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, 2005
[ ] 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.
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(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 10, 2005 59,364,897
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 [ ]
--- --
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
--- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
--- --
Page 1
Vasomedical, Inc. and Subsidiaries
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
August 31, 2005 and May 31, 2005 3
Consolidated Condensed Statements of Operations for the
Three Months Ended August 31, 2005 and 2004 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2005 to August 31, 2005 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 2005 and 2004 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Item 4 - Controls and Procedures 27
PART II - OTHER INFORMATION 28
Page 2
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, May 31,
2005 2005
----------------- -----------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $2,465,446 $989,524
Certificates of deposit 995,157 1,758,443
Accounts receivable, net of an allowance for doubtful accounts of
$459,139 at August 31, 2005, and $394,692 at May 31, 2005 2,479,103 1,892,002
Inventories, net 3,075,393 3,360,272
Other current assets 489,005 223,902
----------------- -----------------
Total current assets 9,504,104 8,224,143
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,669,940 at
August 31, 2005, and $2,626,983 at May 31, 2005 2,114,065 2,234,153
DEFERRED INCOME TAXES 14,582,000 14,582,000
OTHER ASSETS 315,301 321,174
----------------- -----------------
$26,515,470 $25,361,470
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,481,360 $1,569,131
Current maturities of long-term debt and notes payable 364,301 148,212
Sales tax payable 222,783 216,753
Deferred revenue 1,517,893 1,667,080
Accrued warranty and customer support expenses 90,750 110,583
Accrued professional fees 348,881 401,511
Accrued commissions 181,653 178,104
----------------- -----------------
Total current liabilities 4,207,621 4,291,374
LONG-TERM DEBT 909,303 947,597
ACCRUED WARRANTY COSTS 4,250 7,750
DEFERRED REVENUE 958,870 884,452
OTHER LIABILITIES 34,250 67,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
25,000 and 0 at August 31, 2005, and May 31, 2005, respectively, 250 --
issued and outstanding; aggregate liquidation preference of
$2,514,430 and $0 at August 31, 2005 and May 31, 2005,
respectively
Common stock, $.001 par value; 110,000,000 shares authorized;
58,752,688 and 58,552,688 shares at August 31, 2005, and May 31,
2005, respectively, issued and outstanding 58,752 58,552
Additional paid-in capital 53,581,430 51,450,639
Accumulated deficit (33,239,256) (32,346,394)
----------------- -----------------
Total stockholders' equity 20,401,176 19,162,797
----------------- -----------------
$26,515,470 $25,361,470
================= =================
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three months
ended August 31,
--------------------------------------
2005 2004
----------------- -----------------
Revenues
Equipment sales $2,456,909 $3,974,897
Equipment rentals and services 1,079,462 846,519
----------------- -----------------
Total revenues 3,536,371 4,821,416
Cost of Sales and Services
Cost of sales, equipment 1,032,257 1,325,557
Cost of equipment rentals and services 390,927 336,236
----------------- -----------------
Total cost of sales and services 1,423,184 1,661,793
----------------- -----------------
Gross profit 2,113,187 3,159,623
Operating Expenses
Selling, general and administrative 2,409,149 3,052,481
Research and development 512,006 871,898
Provision for doubtful accounts 70,575 132,956
----------------- -----------------
Total operating expenses 2,991,730 4,057,335
----------------- -----------------
LOSS FROM OPERATIONS (878,543) (897,712)
Other Income (Expense)
Interest and financing costs (23,509) (30,362)
Interest and other income, net 19,016 13,744
----------------- -----------------
Total other income (expense) (4,493) (16,618)
----------------- -----------------
LOSS BEFORE INCOME TAXES (883,036) (914,330)
Income tax expense, net (9,826) (10,000)
----------------- -----------------
NET LOSS (892,862) (924,330)
Preferred stock dividend (805,623) --
----------------- -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,698,485) $(924,330)
================= =================
Net loss per common share
- basic $(0.03) $(0.02)
================= =================
- diluted $(0.03) $(0.02)
================= =================
Weighted average common shares outstanding
- basic 58,646,166 58,532,398
================= =================
- diluted 58,646,166 58,532,398
================= =================
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------- ---------- ------------------ -----------------
Balance at June 1, 2005 -- -- 58,552,688 $58,552 $51,450,639 $(32,346,394) $19,162,797
Issuance of Series D
convertible
preferred stock,
net of costs 25,000 $250 1,613,209 1,613,459
Warrants issued in
connection with 411,158 411,158
the issuance
of Series D
convertible
preferred stock
Beneficial conversion
feature embedded
in Series D 786,247 786,247
convertible
preferred stock issued
Dividends on Series D
convertible preferred
stock (805,623) (805,623)
Issuance of common stock
in connection with the
issuance of Series D
convertible preferred
stock 200,000 200 125,800 126,000
Net loss (892,862) (892,862)
------ ------ ---------- ------- ----------- ------------------ -----------------
Balance at August 31, 2005 25,000 $250 58,752,688 $58,752 $53,581,430 $(33,239,256) $20,401,176
====== ====== ========== ======= =========== ================== =================
The accompanying notes are an integral part of this condensed financial
statement.
Page 5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three months
ended August 31,
-------------------------------------
2005 2004
---------------- ----------------
Cash flows from operating activities
Net loss $(892,862) $(924,330)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 108,301 149,660
Provision for doubtful accounts 70,575 132,956
Reserve for excess and obsolete inventory 15,119 8,583
Changes in operating assets and liabilities
Accounts receivable (657,676) 872,142
Inventories 292,258 (299,527)
Other current assets 36,949 (390,054)
Other assets (4,838) (25,236)
Accounts payable, accrued expenses and other current liabilities
(372,312) (577,682)
Other liabilities 37,668 (191,793)
---------------- ----------------
(473,956) (320,951)
---------------- ----------------
Net cash used in operating activities (1,366,818) (1,245,281)
---------------- ----------------
Cash flows provided by (used in) investing activities
Purchase of property and equipment -- (138,568)
Purchase of certificates of deposit and treasury bills -- (1,474,474)
Redemptions of certificates of deposit 763,286 --
---------------- ----------------
Net cash provided by (used in) investing activities 763,286 (1,613,042)
---------------- ----------------
Cash flows provided by financing activities
Payments on long term debt and notes payable (124,257) (32,326)
Payments of preferred stock dividends (4,946) --
Payments of preferred stock issue costs (291,343) --
Proceeds from exercise of options and warrants -- 130,666
Proceeds from sale of convertible preferred stock 2,500,000 --
---------------- ----------------
Net cash provided by financing activities 2,079,454 98,340
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,475,922 (2,759,983)
Cash and cash equivalents - beginning of period 989,524 6,365,049
---------------- ----------------
Cash and cash equivalents - end of period $2,465,446 $3,605,066
================ ================
Non-cash investing and financing activities were as follows:
Inventories transferred to (from) property and equipment, attributable to
operating leases, net $(22,498) $67,858
Issue of note for purchase of insurance policy $302,052 --
Preferred stock dividends $800,677 --
Preferred stock issue costs $250,127 --
Supplemental Disclosures
Interest Paid $23,509 $22,690
Income taxes paid $16,805 $19,526
The accompanying notes are an integral part of these condensed financial
statements.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of August 31, 2005, and the
related consolidated condensed statements of operations for the three-month
periods ended August 31, 2005 and 2004, changes in stockholders' equity for the
three-month period ended August 31, 2005, and cash flows for the three-month
periods ended August 31, 2005 and 2004, 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 and results of operations as
of August 31, 2005, and for all periods presented have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, 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, 2005. Results of operations for the periods ended August 31, 2005 and
2004, are not necessarily indicative of the operating results expected or
reported for the full year.
We believe that our cash flow from operations together with our current
cash reserves and the cash received for the sale of convertible preferred stock
and warrants on July 19, 2005 (see Note L), will be sufficient to fund our
business plan and projected capital requirements through at least May 31, 2006.
However, we have incurred significant losses during the last three fiscal years
and our long-term ability to maintain current operations is dependent upon
achieving profitable operations, which is largely dependent upon the successful
commercialization of EECP therapy into the congestive heart failure indication,
and depends in part upon the acceptance of the results of the PEECH clinical
trial by the medical community and expanded reimbursement coverage to include
CHF as being sufficient to promote the adoption of EECP therapy in CHF; or
through additional debt or equity financing. In the event that additional
capital is required, we may seek to raise such capital through public or private
equity or debt financings. Future capital funding, if available, may result in
dilution to current shareholders.
Reclassifications
Certain reclassifications have been made to the prior years' amounts to conform
with the current year's presentation.
NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154 ("SFAS No. 154"), "Accounting Changes and Error Corrections." SFAS No.
154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. The Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets -- an
amendment of APB Opinion No. 29". SFAS No. 153 amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. A non- monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for fiscal
periods after June 15, 2005. The Company does not expect the adoption of SFAS
No. 153 to have a material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based
Compensation". SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were required. SFAS No. 123(R) shall be effective for the Company as of
the beginning of the next fiscal year that begins after June 15, 2005. The
adoption of this new accounting pronouncement is expected to have a material
impact on the financial statements of the Company commencing with the quarter
ending August 31, 2006.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 24, 2004. The Company
adopted SFAS No. 151 effective for fiscal periods beginning June 1, 2005. We
determined that our production facilities are currently operating below normal
capacity and as a result we applied production overhead rates based on normal
production capacity which resulted in a reduction of the amount of overhead
allocated to inventory for the three month period ended August 31, 2005 of
$73,000. Had the Company adopted the provisions of SFAS No. 151 beginning in
fiscal 2005, there would have been no change in overhead allocation as the
Company was operating within its normal production capacity at that time.
NOTE C - STOCK-BASED COMPENSATION
The Company has five stock-based employee compensation plans. The Company
accounts for stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25") and has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Accordingly, no compensation expense has been recognized in the consolidated
financial statements in connection with employee stock option grants.
On October 28, 2004 the shareholders approved the 2004 Stock Option/Stock
Issuance Plan and authorized the issuance of 2,500,000 shares.
During the three-month period ended August 31, 2005, the Board of Directors
granted non-qualified stock options under the 2004 Stock Option/Stock Issuance
Plan to three officers, and 31 employees to purchase an aggregate of 511,055
shares of common stock, at an exercise price of $0.57 per share, which
represented the fair market value of the underlying common stock at the time of
the respective grants. These options vest on May 31, 2006, and expire ten years
from the date of grant.
During the three-month period ended August 31, 2005, options to purchase
275,191 shares of common stock at an exercise price of $0.57 - $5.15 were
cancelled.
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
The following table illustrates the effect on net loss and loss per share
had the Company applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
Three months
ended August 31,
--------------------------------------
2005 2004
----------------- -----------------
Net loss attributable to common stockholders, as reported $(1,698,485) $(924,330)
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards
(212,294) (170,921)
----------------- -----------------
Pro forma net loss $(1,910,779) $(1,095,251)
================= =================
Loss per share:
Basic and diluted - as reported $(0.03) $(0.02)
================= =================
Basic and diluted - pro forma $(0.03) $(0.02)
================= =================
For purposes of estimating the fair value of each option on the date of
grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.
The fair value of the Company's stock-based awards was estimated assuming
no expected dividends and the following weighted-average assumptions for the
three months ended August 31, 2005:
Expected life (years) 5
Expected volatility 73%
Risk-free interest rate 4.18%
Expected dividend yield 0.0%
NOTE D - LOSS PER COMMON SHARE
Basic loss per share is based on the weighted average number of common
shares outstanding without consideration of potential common shares. Diluted
loss per share is based on the weighted number of common and potential common
shares outstanding. The calculation takes into account the shares that may be
issued upon the exercise of stock options and warrants, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average price during the period, plus conversion of convertible preferred stock
into common shares based upon the most advantageous conversion rate during the
period.
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
Three months ended
August 31,
--------------------------------------
2005 2004
----------------- -----------------
Numerator:
Basic and diluted net loss $(892,862) $(924,330)
Deemed dividend related to beneficial conversion
feature on Series D preferred stock (786,247) --
Series D preferred stock dividends (19,376) --
----------------- -----------------
Net loss attributable to common stockholders $(1,698,485) $(924,330)
================= =================
Denominator:
Basic - weighted average common shares 58,646,166 58,532,398
Stock options -- --
Warrants -- --
----------------- -----------------
Diluted - weighted average common shares 58,646,166 58,532,398
================= =================
Basic and diluted loss per common share $(0.03) $(0.02)
Options, warrants, and convertible preferred stock, in accordance with the
following table, were excluded from the computation of diluted loss per share
for the three months ended August 31, 2005 and 2004, respectively, because the
effect of their inclusion would be antidilutive.
Three months ended
August 31,
--------------------------------------
2005 2004
----------------- -----------------
Options to purchase common stock 6,789,408 5,439,753
Warrants to purchase common stock 2,454,538 200,000
Convertible preferred stock 5,159,959 --
----------------- -----------------
14,403,905 5,639,753
================= =================
NOTE E - INVENTORIES, NET
Inventories, net consist of the following:
August 31, May 31,
2005 2005
----------------- -----------------
Raw materials $912,261 $960,101
Work in process 1,053,063 1,194,688
Finished goods 1,110,069 1,205,483
----------------- -----------------
$3,075,393 $3,360,272
================= =================
At August 31, 2005 and May 31, 2005, the Company has recorded reserves for
excess and obsolete inventory of $581,268 and $566,149, respectively.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
August 31, 2005 May 31, 2005
---------------- ---------------
Land $ 200,000 $ 200,000
Building and improvements 1,383,976 1,383,976
Office, laboratory and other equipment 1,445,168 1,445,168
EECP systems under operating leases or under loan
for clinical trials 1,474,990 1,552,121
Furniture and fixtures 162,068 162,068
Leasehold improvements 117,803 117,803
---------------- ---------------
4,784,005 4,861,136
---------------- ---------------
Less: accumulated depreciation and amortization (2,669,940) (2,626,983)
---------------- ---------------
$2,114,065 $2,234,153
================ ===============
NOTE G - NOTES PAYABLE
The Company financed the purchase of Director's and Officer's Liability
Insurance through the issuance of a note with a principal value of $302,052. The
note, which bears interest at 5.85%, is payable in ten monthly installments
consisting of principal and interest, and expires in March 2006. The balance
outstanding at August 31, 2005, of $212,974 is presented on the consolidated
condensed balance sheet in current maturities of long-term debt and notes
payable.
NOTE H - LONG-TERM DEBT
The following table sets forth the computation of long-term debt:
August 31, 2005 May 31, 2005
----------------- --------------
Facility loans (a) $955,634 $969,566
Term loans (b) 104,996 126,243
----------------- --------------
1,060,630 1,095,809
Less: current portion (151,327) (148,212)
----------------- --------------
$909,303 $947,597
================= ==============
(a) The Company purchased its headquarters and warehouse facility and
secured notes of $641,667 and $500,000, respectively, under two programs
sponsored by New York State. These notes, which bear interest at 7.8% and 6%,
respectively, are payable in monthly installments consisting of principal and
interest payments over fifteen- year terms, expiring in September 2016 and
January 2017, respectively, and are secured by the building.
(b) In fiscal years 2003 and 2004, the Company financed the cost and
implementation of a management information system and secured several notes,
aggregating approximately $305,219. The notes, which bear interest at rates
ranging from 7.5% through 12.5%, are payable in monthly installments consisting
of principal and interest payments over four-year terms, expiring at various
times between August and October 2006.
NOTE I - DEFERRED REVENUES
The Company records revenue on extended service contracts ratably over the
term of the related warranty contracts. Effective September 1, 2003, the Company
prospectively adopted the provisions of EITF 00-21. Upon adoption of the
provisions of EITF 00-21, the Company began to defer revenue related to domestic
Page 11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
EECP system sales for the fair value of in-service and training to the period
when the services are rendered and for warranty obligations ratably over the
service period, which is generally one year:
The changes in the Company's deferred revenues are as follows:
Three months ended
August 31,
--------------------------------------
2005 2004
----------------- -----------------
Deferred Revenue at the beginning of the period $2,551,532 $2,846,451
ADDITIONS
Deferred extended service contracts 510,855 319,850
Deferred in-service training 47,500 67,500
Deferred warranty obligations 152,500 310,000
RECOGNIZED AS REVENUE
Deferred extended service contracts (580,000) (432,771)
Deferred in-service training (50,000) (127,500)
Deferred warranty obligations (155,624) (332,084)
----------------- -----------------
Deferred revenue at end of period 2,476,763 2,651,446
Less: current portion (1,517,893) (1,672,713)
----------------- -----------------
Long-term deferred revenue at end of period $958,870 $978,733
================= =================
NOTE J - WARRANTY COSTS
Equipment sold is generally covered by a warranty period of one year.
Effective September 1, 2003, we adopted the provisions of EITF 00-21 on a
prospective basis for our shipments to customers in the United States. Under
EITF 00-21, for certain arrangements, a portion of the overall system price
attributable to the first year service arrangement is deferred and recognized as
revenue over the service period. As such, we no longer accrue warranty costs
upon delivery for these customers but rather recognize warranty and related
service costs as incurred. Prior to September 1, 2003, we accrued a warranty
reserve for estimated costs to provide warranty services when the equipment sale
was recognized.
Equipment sold to international customers through our distributor network
is generally covered by a one- year warranty period. For these customers we
accrue a warranty reserve for estimated costs to provide warranty services when
the equipment sale is recognized.
The factors affecting our warranty liability included the number of units
sold and historical and anticipated rates of claims and costs per claim. The
warranty provision resulting from transactions prior to September 1, 2003, will
be reduced in future periods for material and labor costs incurred as related
product is returned during the warranty period or when the warranty period
elapses.
The changes in the Company's product warranty liability are as follows:
Three months ended
August 31,
-----------------------------------
2005 2004
--------------- ---------------
Warranty liability at the beginning of the period $118,333 $244,917
Expense for new warranties issued 12,000 --
Warranty amortization (35,333) (56,084)
--------------- ---------------
Warranty liability at end of period 95,000 188,833
Less: current portion (90,750) (131,833)
--------------- ---------------
Long-term warranty liability at end of period $4,250 $57,000
=============== ===============
NOTE K - INCOME TAXES
During the three-months ended August 31, 2005 and 2004, we recorded a
provision for state income taxes of $9,826 and $10,000, respectively.
Page 12
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
As of August 31, 2005, the Company had recorded deferred tax assets of
$14,582,000 (net of a $4,073,000 valuation allowance) related to the anticipated
recovery of tax loss carryforwards. The amount of the deferred tax assets
considered realizable could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced. Ultimate realization
of the deferred tax assets is dependent upon the Company generating sufficient
taxable income prior to the expiration of the tax loss carryforwards. Management
believes that the Company is positioned for long-term growth despite the losses
during fiscal years 2005 and 2004, and that based upon the weight of available
evidence, that it is "more likely than not" that the net deferred tax assets
will be realized. The "more likely than not" standard is subjective, and is
based upon management's estimate of a greater than 50% probability that its long
range business plan can be realized.
Ultimate realization of any or all of the deferred tax assets is not
assured, due to significant uncertainties and material assumptions associated
with estimates of future taxable income during the carryforward period. Our
estimates are largely dependent upon achieving considerable growth in revenue
and profits resulting from the successful commercialization of EECP therapy into
the congestive heart failure indication, which we believe will enable us to
reverse the current trend of increasing losses and generate pre-tax income in
excess of $39 million over the next seven years in order to fully utilize all of
the deferred tax assets. Such estimates of future taxable income are based on
our beliefs, as well as assumptions made by and information currently available
to us. Certain critical assumptions associated with our estimates include:
-- that the results from the PEECH clinical trial, as well as other
clinical evidence are sufficiently positive for the PEECH clinical
trial to be published in a peer reviewed journal and enable the EECP
therapy to obtain approval for a national Medicare reimbursement
coverage policy plus other third-party payer reimbursement policies
specific to the congestive heart failure indication;
-- that the reimbursement coverage will be both broad enough in terms of
coverage language and at an amount adequate to enable successful
commercialization of EECP therapy into the congestive heart failure
indication and enable us to achieve material growth in revenue and
profits;
-- that the EECP therapy will be accepted by the medical community as an
adjunctive therapy for the treatment of patients suffering from
congestive heart failure; and
-- that we will be able to secure additional financing to provide
sufficient funds to market EECP therapy in the congestive heart
failure indication.
Additional uncertainties 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;
-- other medical insurance reimbursement policies;
-- lack of assurance that we will be able to raise additional capital
necessary to implement our business plan;
-- unexpected manufacturing problems;
-- unforeseen difficulties and delays in the conduct of clinical trials,
peer reviewed publications 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;
-- our recent financial history of declining revenues and losses;
-- unanticipated loss of management or other key personnel; and
-- the risk factors reported from time to time in our SEC reports.
Factors considered by us in making our assumptions and included in our
long-term business plan are the following:
-- we currently have FDA clearance to market EECP therapy in congestive
heart failure;
-- independent market research indicates that the patient population
potentially eligible for EECP therapy in congestive heart failure
market is larger than the current refractory angina patient population
and when the two patient populations are combined the total market
opportunity for EECP therapy will be more than double;
-- many physician practices have told us that they do not have a
sufficient number of patients to economically justify adoption of the
Page 13
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
procedure with the current reimbursement coverage for refractory
angina. The increased market size resulting from the addition of CHF
patients could improve the economic model for the physician practice;
-- we have positive clinical evidence from the PEECH clinical trial that
was recently concluded, plus other smaller clinical trials and the
IEPR patient registry that demonstrates the clinical effectiveness of
EECP therapy in the treatment of congestive heart failure to medical
providers, payers and regulators;
-- we completed the PEECH clinical trial this fiscal year as planned and
disclosed the summary results of the trial in March 2005;
-- we expect the results of the PEECH trial to be published in a peer
reviewed journal, which is an important step necessary to support an
application to CMS to expand reimbursement coverage of EECP therapy to
include CHF patients;
-- we sustained a period of profitability in fiscal years 2000, 2001 and
2002 with profits before income taxes of $1,290,916, $5,237,242 and
$4,240,106, respectively; and
-- we continue to believe that we will be able to raise sufficient funds
to enable us to execute our business plan.
While we believe that we will be able to execute our business plan over the
longer term and we will be able to utilize our tax loss carryforwards, the exact
timing of our return to profitability is uncertain, subject to significant
management judgments and estimates and dependent on a variety of external
factors including: market conditions at that time, the reception of the EECP
therapy by the medical professionals and payers and the timing of a Medicare
reimbursement decision. It is possible that significant tax loss carryforwards
from earlier fiscal years that expire in fiscal years 2006, 2007 and beyond may
expire before we are able to use them. As a result of these uncertainties,
beginning in fiscal 2004, we began to provide a valuation reserve for all
additional tax loss carryforwards that were generated by current operating
losses. We review this policy on a quarterly basis and believe that the above
valuation reserve is appropriate under the current circumstances.
The amount of the deferred tax assets considered realizable could be
reduced in the future if estimates of future taxable income during the
carryforward period are reduced.
The recorded deferred tax asset includes an increase to the valuation
allowance of $299,000 during the three-months ended August 31, 2005.
NOTE L - SERIES D CONVERTIBLE PREFERRED STOCK AND WARRANTS
On July 19, 2005, we entered into a Securities Purchase Agreement that
provided us with gross proceeds of $2.5 million through a private placement of
preferred stock with M.A.G. Capital, LLC through its designated funds, Monarch
Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP
(the "Investors"). The agreement provided for a private placement of 25,000
shares of Vasomedical's Series D Preferred Stock at $100 per share. The
preferred stock is convertible into shares of Vasomedical's common stock at 85
percent of the volume weighted average price per share for the five trading days
preceding any conversion, but not at more than $0.6606 or less than $0.40 per
share. Vasomedical may, at its option, require the holders to convert all their
preferred stock into common shares if the closing price for the common stock for
the preceding 20 trading days has been greater than $1.30 per share. The
Investors also acquired warrants for the purchase of 1,892,219 shares of common
stock. The warrants may be exercised at a price of $0.69 per share for a term of
five years, ending July 19, 2010. Conversion of the preferred stock and exercise
of the warrants are subject to limitation such that the beneficial ownership of
the Investors and their affiliates shall not exceed 9.99% of the common stock
outstanding.
An event of default occurs if we fail to timely pay the dividend or
commence a voluntary case or proceeding under the bankruptcy laws, among other
specified occurrences. Upon an event of default, the price at which the
preferred stock may be converted into common stock is reduced from 85 percent to
75 percent of the then current volume weighted average market price per share,
but not more than $0.6606 or less than $0.40 per share (the "Floor Price"). In
the event that our quarterly gross revenues are less than $2,500,000, then the
Floor Price shall automatically reduce to $0.30. In addition, the holders of the
preferred stock have the right to be paid first from the assets of Vasomedical
upon any dissolution or liquidation of the Company in an amount equal to $100
per share plus any declared but unpaid dividends.
Page 14
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
Under the terms of a Registration Rights Agreement with the Investors,
Vasomedical filed a Form S-3 registration statement with the Securities and
Exchange Commission (SEC) on August 22, 2005, for 10,787,871 shares of common
stock representing up to 8,533,333 shares issuable in connection with conversion
of our Series D Convertible Preferred Stock and up to 2,254,538 shares issuable
upon the exercise of our common stock purchase warrants. The registration
statement was declared effective by the SEC on September 1, 2005. The total
number of shares registered is based on a conversion price of $0.30 per share,
which would only have affect in the event of default by Vasomedical of its
obligation to holders of the Series D Convertible Preferred Stock.
These securities were offered and sold to the Investors in a private
placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) of the Securities Act of 1933. The Investors are
accredited investors as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933. Vasomedical intends to apply the funds for working
capital.
Warrants and Beneficial Conversion Feature
The Company applied Emerging Issues Task Force Issue No. 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios"(EITF No. 98-5) and Emerging Issues Task Force
(EITF 00-27) Application of Issue No. 98-5 to Certain Convertible Instruments in
accounting for the preferred stock issuance. EITF No. 98-5 provides that
detachable warrants issued with convertible securities are valued separately,
and that the beneficial conversion feature of the convertible security be
measured and recognized over the minimum period over which the shareholders can
realize the return.
The Task Force reached a consensus that convertible preferred securities
with a non-detachable conversion feature that is in-the-money at the commitment
date represents an embedded beneficial conversion feature that should be
recognized as a dividend and recorded to additional paid-in capital. That amount
should be calculated at the commitment date as the difference between the
allocated portion of the gross proceeds to the convertible preferred stock and
the fair value of the common stock or other securities into which the security
is convertible, multiplied by the number of shares into which the security is
convertible (intrinsic value method).
The beneficial conversion feature is treated analogous to a dividend and is
recognizable immediately over the minimum period during which the preferred
shareholders can realize that return. The imputed dividend will increase the
Company's loss for the purpose of computing the loss-per-share. The beneficial
conversion feature is calculated at its intrinsic value at the commitment date
(that is, the difference between the total gross proceeds allocated to the
preferred stock as compared to the total market value of the common stock into
which the Preferred Stock is convertible on the commitment date. The computed
value of the beneficial conversion feature is treated as a deemed dividend
immediately with a corresponding increase to paid-in capital. No additional
amount will be recognized at the conversion date in recognition of an increase
in the fair value of the stock conversion.
In circumstances in which convertible securities are issued with detachable
warrants, the Task Force noted that in order to determine the amount to be
allocated to the beneficial conversion feature, the issuer must first allocate
the proceeds between the convertible instrument and the detachable warrants
using the relative fair value method of APB Opinion Number 14.
The investors and consultants acquired detachable warrants for the purchase
of 1,892,219 and 362,319 shares of common stock, respectively, which were valued
at $345,071 and $66,087, respectively. The warrants may be exercised at a price
of $0.69 per share for a term of five years, ending July 18, 2010. For purposes
of estimating the intrinsic fair value of each warrant as of July 19, 2005, we
utilized the Black-Scholes option-pricing model. We estimated the fair value of
the warrants assuming no expected dividends and the following weighted-average
assumptions:
Expected life (years) 2.5
Expected volatility 66%
Risk-free interest rate 4.16%
Expected dividend yield 0.0%
We next determined the intrinsic fair value of the convertible preferred
stock as of July 19, 2005, to be $2,941,176 based on the number of common shares
that could be acquired as of the date of closing times $0.63, the closing price
of the common stock on the date preceding the close of the transaction. In
applying EITF No. 98-5, we then allocated the gross proceeds of $2,500,000
Page 15
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2005
between the warrants and preferred stock based on intrinsic value of each
instrument. As a result, we allocated $2,154,929 of gross proceeds to the
convertible preferred stock and $345,071 to the detachable warrants. The
beneficial conversion feature of $786,247 was then determined by subtracting the
allocated proceeds of convertible preferred stock from the intrinsic fair value
of convertible preferred stock. The beneficial conversion feature was
immediately recognized as a preferred stock dividend, as the preferred stock can
be converted immediately.
Dividends
By the placement of the convertible preferred stock described above, we
became obligated to pay a cash dividend monthly on the outstanding shares of
convertible preferred stock. The dividend rate is the higher of (i) the prime
rate as reported by the Wall Street Journal on the first day of the month, plus
three percent or, (ii) 8.5% times $100 per share, but in no event greater than
10% annually. For the three-month period ended August 31, 2005, cash dividends
of $19,376 were recorded, of which $14,430 were unpaid. Preferred stock
dividends in the quarter are summarized as follows:
Amount
-------
Cash dividends paid $4,946
Cash dividends accrued 14,430
Beneficial conversion feature 786,247
--------
$805,623
========
Common stock
The Company issued 200,000 shares of common stock in lieu of cash for
$126,000 in consultant services associated with the issuance of the Series D
Convertible Preferred Stock. These issue costs were treated as a reduction in
the paid-in capital associated with the preferred stock issuance.
NOTE M - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The approximate aggregate minimum compensation obligation under active
employment agreements at August 31, 2005 are summarized as follows:
Twelve month period ended August 31, Amount
------------------------------------ ------
2006 $3,125
======
Litigation
The Company is currently, and has in the past been, a party to various
routine legal proceedings incident to the ordinary course of business. The
Company believes that the outcome of all such pending legal proceedings in the
aggregate is unlikely to have a material adverse effect on the business or
consolidated financial condition of the Company.
Page 16
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipated", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" 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 business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; 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. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. incorporated in Delaware in July 1987 is primarily
engaged in designing, manufacturing, marketing and supporting EECP(R) external
counterpulsation systems based on our proprietary technology. EECP therapy is a
non-invasive, outpatient therapy for the treatment of diseases of the
cardiovascular system. The therapy serves to increase circulation in areas of
the heart with less than adequate blood supply and has been shown to improve
systemic vascular function. We provide hospitals and physician private practices
with EECP equipment, treatment guidance, and a staff training and equipment
maintenance program designed to provide optimal patient outcomes. EECP is a
registered trademark for Vasomedical's enhanced external counterpulsation
systems.
We have Food and Drug Administration (FDA) clearance to market our EECP
therapy for use in the treatment of stable and unstable angina, congestive heart
failure, acute myocardial infarction, and cardiogenic shock, however our current
marketing efforts are limited to the treatment of stable angina and congestive
heart failure indications. Within the stable angina and CHF indications,
Medicare and other third-party payers currently reimburse for stable angina
patients with moderate to severe symptoms who are refractory to medications and
not candidates for invasive procedures. CHF patients are also reimbursed under
the same criteria, provided their primary symptoms are angina.
We are also actively engaged in research to establish the potential
benefits of EECP therapy in the management of CHF and sponsored a pivotal study
to demonstrate the efficacy of EECP therapy in the most prevalent types of heart
failure patients. This study, known as PEECH (Prospective Evaluation of EECP in
Congestive Heart Failure), is intended to provide additional clinical data in
order to support our application for expanded Medicare national coverage policy
for the use of EECP therapy in the treatment of CHF. The preliminary results of
the trial were presented at the American College of Cardiology scientific
sessions in March 2005, and we expect the results of the PEECH clinical trial to
be published in a peer-reviewed journal within the next few months. On June 20,
2005, the Centers for Medicare and Medicaid Services (CMS) accepted our
application for expanded coverage of EECP therapy to include CHF as a primary
indication, as well as additional patients with angina.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, or SEC, in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note A of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended May 31, 2005, includes a summary of our significant accounting policies
and methods used in the preparation of our financial statements. In preparing
these financial statements, we have made our best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. Our critical
accounting policies are as follows:
Page 17
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the price is fixed or
determinable and collectibility is reasonably assured. In the United States, we
recognize revenue from the sale of our EECP systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP systems to
international markets is recognized upon shipment, during the period in which we
deliver the product to a common carrier, as are supplies, accessories and spare
parts delivered to both domestic and international customers. Returns are
accepted prior to the in-service and training subject to a 10% restocking charge
or for normal warranty matters, and we are not obligated for post-sale upgrades
to these systems. In addition, we use the installment method to record revenue
based on cash receipts in situations where the account receivable is collected
over an extended period of time and in our judgment the degree of collectibility
is uncertain.
In most cases, revenue from domestic EECP system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectibility, the separability of units of accounting, and the
fair value of individual elements. Effective September 1, 2003, we adopted the
provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables", ("EITF 00-21"), on a prospective
basis. The principles and guidance outlined in EITF 00-21 provide a framework to
determine (a) how the arrangement consideration should be measured (b) whether
the arrangement should be divided into separate units of accounting, and (c) how
the arrangement consideration should be allocated among the separate units of
accounting. We determined that the domestic sale of our EECP systems includes a
combination of three elements that qualify as separate units of accounting:
i. EECP equipment sale,
ii. provision of in-service and training support consisting of equipment
set-up and training provided at the customer's facilities, and
iii. a service arrangement (usually one year), consisting of: service by
factory-trained service representatives, material and labor costs,
emergency and remedial service visits, preventative maintenance,
software upgrades, technical phone support and preferred response
times.
Each of these elements represent individual units of accounting as the
delivered item has value to a customer on a stand-alone basis, objective and
reliable evidence of fair value exists for undelivered items, and arrangements
normally do not contain a general right of return relative to the delivered
item. We determine fair value based on the price of the deliverable when it is
sold separately or based on third-party evidence. In accordance with the
guidance in EITF 00-21, we use the residual method to allocate the arrangement
consideration when it does not have fair value of the EECP system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
i. EECP equipment sales, when delivery and acceptance occurs based on
delivery and acceptance documentation received from independent
shipping companies or customers,
ii. in-service and training, following documented completion of the
training, and
iii. the service arrangement, ratably over the service period, which is
generally one year.
In-service and training generally occurs within three weeks of shipment and
our return policy states that no returns will be accepted after in-service and
training has been completed. The amount related to in-service and training is
recognized as revenue at the time the in-service and training is completed and
the amount related to service arrangements is recognized as service revenue
ratably over the related service period, which is generally one year. Costs
associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of sales as incurred.
We also recognize revenue generated from servicing EECP systems that are no
longer covered by the service arrangement, or by providing sites with additional
training, in the period that these services are provided. Revenue related to
future commitments under separately priced extended service agreements on our
EECP system are deferred and recognized ratably over the service period,
generally ranging from one year to four years. Costs associated with the
provision of service and maintenance, including salaries, benefits, travel,
spare parts and equipment, are recognized in cost of sales as incurred. Amounts
billed in excess of revenue recognized are included as deferred revenue in the
consolidated balance sheets.
Page 18
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues from the sale of EECP systems through our international
distributor network are generally covered by a one-year warranty period. For
these customers we accrue a warranty reserve for estimated costs to provide
warranty services when the equipment sale is recognized.
We have also entered into lease agreements for our EECP systems, generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized, in accordance with the terms of
the lease agreements, on a straight-line basis over the life of the respective
leases. For certain operating leases in which payment terms are determined on a
"fee-per-use" basis, revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and equipment and is amortized to cost of sales over
the estimated useful life of the equipment, not to exceed five years. There were
no significant minimum rental commitments on these operating leases at August
31, 2005.
Accounts Receivable, net
The Company's accounts receivable -- trade are due from customers engaged
in the provision of medical services. Credit is extended based on evaluation of
a customer's financial condition and, generally, collateral is not required.
Accounts receivable are generally due 30 to 90 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts, returns,
term discounts and other allowances. Accounts outstanding longer than the
contractual payment terms are considered past due. Estimates are used in
determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of our accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. The Company
also looks at the credit quality of its customer base as well as changes in its
credit policies. The Company continuously monitors collections and payments from
its customers. While credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same credit loss rates that it has in the past.
Inventories, net
The Company values inventory at the lower of cost or estimated market, cost
being determined on a first-in, first-out basis. The Company often places EECP
systems at various field locations for demonstration, training, evaluation, and
other similar purposes at no charge. The cost of these EECP systems is
transferred to property and equipment and is amortized over the next two to five
years. The Company records the cost of refurbished components of EECP systems
and critical components at cost plus the cost of refurbishment. The Company
regularly reviews inventory quantities on hand, particularly raw materials and
components, and records a provision for excess and obsolete inventory based
primarily on existing and anticipated design and engineering changes to our
products as well as forecasts of future product demand.
Effective June 1, 2005, we adopted the provisions of Statement of Financial
Accounting Standards No. 151, "Inventory Costs", on a prospective basis. The
statement clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. As a
result of adopting SFAS No. 151, we absorbed approximately $73,000 less in fixed
production overheads into inventory.
Deferred Revenues
We record revenue on extended service contracts ratably over the term of
the related warranty contracts. Effective September 1, 2003, we prospectively
adopted the provisions of EITF 00-21. Upon adoption of the provisions of EITF
00-21 we began to defer revenue related to EECP system sales for the fair value
of installation and in-service training to the period when the services are
rendered and for warranty obligations ratably over the service period, which is
generally one year.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year.
Effective September 1, 2003, we adopted the provisions of EITF 00-21 on a
prospective basis. Under EITF 00-21, for certain arrangements, a portion of the
overall system price attributable to the first year service arrangement is
deferred and recognized as revenue over the service period. As such, we no
Page 19
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
longer accrue warranty costs upon delivery but rather recognize warranty and
related service costs as incurred. Prior to September 1, 2003, we accrued a
warranty reserve for estimated costs to provide warranty services when the
equipment sale was recognized.
Equipment sold to international customers through our distributor network
is generally covered by a one year warranty period. For these customers we
accrue a warranty reserve for estimated costs to provide warranty services when
the equipment sale is recognized.
The factors affecting our warranty liability included the number of units
sold and historical and anticipated rates of claims and costs per claim. The
warranty provision resulting from transactions prior to September 1, 2003, will
be reduced in future periods for material and labor costs incurred as related
product is returned during the warranty period or when the warranty period
elapses.
Net Loss per Common Share
Basic loss per share are based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted loss
per share are based on the weighted number of common and potential dilutive
common shares outstanding. The calculation takes into account the shares that
may be issued upon the exercise of stock options and warrants, reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the period.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. The deferred tax asset is
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets change, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the asset changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not" standard is subjective, and is based upon our estimate of a greater
than 50% probability that our long range business plan can be realized.
Deferred tax liabilities and assets are classified as current or
non-current based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference. The deferred tax asset we recorded relates
primarily to the realization of net operating loss carryforwards, of which the
allocation of the current portion, if any, reflects the expected utilization of
such net operating losses in next twelve months. Such allocation is based our
internal financial forecast and may be subject to revision based upon actual
results.
Stock-based Employee Compensation
We have five stock-based employee compensation plans. We account for
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25") and have adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price
of our employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. Accordingly, no
compensation expense has been recognized in the consolidated financial
statements in connection with employee stock option grants.
Pro forma compensation expense may not be indicative of future disclosures
because it does not take into effect pro forma compensation expense related to
grants before 1995. For purposes of estimating the fair value of each option on
the date of grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
Page 20
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.
Recently Issued Accounting Standards
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154 ("SFAS No. 154"), "Accounting Changes and Error Corrections." SFAS No.
154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. The Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets -- an
amendment of APB Opinion No. 29". SFAS No. 153 amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. A non- monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for fiscal
periods after June 15, 2005. The Company does not expect the adoption of SFAS
No. 153 to have a material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based
Compensation". SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were required. SFAS No. 123(R) shall be effective for the Company as of
the beginning of the first interim reporting period that begins after June 15,
2005. The adoption of this new accounting pronouncement is expected to have a
material impact on the financial statements of the Company commencing with the
quarter ending August 31, 2006.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 24, 2004. The Company has
adopted SFAS No. 151 effective June 1, 2005.
Results of Operations
Three Months Ended August 31, 2005 and 2004
Net revenue from sales, leases and service of our EECP systems for the
three-month periods ended August 31, 2005 and 2004, was $3,536,371 and
$4,821,416, respectively, which represented a decline of $1,285,045 or 27%. We
reported a net loss of $892,862 compared to $924,330 for the three-month periods
ended August 31, 2005 and 2004, respectively. Our net loss per common share was
$0.03 for the three-month period ended August 31, 2005 compared to a net loss of
$0.02 per share for the three-month period August 31, 2004.
Page 21
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues
Revenue from equipment sales declined approximately 38% to $2,456,909 for
the three-month period ended August 31, 2005 as compared to $3,974,897 for the
same period for the prior year. The decline in equipment sales is due primarily
to a 43% decline in the number of equipment shipments, partially offset by a 13%
improvement in average sales prices. A higher mix of both newer model equipment
and new equipment versus used equipment was the primary cause of the increase in
average sales prices.
We believe the decline in domestic units shipped reflects weakened demand
in the refractory angina market as existing capacity is more fully utilized,
coupled with increased competition from surgical procedures, mainly the use of
drug-eluting stents. We anticipate that demand for EECP systems will remain soft
until a projected expansion of the current CMS national reimbursement policy for
use of EECP therapy to treat congestive heart failure patients is obtained. If
we are unable to obtain an adequate national Medicare coverage policy for
treatment procedures using the EECP therapy system in CHF, it would adversely
affect our business prospects. Although, average domestic selling prices
improved compared to the first quarter of fiscal 2005, we anticipate that a
prevailing trend of declining prices will continue in the immediate future as
our competition attempts to capture greater market share through pricing
discounts. We sold an unusually high percentage of used equipment in the first
quarter of fiscal 2005,which reduced the average selling price in that period.
The average price of new systems sales declined approximately 1% in the first
quarter of fiscal 2006 compared to the same period in the prior year. Lastly, we
continue to reorganize certain territory responsibilities in our sales
department due to vacant and/or unproductive territories. Our revenue from the
sale of EECP systems to international distributors in the first quarter of
fiscal 2006 decreased approximately 6% to $313,334 compared $334,792 in same
period of the prior year reflecting decreased volume.
The above decline in revenue from equipment sales was partially offset by a
28% increase in revenue from equipment rental and services for the three month
period ended August 31, 2005, from the same three-month period in the prior
year. Revenue from equipment rental and services represented 31% of total
revenue in the first quarter of fiscal 2006 compared to 18% in the first quarter
of fiscal 2005. The increase in both absolute amounts and percentage of total
revenue resulted primarily from an increase of approximately 38% in service
related revenue. The higher service revenue reflects an increase in service,
spare parts and consumables as a result of the continued growth of the installed
base of EECP systems plus greater marketing focus on the sale of extended
service contracts. Rental revenue declined approximately 26%, partially
offsetting the above. The decline was due to a multi-system customer defaulting
on its rental payments; consequently, we shifted to a cash basis for revenue
recognition for this customer.
Gross Profit
The gross profit declined to $2,113,187 or 60% of revenues for the
three-month period ended August 31, 2005, compared to $3,159,623 or 66% of
revenues for the three-month period ended August 31, 2004. Gross profit margin
as a percentage of revenue for the three-month period ended August 31, 2005,
decreased compared to the same year of the prior fiscal year despite the
improvement in average selling prices, mainly due to the higher production units
costs associated with reduced production volumes in the last two fiscal
quarters. In addition, adoption of SFAS No. 151 lowered the amount of fixed
overhead costs absorbed into inventory in the first quarter of fiscal 2006.
Partially offsetting the decline was an improvement in the gross profit margins
associated with accessory revenues, reflecting higher average selling prices.
The decline in gross profit when compared to the prior year in absolute dollars
is a direct result of the lower sales volume.
Gross profits are dependent on a number of factors, particularly the mix of
EECP models sold and their respective average selling prices, the mix of EECP
units sold, rented or placed during the period, the ongoing costs of servicing
such units, and certain fixed period costs, including facilities, payroll and
insurance. Gross profit margins are generally less on non-domestic business due
to the use of distributors resulting in lower selling prices. Consequently, the
gross profit realized during the current period may not be indicative of future
margins.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the three-months
ended August 31, 2005 and 2004, were $2,409,149 or 68% of revenues and
$3,052,481 or 63% of revenues, respectively reflecting an decrease of $643,332
or approximately 21%. The decrease in SG&A expenditures in the first quarter of
fiscal 2006 compared to fiscal 2005 resulted primarily from decreased sales and
Page 22
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
marketing expenditures reflecting lower sales and marketing personnel and
travel, plus reduced market research and advertising costs.
Research and Development
Research and development ("R&D") expenses of $512,006 or 14% of revenues
for the three months ended August 31, 2005, decreased by $359,892 or 41%, from
the prior three months ended August 31 2004, of $871,898 or 18% of revenues. The
decrease is primarily attributable to lower new product development spending.
Provision for Doubtful Accounts
During the three-month period ended August 31, 2005, the Company charged
$70,575 to its provision for doubtful accounts as compared to $132,956 during
the three-month period ended August 31, 2004, reflecting lower sales volume.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $23,509 in the
three-month period ended August 31, 2005, from $30,362 for the same period in
the prior year. Interest expense primarily reflects interest on loans secured to
refinance the November 2000 purchase of the Company's headquarters and warehouse
facility, as well as on loans secured to finance the cost and implementation of
a new management information system.
Interest and Other Income, Net
Interest and other income for the first quarter of 2006 and 2005, were
$19,016 and $13,744, respectively. The increase in interest income from the
prior period is the direct result of $8,871 in increased unrealized gain on
investments. Lower average cash balances invested during the quarter compared to
the prior period partially offset the above.
Income Tax Expense, Net
During the three-months ended August 31, 2005 and 2004, we recorded a
provision for state income taxes of $9,826 and $10,000, respectively.
As of August 31, 2005, we had recorded deferred tax assets of $14,582,000
net of a $4,073,000 valuation allowance related to the anticipated recovery of
tax loss carryforwards. The amount of the deferred tax assets considered
realizable could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating sufficient taxable income prior to
the expiration of the tax loss carryforwards. We believe that the Company is
positioned for long-term growth despite the losses during fiscal years 2005,
2004 and 2003, and that based upon the weight of available evidence, that it is
"more likely than not" that net deferred tax assets will be realized. The "more
likely than not" standard is subjective, and is based upon management's estimate
of a greater than 50% probability that its long range business plan can be
realized.
Ultimate realization of any or all of the deferred tax assets is not
assured, due to significant uncertainties and material assumptions associated
with estimates of future taxable income during the carryforward period. Our
estimates are largely dependent upon achieving considerable growth in revenue
and profits resulting from the successful commercialization of EECP therapy into
the congestive heart failure indication, which we believe will enable us to
reverse the current trend of increasing losses and generate pre-tax income in
excess of $39 million over the next seven years in order to fully utilize all of
the deferred tax assets. Such estimates of future taxable income are based on
our beliefs, as well as assumptions made by and information currently available
to us. Certain critical assumptions associated with our estimates include:
-- that the results from the PEECH clinical trial, as well as other
clinical evidence are sufficiently positive for the PEECH clinical
trial to be published in a peer-reviewed journal and to enable EECP
therapy to obtain approval of a national Medicare reimbursement
coverage policy plus other third-party payer reimbursement policies
inclusive of the congestive heart failure indication;
-- that the reimbursement coverage will be both broad enough in terms of
coverage language and at an amount adequate to enable successful
commercialization of EECP therapy into the congestive heart failure
indication and enable us to achieve material growth in revenue and
profits;
Page 23
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-- that EECP therapy will be sufficiently accepted by the medical
community as an adjunctive therapy for the treatment of patients
suffering from congestive heart failure; and
-- that we will be able to secure additional financing to provide
sufficient funds to market EECP therapy in the congestive heart
failure indication.
Additional uncertainties 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;
-- other medical insurance reimbursement policies;
-- lack of assurance that we will be able to raise additional capital
necessary to implement our business plan;
-- unexpected manufacturing problems;
-- unforeseen difficulties and delays in the conduct of clinical trials,
peer-reviewed publications and 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;
-- our recent financial history of declining revenues and losses;
-- unanticipated loss of management or other key personnel; and
-- the risk factors reported from time to time in our SEC reports.
Factors considered by us in making our assumptions and included in our
long-term business plan are the following:
-- we currently have FDA clearance to market EECP therapy in congestive
heart failure;
-- independent market research indicates that the patient population
potentially eligible for EECP therapy in congestive heart failure
market is larger than the current refractory angina patient population
and when the two patient populations are combined the total market
opportunity for EECP therapy will be more than double;
-- many physician practices have told us that they do not have a
sufficient number of patients to economically justify adoption of the
procedure with the current reimbursement coverage for refractory
angina. The increased market size resulting from the addition of CHF
patients could improve the economic model for the physician practice;
-- we have positive clinical evidence from the PEECH clinical trial that
was recently concluded, plus other smaller clinical trials and the
IEPR patient registry that demonstrates the clinical effectiveness of
EECP therapy in the treatment of congestive heart failure to medical
providers, payers and regulators;
-- we completed the PEECH clinical trial this fiscal year as planned and
disclosed the summary results of the trial in March 2005;
-- we expect the results of the PEECH trial to be published in a
peer-reviewed journal, which is an important step necessary to support
an application to CMS to expand reimbursement coverage of EECP therapy
to include CHF patients;
-- we sustained a period of profitability in fiscal years 2000, 2001 and
2002 with profits before income taxes of $1,290,916, $5,237,242 and
$4,240,106, respectively; and
-- we continue to believe that we will be able to raise sufficient funds
to enable us to execute our business plan.
While we believe that we will be able to execute our business plan over the
longer term and we will be able to utilize our tax loss carryforwards, the exact
timing of our return to profitability is uncertain, subject to significant
management judgments and estimates and dependent on a variety of external
factors including: market conditions at that time, the reception of EECP therapy
by medical professionals and payers and the timing of a Medicare reimbursement
decision. It is possible that significant tax loss carryforwards from earlier
fiscal years that expire in fiscal years 2006, 2007 and beyond may expire before
we are able to use them. As a result of these uncertainties, beginning in fiscal
2004, we began to provide a valuation reserve for all additional tax loss
carryforwards that were generated
Page 24
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
by current operating losses. We review this policy on a quarterly basis and
believe that the above valuation reserve is appropriate under the current
circumstances.
The amount of the deferred tax assets considered realizable could be
reduced in the future if estimates of future taxable income during the
carryforward period are reduced.
The recorded deferred tax asset and increase to the valuation allowance
during the three months ended August 31, 2005 was $299,000.
Liquidity and Capital Resources
We have financed our operations in fiscal 2006 and fiscal 2005 from working
capital and in fiscal 2006 from the issuance of preferred stock. At August 31,
2005, we had a cash, cash equivalents, and certificates of deposit balance of
$3,460,603 and working capital of $5,296,483 as compared to a cash, cash
equivalents, and certificates of deposit balance of $2,747,967 and working
capital of $3,932,769 at May 31, 2005. Our cash, cash equivalents, and
certificates of deposit balances increased $1,475,922 in fiscal year 2006
primarily due to $2,208,657 in net proceeds from the issuance of preferred
stock, partially offset by the net loss of $892,862.
The increase in cash used in our operating activities during the first
quarter of fiscal year 2006 resulted primarily from the net loss of $892,862
plus adjustments to reconcile net loss to net cash provided by operating
activities of $473,956. Changes in our operating assets and liabilities were
$667,951. The changes in the asset components primarily reflect an increase in
accounts receivable of $657,676, offset by lower inventory of $292,258. The
changes in our operating liability components reflect a decrease in accounts
payable and accrued liabilities of $372,312 and an increase in other liabilities
of $37,668. Non-cash adjustments for depreciation, amortization, allowance for
doubtful accounts and allowance for inventory write-offs of $193,995 partially
offset the above. Net accounts receivable were 70% of quarterly revenues for the
three-month period ended August 31, 2005, compared to 94% at the end of the
three-month period ended August 31, 2004, and accounts receivable turnover
decreased to 4.0 times as of August 31, 2005, as compared to 4.5 times as of
August 31, 2004.
Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from shipment and do not contain "right of return" provisions. We
have historically offered a variety of extended payment terms, including
sales-type leases, in certain situations and to certain customers in order to
expand the market for our EECP products in the US and internationally. Such
extended payment terms were offered in lieu of price concessions, in competitive
situations, when opening new markets or geographies and for repeat customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable monthly payment amount
for a six to twelve month period followed by a balloon payment, if applicable.
During the first quarter of fiscal 2006 and 2005, approximately 0% and 1%,
respectively, of revenues were generated from sales in which initial payment
terms were greater than 90 days and we offered no sales-type leases during
either period. In general, reserves are calculated on a formula basis
considering factors such as the aging of the receivables, time past due, and the
customer's credit history and their current financial status. In most instances
where reserves are required, or accounts are ultimately written-off, customers
have been unable to successfully implement their EECP program. As we are
creating a new market for the EECP therapy and recognizing the challenges that
some customers may encounter, we have opted, at times, on a customer-by-customer
basis, to recover our equipment instead of pursuing other legal remedies, which
has resulted in our recording of a reserve or a write-off.
Investing activities provided net cash of $763,286 during the three-month
period ended August 31, 2005. Cash was provided by the sale of short-term
certificates of deposit. All of our certificates of deposit have original
maturities of greater than three months and mature in less than twelve months.
Our financing activities provided net cash of $2,079,454 during the
three-month period ended August 31, 2005, reflecting $2,208,657 in net proceeds
received from the issuance of preferred stock, less payments on our outstanding
notes and loans totaling $124,257, and preferred stock dividend payments
totaling $4,946. On July 19, 2005, we entered into a Securities Purchase
Agreement that provided us with gross proceeds of $2.5 million through a private
placement of preferred stock with M.A.G. Capital, LLC through its designated
funds, Monarch Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator
Momentum Fund, LP. The agreement provided for a private placement of 25,000
shares of Vasomedical's Series D Preferred Stock at $100 per share.
We do not have an available line of credit.
We believe that our projected cash flow from operations together with our
current cash reserves and working capital will be sufficient to fund our
Page 25
Vasomedical, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
business plan and projected capital requirements through at least May 31, 2006;
however, we have incurred significant losses during the last two fiscal years
and our long-term ability to maintain current operations is dependent upon
achieving profitable operations or through additional debt or equity financing.
In the event that additional capital is required, we may seek to raise such
capital through public or private equity or debt financings. Future capital
funding, if available, may result in dilution to current shareholders.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of August 31, 2005.
Due as of Due as of
Due as of 8/31/07 and 8/31/09 and Due
Total 8/31/06 8/31/08 8/31/10 Thereafter
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt $1,060,630 $151,327 $141,130 $128,982 $639,191
Notes Payable 212,974 212,974
Operating Leases 53,299 49,739 3,560 -- --
Litigation Settlement 167,250 133,000 34,250 -- --
Employment Agreements (a) 3,125 3,125 -- -- --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash $1,497,278 $ 550,165 $178,940 $128,982 $639,191
Obligations
====================================================================================================================
(a) We intend to incur a contractual cash requirement in the future with our President and Chief Executive Officer.
Effects of Inflation
We believe that inflation and changing prices over the past three years
have not had a significant impact on our revenue or on our results of
operations.
Page 26
Vasomedical, Inc. and Subsidiaries
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, including changes in
interest rates. All of our revenue, expenses and capital spending are transacted
in US dollars. Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalent balances. The majority of our
investments are in short-term instruments and subject to fluctuations in US
interest rates. Due to the nature of our short-term investments, we believe that
there is no material risk exposure.
ITEM 4 - CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of August 31, 2005, our disclosure controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures satisfy their objectives and that the information required to be
disclosed by us in the reports we file under the Exchange Act is recorded,
processed, summarized and reported within the required time periods. There were
no changes during the fiscal quarter ended August 31, 2005 in our internal
controls or in other factors that could have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Page 27
Vasomedical, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
None.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:
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
31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
None
Page 28
Vasomedical, Inc. and Subsidiaries
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/ Thomas Glover
-----------------
Thomas Glover
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Thomas W. Fry
-----------------
Thomas W. Fry
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: October 13, 2005
Page 29