |   |   |
| **Investing  activities**                                                    |   |                            |       |                           |   |   |   |   |   |
| Purchases of  short-term investments                                         |   | —                          |       | —                         |   | — |   | (2,938,753 | ) |
| Maturities of  short-term investments                                        |   | —                          |       | 3,474,082                      |   | — |   | 5,926,341 |   |
| Purchases of  furniture and equipment                                        |   | (394,008                        | )          | (214,346                       | )      | (488,667 | ) | (281,709 | ) |
| Patent  expenditures                                                         |   | —                          |       | —                         |   | — |   | (650 | ) |
| Software  development costs                                                  |   | —                          |       | —                         |   | — |   | (295,777 | ) |
| Net cash  (provided by) investing activities                                 |   | (394,008                        | )          | 3,259,736                      |   | (488,667 | ) | 2,409,452 |   |
|                                                                         |   |                            |       |                           |   |   |   |   |   |
| **Financing  activities**                                                    |   |                            |       |                           |   |   |   |   |   |
| Proceeds from  bank line of credit                                           |   | 250,000                         |       | —                         |   | 250,000 |   | — |   |
| Proceeds from  capital lease obligations                                     |   | —                          |       | —                         |   | 162,617 |   | — |   |
| Principal  payments on notes payable and capital lease obligations           |   | (247,033                        | )          | (140,154                       | )      | (578,187 | ) | (7,455,584 | ) |
| Proceeds from  issuance of common stock                                      |   | (13,366                         | )          | (36,806                        | )      | 9,376,196 |   | 7,155,764 |   |
| Net cash  provided by (used in) financing activities                         |   | (10,399                         | )          | (176,960                       | )      | 9,210,626 |   | (299,820 | ) |
|                                                                         |   |                            |       |                           |   |   |   |   |   |
| Effect of  exchange rate changes on cash                                     |   | (25,359                         | )          | —                         |   | 172,617 |   | — |   |
|                                                                         |   |                            |       |                           |   |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                            |   | (2,207,600                      | )          | 574,401                        |   | (655,336 | ) | (3,274,764 | ) |
| Cash and cash  equivalents at beginning of period                            |   | 6,102,323                       |       | 3,922,375                      |   | 4,550,059 |   | 7,771,540 |   |
| Cash and cash  equivalents at end of period                                  |   | $                               | 3,894,723  |                           | $      | 4,496,776 |   | $ | 3,894,723 |   | $ | 4,496,776 |   |
|                                                                         |   |                            |       |                           |   |   |   |   |   |
| **Supplemental  disclosure of non-cash investing and financing activities**  |   |                            |       |                           |   |   |   |   |   |
| Purchase of  equipment and inventory through capital lease obligations       |   | $                               | —     |                           | $      | 79,128 |   | $ | 724,830 |   | $ | 352,403 |   |
|                                                                              |        |                                 |            |                                |        |  |  |  |  |  |  |  |  |  |

 

 

 

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### **Endocardial Solutions,Inc.**

### ** **

### **Notes to Consolidated Financial Statements**

### ** **

### **(Unaudited)**

**1.**                                      Basis ofPresentation

The accompanying unaudited financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10–Qand Article 10 of Regulation S–X. Accordingly, they do not include all the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  Operating results for the three and ninemonths ended September 30, 2002, are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2002.  These financial statements should be read inconjunction with the audited financial statements and accompanying notes forthe fiscal year ended December 31, 2001, contained in the Company’sForm 10–K.

**2.             Inventories**

Inventories are carried at the lower of cost(first-in, first-out basis) or market. The majority of inventory consists of purchased components.  To determine the technological feasibilityof its software efforts, the Company utilizes the working model approachavailable under SFAS No. 86 and believes that the working model wasachieved when the software was available for commercial use in June 1998.

**3.             Reclassifications**

Certain prior year items have been reclassified toconform to current year presentations.

**4.             Stock Offering**

In February 2002, the Company received proceeds of$10,000,000 from a private placement of 1,666,667 shares of its common stock ata price of $6.00 per share, to accredited investors.

**5.             Segment Reporting**

Sales by geographic destination as a percentage oftotal sales were as follows for the three and nine months ended September 30:
|           |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |   |
|----------------|--------|--------------------------------|--------|-------------------------------|--------|
|           |   | **September 30,**              |   | **September 30,**             |   | **September 30,** |   | **September 30,** |   |
|           |   | **2002**                       |   | **2001**                      |   | **2002** |   | **2001** |   |
| Domestic       |   | 81                             | %      | 73                            | %      | 76 | % | 81 | % |
| International: |   |                           |   |                          |   |   |   |   |   |
| Europe         |   | 14                             | %      | 14                            | %      | 16 | % | 10 | % |
| Asia Pacific   |   | 5                              | %      | 11                            | %      | 5 | % | 6 | % |
| Canada/Mexico  |   | 0                              | %      | 2                             | %      | 3 | % | 3 | % |

 

5

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## **Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**General**

Endocardial SolutionsInc. (the “Company”), was incorporated in May 1992.  The Company develops, manufactures and markets the EnSite 3000®clinical workstation and the EnSite® catheter (together, the “EnSite System”)for use by electrophysiologists in diagnosing and mapping abnormal heartrhythms known as tachycardias.  Duringthe second quarter of 1999, the Company received approval from the U.S. Foodand Drug Administration to market the EnSite System in the U.S. for use in theright atrium of the heart.  The EnSiteSystem is available to electrophysiologists in Europe for use in the rightatrium and left ventricle of the heart.

**Results of Operations**

**General**.  Net losses increased to $3,117,673 or $.19per share, for the three months ended September 30, 2002, compared to$1,993,563 or $.13 per share, for the same period in 2001.  For the nine months ended September 30,2002, net losses were $6,842,467, or $.42 per share, as compared to $6,947,153,or $.50 per share, for the same period in 2001.  The Company expects losses to continue at least through the firstquarter of 2003.  The Company is in aperiod of growth in sales and marketing expenses related to market penetration,including increases in personnel costs. The net loss increase as compared to the second quarter of 2002 is theresult of lower sales of both EnSite clinical workstations and EnSite cathetersfollowing a reorganization and realignment of the U.S. field sales and clinicalorganization during the third quarter of 2002.

**Revenue and Cost of Goods Sold**.  Worldwide revenue for the three months endedSeptember 30, 2002 was approximately $5.5 million, a $309,000, or 5%,decrease over the same period in 2001. For the nine months ended September 30, 2002, worldwide revenue wasapproximately $20.1 million, a $4.2 million, or 26%, increase over the sameperiod in 2001.  In the U.S., revenuesincreased approximately $232,000 for the three months ended September 30, 2002,a 6% increase over the same period in 2001. EnSite U.S. catheter revenue represented approximately $267,000 of thisincrease (which was offset by a slight decrease in EnSite clinical workstationrevenue), and catheter unit sales increased 9% over the same three-month periodin 2001.  For the nine months endedSeptember 30, 2002, U.S. revenues increased approximately $2.5 million, a 19%increase over the same period in 2001. EnSite catheter revenue in the U.S. represented approximately $2.3million of this increase, and catheter unit sales increased 36% over the samenine-month period in 2001.

International revenues decreased approximately $541,000,or 35%, for the three months ended September 30, 2002, compared to the sameperiod in 2001.  For the nine monthsended September 30, 2002, international revenues increased approximately $1.7million, or 54%, compared to the same period in 2001.  International revenues include sales direct to end-users inEurope and Canada, and to distributors in Europe, Asia Pacific and Mexico.  These revenues were higher as a result ofhigher average selling prices on both the EnSite catheter and EnSite clinicalworkstation in Europe.   Sales in Europeduring the period in 2001 were done exclusively through a third-partydistributor at lower distribution transfer prices, while a majority of thesales in 2002 have been direct to the end-users consistant with the Company'send-user pricing in Europe.

Other revenue, which represents 4.0% and 1.7%,respectively, of worldwide sales for the three month periods ending September30, 2002 and 2001, includes revenue generated from extended service agreements,and repairs and accessories sales related to EnSite clinical workstations.  For the nine months ended September 30,2002, other revenue represented 3.0% of worldwide sales, compared to 2.0% forthe same period in 2001.

EnSite clinical workstation revenue was approximately$2.2 million for the third quarter of 2002, compared to $2.9 million for thesame period in 2001.  For the ninemonths ended September 30, 2002, EnSite clinical workstation revenue wasapproximately $8.9 million, compared to $8.1 million for the same period in2001.  The increase is due primarily tothe higher sales of the EnSite clinical workstations internationally whencompared to last year’s nine month period, or an increase of 36%.  Domestic revenues accounted for 85% and 74%,respectively, of total EnSite clinical workstation sales for the three and ninemonths ended September 30, 2002, compared to 68% and 81%, respectively for thesame periods in 2001.  The Companyexpects EnSite clinical workstation revenue will be approximately 42% of totalrevenues in 2002.

EnSite catheter revenue was approximately $3.1 millionfor the quarter ended September 30, 2002, compared to $2.8 million for the sameperiod in 2001, or an increase of 9%. For the nine months ended September 30, 2002, EnSite catheter revenuewas approximately $10.7 million, compared to $7.6 million for the same periodin 2001, or an increase of 41%. Domestic revenue accounted for 80% and 80%, respectively, of totalEnSite catheter sales for the three and nine months ended September 30, 2002,compared to 78% and 82%, respectively, for the

 

6

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same periods in2001.  The Company expects EnSitecatheter revenue will be approximately 55% of total revenues in 2002.

Cost of goods sold including over/under absorbedmanufacturing expenses was approximately $2.0 million and $2.3 million for thethree months ended September 30, 2002 and 2001, respectively.  For the nine months ended September 30,2002, cost of goods sold was approximately $7.4 million, compared to $6.6million for the same period in 2001.

The gross profit margin was 63.0% for the three monthsended September 30, 2002, compared with 60.7% during the same period in2001.  For the nine months endedSeptember 30, 2002, the Company’s gross profit margin was 63.1%, compared to58.8% for the same period in 2001.  Theincrease in gross margins is mainly attributed to the better EnSite catheterabsorption of manufacturing overhead from the growth in domestic sales duringthe comparable periods.  Additionally,the Company’s margins on its domestic and international sales are substantiallyhigher for the nine months ended September 30, 2002, compared to the sameperiod in 2001, due to sales in Europe during the period in 2001 doneexclusively through a distributor versus a majority of the sales in 2002 donedirect to end-users.  The Companyexpects gross profit margins will be, in aggregate, two to three percentagepoints higher during the remaining three months of 2002.

**Research and Development Expenses**.  Research and development expenses includecompensation and benefit costs within the clinical, software, hardware,catheter and applied research departments as well as costs associated withregulatory expenses.  Research anddevelopment expenses were approximately $1.4 million for the three month periodended September 30, 2002, compared to $1.4 million during the same period in2001.  For the nine months endedSeptember 30, 2002, research and development expenses were approximately $4.0million, compared to $3.9 million for the same period in 2001.  The Company believes research anddevelopment expenditures will be in the range of $1.4 to $1.5 million for thefourth quarter of 2002.

**General and Administrative Expenses**.  General and administrative expenses wereapproximately $745,000 and $557,000 for the three months ended September 30,2002 and 2001, respectively.  Theincrease is due primarily to an increase in professional services expenses andcosts related to the hiring of a new CFO. For the nine months ended September 30, 2002, general and administrativeexpenses were approximately $2.0 million, compared to $1.8 million for the sameperiod in 2001.  The Company expectsgeneral and administrative expenses to be approximately $750,000 to $775,000for the fourth quarter of 2002.

**Sales and Marketing Expenses**.  Sales and marketing expenses wereapproximately $4.4 million during the three months ended September 30, 2002,compared to $3.6 million during the same period in 2001.  The increase is primarily attributable toincreases in personnel and costs associated with building and training of theU.S. and European sales and clinical team. For the nine months ended September 30, 2002, sales and marketingexpenses were approximately $13.5 million, compared to $10.8 million for thesame period in 2001.  The Companyexpects sales and marketing expenses to be approximately $4.4 to $4.5 millionfor the fourth quarter of 2002.

**Interest Income and Expense**.  Interest income was approximately $16,000and $56,000 for the three months ended September 30, 2002 and 2001,respectively.  For the nine months endedSeptember 30, 2002, interest income was approximately $65,000, compared to$232,000 for the same period in 2001. The decrease for the three and nine month periods ended September 30,2002 was due to lower average cash and cash equivalent balances and lowerinterest rates.  Interest expense wasapproximately $40,000 and $25,000 for the three months ended September 30, 2002and 2001, respectively.  For the ninemonths ended September 30, 2002, interest expense was approximately $101,000,compared to $130,000 for the same period in 2001.  The nine month year-to-year decrease is directly related to therepayment of the loan to Medtronic during February 2001, while the three monthyear-to-year increase is due to higher debt balance.

**Liquidity and Capital Resources**.

The Company’s operations since inception have beenfunded by net proceeds from the sales of common and preferred stock totalingapproximately $89.2 million.  As of September30, 2002 and December 31, 2001, the Company had cash, cash equivalents andshort-term investments of approximately $3.9 million and $4.6 million,respectively.

 

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For the three and nine months ended September 30,2002, the Company used cash of approximately $1.8 million and $9.5 million foroperations, compared to approximately $2.5 million and $5.4 million for thesame periods in 2001, respectively.  TheCompany’s accounts receivable balances decreased approximately $1.8 million forthe three months ended September 30, 2002 and increased $1.5 million for thenine months ended September 30, 2002. The decrease in accounts receivable during the third quarter is attributedto the Company’s lower revenues for the third quarter and increase in paymentsreceived.  Inventories increasedapproximately $162,000 and $1.1 million for the three and nine months endedSeptember 30, 2002.  The Companybelieves its inventory balances will increase slightly during the fourthquarter of 2002 as a result of building inventory in anticipation of releasingits EnSite System NavXTM upgrade in the second quarter of 2003.  Accounts payable and accrued expensesdecreased approximately $573,000 and $1.2 million for the three and nine monthsended September 30, 2002.  The Companyexpects accounts payable and accrued expenses to increase during the fourthquarter of 2002 as operating and production expenses increase to supportrevenue growth, and the Company continues to accrue for 2002 annual performancecompensation payments that will be made in the first quarter 2003.  The Company had no short-term investmentportfolio as of September 30, 2002 and December 31, 2001.  A majority of the Company’s available cashwas in money market funds due to the inability to attain higher rates of interestin short-term investments dictated by the Company’s investment policy.

In January 1999, the Company announced a financingagreement with Medtronic, Inc.  Underthe agreement, the Company received $7 million from Medtronic Asset Management,which was repaid in February 2001.

In March 2001, the Company received proceeds of$7,347,000 from a private placement of 2,449,666 shares of its common stock toaccredited investors.  The placement waspriced at $3.00 per share.  In June2001, the Company announced a $3.5 million credit facility agreement withSilicon Valley Bank, consisting of a $1.5 million capital lease line and a $2million revolving line of credit.  InApril 2002, the Company modified the loan agreement with Silicon Valley Bankrelated to the revolving line of credit. The line was increased $1 million to $3 million and was renewed for aone year period.  The capital lease linehas expired and the Company expects to be able to renew the facility undersimilar terms.  As of September 30, 2002the Company has drawn $1,077,234 on the capital lease line and has $1,000,000outstanding on the revolving line of credit. The agreement specifies certain restrictive covenants, which the Companywas in compliance with as of September 30, 2002.

In February 2002, the Company received proceeds of$10,000,000 from a private placement of 1,666,667 shares of its common stock toaccredited investors.  The placement waspriced at $6.00 per share.

The Company believes that its existing cash, cashequivalents, short-term investments and bank financing will be sufficient tofund the operations of the Company through fourth quarter of 2002.  The Company is evaluating financingalternatives.  The Company’s futureliquidity and capital requirements will depend on the ability of the Company toobtain additional bank or equity financing.

**Critical AccountingPolicies**

The consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the U.S., which require the Company to make estimates andassumptions in certain circumstances that affect amounts reported in theaccompanying consolidated financial statements and related footnotes.  In preparing these financial statements,management has made its best estimates and judgments of certain amountsincluded in the financial statements, giving due consideration tomateriality.  The Company does notbelieve there is a great likelihood that materially different amounts would bereported related to the accounting policies described below.  However, application of these accountingpolicies involves the exercise of judgment and use of assumptions as to futureuncertainties and, as a result, actual results could differ from theseestimates.

*Revenue Recognition. *Revenue from the sale of the Company’s EnSite clinicalworkstation is recognized at the time of shipment in instances where theCompany has evidence of a contract, the fee charged is fixed and determinable,and collection is probable.  Revenuefrom service and customer support contracts is deferred and 

 

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recognized ratablyover the period the services are provided. The Securities and Exchange Commission’s Staff Accounting Bulletin (SAB)No. 101, “Revenue Recognition” provides guidance on the application ofgenerally accepted accounting principals to selected revenue recognitionissues.  The Company has concluded thatits revenue recognition policy is appropriate and in accordance with SAB No.101.

*Allowance for Doubtful Accounts.*  Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future.  The estimated allowance is based onmanagement’s review of accounts receivable balances sales and historicwrite-offs.

*Inventories and Related Allowance for Excess and ObsoleteInventory.* Inventories are valued at the lower of cost or market and have beenreduced by an allowance for excess and obsolete inventories.  The estimated allowance is based on management’sreview of inventories on hand compared to estimated future usage and sales.

*New Accounting Standards.*  In October 2001, the FASB issued SFAS No.144, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, which is effective for fiscal years beginning after June15, 2002.  This statement addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets and supersedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of*, and the accounting andreporting provisions of Accounting Principles Board (APB) Opinion No. 30, *Reportingthe Results of Operations* for a disposal of a segment of abusiness.  The adoption of thispronouncement is not expected to have a material impact on the Company’sconsolidated results of operations, financial position, or cash flows.

**Cautionary Statement**

Except for the historical information containedherein, this Quarterly Report on Form 10–Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  When used in thisForm 10–Q and in future filings by the Company with the Securitiesand Exchange Commission, in the Company’s press releases and in oral statementsmade with the approval of an authorized executive officer, the word or phrases“believes,” “anticipates,” “expects,” “intends,” “will likely result,”“estimates,” “projects” or similar expressions are intended to identify such forward-lookingstatements, but are not the exclusive means of identifying suchstatements.  These forward-lookingstatements involve risks and uncertainties that may cause the Company’s actualresults to differ materially from the results discussed in the forward-lookingstatements.  Factors that might causesuch differences include, but are not limited to, the following:  risks associated with the successfuldevelopment and commercialization of a new technology; continued clinicaltesting experience; uncertainty of obtaining Food and Drug Administration andinternational regulatory clearances; uncertainty of availability of treatmentsemploying the Company’s EnSite system; uncertainty of market acceptance of theEnSite System; training requirements for electrophysiologists; the uncertaintyof the ability to diagnose and treat atrial fibrillation; the expectation offuture losses; significant competition and rapid technological change in thetachycardia diagnostic market; risks associated with the Company’s dependenceon patents and proprietary technology; risks associated with the Company’slimited manufacturing experience and dependence on suppliers; and theuncertainty of third-party reimbursement for diagnostic medical proceduresemploying the EnSite System.  Thesefactors are discussed in the cautionary statements included in Exhibit 99to our Form 10–K for the year ended December 31, 2001.  Other forward-looking statements are foundin the Company’s disclosures about market risk.  The Company cautions investors and others to review thestatements set forth in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, Exhibit 99 and in the Company’s otherreports filed with the Securities and Exchange Commission and that other factorsmay prove to be important in affecting the Company’s business and results ofoperations.

## **Item3.  Qualitative and QuantitativeDisclosures about Market Risk.**

The Company had approximately $3.9 million of cash andinvestments as of September 30, 2002.  Substantially all of the investments were U.S.  government or investment grade, fixed incomesecurities from domestic issuers.  TheCompany had no short-term investment portfolio as of September 30, 2002 andDecember 31, 2001.  A majority of theCompany’s available cash was in money market funds due to the inability toattain higher rates of interest in short-term investments dictated by theCompany’s investment policy.  Because ofthe credit risk criteria of the Company’s investment policies, the primary marketrisk associated with these investments is interest rate risk.  The Company does not use derivativefinancial instruments to manage interest rate risk or to speculate on futureschanges in interest rates.  A rise ininterest rates could negatively affect the fair value of the Company’sinvestments; however, because management considers it unlikely that the 

 

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Company would need orchoose to substantially liquidate the Company’s investments, managementbelieves that such an increase in interest rates would not have a materialimpact on the Company’s future earnings or cash flows.  Even though the Company distributes productsabroad, the Company does not conduct sales in foreign currencies.  Therefore, management does believe thatCompany is exposed to any material foreign currency exchange rate risk.

**Item4.  Controls and Procedures.**

 (a) Evaluation of disclosure controls andprocedures.

                Under the supervision and with the participation ofour management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, we evaluated the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a-14(c) underthe Exchange Act) as of a date (the “Evaluation Date”) within 90 days prior tothe filing date of this report.  Basedupon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that, as of the Evaluation Date, our disclosure controls andprocedures are effective in timely alerting them to the material informationrelating to us (or our consolidated subsidiaries) required to be included inour periodic SEC filings.

 (b) Changes in internal controls.

                There were nosignificant changes made in our internal controls during the period covered bythis report or, to our knowledge, in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

# **PART II.  OTHER INFORMATION**

## ** **

## **Item 6.**  Exhibits and Reports on Form 8-K

(a)           Exhibits
| **Exhibit** |   | **Description**                                                                                                                                                                                                 |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.1        |   | Certification of  the Chief Executive Officer, filed herewith, dated November 14, 2002,  pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                |
| 99.2        |   | Certification of  the Chief Financial Officer, filed herewith, dated November 14, 2002,  pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 filed herewith. |
|        |   |                                                                                                                                                                                                            |
| (b)         |   | Reports on  Form 8-K                                                                                                                                                                                       |

** **

A report on Form 8-K wasfiled by the Company on July 23, 2002; such report contained informationdisclosed pursuant to Regulation FD under Item 9 and included as an exhibitunder Item 7 a copy of a press release issued by the Company announcing itssecond quarter 2002 earnings results.

A report on Form 8-K wasfiled by the Company on August 14, 2002; such report contained informationdisclosed under Item 5 and included as an exhibit under Item 7 a copy of apress release issued by the Company announcing its first NavXTM procedure.

A report on Form 8-K wasfiled by the Company on August 19, 2002; such report contained informationdisclosed under Item 5 and included as an exhibit under Item 7 a copy of apress release issued by the Company announcing the hiring of J. Robert Paulson,Jr. as its Chief Financial Officer.

A report on Form 8-K wasfiled by the Company on September 20, 2002; such report contained informationdisclosed under Item 5 and included as an exhibit under Item 7 a copy of a pressrelease issued by the Company announcing the resignation of Michael D. Dale asits Vice President of Sales and Marketing.

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** **

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| ENDOCARDIAL  SOLUTIONS, INC.        |   |                                     |
|-------------------------------------|--------|------------------------------------------|
|                                |   |                                     |
| Dated:  November 14, 2002 | By:    | /s/ JAMES W. BULLOCK                |
|                                |   | James W. Bullock                    |
|                                |   | *President  and Chief Executive Officer* |
|                                |   |                                     |
|                                |   | /s/ J. ROBERT PAULSON, JR.               |
|                                |   | J. Robert Paulson, Jr.                   |
|                                |   | *Chief  Financial Officer*               |
|                                |   | *(Principal  Accounting Officer)*        |
|                                     |        |                                          |  |  |

 

 

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** **

**Certification of Chief ExecutiveOfficer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002**

 

 

I, James W. Bullock, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Endocardial Solutions, Inc.;

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               This registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)              designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: November 14, 2002                                            

| Name:  | /s/ James W. Bullock    |
|--------|-------------------------|
| Title: | Chief Executive Officer |

 

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**Certification of Chief FinancialOfficerPursuant to Section 302 of theSarbanes-Oxley Act of 2002**

 

 

I, J. Robert Paulson, Jr., certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Endocardial Solutions, Inc.;

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               This registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

d)             all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

e)              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: November 14, 2002

| Name:  | /s/ J. Robert Paulson, Jr. |
|--------|----------------------------|
| Title: | Chief Financial Officer    |

 

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