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, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-2871434
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at January 7, 2005 58,552,688
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
--- --
Page 1
Vasomedical, Inc. and Subsidiaries
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
November 30, 2004 and May 31, 2004 3
Consolidated Condensed Statements of Earnings for the
Six and Three Months Ended November 30, 2004 and 2003 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2004 to November 30, 2004 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended November 30, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Qualitative and Quantitative Disclosures About Market Risk 26
Item 4 - Procedures and Controls 26
PART II - OTHER INFORMATION 27
Page 2
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, May 31,
2004 2004
----------------- -----------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $1,913,462 $6,365,049
Certificates of deposit and treasury bills 3,450,000 1,180,540
Accounts receivable, net of an allowance for doubtful accounts of
$609,840 at November 30, 2004 and $699,203 at May 31, 2004 2,474,308 5,521,853
Inventories 3,295,025 2,373,748
Other current assets 477,386 272,513
----------------- -----------------
Total current assets 11,610,181 15,713,703
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,451,192 at
November 30, 2004 and $ 2,378,576 at May 31, 2004 2,429,884 2,430,521
DEFERRED INCOME TAXES 14,582,000 14,582,000
OTHER ASSETS 315,910 297,391
----------------- -----------------
$28,937,975 $33,023,615
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,949,402 $3,122,184
Current maturities of long-term debt and notes payable 142,255 136,478
Sales tax payable 305,272 353,360
Deferred revenues 1,959,910 1,734,925
Accrued warranty and customer support expenses 120,083 161,917
Accrued professional fees 61,581 91,486
Accrued commissions 204,862 341,483
----------------- -----------------
Total current liabilities 4,743,365 5,941,833
LONG-TERM DEBT 1,021,720 1,092,837
ACCRUED WARRANTY COSTS 34,500 83,000
DEFERRED REVENUES 813,708 1,111,526
OTHER LIABILITIES 134,000 200,250
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $.001 par value; 110,000,000 shares authorized;
58,552,688 and 58,419,356 shares at November 30, 2004 and May 31,
2004, respectively, issued and outstanding 58,552 58,419
Additional paid-in capital 51,450,639 51,320,106
Accumulated deficit (29,318,509) (26,784,356)
----------------- -----------------
Total stockholders' equity 22,190,682 24,594,169
----------------- -----------------
$28,937,975 $33,023,615
================= =================
The accompanying notes are an integral part of these condensed statements.
Page 3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------ --------------------------------
2004 2003 2004 2003
------------ ------------- --------------- -------------
Revenues
Equipment sales $6,497,459 $8,961,860 $2,522,562 $4,173,750
Equipment rentals and services 1,785,632 1,367,801 939,113 729,379
------------ ------------- --------------- -------------
8,283,091 10,329,661 3,461,675 4,903,129
Cost of sales and services 2,835,667 3,631,923 1,173,874 1,693,249
------------ ------------- --------------- -------------
Gross Profit 5,447,424 6,697,738 2,287,801 3,209,880
Expenses
Selling, general and administrative 6,140,879 6,134,429 3,088,398 3,512,977
Research and development 1,657,846 1,953,375 785,948 997,830
Provision for doubtful accounts 132,956 985,511 0 796,330
Interest expense and financing costs 59,040 66,246 28,678 32,880
Interest and other income, net (30,827) (108,287) (17,083) (53,195)
------------ ------------- --------------- -------------
7,959,894 9,031,274 3,885,941 5,286,822
------------ ------------- --------------- -------------
LOSS BEFORE INCOME TAXES (2,512,470) (2,333,536) (1,598,140) (2,076,942)
Income tax expense, net (21,683) (20,000) (11,683) (10,000)
------------ ------------- --------------- -------------
NET LOSS $(2,534,153) $(2,353,536) $(1,609,823) $(2,086,942)
============ ============= =============== =============
Net loss per common share
- basic $(0.04) $(0.04) $(0.03) $(0.04)
============ ============= =============== =============
- diluted $(0.04) $(0.04) $(0.03) $(0.04)
============ ============= =============== =============
Weighted average common shares outstanding
- basic 58,542,488 57,827,265 58,552,688 57,827,690
============ ============= =============== =============
- diluted 58,542,488 57,827,265 58,552,688 57,827,690
============ ============= =============== =============
The accompanying notes are an integral part of these condensed statements.
Page 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Additional Total
Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ---------- -------------- --------------- ---------------
Balance at June 1, 2004 58,419,356 $58,419 $51,320,106 $(26,784,356) $24,594,169
Exercise of stock options 133,332 133 130,533 130,666
Net loss (2,534,153) (2,534,153)
------------ ---------- -------------- --------------- ---------------
Balance at November 30, 2004 58,552,688 $58,552 $51,450,639 $(29,318,509) $22,190,682
============ ========== ============== =============== ===============
The accompanying notes are an integral part of this condensed statement.
Page 5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
November 30,
--------------------------------------
2004 2003
----------------- -----------------
Cash flows from operating activities
Net loss $(2,534,153) $(2,353,536)
----------------- -----------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 298,127 415,003
Provision for doubtful accounts 132,956 675,258
Allowance for inventory write-off 27,062 --
Changes in operating assets and liabilities
Accounts receivable 2,914,589 2,867,497
Financing receivables, net -- 113,999
Inventories (1,062,827) 645,361
Other current assets (204,873) (226,492)
Other assets (37,749) (53,372)
Accounts payable, accrued expenses and other current
liabilities (1,204,245) 456,737
Other liabilities (412,568) (41,250)
----------------- -----------------
450,472 4,852,741
----------------- -----------------
Net cash (used in) provided by operating activities (2,083,681) 2,499,205
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (163,772) (120,362)
Purchase of certificates of deposit and treasury bills (2,269,460) --
----------------- -----------------
Net cash used in investing activities (2,433,232) (120,362)
----------------- -----------------
Cash flows from financing activities
Payments on notes (65,340) (52,429)
Proceeds from exercise of options and warrants 130,666 4,959
----------------- -----------------
Net cash provided by (used in) financing activities 65,326 (47,470)
----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(4,451,587) 2,331,373
Cash and cash equivalents - beginning of period 6,365,049 5,222,847
----------------- -----------------
Cash and cash equivalents - end of period $1,913,462 $7,554,220
================= =================
Non-cash investing and financing activities were as follows:
Inventories transferred to (from) property and equipment, attributable
to operating leases, net $114,488 ($268,054)
The accompanying notes are an integral part of these condensed statements.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of November 30, 2004, and the
related consolidated condensed statements of earnings for the six and
three-month periods ended November 30, 2004 and 2003, changes in stockholders'
equity for the six-month period ended November 30, 2004, and cash flows for the
six-month periods ended November 30, 2004 and 2003, have been prepared by
Vasomedical, Inc. and Subsidiaries (the "Company") without audit. In the opinion
of management, all adjustments (which include only normal, recurring accrual
adjustments) necessary to present fairly the financial position and results of
operations as of November 30, 2004, and for all periods presented have been
made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended
May 31, 2004. Results of operations for the periods ended November 30, 2004 and
2003 are not necessarily indicative of the operating results expected or
reported for the full year.
We believe that our cash flow from operations together with our current
cash reserves will be sufficient to fund our business plan and projected capital
requirements through at least August 2005. Although we have incurred significant
losses during the last three fiscal years, we believe that the Company is
positioned for long-term growth. Our long-term growth is largely dependent upon
the successful commercialization of EECP therapy into the congestive heart
failure indication which depends on favorable results from the PEECH clinical
trial. Our long-term ability to achieve profitable operations is further
dependent on successfully completing additional debt or equity financing to
provide marketing funds necessary to launch EECP therapy in the congestive heart
failure market and to bridge the period between completion of the PEECH clinical
trial and a congestive heart failure coverage decision by CMS. While we are
currently seeking to raise such capital through public or private equity or debt
financings, there is no assurance we will be successful in these efforts. Future
capital funding, if available, may result in dilution to current shareholders.
Reclassifications
Certain reclassifications have been made to the prior years' amounts to conform
with the current year's presentation.
NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based
Compensation". SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were required. SFAS No. 123(R) shall be effective for the Company as of
the beginning of the first interim reporting period that begins after June 15,
2005. The adoption of this new accounting pronouncement is expected to have a
material impact on the financial statements of the Company commencing with the
quarter ending November 30, 2005.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 24, 2004. The Company is
currently evaluating the impact of adoption of SFAS No. 151 on its financial
position and results of operations.
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition in Financial Statements",
in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material effect on the Company's
financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 has not had a material impact on the Company's
financial position and results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except for the provisions that were cleared by the
FASB in prior pronouncements. The adoption of SFAS No. 149 has not had a
material impact on the Company's financial position and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), as interpreted by FIN 46R. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.
In November 2002, the Emerging Issues Task Force, ("EITF") reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables", "(EITF
00-21)". That consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration of the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value is contingent on delivery of specified
items or performance conditions. Applicable revenue criteria should be
considered separately for each separate unit of accounting. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Effective September 1, 2003, the Company prospectively
adopted the provisions of EITF 00-21.
NOTE C - STOCK-BASED COMPENSATION
The Company has five stock-based employee compensation plans. The Company
accounts for stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25") and has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Accordingly, no compensation expense has been recognized in the consolidated
financial statements in connection with employee stock option grants.
On October 28, 2004 the shareholders approved the 2004 Stock Option/Stock
Issuance Plan and authorized the issuance of 2,500,000 shares.
During the six-month period ended November 30, 2004, the Board of Directors
granted non-qualified stock options under the 1997 Stock Option Plan, the 1999
Stock Option Plan and the 2004 Stock Option/Stock Issuance Plan to 9 directors,
4 officers, and 37 employees to purchase an aggregate of 2,428,000 shares of
common stock, at exercise prices ranging from $0.95 to $1.70 per share, which
represented the fair market value of the underlying common stock at the time of
the respective grants. These options vest immediately, or over three-year and
four-year periods, and expire five years and ten years from the date of grant.
During the six-month period ended November 30, 2004, options to purchase
133,332 shares of common stock were exercised at an exercise price of $0.98 per
share, aggregating $130,666 of proceeds to the Company. During the six-month
period ended November 30, 2004, options to purchase 213,333 shares of common
stock at an exercise price of $0.91 - $3.88 were cancelled.
The following table illustrates the effect on net loss and loss per share
had the Company applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
Six Months Ended Three Months Ended
November 30, November 30,
----------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- -------------- ---------------
Net loss, as reported $(2,534,153) $(2,353,536) $(1,609,823) $(2,086,942)
Deduct: Total stock-based
employee compensation expense
determined under fair (653,526) (678,580) (482,605) (349,109)
value-based method for all
awards
--------------- --------------- -------------- ---------------
Pro forma net loss $(3,187,679) $(3,032,116) $(2,092,428) $(2,436,051)
=============== =============== ============== ===============
Loss per share:
Basic - as reported $(0.04) $(0.04) $(0.03) $(0.04)
=============== =============== ============== ===============
Diluted - as reported $(0.04) $(0.04) $(0.03) $(0.04)
=============== =============== ============== ===============
Basic - pro forma $(0.05) $(0.05) $(0.04) $(0.04)
=============== =============== ============== ===============
Diluted - pro forma $(0.05) $(0.05) $(0.04) $(0.04)
=============== =============== ============== ===============
Pro forma compensation expense may not be indicative of future disclosures
because it does not take into effect pro forma compensation expense related to
grants before 1995. For purposes of estimating the fair value of each option on
the date of grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.
The fair value of the Company's stock-based awards was estimated assuming no
expected dividends and the following weighted-average assumptions for the six
months ended November 30, 2004:
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
Expected life (years) 5
Expected volatility 82%
Risk-free interest rate 4.4%
Expected dividend yield 0.0%
NOTE D - EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is based on the weighted average number of
common shares outstanding without consideration of potential common shares.
Diluted earnings (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. For the six-month and
three-month periods ended November 30, 2004 options and warrants to purchase
180,146 and 160,148 shares, respectively, of common stock were excluded from the
computation of diluted earnings per share because the effect of their inclusion
would be antidilutive. Similarly, for the six-month and three-month periods
ended November 30, 2003, options and warrants to purchase 257,379 and 234,379
shares, respectively, were excluded from the computation of diluted earnings per
share due to their antidilutive effect.
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------ -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Numerator:
Basic and diluted net loss $(2,534,153) $(2,353,536) $(1,609,823) $(2,086,942)
Denominator:
Basic - weighted average common shares 58,542,488 57,827,265 58,552,688 57,827,690
Stock options -- -- -- --
Warrants -- -- -- --
------------- ------------- ------------- -------------
Diluted - weighted average common shares 58,542,488 57,827,265 58,552,688 57,827,690
============= ============= ============= =============
Basic and diluted loss per common share $(0.04) $(0.04) $(0.03) $(0.04)
============= ============= ============= =============
NOTE E - INVENTORIES
Inventories consist of the following:
November 30, May 31,
2004 2004
----------------- -----------------
Raw materials $1,075,089 $928,269
Work in process 1,098,462 455,731
Finished goods 1,121,474 989,748
----------------- -----------------
$3,295,025 $2,373,748
================= =================
At November 30, 2004 and May 31, 2004, the Company has recorded reserves
for obsolete inventory of $427,000 and $399,000, respectively.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
NOTE F - LONG-TERM DEBT
The following table sets forth the computation of long-term debt:
November 30, May 31,
2004 2004
----------------- -----------------
Facility loans (a) $996,713 $1,022,933
Term loans (b) 167,262 206,382
----------------- -----------------
1,163,975 1,229,315
Less current portion (142,255) (136,478)
----------------- -----------------
$1,021,720 $1,092,837
================= =================
(a) The Company purchased its headquarters and warehouse facility and
secured notes of $641,667 and $500,000, respectively, under two programs
sponsored by New York State. These notes, which bear interest at 7.8% and 6%,
respectively, are payable in monthly installments consisting of principal and
interest payments over fifteen- year terms, expiring in September 2016 and
January 2017, respectively, and are secured by the building.
(b) In fiscal years 2003 and 2004, the Company financed the cost and
implementation of a management information system and secured several notes,
aggregating approximately $305,219. The notes, which bear interest at rates
ranging from 7.5% through 12.5%, are payable in monthly installments consisting
of principal and interest payments over four-year terms, expiring at various
times between August and October 2006.
NOTE G - DEFERRED REVENUES
The Company records revenue on extended service contracts ratably over the
term of the related warranty contracts. Effective September 1, 2003, the Company
prospectively adopted the provisions of EITF 00-21. Upon adoption of the
provisions of EITF 00-21, the Company began to defer revenue related to EECP
system sales for the fair value of installation and in-service training to the
period when the services are rendered and for warranty obligations ratably over
the service period, which is generally one year. The changes in the Company's
deferred revenues are as follows:
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Deferred Revenue at the beginning of the period $2,846,451 $1,709,551 $2,651,446 $1,851,585
ADDITIONS
Deferred extended service contracts 1,044,364 945,938 724,514 500,750
Deferred in-service training 117,500 97,500 50,000 97,500
Deferred warranty obligations 497,500 292,500 187,500 292,500
RECOGNIZED AS REVENUE
Deferred extended service contracts (883,446) (667,573) (450,675) (364,419)
Deferred in-service training (170,000) (55,000) (42,500) (55,000)
Deferred warranty obligations (678,751) (38,750) (346,667) (38,750)
------------- ------------- ------------- -------------
Deferred revenue at end of period 2,773,618 2,284,166 2,773,618 2,284,166
Less: current portion (1,959,910) (1,334,983) (1,959,910) (1,334,983)
------------- ------------- ------------- -------------
Long-term deferred revenue at end of period $813,708 $949,183 $813,708 $949,183
============= ============= ============= =============
NOTE H - WARRANTY COSTS
Equipment sold is generally covered by a warranty period of one year.
Effective September 1, 2003, the Company adopted the provisions of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" on a
prospective basis. Under EITF 00-21, for certain arrangements, a portion of the
overall system price attributable to the first year warranty service is deferred
and recognized as revenue over the service period. As such, the Company no
longer accrues estimated warranty costs upon delivery but rather recognizes
warranty and related service costs as incurred. Prior to September 1, 2003, the
Page 11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
Company accrued a warranty reserve for estimated costs to provide warranty
services when the equipment sale is recognized. The factors affecting the
Company's warranty liability included the number of units sold and historical
and anticipated rates of claims and costs per claim. The warranty provision
resulting from transactions prior to September 1, 2003 will be reduced in future
periods for material and labor costs incurred as related product is serviced
during the warranty period or when the warranty period elapses. A review of
warranty obligations is performed regularly to determine the adequacy of the
reserve. Based on the outcome of this review, revisions to the estimated
warranty liability are recorded as appropriate.
The changes in the Company's product warranty liability are as follows:
----------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------- ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Warranty liability at the beginning of the $244,917 $788,000 $188,833 $715,000
period
Expense for new warranties issued 0 164,000 0 0
Warranty amortization (90,334) (451,000) (34,250) (214,000)
------------- ------------- ------------- -------------
Warranty liability at end of period 154,583 501,000 154,583 501,000
Less: Current portion (120,083) (358,000) (120,083) (358,000)
------------- ------------- ------------- -------------
Long-term warranty liability at end of period $34,500 $143,000 $34,500 $143,000
============= ============= ============= =============
NOTE I - INCOME TAXES
During the six-months ended November 30, 2004 and 2003, we recorded a
provision for state income taxes of $21,683 and $20,000, respectively.
As of November 30, 2004, the Company had recorded deferred tax assets of
$14,582,000 (net of a $2,762,169 valuation allowance) related to the anticipated
recovery of tax loss carryforwards. The amount of the deferred tax assets
considered realizable could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced. Ultimate realization
of the deferred tax assets is dependent upon the Company generating sufficient
taxable income prior to the expiration of the tax loss carryforwards. Management
believes that the Company is positioned for long-term growth despite the
financial results achieved through November 30, 2004, and that based upon the
weight of available evidence, that it is "more likely than not" that the net
deferred tax assets will be realized. The "more likely than not" standard is
subjective, and is based upon management's estimate of a greater than 50%
probability that its long range business plan can be realized.
Ultimate realization of any or all of the deferred tax assets is not
assured, due to significant uncertainties associated with estimates of future
taxable income during the carryforward period. The Company's estimates are
largely dependent upon achieving considerable growth resulting from the
successful commercialization of EECP therapy into the congestive heart failure
indication. Such future estimates of future taxable income 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. Certain critical
assumptions associated with the Company's estimates include:
-- that the results from the PEECH clinical trial will be sufficiently
positive to enable EECP therapy to obtain approval for a national
Medicare reimbursement coverage policy plus other third-party payer
reimbursement policies specific to the congestive heart failure
indication;
-- that the reimbursement coverage will be both broad enough in terms of
coverage language and at an amount adequate to enable successful
commercialization of EECP therapy into the congestive heart failure
indication.
-- that we be able to secure additional financing to provide sufficient
funds to market EECP therapy in the congestive heart failure
indication.
Additional factors that could cause actual results to differ materially are
the following:
-- the effect of the dramatic changes taking place in the healthcare
environment;
-- the impact of competitive procedures and products and their pricing;
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Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2004
-- other medical insurance reimbursement policies;
-- unexpected manufacturing problems;
-- unforeseen difficulties and delays in the conduct of clinical
trials, peer review publications and other product development
programs;
-- the actions of regulatory authorities and third-party payers in
the United States and overseas;
-- uncertainties about the acceptance of a novel therapeutic
modality by the medical community;
-- and the risk factors reported from time to time in the Company's
SEC reports.
The amount of the deferred tax assets considered realizable could be
reduced in the future if estimates of future taxable income during the
carryforward period are reduced or if the accounting standards are changed to
reflect a more stringent standard for evaluation of deferred tax assets.
The recorded deferred tax asset includes an increase to the valuation
allowance of $854,169 during the six- months ended November 30, 2004.
NOTE J - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The approximate aggregate minimum compensation obligation under active
employment agreements at November 30, 2004 are summarized as follows:
Twelve month period ended November 30, Amount
-------------------------------------- ------
2005 $140,625
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Vasomedical, Inc. and Subsidiaries
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipated", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third- party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. (the "Company"), incorporated in Delaware in July 1987,
is primarily engaged in designing, manufacturing, marketing and supporting EECP
external counterpulsation systems based on our proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
cardiogenic shock, acute myocardial infarction (i.e., heart attack) and
congestive heart failure ("CHF"). EECP therapy is currently marketed for chronic
stable angina. We are also actively engaged in research to determine the
potential benefits of EECP therapy in the management of CHF. EECP is a
non-invasive, outpatient therapy for the treatment of diseases of the
cardiovascular system. The therapy serves to increase circulation in areas of
the heart with less than adequate blood supply and may restore systemic vascular
function. We provide hospitals, clinics and private practices with EECP
equipment, treatment guidance, and a staff training and maintenance program
designed to provide improved patient outcomes. EECP is a registered trademark
for Vasomedical's enhanced external counterpulsation systems.
Medicare and numerous other commercial third-party payers currently
reimburse for EECP therapy in the treatment of refractory angina. The Medicare
reimbursement rate in the continental United States for a full course of 35
one-hour treatments ranges from $3,960 to $6,926. Although Medicare has not
modified its national coverage policy for EECP therapy to specifically include
CHF patients, we believe, based upon data published from the International EECP
Patient Registry ("IEPR"), that there exists a significant subset of patients
with CHF that also have disabling angina that qualify for Medicare reimbursement
under its present coverage policy. However reimbursement for CHF as a primary
indication is not covered under national coverage policy.
In July 2004, the Centers for Medicare and Medicaid Services (CMS) proposed
a 9% reduction in Medicare national average physician reimbursement rates for
angina for calendar year 2005. However, following public review with
manufacturers and providers, CMS revised the physician rate to reflect a 1%
increase over the calendar year 2004 rate. The hospital outpatient rate,
however, was reduced by 9%.
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, 2004 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
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Vasomedical, Inc. and Subsidiaries
recognize revenue from the sale of our EECP systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP systems to
international markets is recognized upon shipment, during the period in which we
deliver the product to a common carrier, as are supplies, accessories and spare
parts delivered to both domestic and international customers. Returns are
accepted prior to the installation and in-service 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 direct EECP system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectibility, the separability of units of accounting, and the
fair value of individual elements. Effective September 1, 2003, we adopted the
provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables", ("EITF 00-21"), on a prospective
basis. The principles and guidance outlined in EITF 00-21 provide a framework to
determine (a) how the arrangement consideration should be measured (b) whether
the arrangement should be divided into separate units of accounting, and (c) how
the arrangement consideration should be allocated among the separate units of
accounting. We determined that our multiple-element arrangements are generally
comprised of the following elements that would qualify as separate units of
accounting: system sales, in-service support consisting of equipment set-up and
training provided at the customers facilities and warranty service for system
sales generally covered by a warranty period of one year. Each of these elements
represent individual units of accounting as the delivered item has value to a
customer on a stand-alone basis, objective and reliable evidence of fair value
exists for undelivered items, and arrangements normally do not contain a general
right of return relative to the delivered item. We determine fair value based on
the price of the deliverable when it is sold separately or based on third-party
evidence. In accordance with the guidance in EITF 00-21, we use the residual
method to allocate the arrangement consideration when it does not have fair
value of the EECP system sale. Under the residual method, the amount of
consideration allocated to the delivered item equals the total arrangement
consideration less the aggregate fair value of the undelivered items. Assuming
all other criteria for revenue recognition have been met, we recognize revenue
for EECP system sales when delivery and acceptance occurs, for installation and
in-service training when the services are rendered, and for warranty service
ratably over the service period, which is generally one year.
We recognized deferred revenues of $170,000 and $42,500 related to
in-service training and $678,751 and $346,667 related to warranty service during
the six-month and three-month periods ended November 30, 2004, respectively. In
addition, following the adoption of the provisions of EITF 00-21 beginning
September 1, 2003 we began to defer revenue that had previously been recorded at
the time of sale. Previously, in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements," we accrued costs associated
with these arrangements as warranty expense in the period the system was
delivered and accepted. During the six-month and three-month periods ended
November 30, 2004, we deferred $117,500 and $50,000 related to in-service
training and $497,500 and $187,500 related to warranty service, respectively.
The amount related to in-service training is recognized as revenue at the time
the in-service training is completed and the amount related to warranty service
is recognized as service revenue ratably over the related service period, which
is generally one year. Costs associated with the provision of in-service
training and warranty service, including salaries, benefits, travel, spare parts
and equipment, are recognized in cost of sales as incurred.
We also recognize revenue generated from servicing EECP systems that are no
longer covered by a warranty agreement, or by providing sites with additional
training, in the period that these services are provided. Revenue related to
future commitments under separately priced extended warranty agreements on the
EECP system are deferred and recognized ratably over the service period,
generally ranging from one year to four years. Deferred revenues recognized
related to extended warranty agreements that have been invoiced to customers
prior to the performance of these services, were $883,446 and $667,573 for the
six-month periods ended November 30, 2004 and 2003, respectively, and $450,675
and $364,419 for the three-month periods ended November 30, 2004 and 2003,
respectively. 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.
We have also entered into lease agreements for our EECP systems, generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized, in accordance with the terms of
the lease agreements, on a straight-line basis over the life of the respective
leases. For certain operating leases in which payment terms are determined on a
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Vasomedical, Inc. and Subsidiaries
"fee-per-use" basis, revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and equipment and is amortized to cost of sales over
the estimated useful life of the equipment, not to exceed five years. There were
no significant minimum rental commitments on these operating leases at November
30, 2004.
Accounts Receivable, net
Our accounts receivable, net 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 our allowance for doubtful accounts based on our 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. We also look at the credit quality
of its customer base as well as changes in our credit policies. We continuously
monitor collections and payments from its customers. While credit losses have
historically been within expectations and the provisions established, we cannot
guarantee that we will continue to experience the same credit loss rates that we
have in the past.
Inventories, net
We value inventory at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis. We often place EECP systems at
various field locations for demonstration, training, evaluation, and other
similar purposes at no charge. The cost of these EECP systems is transferred to
property and equipment and is amortized over the next two to five years. We
record the cost of refurbished components of EECP systems and critical
components at cost plus the cost of refurbishment. We regularly review inventory
quantities on hand, particularly raw materials and components, and record 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.
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 effective September 1, 2003, we began to defer revenue related to EECP
system sales for the fair value of installation and in-service training to the
period when the services are rendered and for warranty obligations ratably over
the service period, which is generally one year.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year.
Effective September 1, 2003, we adopted the provisions of EITF 00-21 on a
prospective basis. Under EITF 00-21, for certain arrangements, a portion of the
overall system price attributable to the first year warranty service 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. The factors affecting our warranty liability included the number of
units sold and historical and anticipated rates of claims and costs per claim.
The warranty provision resulting from transactions prior to September 1, 2003,
will be reduced in future periods for material and labor costs incurred as
related product is returned during the warranty period or when the warranty
period elapses.
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
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Vasomedical, Inc. and Subsidiaries
the realization of the deferred tax assets change, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the asset changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not" standard is subjective, and is based upon our estimate of a greater
than 50% probability that our long range business plan can be realized.
Deferred tax liabilities and assets are classified as current or
non-current based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference. The deferred tax asset we recorded relates
primarily to the realization of net operating loss carryforwards, of which the
allocation of the current portion, if any, reflects the expected utilization of
such net operating losses in next twelve months. Such allocation is based our
internal financial forecast and may be subject to revision based upon actual
results.
Stock Compensation
We have five stock-based employee compensation plans. We account for
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25") and have adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price
of our employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. Accordingly, no
compensation expense has been recognized in the consolidated financial
statements in connection with employee stock option grants.
Pro forma compensation expense may not be indicative of future disclosures
because it does not take into effect pro forma compensation expense related to
grants before 1995. For purposes of estimating the fair value of each option on
the date of grant, we 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 our 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
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.
Recently Issued Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based
Compensation". SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were required. SFAS No. 123(R) shall be effective for the Company as of
the beginning of the first interim reporting period that begins after June 15,
2005. The adoption of this new accounting pronouncement is expected to have a
material impact on the financial statements of the Company commencing with the
quarter ending November 30, 2005.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and by requiring the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
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Vasomedical, Inc. and Subsidiaries
incurred during fiscal years beginning after November 24, 2004. The Company is
currently evaluating the impact of adoption of SFAS No. 151 on its financial
position and results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition in Financial Statements",
in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material effect on our financial
position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 has not had a material impact on our financial position
and results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except for the provisions that were cleared by the FASB in prior pronouncements.
The adoption of SFAS No. 149 has not had a material impact on our financial
position and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), as interpreted by FIN 46R. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. We adopted FIN
46 effective January 31, 2003. The adoption of FIN 46 did not have a material
impact on our financial position or results of operations.
In November 2002, the Emerging Issues Task Force, ("EITF") reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables", "(EITF
00-21)". That consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration of the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value is contingent on delivery of specified
items or performance conditions. Applicable revenue criteria should be
considered separately for each separate unit of accounting. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Effective September 1, 2003, we prospectively adopted the
provisions of EITF 00-21.
Results of Operations
Three Months Ended November 30, 2004 and 2003
Net revenues from sales, leases and service of our external
counterpulsation systems ("EECP" systems) for the three-month periods ended
November 30, 2004 and 2003, were $3,461,675 and $4,903,129, respectively, which
represented a decline of $1,441,454 or 29%. We reported a net loss of $1,609,823
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Vasomedical, Inc. and Subsidiaries
compared to a net loss of $2,086,942 for the three-month periods ended November
30, 2004 and 2003, respectively. Our net loss per common share was $0.03 for the
three-month period ended November 30, 2004 compared to a net loss of $0.04 for
the three- month period November 30, 2003.
Revenues
Revenues from equipment sales declined approximately 40% to $2,522,562 for
the three-month period ended November 30, 2004 as compared to $4,173,750 for the
same period for the prior year. The decline in equipment sales is due primarily
to a 33% decline in domestic units shipped and a 15% decline in the average
sales prices of new EECP systems sold in the domestic market, as well as an
unfavorable product mix reflecting a higher portion of used versus new equipment
sales, which earned a lower average selling price compared to new systems.
We believe that the domestic market for EECP systems continues to be
negatively impacted from the reduction by the Centers for Medicare and Medicaid
Services (CMS), the federal agency that administers the Medicare program for
more than 39 million beneficiaries, of approximately 34% in Medicare national
average reimbursement rates for the calendar year 2004 plus uncertainty during
much of the quarter over a proposed rate reduction for calendar year 2005. We
estimate that over 65% of the patients that receive EECP therapy are Medicare
patients. We also believe that many prospective customers are deferring sales
decisions pending the results of our Prospective Evaluation of EECP in
Congestive Heart Failure, ("PEECH") clinical trial, which we expect will be made
public in early 2005. In addition, average domestic selling prices continue to
decline reflecting the impact in the market of lower priced competitive
products. We continue to believe that our EECP systems currently sell at a
significant price premium to competitive products reflecting the clinical
efficacy and superior quality of the EECP system plus the many value added
services offered by us. However, we anticipate that this current trend of
declining prices will continue in the immediate future as our competition
attempts to capture greater market share through pricing discounts. In addition,
we sold an unusually high percentage of used equipment, which reflected the
availability of used EECP systems that had been recovered from a former
customer, as well as EECP systems that had been used to treat patients in the
PEECH clinical trial but were no longer required since the treatment portion of
the trial has been completed. These used systems were sold at average sales
prices significantly below our new systems. Lastly, we are in the process of
reorganizing territory responsibilities in our sales department due to recently
vacant and/or unproductive territories plus the restructuring of a major
independent distributor territory to direct sales. Our revenue from the sale of
EECP systems to international distributors in the second quarter of fiscal 2005
decreased approximately 42% to $137,995 compared to $239,000 in same period of
the prior year reflecting decreased volume.
The above decline in revenue from equipment sales was partially offset by a
29% increase in revenue from equipment rental and services for the three month
period ended November 30, 2004, from the same three-month period in the prior
year. Revenue from equipment rental and services represented 27% of total
revenue in the second quarter of fiscal 2005 compared to 15% in the second
quarter of fiscal 2004. The increase in both absolute amounts and percentage of
total revenue resulted primarily from an increase of $194,097, or approximately
35%, in service related revenue from $550,082 to $744,179 for the three-month
periods ended November 30, 2003 and November 30, 2004, respectively. The higher
service revenue reflects an increase in service, spare parts and consumables as
a result of the continued growth of the installed base of EECP systems plus
greater marketing focus on the sale of extended service contracts. Rental
revenue increased approximately 6% from $155,855 for the three-month period
ended November 30, 2003 to $164,706 for the three-month period ended November
30, 2004.
Gross Profit
Gross profit declined to $2,287,801 or 66% of revenues for the three-month
period ended November 30, 2004, compared to $3,209,880 or 65% of revenues for
the three-month period ended November 30, 2003. Gross profit margin as a
percentage of revenue for the three-month period ended November 30, 2004,
improved slightly compared to the same period of the prior fiscal year despite
the lower revenue and the negative impact resulting from the reduction in
average selling prices. The improvement in gross profit as a percentage of
revenue reflects the sale of our latest model EECP system, the TS4, which has a
lower cost to manufacture compared to the model TS3, which we sold in the
previous fiscal year. In addition, the gross profit margin benefited from the
recognition of previously deferred installation, in-service training and
warranty revenues generated by the adoption of EITF 00-21 in the second quarter
of fiscal year 2004, which increased from $93,750 to $389,167 in the three
months ended November 30, 2003 and November 30, 2004, respectively, as well as
the sale of a higher percentage of used equipment. Many of these used EECP
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Vasomedical, Inc. and Subsidiaries
systems carried reduced book values since they were partially amortized and as a
result generated above average gross profit margins. We have limited quantities
of the lower cost systems and do not anticipate a significant volume of used
equipment will be sold in the future. The gross profit margin also improved due
to increased service related margins resulting from higher accessory and service
contract revenues. The decline in gross profit when compared to the prior year
in absolute dollars is a direct result of the lower revenue.
Gross profits are dependent on a number of factors, particularly the mix of
EECP models sold and their respective average selling prices, the mix of EECP
units sold, rented or placed during the period, the ongoing costs of servicing
such units, and certain fixed period costs, including facilities, payroll and
insurance. Gross profit margins are generally less on non-domestic business due
to the use of distributors resulting in lower selling prices. In addition, we
anticipate that lower than usual production reflecting efforts to reduce
inventory levels in next two quarters will result in higher absorbed overhead
costs and can be expected to negatively impact future quarters' margins.
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, 2004 and 2003 were $3,088,398 or 89% of revenues and
$3,512,977 or 72% of revenues, respectively reflecting a decrease of $424,579 or
approximately 12%. The decrease in SG&A expenditures in the second quarter of
fiscal 2005 compared to fiscal 2004 resulted primarily from decreases of $70,000
and $149,758 in severance payments and sales commissions, respectively, as well
as a $214,053 reduction in administrative consulting fees. Partially offsetting
the above were increases in accounting and market research fees of $73,260 and
$168,000, respectively. The Company hired its new President and Chief Executive
Officer, Thomas Glover, in October 2004.
Research and Development
Research and development ("R&D") expenses of $785,948 or 23% of revenues
for the three months ended November 30, 2004, decreased by $211,882 or 21%, from
the prior three months ended November 30 2003, of $997,830 or 20% of revenues.
The decrease reflects lower spending related to the PEECH clinical trial,
partially offset by increased costs associated with developing the new Lumenair
EECP Therapy System. The patient treatment phase of the PEECH study was
completed in March 2004; as a result, we have incurred lower levels of spending
related to subject study activity and study management aspects of the trial. The
final six-month patient examination was completed in December 2004 and the PEECH
Steering Committee, composed of the lead physician investigators, is currently
analyzing the data. We continue to expect to be able to release the initial
results of the PEECH trial in March 2005 and, provided results of the trial are
positive, subsequently submit an application to CMS for a coverage decision
leading to reimbursement for use of EECP therapy in treatment of CHF. Based on
the above timetable we anticipate a coverage decision by CMS in early 2006. We
expect to continue to invest in product development and clinical trials through
the remainder of fiscal 2005 and beyond to further validate and expand the
clinical applications of EECP, including, but not limited to angina and heart
failure. In addition, we launched our latest generation EECP system, the
"Lumenair EECP Therapy System", in November at the American Heart Association
Scientific Sessions in New Orleans, Louisiana.
Provision for Doubtful Accounts
We collected funds from previously reserved accounts, which offset new
reserve requirements. As a result, we did not incur a charge to our provision
for doubtful accounts during the three-month period ended November 30, 2004, as
compared to $796,330 during the three-month period ended November 30, 2003.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $28,678 in the
three-month period ended November 30, 2004, from $32,880 for the same period in
the prior year. Interest expense reflects interest on loans secured to refinance
the November 2000 purchase of our headquarters and warehouse facility, as well
as on loans secured to finance the cost and implementation of a new management
information system.
Interest and Other Income, Net
Interest and other income for the second quarters of fiscal years 2005 and
2004, was $17,083 and $53,195, respectively. The decrease in interest and other
income from the prior period is attributable to lower other income resulting
from miscellaneous customer payments in the second quarter of fiscal 2005.
Although average cash balances invested during the quarter were lower than the
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Vasomedical, Inc. and Subsidiaries
prior period, interest income increased due to higher yields on invested
balances, partially offsetting the above.
Income Tax Expense, Net
During the three-months ended November 30, 2004 and 2003, we recorded a
provision for state income taxes of $11,683 and $10,000, respectively.
As of November 30, 2004, we had recorded deferred tax assets of $14,582,000
net of a $2,762,169 valuation allowance related to the anticipated recovery of
tax loss carryforwards. The amount of the deferred tax assets considered
realizable could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating sufficient taxable income prior to
the expiration of the tax loss carryforwards. We believe that the Company is
positioned for long-term growth despite the financial results achieved during
fiscal years 2005, 2004 and 2003, and that based upon the weight of available
evidence, that it is "more likely than not" that net deferred tax assets will be
realized. The "more likely than not" standard is subjective, and is based upon
management's estimate of a greater than 50% probability that its long range
business plan can be realized.
Ultimate realization of any or all of the deferred tax assets is not
assured, due to significant uncertainties associated with estimates of future
taxable income during the carryforward period. Our estimates are largely
dependent upon achieving considerable growth resulting from the successful
commercialization of EECP therapy into the congestive heart failure indication.
Such future estimates of future taxable income are based on our beliefs, as well
as assumptions made by and information currently available to us. Certain
critical assumptions associated with our estimates include:
-- that the results from the PEECH clinical trial will be
sufficiently positive to enable EECP therapy to obtain approval
for a national Medicare reimbursement coverage policy plus other
third-party payer reimbursement policies specific to the
congestive heart failure indication;
-- that the reimbursement coverage will be both broad enough in
terms of coverage language and at an amount adequate to enable
successful commercialization of EECP therapy into the congestive
heart failure indication.
-- that we be able to secure additional financing to provide
sufficient funds to market EECP therapy in the congestive heart
failure indication.
Additional factors that could cause actual results to differ
materially are the following:
-- the effect of the dramatic changes taking place in the healthcare
environment;
-- the impact of competitive procedures and products and their
pricing;
-- other medical insurance reimbursement policies;
-- unexpected manufacturing problems;
-- unforeseen difficulties and delays in the conduct of clinical
trials, peer review publications and other product development
programs;
-- the actions of regulatory authorities and third-party payers in
the United States and overseas;
-- uncertainties about the acceptance of a novel therapeutic
modality by the medical community;
-- and the risk factors reported from time to time in our SEC
reports.
The amount of the deferred tax assets considered realizable could be
reduced in the future if estimates of future taxable income during the
carryforward period are reduced or if the accounting standards are changed to
reflect a more stringent standard for evaluation of deferred tax assets.
The recorded deferred tax asset and increase to the valuation allowance
during the three months ended November 30, 2004 was $539,161.
Six Months Ended November 30, 2004 and 2003
Net revenues from sales, leases and service of our external
counterpulsation systems ("EECP" systems) for the six-month periods ended
November 30, 2004 and 2003, were $8,283,091 and $10,329,661, respectively, which
represented a decline of $2,046,570 or 20%. We reported a net loss of $2,534,153
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Vasomedical, Inc. and Subsidiaries
compared to $2,353,536 for the six-month periods ended November 30, 2004 and
2003, respectively. Our net loss per common share was $0.04 for the six-month
period ended November 30, 2004, matching our net loss of $0.04 for the six-month
period November 30, 2003.
Revenues
Revenues from equipment sales declined approximately 27% to $6,497,459 for
the six-month period ended November 30, 2004 as compared to $8,961,860 for the
same period for the prior year. The decline in equipment sales is due primarily
to a 16% decline in domestic units shipped, a 15% decline in the average sales
prices of new EECP systems sold in the domestic market, and an unfavorable
product mix reflecting a higher portion of used versus new equipment sales. Used
systems earned a lower average selling price compared to new systems, and
experienced a 35% decrease in average selling price when compared to used
systems sold in the domestic market in the first half of fiscal 2004.
We believe that the domestic market for EECP systems continues to be
negatively impacted from the reduction by the Centers for Medicare and Medicaid
Services (CMS), the federal agency that administers the Medicare program for
more than 39 million beneficiaries, of approximately 34% in Medicare national
average reimbursement rates for the calendar year 2004 plus uncertainty during
much of the first half over a proposed rate reduction for calendar year 2005. We
estimate that over 65% of the patients that receive EECP therapy are Medicare
patients. We also believe that many prospective customers are deferring sales
decisions pending the results of our Prospective Evaluation of EECP in
Congestive Heart Failure, ("PEECH") clinical trial, which we expect will be made
public in early 2005. In addition, average domestic selling prices continue to
decline reflecting the impact in the market of lower priced competitive
products. We continue to believe that our EECP systems currently sell at a
significant price premium to competitive products reflecting the clinical
efficacy and superior quality of the EECP system plus the many value added
services offered by us. However, we anticipate that this current trend of
declining prices will continue in the immediate future as our competition
attempts to capture greater market share through pricing discounts. In addition,
we sold an unusually high percentage of used equipment, which reflected the
availability of used EECP systems that had been recovered from a former
customer, as well as EECP systems that had been used to treat patients in the
PEECH clinical trial but were no longer required since the treatment portion of
the trial has been completed. These used systems were sold at average sales
prices significantly below our new systems. Furthermore, we are in the process
of reorganizing territory responsibilities in our sales department due to
recently vacant and/or unproductive territories plus the restructuring of a
major independent distributor territory to direct sales. Finally, revenue was
adversely impacted by bad weather in Florida, which caused some EECP systems
orders to be delayed.
Our revenue from the sale of EECP systems to international distributors in
the first half of fiscal 2005 increased approximately 32% to $462,995 compared
to $350,100 in same period of the prior year reflecting increased volume of new
systems.
The above decline in revenue from equipment sales was partially offset by a
31% increase in revenue from equipment rental and services for the six month
period ended November 30, 2004, from the same six-month period in the prior
year. Revenue from equipment rental and services represented 22% of total
revenue in the first half of fiscal 2005 compared to 13% in the first half of
fiscal 2004. The increase in both absolute amounts and percentage of total
revenue resulted primarily from an increase of approximately 45% in service
related revenue. The higher service revenue reflects an increase in service,
spare parts and consumables as a result of the continued growth of the installed
base of EECP systems plus greater marketing focus on the sale of extended
service contracts. Rental revenue declined approximately 18% following the
termination of several short-term rental agreements partially offsetting the
above.
Gross Profit
Gross profit declined to $5,447,424 or 66% of revenues for the six-month
period ended November 30, 2004, compared to $6,697,738 or 65% of revenues for
the six-month period ended November 30, 2003. Gross profit margin as a
percentage of revenue for the six-month period ended November 30, 2004, improved
slightly compared to the same period of the prior fiscal year despite the lower
revenue and the negative impact resulting from the reduction in average selling
prices. The improvement in gross profit as a percentage of revenue reflects the
sale of our latest model EECP system, the TS4, which has a lower cost to
manufacture compared to the model TS3, which we sold in the previous fiscal
year. In addition, the gross profit margin benefited from the recognition of
previously deferred installation, in-service training and warranty revenues
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Vasomedical, Inc. and Subsidiaries
generated by the adoption of EITF 00-21 in the second quarter of fiscal year
2004, which increased from $93,750 to $848,751 in the six month periods ended
November 30, 2003 and November 30, 2004, respectively. The gross profit margin
also improved due to increased service related margins resulting from accessory
and service contract revenue increases exceeding associated cost increases. The
decline in gross profit when compared to the prior year in absolute dollars is a
direct result of the lower revenue.
Gross profits are dependent on a number of factors, particularly the mix of
EECP models sold and their respective average selling prices, the mix of EECP
units sold, rented or placed during the period, the ongoing costs of servicing
such units, and certain fixed period costs, including facilities, payroll and
insurance. Gross profit margins are generally less on non-domestic business due
to the use of distributors resulting in lower selling prices. Consequently, the
gross profit realized during the current period may not be indicative of future
margins.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the six-months
ended November 30, 2004 and 2003 were $6,140,879 or 74% of revenues and
$6,134,429 or 59% of revenues, respectively reflecting an increase of $6,450 or
less than 1%. The increase in SG&A expenditures in both absolute amounts and as
a percentage of revenues in first half of fiscal 2005 compared to fiscal 2004
resulted primarily from increased market research and sales travel expenditures,
largely offset by decreased administrative consulting and severance fees.
Research and Development
Research and development ("R&D") expenses of $1,657,846 or 20% of revenues
for the six months ended November 30, 2004, decreased by $295,529 or 15%, from
the prior six months ended November 30 2003, of $1,953,375 or 19% of revenues.
The decrease reflects lower spending related to the PEECH clinical trial,
partially offset by increased expenditures for developing the new Lumenair EECP
Therapy System.
Provision for Doubtful Accounts
During the six-month period ended November 30, 2004, we charged $132,956 to
our provision for doubtful accounts as compared to $985,511 during the six-month
period ended November 30, 2003. The decrease was due primarily to a $680,000
provision made in the prior fiscal period associated with the write-off of all
funds due from a major customer that ceased operations in December 2003.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $59,040 in the six-month
period ended November 30, 2004, from $66,246 for the same period in the prior
year. Interest expense reflects interest on loans secured to refinance the
November 2000 purchase of our headquarters and warehouse facility, as well as on
loans secured to finance the cost and implementation of a new management
information system.
Interest and Other Income, Net
Interest and other income for the first half of 2005 and 2004, was $30,827
and $108,287, respectively. The decrease in interest and other income from the
prior period is the direct result of the absence of interest income related to
certain equipment sold under sales-type leases incurred in fiscal 2004 and lower
miscellaneous customer payments, partially offset by higher interest income due
to improved yields.
Income Tax Expense, Net
During the six-months ended November 30, 2004 and 2003, we recorded a
provision for state income taxes of $21,683 and $20,000, respectively.
As of November 30, 2004, we had recorded deferred tax assets of $14,582,000
net of a $2,762,169 valuation allowance related to the anticipated recovery of
tax loss carryforwards. The amount of the deferred tax assets considered
realizable could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating sufficient taxable income prior to
the expiration of the tax loss carryforwards. We believe that the Company is
positioned for long-term growth despite the financial results achieved during
fiscal years 2005, 2004 and 2003, and that based upon the weight of available
evidence, that it is "more likely than not" that net deferred tax assets will be
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Vasomedical, Inc. and Subsidiaries
realized. The "more likely than not" standard is subjective, and is based upon
management's estimate of a greater than 50% probability that its long range
business plan can be realized.
Ultimate realization of any or all of the deferred tax assets is not
assured, due to significant uncertainties associated with estimates of future
taxable income during the carryforward period. Our estimates are largely
dependent upon achieving considerable growth resulting from the successful
commercialization of EECP therapy into the congestive heart failure indication.
Such future estimates of future taxable income are based on our beliefs, as well
as assumptions made by and information currently available to us. (See "Income
Tax Expense, Net" in the "Three Months Ended November 30, 2004 and 2003" section
of this "Management's Discussion and Analysis of Financial Condition and Results
of Operation").
The recorded deferred tax asset and increase to the valuation allowance
during the six months ended November 30, 2004 was $854,169.
Liquidity and Capital Resources
We believe that our cash flow from operations together with our current
cash reserves will be sufficient to fund our business plan and projected capital
requirements through at least August 2005. Although we have incurred significant
losses during the last three fiscal years, we believe that the Company is
positioned for long-term growth. Our long-term growth is largely dependent upon
the successful commercialization of EECP therapy into the congestive heart
failure indication which depends on favorable results from the PEECH clinical
trial. Our long-term ability to achieve profitable operations is further
dependent on successfully completing additional debt or equity financing to
provide marketing funds necessary to launch EECP therapy in the congestive heart
failure market and to bridge the period between completion of the PEECH clinical
trial and a congestive heart failure coverage decision by CMS. While we are
currently seeking to raise such capital through public or private equity or debt
financings, there is no assurance we will be successful in these efforts. Future
capital funding, if available, may result in dilution to current shareholders.
We have financed our operations in fiscal 2005 and 2004 primarily from
working capital and operating results. At November 30, 2004, we had a cash and
cash equivalents balance of $1,913,462 and working capital of $6,866,816 as
compared to a cash and cash equivalents balance of $6,365,049 and working
capital of $9,771,870 at May 31, 2004. Our cash balances decreased $4,451,587 in
the six-month period compared to May 31, 2004, primarily due to $2,433,232 used
in investing activities and $2,083,681 used in operating activities.
The decrease in cash provided by our operating activities during the first
half of fiscal year 2005 resulted primarily from the net loss of $2,534,153 less
adjustments to reconcile net loss to net cash used in operating activities of
$450,472. Changes in our operating assets and liabilities totaled a cash use of
$7,673. The changes in the asset components primarily reflect an increase in
inventory of $1,062,827 plus higher other current assets of $204,873, primarily
prepaid insurance premiums offset by a $2,914,589 reduction in accounts
receivable due to the revenue. The changes in our operating liability components
reflect a reduction in accounts payable and accrued liabilities of $1,204,245
and other liabilities totaling $412,568. Non-cash adjustments for depreciation,
amortization, allowance for doubtful accounts and allowance for inventory
write-offs of $458,145 partially offset the above.
Net accounts receivable were 30% of revenues for the six-month period ended
November 30, 2004, compared to 44% at the end of the six-month period ended
November 30, 2003, and accounts receivable turnover improved to 5.8 times as of
November 30, 2004, as compared to 3.4 times as of November 30, 2003. Standard
payment terms on our domestic equipment sales are generally net 30 to 90 days
from shipment and do not contain "right of return" provisions. We have
historically offered a variety of extended payment terms, including sales-type
leases, in certain situations and to certain customers in order to expand the
market for our EECP products in the US and internationally. Such extended
payment terms were offered in lieu of price concessions, in competitive
situations, when opening new markets or geographies and for repeat customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable monthly payment amount
for a six to twelve month period followed by a balloon payment, if applicable.
If in our judgment the degree of collectibility is uncertain at the time of
shipment, we use the installment sales method and record revenue based on cash
receipt. During the first half of fiscal 2005 and 2004, approximately 2% and 1%,
respectively, of revenues were generated from sales in which initial payment
terms were greater than 90 days, we offered no sales- type leases and 2% and 0%
of revenues reflect cash receipts from installment sales . In general, reserves
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Vasomedical, Inc. and Subsidiaries
are calculated on a formula basis considering factors such as the aging of the
receivables, time past due, and the customer's credit history and their current
financial status. In most instances where reserves are required, or accounts are
ultimately written-off, customers have been unable to successfully implement
their EECP program. As we are creating a new market for EECP therapy and
recognizing the challenges that some customers may encounter, we have opted, at
times, on a customer-by-customer basis, to recover our equipment instead of
pursuing other legal remedies, which has resulted in our recording of a reserve
or a write-off.
Investing activities used net cash of $2,433,232 during the six-month
period ended November 30, 2004. The principal use of cash was for the purchase
of short-term certificates of deposit and treasury bills totaling $2,269,460 to
improve the yield on our unused cash balances. All of our certificates of
deposit have original maturities of greater than three months and mature in less
than twelve months. Additionally, we used $163,772 in cash primarily for the
purchase of equipment to be used in the manufacture of our EECP systems.
Our financing activities provided net cash of $65,326 during the six-month
period ended November 30, 2004, reflecting $130,666 received from the exercise
of stock options less payments on our outstanding notes and loans totaling
$65,340.
We cancelled our line of credit in August 2004 and do not currently have an
available line of credit.
The following table presents our expected cash requirements for contractual
obligations outstanding as of November 30, 2004.
Due as of Due as of
Due as of 11/30/06 and 11/30/08 and Due
Total 11/30/05 11/30/07 11/30/09 Thereafter
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt $1,163,975 $142,255 $201,020 $111,982 $708,718
Operating Leases 123,103 87,507 35,596 -- --
Litigation Settlement 267,000 133,000 134,000 -- --
Employment Agreements 140,625 140,625 -- -- --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash $1,694,703 $503,387 $370,616 $111,982 $708,718
Obligations
====================================================================================================================
Effects of Inflation
We believe that inflation and changing prices over the past three years
have not had a significant impact on our revenue or on our results of
operations.
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Vasomedical, Inc. and Subsidiaries
ITEM 3 - QUALITATIVE AND QUANTITATIVE 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 its cash and cash equivalent balances and the line of credit
agreement. 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 - PROCEDURES AND CONTROLS
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 our disclosure controls and procedures are effective. There were
no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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Vasomedical, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
None.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Registrant held its Annual Meeting of Stockholders on October
28, 2004.
B. Not Applicable
C. Three directors were elected. Alexander G. Bearn, MD; David S.
Blumenthal, MD; and Kenneth W. Rind, PhD were elected to serve
until the 2007 Annual Meeting of Stockholders or until their
successors are duly elected and qualified. The minimum number of
votes cast in favor of their elections was 50,725,523.
Another matter voted upon was the approval of the Company's
2004 Stock Option/Stock Issuance Plan covering 2,500,000 shares.
The votes cast were as follows: Votes for: 6,691,309; Votes
against: 3,522,908; and Votes abstained: 294,138.
The third matter voted upon was the ratification of the
appointment of Grant Thornton LLP as the Company's independent
registered public accounting firm for the fiscal year ended May
31, 2005. The votes cast were as follows: Votes for: 51,698,837;
Votes against: 412,999; and Votes abstained: 164,287.
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits
31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated October 4, 2004 to report
an event under Items 5.01 and 9.01.
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Vasomedical, Inc. and Subsidiaries
In accordance with to the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VASOMEDICAL, INC.
By: /s/ Thomas Glover
---------------------------------
Thomas Glover
Chief Executive Officer and Director (Principal Executive
Officer)
/s/ Thomas W. Fry
---------------------------------
Thomas W. Fry
Chief Financial Officer (Principal Financial and Accounting
Officer)
Date: January 13, 2005
Page 28