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 February 28, 1998
[ ] 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 April 14, 1998 48,407,866
----------
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
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements: Page
----
Consolidated Condensed Balance Sheets as of
February 28, 1998 and May 31, 1997 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Nine and Three Months Ended
February 28, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Nine Months Ended February 28, 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended February 28, 1998 and 1997 (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
<PAGE>
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,048,517 $1,753,004
Accounts receivable 815,277 56,648
Inventory 789,273 953,045
Other current assets 250,445 86,063
---------- ----------
Total current assets 3,903,512 2,848,760
PROPERTY AND EQUIPMENT, net 291,738 308,204
CAPITALIZED COSTS IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 834,647 994,469
OTHER ASSETS 23,991 23,588
---------- ----------
$5,053,888 $4,175,021
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $238,007 $272,978
Accrued warranty and customer support expenses 240,000 321,000
Accrued professional fees 521,311 243,062
Accrued commissions 60,796 30,389
Dividends payable 44,057
---------- ----------
Total current liabilities 1,104,171 867,429
ACCRUED WARRANTY COSTS 409,000 220,000
OTHER LONG-TERM LIABILITIES 69,000 66,630
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 61,500 shares at February 28, 1998
issued and outstanding 615
Common stock, $.001 par value; 110,000,000 shares authorized;
48,374,500 shares and 46,782,003 shares at February 28, 1998
and May 31, 1997, respectively, issued and outstanding 48,374 46,782
Additional paid-in capital 32,881,977 28,699,219
Accumulated deficit (29,459,249) (25,725,039)
---------- ----------
3,471,717 3,020,962
---------- ----------
$5,053,888 $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>
Nine months ended Three months ended
----------------- ------------------
February 28, February 28,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Equipment sales $3,650,080 $1,275,150 $1,625,664 $292,822
Equipment rentals and services 205,231 367,912 52,499 79,912
---------- ---------- ---------- --------
3,855,311 1,643,062 1,678,163 372,734
---------- ---------- ---------- --------
Costs and expenses
Cost of sales and services 1,063,367 728,871 423,647 243,891
Selling, general and administrative 4,175,189 3,293,141 1,668,656 1,056,823
Research and development 1,279,966 618,142 331,101 296,746
Depreciation and amortization 275,179 239,918 92,863 84,502
Interest and financing costs 1,546 3,750 470 1,843
Interest and other income - net (132,385) (143,392) (35,780) (36,067)
--------- ---------- ---------- ---------
6,662,862 4,740,430 2,480,957 1,647,738
--------- ---------- ---------- ---------
NET LOSS (2,807,551) (3,097,368) (802,794) (1,275,004)
Deemed dividend on preferred stock (857,000) - - -
Preferred stock dividend requirement (69,659) - (16,720) -
--------- ---------- ---------- --------
NET LOSS APPLICABLE TO
COMMON STOCK $(3,734,210) $(3,097,368) $(819,514) $(1,275,004)
----------- ----------- --------- -----------
Net loss per common share (basic and
diluted) $(.08) $(.07) $(.02) $(.03)
----- ----- ----- -----
Weighted average common shares
outstanding 47,689,862 46,542,928 48,235,284 46,747,312
---------- ---------- ---------- ----------
<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 (88,500) (885) 1,009,594 1,010 (125) -
Exercise of options and warrants 568,406 568 483,895 484,463
Deemed dividend on preferred stock 857,000 (857,000) -
Preferred stock dividend requirement 14,497 14 25,588 (69,659) (44,057)
Net loss (2,807,551) (2,807,551)
------- ----- ---------- ------- ----------- ------------ ----------
Balance at February 28, 1998 61,500 $615 48,374,500 $48,374 $32,881,977 $(29,459,249) $3,471,717
------- ----- ---------- ------- ----------- ------------ ----------
<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>
Nine months ended February 28,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,807,551) $(3,097,368)
----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 275,179 239,918
Provision for doubtful accounts 200,000
Amortization of deferred compensation 127,359
Changes in operating assets and liabilities
Accounts receivable (758,629) 556,026
Inventory 163,772 (491,309)
Other current assets (164,382) 38,017
Other assets (403)
Accounts payable, accrued expenses and
other current liabilities 192,685 (140,060)
Other liabilities 191,370 103,000
----------- -----------
(100,408) 632,951
----------- -----------
Net cash used in operating activities (2,907,959) (2,464,417)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (98,891) (193,472)
----------- -----------
Net cash used in investing activities (98,891) (193,472)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of options and warrants 484,463 919,416
Debt conversion fees (10,000)
Proceeds from the financing of operating leases 118,320
Proceeds from issuance of preferred stock, net 2,817,900
----------- -----------
Net cash provided by financing activities 3,302,363 1,027,736
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 295,513 (1,630,153)
Cash and cash equivalents - beginning of period 1,753,004 4,447,806
---------- ----------
Cash and cash equivalents - end of period $2,048,517 $2,817,653
---------- ----------
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
February 28, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of February 28, 1998 and the
related consolidated condensed statements of operations for the nine- and
three-month periods ended February 28, 1998 and 1997, changes in stockholders'
equity for the nine-month period ended February 28, 1998 and cash flows for the
nine-month periods ended February 28, 1998 and 1997 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 February
28, 1998 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 February 28, 1998 and 1997 are not necessarily
indicative of the operating results expected for the full year.
NOTE B EARNINGS PER SHARE
In the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share,"
which supercedes Accounting Principle Board Opinion No. 15. Under SFAS No. 128,
earnings per common share is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding during the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock. For the
three- and nine-month periods ended February 28, 1998 and 1997, there is no
difference between basic and diluted net loss per share or between the basic and
net loss per share as previously reported. Potential common shares from stock
options and convertible preferred stock are excluded in computed basic and
diluted net loss per share as their effects would be antidilutive.
NOTE C - 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.
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)
February 28, 1998
(unaudited)
NOTE C STOCKHOLDERS' EQUITY (continued)
In the first three quarters of fiscal 1998, 88,500 shares of preferred stock
were converted into 1,009,594 shares of common stock. Also in the first three
quarters, options and warrants to purchase 568,406 shares of common stock were
exercised, aggregating $484,000. (Subsequent to the third quarter, 2,500 shares
of preferred stock were converted into 32,231 shares of common stock.)
On March 12, 1998, the Company's Board of Directors approved a grant of
stock options under the 1997 Stock Option Plan to certain outside directors,
officers and employees to purchase 100,000 shares, 602,500 shares and 252,000
shares, respectively, of the Company's common stock at $1.91 per share.
NOTE D - COMMITMENTS AND CONTINGENCIES
Employment Agreements
- ---------------------
Approximate aggregate minimum annual compensation obligations under active
employment agreements at February 28, 1998, and including modifications approved
by the Board of Directors on March 12, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Twelve months ended February 28, Amount
------------------------------- ------
<S> <C>
1999 $569,000
2000 569,000
2001 498,000
2002 128,000
----------
$1,764,000
----------
</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 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
- ---------------------
Nine and Three Months Ended February 28, 1998 and 1997
- ------------------------------------------------------
The Company generated revenues from the sale and lease of EECP systems of
$3,855,000 and $1,678,000 and $1,643,000 and $373,000 for the nine- and
three-month periods ended February 28, 1998 and 1997, respectively. The Company
incurred net losses of $2,808,000 and $3,097,000 for the nine months ended
February 28, 1998 and 1997, 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 $70,000 in dividend
requirements, in connection with the Company's June 1997 financing). The Company
incurred net losses of $803,000 and $1,275,000 for the three months ended
February 28, 1998 and 1997, respectively (excluding the fiscal 1998 recognition
of $17,000 in dividend requirements in connection with the Company's June 1997
financing). The Company has generated increasing revenues in each of its last
five quarterly periods as the number of EECP units purchased or rented by
treatment centers is growing. Although there can be no assurances that EECP
devices will become a commercial success, the Company expects to generate
increasing revenues in fiscal 1998. Management believes that the number of
cardiology practices and hospitals interested in becoming providers of EECP
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) and additional reports presented at the American
College of Cardiology meeting at the end of March 1998.
Gross margins are dependent on a number of factors, particularly the mix of
EECP 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 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 nine- and
three-month periods ended February 28, 1998 and 1997 were approximately
$4,175,000 and $1,669,000, and $3,293,000 and $1,057,000, respectively. The
$882,000 increase in SGA expenses in fiscal 1998 from the nine-month period in
fiscal 1997 resulted primarily from increases in marketing expenses related to
programs for the dissemination of the aforementioned multicenter study's results
and for promotional materials, and the expansion of the Company's direct sales
force, offset by a $200,000 bad debt expense charged in the prior-year period.
The $612,000 increase in SGA expenses in fiscal 1998 from the three-month period
in fiscal 1997 resulted primarily from increases in marketing expenses related
to programs for the dissemination of the aforementioned multicenter study's
results and for promotional materials, an increase in commission expense as a
result of increasing sales, and the two-fold expansion of the Company's direct
sales force in January 1998.
Research and development (R&D) expenses increased $662,000 and $34,000 for
the nine and three months ended February 28, 1998 compared to the prior periods.
The increases are a result of commitments and expenses related to the Company's
multicenter clinical study of EECP which was completed in July 1997, the
initiation of the development of the next-generation model of the EECP 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 system and to the establishment of new indications
are expected to continue in fiscal 1998.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Working capital at February 28, 1998 increased $818,000 to $2,799,000 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
February 28, 1998, the Company generated net proceeds of $484,000 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 system on a non-recourse basis and lease
the system to the Company's customers. During fiscal 1997 and the first three
quarters of fiscal 1998, approximately 54% and 18%, 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 $2,818,000.
Dividends due on such preferred stock are expected to be payable in shares of
the Company's common stock. At March 31, 1998, approximately 61% of the
preferred stock issued was converted into common stock.
Management believes that its present working capital position at February
28, 1998, along with the ongoing commercialization of the EECP 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 February 28, 1999.
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:
None
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 A. Giacalone
-----------------------
Treasurer (Principal Financial and Accounting Officer)
Date: April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial informaton extracted from the
consolidated condensed financial statements for the nine-months ended February
28, 1998 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 2,048,517
<SECURITIES> 0
<RECEIVABLES> 815,277
<ALLOWANCES> 0
<INVENTORY> 789,273
<CURRENT-ASSETS> 3,903,512
<PP&E> 690,139
<DEPRECIATION> (398,401)
<TOTAL-ASSETS> 5,053,888
<CURRENT-LIABILITIES> 1,104,171
<BONDS> 0
0
615
<COMMON> 48,374
<OTHER-SE> 3,422,728
<TOTAL-LIABILITY-AND-EQUITY> 5,053,888
<SALES> 3,855,311
<TOTAL-REVENUES> 3,855,311
<CGS> 1,063,367
<TOTAL-COSTS> 1,063,367
<OTHER-EXPENSES> 5,597,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,546
<INCOME-PRETAX> (3,734,210)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,734,210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,734,210)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
