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 August 31, 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 October 2, 1998 48,733,812
----------
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 [ ]
--- --
<PAGE>
Vasomedical, Inc. and Subsidiary
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Page
----
Consolidated Condensed Balance Sheets as of
August 31, 1998 and May 31, 1998 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Three Months Ended August 31, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Three Months Ended August 31, 1998 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 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 Subsidiary
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,151,647 $4,367,986
Accounts receivable 234,928 976,341
Inventories 658,051 678,302
Other current assets 309,166 164,826
---------- ----------
Total current assets 4,353,792 6,187,455
PROPERTY AND EQUIPMENT, net 481,889 352,902
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 728,099 781,373
OTHER ASSETS 23,114 23,516
---------- ----------
$5,586,894 $7,345,246
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $262,250 $436,730
Accrued warranty and customer support expenses 231,000 240,000
Accrued professional fees 126,862 225,833
Accrued commissions 66,825 176,553
Dividends payable 107,648 62,137
--------- ---------
Total current liabilities 794,585 1,141,253
ACCRUED WARRANTY COSTS 339,500 334,000
OTHER LONG-TERM LIABILITIES 154,000 117,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 216,500 and 225,750 shares at August 31,
1998 and May 31, 1998, respectively, issued and outstanding 2,165 2,258
Common stock, $.001 par value; 110,000,000 shares authorized;
48,707,301 and 48,531,278 shares at August 31, 1998 and
May 31, 1998, respectively, issued and outstanding 48,707 48,531
Additional paid-in capital 37,128,318 36,458,155
Accumulated deficit (32,880,381) (30,755,951)
---------- ----------
4,298,809 5,752,993
---------- ----------
$5,586,894 $7,345,246
---------- ----------
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended August 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues
Equipment sales $350,000 $952,537
Equipment rentals and services 78,100 89,219
-------- ---------
428,100 1,041,756
-------- ---------
Costs and expenses
Cost of sales and services 330,368 374,840
Selling, general and administrative 1,270,664 1,021,039
Research and development 189,664 598,724
Depreciation and amortization 93,083 90,767
Interest and financing costs 5,209 1,024
Interest and other income - net (52,214) (46,890)
--------- ---------
1,836,774 2,039,504
--------- ---------
NET LOSS (1,408,674) (997,748)
Deemed dividend on preferred stock (661,000) (857,000)
Preferred stock dividend requirement (54,756) (27,534)
--------- ---------
LOSS APPLICABLE TO
COMMON STOCK $(2,124,430) $(1,882,282)
----------- -----------
Net loss per common share (basic and diluted) $(.04) $(.04)
----- -----
Weighted average common shares
outstanding (basic and diluted) 48,659,766 47,022,520
---------- ----------
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Total
Additional Accum- stock-
Preferred Stock Common stock paid-in ulated holders'
Shares Amount Shares Amount capital deficit equity
------ ------ ------ ------------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1998 225,750 $2,258 48,531,278 $48,531 $36,458,155 $(30,755,951) $5,752,993
Conversion of preferred stock (9,250) (93) 167,636 168 (75) -
Deemed dividend on preferred stock 661,000 (661,000) -
Preferred stock dividend requirement (54,756) (54,756)
Common stock issued in lieu of
preferred stock dividends 8,387 8 9,238 9,246
Net loss (1,408,674) (1,408,674)
------- ------ ---------- ------- ----------- ------------ ----------
Balance at August 31, 1998 216,500 $2,165 48,707,301 $48,707 $37,128,318 $(32,880,381) $4,298,809
------- ------ ---------- ------- ----------- ------------ ----------
<FN>
The accompanying notes are an integral part of this condensed statement.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended August 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,408,674) $(997,748)
Adjustments to reconcile net loss ----------- ---------
to net cash used in operating activities
Depreciation and amortization 93,083 90,767
Changes in operating assets and liabilities
Accounts receivable 741,413 (184,432)
Inventories (139,749) 70,302
Other current assets (144,340) (565)
Other assets 402
Accounts payable, accrued expenses and other
current liabilities (392,178) 217,269
Other liabilities 42,500 62,370
--------- --------
201,131 255,711
--------- --------
Net cash used in operating activities (1,207,543) (742,037)
--------- --------
Cash flows from investing activities
Purchase of property and equipment (8,796) (965)
-------- --------
Net cash used in investing activities (8,796) (965)
-------- --------
Cash flows from financing activities
Proceeds from exercise of options and warrants 240,518
Proceeds from issuance of preferred stock, net 2,817,900
-------- ---------
Net cash provided by financing activities - 3,058,418
-------- ---------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (1,216,339) 2,315,416
Cash and cash equivalents - beginning of period 4,367,986 1,753,004
---------- ----------
Cash and cash equivalents - end of period $3,151,647 $4,068,420
--------- ----------
Non-cash investing and financing activities were
as follows:
Deemed dividend on preferred stock $661,000 $857,000
Issuance of common stock in lieu of preferred dividends 9,246 86
Inventories transferred to property and equipment,
attributable to operating leases 160,000 30,000
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of August 31, 1998 and the
related consolidated condensed statements of operations for the three-month
periods ended August 31, 1998 and 1997, changes in stockholders' equity for the
three-month period ended August 31, 1998 and cash flows for the three-month
periods ended August 31, 1998 and 1997 have been prepared by Vasomedical, Inc.
and Subsidiary (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, 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, 1998. Results of
operations for the periods ended August 31, 1998 and 1997 are not necessarily
indicative of the operating results expected for the full year.
NOTE B - STOCKHOLDERS' EQUITY
On April 30, 1998, the Company completed a second tranche of financing with
an accredited investor and issued 175,000 shares of newly created 5% Series C
Cumulative Convertible Preferred Stock, $.01 par value, pursuant to Regulation D
under the Securities Act of 1933 at a price of $20 per share, for net cash
proceeds of $3,294,000. The convertible preferred stock has no voting rights and
is convertible into common stock of the Company at an effective conversion price
of the lower of (i) $2.08 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, the investor was granted five-year warrants to
purchase 413,712 shares of common stock at an exercise price of $2.08 per share.
The Company has estimated the value of the deemed dividend, representing the
discount resulting from the allocation of proceeds to the beneficial conversion
feature and the fair value of the underlying warrants, to approximate $936,000.
Such deemed dividend has been recognized from the date of issuance through the
date such preferred stock was first convertible (on or about August 15, 1998).
Accordingly, the Company recognized a deemed dividend of $275,000 in the fourth
quarter of fiscal 1998 and has recognized the remaining portion of the deemed
dividend of $661,000 in the first quarter of fiscal 1999.
In the first quarter of fiscal 1999, 9,250 shares of preferred stock were
converted into 167,636 shares of common stock. (Subsequent to the first quarter,
1,000 shares of preferred stock were converted into 26,511 shares of common
stock.)
<PAGE>
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
August 31, 1998
(unaudited)
NOTE C - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Approximate aggregate minimum annual compensation obligations under active
employment agreements at August 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Twelve months ended August 31, Amount
------------------------------ ------
<S> <C>
1999 $569,000
2000 569,000
2001 283,000
2002 58,000
----------
$1,479,000
----------
</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 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 . 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.
In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County, against the Company and other parties. The action seeks damages in the
sum of $5,000,000 based upon alleged injuries resulting from the alleged
negligence of the defendants in the use of the Company's product. Management
believes that this action is fully covered by insurance. 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.
Purchase Commitments
- --------------------
At August 31, 1998, the Company had outstanding purchase commitments of
$378,600 for the purchase of EECP systems from its contract manufacturer.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
- ---------------------
Three Months Ended August 31, 1998 and 1997
- -------------------------------------------
The Company generated revenues from the sale and lease of its EECP system of
$428,000 and $1,042,000 for the three-month periods ended August 31, 1998 and
1997, respectively. The Company incurred a net loss of $1,409,000 for the three
months ended August 31, 1998 (before deducting a $661,000 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 $55,000 in dividend requirements, in connection with
the Company's April 1998 financing). The Company incurred a net loss of $997,000
for the three months ended August 31, 1997 (before deducting 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). Management believes that the number of
cardiology practices and hospitals interested in becoming providers of EECP
therapy has increased following the announcement of the results of the Company's
multicenter clinical study at the American Heart Association meeting in November
1997 and additional reports presented at the American College of Cardiology
meeting in March 1998. Furthermore, new reports, including a one-year follow-up
quality-of-life outcomes study, are to be presented at the American Heart
Association meeting in November 1998. Although there can be no assurances that
EECP devices will become a commercial success, the Company expects fiscal 1999
revenues to ultimately exceed those achieved in fiscal 1998. Revenues in the
first quarter of 1999 were adversely affected by the nature of the commercial
arrangements under which those units were placed, even though the number of
units placed in the quarter exceeded that of the prior-year quarter. It is the
Company's expectation that many of the placements currently under rental or use
arrangements will become outright sales or financed leases in the latter part of
fiscal 1999.
Gross margins are dependent on a number of factors, particularly the mix of
EECP units sold and rented during the period, the ongoing costs of servicing
such units, 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 three-month
periods ended August 31, 1998 and 1997 were approximately $1,271,000 and
$1,021,000. The $250,000 increase in SGA expenses compared to the prior period
resulted primarily from the expansion of the Company's direct sales force and
customer support personnel and marketing expenses related to customer support
activities and programs for the dissemination of the aforementioned multicenter
study's results and for promotional materials, offset by a decrease in
commissions and other related selling expenses as a result of decreased
revenues.
Research and development (R&D) expenses decreased $409,000 for the three
months ended August 31, 1998 compared to the prior period. The decrease was a
result of significant prior period expenses related the completion of the
Company's multicenter clinical study of EECP (completed in July 1997) and the
initiation of the development of a new model of the EECP system. Current period
expenses relate to the long-term follow-up phase of the multicenter clinical
study, the quality-of-life and resource utilization study (completed in July
1998) which started in parallel with the multicenter clinical study, the
expansion of the International EECP Patient Registry at the University of
Pittsburgh, and the ongoing feasibility study in congestive heart failure, all
of which, to some extent, are expected to further affect operating results in
fiscal 1999.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Working capital decreased by $1,487,000 from $5,046,000 at May 31, 1998 to
$3,559,000 at August 31, 1998, principally as a result of continuing operating
losses.
In Fiscal 1998, the Company issued an aggregate of 325,000 shares of newly
created 5% Series B and Series C Convertible Preferred Stock to one accredited
investor at a price of $20 per share, realizing net cash proceeds of $6,112,000.
Dividends due on such preferred stock have been, and are expected to be, paid in
shares of the Company's common stock. At August 31, 1998, approximately 72% of
Series B preferred stock and no Series C preferred stock had been converted into
common stock.
Management believes that its present working capital position at August 31,
1998, along with the ongoing commercialization of the EECP system in domestic
markets, will make it possible for the Company to support its internal overhead
expenses and to implement its business plans for the next twelve months.
Management will revise its business plans accordingly in the event actual
revenues deviate from current projections.
Impact of the Year 2000 on Information Systems
The Year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company's sole product is not expected to be affected by Year 2000 as it
does not rely on date-sensitive software or affected hardware. The Company's
current accounting and other systems were purchased "off-the-shelf". The Company
intends to timely update its accounting and other systems which are determined
to be affected by Year 2000 by purchasing Year 2000 compliant software and
hardware available from retail vendors at reasonable costs.
The Company has not yet contacted other companies on whose services the
Company depends to determine whether such companies' systems are year 2000
compliant. If the systems of the Company or other companies on whose services
the Company depends, including the Company's customers, are not year 2000
compliant, there could be a material adverse effect on the Company's financial
condition or results of operations.
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 SUBSIDIARY
--------------
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:
(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: October 6, 1998
<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, 1998 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 3,151,647
<SECURITIES> 0
<RECEIVABLES> 234,928
<ALLOWANCES> 0
<INVENTORY> 658,051
<CURRENT-ASSETS> 4,353,792
<PP&E> 788,050
<DEPRECIATION> (306,161)
<TOTAL-ASSETS> 5,586,894
<CURRENT-LIABILITIES> 794,585
<BONDS> 0
0
2,165
<COMMON> 48,707
<OTHER-SE> 4,247,937
<TOTAL-LIABILITY-AND-EQUITY> 5,586,894
<SALES> 428,100
<TOTAL-REVENUES> 428,100
<CGS> 330,368
<TOTAL-COSTS> 330,368
<OTHER-EXPENSES> 1,501,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,209
<INCOME-PRETAX> (1,408,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,408,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,408,674)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
