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, 2006
[ ] 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities 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 large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
--- --
Number of Shares Outstanding of Common Stock, $.001 Par Value, at
October 16, 2006 - 65,198,592
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, 2006 and May 31, 2006 3
Consolidated Condensed Statements of Operations for the
Three Months Ended August 31, 2006 and 2005 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2006 to August 31, 2006 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 2006 and 2005 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 - Controls and Procedures 26
PART II - OTHER INFORMATION 27
Page 2
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, May 31,
2006 2006
----------------- -----------------
ASSETS (Unaudited) (Derived from
audited
financial
statements)
CURRENT ASSETS
Cash and cash equivalents $1,790,851 $2,385,778
Accounts receivable, net of an allowance for doubtful accounts of
$373,071 at August 31, 2006, and $410,691 at May 31, 2006 1,000,870 843,282
Inventories, net 2,394,623 2,699,673
Other current assets 276,683 108,049
----------------- -----------------
Total current assets 5,463,027 6,036,782
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,683,979 at
August 31, 2006, and $2,613,180 at May 31, 2006 1,483,752 1,569,588
OTHER ASSETS 297,440 305,670
----------------- -----------------
$7,244,219 $7,912,040
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $846,822 $938,095
Current maturities of long-term debt and notes payable 223,170 97,309
Sales tax payable 137,651 172,646
Deferred revenue 1,492,179 1,600,887
Accrued director and executive compensation 321,500 175,000
Accrued warranty and customer support expenses 29,250 30,500
Accrued professional fees 42,439 61,875
Accrued commissions 114,907 93,182
----------------- -----------------
Total current liabilities 3,207,918 3,169,494
LONG-TERM DEBT 835,000 853,189
ACCRUED WARRANTY COSTS 750 1,500
DEFERRED REVENUE 573,852 721,701
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 110,000,000 shares authorized;
65,198,592 shares at August 31, 2006, and May 31, 2006, issued
and outstanding 65,198 65,198
Additional paid-in capital 46,148,493 46,148,493
Accumulated deficit (43,586,992) (43,047,535)
----------------- -----------------
Total stockholders' equity 2,626,699 3,166,156
----------------- -----------------
$7,244,219 $7,912,040
================= =================
The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
August 31,
--------------------------------------
2006 2005
----------------- -----------------
Revenues
Equipment sales $1,073,216 $2,456,909
Equipment rentals and services 1,008,640 1,079,462
----------------- -----------------
Total revenues 2,081,856 3,536,371
Cost of Sales and Services
Cost of sales, equipment 609,342 1,032,257
Cost of equipment rentals and services 355,268 390,927
----------------- -----------------
Total cost of sales and services 964,610 1,423,184
----------------- -----------------
Gross profit 1,117,246 2,113,187
Operating Expenses
Selling, general and administrative 1,323,826 2,409,149
Research and development 328,495 512,006
Provision for doubtful accounts 1,681 70,575
----------------- -----------------
Total operating expenses 1,654,002 2,991,730
----------------- -----------------
LOSS FROM OPERATIONS (536,756) (878,543)
Other Income (Expense)
Interest and financing costs (18,889) (23,509)
Interest and other income, net 20,738 19,016
----------------- -----------------
Total other income (expense) 1,849 (4,493)
----------------- -----------------
LOSS BEFORE INCOME TAXES (534,907) (883,036)
Income tax expense, net (4,550) (9,826)
----------------- -----------------
NET LOSS (539,457) (892,862)
Preferred stock dividend -- (805,623)
----------------- -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(539,457) $(1,698,485)
================= =================
Net loss per common share
- basic $(.01) $(0.03)
================= =================
- diluted $(.01) $(0.03)
================= =================
Weighted average common shares outstanding
- basic 65,198,592 58,646,166
================= =================
- diluted 65,198,592 58,646,166
================= =================
The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ------------ ---------------- ------------------ ----------------
Balance at June 1, 2006 65,198,592 $65,198 $46,148,493 $(43,047,535) $3,166,156
Net loss (539,457) (539,457)
--------------- ------------ ---------------- ------------------ ----------------
Balance at August 31, 2006 65,198,592 $65,198 $46,148,493 $(43,586,992) $2,626,699
=============== ============ ================ ================== ================
The accompanying notes are an integral part of this consolidated condensed financial statement.
Page 5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months
ended August 31,
-------------------------------------
2006 2005
---------------- ----------------
Cash flows from operating activities
Net loss $(539,457) $(892,862)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 94,313 108,301
Provision for doubtful accounts 1,681 70,575
Reserve for excess and obsolete inventory -- 15,119
Changes in operating assets and liabilities
Accounts receivable (159,269) (657,676)
Inventories 308,059 292,258
Other current assets 23,486 36,949
Other assets (3,256) (4,838)
Accounts payable, accrued expenses and other current
liabilities
Other liabilities (148,599) 37,668
---------------- ----------------
28,978 (473,956)
---------------- ----------------
Net cash used in operating activities (510,479) (1,366,818)
---------------- ----------------
Cash flows provided by investing activities
Redemptions of certificates of deposit -- 763,286
---------------- ----------------
Net cash provided by investing activities -- 763,286
---------------- ----------------
Cash flows provided by (used in) financing activities
Payments on long term debt and notes payable (84,448) (124,257)
Payments of preferred stock dividends -- (4,946)
Payments of preferred stock issue costs -- (291,343)
Proceeds from sale of convertible preferred stock -- 2,500,000
---------------- ----------------
Net cash provided by (used in) financing activities (84,448) 2,079,454
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (594,927) 1,475,922
Cash and cash equivalents - beginning of period 2,385,778 989,524
---------------- ----------------
Cash and cash equivalents - end of period $1,790,851 $2,465,446
================ ================
Non-cash investing and financing activities were as follows:
Inventories transferred to (from) property and equipment, attributable to
operating leases, net $(3,009) $(22,498)
Issue of note for purchase of insurance policy $192,120 $302,052
Preferred stock dividends $-- $800,677
Preferred stock issue costs $-- $250,127
Supplemental Disclosures
Interest paid $18,889 $23,509
Income taxes paid $2,825 $16,805
The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 6
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
NOTE A - ORGANIZATION AND PLAN OF OPERATIONS
The Company was incorporated in Delaware in July 1987. During fiscal 1996,
the Company commenced the commercialization of its EECP external
counterpulsation system ("EECP"), a microprocessor-based medical device for the
noninvasive, outpatient treatment of patients with cardiovascular disease. EECP
is marketed worldwide to hospitals and physician private practices. To date, the
Company's revenues have been generated primarily from customers in the United
States.
The Company has incurred large declines in revenue and significant
operating losses during the last four fiscal years and its ability to continue
operating as a going concern is dependent upon achieving profitability or
through additional debt or equity financing. Achieving profitability is largely
dependent on sufficiently reducing operating costs and halting the current trend
of declining revenue. The Company's ability to halt the declines in revenue and
restore its revenue base is largely dependent upon increasing the demand in the
refractory angina market and operating in a more efficient manner. If the
Company is not able to restore its revenue base and sufficiently reduce
operating costs to generate an adequate cash inflow, or raise additional
capital, it will not be able to continue as a going concern.
In order to reduce the Company's cash usage and bring its cost structure
more into alignment with current revenue, the Company initiated a restructuring
in January 2006, to reduce personnel and spending on marketing and development
projects. Additional cost reductions are continuing. In addition, in April 2006,
the outside directors of the Company elected to defer payment of board of
director meeting fees and senior officers elected to defer approximately $0.4
million in annual salary compensation. However, revenue has continued to decline
and the Company has not achieved its goal of profitability.
Management believes that cash flow from operations together with current
cash reserves will be sufficient to fund minimum projected capital requirements
through at least May 2007, assuming the current revenue rate.
In the event that additional capital is required, the Company may seek to
raise such capital through public or private equity or debt financings or by
other means. The Company may not be able to obtain additional financing on
favorable terms or at all. If the Company is unable to raise additional funds
when needed, it may need to further scale back operations, research, marketing
or sales efforts or obtain funds through arrangements with collaborative
partners or others that may require the Company to license or relinquish rights
to technologies or products. Future capital funding, if available, may result in
dilution to current shareholders, and new investors could have rights superior
to existing stockholders.
The accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Reclassifications
Certain reclassifications have been made to the prior years' amounts to
conform with the current year's presentation.
NOTE B - STOCK-BASED COMPENSATION
In December 2004, the FASB issued Statement of Financial Standards No. 123
(revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of
SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values.
Page 7
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
Pro forma disclosure of the fair value of share-based payments is no longer
an alternative to financial statement recognition.
Prior to first quarter of fiscal 2007 the Company accounted 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 prior to fiscal 2007.
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,
--------------------------------------
2006 2005
----------------- -----------------
Net loss attributable to common stockholders, as reported $(539,457) $(1,698,485)
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards
-- (212,294)
----------------- -----------------
Pro forma net loss $(539,457) $(1,910,779)
================= =================
Loss per share:
Basic and diluted - as reported $(.01) $(0.03)
================= =================
Basic and diluted - pro forma $(.01) $(0.03)
================= =================
The pro forma impact of options on the net income for the three months
ended August 31, 2006 is not representative of the effects on net income for
future periods, as future periods will include the effects of additional stock
option grants which will be immediately expensed.
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(R).
Page 8
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
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%
In May 2006, the compensation committee of the board of directors
accelerated the vesting provision of all outstanding stock options and warrants
so that they were fully vested at May 31, 2006, and as a result the Company
expects that the adoption of SFAS No. 123(R) will not have an immediate material
effect on its financial statements. However as new stock options are issued and
with the adoption by the Company of SFAS No 123(R) the Company expects that this
will have a material effect on its quarterly and annual financial statements, in
the form of additional compensation expense. It is not possible to precisely
determine the expense impact of adoption since a portion of the ultimate expense
that is recorded will likely relate to awards that have not yet been granted.
The expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date. However, the pro forma disclosures related to SFAS No. 123 included in the
Company's historic financial statements are relevant data points for gauging the
potential level of expense that might be recorded in future periods.
During the three-month period ended August 31, 2006, the Company did not
issue any share based compensation.
During the three-month period ended August 31, 2006, options to purchase
133,567 shares of common stock at an exercise price of $0.88 - $3.88 were
cancelled.
NOTE C - 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, 2006
The following table sets forth the computation of basic and diluted
loss per common share:
Three months
ended August 31,
--------------------------------------
2006 2005
----------------- -----------------
Numerator:
Basic and diluted net loss $(539,457) $(892,862)
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 $(539,457) $(1,698,485)
================= =================
Denominator:
Basic - weighted average common shares 65,198,592 58,646,166
Stock options -- --
Warrants -- --
----------------- -----------------
Diluted - weighted average common shares 65,198,592 58,646,166
================= =================
Basic and diluted loss per common share $(.01) $(0.03)
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, 2006 and 2005, respectively, because the
effect of their inclusion would be antidilutive.
Three months ended
August 31,
--------------------------------------
2006 2005
----------------- -----------------
Options to purchase common stock 7,878,508 6,789,408
Warrants to purchase common stock 2,454,538 2,454,538
Convertible preferred stock -- 5,159,959
----------------- -----------------
10,333,046 14,403,905
================= =================
NOTE D - INVENTORIES, NET
Inventories, net consist of the following:
August 31, May 31,
2006 2006
----------------- -----------------
Raw materials $904,613 $863,952
Work in process 1,014,906 1,243,986
Finished goods 475,104 591,735
----------------- -----------------
$2,394,623 $2,699,673
================= =================
At August 31, 2006 and May 31, 2006, the Company has recorded reserves for
excess and obsolete inventory of $677,166.
Page 10
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
August 31, 2006 May 31, 2006
---------------- ---------------
Land $ 200,000 $ 200,000
Building and improvements 1,383,976 1,383,976
Office, laboratory and other equipment 1,436,362 1,444,850
EECP systems under operating leases or under loan
for clinical trials 867,522 874,071
Furniture and fixtures 162,068 162,068
Leasehold improvements 117,803 117,803
---------------- ---------------
4,167,731 4,182,768
---------------- ---------------
Less: accumulated depreciation and amortization (2,683,979) (2,613,180)
---------------- ---------------
$1,483,752 $1,569,588
================ ===============
NOTE F - 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 $192,120. The
note, which bears interest at 8.15%, is payable in ten monthly installments
consisting of principal and interest, and expires in March 2007. The balance
outstanding at August 31, 2006, of $154,729 is presented on the consolidated
condensed balance sheet in current maturities of long-term debt and notes
payable.
NOTE G - LONG-TERM DEBT
The following table sets forth the computation of long-term debt:
August 31, 2006 May 31, 2006
----------------- ---------------
Facility loans (a) $897,417 $914,528
Term loans (b) 6,024 35,970
----------------- ---------------
903,441 950,498
Less: current portion (68,441) (97,309)
----------------- ---------------
$835,000 $853,189
================= ===============
(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.
Page 11
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
NOTE H - DEFERRED REVENUES
The changes in the Company's deferred revenues are as follows:
Three months ended
August 31,
--------------------------------------
2006 2005
----------------- -----------------
Deferred Revenue at the beginning of the period $2,322,588 $2,551,532
ADDITIONS
Deferred extended service contracts 390,534 510,855
Deferred in-service training 17,500 47,500
Deferred warranty obligations 52,500 152,500
RECOGNIZED AS REVENUE
Deferred extended service contracts (606,049) (580,000)
Deferred in-service training (20,000) (50,000)
Deferred warranty obligations (91,042) (155,624)
----------------- -----------------
Deferred revenue at end of period 2,066,031 2,476,763
Less: current portion (1,492,179) (1,517,893)
----------------- -----------------
Long-term deferred revenue at end of period $573,852 $958,870
================= =================
NOTE I - WARRANTY COSTS
The changes in the Company's product warranty liability are as follows:
Three months ended
August 31,
-----------------------------------
2006 2005
--------------- ---------------
Warranty liability at the beginning of the period $32,000 $118,333
Expense for new warranties issued 21,000 12,000
Warranty amortization (23,000) (35,333)
--------------- ---------------
Warranty liability at end of period 30,000 95,000
Less: current portion (29,250) (90,750)
--------------- ---------------
Long-term warranty liability at end of period $750 $4,250
=============== ===============
NOTE J - INCOME TAXES
During the three-months ended August 31, 2006 and 2005, we recorded a
provision for state income taxes of $4,550 and $9,826, respectively.
As of August 31, 2006, the recorded deferred tax assets were $19,741,653,
reflecting an increase of $182,195 during the first quarter of fiscal 2007,
which was offset by the valuation allowance of the same amount.
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. In
February 2006, we concluded that, based upon the weight of available evidence,
it was "more likely than not" that the net deferred tax asset would not be
realized and increased the valuation allowance to bring the net deferred tax
asset carrying value to zero.
Page 12
Vasomedical Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
August 31, 2006
NOTE K - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The approximate aggregate minimum compensation obligation under active
employment agreements at August 31, 2006 is summarized as follows:
Twelve month period ended August 31, Amount
------------------------------------------------------ ----------------
2007 $260,000
2008 210,000
----------------
Total $470,000
================
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.
NOTE L - SUBSEQUENT EVENT
Change in Senior Management
On September 20, 2006 Thomas W. Fry resigned as Chief Financial Officer of
the Company and his employment agreement was terminated. Mr. Fry continues to
act as a consultant to the company. Tricia Efstathiou was appointed Chief
Financial Officer of the Company on September 20, 2006. Prior thereto, Ms.
Efstathiou served as Controller of the Company since June 2000.
Page 13
Vasomedical, Inc. and Subsidiaries
ITEM 2. 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 , including the ability of the Company to
continue as a going concern. 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, develops,
manufactures and markets EECP(R) therapy systems to deliver its proprietary form
of enhanced external counterpulsation therapy. EECP(R) therapy is a noninvasive,
outpatient therapy used in the treatment of ischemic cardiovascular diseases,
currently used to manage chronic stable angina and heart failure. The therapy
increases blood flow and oxygen supply to the heart muscle and other organs and
decreases the heart's workload and need for oxygen, while also improving
function of the endothelium, the inner lining of blood vessels throughout the
body, lessening resistance to blood flow. 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. For more information visit www.vasomedical.com.
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 chronic stable angina and
congestive heart failure . Medicare and other third-party payers currently
reimburse for the treatment of angina or angina equivalent symptoms in patients
with moderate to severe symptoms who are refractory to medications and not
candidates for invasive procedures, including patients with serious
comorbidities, such as heart failure, diabetes and/or peripheral vascular
disease, etc. Patients with primary diagnoses of heart failure, diabetes,
peripheral vascular disease, etc. are also reimbursed under the same criteria,
provided the primary indication for treatment with EECP therapy is angina or
angina equivalent symptoms.
We recently sponsored a pivotal, randomized clinical trial to demonstrate
the efficacy of EECP therapy in the most prevalent types of heart failure
patients. This trial, known as PEECH (Prospective Evaluation of EECP in
Congestive Heart Failure), was intended to provide additional evidence of the
safety and efficacy of EECP therapy in the treatment of mild-to- moderate heart
failure and to support our application for expansion of the Medicare national
reimbursement coverage policy to include mild-to-moderate heart failure as a
primary indication. The PEECH trial was a positive clinical trial, having met
the statistical requirement of meeting at least one of its co-primary endpoints,
a significant difference in the proportion of patients satisfying a prespecified
threshold of improvement in exercise duration. The trial also demonstrated
significant improvements in favor of EECP therapy on several important secondary
endpoints, including exercise duration and improvement in symptom status and
quality of life. Measures of change in peak oxygen consumption were not
statistically significant in the overall study population, though a trend
favoring EECP therapy was present in early follow-up. Patients in the trial who
had an ischemic etiology, i.e. pre-existing coronary artery disease,
demonstrated a greater response to EECP therapy than those who had an idiopathic
(non-ischemic) etiology. Subsequent analyses of the subgroup of patients in the
trial age 65 and over has been performed and a manuscript reporting those
results has been accepted for publication.
Page 14
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The preliminary results of the PEECH trial were presented at the American
College of Cardiology scientific sessions in March 2005, and the initial
peer-reviewed report of the results of the trial were published in the Journal
of the American College of Cardiology initially on-line on August 25, 2006 and
subsequently in print on September 19, 2006. On June 20, 2005, the Centers for
Medicare and Medicaid Services (CMS) accepted our application for expansion of
reimbursement coverage of EECP therapy to include patients with New York Heart
Association (NYHA) Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%, i.e. chronic, stable, mild-to-moderate
systolic heart failure as a primary indication, as well as patients with
Canadian Cardiovascular Society Classification (CCSC) II, i.e. chronic, stable
mild angina.
On June 23, 2005, CMS also received a request from a competing manufacturer
of external counterpulsation therapy equipment, to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure, to include NYHA Class II, III with a left ventricular
ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2)
treatment of stable angina to include CCSC II angina; 3) treatment of acute
myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005,
they amended their request to include NYHA Class IV heart failure.
On March 20, 2006, the Centers for Medicare and Medicaid Services (CMS)
issued their Decision Memorandum regarding this reconsideration with the opinion
"that the evidence is not adequate to conclude that external counterpulsation
therapy is reasonable and necessary for the treatment of:
* Canadian Cardiovascular Society Classification (CCSC) II angina
* Heart Failure
- New York Heart Association Class II/III stable heart failure
symptoms with an ejection fraction of less than or equal to 35%
- New York Heart Association Class II/III stable heart failure
symptoms with an ejection fraction of less than or equal to 40%
- New York Heart Association Class IV heart failure
- Acute heart failure
* Cardiogenic shock
* Acute myocardial infarction."
They reiterated in the decision memorandum that "Current coverage as
described in Section 20.20 of the Medicare National Coverage Determination (NCD)
manual will remain in effect."
We will continue to educate the marketplace that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP therapy
with Medicare and other third-party payers as evidence of its clinical utility
develops.
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, 2006, 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:
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
Page 15
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 16
Vasomedical, Inc. and Subsidiaries
ITEM 2. 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, 2006.
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 $78,000 less in fixed
production overhead 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.
Page 17
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
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 of providing a parts only warranty
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.
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 on our
internal financial forecast and may be subject to revision based upon actual
results.
Stock-based Employee Compensation
In December 2004, the FASB issued Statement of Financial Standards No. 123
(revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of
SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees including grants of
employee stock options, to be recognized in the financial statements based on
Page 18
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
their fair values. Pro forma disclosure of the fair value of share-based
payments is no longer an alternative to financial statement recognition. The
Company has five stock-based employee compensation plans.
Prior to first quarter of fiscal 2007 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 prior to fiscal 2007.
The Company has five stock-based employee compensation plans.
In May 2006, the compensation committee of the board of directors
accelerated the vesting provision of all outstanding stock options and warrants
so that they were fully vested at May 31, 2006, and as a result the Company
expects that the adoption of SFAS No. 123(R) will not have an immediate material
effect on its financial statements, however as new stock options are issued the
Company has adopted SFAS No 123(R) and this will have a material effect on its
quarterly and annual financial statements, in the form of additional
compensation expense. It is not possible to precisely determine the expense
impact of adoption since a portion of the ultimate expense that is recorded will
likely relate to awards that have not yet been granted. The expense associated
with these future awards can only be determined based on factors such as the
price for the Company's common stock, volatility of the Company's stock price
and risk free interest rates as measured at the grant date. However, the pro
forma disclosures related to SFAS No. 123 included in the Company's historic
financial statements are relevant data points for gauging the potential level of
expense that might be recorded in future periods.
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
(R).
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 152, "Accounting for Real
Estate Time-Sharing Transactions", an amendment of FASB Statements No. 66 and 67
(SFAS 152) was issued in December 2004 and becomes effective for financial
statements for fiscal years beginning after June 15, 2005. The Company does not
expect that SFAS 152 will have an effect on future financial statements.
In December 2004, the 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
Page 19
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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.
Statement of Financial Accounting Standards No. 155, Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,
was issued in February 2006 and is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. Certain parts of this Statement may be applied
prior to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis. The Company does not expect that SFAS 155 will have any significant
effect on future financial statements.
Statement of Financial Accounting Standards No. 156, Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140, pertains
to the servicing of financial assets and was issued in March 2006 and should be
adopted as of the beginning of its first fiscal year that begins after September
15, 2006. Earlier adoption is permitted as of the beginning of an entity's
fiscal year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal year. The
Company does not expect that SFAS 156 will have any significant effect on future
financial statements.
In March 2005, FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations - an interpretation of FASB Statement No. 143 (FIN 47).
FIN 47 is effective no later than the end of fiscal years ending after December
15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective
application for interim financial information is permitted but is not required.
Early adoption of this Interpretation is encouraged. The Company does not expect
that FIN 47 will have any significant effect on future financial statements.
In December 2004, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position 04-2, Accounting for Real Estate Time-Sharing Transactions (SOP 04-2).
SOP 04-2 is effective for financial statements issued for fiscal years beginning
after June 15, 2005, with earlier application encouraged. The Company does not
expect that SOP 04-2 will have any effect on future financial statements.
In September 2005, AcSEC issued Statement of Position 05-1: Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 is
effective for fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. The Company does not expect that SOP 05-1 will have any
effect on future financial statements.
FASB Staff Position (FSP) FAS 13-1 - Accounting for Rental Costs Incurred
during a Construction Period, was issued on October 6, 2005, and becomes
effective for the for new transactions or arrangements entered into after the
beginning of the first fiscal quarter following the date that the final FSP is
posted by the FASB. The Company does not expect that FSP 13-1 will have any
significant effect on future financial statements.
Page 20
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On June 29, 2005, the FASB ratified the consensus reached for Emerging
Issues Task Force (EITF) Issue No. 05-5, Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms Specified in
Altersteilzeit Early Retirement Arrangements). The consensus in this Issue
should be applied to fiscal years beginning after December 15, 2005, and
reported as a change in accounting estimate effected by a change in accounting
principle as described in paragraph 19 of FASB Statement 154. The Company does
not expect that EITF 05-5 will have any significant effect on future financial
statements.
On September 28, 2005, the FASB ratified the consensus reached for EITF
Issue No. 05-7, Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues. The provisions of this Issue should be
applied to future modifications of debt instruments beginning in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects that the application of EITF 05-7 could have an effect on
interest and debt valuations in future financial statements. It is not possible
to determine the impact, if any, from the application since the Company does not
presently have any convertible debt.
On July 13, 2006, the FASB issued Interpretation No. 48 for Uncertainty in
Income Taxes and interpretation of FASB Statement 109. Interpretation 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with Statement No. 109 and
prescribes a recognition threshold and measurement attribute for financial
statements disclosure of tax position taken or expected to be taken on a tax
return. Additionally, Interpretation No. 48 provides guidance on depreciation,
classification, interest and penalties accounting in interim periods, disclosure
and transition. Interpretation No. 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption permitted. The Company is currently
evaluating whether the adoption of Interpretation No. 48 will have a material
effect on our consolidated financial position, results of operations and cash
flows.
In July 2006, the FASB issued Staff Position ("FSB") on FAS 13, FSP FAS
13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease transaction. FSP FAS
13-2 addresses how a change or projected change in the timing of cash flows
relating to income taxes generated by a leveraged lease transaction affects the
accounting by a lessor for that lease and amends FAS 13 Accounting for Leases.
FSP FAS 13-2 is effective for fiscal years beginning December 15, 2006, with
earlier application permitted. The Company does not expect that FSP FAS 13-2
will have any significant effect on future financial statements.
Statement of Financial Accounting Standards No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The Company does not expect that this pronouncement will have any significant
effect on future financial statements.
FASB Staff Position (FSP) No. FIN 46(R)-6, Determining the Variability to
Be Considered in Applying FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities. Posted on April 13, 2006. An
enterprise shall apply the guidance in this FSP prospectively to all entities
(including newly created entities) with which that enterprise first becomes
involved and to all entities previously required to be analyzed under
Interpretation 46(R) when a reconsideration event has occurred pursuant to
paragraph 7 of Interpretation 46(R) beginning the first day of the first
reporting period beginning after June 15, 2006. Early application is permitted
for periods for which financial statements have not yet been issued.
Retrospective application to the date of the initial application of
Interpretation 46(R) is permitted but not required. Retrospective application,
Page 21
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
if elected, must be completed no later than the end of the first annual
reporting period ending after July 15, 2006. The Company does not expect that
this pronouncement will have any significant effect on future financial
statements.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations - an interpretation of FASB Statement No. 143 (FIN 47) was issued in
March 2005. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005 (December 31, 2005, for calendar-year enterprises).
Retrospective application for interim financial information is permitted but is
not required. Early adoption of this Interpretation is encouraged. The Company
does not expect that FIN 47 will have any significant effect on future financial
statements. FASB Staff Position (FSP) No. FTB 85-4-1, Accounting for Life
Settlement Contracts by Third-Party Investors, was posted in March 27, 2006 and
is effective for fiscal years beginning after June 15, 2006. It provides initial
and subsequent measurement guidance and financial statement presentation and
disclosure guidance for investments by third-party investors in life settlement
contracts. This FSP also amends certain provisions of FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance, and FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The Company
does not expect that (FSP) No. FTB 85-4-1 will have any effect on future
financial statements.
Results of Operations
Three Months Ended August 31, 2006 and 2005
Net revenue from sales, leases and service of our EECP systems for the
three-month periods ended August 31, 2006 and 2005, was $2,081,856 and
$3,536,371, respectively, which represented a decline of $1,454,515 or 41%. We
reported a net loss of $539,457 compared to $892,862 for the three-month periods
ended August 31, 2006 and 2005, respectively. Our net loss per common share was
$.01 for the three-month period ended August 31, 2006 compared to a net loss of
$0.03 per share for the three-month period August 31, 2005.
Revenues
Revenue from equipment sales declined approximately 56% to $1,073,216 for
the three-month period ended August 31, 2006 as compared to $2,456,909 for the
same period for the prior year. The decline in equipment sales is due primarily
to a 46% decline in the number of equipment shipments and a 16% decrease in
average sales prices. A higher mix of used equipment verses both newer model
equipment and new equipment was the primary cause of the decrease 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 there is greater clinical acceptance for the use of EECP therapy in
treating patients with angina or angina equivalent symptoms who meet the current
reimbursement guidelines or an expansion of the current CMS national
reimbursement policy to include some or all Class II & III heart failure
patients. Patients with angina or angina equivalent symptoms eligible for
reimbursement under current policies include many with serious comorbidities,
such as heart failure, diabetes, peripheral vascular disease and/or others.
Despite this, many cardiology clinicians appear to be waiting for approval of
reimbursement coverage for heart failure as a primary indication before they
will move forward with the treatment of ischemic heart failure patients with
angina equivalent symptoms. Reluctance to bill for ischemic heart failure
patients under the current coverage guidelines, failure to get or maintain
adequate reimbursement coverage for angina and heart failure would adversely
affect our business prospects. 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 2007
compared to the first quarter of fiscal 2006, which reduced the average selling
price in that period. The average price of new systems sales declined
approximately 3% in the first quarter of fiscal 2007 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
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
territories. Our revenue from the sale of EECP systems to international
distributors in the first quarter of fiscal 2007 increased approximately 34% to
$418,350 compared $313,334 in same period of the prior year reflecting increased
volume.
The above decline in revenue was also partially due to a 7% decrease in
revenue from equipment rental and services for the three-month period ended
August 31, 2006, from the same three-month period in the prior year. Revenue
from equipment rental and services represented 48 % of total revenue in the
first quarter of fiscal 2007 compared to 31% in the first quarter of fiscal
2006. The decrease in the absolute amounts and the increase in the percentage of
total revenue resulted primarily from a less than a 1% change in service related
revenue, offset by a 71% decline in rental revenue. The decline was due to a
decrease in the rental install base from the prior period ended August 31, 2005.
Gross Profit
The gross profit declined to $1,117,246 or 54% of revenues for the
three-month period ended August 31, 2006, compared to $2,113,187 or 60% of
revenues for the three-month period ended August 31, 2005. Gross profit margin
as a percentage of revenue for the three-month period ended August 31, 2006,
decreased compared to the same year of the prior fiscal 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
2007. 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, 2006 and 2005, were $1,323,826 or 64% of revenues and
$2,409,149 or 68% of revenues, respectively reflecting a decrease of $1,085,323
or approximately 45%. The decrease in SG&A expenditures in the first quarter of
fiscal 2007 compared to fiscal 2006 resulted primarily from decreased sales and
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 $328,495 or 16% of revenues
for the three months ended August 31, 2006, decreased by $183,511 or 36%, from
the prior three months ended August 31 2005, of $512,006 or 14% of revenues. The
decrease is primarily attributable to lower new product development spending and
reduced spending on clinical trials.
Provision for Doubtful Accounts
During the three-month period ended August 31, 2006, the Company charged
$1,681 to its provision for doubtful accounts as compared to $70,575 during the
three-month period ended August 31, 2005. The decrease in the provision is a
direct result of the first quarter of fiscal 2007 decrease in accounts
receivable and sales from the corresponding quarter ended August 31, 2005.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $18,889 in the
three-month period ended August 31, 2006, from $23,509 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.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interest and Other Income, Net
Interest and other income for the first quarter of 2007 and 2006, were
$20,738 and $19,016, respectively.
Income Tax Expense, Net
During the three-months ended August 31, 2006 and 2005, we recorded a
provision for state income taxes of $4,550 and $9,826, respectively.
As of August 31, 2006, the recorded deferred tax assets were $19,741,653,
reflecting an increase of $182,195 during fiscal 2007, which was offset by the
valuation allowance of the same amount.
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. In
February 2006, we concluded that, based upon the weight of available evidence,
it was "more likely than not" that the net deferred tax asset would not be
realized and increased the valuation allowance to bring the net deferred tax
asset carrying value to zero.
Liquidity and Capital Resources
We have financed our operations in fiscal 2007 and fiscal 2006 from working
capital and in fiscal 2006 from the issuance of preferred stock. At August 31,
2006, we had cash, cash equivalents, and certificates of deposit balance of
$1,790,851 and working capital of $2,255,109 as compared to cash, cash
equivalents, and certificates of deposit balance of $2,385,778 and working
capital of $2,867,288 at May 31, 2006. Our cash, cash equivalents, and
certificates of deposit balances decreased $594,927 in fiscal year 2007
primarily due to cash used in operating activities of $510,479 and $84,448 in
cash used in financing activities.
The decrease in cash used in operating activities during the first quarter
of fiscal year 2007 resulted primarily from the net loss of $539,457 plus
adjustments to reconcile net loss to net cash provided by operating activities
of $28,979. Changes in our operating assets and liabilities were $65,335. The
changes in the asset components primarily reflect an increase in accounts
receivable of $159,269 offset by lower inventory of $308,059 and other current
assets of $23,486. The changes in our operating liability components reflect a
decrease in accounts payable and accrued liabilities of $87,437 and a decrease
in other liabilities of $148,599. Non-cash adjustments for depreciation,
amortization, allowance for doubtful accounts and allowance for inventory
write-offs of $95,994 partially offset the above. Net accounts receivable were
48% of quarterly revenues for the three-month period ended August 31, 2006,
compared to 70% at the end of the three-month period ended August 31, 2005, and
accounts receivable turnover increased to 7.0 times as of August 31, 2006, as
compared to 4.0 times as of August 31, 2005.
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 2007 and 2006, less than 1% 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.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
There were no investing activities during the three-month period ended
August 31, 2006.
Our financing activities used cash of $84,448 during the three-month period
ended August 31, 2006, reflecting payments on our outstanding notes and loans.
We believe that our projected cash flow from operations together with our
current cash reserves and working capital will be sufficient to fund our
business plan and projected capital requirements through at least May 2007,
assuming current revenue rate, however, we have incurred significant losses
during the last four 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, 2006.
Due as of Due as of
Due as of 8/31/08 and 8/31/10 and Due
Total 8/31/07 8/31/09 8/31/11 Thereafter
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt $903,441 $68,441 $138,595 $155,705 $540,700
Notes Payable 154,729 154,729 -- -- --
Operating Leases 3,560 3,560 -- -- --
Employment Agreements 470,000 260,000 210,000 -- --
-----------------------------------------------------------------------------------
Total Contractual Cash $1,531,730 $ 486,730 $348,595 $155,705 $540,700
Obligations
===================================================================================
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.
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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, 2006, 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, 2006 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.
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Vasomedical, Inc.
PART II - OTHER INFORMATION
ITEM 1 -LEGAL PROCEEDINGS:
None
ITEM 2 UNREGISTERED SALES OF EQUITY 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
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.
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Vasomedical, Inc. and Subsidiaries
In accordance with 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/ Tricia Efstathiou
----------------------------------
Tricia Efstathiou
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: October 16, 2006