**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 March 31, 2002**

o            **TransitionReport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the transition period from       to       .**

**Commission File No. 0-22233****Endocardial Solutions, Inc.**

(Exact name ofregistrant as 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**  (Registrant’s telephone number including area code) |
| ** **(Address of principal executive offices and  zip 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 the Registrant was required to file such reports) and(2) has been subject to such filing requirements for the past 90days.  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** |   | **16,611,109**                                      |
|-----------------------------------|--------|-----------------------------------------------------|
| (Class)                           |   | (Number of Shares Outstanding at May 10, 2002) |

 

 

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**INDEXEndocardial Solutions, Inc.**
|                                    |                                                                                             |                                                                                               |   |
|-----------------------------------------|--------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|--------|
| **PART I.  FINANCIAL INFORMATION** |                                                                                             |
|                                    |                                                                                             |                                                                                               |   |
|                                    | Item 1.                                                                                          | Consolidated Financial  Statements (Unaudited)                                                     |   |
|                                    |                                                                                             | Consolidated Balance Sheets–March  31, 2002 and December 31, 2001                             |   |
|                                    |                                                                                             | Consolidated  Statements of Operations– Three months ended March 31, 2002 and March  31, 2001 |   |
|                                    |                                                                                             | Consolidated  Statements of Cash Flows–Three months ended March 31, 2002 and March  31, 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.                                       |   |
|                                    |                                                                                             |                                                                                               |   |
| **PART II.  OTHER INFORMATION**    |                                                                                             |
|                                    |                                                                                             |                                                                                               |   |
|                                    | Items 1 and 3 through 5 have been  omitted since all items are inapplicable or answers negative. |                                                                                               |
|                                    | Item  2.                                                                                         | Changes  in Securities and Use of Proceeds                                                         |   |
|                                    | Item 6.                                                                                          | Exhibits and Reports on  Form 8–K                                                             |   |
|                                         |                                                                                                  |                                                                                                    |        |  |  |

 

1

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**PART I —FINANCIAL INFORMATION**

 

**Item 1.  Consolidated Financial Statements**

 

 

 

**EndocardialSolutions, Inc.**

 

**ConsolidatedBalance Sheets**

 
|                                                                                                         |   | **March 31,**   |       | **December 31,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|-----------------------|--------|
|                                                                                                         |   | **2002**        |       | **2001**              |   |
|                                                                                                         |   | **(Unaudited)** |       | **(Note)**            |   |
| **ASSETS**                                                                                                   |   |            |       |                  |   |
| Current Assets:                                                                                              |   |            |       |                  |   |
| Cash and cash  equivalents                                                                                   |   | $               | 10,192,700 |                  | $      | 4,550,059 |   |
| Short-term  investments                                                                                      |   | —          |       | —                |   |
| Accounts  Receivable, net of reserve for doubtful accounts (2002 — $60,000; 2001 —  $60,000)       |   | 6,445,535       |       | 5,084,412             |   |
| Inventories                                                                                                  |   | 3,056,908       |       | 2,733,145             |   |
| Prepaid expenses  and other current assets                                                                   |   | 475,457         |       | 554,202               |   |
| Total current  assets                                                                                        |   | 20,170,600      |       | 12,921,818            |   |
|                                                                                                         |   |            |       |                  |   |
| Furniture and  equipment                                                                                     |   | 7,670,667       |       | 7,329,598             |   |
| Less accumulated  depreciation                                                                               |   | (4,992,810      | )          | (4,721,350            | )      |
|                                                                                                         |   | 2,677,857       |       | 2,608,248             |   |
|                                                                                                         |   |            |       |                  |   |
| Deposits                                                                                                     |   | 48,059          |       | 49,947                |   |
| Patents, net of  accumulated amortization (2002 — $113,878; 2001 — $111,489)                       |   | 17,420          |       | 19,809                |   |
| Software  development costs, net of accumulated amortization (2002 — $1,038,996; 2001 —  $891,107) |   | 49,296          |       | 197,185               |   |
| Total assets                                                                                                 |   | $               | 22,963,232 |                  | $      | 15,797,007 |   |
|                                                                                                         |   |            |       |                  |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                               |   |            |       |                  |   |
| Current  Liabilities:                                                                                        |   |            |       |                  |   |
| Accounts payable                                                                                             |   | $               | 2,529,759  |                  | $      | 2,287,338 |   |
| Accrued salaries  and expenses                                                                               |   | 1,293,295       |       | 2,363,200             |   |
| Bank line of  credit                                                                                         |   | 750,000         |       | 750,000               |   |
| Current portion  of capital lease obligations                                                                |   | 692,944         |       | 594,010               |   |
| Current portion  of deferred revenue                                                                         |   | 665,350         |       | 586,104               |   |
| Total current  liabilities                                                                                   |   | 5,931,348       |       | 6,580,652             |   |
|                                                                                                         |   |            |       |                  |   |
| Long-term  Liabilities:                                                                                      |   |            |       |                  |   |
| Capital lease  obligations                                                                                   |   | 540,998         |       | 301,187               |   |
| Deferred revenue                                                                                             |   | 173,440         |       | 199,368               |   |
| Total long-term  liabilities                                                                                 |   | 714,438         |       | 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 —March 31, 2002 —16,604,396; December 31, 2001 —14,934,624      |   | 166,044         |       | 149,346               |   |
| Additional  paid-in capital                                                                                  |   | 89,072,306      |       | 79,707,845            |   |
| Less notes  receivable from officer                                                                          |   | (371,250        | )          | (371,250              | )      |
| Accumulated  deficit                                                                                         |   | (72,281,133     | )          | (70,486,214           | )      |
| Accumulated  other comprehensive loss                                                                        |   | (16,064         | )          | (9,556                | )      |
| Deferred  compensation                                                                                       |   | (252,457        | )          | (274,371              | )      |
| Total  stockholders’ equity                                                                             |   | 16,317,446      |       | 8,715,800             |   |
| Total  liabilities and stockholders’ equity                                                             |   | $               | 22,963,232 |                  | $      | 15,797,007 |   |

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Note: The balance sheet at December 31, 2001 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

*Seeaccompanying notes.*

 

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**EndocardialSolutions, Inc.**

 

**ConsolidatedStatements of Operations**

(Unaudited)

 
|                                         |   | **For the  Three Months Ended** |       |
|----------------------------------------------|--------|---------------------------------|------------|
|                                         |   | **March 31,**                   |       | **March 31,** |   |
|                                         |   | **2002**                        |       | **2001** |   |
|                                         |   |                            |       |   |   |
| Revenue                                      |   | $                               | 7,108,296  |   | $ | 4,602,166 |   |
|                                         |   |                            |       |   |   |
| Cost of goods  sold                          |   | 2,601,295                       |       | 2,078,059 |   |
| Gross margin                                 |   | 4,507,001                       |       | 2,524,107 |   |
|                                         |   |                            |       |   |   |
| Operating  expenses:                         |   |                            |       |   |   |
| Research and  development                    |   | 1,306,921                       |       | 1,013,327 |   |
| General and  administrative                  |   | 613,821                         |       | 590,445 |   |
| Sales and  marketing                         |   | 4,377,121                       |       | 3,413,896 |   |
| Operating loss                               |   | (1,790,862                      | )          | (2,493,561 | ) |
|                                         |   |                            |       |   |   |
| Other income  (expense):                     |   |                            |       |   |   |
| Interest income                              |   | 23,099                          |       | 84,443 |   |
| Interest expense                             |   | (27,156                         | )          | (81,993 | ) |
|                                         |   | (4,057                          | )          | 2,450 |   |
|                                         |   |                            |       |   |   |
| Net loss for the  period                     |   | $                               | (1,794,919 | ) | $ | (2,491,111 | ) |
|                                         |   |                            |       |   |   |
| Net loss per  share — basic and diluted |   | $                               | (0.12      | ) | $ | (0.20 | ) |
|                                         |   |                            |       |   |   |
| Weighted average  shares outstanding         |   | 15,490,930                      |       | 12,466,559 |   |

 

 

*Seeaccompanying notes.*

 

 

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**EndocardialSolutions, Inc.**

 

**ConsolidatedStatements of Cash Flows**

(Unaudited)

 
|                                                                         |   | **For the  Three Months Ended** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **March 31,**                   |       | **March 31,** |   |
|                                                                         |   | **2002**                        |       | **2001** |   |
| **Operating  activities**                                                    |   |                            |       |   |   |
| Net loss                                                                     |   | $                               | (1,794,919 | ) | $ | (2,491,111 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            |       |   |   |
| Depreciation and  amortization                                               |   | 421,738                         |       | 443,434 |   |
| Amortization of  deferred compensation                                       |   | 21,914                          |       | 2,227 |   |
| Changes in  operating assets and liabilities:                                |   |                            |       |   |   |
| Accounts  Receivable                                                         |   | (1,378,528                      | )          | 252,476 |   |
| Inventory                                                                    |   | (331,758                        | )          | 494,235 |   |
| Prepaid expenses  and other assets                                           |   | 79,159                          |       | (489,022 | ) |
| Accounts payable                                                             |   | 244,030                         |       | 74,303 |   |
| Accrued salaries  and expenses                                               |   | (1,069,123                      | )          | (551,148 | ) |
| Deferred revenue                                                             |   | 54,442                          |       | (15,209 | ) |
| Net cash  provided by (used in) operating activities                         |   | (3,753,045                      | )          | (2,279,815 | ) |
|                                                                         |   |                            |       |   |   |
| **Investing  activities**                                                    |   |                            |       |   |   |
| Purchases of  short-term investments                                         |   | —                          |       | (2,894,128 | ) |
| Maturities of  short-term investments                                        |   | —                          |       | 2,400,000 |   |
| Purchases of  furniture and equipment                                        |   | —                          |       | (163,587 | ) |
| Patent  expenditures                                                         |   | —                          |       | (650 | ) |
| Software  development costs                                                  |   | —                          |       | (295,777 | ) |
| Proceeds from  sale of equipment                                             |   | —                          |       | — |   |
| Net cash provided  by (used in) investing activities                         |   | —                          |       | (954,142 | ) |
|                                                                         |   |                            |       |   |   |
| **Financing  activities**                                                    |   |                            |       |   |   |
| Proceeds from  notes payable                                                 |   | —                          |       | — |   |
| Proceeds from  capital lease obligations                                     |   | 162,617                         |       | — |   |
| Principal  payments on notes payable and capital lease obligations           |   | (164,944                        | )          | (7,155,925 | ) |
| Proceeds from  issuance of common stock                                      |   | 9,381,158                       |       | 7,277,115 |   |
| Net cash  provided by (used in) financing activities                         |   | 9,378,831                       |       | 121,190 |   |
|                                                                         |   |                            |       |   |   |
| Effect of  exchange rate changes on cash                                     |   | 16,855                          |       | — |   |
|                                                                         |   |                            |       |   |   |
| Increase  (decrease) in cash and cash equivalents                            |   | 5,642,641                       |       | (3,112,767 | ) |
| Cash and cash  equivalents at beginning of period                            |   | 4,550,059                       |       | 7,771,540 |   |
| Cash and cash  equivalents at end of period                                  |   | $                               | 10,192,700 |   | $ | 4,658,773 |   |
|                                                                         |   |                            |       |   |   |
| **Supplemental  disclosure of non-cash investing and financing activities**  |   |                            |       |   |   |
| Purchase of  equipment through capital lease obligations                     |   | $                               | 503,690    |   | $ | — |   |
| Note receivable  from officer                                                |   | —                          |       | 371,250 |   |

 

 

*Seeaccompanying notes.*

 

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

### **Notesto Consolidated Financial Statements**

### **(Unaudited)**

**1.             Basis of Presentation**

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  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 months endedMarch 31, 2002, are not necessarily indicative of the results that may beexpected for the year ending December 31, 2002.  These financial statements should be read in conjunction with theaudited financial statements and accompanying notes for the fiscal year endedDecember 31, 2001, contained in the Company’s Form 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 months ended March 31:
|           |   | **2002** |   | **2001** |   |
|----------------|--------|----------|--------|----------|--------|
| Domestic       |   | 70       | %      | 86       | %      |
| International: |   |     |   |     |   |
| Europe         |   | 22       | %      | 8        | %      |
| Asia Pacific   |   | 5        | %      | 2        | %      |
| Canada         |   | 3        | %      | 4        | %      |

## ** **

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

**General**

Endocardial Solutions Inc. (the “Company”), wasincorporated in May 1992.  The Companydevelops, manufactures and markets the EnSite 3000® clinical workstation andEnSite® catheter (together, the “EnSite System”) for use byelectrophysiologists in diagnosing and mapping abnormal heart rhythms known astachycardias.  During the second quarterof 1999, we received approval from the U.S. Food and Drug Administration tomarket the

 

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EnSite System in the U.S.for use in the right atrium of the heart. The EnSite System is available to electrophysiologists in Europe for usein the right atrium and left ventricle of the heart.

**Results of Operations**

**General**. Net losses decreased to $1,794,919 or $.12 per share, for the threemonths ended March 31, 2002, compared to $2,491,111 or $.20 per share, forthe same period in 2001.  The Companyexpects losses to continue at least through first quarter of 2002.  The Company is in a period of growth insales and marketing expenses related to market penetration, including increasesin personnel costs.  The Companybelieves that it will still post an overall loss for the year 2002, but isexpecting to show a profit for its fourth quarter of 2002.

**Revenue and Cost of Goods Sold**. Worldwide revenue for the three months ended March 31, 2002 wasapproximately $7.1 million, a $2.5 million, or 54%, increase over the sameperiod in 2001.  In the U.S., revenuesincreased approximately $996,000, or 25%, for the three months endedMarch 31, 2002, compared to the same period in 2001.  Approximately $975,000 of the U.S. revenueincrease came from EnSite catheter sales, while unit sales increasedapproximately 51% over 2001.

  Internationalrevenues increased approximately $1.5 million, or 240%, for the three monthsended March 31, 2002, compared to the same period in 2001.  International revenues include sales directto the end-user in Europe and Canada, and to distributors in Europe and AsiaPacific.  These revenues during thethree months ended March 31, 2002, compared to the same period in 2001, werehigher due to higher average selling prices on both the EnSite catheter andEnSite clinical workstation in Europe.  Sales in Europe during this period in 2001 were performed by adistributor, versus a majority of the sales in 2002 were made directly to theend-user.

Other revenue, which represents 5.4% and 6.1% ofworldwide sales for the three month periods ending March 31, 2002 and 2001,respectively, includes revenue generated from extended service contracts,repairs and accessories sales related to the EnSite System.

EnSite clinical workstation revenue was approximately$3.3 million for the first quarter of 2002, compared to $2.4 million for thesame period in 2001.  The increase isdue mainly to the higher sales of the EnSite clinical workstationinternationally compared to last year’s comparable period, or an increase of500%.  Domestic revenues accounted for61% of total EnSite clinical workstation sales for the March 31, 2002quarter end, compared to 88% for the same period in 2001.  The Company expects EnSite clinicalworkstation revenue will be approximately 35% to 40% of total revenues in 2002.

EnSite catheter revenue was approximately $3.6 millionfor the quarter ended March 31, 2002, compared to $2.1 million for thesame period in 2001, or an increase of 69%. Domestic revenue accounted for 78% of total EnSite catheter sales for theMarch 31, 2002 quarter end, compared to 86% for the same period in2001.  The Company expects EnSitecatheter revenue will be approximately 60% to 65% of total revenues in 2002.

Cost of goods sold was approximately $2.6 million and$2.1 million for the quarters ended March 31, 2002 and 2001, respectively.

The gross profit margin was 63% for the three monthsended March 31, 2002, compared with 55% during the same period in2001.  The increase in margins is mainlyattributed to better absorption of manufacturing overhead from the growth indomestic sales during the comparable periods. Additionally, the Company’s margins on its domestic and internationalsales are substantially higher for the three months ended March 31, 2002,compared to the same period in 2001, due to sales in Europe during this periodin 2001 were performed by a distributor, versus a majority of the sales in 2002were made directly to the end-user. Also, EnSite catheter margin for the three months ended March 31,2002, increased approximately fourteen percentage points above last year’smargin for the same period.  The Companyexpects gross profit margins will be, in aggregate, three to four percentagepoints higher during the remaining nine months in 2002.

 

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**Research and Development Expenses**. Research and development expenses include compensation and benefit costswithin the clinical, software, hardware, catheter and applied researchdepartments as well as costs associated with regulatory expenses.  Research and development expenses were$1,306,921 for the three month period ended March 31, 2002, compared to$1,013,327 during the same period in 2001, an increase of approximately$294,000.  This increase in expense isattributed to the Company’s left atrium study. The Company believes research and development expenditures will be inthe range of $1.4 to $1.5 million per quarter for the remaining quarters of2002.

**General and Administrative Expenses**. General and administrative expenses were $613,821 and $590,445 for thethree months ended March 31, 2002 and 2001, respectively, an increase ofapproximately $23,000.  The increase isdue primarily to an increase in professional services expenses.  The Company expects general andadministrative expenses to be approximately $650,000 per quarter for theremaining quarters of 2002.

**Sales and Marketing Expenses**. Sales and marketing expenses were $4,377,121 during the three monthsended March 31, 2002, and $3,413,896 during the same period in 2001, anincrease of approximately $963,000.  Theincrease is primarily attributable to increases in personnel and costsassociated with building and training of the U.S. and European sales andclinical team.  As the Company continuesto penetrate the U.S. and European markets, sales and marketing expenses areexpected to be in the $4.2 to $4.6 million range per quarter for the remainingquarters of 2002 as additional headcount is added in both the selling and fieldclinical engineering areas.

**Interest Income and Expense**. Interest income was $23,099 and $84,443 for the three months endedMarch 31, 2002 and 2001, respectively. The decrease for the three months ended March 31, 2001 was due tolower average cash and cash equivalent balances and lower interest rates.  Interest expense was $27,156 and $81,993 forthe three months ended March 31, 2002 and 2001, respectively.  The decrease is directly related to therepayment of a $7 million loan to Medtronic during February 2001.

**Liquidity and Capital Resources**.

The Company’s operations since inception have been fundedby net proceeds from the sales of common and preferred stock totalingapproximately $89.2 million.  As ofMarch 31, 2002 and December 31, 2001, the Company had cash, cashequivalents and short-term investments of approximately $10.2 million and $4.6 million,respectively.

For the three months ended March 31, 2002, theCompany used cash of approximately $3.8 million for operations, compared toapproximately $2.3 million for the same period in 2001.  The Company saw an increase in its accountsreceivable balances of approximately $1.4 million from December 31,2001.  The increase in accountsreceivable is attributed to the Company’s direct selling efforts in Europe andthe timing of first quarter 2002 sales in relation to the payment terms ofthese sales.  Inventories increasedapproximately $332,000 since December 31, 2001.  The Company believes inventory balances will grow slightly duringthe remaining nine months of 2002 due to increases in catheter production as2002 total revenues are expected to increase 47% to 49% over 2001 totalrevenues.  Accounts payable increasedapproximately $244,000 since December 31, 2001.  The Company expects accounts payable to grow during the remainingnine months of 2002 as operating and production expenses increase to supportrevenue growth.  Accrued salaries andrelated expenses decreased approximately $1.1 million since December 31,2001.  A majority of this decline isattributed to the payout of the 2001 annual performance bonus.  The Company expects this accrual balance toincrease during the remaining nine months of 2002, as it accrues the 2002annual performance compensation for payment in the first quarter of 2003.  The Company had no short-term investmentportfolio as of March 31, 2002 and December 31, 2001.  A majority of the Company’s available cash was in money marketfunds due to the inability to attain higher rates of interest in short-terminvestments 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 by February 2001. 

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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.  Thecredit facility expires in June of 2002, but the Company expects to be able torenew the facility under similar terms. As of March 31, 2002 the Company has drawn $856,093 on the capital leaseline and has $750,000 outstanding on the revolving line of credit.  The agreement specifies certain restrictivecovenants, which the Company was in compliance with as of March 31, 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 to profitability, which the Companyanticipates will occur in the fourth quarter of 2002.  If the Company achieves profitability as expected, the need foradditional financing is not presently anticipated.  The Company’s future liquidity and capital requirements willdepend on numerous factors, including the timing of regulatory actionsregarding the Company’s products, the results of clinical trials andcompetition, the extent to which the Company’s EnSite System gains marketacceptance, the costs, timing and method of expansion of sales, marketing,research and development and manufacturing activities and the ability of theCompany to obtain additional bank 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 assumptions asto future uncertainties and, as a result, actual results could differ fromthese estimates.

*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 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 an allowance for amounts that maybecome uncollectible in the future.  Theestimated allowance is based on management’s review of accounts receivablebalances sales and historic write offs.

*Inventories and Related Allowancefor Excess and Obsolete Inventory.*  Inventoriesare valued at the lower of cost or market and have been reduced by an allowancefor excess and obsolete inventories. The estimated allowance is based on management’s review of inventorieson hand compared to estimated future usage and sales.

*New Accounting Standards.* In October 2001, The FASB issued SFAS No. 144, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of*, whichis effective for fiscal years beginning after June 15, 2002.  This statement addresses financialaccounting and reporting for the impairment or disposal of long-lived assetsand 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.

 

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**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 suchforward-looking statements, 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 otherfactors may prove to be important in affecting the Company’s business andresults of operations.

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

The Company had approximately $10.2 million of cashand investments as of March 31, 2002. Substantially all of the investments were U.S.  government or investment grade, fixed income securities fromdomestic issuers.  Because of the creditrisk criteria of the Company’s investment policies, the primary market riskassociated 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 Companywould need or choose to substantially liquidate the Company’s investments,management believes that such an increase in interest rates would not have amaterial impact 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.

# **PART II.  OTHER INFORMATION**

## **Item2.  Changes in Securities and Use ofProceeds**

In February 2002, the Company completed the sale in aprivate placement of 1,666,667 shares of its common stock to accreditedinvestors at a price of $6.00 per share, for proceeds of $10,000,000.  The Company relied on the exemption fromregistration provided by Section 4(2) of the Securities Act of 1933.  Pursuant to the terms of the stock purchaseagreement, these shares were registered for resale pursuant to the SecuritiesAct of 1933.  Proceeds from the sale ofthese shares will be used for general working capital including expensesassociated with new product development.

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

(a)           Exhibits

 

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| **Exhibit** |   | **Description**                                                                                                                                                                                                                                                          |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |   | Form of Stock  Purchase Agreement, dated February 25, 2002, among the Company and the  Investors named therein (incorporated by reference to Exhibit 10.35 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2001). |
|        |   |                                                                                                                                                                                                                                                                     |
| (b)         |   | Reports on  Form 8-K                                                                                                                                                                                                                                                |

 

Reports on Form 8-Kwere filed by the Company on January 16, 2002, January 23, 2002 andFebruary 27, 2002; each report contained information disclosed pursuant toRegulation FD under Item 9 and included as exhibits copies of three pressreleases issued by the Company announcing the appointment of a new Director,announcing its fourth quarter and year-end 2001 earnings results and announcingthe sale of common stock through a private placement.

** **

**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:  May 14, 2002                                                                           By:  /s/ JAMES W. BULLOCK

                James W.Bullock                *President and Chief Executive Officer                (Principal Executive,Financial and                Accounting Officer)*

 

 

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