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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 June 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
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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)
NOVA TECHNOLOGIES, INC.
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(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 - 7,726,916 shares outstanding as of June
30, 1997.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VIVAX MEDICAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS AND PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma
June 30, 1997 June 30, 1997 December 31, 1996
See Note J
-------------------------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $422,381 $294,819 $373,526
Restricted cash..................................... 299,829 299,829
Inventories......................................... 170,871 170,871 584,026
Accounts receivable, net of reserve for doubtful
accounts.......................................... 1,428,199 1,495,105 581,815
Prepaid expenses and other current assets........... 105,985 105,985 95,278
Subscription receivable............................. 800,000
----------- ----------- -----------
Total current assets............................. 2,427,265 2,366,609 2,434,645
Restricted cash.......................................... 216,300
Rental equipment, net of accumulated depreciation........ 1,817,798 906,317 935,821
Equipment and leasehold improvements, net of accumulated
depreciation and amortization........................ 388,183 388,183 319,905
Deposits and other assets................................ 201,542 198,841 93,868
Deferred financing costs................................. 121,489 121,489 54,083
Goodwill, net of accumulated amortization................ 2,160,425 1,263,247 1,296,591
------------ ----------- -----------
TOTAL............................................ $7,116,702 $5,244,686 $5,351,213
============ =========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses............... $985,483 $938,252 $705,105
Income taxes payable................................ 28,901 28,901 30,000
Notes payable-bank.................................. 400,000 400,000 260,000
Notes payable-stockholders including accrued
interest.......................................... 140,023 140,023 134,609
Notes payable-acquisition debt...................... 437,500 337,500 300,000
Current maturities of long-term debt................ 25,000
Deferred officers' compensation (including accrued
interest)......................................... 199,395 199,395 210,924
------------ ----------- -----------
Total current liabilities........................ 2,216,302 2,044,071 1,640,638
Note payable-CII (including accrued interest
and net of deferred debt discount).................. 761,585 761,585 713,318
Note payable-acquisition debt............................ 1,612,500 712,500 785,000
Note payable-CDA including accrued interest.............. 104,289 104,289 100,243
Note payable-DECD including accrued interest............. 204,778 204,778
Convertible promissory note payable...................... 111,000 111,000
Notes payable-equipment.................................. 49,785
Deferred tax liability................................... 30,000 30,000 30,000
Grant award and other liabilities........................ 73,124 73,124 73,124
------------ ----------- -----------
Total liabilities................................ 5,163,363 4,041,347 3,342,323
------------ ----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized........................................... 80,603 77,269 76,697
Additional paid-in capital............................... 14,175,809 13,429,143 13,307,542
Deficit.................................................. (12,303,073) (12,303,073) (11,375,349)
------------ ----------- -----------
Total stockholders' equity ...................... 1,953,339 1,203,339 2,008,890
------------ ----------- -----------
TOTAL............................................ $7,116,702 $5,244,686 $5,351,213
============ =========== ===========
</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 Six months ended
June 30, June 30,
-------------------------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales........................... $307,968 $206,359 $729,794 $288,912
Rental income....................... 404,303 173,968 797,650 173,968
--------- --------- --------- ---------
Total revenues.......... 712,271 380,327 1,527,444 462,880
Cost of revenues.................... 594,874 406,883 1,417,838 709,589
--------- --------- --------- ---------
Gross profit (loss)................. 117,397 (26,556) 109,606 (246,709)
--------- --------- --------- ---------
Research and development expenses... 72,099 84,549 214,635 166,168
General, administrative, and
marketing expenses................ 277,801 194,659 740,212 346,785
--------- --------- --------- ---------
Total expenses...................... (349,900) (279,208) (954,847) (512,953)
--------- --------- --------- ---------
(Loss) from operations.............. (232,503) (305,764) (845,241) (759,662)
Interest and other income........... 31,457 8,069 58,751 32,123
Interest expense.................... (71,609) (43,630) (141,234) (71,461)
--------- --------- --------- ---------
NET LOSS............................($272,655) ($341,325) ($927,724) ($799,000)
========== ========== ========== ==========
Net loss per share.................. ($0.04) ($0.06) ($0.12) ($0.14)
======= ======= ======= =======
Weighted average number of common
shares used in computing loss
per share.........................7,687,016 5,803,616 7,676,575 5,799,816
========= ========= ========= =========
</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>
Six months ended
June 30,
------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ ($927,724) ($799,000)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization.......................... 311,898 60,156
Common stock issued for professional services rendered. 11,250 11,211
Gain on sale of fixed assets........................... (2,925)
Changes in operating assets and liabilities:
Decrease (increase) in inventories.................... 413,155 (151,077)
(Increase) in accounts receivable, prepaid expenses
and other assets..................................... (1,110,414) (286,161)
(Increase) in restricted cash......................... (83,529) (109,500)
Increase in accounts payable and accrued expenses..... 304,550 15,649
(Decrease) increase in deferred officers' compensation (17,500) 75,999
(Decrease) increase in accrued interest payable....... (12,163) 44,649
------------------------
Net cash (used in) operating activities............. (1,113,402) (1,138,074)
------------------------
Cash flows from investing activities:
Purchase of equipment................................... (298,279) (11,808)
Proceeds from sale of fixed assets...................... 8,550
Cash acquired with acquisition of company............... 30,771
Costs incurred with acquisition of company.............. (16,895)
------------------------
Net cash (used in) provided by investing activities. (289,729) 2,068
------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable................. 451,000 900,000
Decrease in notes payable............................... (37,500)
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......... 9,724
Deferred financing costs................................ 59,400
Repayment of notes payable-officers..................... (115,750)
Decrease in subscription receivable..................... 800,000 90,000
------------------------
Net cash provided by financing activities........... 1,324,424 892,250
------------------------
(DECREASE) IN CASH AND CASH EQUIVALENTS.................. (78,707) (243,756)
Cash and cash equivalents at beginning of period......... 373,526 485,819
------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $294,819 $242,063
========================
Supplemental disclosure of cash flow information:
Value of warrants given in connection with financing.. $100,800
Issuance of stock for acquisition of subsidiary....... 1,200,000
Issuance of debt for acquisition of subsidiary........ 1,500,000
</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 JUNE 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. The name of its wholly-owned subsidiary has
been changed from Vivax Medical Corp. to Vivax Medical Services, Inc.
(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 six months ended June 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 JUNE 30, 1997
(UNAUDITED)
(NOTE E):
At June 30, 1997 the following loans are outstanding:
<TABLE>
<CAPTION>
<S> <C>
(a) Notes Payable-Peoples $ 400,000
(b) Notes Payable-Stockholder 99,250
(c) Notes Payable-Acquisition Debt 1,050,000
(d) Notes Payable-CII 750,000
(e) Notes Payable-CDA 100,000
(f) Notes Payable-DECD 200,000
(g) Convertible Promissory Note 111,000
----------
Total Notes Payable 2,710,250
Current Portion 836,750
----------
Long-term Portion $1,873,500
</TABLE>
(a) revolving credit loan maturing September 5, 1997: interest at prime
plus 1 1/2%.
(b) interest at 11% per annum; payable October 1, 1997 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 a $300,000 promissory note payable on July 1, 1997 and
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; both notes bear interest at 8% per annum and are secured by
certain inventory, equipment and technology. On December 30, 1996 $450,000 of
the original $750,000 promissory note was exchanged for 225,000 shares of the
Company's common stock and the remaining $300,000 was paid in full in July 1997.
(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 and convertible into common stock at
any time prior to maturity at a conversion price of $3.00 per share.
(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 $15,968. An aggregate of $175,750 of such sum is subordinated to
borrowings under Peoples and CII loan facilities.
6
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997
(UNAUDITED)
(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. ("VSI") 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.
Such installments are equal to the lesser of $37,500 or 25 percent of VSI'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.
(NOTE I):
In July and August 1997 the Company received net proceeds from the
sale of Convertible promissory notes aggregating $307,500.
(NOTE J):
In August 1997, the Company executed a contract to purchase all of the
outstanding stock of Concept Medical Corporation and Affiliates ("Concept") in
exchange for 333,334 shares of its common stock, a $500,000 promissory note and
$500,000 cash payable at closing. The closing is scheduled for on or about
September 30, 1997. The note will bear interest at 8% per annum and will be
subject to quarterly prepayment installments commencing December 31, 1998. Such
installments will be equal to the lesser of $31,250 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 $900,000 was
7
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VIVAX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997
(UNAUDITED)
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:
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
-------------------------------
<S> <C> <C>
Revenue .................. $ 1,809,866 $ 1,199,433
Net loss ................. (957,498) (523,037)
Loss per share ........... ($.12) ($.09)
Shares used .............. 8,009,909 6,133,150
</TABLE>
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. In 1994, the Company began taking
orders for Novabed units and in June 1994, the Company shipped its initial
Novabed model.
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.
The Company has entered into an agreement to purchase all of the
outstanding stock of Concept Medical Corporation and Affiliates ("Concept").
Concept is a distributor of the Company's products and rents specialty beds in
South Florida. The purchase price of $2,000,000 was valued pursuant to the
agreement and consists of 333,334 shares of the Company's common stock valued at
$1,000,000, a $500,000 promissory note and a cash payment at closing of
$500,000. The closing is currently scheduled for on or about September 30, 1997.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996.
In the three months ended June 30, 1997 the Company recorded revenues of
$712,000 and incurred a net loss of $273,000 ($.04 per share) compared to
revenues of $380,000 and a net loss of $341,000 ($.06 per share) in the three
months ended June 30, 1996. The results of 1997 include the operations of VSI
which was acquired in June 1996; as a result of the acquisition, the comparison
between the
9
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quarters ended June 30, 1997 and June 30, 1996 may not necessarily be
meaningful.
The increase in revenues of $332,000 is due to the inclusion of VSI
revenues for three months in 1997 compared to a half a month in 1996 ($230,000)
and increased Vivax sales ($102,000). Vivax incurred a loss for the quarter of
$442,000 and VSI earned $169,000 in the quarter.
In the quarter ended June 30, the Company realized a gross profit of
$117,000 compared to a gross loss of $27,000 in the quarter ended June 30, 1996.
VSI's gross profit of $213,000 was offset by a $96,000 gross loss by Vivax. In
September 1995, Vivax opened its new 28,000 square foot manufacturing facility
in conjunction with the completion of an equity and debt financing package (the
"1995 Financing"). The new manufacturing facility was necessary to enable Vivax
to meet its manufacturing requirements and sales objectives. Production levels
at the new facility have not yet been high enough to absorb the higher overhead
incurred in the new facility. Manufacturing in the Hauppauge facility was shut
down at the end of June 1996. As production and sales levels increase 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 $13,000 from $85,000 in the
second quarter of 1996 to $72,000 in the comparable 1997 quarter. The decrease
is attributable to the closing of the Hauppauge research and development
facility. The Company closed its 7500 square foot location in March 1997
and on May 1, 1997 moved that operation to a 1500 square foot building and
reduced the number of personnel involved in the research and development
function.
General, administrative and marketing expenses increased $83,000 from
$195,000 in the second quarter of 1996 to $278,000 in the comparable 1997
quarter. The increase is attributable to expansion of the sales force by Vivax,
increases in payroll and payroll-related items, consulting and professional
fees concerning possible acquisitions, financing, public relations and sundry
expenses in connection with the growth of the Company. The acquisition of Comed
in June 1996 resulted in increased expenses aggregating $27,000 in the current
quarter, of which $17,000 is attributable to the amortization of goodwill
incurred in connection with the acquisition of Comed.
Interest expense increased $28,000 from $44,000 in 1996 to $72,000 in
1997, of which approximately $45,000 is attributable to interest on debt and
amortization of financing costs incurred in the 1995 Financing and $21,000 is
attributable to interest on notes payable issued in conjunction with the
acquisition of Comed.
As a result of the issuance of common stock in 1996 for capital funds
and for the acquisition of Comed, the weighted average number of
10
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common shares used in computing loss per share increased from 5,804,000 at
June 30, 1996 to 7,687,000 at June 30, 1997.
Six months Ended June 30, 1997 Compared to Six months ended June 30,
1996.
In the six months ended June 30, 1997 the Company recorded revenues of
$1,527,000 and incurred a net loss of $928,000 ($.12 per share) compared to
revenues of $463,000 and a net loss $799,000 ($.14 per share) in the six months
ended June 30, 1996.
The increase in revenues of $1,064,000 is due to the inclusion of VSI
revenues for the whole six month period ($624,000) and increased Vivax sales
($440,000).
In the six months ended June 30, 1997 the Company realized a gross
profit of $110,000 compared to a gross loss of $247,000 in the six months ended
June 30, 1996. VSI's gross profit of $401,000 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. Manufacturing in the original facility
was shut down at the end of June 1996 and as production and sales levels
increase 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 $49,000 from $166,000 in the
first six months of 1996 to $215,000 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 quarter of 1997 research and
development expenses declined from the comparable quarter.
General, administrative and marketing expenses increased $393,000 from
$347,000 in the first half of 1996 to $740,000 in the comparable 1997 half. The
increase is attributable to expansion of the sales force by Vivax, increases in
payroll and payroll-related items, consulting and professional fees concerning
possible acquisitions and financing, public relations and sundry expenses in
connection with the growth of the Company. In addition, VSI's expenses were
included for six months versus a half a month in the comparable prior period.
Interest expense increased $70,000 from $71,000 in 1996 to $141,000 in
1997, of which $86,000 is attributable to interest on new debt and amortization
of financing costs incurred on the 1995
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<PAGE>
Financing and $42,000 is attributable to interest on notes payable issued in
conjunction with the acquisition of Comed.
Liquidity and Capital Resources
During the first six months of 1997 the Company (including VSI) used net
cash in operating activities aggregating $1,113,000 compared to $1,138,000 in
the prior years's six month period. In the 1997 period funds were provided by
higher depreciation charges, inventory reductions (primarily of Novabeds) and
higher accounts payable and accrued expenses. In the same period funds were used
for increased accounts receivables . The Company purchased equipment aggregating
$298,000, of which $126,000 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 $12,000. 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.
In the first six months ended June 30, 1997 net cash provided by
financing activities aggregated $1,324,000 compared to $892,000 in the first
half of 1996. In the first six months of 1997 the Company received financing
proceeds as follows: (i) $200,000 loan from the Connecticut Department of
Economic and Community Development ("DECD"), (ii) $111,000 from the sale of a
Convertible promissory note, (iii) $140,000 loan from People's Bank (iv) and net
proceeds of $842,000 in connection with the sale of its common stock. In the
first half of 1996 the Company received proceeds of a $650,000 loan from
Connecticut Innovations, Incorporated ("CII"), a $250,000 loan from People's
Bank and received $108,000 from the sale of its common stock.
As of June 30, 1997, the Company had borrowed $400,000 under a revolving
line of credit, $300,000 under equipment loans (including a $200,000 equipment
loan in January 1997), $1,050,000 under a promissory note to purchase Comed,
$750,000 under a loan from CII and $111,000 under a Convertible promissory note.
At June 30, 1997 the Company (including Service) had a net worth of $1,203,000,
net rental equipment of $906,000, working capital of $323,000, including
unrestricted cash of $295,000, accounts receivable of $1,495,000 and inventory
aggregating $171,000.
At June 30, 1996, the Company had a net worth of $1,115,000, working
capital of $630,000, including unrestricted cash of $242,000, accounts
receivable of $503,000 and inventory aggregating $685,000.
The Company has expended approximately $314,000 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.
12
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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:
<TABLE>
<CAPTION>
REQUIRED ACTUAL
<S> <C> <C>
Min. Working Capital $700,000 $322,538
Min. Current Ratio 1.75 to 1.00 1.16 to 1.00
Min. Capital Funds $1,300,000 $1,329,593
Max. Unsubord. Debt Ratio 2.50 to 1.00 1.94 to 1.00
</TABLE>
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 June 30, 1997, the Company was not in compliance with the Minimum
Working Capital and Minimum Current Ratio covenants. The bank has agreed to
waive these covenants at June 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.
In connection with the acquisition of Comed, VSI issued two promissory
notes of $750,000 each to Douglas and Donna Drew, the former shareholders of
Comed, which are guaranteed by the Company. The first note bears interest at the
rate of 8%, payable at maturity. The maturity date of the note was extended from
June 14, 1997 to July 1, 1997. On December 30, 1996 $450,000 of the note was
converted to 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.
The Company intends to continue to explore strategic alliances or
mergers in addition to the Comed acquisition as a means of improving the
Company's cash flow and capital. In this regard, the Company has contracted to
purchase Concept for $2,000,000. In order to meet the
13
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terms required at the September 30, 1997 closing date, the Company must raise
funds for the required cash payment of $500,000. The Company believes that it
has the resources to either borrow funds or sell equity to complete this
transaction, although no assurance can be given that the Company will be able
to secure such funds or secure at economical terms.
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, component parts and intellectual property rights to all
of Therapy's therapeutic mattress systems for approximately $1 million.
The Company is also engaged in preliminary discussions with several
distributors of medical products regarding a potential business combination. The
Company cannot state that any of these transactions is probable because no
agreement in principle with respect to transaction price and all other material
terms has been reached. In addition, any such transaction is likely to be
subject to the Company obtaining additional financing and ongoing due diligence.
There can be no assurance that any such transaction will be consummated.
At December 31, 1996, an $800,000 subscription receivable for the sale
of 400,000 shares of the Company's common stock was outstanding. The Company
received proceeds of this subscription in the first quarter of 1997 aggregating
$800,000 less commissions of $80,000.
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 Nova common stock.
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
14
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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.
In August 1997, the Company received verbal commitments for financing
from CII and DECD, aggregating $500,000 and $650,000, respectively. CII has
committed to purchase convertible debentures from the Company and the funds
will be used for working capital. The funds from DECD will be used to
purchase manufacturing machinery and DECD will receive installment notes
repayable over seven years. The Company feels that the receipt of these funds,
in addition to the $400,000 received from the sale of Convertible promissory
notes in June through August, together with an additional $500,000 it is seeking
to raise will fulfill the Company's capital requirements for at least one year.
There can be no assurance that the Company will be able to raise the
additional funds or that the funds will be sufficient to completely fulfill
the Company's capital requirements.
PART II. OTHER INFORMATION
Not Applicable
15
<PAGE>
<PAGE>
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)
August 19, 1997 By: /s/ Stephen M. Fisher
-------------------------
President
16
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as............ 'r'
The trademark symbol shall be expressed as....................... 'tm'
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 294,819
<SECURITIES> 0
<RECEIVABLES> 1,555,038
<ALLOWANCES> 59,933
<INVENTORY> 170,871
<CURRENT-ASSETS> 2,366,609
<PP&E> 1,902,282
<DEPRECIATION> 607,782
<TOTAL-ASSETS> 5,244,686
<CURRENT-LIABILITIES> 2,044,071
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<COMMON> 77,269
<OTHER-SE> 1,126,070
<TOTAL-LIABILITY-AND-EQUITY> 5,244,686
<SALES> 1,527,444
<TOTAL-REVENUES> 1,527,444
<CGS> 1,417,838
<TOTAL-COSTS> 2,372,685
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<INTEREST-EXPENSE> 141,234
<INCOME-PRETAX> (927,724)
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