**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

## **WASHINGTON, D.C. 20549**

 

###### **FORM 10-Q**

 

 

 
| **ý** | **Quarterly Report pursuant to Section 13 or 15 (d) of the  Securities Exchange Act of  1934**

**for the quarterly period ended September 30, 2001**               |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |
|       |
| o          | **Transition Report pursuant to Section 13 or 15 (d) of the  Securities Exchange Act****of 1934**

**for the transition period from ______________ to  ______________.** |

 

 

 

**Commission File No. 0-22233**

 

**Endocardial Solutions, Inc.**

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

 
|                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Indicate by check mark  whether the registrant (1) has filed all reports required to be filed by  Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the  preceding twelve (12) months (or for such shorter period that the Registrant  was required to file such reports) and (2) has been subject to such filing  requirements for the past 90 days**.** |
|                                                                                                                                                                                                                                                                                                                                                                       |   |   |
| **YES**ý                                                                                                                                                                                                                                                                                                                                                              |   | **NO**o |
|                                                                                                                                                                                                                                                                                                                                                                       |   |   |
| Indicate the number of  shares outstanding of each of the issuer’s classes of common stock, as of the  latest practicable date.                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                       |   |   |
| Common Stock, $.01 par  value                                                                                                                                                                                                                                                                                                                                              |   | 14,811,674 |
| (Class)                                                                                                                                                                                                                                                                                                                                                                    |   | (Number of Shares  Outstanding at November 2, 2001) |

 

 

 

 

 

 

 

**INDEX**

 

 

**Endocardial Solutions, Inc.**

 

 

 
|                                                                                       |                                                            |
|--------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
| **PART I.  FINANCIAL INFORMATION**                                                    |
|                                                                                       |                                                            |
| Item 1.                                                                                    | Financial Statements  (Unaudited)                               |
|                                                                                       |                                                            |
|                                                                                       | Balance Sheets – September 30, 2001 and  December 31, 2000 |
|                                                                                       |                                                            |
|                                                                                       | Statements  of Operations - Three and nine months ended         |
|                                                                                       | September 30, 2001 and  September 30, 2000                      |
|                                                                                       |                                                            |
|                                                                                       | Statements of Cash Flows –  Three and nine months ended    |
|                                                                                       | September 30, 2001 and  September 30, 2000                      |
|                                                                                       |                                                            |
|                                                                                       | Notes to Financial  Statements                                  |
|                                                                                       |                                                            |
| Item  2.                                                                                   | Management’s  Discussion and Analysis                      |
|                                                                                       | of  Financial Condition and Results of Operations               |
|                                                                                       |                                                            |
| Item  3.                                                                                   | Quantitative  and Qualitative Disclosures about Market Risk     |
|                                                                                       |                                                            |
|                                                                                       |                                                            |
| **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                               |
|                                                                                       |                                                            |

 

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

** **

**EndocardialSolutions, Inc.**

 

Balance Sheets

 
|                                                                                             |   |               |       |              |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|--------|
|                                                                                             |   | **September  30,** |       | **December  31,** |   |
|                                                                                             |   | **2001**           |       | **2000**          |   |
|                                                                                             |   | (Unaudited)        |       | (Note)            |   |
| **ASSETS**                                                                                       |   |               |       |              |   |
| Current Assets:                                                                                  |   |               |       |              |   |
| Cash and cash  equivalents                                                                       |   | $                  | 4,496,776  |              | $      | 7,771,540 |   |
| Short-term  investments                                                                          |   | -                  |       | 2,987,588         |   |
| Accounts  Receivable, net of reserve for doubtful accounts (2001 - $60,000; 2000 -  $60,000)     |   | 4,020,729          |       | 3,522,166         |   |
| Inventories                                                                                      |   | 2,631,539          |       | 3,211,818         |   |
| Prepaid expenses  and other current assets                                                       |   | 573,995            |       | 500,694           |   |
| Total current  assets                                                                            |   | 11,723,039         |       | 17,993,806        |   |
|                                                                                             |   |               |       |              |   |
| Furniture and  equipment                                                                         |   | 7,047,119          |       | 6,441,554         |   |
| Less accumulated  depreciation                                                                   |   | (4,458,310         | )          | (3,631,652        | )      |
|                                                                                             |   | 2,588,809          |       | 2,809,902         |   |
|                                                                                             |   |               |       |              |   |
| Deposits                                                                                         |   | 50,661             |       | 40,174            |   |
| Patents, net of  accumulated amortization (2001 - $108,964; 2000 - $102,511)                     |   | 22,334             |       | 28,137            |   |
| Software  development costs, net of accumulated amortization (2001 - $704,458; 2000 -  $308,201) |   | 383,834            |       | 484,314           |   |
| Total assets                                                                                     |   | $                  | 14,768,677 |              | $      | 21,356,333 |   |
|                                                                                             |   |               |       |              |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                        |   |               |       |              |   |
| Current  Liabilities:                                                                            |   |               |       |              |   |
| Accounts payable                                                                                 |   | $                  | 1,470,934  |              | $      | 938,866 |   |
| Accrued salaries  and expenses                                                                   |   | 1,662,765          |       | 1,634,346         |   |
| Current portion  of capital lease obligations                                                    |   | 695,034            |       | 593,264           |   |
| Current portion  of long-term debt                                                               |   | -                  |       | 7,000,000         |   |
| Current portion  of deferred revenue                                                             |   | 611,127            |       | 554,374           |   |
| Total current  liabilities                                                                       |   | 4,439,860          |       | 10,720,850        |   |
|                                                                                             |   |               |       |              |   |
| Long-term  Liabilities:                                                                          |   |               |       |              |   |
| Capital lease  obligations                                                                       |   | 379,303            |       | 584,252           |   |
| Long-term debt                                                                                   |   | -                  |       | -                 |   |
| Deferred revenue                                                                                 |   | 208,487            |       | 187,062           |   |
| Total long-term  liabilities                                                                     |   | 587,790            |       | 771,314           |   |
|                                                                                             |   |               |       |              |   |
| 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, 2001--14,811,674; December 31,  2000--12,249,695   |   | 148,117            |       | 122,497           |   |
| Additional  paid-in capital                                                                      |   | 79,214,769         |       | 71,769,626        |   |
| Less notes  receivable from officer                                                              |   | (371,250           | )          | -                 |   |
| Accumulated  deficit                                                                             |   | (68,954,324        | )          | (62,007,171       | )      |
| Deferred  compensation                                                                           |   | (296,285           | )          | (20,783           | )      |
| Total  stockholders' equity                                                                      |   | 9,741,027          |       | 9,864,169         |   |
| Total  liabilities and stockholders' equity                                                      |   | $                  | 14,768,677 |              | $      | 21,356,333 |   |

 

Note: The balance sheetat December 31, 2000 has been derived from the audited financial statements atthat date but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements.

 *See accompanying notes*

 

 

 

**EndocardialSolutions, Inc.**

** **

## **Statements of Operations**

(Unaudited)

** **

** **

 
|                                    |   | **For  the Three Months Ended** |       | **For  the Nine Months Ended** |   |
|-----------------------------------------|--------|---------------------------------|------------|--------------------------------|--------|
|                                    |   | **September 30,**               |       | **September  30,**             |   | **September  30,** |   | **September  30,** |   |
|                                    |   | **2001**                        |       | **2000**                       |   | **2001** |   | **2000** |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Revenue                                 |   | $                               | 5,817,633  |                           | $      | 3,097,137 |   | $ | 15,997,504 |   | $ | 10,194,326 |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Cost of goods  sold                     |   | 2,287,088                       |       | 1,524,536                      |   | 6,588,261 |   | 5,329,527 |   |
| Gross profit                            |   | 3,530,545                       |       | 1,572,601                      |   | 9,409,243 |   | 4,864,799 |   |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Operating  expenses:                    |   |                            |       |                           |   |   |   |   |   |
| Research and  development               |   | 1,446,492                       |       | 1,203,583                      |   | 3,916,334 |   | 3,431,228 |   |
| General and  administrative             |   | 556,996                         |       | 547,380                        |   | 1,750,402 |   | 1,614,823 |   |
| Sales and  marketing                    |   | 3,551,849                       |       | 2,651,396                      |   | 10,791,782 |   | 8,153,066 |   |
| Operating loss                          |   | (2,024,792                      | )          | (2,829,758                     | )      | (7,049,275 | ) | (8,334,318 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Other income  (expense):                |   |                            |       |                           |   |   |   |   |   |
| Interest income                         |   | 56,275                          |       | 209,150                        |   | 231,689 |   | 411,193 |   |
| Interest expense                        |   | (25,046                         | )          | (170,428                       | )      | (129,567 | ) | (507,786 | ) |
|                                    |   | 31,229                          |       | 38,722                         |   | 102,122 |   | (96,593 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Net loss for the  period                |   | $                               | (1,993,563 | )                              | $      | (2,791,036 | ) | $ | (6,947,153 | ) | $ | (8,430,911 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Net loss per  share - basic and diluted |   | $                               | (0.13      | )                              | $      | (0.23 | ) | $ | (0.50 | ) | $ | (0.78 | ) |
|                                    |   |                            |       |                           |   |   |   |   |   |
| Weighted average  shares outstanding    |   | 14,810,271                      |       | 12,223,496                     |   | 14,028,730 |   | 10,870,003 |   |

 

*See accompanying notes.*

* *

 

**EndocardialSolutions, Inc.**

** **

## **Statements of Cash Flows**

(Unaudited)

 

 
|                                                                         |   |                            |       |                           |   |               |   |               |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|--------------------------------|--------|--------------------|--------|--------------------|------------|
|                                                                         |   | **For  the Three Months Ended** |       | **For  the Nine Months Ended** |   |
|                                                                         |   | **September 30,**               |       | **September  30,**             |   | **September  30,** |   | **September  30,** |       |
|                                                                         |   | **2001**                        |       | **2000**                       |   | **2001**           |   | **2000**           |       |
| **Operating  activities**                                                    |   |                            |       |                           |   |               |   |               |       |
| Net loss                                                                     |   | $                               | (1,993,563 | )                              | $      | (2,791,036         | )      | $                  | (6,947,153 | ) | $ | (8,430,911 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            |       |                           |   |               |   |               |       |
| Depreciation and  amortization                                               |   | 405,375                         |       | 444,017                        |   | 1,251,571          |   | 1,054,334          |       |
| Amortization of  deferred compensation                                       |   | 21,914                          |       | 10,039                         |   | 39,498             |   | 14,492             |       |
| Loss on disposal  of equipment                                               |   | -                               |       | -                              |   | 6,344              |   | 1,394              |       |
| Changes in  operating assets and liabilities:                                |   |                            |       |                           |   |               |   |               |       |
| Accounts  Receivable                                                         |   | (1,080,565                      | )          | 1,947,834                      |   | (498,563           | )      | 778,318            |       |
| Inventory                                                                    |   | (39,106                         | )          | (463,258                       | )      | 580,279            |   | (1,099,101         | )          |
| Prepaid expenses  and other assets                                           |   | 118,239                         |       | 4,107                          |   | (83,787            | )      | 115,714            |       |
| Accounts payable                                                             |   | (6,542                          | )          | (453,170                       | )      | 532,068            |   | (469,103           | )          |
| Accrued salaries  and expenses                                               |   | 15,203                          |       | 120,318                        |   | 28,419             |   | (220,984           | )          |
| Deferred revenue                                                             |   | 50,670                          |       | (72,444                        | )      | 78,178             |   | 55,471             |       |
| Net cash used in  operating activities                                       |   | (2,508,375                      | )          | (1,253,593                     | )      | (5,013,146         | )      | (8,200,376         | )          |
|                                                                         |   |                            |       |                           |   |               |   |               |       |
| **Investing  activities**                                                    |   |                            |       |                           |   |               |   |               |       |
| Purchases of  short-term investments                                         |   | -                               |       | (1,404,622                     | )      | (2,938,753         | )      | (2,421,065         | )          |
| Maturities of  short-term investments                                        |   | 3,474,082                       |       | -                              |   | 5,926,341          |   | 4,055,000          |       |
| Purchases of  furniture and equipment                                        |   | (214,346                        | )          | (175,892                       | )      | (281,709           | )      | (828,059           | )          |
| Patent  expenditures                                                         |   | -                               |       | (6,246                         | )      | (650               | )      | (13,566            | )          |
| Software  development costs                                                  |   | -                               |       | -                              |   | (295,777           | )      | (493,967           | )          |
| Proceeds from  sale of equipment                                             |   | -                               |       | -                              |   | -                  |   | 2,200              |       |
| Net cash used in  investing activities                                       |   | 3,259,736                       |       | (1,586,760                     | )      | 2,409,452          |   | 300,543            |       |
|                                                                         |   |                            |       |                           |   |               |   |               |       |
| **Financing  activities**                                                    |   |                            |       |                           |   |               |   |               |       |
| Proceeds from  notes payable                                                 |   | -                               |       | -                              |   | -                  |   | 3,500,000          |       |
| Principal payments  on notes payable and capital lease obligations           |   | (140,154                        | )          | (167,904                       | )      | (7,455,584         | )      | (522,019           | )          |
| Proceeds from  issuance of common stock                                      |   | (36,806                         | )          | (15,937                        | )      | 7,155,764          |   | 11,899,914         |       |
| Notes receivable  from officer                                               |   | -                               |       | -                              |   | (371,250           | )      | -                  |       |
| Net cash  provided by (used in) financing activities                         |   | (176,960                        | )          | (183,841                       | )      | (671,070           | )      | 14,877,895         |       |
| Increase  (decrease) in cash and cash equivalents                            |   | 574,401                         |       | (3,024,194                     | )      | (3,274,764         | )      | 6,978,062          |       |
| Cash and cash  equivalents at beginning of period                            |   | 3,922,375                       |       | 11,773,236                     |   | 7,771,540          |   | 1,770,980          |       |
| Cash and cash  equivalents at end of period                                  |   | $                               | 4,496,776  |                           | $      | 8,749,042          |   | $                  | 4,496,776  |   | $ | 8,749,042 |   |
|                                                                         |   |                            |       |                           |   |               |   |               |       |
| **Supplemental  disclosure of non-cash investing and financing activities**  |   |                            |       |                           |   |               |   |               |       |
| Purchase of  equipment and inventory through capital lease obligations       |   | $                               | 79,128     |                           | $      | 61,128             |   | $                  | 352,403    |   | $ | 61,128 |   |

 

*See accompanying notes.*

* *

**Endocardial Solutions, Inc.**

 

 

**Notesto Financial Statements**

(Unaudited)

 

 

**1.  Basis of Presentation**

 

     The accompanying unauditedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  Operating results for thethree and nine months ended September 30, 2001, are not necessarily indicativeof the results that may be expected for the year ending December 31, 2001.  These financial statements should be read inconjunction with the audited financial statements and accompanying notes forthe fiscal year ended December 31, 2000, contained in the Company’s Form10-K/A.

 

**2.  Inventories**

 

     Inventories are carried atthe lower of cost (first-in, first-out basis) or market.  The majority of inventory consists ofpurchased components.  To determine thetechnological feasibility of its software efforts, the Company utilizes theworking model approach available under SFAS No. 86 and believes that theworking model was achieved when the software was available for commercial usein June 1998.

 

**3.  Reclassifications**

 

    Certain prior year itemshave been reclassified to conform to current year presentations.

 

**4.  Stock Offering**

 

    In March 2001, the Company received proceeds of $7,349,000 from a privateplacement of 2,449,666 shares of its common stock at a price of $3.00 pershare, to accredited investors.

 

**5.     SegmentReporting**

Sales by geographic destination as a percentage oftotal sales were as follows for the three and nine  months ended September 30, 2001:

 

 
|           |   | **For the Three Months Ended September 30,** |       | **   For the Nine Months Ended September 30,** |
|----------------|--------|----------------------------------------------|------------|----------------------------------------------------------|
|           |   | **2001**                                     | ** ** | **2000**                                                 | ** ** | **2001** | ** ** | **2000** |   |
|           |   |                                         |       |                                                     |   |   |   |   |   |
| Domestic       |   | 73                                           | %          | 79                                                       | % | 81 | % | 71 | % |
| International: |   |                                         |       |                                                     |   |   |   |   |   |
| Europe         |   | 14                                           | %          | 12                                                       | % | 9 | % | 20 | % |
| Asia Pacific   |   | 11                                           | %          | 8                                                        | % | 7 | % | 7 | % |
| Canada         |   | 2                                            | %          | 1                                                        | % | 3 | % | 2 | % |

 

 

**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

**General**

 

Endocardial Solutions Inc. (the “Company”), was incorporated in May1992.  The Company develops,manufactures and markets the EnSite 3000Òclinical workstation and EnSiteÒ catheter(together, the “EnSite System”) for use by electrophysiologists in diagnosingand mapping abnormal heart rhythms known as tachycardias.  During the second quarter of 1999, wereceived approval from the U.S. Food and Drug Administration to market theEnSite System in the U.S. for use in the right atrium of the heart.  The EnSite System is also available toelectrophysiologists in Europe for use in the right atrium and left ventricleof the heart.

 

# **Results of Operations**

 

**General.**  Net losses were  $1,993,563 or $.13 per share, for the three months endedSeptember 30, 2001, as compared to $2,791,036 or $.23 per share, for thesame period in 2000.  For the ninemonths ended September 30, 2001, net losses were $6,947,153 or $.50 per share,and compares to $8,430,911 or $.78 per share, for the same period in 2000.  TheCompany expects losses to continue through the first half of 2002.   The Company is in the process of buildingits own sales organization in Europe and has made an agreement with a newdistributor in Japan to promote future revenue growth.  The Company is in a period ofgrowth in sales and marketing expenses related to introduction, includingincreases in personnel costs.

 

**Revenueand Cost of Goods Sold.** Worldwide revenue for the three months ended September 30, 2001 was $5.8million, a $2.7 million, or 88%, increase over the same period in 2000.  For the nine months ended September 30,2001, worldwide revenue was $16.0 million, a $5.8 million, or 57%, increaseover the same period in 2000.

 

Revenue for domestic sales increased $1.8 million, or 73%, for thethree months ended September 30, 2001, compared to the same period in2000.  For the nine months endedSeptember 30, 2001, domestic sales increased $5.8 million, or 80%, over thesame period in 2000.  This increase inrevenues can be directly attributed to a higher number of EnSite clinicalworkstations sold during the first nine months of 2001, compared to the sameperiod in 2000.  Additionally, with a100% increase in the installed base of the EnSite clinical workstation sinceSeptember 30, 2000 and an overall increase in EnSite catheter utilization persystem per month, EnSite catheter revenues increased 103%.

 

Revenue for international sales, which includes sales to distributorsin Europe and Asia Pacific, for the three months ended September 30, 2001,increased $925,000, or 144%, over the same period in 2000.  For the nine months ended September 30,2001, international sales increased $53,000, or 2%, over the same period in2000.  A majority of the increase inrevenue for the quarter is related to the Company’s initial sales inJapan.  The end of third quarter 2001also saw the start of the transition period related to the termination of thedistribution agreement with Medtronic in Europe.  The Company believes that selling directly to the end-user willimprove sales in the European market.

 

Other revenue, which represents 5.3% and 8.6% of worldwide sales forthe three month periods ending September 30, 2001 and 2000, respectively,includes revenue generated from extended service contracts, repairs andaccessories sales related to the EnSite System.  For the nine months ended September 30, 2001 and 2000, otherrevenue represents 5.9% and 6.6% of worldwide sales.

 

EnSite clinical workstation sales were $2.9 million for the threemonths ended September 30, 2001, compared to $1.6 million for the same periodin 2000.  For the nine months endedSeptember 30, 2001, EnSite clinical workstation sales were $8.1 million,compared to $6.0 million for the same period in 2000.  The increase is due mainly to the higher sales of the EnSiteclinical workstation in U.S. and Canada. Domestic sales accounted for 68% of total EnSite clinical workstationsales for the September 30, 2001 quarter end, compared to 82% for the sameperiod in 2000.  For the nine monthsended September 30, 2001, domestic sales accounted for 81% of total EnSiteclinical workstation sales, compared to 68% for the same period in 2000.

EnSite catheter sales were $2.8 million for the quarter ended September30, 2001, compared to $1.4 million for the same period in 2000, or an increaseof 100%.  For the nine months endedSeptember 30, 2001, EnSite catheter sales were $7.6 million, compared to $4.1million for the same period in 2000. Domestic sales accounted for 78% of total EnSite catheter sales for theSeptember 30, 2001 quarter end, compared to 77% for the same period in 2000.  For the nine months ended September 30,2001, domestic sales accounted for 82% of total EnSite catheter sales, comparedto 76% for the same period in 2000.

 

Cost of goods sold including unabsorbed manufacturing expenses was $2.3million and $1.5 million for the quarters ended September 30, 2001 and 2000,respectively.  For the nine months endedSeptember 30, 2001 cost of goods sold was $6.6 million, compared to $5.3million for the same period in 2000. With the market release of the Company’s Clarity software starting inJune 2000, capitalized software development costs are being amortized throughcost of goods sold over the expected 18-month product life cycle.

 

The gross profit margin was 60.7% for the three months ended September30, 2001, compared with 50.8% during the same period in 2000.  For the nine months ended September 30,2001, gross profit margin was 58.8%, compared to 47.7% for the same period in2000.  The increase in margins is mainlyattributed to the growth in domestic sales of $1.8 and $5.8 million, or 73% and80%, over the three and nine months ended September 30, 2001, respectively, ascompared to the same periods in 2000. Additionally, because the Company’s margins on its domestic sales aresubstantially higher then those of its international sales, the Company saw amore favorable result in margins.  Forthe three months ended September 30, 2001, domestic sales accounted for 73%  of worldwiderevenues, compared to 79% from the same period in 2000.  For the nine months ended September 30,2001, domestic sales accounted for 81% of worldwide revenues, compared to 71%for the same period in 2000.

 

**Researchand 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 $1.4million for the three month period ended September 30, 2001, compared to $1.2million during the same period in 2000, an increase of $243,000.  For the nine months ended September 30,2001, research and development expenses were $3.9 million, compared to $3.4million for the same period in 2000, an increase of $485,000.  The increase in expense for both the threeand nine month periods is attributed to the higher capitalization of softwaredevelopments in 2000 compared to 2001. The Company believes research and development expenditures will remainsteady at $1.4 to $1.5 million, per quarter, the next five quarters.

 

**Generaland Administrative Expenses.** General and administrative expenses were $557,000 and $547,000 for thethree months ended September 30, 2001 and 2000, respectively, an increase of$10,000.  For the nine months endedSeptember 30, 2001, general and administrative expenses were $1.8 million,compared to $1.6 million for the same period in 2000, an increase of$136,000.  The increase is due primarilyto an increase in professional services expense.  The Company believes general and administrative expenditures willremain steady at $600,000, per quarter, the next five quarters.

 

 

**Salesand Marketing Expenses.** Sales and marketing expenses were $3.6 million during the three monthsended September 30, 2001, and $2.7 million during the same period in 2000, anincrease of  $900,000.  For the nine months ended September 30,2001, sales and marketing expenses were $10.8 million, compared to $8.2 millionfor the same period in 2000, an increase of $2.6 million.  The increase is primarily attributable toincreases in personnel and costs associated with building and training of theU.S. sales and clinical engineering team. As the Company continues to penetrate the U.S. market, increases insales and marketing expenses are expected in the next quarter, as it addsadditional headcount in both its selling and field clinical engineeringareas.  The Company believes sales andmarketing expenditures will range from $4.0 to $4.2 million, per quarter, thenext five quarters.

 

**InterestIncome and Expense.** Interest income was $56,000 and $209,000 for the three months endedSeptember 30, 2001 and 2000, respectively.  For the nine months ended September 30, 2001, interest income was$232,000, compared to $411,000 for the same period in 2000.  The decrease for the three and nine monthsended September 30, 2001 was due to lower average cash and cash equivalentbalances.  Interest expense was $25,000and $170,000 for the three months ended September 30, 2001 and 2000,respectively.  For the nine months endedSeptember 30, 2001, interest expense was $130,000, compared to $508,000 for thesame period in 2000.  The decrease isrelated to the repayment of the Medtronic loan during February 2001.

 

**Liquidityand Capital Resources.**

 

The Company’s operations since inception have beenfunded by net proceeds from the sales of common and preferred stock totalingapproximately $79.2million.  As of September 30, 2001 andDecember 31, 2000, the Company had cash, cash equivalents and short-terminvestments of $4.5 and$10.8 million, respectively.

 

For the three months ended September 30, 2001, the Companyused cash of $2.5 million for operations, compared to $1.3 million for the sameperiod in 2000.  For the nine monthsended September 30, 2001, cash used to support operations was $5.4 million,compared to $8.2 million for the same period in 2000.  The Company saw an increase in its accounts receivable balancesof $1.1 million from June 30, 2001. This increase was mainly due to the booking of 45% of the quarters’revenues the last two weeks of September. Additionally, cash collected during the three months ended September 30,2001 was $4.8 million, or $1.2 million less than the cash collected during thethree months ended June 30, 2001. Inventory balances increased $39,000 since June 30, 2001.  The Company has more efficiently managed thelevels of its raw material, work-in-process and finished goods inventories overthe last twelve months.  The Companybelieves inventory balances will remain steady during the fourth quarter of2001, and increase slightly during 2002 as production levels increase to keeppace with expected revenue growth during this period.  Accounts payable decreased $7,000 since June 30, 2001.  The Company expects accounts payable willremain steady during the fourth quarter of 2001, and increase slightly during2002 as operating and production expenses increase to support revenuegrowth.  Accrued salaries and relatedexpenses increased $15,000 since June 30, 2001.  The Company expects this accrual balance to increase during thefourth quarter of 2001, as it continues to accrue the 2001 annual performancecompensation for payment in the first quarter 2002.  Purchases of short-term investments were $0 and $2.9 million forthe three and nine months ended September 30, 2001.  Due to the Company’s current liquidity position, all of its investmentholdings are in a money market fund.

 

In January 1999, the Company announced a financingagreement with Medtronic, Inc.  Underthe agreement, the Company received $7 million from Medtronic Asset Management,which was repayable in 2001 or, if earlier, at the close of a significant roundof debt or equity financing.  TheCompany received $3.5 million of the debt financing in February 1999 and theremaining $3.5 million in January 2000. The $7 million was repaid to Medtronic Asset Management in February2001.

 

In June 2000, the Company received proceeds of$12,687,500 from a private placement of 2,030,000 shares of its common stock toaccredited investors.  The placement waspriced at $6.25 per share.  In July2000, these shares were registered pursuant to the Securities Act of 1933.

 

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, these shares were registered pursuant to the Securities Act of 1993.

 

In June 2001, the Company announced a $3.5 millioncredit facility agreement with Silicon Valley Bank, consisting of a $1.5million capital lease line and a $2 million revolving line of credit. As ofSeptember 30, 2001 the Company has drawn $352,000 on the capital lease line andhas no amount outstanding on the revolving line of credit.

The Company believes that its existing cash, cashequivalents, short-term investments and bank financing will be sufficient tofund the operations of the Company through first quarter 2002.  The Company’s future liquidity and capitalrequirements will depend on numerous factors, including the timing ofregulatory actions regarding the Company’s products, the results of clinicaltrials and competition, the extent to which the Company’s EnSite System gainsmarket acceptance, the costs and timing of expansion of sales, marketing andmanufacturing activities and the ability of the Company to obtain bankfinancing.

 

 

**CautionaryStatement**

 

Except for the historical information contained herein, this QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. When used in this Form 10-Q and in future filings by the Company withthe Securities and Exchange Commission, in the Company’s press releases and inoral statements made with the approval of an authorized executive officer, theword or phrases “believes,” “anticipates,” “expects,” ”intends,” “will likelyresult,” “estimates,” “projects” or similar expressions are intended toidentify such forward-looking statements, but are not the exclusive means ofidentifying such statements.  Theseforward-looking statements involve risks and uncertainties that may cause theCompany’s actual results to differ materially from the results discussed in theforward-looking statements.  Factorsthat might cause such differences include, but are not limited to, thefollowing:  risks associated with thesuccessful development and commercialization of a new technology;  continued clinical testing experience;uncertainty of obtaining Food and Drug Administration and internationalregulatory clearances; uncertainty of availability of treatments employing theCompany’s EnSite system; uncertainty of market acceptance of the EnSite System;training requirements for electrophysiologists; the uncertainty of the abilityto diagnose and treat atrial fibrillation; the expectation of future losses;significant competition and rapid technological change in the tachycardiadiagnostic market; risks associated with the Company’s dependence on patentsand proprietary technology; risks associated with the Company’s limitedmanufacturing experience and dependence on suppliers; and the uncertainty ofthird-party reimbursement for diagnostic medical procedures employing theEnSite System.  These factors arediscussed in the cautionary statements included in Exhibit 99 to our Form10-K/A for the year ended December 31, 2000. Other forward looking statements are found in the Company’s disclosuresabout market risk.  The Company cautionsinvestors and others to review the statements set forth in Management’sDiscussion and Analysis of Financial Condition and Results of Operations,Exhibit 99 and in the Company’s other reports filed with the Securities andExchange Commission and that other factors may prove to be important inaffecting the Company’s business and results of operations.

 

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

 

The Company had approximately $4.5 million of cash and investments asof September 30, 2001.  Substantiallyall of the investments were U.S. government or investment grade, fixed incomesecurities from domestic issuers. Because of the credit risk criteria of the Company’s investmentpolicies, the primary market risk associated with these investments is interestrate risk.  The Company does not usederivative financial instruments to manage interest rate risk or to speculateon future changes in interest rates.  Arise in interest 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**

 

# ** **

# **Item6.    Exhibits and Reports on Form 8-K**

 
| (a)     |   | Exhibits                                                                                  |
|---------|--------|-------------------------------------------------------------------------------------------|
|    |   |                                                                                      |
|    |   |                                                                                      |
| Exhibit |   | Description                                                                               |
|    |   |                                                                                      |
| 10.1    |   | Real Property Lease  dated August 13, 2001 between the Company and Place & Plaza LLC. |
|    |   |                                                                                      |
| (b)     |   | Reports on form 8-K                                                                       |

 

                Areport on form 8-K was filed bythe Company on July 25, 2001; such report contained information disclosedpursuant to Regulation FD under Item 9 and included as an exhibit a pressrelease issued by the Company regarding foreign distribution arrangements.

 

 

 

 

**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
|   |              |   | **Endocardial  Solutions, Inc.**                         |
|--------|-------------------|--------|----------------------------------------------------------|
|   |              |   |                                                     |
|   |              |   |                                                     |
|   |              |   |                                                     |
| Dated: | November 14, 2001 |   | By: /S/ James W. Bullock                                 |
|   |              |   | James W. Bullock                                         |
|   |              |   | President and Chief Executive Officer                    |
|   |              |   | (Principal Executive, Financial and Accounting  Officer) |
|   |              |   |