UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended November 30, 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2871434
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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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 January 16, 2007 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
November 30, 2006 and May 31, 2006 3
Consolidated Condensed Statements of Operations for the
Six and Three Months Ended November 30, 2006 and 2005 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2006 to November 30, 2006 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended November 30, 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 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION 29
Page 2
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, May 31,
2006 2006
---------------- ----------------
ASSETS (Unaudited) (Derived from
audited
financial
statements)
CURRENT ASSETS
Cash and cash equivalents $1,441,816 $2,385,778
Accounts receivable, net of an allowance for doubtful accounts of $364,809
at November 30, 2006, and $410,691 at May 31, 2006 806,771 843,282
Inventories, net 2,332,502 2,699,673
Other current assets 266,377 108,049
---------------- ----------------
Total current assets 4,847,466 6,036,782
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,708,201 at
November 30, 2006, and $2,613,180 at May 31, 2006 1,407,151 1,569,588
OTHER ASSETS 291,967 305,670
---------------- ----------------
$6,546,584 $7,912,040
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $766,838 $938,095
Current maturities of long-term debt and notes payable 161,200 97,309
Sales tax payable 142,378 172,646
Deferred revenue 1,500,038 1,600,887
Accrued director and executive compensation 85,250 175,000
Accrued warranty and customer support expenses 26,500 30,500
Accrued professional fees 70,571 61,875
Accrued commissions 162,391 93,182
---------------- ----------------
Total current liabilities 2,915,166 3,169,494
LONG-TERM DEBT 818,704 853,189
ACCRUED WARRANTY COSTS - 1,500
DEFERRED REVENUE 551,160 721,701
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 110,000,000 shares authorized; 65,198,592
shares at November 30, 2006, and May 31, 2006, issued and outstanding 65,198 65,198
Additional paid-in capital 46,152,283 46,148,493
Accumulated deficit (43,955,927) (43,047,535)
---------------- ----------------
Total stockholders' equity 2,261,554 3,166,156
---------------- ----------------
$6,546,584 $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)
Six Months Ended Three Months Ended
November 30, November 30,
----------------------------------- -----------------------------------
2006 2005 2006 2005
--------------- ---------------- --------------- ----------------
Revenues
Equipment sales $1,648,148 $4,191,318 $574,932 $1,734,409
Equipment rentals and services 1,956,931 2,025,237 948,291 945,775
--------------- ---------------- --------------- ----------------
Total revenues 3,605,079 6,216,555 1,523,223 2,680,184
Cost of Sales and Services
Cost of sales, equipment 908,829 1,857,405 299,487 825,148
Cost of equipment rentals and services 772,389 663,608 417,121 272,681
--------------- ---------------- --------------- ----------------
Total cost of sales and services 1,681,218 2,521,013 716,608 1,097,829
--------------- ---------------- --------------- ----------------
Gross Profit 1,923,861 3,695,542 806,615 1,582,355
Operating Expenses
Selling, general and administrative 2,357,164 4,917,773 1,033,338 2,508,624
Research and development 469,285 1,115,702 140,790 603,696
Provision for doubtful accounts (4,001) 70,575 (5,682) --
--------------- ---------------- --------------- ----------------
Total operating expenses 2,822,448 6,104,050 1,168,446 3,112,320
--------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS (898,587) (2,408,508) (361,831) (1,529,965)
Other Income (Expense)
Interest and financing costs (37,329) (44,953) (18,440) (21,444)
Interest and other income, net 35,824 40,790 15,086 21,774
--------------- ---------------- --------------- ----------------
Total other income (expense) (1,505) (4,163) (3,354) 330
--------------- ---------------- --------------- ----------------
LOSS BEFORE INCOME TAXES (900,092) (2,412,671) (365,185) (1,529,635)
Income tax expense, net (8,300) (7,112,826) (3,750) (7,103,000)
--------------- ---------------- --------------- ----------------
NET LOSS (908,392) (9,525,497) (368,935) (8,632,635)
Preferred Stock Dividend -- (854,536) -- (48,913)
--------------- ---------------- --------------- ----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(908,392) $(10,380,033) $(368,935) $(8,681,548)
=============== ================ =============== ================
Net loss per common share
- basic $(0.01) $(0.18) $(0.00) $(0.15)
=============== ================ =============== ================
- diluted $(0.01) $(0.18) $(0.00) $(0.15)
=============== ================ =============== ================
Weighted average common shares
outstanding
- basic 65,198,592 59,031,491 65,198,592 59,421,050
=============== ================ =============== ================
- diluted 65,198,592 59,031,491 65,198,592 59,421,050
=============== ================ =============== ================
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
Stock options granted for services -- -- 3,790 -- 3,790
Net loss -- -- -- (908,392) (908,392)
--------------- ------------ ---------------- ------------------ ---------------
Balance at November 30, 2006 65,198,592 $65,198 $46,152,283 $(43,955,927) $2,261,554
=============== ============ ================ ================== ===============
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)
Six months ended
November 30,
-----------------------------------------------
2006 2005
---------------------- ------------------
Cash flows from operating activities
Net loss $(908,392) $(9,525,497)
---------------------- ------------------
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 194,021 307,379
Provision for doubtful accounts (4,001) 70,575
Reserve for excess and obsolete inventory -- (82,765)
Deferred income taxes -- 7,093,000
Common stock issued for services -- 101,250
Stock options granted for services 3,790 --
Changes in operating assets and liabilities
Accounts receivable 40,512 (246,611)
Inventories 358,654 549,675
Other current assets 33,792 155,274
Other assets (9,364) (16,583)
Accounts payable, accrued expenses and other current
liabilities (318,219) 25,843
Other liabilities (172,041) (114,253)
---------------------- ------------------
127,144 7,842,784
---------------------- ------------------
Net cash used in operating activities (781,248) (1,682,713)
---------------------- ------------------
Cash flows provided by investing activities
Redemptions of certificates of deposit -- 1,464,757
---------------------- ------------------
Net cash provided by investing activities -- 1,464,757
---------------------- ------------------
Cash flows provided by (used in) financing activities
Payments on long term debt and notes payable (162,714) (250,579)
Payments of preferred stock dividends -- (51,206)
Payments of preferred stock issue costs -- (314,383)
Proceeds from sale of convertible preferred stock -- 2,500,000
---------------------- ------------------
Net cash provided by (used in) financing activities (162,714) 1,883,832
---------------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (943,962) 1,665,876
Cash and cash equivalents - beginning of period 2,385,778 989,524
---------------------- ------------------
Cash and cash equivalents - end of period $1,441,816 $2,655,400
====================== ==================
Non-cash investing and financing activities were as follows:
Inventories transferred to (from) property and equipment, attributable to
operating leases, net $8,517 $(55,938)
Issue of note for purchase of insurance policy $192,120 $302,052
Preferred stock dividends $-- $803,330
Preferred stock issue costs $-- $227,087
Supplemental Disclosures
Interest paid $37,329 $44,953
Income taxes paid $6,534 $22,086
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)
November 30, 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(R) external
counterpulsation system ("EECP(R)"), a microprocessor-based medical device for
the noninvasive, outpatient treatment of patients with cardiovascular disease.
EECP(R) 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. 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.
The Company may seek to raise capital through public or private equity or
debt financings or by other means. 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. Pro forma disclosure of the fair value of share-based
payments is no longer an alternative to financial statement recognition.
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2006
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 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 proforma 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, for the six and three
months ended November 30, 2005.
-------------------- ---------------------
Six Months Ended Three Months Ended
November 30, 2005 November 30, 2005
-------------------- ---------------------
Net loss attributable to common
stockholders, as reported $(10,380,033) $(8,681,548)
Deduct: Total stock-based
employee compensation expense
determined under fair
value-based method for all
awards (433,742) (221,448)
-------------------- ---------------------
Pro forma net loss $(10,813,775) $(8,902,996)
==================== =====================
Loss per share:
Basic and diluted - as reported $(0.18) $(0.15)
==================== =====================
Basic and diluted - pro forma $(0.18) $(0.15)
==================== =====================
During the six-month period ended November 30, 2006, the Board of Directors
granted non-qualified stock options under the 1997 Stock Option/Stock Issuance
Plan to one director to purchase an aggregate of 150,000 shares of common stock,
at an exercise price of $.09 per share, and granted non-qualified stock options
under the 1999 Stock Option/Stock Issuance Plan to three directors to purchase
an aggregate of 450,000 shares of common stock, at an exercise price of $.09 per
share, and granted non-qualified stock options under the 2004 Stock Option/Stock
Issuance Plan to one officer to purchase an aggregate of 200,000 shares of
common stock, at an exercise price of $.11 per share, which represented the fair
market value of the underlying common stock at the time of the respective
grants. These options vest over a two year period, and expire ten years from the
date of grant.
Stock-based compensation expense recognized under SFAS 123 (R) for the six
months ended November 30, 2006 was $3,790 which comprised the fair value of the
stock options discussed above.
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 changesin 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.
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 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 six
months ended November 30, 2006:
Expected life (years) 5
Expected volatility 114.09%
Risk-free interest rate 4.76%
Expected dividend yield 0.00%
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).
During the six-month period ended November 30, 2006, options to purchase
1,219,026 shares of common stock at an exercise price of $.22 - $3.875 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.
The following table sets forth the computation of basic and diluted loss per
common share:
Six Months Ended Three Months Ended
November 30, November 30,
---------------------------------- -------------------------------
2006 2005 2006 2005
--------------- --------------- -------------- -------------
Numerator:
Net loss $(908,392) $(9,525,497) $(368,935) $(8,632,635)
Deemed dividend related to beneficial
conversion feature on Series D preferred
stock -- (786,247) -- --
Series D preferred stock dividends -- (68,289) -- (48,913)
--------------- --------------- -------------- -------------
Net loss attributable to common
stockholders - basic and diluted $(908,392) $(10,380,033) $(368,935) $(8,681,548)
=============== =============== ============== =============
Denominator:
Basic - weighted average common shares 65,198,592 59,031,491 65,198,592 59,421,050
Stock options -- -- -- --
Warrants -- -- -- --
Convertible preferred stock -- -- -- --
--------------- --------------- -------------- -------------
Diluted - weighted average common shares
65,198,592 59,031,491 65,198,592 59,421,050
=============== =============== ============== =============
Basic and diluted loss per common share $(0.01) $(0.18) $(0.00) $(0.15)
=============== =============== ============== =============
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2006
Options, warrants, and convertible preferred stock, in accordance with the
following table, were excluded from the computation of diluted loss per share
for the six and three months ended November 30, 2006 and 2005, respectively,
because the effect of their inclusion would be antidilutive.
Six and three months ended
November 30,
--------------------------------------
2006 2005
---------------- -----------------
Options to purchase common stock 7,593,049 7,372,179
Warrants to purchase common stock 2,254,538 2,454,538
Convertible preferred stock -- 5,125,000
---------------- -----------------
9,847,587 14,951,717
================ =================
NOTE D - INVENTORIES, NET
Inventories, net consist of the following:
November 30, May 31,
2006 2006
----------------- -----------------
Raw materials $720,063 $863,952
Work in process 1,017,413 1,243,986
Finished goods 595,026 591,735
----------------- -----------------
$2,332,502 $2,699,673
================= =================
At November 30, 2006 and May 31, 2006, the Company has recorded reserves
for excess and obsolete inventory of $677,166.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
November 30, May 31,
2006 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(R) systems under operating leases or under loan
for clinical trials 815,143 874,071
Furniture and fixtures 162,068 162,068
Leasehold improvements 117,803 117,803
---------------- ---------------
4,115,352 4,182,768
Less: accumulated depreciation and amortization (2,708,201) (2,613,180)
---------------- ---------------
$1,407,151 $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 April 2007. The balance
outstanding at November 30, 2006, of $97,685 is presented on the consolidated
condensed balance sheet in current maturities of long-term debt and notes
payable.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2006
NOTE G - LONG-TERM DEBT
The following table sets forth the computation of long-term debt:
November 30, May 31,
2006 2006
----------------- ---------------
Facility loans (a) $ 882,219 $ 914,528
Term loans (b) - 35,970
----------------- ---------------
882,219 950,498
Less: current portion (63,515) (97,309)
----------------- ---------------
$ 818,704 $ 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%, were payable in monthly installments consisting
of principal and interest payments over four-year terms, and expired at various
times between August and October 2006. As of November 30, 2006 the loans have
been paid in full.
NOTE H - DEFERRED REVENUES
The changes in the Company's deferred revenues are as follows:
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Deferred Revenue at the beginning of the period $2,322,588 $2,551,532 $2,066,031 $2,476,763
ADDITIONS
Deferred extended service contracts 1,049,461 1,177,310 658,927 666,455
Deferred in-service and training 25,000 85,000 7,500 37,500
Deferred service arrangements 75,000 265,000 22,500 112,500
RECOGNIZED AS REVENUE
Deferred extended service contracts (1,241,476) (1,143,855) (635,427) (563,855)
Deferred in-service and training (25,000) (85,000) (5,000) (35,000)
Deferred service arrangements (154,375) (288,957) (63,333) (133,333)
------------- ------------- ------------- -------------
Deferred revenue at end of period 2,051,198 2,561,030 2,051,198 2,561,030
Less: current portion (1,500,038) (1,718,581) (1,500,038) (1,718,581)
------------- ------------- ------------- -------------
Long-term deferred revenue at end of period $551,160 $842,449 $551,160 $842,449
============= ============= ============= =============
Page 11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2006
NOTE I - WARRANTY COSTS
The changes in the Company's product warranty liability are as follows:
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------- ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Warranty liability at the beginning of the $32,000 $118,333 $30,000 $95,000
period
Expense for new warranties issued 30,000 15,000 9,000 3,000
Warranty amortization (35,500) (68,333) (12,500) (33,000)
------------- ------------- ------------- -------------
Warranty liability at end of period 26,500 65,000 26,500 65,000
Less: current portion (26,500) (62,000) (26,500) (62,000)
------------- ------------- ------------- -------------
Long-term warranty liability at end of period $ -- $3,000 $ -- $3,000
============= ============= ============= =============
NOTE J - INCOME TAXES
During the six-months ended November 30, 2006 and 2005, we recorded a
provision for state income taxes of $8,300 and $20,000, respectively.
As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting an increase of $306,031 during the six months ended November 30,
2006, 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.
NOTE K - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The approximate aggregate minimum compensation obligation under active
employment agreements at November 30, 2006 is summarized as follows:
Twelve months ended November 30, Amount
------------------------------------------------------ ----------------
2007 $260,000
2008 210,167
----------------
Total $470,167
================
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 12
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(R) equipment, treatment guidance, and a staff
training and equipment maintenance program designed to provide optimal patient
outcomes. EECP(R) 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(R)
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, 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(R) therapy is angina or angina
equivalent symptoms.
We recently sponsored a pivotal, randomized clinical trial to demonstrate
the efficacy of EECP(R) therapy in the most prevalent types of heart failure
patients. This trial, known as PEECH (Prospective Evaluation of EECP(R) in
Congestive Heart Failure), was intended to provide additional evidence of the
safety and efficacy of EECP(R) 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. Results of the trial were initially published on line
by the Journal of the American College of Cardiology (JACC) on August 25, 2006,
and in print in its September 19, 2006 issue. JACC is the official journal of
the American College of Cardiology. 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(R) 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
Page 13
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
population, though a trend favoring EECP(R) 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(R) therapy than
those who had an idiopathic (non-ischemic) etiology.
Very recently, a second report of results from the PEECH trial was
published in the November-December 2006 issue of the journal Congestive Heart
Failure, focusing on the results of a prespecified subgroup analysis in trial
patients age 65 and over. This analysis demonstrated a statistically positive
response on both co-primary endpoints of the trial in patients receiving EECP(R)
therapy versus those who did not, i.e. a significantly larger proportion of
patients undergoing EECP(R) therapy met or exceeded prespecified thresholds of
improvement in exercise duration and peak oxygen consumption. Moreover, the
patients age 65 and older who received EECP(R) therapy demonstrated the greatest
differences in exercise duration, peak oxygen consumption and functional class
(symptom status) compared with those who did not receive EECP(R) therapy.
The preliminary results of the PEECH trial were presented at the American
College of Cardiology scientific sessions in March 2005. On June 20, 2005, the
Centers for Medicare and Medicaid Services (CMS) accepted our application for
expansion of reimbursement coverage of EECP(R) therapy to include patients with
New York Heart Association (NYHA) Class II/III stable heart failure symptoms
with an ejection fraction of <, or = 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) <, or = 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:
o Canadian Cardiovascular Society Classification (CCSC) II angina
o Heart Failure
- New York Heart Association Class II/III stable heart failure
symptoms with an ejection fraction of <, or = 35%
- New York Heart Association Class II/III stable heart failure
symptoms with an ejection fraction of <, or = 40%
- New York Heart Association Class IV heart failure
- Acute heart failure
o Cardiogenic shock
o Acute myocardial infarction."
They commented in their decision memorandum that they were not able to
apply full weight to the evidence generated by the PEECH trial, as it had not
yet been published in a peer-reviewed medical journal by the time they were
required to issue a final decision on this application. Moreover, they did not
opine on whether they would consider the results of the trial when published to
be sufficient evidence to conclude that external counterpulsation therapy is
reasonable and necessary for the treatment of New York Heart Association Class
II/III stable heart failure symptoms with an ejection fraction of <, or = 35%.
They did, however, reiterate 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 EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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(R) 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(R)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
recognize revenue from the sale of our EECP(R) systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP(R) 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(R) 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(R) systems includes
a combination of three elements that qualify as separate units of accounting:
i. EECP(R) 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(R) 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:
Page 15
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
i. EECP(R) 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(R) 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(R) 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.
Revenues from the sale of EECP(R) 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 parts when the equipment sale is recognized.
We have also entered into lease agreements for our EECP(R) 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(R) 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 November 30, 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(R) systems at various field locations for demonstration, training,
evaluation, and other similar purposes at no charge. The cost of these EECP(R)
Page 16
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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(R) 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 $89,000 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(R) 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
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.
Page 17
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
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 second 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.
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
Page 18
Vasomedical, Inc. and Subsidiaries
ITEM 2. 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
(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
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.
Page 19
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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.
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.
Page 20
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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,
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 November 30, 2006 and 2005
Net revenue from sales, leases and service of our EECP(R) systems for the
three-month periods ended November 30, 2006 and 2005, was 1,523,223 and
$2,680,184, respectively, which represented a decline of $1,156,961 or 43%. We
reported a net loss of $368,935 compared to $8,632,635 for the three-month
periods ended November 30, 2006 and 2005, respectively. Our net loss per common
share was $0.00 for the three-month period ended November 30, 2006 compared to a
net loss of $0.15 per share for the three-month period November 30, 2005. The
decrease in the net loss per share is due primarily to a $7,103,000 income tax
expense valuation reserve recorded in November 30, 2005 for the remaining value
of the deferred tax asset.
Revenues
Revenue from equipment sales declined approximately 67% to $574,932 for the
three-month period ended November 30, 2006 as compared to $1,734,409 for the
same period for the prior year. The decline in equipment sales is due primarily
Page 21
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to a 59% decline in the number of equipment shipments and a 68% decrease in
average sales prices. A higher mix of used equipment versus 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 direct and indirect competition. We anticipate that
demand for EECP(R) systems will remain soft until there is greater clinical
acceptance for the use of EECP(R) 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 second quarter of
fiscal 2007 compared to the second quarter of fiscal 2006, which reduced the
average selling price in that period. The average price of new systems sales
declined approximately 67% in the second 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 territories. Our revenue from the sale of EECP(R) systems to
international distributors in the second quarter of fiscal 2007 increased
approximately 255% to $230,000 compared to $90,000 in same period of the prior
year reflecting increased volume.
The above decline in revenue was also partially offset by a less than 1%
increase in revenue from equipment rental and services for the three-month
period ended November 30, 2006, from the same three-month period in the prior
year. Revenue from equipment rental and services represented 62% of total
revenue in the second quarter of fiscal 2007 compared to 56% in the second
quarter of fiscal 2006. The increase in the absolute amounts and the increase in
the percentage of total revenue resulted primarily from a 1% change in service
related revenue, offset by a 64% decline in rental revenue. The decline was due
to a decrease in the rental install base from the prior period ended November
30, 2005.
Gross Profit
The gross profit declined to $806,615 or 53% of revenues for the
three-month period ended November 30, 2006, compared to $1,582,355 or 59% of
revenues for the three-month period ended November 30, 2005. Gross profit margin
as a percentage of revenue for the three-month period ended November 30, 2006,
decreased compared to the same period of the prior fiscal year mainly due to the
higher fixed production unit costs associated with reduced production 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 second quarter of
fiscal 2007. The decline in gross profit when compared to the prior year in
absolute dollars is principally due to the lower sales volume.
Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) models sold and their respective average selling prices, the mix of
EECP(R) 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 November 30, 2006 and 2005, were $1,033,338 or 68% of revenues and
$2,508,624 or 94% of revenues, respectively reflecting a decrease of $1,475,286
or approximately 59%. The decrease in SG&A expenditures in the second quarter of
Page 22
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $140,790 or 9% of revenues for
the three months ended November 30, 2006, decreased by $462,906 or 77%, from
$603,696 or 23% of revenues for the three months ended November 30 2005. 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 November 30, 2006, the Company reversed
$5,682 from its provision for doubtful accounts as compared to not recording a
charge during the three-month period ended November 30, 2005. The decrease in
the provision is a direct result of the second quarter of fiscal 2007 decrease
in accounts receivable and sales from the corresponding quarter ended November
30, 2005.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $18,440 in the
three-month period ended November 30, 2006, from $21,444 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. As of November 30, 2006 the loans related
to the cost and implementation of the management information system have been
paid in full.
Interest and Other Income, Net
Interest and other income for the three months ended November 30 2006 and
2005, were $15,086 and $21,774 respectively.
Income Tax Expense, Net
During the three-months ended November 30, 2006 and 2005, we recorded a
provision for state income taxes of $3,750 and $10,000, respectively.
As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting an increase of $123,836 during the three months ended November 30,
2006, 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.
Six Months Ended November 30, 2006 and 2005
Net revenue from sales, leases and service of our EECP(R) systems for the
six-month periods ended November 30, 2006 and 2005, was $3,605,079 and
$6,216,555, respectively, which represented a decline of $2,611,476 or 42%. We
reported a net loss of $908,392 compared to $9,525,497 for the six-month periods
ended November 30, 2006 and 2005, respectively. Our net loss per common share
was $0.01 for the six-month period ended November 30, 2006 compared to a net
loss of $0.18 per share for the six-month period November 30, 2005. The decrease
in the net loss per share is due primarily to a $7,112,826 income tax valuation
reserve established in November 2005 for the remaining value of the deferred tax
asset.
Page 23
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenues
Revenue from equipment sales declined approximately 61% to $1,648,148 for
the six-month period ended November 30, 2006 as compared to $4,191,318 for the
same period for the prior year. The decline in equipment sales is due primarily
to a 51% decline in the number of equipment shipments, and a 63% decrease in
average sales prices. A higher mix of used equipment sold versus 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 direct and indirect competition. We anticipate that
demand for EECP(R) systems will remain soft until there is greater clinical
acceptance for the use of EECP(R) 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 second half of
fiscal 2007 compared to the second half of fiscal 2006, which reduced the
average selling price in that period. The average price of new systems sales
declined approximately 72% in the first and second quarters 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 territories. Our revenue from the sale of EECP(R) systems to
international distributors in the first and second quarters of fiscal 2007
increased approximately 64% to $647,760 compared $395,000 in same period of the
prior year reflecting increased volume.
The above decline in revenue was also partially due to a 3% decrease in
revenue from equipment rental and services for the six-month period ended
November 30, 2006, from the same six-month period in the prior year. Revenue
from equipment rental and services represented 54% of total revenue in the first
and second quarter of fiscal 2007 compared to 33% in the first and second
quarters 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 69% decline in rental revenue.
The decline was due to a decrease in the rental installed base from the prior
period ended November 30, 2005.
Gross Profit
The gross profit declined to $1,923,861 or 53% of revenues for the
six-month period ended November 30, 2006, compared to $3,695,542 or 59% of
revenues for the six-month period ended November 30, 2005. Gross profit margin
as a percentage of revenue for the six-month period ended November 30, 2006,
decreased compared to the same period of the prior fiscal year mainly due to the
higher fixed production unit costs associated with reduced production 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 and second
quarters 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(R) models sold and their respective average selling prices, the mix of
EECP(R) 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.
Page 24
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the six-months
ended November 30, 2006 and 2005, were $2,357,164 or 65% of revenues and
$4,917,773 or 79% of revenues, respectively reflecting a decrease of $2,560,609
or approximately 52%. The decrease in SG&A expenditures in the first half of
fiscal 2007 compared to fiscal 2006 resulted primarily from decreased sales and
marketing expenditures reflecting fewer sales and marketing personnel and
reduced travel, plus lower market research, and advertising costs.
Research and Development
Research and development ("R&D") expenses of $469,285 or 13% of revenues
for the six months ended November 30, 2006, decreased by $646,417 or 58%, from
the six months ended November 30 2005, of $1,115,702 or 18% 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 six-month period ended November 30, 2006, the Company reversed
$4,001 from its provision for doubtful accounts as compared to recording $70,575
during the six-month period ended November 30, 2005. The decrease in the
provision is a direct result of the first half of fiscal 2007 decrease in
accounts receivable and sales from the corresponding quarter ended November 30,
2005.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $37,329 in the six-month
period ended November 30, 2006, from $44,953 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. As of November 30, 2006 the loans related to the
cost and implementation of the management information system have been paid in
full.
Interest and Other Income, Net
Interest and other income for the first half of fiscal 2007 and fiscal
2006, were $35,824 and $40,790, respectively.
Income Tax Expense, Net
During the six-months ended November 30, 2006 and 2005, we recorded a
provision for state income taxes of $8,300 and $20,000, respectively.
As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting an increase of $306,031 during the six months ended November 30,
2006, 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 mainly provided by the issuance of preferred stock. At November 30,
2006, we had cash, and cash equivalents of $1,441,816 and working capital of
$1,932,300 as compared to cash, cash equivalents, and certificates of deposit
totalling $2,385,778 and working capital of $2,867,288 at May 31, 2006. Our
cash, cash equivalents, and certificates of deposit balances decreased $943,962
in fiscal year 2007 primarily due to cash used in operating activities of
$781,248 and cash used in financing activities of $162,714.
Page 25
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The decrease in cash used in operating activities during the first half of
fiscal year 2007 resulted primarily from the net loss of $908,392 plus
adjustments to reconcile net loss to net cash used in operating activities of
$781,248. Changes in our operating assets and liabilities were $66,666. The
changes in the asset components primarily reflect an increase in accounts
receivable of $40,512, lower inventory of $358,654 and an increase in other
current assets of $33,792. The changes in our operating liability components
reflect a decrease in accounts payable and accrued liabilities of $318,219 and a
decrease in other liabilities of $172,041. Non-cash adjustments amounted to
$193,810 which partially offset the above. Net accounts receivable were 22% of
revenues for the six-month period ended November 30, 2006, compared to 14% at
the end of the six-month period ended November 30, 2005, and accounts receivable
turnover was 6 times as of November 30, 2006, and November 30, 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(R) 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 half 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(R) program. As we are creating a new market for the EECP(R) 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.
There were no investing activities during the six-month period ended
November 30, 2006.
Our financing activities used cash of $162,714 during the six-month period
ended November 30, 2006, reflecting payments on our outstanding notes and loans.
We have incurred large declines in revenue and significant operating losses
during the last four fiscal years and our 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. Our ability to halt the declines in revenue and restore our revenue
base is largely dependent upon increasing the demand in the refractory angina
market and operating in a more efficient manner. If we are not able to restore
our revenue base and sufficiently reduce operating costs to generate an adequate
cash inflow, or raise additional capital, we will not be able to continue as a
going concern.
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 ability to maintain current operations
is dependent upon achieving profitable operations or through additional debt or
equity financing. Future capital funding, if available, may result in dilution
to current shareholders.
Page 26
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of November 30, 2006.
Due as of Due as of
Due as of 11/30/08 and 11/30/10 and Due
Total 11/30/07 11/30/09 11/30/11 Thereafter
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt $882,219 $63,515 $142,038 $136,966 $539,700
Notes Payable 97,685 97,685 - - -
Employment Agreements 470,167 260,000 210,167 - -
-----------------------------------------------------------------------------------
Total Contractual Cash $1,450,071 $421,200 $352,205 $136,966 $539,700
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.
Page 27
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 November 30, 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 November 30, 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.
Page 28
Vasomedical, Inc. and Subsidiaries
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.
Page 29
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: January 16, 2007
Page 30