UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 November 30, 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
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
-------------
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at January 12, 1998 48,300,656
----------
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 [ ]
<PAGE>
Vasomedical, Inc. and Subsidiaries
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements:
<S> <C>
Consolidated Condensed Balance Sheets as of
November 30, 1997 and May 31, 1997 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Six and Three Months Ended
November 30, 1997 and 1996 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 1997 to November 30, 1997
(Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended November 30, 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>
November 30, May 31,
1997 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,270,905 $1,753,004
Accounts receivable 417,014 56,648
Inventory 802,901 953,045
Other current assets 134,855 86,063
--------- ---------
Total current assets 4,625,675 2,848,760
PROPERTY AND EQUIPMENT, net 275,640 308,204
CAPITALIZED COSTS IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 887,921 994,469
OTHER ASSETS 23,588 23,588
---------- ----------
$5,812,824 $4,175,021
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $196,902 $272,978
Accrued warranty and customer support expenses 369,000 321,000
Accrued professional fees 527,876 243,062
Accrued commissions 132,478 30,389
Dividends payable 34,657
--------- --------
Total current liabilities 1,260,913 867,429
ACCRUED WARRANTY COSTS 280,000 220,000
OTHER LONG-TERM LIABILITIES 63,000 66,630
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 75,000 shares at November 30, 1997
issued and outstanding 750
Common stock, $.001 par value; 85,000,000 shares
authorized; 48,152,059 shares and 46,782,003 shares
at November 30, 1997 and May 31, 1997, respectively,
issued and outstanding 48,152 46,782
Additional paid-in capital 32,799,744 28,699,219
Accumulated deficit (28,639,735) (25,725,039)
---------- ----------
4,208,911 3,020,962
---------- ----------
$5,812,824 $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>
Six months ended Three months ended
---------------- ------------------
November 30, November 30,
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Equipment sales $2,024,416 $982,328 $1,071,879 $ -
Equipment rentals and services 152,732 288,000 63,513 96,000
---------- --------- --------- ---------
2,177,148 1,270,328 1,135,392 96,000
---------- --------- --------- ---------
Costs and expenses
Cost of sales and services 639,720 484,980 264,880 212,906
Selling, general and administrative 2,506,533 2,236,318 1,485,494 1,029,281
Research and development 948,865 321,396 350,141 171,862
Depreciation and amortization 182,316 155,416 91,549 79,003
Interest and financing costs 1,076 1,907 52 460
Interest and other income - net (96,605) (107,325) (49,715) (47,562)
--------- --------- --------- ---------
4,181,905 3,092,692 2,142,401 1,445,950
--------- --------- --------- ---------
NET LOSS (2,004,757) (1,822,364) (1,007,009) (1,349,950)
Deemed dividend on preferred stock (857,000) - - -
Preferred stock dividend requirement (52,939) - (25,405) -
--------- --------- --------- ---------
NET LOSS APPLICABLE TO
COMMON STOCK $(2,914,696) $(1,822,364) $(1,032,414) $(1,349,950)
---------- ---------- ----------- ----------
Net loss per common share $(.06) $(.04) $(.02) $(.03)
----- ----- ----- -----
Weighted average common shares
outstanding 47,417,151 46,440,736 47,811,782 46,630,996
---------- ---------- ---------- ----------
<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 (75,000) (750) 841,714 842 (92) -
Exercise of options and warrants 518,406 518 408,945 409,463
Deemed dividend on preferred stock 857,000 (857,000) -
Preferred stock dividend requirement 9,936 10 18,272 (52,939) (34,657)
Net loss (2,004,757) (2,004,757)
------- ----- ---------- ------- ----------- ------------ ----------
Balance at November 30, 1997 75,000 $750 48,152,059 $48,152 $32,799,744 $(28,639,735) $4,208,911
------- ----- ---------- ------- ----------- ------------ ----------
<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>
Six months ended November 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,004,757) $(1,822,364)
----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 182,316 155,416
Provision for doubtful accounts 200,000
Amortization of deferred compensation 84,906
Changes in operating assets and liabilities
Accounts receivable (360,366) 98,898
Inventory 150,144 (238,573)
Other current assets (48,792) 19,585
Accounts payable, accrued expenses and
other current liabilities 358,827 (312,823)
Other liabilities 56,370 77,000
--------- ---------
338,499 84,409
--------- ---------
Net cash used in operating activities (1,666,258) (1,737,955)
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (43,204) (139,653)
-------- ---------
Net cash used in investing activities (43,204) (139,653)
-------- ---------
Cash flows from financing activities
Proceeds from exercise of options and warrants 409,463 890,024
Debt conversion fees (10,000)
Proceeds from issuance of preferred stock, net 2,817,900
--------- -------
Net cash provided by financing activities 3,227,363 880,024
--------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,517,901 (997,584)
Cash and cash equivalents - beginning of period 1,753,004 4,447,806
---------- ----------
Cash and cash equivalents - end of period $3,270,905 $3,450,222
---------- ----------
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
November 30, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of November 30, 1997 and the
related consolidated condensed statements of operations for the six- and
three-month periods ended November 30, 1997 and 1996, changes in stockholders'
equity for the six month period ended November 30, 1997 and cash flows for the
six-month periods ended November 30, 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 November
30, 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 periods ended November 30, 1997 and 1996 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 two quarters of fiscal 1998, 75,000 shares of preferred stock
were converted into 841,714 shares of common stock. Also in the first two
quarters, options and warrants to purchase 518,406 shares of common stock were
exercised, aggregating $409,000. (Subsequent to the second quarter, 11,750
shares of preferred stock were converted into 148,597 shares of common stock.)
On December 4, 1997, the authorized number of common shares was increased
from 85,000,000 to 110,000,000.
<PAGE>
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
November 30, 1997
(unaudited)
NOTE C - COMMITMENTS AND CONTINGENCIES
Employment Agreements
- ---------------------
Approximate aggregate minimum annual compensation obligations under active
employment agreements at November 30, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Twelve months ended November 30, Amount
------------------------------- ------
<S> <C> <C>
1998 $382,000
1999 34,000
--------
$416,000
--------
</TABLE>
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) systems. 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
- --------------------------------------------------------------------------
OPERATIONS
- ----------
Results of Operations
- ---------------------
Six and Three Months Ended November 30, 1997 and 1996
- -------------------------------------------------------
The Company generated revenues from the sale and lease of EECP(R) systems
of $2,177,000 and $1,135,000 and $1,270,000 and $96,000 for the six- and
three-month periods ended November 30, 1997 and 1996, respectively. The Company
incurred net losses of $2,005,000 and $1,822,000 for the six months ended
November 30, 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 $53,000 in dividend
requirements, in connection with the Company's June 1997 financing). The Company
incurred net losses of $1,007,000 and $1,350,000 for the three months ended
November 30, 1997 and 1996, respectively (excluding the fiscal 1998 recognition
of $25,000 in dividend requirements in connection with the Company's June 1997
financing). The Company has generated increasing revenues in each of its last
four quarterly periods as the number of EECP(R) units purchased or rented by
treatment centers is growing. Although there can be no assurances that EECP(R)
devices will become a commercial success, the Company expects to generate
increasing revenues in fiscal 1998, including the expansion of EECP(R) sales in
international markets. Management believes that the number of cardiology
practices and hospitals interested in becoming providers of EECP(R) therapy has
increased substantially following the announcement of the results of the
Company's multicenter clinical study at the American Heart Association meeting
in November 1997 (which data are expected to be published in a major
peer-reviewed journal in 1998).
Gross margins are dependent on a number of factors, particularly the mix of
EECP(R) 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)
system 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 six- and
three-month periods ended November 30, 1997 and 1996 were approximately
$2,507,000 and $2,236,000, and $1,485,000 and $1,029,000, respectively. The
$270,000 increase in SGA expenses for the comparable six-month period resulted
primarily from 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) systems to international markets, offset by $120,000 reduction in
commission expenses as a result of certain current-period sales not subject to
commissions and a $200,000 bad debt expense charged in the prior period. The
$456,000 increase in SGA expenses for the comparable three-month period resulted
primarily from 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) systems to international markets, offset by $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.
<PAGE>
Research and development (R&D) expenses increased $627,000 and $178,000 for
the six and three months ended November 30, 1997 compared to the prior periods.
The increases are a result of commitments and expenses related to the Company's
multicenter clinical study of EECP(R) which was completed in July 1997, the
initiation of the development of the next-generation model of the EECP(R)
system, 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), to
the development of the new model of the EECP(R) system and to the establishment
of new indications are expected to continue in fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
Working capital at November 30, 1997 increased $1,384,000 to $3,365,000 as
compared to $1,981,000 at May 31, 1997, principally as a result of net proceeds
from the issuance of convertible preferred stock and the exercise of options and
warrants, offset by continuing operating losses. During the period ended
November 30, 1997, the Company generated net proceeds of $409,000 from the
exercise of common stock options and purchase warrants.
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 half of
fiscal 1998, approximately 54% and 30%, 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 December 31, 1997, approximately 60% of the
preferred stock issued was converted into common stock.
Management believes that its present working capital position at November
30, 1997, along with the ongoing commercialization of the EECP(R) system 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 November 30, 1998.
Except for historical information contained herein, the matters discussed
are forward-looking statements that involve risks and uncertainties. When used
in this report, words such as "anticipate", "believe", "estimate", "expect" and
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the Company's management, as well as assumptions
made by and information currently available to the Company's management. 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:
A. The registrant held its Annual Meeting of Stockholders on December 4,
1997.
B. Not applicable.
C. Two directors were elected at the Annual Meeting to serve in Class II
until the Annual Meeting of Stockholders for fiscal 2000. They are Abraham E.
Cohen and John C.K. Hui. The minimum number of votes cast in favor of their
elections was 35,444,173.
The other matters voted upon and the votes cast are as follows:
1) Amendment of the Certificate of Incorporation to increase the authorized
shares of common stock from 85,000,000 to 110,000,000
Votes For: 34,322,216; Votes Against: 1,166,122; Votes Abstained:
121,954
2) Adoption of a 1997 Stock Option Plan
Votes For: 32,204,259; Votes against: 2,199,455; Votes Abstained:
189,281
3) Ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ended May 31, 1998.
Votes For: 35,330,749; Votes Against: 152,197; Votes Abstained:
127,346
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
No. 27 Financial Data Schedule
Reports on Form 8-K:
None
<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 Giacalone
----------------------------------------------
Treasurer (Principal Financial
and Accounting Officer)
Date: January 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed financial statements for the six-months ended November
30, 1997 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 3,270,905
<SECURITIES> 0
<RECEIVABLES> 417,014
<ALLOWANCES> 0
<INVENTORY> 802,901
<CURRENT-ASSETS> 4,625,675
<PP&E> 634,454
<DEPRECIATION> (358,814)
<TOTAL-ASSETS> 5,812,824
<CURRENT-LIABILITIES> 1,260,913
<BONDS> 0
0
750
<COMMON> 48,152
<OTHER-SE> 4,160,009
<TOTAL-LIABILITY-AND-EQUITY> 5,812,824
<SALES> 2,177,148
<TOTAL-REVENUES> 2,177,148
<CGS> 639,720
<TOTAL-COSTS> 639,720
<OTHER-EXPENSES> 3,541,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,076
<INCOME-PRETAX> (2,914,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,914,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,914,696)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
