UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended August 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2871434
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
--------------
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at October 14, 1997 47,826,812
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during
the preceding 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 [ ]
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<PAGE>
Vasomedical, Inc. and Subsidiaries
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements: Page
----
<S> <C>
Consolidated Condensed Balance Sheets as of
August 31, 1997 and May 31, 1997 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Three-Months Ended August 31, 1997 and 1996 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the period from June 1, 1997 to
August 31, 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Three-Months Ended August 31, 1997 and 1996 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION 11
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
August 31, May 31,
1997 1997
---- ----
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $4,068,420 $1,753,004
Accounts receivable 241,080 56,648
Inventory 852,743 953,045
Other current assets 86,628 86,063
---------- ----------
Total current assets 5,248,871 2,848,760
PROPERTY AND EQUIPMENT, net 301,676 308,204
CAPITALIZED COSTS IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 941,195 994,469
OTHER ASSETS 23,588 23,588
---------- ----------
$6,515,330 $4,175,021
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $483,237 $272,978
Accrued warranty and customer support expenses 369,000 321,000
Accrued professional fees 213,936 243,062
Accrued commissions 18,525 30,389
Dividends payable 27,448
--------- ---------
Total current liabilities 1,112,146 867,429
ACCRUED WARRANTY COSTS 280,000 220,000
OTHER LONG-TERM LIABILITIES 69,000 66,630
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 149,500 shares at August 31, 1997
issued and outstanding 1,495
Common stock, $.001 par value; 85,000,000 shares
authorized; 47,161,643 shares and 46,782,003 shares at
August 31 and May 31, 1997, respectively, issued and
outstanding 47,162 46,782
Additional paid-in capital 32,612,848 28,699,219
Accumulated deficit (27,607,321) (25,725,039)
---------- ----------
5,054,184 3,020,962
---------- ----------
$6,515,330 $4,175,021
---------- ----------
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three-months ended August 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues
Equipment sales $952,537 $982,328
Equipment rentals and services 89,219 192,000
--------- ---------
1,041,756 1,174,328
--------- ---------
Costs and expenses
Cost of sales and services 374,840 272,074
Selling, general and administrative 1,021,039 1,207,037
Research and development 598,724 149,534
Depreciation and amortization 90,767 76,413
Interest and financing costs 1,024 1,447
Interest and other income - net (46,890) (59,763)
--------- --------
2,039,504 1,646,742
--------- ---------
NET LOSS (997,748) (472,414)
Deemed dividend on preferred stock (857,000) -
Preferred stock dividend requirement (27,534) -
-------- --------
NET LOSS APPLICABLE TO
COMMON STOCK $(1,882,282) $(472,414)
--------- --------
Net loss per common share $(.04) $(.01)
---- ----
Weighted average common shares
outstanding 47,022,520 46,250,476
---------- ----------
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Total
Additional stock-
Preferred Stock Common stock paid-in Accumulated holders'
Shares Amount Shares Amount capital deficit equity
------ ------ ------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1997 - - 46,782,003 $46,782 $28,699,219 $(25,725,039) $3,020,962
Issuance of preferred stock 150,000 $1,500 2,816,400 2,817,900
Conversion of preferred stock (500) (5) 6,582 7 (2) -
Exercise of options and warrants 373,001 373 240,145 240,518
Deemed dividend on preferred stock 857,000 (857,000) -
Preferred stock dividend requirement 57 86 (27,534) (27,448)
Net loss (997,748) (997,748)
------- ------ ---------- ------- ----------- ------------ ----------
Balance at August 31, 1997 149,500 $1,495 47,161,643 $47,162 $32,612,848 $(27,607,321) $5,054,184
------- ------ ---------- ------- ----------- ------------ ----------
<FN>
The accompanying notes are an integral part of this condensed statement.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three-months ended August 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(997,748) $(472,414)
---------- ---------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 90,767 76,413
Provision for doubtful accounts 100,000
Amortization of deferred compensation 42,453
Changes in operating assets and liabilities
Accounts receivable (184,432) 156,371
Inventory 100,302 (307,883)
Other current assets (565) 64,415
Accounts payable, accrued expenses
and other current liabilities 217,269 (76,027)
Other liabilities 62,370 50,000
--------- --------
285,711 105,742
--------- --------
Net cash used in operating activities (712,037) (366,672)
--------- --------
Cash flows from investing activities
Purchase of property and equipment (30,965) (44,327)
--------- --------
Net cash used in investing activities (30,965) (44,327)
--------- --------
Cash flows from financing activities
Proceeds from exercise of options and warrants 240,518 418,125
Debt conversion fees (10,000)
Proceeds from issuance of preferred stock, net 2,817,900
--------- --------
Net cash provided by financing activities 3,058,418 408,125
--------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,315,416 (2,874)
Cash and cash equivalents - beginning of period 1,753,004 4,447,806
--------- ---------
Cash and cash equivalents - end of period $4,068,420 $4,444,932
--------- ---------
Non-cash investing and financing activities:
Deemed dividend on preferred stock $857,000
Issuance of common stock upon conversion of debt $3,344,575
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of August 31, 1997 and the
related consolidated condensed statements of operations for the three-month
periods ended August 31, 1997 and 1996, changes in stockholders' equity for the
three-month period ended August 31, 1997 and cash flows for the three-month
periods ended August 31, 1997 and 1996 have been prepared by Vasomedical, Inc.
and Subsidiaries (the "Company") without audit. In the opinion of management,
all adjustments (which include only normal, recurring accrual adjustments)
necessary to present fairly the financial position as of August 31, 1997 and for
all periods presented have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Annual Report on Form 10-K for the year ended May 31, 1997. Results of
operations for the period ended August 31, 1997 are not necessarily indicative
of the operating results expected for the full year.
NOTE B - STOCKHOLDERS' EQUITY
On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Convertible Preferred Stock, $.01 par value, to one accredited investor
pursuant to Regulation D under the Securities Act of 1933 at a price of $20 per
share, for net cash proceeds approximating $2,800,000. The convertible preferred
stock is convertible into common stock of the Company at an effective conversion
price of the lower of (i) $2.18 or (ii) 85% of the average closing bid of the
Company's common stock for the five (5) trading days immediately preceding the
conversion date, as defined in the Certificate of Designation of the convertible
preferred stock. In addition, five-year warrants were issued granting the
investor one warrant for every five shares of common stock which would be
issuable under the convertible preferred stock at an exercise price of $2.18 per
share, as defined.
The Company recorded a deemed dividend of $857,000 in the first quarter of
fiscal 1998, representing the discount resulting from the allocation of proceeds
to the beneficial conversion feature and the fair value of the underlying
warrants. Such deemed dividend was recognized from the date of issuance through
the date such preferred stock was first convertible.
In the first quarter of fiscal 1998, 500 shares of preferred stock were
converted into 6,582 shares of common stock. (Subsequent to the first quarter,
52,000 shares of preferred stock were converted into 628,710 shares of common
stock.) Also in the first quarter, options and warrants to purchase 373,001
shares of common stock were exercised, aggregating $241,000.
NOTE C - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
Approximate aggregate minimum annual compensation obligations under active
employment agreements at August 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Twelve-months ended August 31, Amount
----------------------------- ------
<S> <C>
1998 $459,000
1999 99,000
--------
$558,000
--------
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
August 31, 1997
(unaudited)
NOTE C - COMMITMENTS AND CONTINGENCIES (continued)
SEC Investigation
- -----------------
In February 1995, the Company received a subpoena duces tecum by the
broker-dealer branch of the Northeast Regional Office of the Securities and
Exchange Commission ("SEC") requesting certain documents from the Company
pursuant to a formal order of private investigation in connection with possible
registration and reporting violations. The Company has complied with the request
for such documents. Whatever the ultimate objectives of the SEC's fact-finding
inquiry may be, the Company intends to cooperate as the investigation proceeds.
As stated in the subpoena, the "investigation is confidential and should not be
construed as an indication by the SEC or its staff that any violations of law
have occurred, nor should it be interpreted as an adverse reflection on any
person, entity or security." This investigation is in its early stages and the
Company is unable to determine the likelihood of an unfavorable outcome or the
existence or amount of any potential loss.
Litigation ---------- In May 1996, an action was commenced in the Supreme
Court of the State of New York, Nassau County, against the Company, its
directors and certain of its officers and employees for the alleged breach of an
agreement to appoint a non-affiliated party as its exclusive distributor of
EECP(R) . The complaint seeks damages in the approximate sum of $50,000,000,
declaratory relief and punitive damages. The Company denies the existence of any
agreement, believes that the complaint is frivolous and without merit and is
vigorously defending the claims as well as asserting substantial counterclaims.
This matter is in its preliminary stages and the Company is unable to determine
the likelihood of an unfavorable outcome or the existence or amount of any
potential loss.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS
- ----------
Results of Operation
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Three-months Ended August 31, 1997 and 1996
- -------------------------------------------
The Company generated revenues from the sale and lease of its EECP(R)
device of $1,042,000 and $1,174,000 for the three-months ended August 31, 1997
and 1996, respectively. The Company incurred net losses of $998,000 and $472,000
for the three-months ended August 31, 1997 and 1996, respectively (excluding the
fiscal 1998 recognition of an $857,000 deemed dividend on preferred stock which
represented the discount resulting from the allocation of proceeds to the
beneficial conversion feature and the fair value of the underlying warrants, and
$28,000 in dividend requirements, in connection with the Company's June 1997
financing). The Company has generated increasing revenues in each of its last
three quarterly periods as the number of EECP(R) units purchased or rented by
treatment centers is growing steadily. Although there can be no assurances that
EECP(R) will become a commercial success, the Company expects to generate
increasing revenues in fiscal 1998, including the expansion of EECP(R) in
international markets. Management believes that there are many cardiology
practices and hospitals interested in becoming providers of EECP(R) that have
decided to await the results of the Company's multicenter clinical study to be
presented at the American Heart Association meeting in November 1997 before
making a financial commitment.
Gross margins from the EECP(R) are dependent on a number of factors,
particularly the mix of units sold and rented during the period, and by certain
fixed period costs, including facilities, payroll and insurance. Gross margins
are furthermore affected by the location of the Company's customers and the
amount and nature of training and other initial costs required to place the
EECP(R) in service for customer use. Accordingly, the gross margin realized
during the current period may not be indicative of future margins.
Selling, general and administrative (SGA) expenses for the three-months
ended August 31, 1997 and 1996 were approximately $1,021,000 and $1,207,000,
respectively. The $186,000 decrease in SGA expenses from the comparable period
resulted primarily from a $120,000 reduction in commission expenses as a result
of certain current-period sales not subject to commissions and a $100,000 bad
debt expense charged in the prior period, offset by increases in marketing
expenses related to programs for the dissemination of the aforementioned
multicenter study's results and for promotional materials, as well as expenses
incurred in extending the marketing of EECP(R) to international markets.
Research and development (R&D) expenses increased $449,000 compared to the
comparable quarterly period. The increase is the result of commitments and
expenses related to the Company's multi-center clinical study for EECP(R) which
was completed in July 1997, the initiation of the development of the
next-generation model of EECP(R) , and expenses related to a continuing
quality-of-life and resource utilization study started in parallel with the
multicenter clinical study. Expenses related to this study (which includes a
long-term follow-up phase) and the continuing mechanical and clinical
development of EECP(R) are expected to continue in fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
Working capital at August 31, 1997 increased $2,156,000 to $4,137,000 as
compared to $1,981,000 at May 31, 1997, principally from net proceeds from the
issuance of convertible preferred stock and the exercise of options and
warrants, offset by continuing operating losses. During the first quarter ended
August 31, 1997, the Company generated net proceeds of $241,000 from the
exercise of common stock options and purchase warrants.
<PAGE>
In March 1996, the Company entered into an exclusive agreement with a
medical equipment finance company whereby this third party will purchase,
subject to credit approval, the EECP(R) system on a non-recourse basis and lease
the system to the Company's customers. During fiscal 1997 and the first quarter
of fiscal 1998, approximately 54% and 14%, respectively, of the Company's
revenues were derived through such transactions. Although there can be no
certainty about future revenues generated through these transactions, the
Company believes that these transactions will contribute to expected growing
revenues and working capital in the future.
On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Convertible Preferred Stock to one accredited investor at a price of
$20 per share, realizing net cash proceeds of approximately $2,800,000.
Dividends due on such preferred stock are expected to be payable in shares of
the Company's common stock. At September 30, 1997, more than one-third of
the preferred stock issued was converted into common stock.
Management believes that its present working capital position at August 31,
1997, along with the ongoing commercialization of EECP(R) in domestic and
international markets, some units of which will be purchased by the
aforementioned medical equipment finance company, will make it possible for the
Company to support its internal overhead expenses and to implement its business
plans at least through August 31, 1998.
Except for historical information contained herein, the matters discussed
are forward looking statements that involve risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
the effect of the dramatic changes taking place in the healthcare environment;
the impact of competitive procedures and products and their pricing; unexpected
manufacturing problems in foreign supplier facilities; unforeseen difficulties
and delays in the conduct of clinical trials and other product development
programs; the actions of regulatory authorities and third-party payers in the
United States and overseas; uncertainties about the acceptance of a novel
therapeutic modality by the medical community; and the risk factors reported
from time to time in the Company's SEC reports.
<PAGE>
VASOMEDICAL, INC.
AND SUBSIDIARIES
----------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS:
Previously reported.
ITEM 2 - CHANGES IN SECURITIES:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
None
Reports on Form 8-K:
Report on Form 8-K dated June 25, 1997.
<PAGE>
In accordance with to the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VASOMEDICAL, INC.
By: /s/ Anthony Viscusi
President and CEO (Principal Executive Officer)
/s/ Joseph A. Giacalone
Treasurer
(Principal Financial and Accounting Officer)
Date: October 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated condensed financial statements for the three-months ended August
31, 1997 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 4,068,420
<SECURITIES> 0
<RECEIVABLES> 241,080
<ALLOWANCES> 0
<INVENTORY> 852,743
<CURRENT-ASSETS> 5,248,871
<PP&E> 622,213
<DEPRECIATION> (320,537)
<TOTAL-ASSETS> 6,515,330
<CURRENT-LIABILITIES> 1,112,146
<BONDS> 0
0
1,500
<COMMON> 47,162
<OTHER-SE> 5,005,527
<TOTAL-LIABILITY-AND-EQUITY> 5,054,184
<SALES> 1,041,756
<TOTAL-REVENUES> 1,041,756
<CGS> 374,840
<TOTAL-COSTS> 374,840
<OTHER-EXPENSES> 1,663,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> (997,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (997,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (997,748)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
