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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 33-42880
VIVAX MEDICAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 11-2674603
- -------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
545 Middle Street Bristol, Connecticut 06010
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(Address of principal executive offices)
(860) 589-8200
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(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, $.01 par value - 8,103,916 shares outstanding as of
September 30, 1997.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $35,995 $373,526
Restricted cash..................................... 299,829
Inventories......................................... 237,571 584,026
Accounts receivable, net of reserve for doubtful
accounts.......................................... 1,394,367 581,815
Prepaid expenses and other current assets........... 144,067 95,278
Subscription receivable............................. 800,000
----------- -----------
Total current assets............................. 2,111,829 2,434,645
Restricted cash.......................................... 216,300
Rental equipment, net of accumulated depreciation........ 1,579,983 935,821
Equipment and leasehold improvements, net of accumulated
depreciation and amortization........................ 382,914 319,905
Deposits and other assets................................ 355,219 93,868
Deferred financing costs................................. 414,770 54,083
Goodwill, net of accumulated amortization................ 2,447,081 1,296,591
----------- -----------
TOTAL............................................ $7,291,796 $5,351,213
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses............... $1,290,746 $705,105
Income taxes payable................................ 37,901 30,000
Notes payable-bank.................................. 400,000 260,000
Notes payable-stockholders including accrued
interest.......................................... 142,775 134,609
Notes payable-acquisition debt...................... 300,000
Current portion of long-term debt................... 175,000
Deferred officers' compensation (including accrued
interest)......................................... 202,395 210,924
----------- -----------
Total current liabilities........................ 2,248,817 1,640,638
Note payable-CII (including accrued interest
and net of deferred debt discount).................. 786,488 713,318
Note payables-acquisition debt........................... 1,000,000 785,000
Note payable-CDA including accrued interest.............. 106,373 100,243
Note payable-DECD including accrued interest............. 207,333
Note payable-Finova Capital Corporation.................. 600,000
Convertible promissory notes payable..................... 498,500
Senior secured convertible note payable.................. 100,000
Notes payable-equipment.................................. 130,668
Deferred tax liability................................... 30,000 30,000
Grant award and other liabilities........................ 73,124 73,124
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Total liabilities................................ 5,781,303 3,342,323
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STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized........................................... 81,035 76,697
Additional paid-in capital............................... 14,587,721 13,307,542
Deficit.................................................. (13,158,263) (11,375,349)
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Total stockholders' equity ...................... 1,510,493 2,008,890
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TOTAL............................................ $7,291,796 $5,351,213
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</TABLE>
The atached notes are made a part hereof.
2
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
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1997 1996 1997 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................... $ 1,201 $194,710 $730,995 $483,622
Rental income....................... 359,182 525,979 1,156,832 699,947
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Total revenues.......... 360,383 720,689 1,887,827 1,183,569
Cost of revenues.................... 511,698 443,697 1,929,536 1,153,286
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Gross profit (loss)................. (151,315) 276,992 (41,709) 30,283
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Research and development expenses... 162,770 168,763 377,405 334,931
General, administrative, and
marketing expenses................ 452,563 362,588 1,192,775 709,373
-------------------------------- -----------
Total expenses...................... (615,333) (531,351) (1,570,180) (1,044,304)
--------------------------------------------
Loss from operations................ (766,648) (254,359) (1,611,889) (1,014,021)
Interest and other income........... 113 1,782 58,864 33,905
Interest expense.................... (88,655) (93,659) (229,889) (165,120)
-------------------------------- -----------
NET LOSS............................($855,190)($346,236)($1,782,914)($1,145,236)
==================== =========== ===========
Net loss per share.................. ($0.11) ($0.05) ($0.23) ($0.19)
======= ======= ======= =======
Weighted average number of common
shares used in computing loss
per share.........................7,730,249 6,412,083 7,700,698 6,003,905
========= ========= ========= =========
</TABLE>
The attached notes are made a part hereof.
3
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................($1,782,914)($1,145,236)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization............................. 481,139 144,428
Common stock issued for professional services rendered.... 75,743 11,988
Gain on sale of fixed assets.............................. (2,925)
Changes in operating assets and liabilities:
Decrease (increase) in inventories....................... 346,455 (11,553)
(Increase) in accounts receivable, prepaid expenses
and other assets........................................ (1,360,407) (386,757)
(Increase) in restricted cash............................ (83,529) (109,500)
Increase in accounts payable and accrued expenses........ 537,739 53,019
(Decrease) increase in deferred officers' compensation... (17,500) 106,000
Increase in accrued interest payable..................... 52,812 103,370
------------------------
Net cash (used in) operating activities................ (1,753,387) (1,234,241)
------------------------
Cash flows from investing activities:
Purchase of equipment...................................... (322,761) (135,942)
Proceeds from sale of fixed assets......................... 8,550
Cost of acquisition net of cash acquired................... (418,857) (47,748)
------------------------
Net cash (used in) in investing activities............. (733,068) (183,690)
------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................... 1,688,500 1,160,000
Decrease in notes payable.................................. (550,000)
Proceeds from sale of common stock......................... 46,100 20,000
Issuance costs incurred in sale of common stock............ (4,300) (2,000)
Stock issued with convertible promissory note.............. 109,224
Deferred financing costs................................... 59,400
Repayment of notes payable-officers........................ (145,750)
Decrease in subscription receivable........................ 800,000 90,000
Common stock issued in connection with financing........... 13,265
------------------------
Net cash provided by financing activities.............. 2,148,924 1,135,515
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(DECREASE) IN CASH AND CASH EQUIVALENTS..................... (337,531) (282,416)
Cash and cash equivalents at beginning of period............ 373,526 485,819
------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $35,995 $203,403
========================
Supplemental disclosure of cash flow information:
Value of warrants given in connection with financing..... $100,800
Issuance of stock for acquisition of subsidiary.......... $800,000 1,200,000
Issuance of debt for acquisition of subsidiary........... 500,000 1,500,000
Value of warrants given in connection with asset purchase 198,352
</TABLE>
The attached notes are made a part hereof.
4
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(NOTE A):
(1) The accompanying unaudited financial statements contained in the Form
10-QSB represent condensed consolidated financial data and, therefore, do not
include all footnote disclosures required to be included in financial statements
prepared in conformity with generally accepted accounting principles. Such
footnote disclosure was included in the Company's Form 10-KSB for the year ended
December 31, 1996. The condensed financial data included herein should be read
in conjunction with the Form 10-KSB. The December 31, 1996 balance sheet has
been derived from the audited financial statements included in the Company's
1996 Form 10-KSB.
(2) In June 1997 the Company changed its name from Nova Technologies, Inc.
to Vivax Medical Corporation ("Vivax"). The name of its wholly-owned subsidiary
has been changed from Vivax Medical Corp. to Vivax Medical Services,
Inc.("VSI").
(3) The consolidated statements include the accounts of Vivax Medical
Corporation and its wholly-owned subsidiary, Vivax Medical Services, Inc. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
(NOTE B):
(1) In management's opinion, all necessary adjustments (consisting only of
normal recurring adjustments) have been made in order to present fairly the
results for the interim periods.
(2) The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results of operations for the year ending
December 31, 1997.
(NOTE C):
Net loss per share is based on the weighted average number of shares
outstanding during each period. No effect has been given to outstanding options
and warrants as the effect would be antidilutive.
(NOTE D):
Inventories are stated at the lower of cost (first-in, first-out) or
market.
5
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(NOTE E):
At September 30, 1997 the following loans are outstanding:
(a) Notes Payable-Peoples $ 400,000
(b) Notes Payable-Stockholder 99,250
(c) Notes Payable-Acquisition Debt 1,000,000
(d) Notes Payable-CII 750,000
(e) Notes Payable-CDA 100,000
(f) Notes Payable-DECD 200,000
(g) Convertible Promissory Notes 498,500
(h) Notes Payable-Finova 750,000
(i) Senior Secured Convertible Note 100,000
(j) Notes Payable-Equipment 155,668
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Total Notes Payable 4,053,418
Current Portion 674,250
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Long-term Portion $3,379,168
(a) revolving credit loan maturing December 5, 1997: interest at prime plus
1 1/2%.
(b) interest at 11% per annum; payable on demand and subordinated to the
borrowings under the Peoples and CII loan facilities. At the stockholder's
discretion the note can be repaid in cash or he may elect to receive one
three-year warrant in exchange for each dollar of debt, to purchase the
Company's common stock at $1.50 per share.
(c) comprised of (i) a $750,000 promissory note payable quarterly over
three years, commencing in 1998, with principal installments dependant on future
operating results of an acquired business and (ii) a $500,000 promissory note
payable over four years commencing April 20, 1999 with principal installments
dependant on future operating results of an acquired business; both notes bear
interest at 8% per annum and are secured by certain inventory, equipment and
technology. On September 30, 1997 $250,000 of the $750,000 promissory note was
paid reducing the outstanding balance to $500,000.
(d) matures on September 5, 2001, with interest payable semi-annually at
10% per annum commencing on September 5, 1998.
(e) matures on September 1, 2002 and repayable in 48 equal monthly
installments commencing October 1, 1998 bearing interest at the rate of 7.94%
per annum.
(f) repayable in 84 equal monthly installments commencing on January 9,
2000 bearing interest at the rate of 5% per annum.
(g) matures on January 15, 1999, bearing interest at 10% per annum payable
quarterly and convertible into common stock at any time prior to maturity at a
conversion price of $3.00 per share.
(h) matures on September 30, 2002,and repayable in 60 equal monthly
installments commencing on November 1, 1997 bearing interest at 10.25% per annum
secured by the Company's common stock and all of the tangible and intangible
assets of VSI, the Company's wholly-owned
6
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
subsidiary.
(i) matures on September 30, 2003, bearing interest at 10% per annum,
payable on the first to occur of (i) payment of dividend on common stock (ii)
conversion into common stock or (iii) January 1, 1998; convertible into common
stock prior to maturity at CII's option at a conversion price of $2.50 per
share.
(j) sundry installment loans to purchase rental equipment.
(NOTE F):
Two officers have agreed to defer payment of salaries due them aggregating
$183,083 and payment of interest on deferred compensation due them aggregating
$18,968. An aggregate of $175,750 of such sum is subordinated to borrowings
under Peoples and CII loan facilities.
(NOTE G):
In June 1996 the Company, through a wholly-owned acquisition corporation,
acquired all of the outstanding capital stock of Comed Systems, Inc., now called
Vivax Medical Services, Inc.-Northeast Division ("NE") in exchange for 600,000
shares of its common stock and two $750,000 promissory notes issued by the
acquisition corporation. The notes, which bear interest at 8% per annum, are
guaranteed by the Company. The first note, due on July 1, 1997 was paid in full
by a combination of cash and common stock and the second note is due on January
1, 2001 subject to quarterly prepayment installments commencing April 20, 1998.
The Company prepaid $250,000 of such installments on September 30, 1997. The
installments are equal to the lesser of $37,500 or 25 percent of NE's operating
income (as defined). The transaction was accounted for as a purchase; therefore
the results of operations for Comed were included in the accompanying financial
statements since the date of acquisition. The cost of the acquisition has been
allocated to the fair market value of the assets acquired and liabilities
assumed and resulted in goodwill of approximately $1,334,000.
(NOTE H):
In January 1997 the Company entered into an agreement with Therapy
Concepts, Inc ("Therapy") containing an option (expiring on October 1, 1999) to
acquire a part or all of Therapy's business at a price based on a multiple of
Therapy's earnings (as defined), and payable in a combination of cash and the
Company's common stock. In July 1997 the Company agreed to acquire Therapy's
manufacturing equipment, tooling, component parts and intellectual property
rights to all of Therapy's therapeutic mattress systems for approximately $1
million.
7
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(NOTE I):
On September 30, 1997, the Company through its wholly owned subsidiary
("VSI") acquired all of the outstanding capital stock of Concept Medical
Corporation ("Concept") in exchange for 333,333 shares of its common stock, a
$500,000 promissory note and $500,000 cash payable at closing. The note bears
interest at 8% per annum and is subject to quarterly prepayment installments
commencing April 20, 1999. Such installments will be equal to the greater of
$41,667 or 25 percent of Concept's operating income (as defined). The
transaction will be accounted for as a purchase. The cost of the acquisition has
been allocated to the fair market value of the assets acquired and liabilities
assumed and goodwill of approximately $1,200,000 was recorded. Assuming the sale
was consummated as of the beginning of the current and prior fiscal years pro
forma operating results of the Company would be as follows:
Nine months ended September 30,
1997 1996
-------------------------------
Revenue..................... $2,422,000 $2,132,000
Net loss.................... (1,745,000) (711,000)
Loss per share.............. ($.22) ($.11)
Shares used................. 8,034,000 6,337,000
(NOTE J):
On September 30, 1997, the Company entered into a credit agreement with
Finova Capital Corporation providing for loans to the Company in an amount not
to exceed $5,000,000. The agreement consists of loans for acquisitions in an
aggregate principal amount of up to $3,500,000 and a revolving loan for working
capital in an aggregate principal amount of up to $1,500,000. On September 30,
the Company borrowed $750,000 under the acquisition loan to purchase Concept
($500,000) and to repay $250,000 of the outstanding loan relating to the
purchase of Comed.
(NOTE K):
In October 1997, the Company received $400,000 from CII for the development
and marketing of medical equipment. The $100,000 convertible demand promissory
note previously issued to CII as of September 30, 1997 was replaced by a 10%
senior secured convertible note payable for $500,000. The note matures on
September 30, 2003 and is convertible into common stock prior to maturity at
CII's option at a conversion price of $2.50 per share.
8
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company, from its inception on January 23, 1984 through the fiscal year
ended December 31, 1994 had been engaged primarily in research and development
of its NOVABED(R) Patient Mobility System and in raising capital to design and
develop a marketable product. From inception through December 31, 1994, the
Company reported its results as a development stage enterprise and discontinued
such reporting in 1995 and thereafter.
In June 1997, the name of the Company was changed to Vivax Medical
Corporation ("Vivax"). The purpose of the name change was to provide unique
market identification to the Company. The company is now marketing its Novabed
units under the name Vivax Mobility System (TM).
On June 14, 1996, the Company, through a wholly owned acquisition
corporation i.e. Vivax Medical Corp., which has been renamed Vivax Medical
Services, Inc. ("VSI") acquired all of the outstanding capital stock of Comed
Systems, Inc. ("Comed") (one of its distributors at that date) in exchange for
600,000 shares of the Company's common stock and two $750,000 promissory notes.
On December 30, 1996, $450,000 of one of the notes was exchanged for 225,000
shares of the Company's common stock.
Comed Systems, Inc. was incorporated in December 1989 and began operations
in mid 1991 to distribute specialized beds and support surfaces in eastern New
England.
On September 30, 1997 VSI acquired all of the outstanding capital stock
of Concept Medical Corporation ("Concept"). Concept is a distributor of the
Company's products and rents specialty beds in South Florida. The purchase price
of $2,000,000 consists of 333,333 shares of the Company's common stock valued at
$1,000,000 pursuant to the purchase agreement, a $500,000 promissory note and a
cash payment of $500,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
In the three months ended September 30, 1997 the Company recorded revenues
of $360,000 and incurred a net loss of $855,000 ($.11 per share) compared to
revenues of $721,000 and a net loss of $346,000 ($.05 per share) in the three
months ended September 30, 1996. The results of 1997 include the operations of
VSI which was acquired in June 1996.
9
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The decrease in revenues of $361,000 is due to (i) the temporary
cessation of shipments of the Vivax Mobility System for the quarter and (2) a
decline of $167,000 in VSI's rental income. In the third quarter of 1997 the
Vivax Mobility System underwent a redesign change for the purpose of upgrading
the system for use in the institutional rental market. All existing finished
product of the prior design was shipped in the second quarter and shipments of
the redesigned system will commence in the fourth quarter. VSI sales declined
because of a decline in the number of its customers resulting from industry
consolidation and to a lesser extent rental price erosion. Vivax sustained a
loss for the quarter of $846,000 and VSI sustained a loss of $9,000 in the
quarter.
In the quarter ended September 30, 1997 the Company sustained a gross
loss of $151,000 compared to a gross profit of $277,000 in the quarter ended
September 30, 1996. VSI's gross profit of $143,000 was offset by a $294,000
gross loss in Vivax. The erosion of gross profit was due to the substantial
reduction in sales, partially due to the redesign of the Vivax Mobility System
and to a decline in manufacturing efficiency resulting from the emphasis on
redesigning the product and the reduction in production levels during the
quarter. As production and sales levels increase in subsequent quarters the
Company expects Vivax's gross losses to diminish and thereafter rising gross
profits, although no assurance can be given that Vivax will be able to achieve
such satisfactory production and sales levels.
Research and development expenses decreased $6,000 from $169,000 in the
third quarter of 1996 to $163,000 in the comparable 1997 quarter. An officer
engaged in research and development retired and the Company closed its 7500
square foot Hauppauge research and development facility. On May 1, 1997 the
Company moved that operation to a 1500 square foot building and terminated most
of the employees in this location. The Company is continuing its research and
development program to design new product lines and to redesign existing product
lines. Research and development expenditures are expected to remain at
relatively high levels.
General, administrative and marketing expenses increased $90,000 from
$363,000 in the third quarter of 1996 to $453,000 in the comparable 1997
quarter. The increase is attributable to increases in consulting and
professional fees concerning possible acquisitions and financing, public
relations, and to a lesser extent payroll and payroll-related items, insurance
and sundry expenses in connection with the growth of the Company.
Interest expense declined $5,000 from $94,000 in 1996 to $89,000 in
1997. The increase in interest expense on greater debt outstanding was offset by
interest savings on the reduction of interest on $450,000 of notes payable
issued in conjunction with the acquisition of Comed which was exchanged for
shares of common stock in December 1996.
10
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As a result of common stock sales in 1996 for capital funds and the
issuance of common stock for the acquisition of Comed and Concept, the weighted
average number of common shares used in computing loss per share increased from
6,412,000 at September 30, 1996 to 7,730,000 at September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
In the nine months ended September 30, 1997 the Company recorded
revenues of $1,888,000 and incurred a net loss of $1,783,000 ($.23 per share)
compared to revenues of $1,184,000 and a net loss of $1,145,000 ($.19 per share)
in the nine months ended September 30, 1996.
The increase in revenues of $704,000 is due to the inclusion of VSI
revenues for the whole nine month period (which accounted for $457,000 of the
sales increase) compared to three and one-half months in the comparable prior
period and an increase in Vivax sales of $247,000.
In the nine months ended September 30, 1997 the Company sustained a
gross loss of $42,000 compared to a gross profit of $30,000 in the nine months
ended September 30, 1996. VSI's gross profit of $544,000 was offset by a gross
loss in Vivax. In September 1995, Vivax opened its new 28,000 square foot
manufacturing facility in conjunction with the completion of the 1995 Financing.
The new manufacturing facility was necessary to enable Vivax to meet its
manufacturing requirements and sales objectives. Initially, production levels at
the new facility have not been high enough to absorb the additional
manufacturing overhead incurred in the new facility. In addition, in the third
quarter of 1997 the Vivax Mobility System underwent a redesign change for the
purpose of upgrading the system for use in the institutional rental market. All
existing finished product of the prior design was shipped in the second quarter
and shipments of the redesigned system will commence in the fourth quarter. As
production and sales levels increase in subsequent quarters the Company expects
gross losses to diminish and thereafter rising gross profits, although no
assurance can be given that the Company will be able to achieve such
satisfactory production and sales levels.
Research and development expenses increased $42,000 from $335,000 in the
first nine months of 1996 to $377,000 in the comparable 1997 period. In the
first quarter of 1997 research and development expenses increased in the
Hauppauge facility as its primary function changed from manufacturing to
research and development. The 7500 square foot facility was closed in March and
a smaller facility was opened in May. In the second and third quarters of 1997
research and development expenses declined from the comparable quarters. The
Company is continuing its research and development program to design new product
lines and to redesign existing product lines. Research and development
expenditures are expected to remain at relatively high levels.
11
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General, administrative and marketing expenses increased $484,000 from
$709,000 in the nine months of 1996 to $1,193,000 in the comparable nine months
of 1997. The increase is attributable to increases in consulting and
professional fees concerning possible acquisitions and financing, public
relations and to a lesser extent increases in payroll and payroll-related items
and sundry expenses in connection with the growth of the Company. The increase
reflects the inclusion of VSI's expenses for nine months compared to three and
one-half months in the comparable prior period.
Interest expense increased $65,000 from $165,000 in 1996 to $230,000 in
1997. The increase is attributable to the assumption of new debt pertaining to
the expansion of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997 the Company used net cash in
operating activities aggregating $1,753,000 compared to $1,234,000 in the prior
years's nine month period. In the 1997 period funds were provided by inventory
reductions (primarily of Novabeds) and higher accounts payable and accrued
expenses. In the same period cash was used to fund an increase in accounts
receivable.
The Company purchased equipment aggregating $323,000, of which $151,000
was used for the Bristol facility and $172,000 was used to buy rental equipment
for VSI. In the prior year's comparable period, equipment purchases were
$136,000. In 1997 the Company paid $62,000 for the development and right to use
plans and technology for three types of mattresses it intends to manufacture and
market and issued warrants in connection with a contract to purchase a company
in the future.
In the nine months ended September 30, 1997 net cash provided by
financing activities aggregated $2,149,000 compared to $1,136,000 in the nine
months of 1996. In 1997 the Company received financing proceeds as follows: (i)
$200,000 loan from the Connecticut Department of Economic and Community
Development ("DECD"), (ii) $598,500 from sales of convertible promissory notes,
(iii) $140,000 loan from People's Bank (iv) net proceeds of $842,000 in
connection with the sale of its common stock and (v) $750,000 loan from Finova
Capital Corporation ("Finova") to acquire Concept and repay existing
indebtedness. In the comparable 1996 period the Company received proceeds of:
(i) $650,000 loan from Connecticut Innovations, Incorporated ("CII"), (ii)
$260,000 loan from People's Bank, and (iii) short-term loan of $250,000 from
Northern Associates.
As of September 30, 1997, the Company had loans outstanding of $400,000
pursuant to a revolving line of credit; $300,000 under equipment loans
(including a $200,000 equipment loan in January 1997); $1,000,000 under
promissory notes to purchase Comed and Concept; $99,250 under a loan from an
officer; $750,000 under a loan from CII; $598,500 under convertible promissory
notes; an installment loan of
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$750,000 payable to Finova and equipment loans of $156,000 acquired with the
purchase of Concept. At September 30, 1997 the Company had a net worth of
$1,510,000, net rental equipment of $1,580,000, working capital deficiency of
$137,000, including unrestricted cash of $36,000, accounts receivable of
$1,394,000 and inventory aggregating $238,000. In October 1997, the Company
received $400,000 from CII for a 10% note payable convertible into common stock
of the Company at CII's option.
At September 30, 1996, the Company had a net worth of $783,000, net
rental equipment of $456,000, working capital deficiency of $505,000, including
unrestricted cash of $203,000, accounts receivable of $650,000 and inventory
aggregating $595,000.
The Company has expended approximately $338,000 to purchase equipment
and furniture for its new manufacturing facility in Bristol, CT. and has
purchased approximately $270,000 of rental equipment for VSI since its
acquisition in June 1996.
The Company's loan agreement with People's Bank requires that the Company
satisfy at the end of each quarter certain financial covenants as set forth
below:
REQUIRED ACTUAL
Min. Working Capital $700,000 ($137,408)
Min. Current Ratio 1.75 to 1.00 .94 TO 1.00
Min. Capital Funds $ 1,300,000 $965,962
Max. Unsubord.Debt Ratio 2.50 to 1.00 3.94 TO 1.00
For purposes of the agreement, "Working Capital" is defined as current
assets minus current liabilities, "Current Ratio" is defined as current assets
divided by current liabilities, "Capital Funds" is defined as the sum of
tangible net worth plus subordinated debt minus the sum of intangible assets
plus loans to officers, directors, employees and affiliates, and "Unsubordinated
Debt Ratio" is defined as total unsubordinated debt divided by total capital
funds. At September 30, 1997, the Company was not in compliance with any of
these covenants. The bank has agreed to waive these covenants at September 30,
1997. The People's Bank loan was secured in part by three letters of credit. The
Bank has agreed to accept substitute collateral from the Company in the form of
additional restricted cash which is being held in escrow in the Debt Service
Reserve and has released these letters of credit. Failure to satisfy any of the
financial covenants constitutes a default under the People's Bank financing
which allows People's Bank to terminate its obligation to provide financing to
the Company and to accelerate all loans outstanding to the Company. A default
under the People's Bank financing also constitutes a default under the Company's
other financing arrangements.
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In connection with the acquisition of Comed, VSI issued two $750,000
promissory notes, aggregating $1,500,000 to Douglas and Donna Drew, the former
shareholders of Comed, which are guaranteed by the Company. The first note
accrued interest at the rate of 8%, payable at maturity. On December 30, 1996
$450,000 of the note was converted into 225,000 shares of the Company's common
stock; the remaining $300,000 of this note was paid in full in July 1997. The
second note bears interest at 8%, requires quarterly interest payments and
matures on January 1, 2001. Principal payments are due quarterly 60 days
following each of the first three calendar quarters and 110 days following the
fourth calendar quarter, commencing April 20, 1998, in an amount equal to the
lesser of (i) $37,000 or (ii) 25% of the operating income of VSI during the
prior calendar quarter. Both notes are secured by a second lien on the accounts
receivable and inventory of VSI and a second lien on Vivax's intellectual
property. On September 30, 1997 the Company repaid $250,000 of this note
bringing the remaining balance to $500,000. The funds to repay the note were
borrowed from Finova.
The Company intends to continue to explore strategic alliances or
mergers in addition to the Comed and Concept acquisitions as a means of
improving the Company's cash flow and capital. On September 30, 1997 VSI entered
into a credit agreement with Finova providing for loans to the Company in an
amount not to exceed $5,000,000. The agreement consists of loans for
acquisitions in an aggregate principal amount of up to $3,500,000. The credit
facility also provides for a revolving loan for working capital in a aggregate
principal amount of up to $1,500,000. On September 30, 1997 the Company borrowed
$500,000 under the acquisition loan to purchase Concept and $250,000 to repay a
portion of the outstanding loan relating to the purchase of Comed.
In January 1997 the Company entered into an agreement with Therapy
Concepts Inc. ("Therapy"), a manufacturer and distributor of air therapy support
surfaces and other related medical products with approximately $10 million in
annual revenues. Under the terms of the agreement the Company has the right to
purchase and Therapy has the option to sell either or both the manufacturing and
the distribution business of Therapy at a purchase price based on a multiple of
earnings (as defined). The term of the option period is from December 1, 1997 to
October 1, 1999. In order to exercise its option, the Company must obtain an
additional $10 million in equity and be listed on the NASDAQ Small-Cap market
system. In July 1997 the Company agreed to acquire Therapy's manufacturing
equipment, tooling and intellectual property rights to all of Therapy's
therapeutic mattress systems for $350,000 and agreed to purchase $650,000 in
component parts, as needed.
The Company is also engaged in preliminary discussions with several
distributors of medical products regarding the Company's potential acquisition
of their business. The Company cannot state that any of these acquisitions is
probable because no agreement in principle with respect to transaction price and
all other material
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terms has been reached. In addition, any such acquisition is subject to Finova's
approval of the financing for the transaction. There can be no assurance that
any such acquisition will be consummated.
In the month of October 1996 TimeCapital purchased 500,000 shares of the
Company's Common Stock at $2 per share and remitted net proceeds to the Company
of $900,000. The Company has also entered into an agreement with TimeCapital for
it to act as the Company's exclusive agent to assist in arranging for one or
more qualified broker-dealers to serve as the underwriter(s) on behalf of the
Company in connection with a public offering of Common Stock. The Company has
the right to terminate this agreement at any time upon payment to TimeCapital of
$250,000, comprised of $100,000 cash and 150,000 shares of Vivax common stock.
In August 1997, the Company received verbal commitments for financing
from CII and DECD, aggregating $500,000 and $650,000, respectively. CII
purchased convertible notes payable from the Company aggregating $500,000 in
September and October. The Company plans to use the funds from DECD, which it
expects to receive in the fourth quarter of 1997 to purchase manufacturing
machinery and tooling; DECD will receive installment notes repayable over seven
years.
The Company has received reports on its financial statements from its
independent auditors which include an explanatory paragraph indicating that
substantial doubt exists about the ability of the Company to continue as a going
concern. The factors referenced by the auditors include the Company's recurring
operating losses and the need for additional financing for commercial
exploitation of its product. The Company has signed a letter of intent with an
underwriter for a proposed offering of the Company's common stock aggregating
approximately $6 to $8 million. The proceeds will be used for working capital.
There can be no assurance that the Company will be able to market the proposed
offering and obtain the amount of funds, or any funds, that it is seeking. If
sufficient capital is not raised, the Company may have to drastically reduce its
staff and curtail manufacturing operations which could result in a default under
and acceleration of the Company's loan obligations and, ultimately, bankruptcy
and/or the discontinuance of operations.
PART II. OTHER INFORMATION
Not Applicable
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIVAX MEDICAL CORPORATION
(Registrant)
October 12, 1997 By: /s/ Stephen M. Fisher
------------------------------
President
16
<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,995
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<RECEIVABLES> 1,576,329
<ALLOWANCES> 181,962
<INVENTORY> 237,571
<CURRENT-ASSETS> 2,111,829
<PP&E> 3,202,911
<DEPRECIATION> 1,240,014
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<COMMON> 81,035
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