-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DljWGMF9MpsJqaU+5UnS7lCTr7lSJWKnq15NGRIpzNnUhRWoGjFEqnlWllb5VKUN m0/cGsxcRY/JkdcAp51E5Q== 0001380878-07-000001.txt : 20070116 0001380878-07-000001.hdr.sgml : 20070115 20070116160817 ACCESSION NUMBER: 0001380878-07-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061130 FILED AS OF DATE: 20070116 DATE AS OF CHANGE: 20070116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASOMEDICAL INC CENTRAL INDEX KEY: 0000839087 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 112871434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18105 FILM NUMBER: 07532162 BUSINESS ADDRESS: STREET 1: 180 LINDEN AVENUE CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5169974600 MAIL ADDRESS: STREET 1: 150 MOTOR PARKWAY STREET 2: SUITE 408 CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /NY/ DATE OF NAME CHANGE: 19920506 10-Q 1 vaso10q-nov06.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 30, 2006 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ______________ Commission File Number: 0-18105 VASOMEDICAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2871434 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 180 Linden Ave., Westbury, New York 11590 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's Telephone Number (516) 997-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --- -- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] ---- -- Number of Shares Outstanding of Common Stock, $.001 Par Value, at January 16, 2007 65,198,592 Page 1 Vasomedical, Inc. and Subsidiaries INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Consolidated Condensed Balance Sheets as of November 30, 2006 and May 31, 2006 3 Consolidated Condensed Statements of Operations for the Six and Three Months Ended November 30, 2006 and 2005 4 Consolidated Condensed Statement of Changes in Stockholders' Equity for the Period from June 1, 2006 to November 30, 2006 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended November 30, 2006 and 2005 6 Notes to Consolidated Condensed Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28 Item 4 - Controls and Procedures 28 PART II - OTHER INFORMATION 29
Page 2 ITEM 1. FINANCIAL STATEMENTS Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, May 31, 2006 2006 ---------------- ---------------- ASSETS (Unaudited) (Derived from audited financial statements) CURRENT ASSETS Cash and cash equivalents $1,441,816 $2,385,778 Accounts receivable, net of an allowance for doubtful accounts of $364,809 at November 30, 2006, and $410,691 at May 31, 2006 806,771 843,282 Inventories, net 2,332,502 2,699,673 Other current assets 266,377 108,049 ---------------- ---------------- Total current assets 4,847,466 6,036,782 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,708,201 at November 30, 2006, and $2,613,180 at May 31, 2006 1,407,151 1,569,588 OTHER ASSETS 291,967 305,670 ---------------- ---------------- $6,546,584 $7,912,040 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $766,838 $938,095 Current maturities of long-term debt and notes payable 161,200 97,309 Sales tax payable 142,378 172,646 Deferred revenue 1,500,038 1,600,887 Accrued director and executive compensation 85,250 175,000 Accrued warranty and customer support expenses 26,500 30,500 Accrued professional fees 70,571 61,875 Accrued commissions 162,391 93,182 ---------------- ---------------- Total current liabilities 2,915,166 3,169,494 LONG-TERM DEBT 818,704 853,189 ACCRUED WARRANTY COSTS - 1,500 DEFERRED REVENUE 551,160 721,701 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.001 par value; 110,000,000 shares authorized; 65,198,592 shares at November 30, 2006, and May 31, 2006, issued and outstanding 65,198 65,198 Additional paid-in capital 46,152,283 46,148,493 Accumulated deficit (43,955,927) (43,047,535) ---------------- ---------------- Total stockholders' equity 2,261,554 3,166,156 ---------------- ---------------- $6,546,584 $7,912,040 ================ ================
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 3 Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended Three Months Ended November 30, November 30, ----------------------------------- ----------------------------------- 2006 2005 2006 2005 --------------- ---------------- --------------- ---------------- Revenues Equipment sales $1,648,148 $4,191,318 $574,932 $1,734,409 Equipment rentals and services 1,956,931 2,025,237 948,291 945,775 --------------- ---------------- --------------- ---------------- Total revenues 3,605,079 6,216,555 1,523,223 2,680,184 Cost of Sales and Services Cost of sales, equipment 908,829 1,857,405 299,487 825,148 Cost of equipment rentals and services 772,389 663,608 417,121 272,681 --------------- ---------------- --------------- ---------------- Total cost of sales and services 1,681,218 2,521,013 716,608 1,097,829 --------------- ---------------- --------------- ---------------- Gross Profit 1,923,861 3,695,542 806,615 1,582,355 Operating Expenses Selling, general and administrative 2,357,164 4,917,773 1,033,338 2,508,624 Research and development 469,285 1,115,702 140,790 603,696 Provision for doubtful accounts (4,001) 70,575 (5,682) -- --------------- ---------------- --------------- ---------------- Total operating expenses 2,822,448 6,104,050 1,168,446 3,112,320 --------------- ---------------- --------------- ---------------- LOSS FROM OPERATIONS (898,587) (2,408,508) (361,831) (1,529,965) Other Income (Expense) Interest and financing costs (37,329) (44,953) (18,440) (21,444) Interest and other income, net 35,824 40,790 15,086 21,774 --------------- ---------------- --------------- ---------------- Total other income (expense) (1,505) (4,163) (3,354) 330 --------------- ---------------- --------------- ---------------- LOSS BEFORE INCOME TAXES (900,092) (2,412,671) (365,185) (1,529,635) Income tax expense, net (8,300) (7,112,826) (3,750) (7,103,000) --------------- ---------------- --------------- ---------------- NET LOSS (908,392) (9,525,497) (368,935) (8,632,635) Preferred Stock Dividend -- (854,536) -- (48,913) --------------- ---------------- --------------- ---------------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(908,392) $(10,380,033) $(368,935) $(8,681,548) =============== ================ =============== ================ Net loss per common share - basic $(0.01) $(0.18) $(0.00) $(0.15) =============== ================ =============== ================ - diluted $(0.01) $(0.18) $(0.00) $(0.15) =============== ================ =============== ================ Weighted average common shares outstanding - basic 65,198,592 59,031,491 65,198,592 59,421,050 =============== ================ =============== ================ - diluted 65,198,592 59,031,491 65,198,592 59,421,050 =============== ================ =============== ================
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 4 Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity --------------- ------------ ---------------- ------------------ --------------- Balance at June 1, 2006 65,198,592 $65,198 $46,148,493 $(43,047,535) $3,166,156 Stock options granted for services -- -- 3,790 -- 3,790 Net loss -- -- -- (908,392) (908,392) --------------- ------------ ---------------- ------------------ --------------- Balance at November 30, 2006 65,198,592 $65,198 $46,152,283 $(43,955,927) $2,261,554 =============== ============ ================ ================== ===============
The accompanying notes are an integral part of this consolidated condensed financial statement. Page 5 Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended November 30, ----------------------------------------------- 2006 2005 ---------------------- ------------------ Cash flows from operating activities Net loss $(908,392) $(9,525,497) ---------------------- ------------------ Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 194,021 307,379 Provision for doubtful accounts (4,001) 70,575 Reserve for excess and obsolete inventory -- (82,765) Deferred income taxes -- 7,093,000 Common stock issued for services -- 101,250 Stock options granted for services 3,790 -- Changes in operating assets and liabilities Accounts receivable 40,512 (246,611) Inventories 358,654 549,675 Other current assets 33,792 155,274 Other assets (9,364) (16,583) Accounts payable, accrued expenses and other current liabilities (318,219) 25,843 Other liabilities (172,041) (114,253) ---------------------- ------------------ 127,144 7,842,784 ---------------------- ------------------ Net cash used in operating activities (781,248) (1,682,713) ---------------------- ------------------ Cash flows provided by investing activities Redemptions of certificates of deposit -- 1,464,757 ---------------------- ------------------ Net cash provided by investing activities -- 1,464,757 ---------------------- ------------------ Cash flows provided by (used in) financing activities Payments on long term debt and notes payable (162,714) (250,579) Payments of preferred stock dividends -- (51,206) Payments of preferred stock issue costs -- (314,383) Proceeds from sale of convertible preferred stock -- 2,500,000 ---------------------- ------------------ Net cash provided by (used in) financing activities (162,714) 1,883,832 ---------------------- ------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (943,962) 1,665,876 Cash and cash equivalents - beginning of period 2,385,778 989,524 ---------------------- ------------------ Cash and cash equivalents - end of period $1,441,816 $2,655,400 ====================== ================== Non-cash investing and financing activities were as follows: Inventories transferred to (from) property and equipment, attributable to operating leases, net $8,517 $(55,938) Issue of note for purchase of insurance policy $192,120 $302,052 Preferred stock dividends $-- $803,330 Preferred stock issue costs $-- $227,087 Supplemental Disclosures Interest paid $37,329 $44,953 Income taxes paid $6,534 $22,086
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 6 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 NOTE A - ORGANIZATION AND PLAN OF OPERATIONS The Company was incorporated in Delaware in July 1987. During fiscal 1996, the Company commenced the commercialization of its EECP(R) external counterpulsation system ("EECP(R)"), a microprocessor-based medical device for the noninvasive, outpatient treatment of patients with cardiovascular disease. EECP(R) is marketed worldwide to hospitals and physician private practices. To date, the Company's revenues have been generated primarily from customers in the United States. The Company has incurred large declines in revenue and significant operating losses during the last four fiscal years and its ability to continue operating as a going concern is dependent upon achieving profitability or through additional debt or equity financing. Achieving profitability is largely dependent on sufficiently reducing operating costs and halting the current trend of declining revenue. The Company's ability to halt the declines in revenue and restore its revenue base is largely dependent upon increasing the demand in the refractory angina market and operating in a more efficient manner. If the Company is not able to restore its revenue base and sufficiently reduce operating costs to generate an adequate cash inflow, or raise additional capital, it will not be able to continue as a going concern. In order to reduce the Company's cash usage and bring its cost structure more into alignment with current revenue, the Company initiated a restructuring in January 2006, to reduce personnel and spending on marketing and development projects. Additional cost reductions are continuing. However, revenue has continued to decline and the Company has not achieved its goal of profitability. Management believes that cash flow from operations together with current cash reserves will be sufficient to fund minimum projected capital requirements through at least May 2007, assuming the current revenue rate. The Company may seek to raise capital through public or private equity or debt financings or by other means. If the Company is unable to raise additional funds when needed, it may need to further scale back operations, research, marketing or sales efforts or obtain funds through arrangements with collaborative partners or others that may require the Company to license or relinquish rights to technologies or products. Future capital funding, if available, may result in dilution to current shareholders, and new investors could have rights superior to existing stockholders. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Reclassifications Certain reclassifications have been made to the prior years' amounts to conform with the current year's presentation. NOTE B - STOCK-BASED COMPENSATION In December 2004, the FASB issued Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition. Page 7 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 Prior to first quarter of fiscal 2007 the Company accounted for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, no compensation expense has been recognized in the consolidated financial statements in connection with employee stock option grants prior to fiscal 2007. The following table illustrates the proforma effect on net loss and loss per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation, for the six and three months ended November 30, 2005.
-------------------- --------------------- Six Months Ended Three Months Ended November 30, 2005 November 30, 2005 -------------------- --------------------- Net loss attributable to common stockholders, as reported $(10,380,033) $(8,681,548) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards (433,742) (221,448) -------------------- --------------------- Pro forma net loss $(10,813,775) $(8,902,996) ==================== ===================== Loss per share: Basic and diluted - as reported $(0.18) $(0.15) ==================== ===================== Basic and diluted - pro forma $(0.18) $(0.15) ==================== =====================
During the six-month period ended November 30, 2006, the Board of Directors granted non-qualified stock options under the 1997 Stock Option/Stock Issuance Plan to one director to purchase an aggregate of 150,000 shares of common stock, at an exercise price of $.09 per share, and granted non-qualified stock options under the 1999 Stock Option/Stock Issuance Plan to three directors to purchase an aggregate of 450,000 shares of common stock, at an exercise price of $.09 per share, and granted non-qualified stock options under the 2004 Stock Option/Stock Issuance Plan to one officer to purchase an aggregate of 200,000 shares of common stock, at an exercise price of $.11 per share, which represented the fair market value of the underlying common stock at the time of the respective grants. These options vest over a two year period, and expire ten years from the date of grant. Stock-based compensation expense recognized under SFAS 123 (R) for the six months ended November 30, 2006 was $3,790 which comprised the fair value of the stock options discussed above. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changesin the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Page 8 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 The fair value of the Company's stock-based awards was estimated assuming no expected dividends and the following weighted-average assumptions for the six months ended November 30, 2006: Expected life (years) 5 Expected volatility 114.09% Risk-free interest rate 4.76% Expected dividend yield 0.00%
Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123(R). During the six-month period ended November 30, 2006, options to purchase 1,219,026 shares of common stock at an exercise price of $.22 - $3.875 were cancelled. NOTE C - LOSS PER COMMON SHARE Basic loss per share is based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted loss per share is based on the weighted number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon the exercise of stock options and warrants, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period, plus conversion of convertible preferred stock into common shares based upon the most advantageous conversion rate during the period. The following table sets forth the computation of basic and diluted loss per common share:
Six Months Ended Three Months Ended November 30, November 30, ---------------------------------- ------------------------------- 2006 2005 2006 2005 --------------- --------------- -------------- ------------- Numerator: Net loss $(908,392) $(9,525,497) $(368,935) $(8,632,635) Deemed dividend related to beneficial conversion feature on Series D preferred stock -- (786,247) -- -- Series D preferred stock dividends -- (68,289) -- (48,913) --------------- --------------- -------------- ------------- Net loss attributable to common stockholders - basic and diluted $(908,392) $(10,380,033) $(368,935) $(8,681,548) =============== =============== ============== ============= Denominator: Basic - weighted average common shares 65,198,592 59,031,491 65,198,592 59,421,050 Stock options -- -- -- -- Warrants -- -- -- -- Convertible preferred stock -- -- -- -- --------------- --------------- -------------- ------------- Diluted - weighted average common shares 65,198,592 59,031,491 65,198,592 59,421,050 =============== =============== ============== ============= Basic and diluted loss per common share $(0.01) $(0.18) $(0.00) $(0.15) =============== =============== ============== =============
Page 9 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 Options, warrants, and convertible preferred stock, in accordance with the following table, were excluded from the computation of diluted loss per share for the six and three months ended November 30, 2006 and 2005, respectively, because the effect of their inclusion would be antidilutive.
Six and three months ended November 30, -------------------------------------- 2006 2005 ---------------- ----------------- Options to purchase common stock 7,593,049 7,372,179 Warrants to purchase common stock 2,254,538 2,454,538 Convertible preferred stock -- 5,125,000 ---------------- ----------------- 9,847,587 14,951,717 ================ =================
NOTE D - INVENTORIES, NET Inventories, net consist of the following:
November 30, May 31, 2006 2006 ----------------- ----------------- Raw materials $720,063 $863,952 Work in process 1,017,413 1,243,986 Finished goods 595,026 591,735 ----------------- ----------------- $2,332,502 $2,699,673 ================= =================
At November 30, 2006 and May 31, 2006, the Company has recorded reserves for excess and obsolete inventory of $677,166. NOTE E - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
November 30, May 31, 2006 2006 ---------------- --------------- Land $ 200,000 $ 200,000 Building and improvements 1,383,976 1,383,976 Office, laboratory and other equipment 1,436,362 1,444,850 EECP(R) systems under operating leases or under loan for clinical trials 815,143 874,071 Furniture and fixtures 162,068 162,068 Leasehold improvements 117,803 117,803 ---------------- --------------- 4,115,352 4,182,768 Less: accumulated depreciation and amortization (2,708,201) (2,613,180) ---------------- --------------- $1,407,151 $1,569,588 ================ ===============
NOTE F - NOTES PAYABLE The Company financed the purchase of Director's and Officer's Liability Insurance through the issuance of a note with a principal value of $192,120. The note, which bears interest at 8.15%, is payable in ten monthly installments consisting of principal and interest, and expires in April 2007. The balance outstanding at November 30, 2006, of $97,685 is presented on the consolidated condensed balance sheet in current maturities of long-term debt and notes payable. Page 10 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 NOTE G - LONG-TERM DEBT The following table sets forth the computation of long-term debt:
November 30, May 31, 2006 2006 ----------------- --------------- Facility loans (a) $ 882,219 $ 914,528 Term loans (b) - 35,970 ----------------- --------------- 882,219 950,498 Less: current portion (63,515) (97,309) ----------------- --------------- $ 818,704 $ 853,189 ================= ===============
(a) The Company purchased its headquarters and warehouse facility and secured notes of $641,667 and $500,000, respectively, under two programs sponsored by New York State. These notes, which bear interest at 7.8% and 6%, respectively, are payable in monthly installments consisting of principal and interest payments over fifteen-year terms, expiring in September 2016 and January 2017, respectively, and are secured by the building. (b) In fiscal years 2003 and 2004, the Company financed the cost and implementation of a management information system and secured several notes, aggregating approximately $305,219. The notes, which bear interest at rates ranging from 7.5% through 12.5%, were payable in monthly installments consisting of principal and interest payments over four-year terms, and expired at various times between August and October 2006. As of November 30, 2006 the loans have been paid in full. NOTE H - DEFERRED REVENUES The changes in the Company's deferred revenues are as follows:
Six Months Ended Three Months Ended November 30, November 30, ------------------------------ ------------------------------ 2006 2005 2006 2005 ------------- ------------- ------------- ------------- Deferred Revenue at the beginning of the period $2,322,588 $2,551,532 $2,066,031 $2,476,763 ADDITIONS Deferred extended service contracts 1,049,461 1,177,310 658,927 666,455 Deferred in-service and training 25,000 85,000 7,500 37,500 Deferred service arrangements 75,000 265,000 22,500 112,500 RECOGNIZED AS REVENUE Deferred extended service contracts (1,241,476) (1,143,855) (635,427) (563,855) Deferred in-service and training (25,000) (85,000) (5,000) (35,000) Deferred service arrangements (154,375) (288,957) (63,333) (133,333) ------------- ------------- ------------- ------------- Deferred revenue at end of period 2,051,198 2,561,030 2,051,198 2,561,030 Less: current portion (1,500,038) (1,718,581) (1,500,038) (1,718,581) ------------- ------------- ------------- ------------- Long-term deferred revenue at end of period $551,160 $842,449 $551,160 $842,449 ============= ============= ============= =============
Page 11 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) November 30, 2006 NOTE I - WARRANTY COSTS The changes in the Company's product warranty liability are as follows:
Six Months Ended Three Months Ended November 30, November 30, ------------------------------- ------------------------------ 2006 2005 2006 2005 ------------- ------------- ------------- ------------- Warranty liability at the beginning of the $32,000 $118,333 $30,000 $95,000 period Expense for new warranties issued 30,000 15,000 9,000 3,000 Warranty amortization (35,500) (68,333) (12,500) (33,000) ------------- ------------- ------------- ------------- Warranty liability at end of period 26,500 65,000 26,500 65,000 Less: current portion (26,500) (62,000) (26,500) (62,000) ------------- ------------- ------------- ------------- Long-term warranty liability at end of period $ -- $3,000 $ -- $3,000 ============= ============= ============= =============
NOTE J - INCOME TAXES During the six-months ended November 30, 2006 and 2005, we recorded a provision for state income taxes of $8,300 and $20,000, respectively. As of November 30, 2006, the recorded deferred tax assets were $19,865,489, reflecting an increase of $306,031 during the six months ended November 30, 2006, which was offset by the valuation allowance of the same amount. Ultimate realization of any or all of the deferred tax assets is not assured, due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carryforward period. In February 2006, we concluded that, based upon the weight of available evidence, it was "more likely than not" that the net deferred tax asset would not be realized and increased the valuation allowance to bring the net deferred tax asset carrying value to zero. NOTE K - COMMITMENTS AND CONTINGENCIES Employment Agreements The approximate aggregate minimum compensation obligation under active employment agreements at November 30, 2006 is summarized as follows:
Twelve months ended November 30, Amount - ------------------------------------------------------ ---------------- 2007 $260,000 2008 210,167 ---------------- Total $470,167 ================
Litigation The Company is currently, and has in the past been, a party to various routine legal proceedings incident to the ordinary course of business. The Company believes that the outcome of all such pending legal proceedings in the aggregate is unlikely to have a material adverse effect on the business or consolidated financial condition of the Company. Page 12 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipated", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; uncertainties about the acceptance of a novel therapeutic modality by the medical community; and the risk factors reported from time to time in the Company's SEC reports , including the ability of the Company to continue as a going concern. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments. General Overview Vasomedical, Inc. incorporated in Delaware in July 1987, develops, manufactures and markets EECP(R) therapy systems to deliver its proprietary form of enhanced external counterpulsation therapy. EECP(R) therapy is a noninvasive, outpatient therapy used in the treatment of ischemic cardiovascular diseases, currently used to manage chronic stable angina and heart failure. The therapy increases blood flow and oxygen supply to the heart muscle and other organs and decreases the heart's workload and need for oxygen, while also improving function of the endothelium, the inner lining of blood vessels throughout the body, lessening resistance to blood flow. We provide hospitals and physician private practices with EECP(R) equipment, treatment guidance, and a staff training and equipment maintenance program designed to provide optimal patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced external counterpulsation systems. For more information visit www.vasomedical.com. We have Food and Drug Administration (FDA) clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock, however our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina or angina equivalent symptoms in patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures, including patients with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease, etc. Patients with primary diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary indication for treatment with EECP(R) therapy is angina or angina equivalent symptoms. We recently sponsored a pivotal, randomized clinical trial to demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart failure patients. This trial, known as PEECH (Prospective Evaluation of EECP(R) in Congestive Heart Failure), was intended to provide additional evidence of the safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate heart failure and to support our application for expansion of the Medicare national reimbursement coverage policy to include mild-to-moderate heart failure as a primary indication. Results of the trial were initially published on line by the Journal of the American College of Cardiology (JACC) on August 25, 2006, and in print in its September 19, 2006 issue. JACC is the official journal of the American College of Cardiology. The PEECH trial was a positive clinical trial, having met the statistical requirement of meeting at least one of its co-primary endpoints, a significant difference in the proportion of patients satisfying a prespecified threshold of improvement in exercise duration. The trial also demonstrated significant improvements in favor of EECP(R) therapy on several important secondary endpoints, including exercise duration and improvement in symptom status and quality of life. Measures of change in peak oxygen consumption were not statistically significant in the overall study Page 13 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS population, though a trend favoring EECP(R) therapy was present in early follow-up. Patients in the trial who had an ischemic etiology, i.e. pre-existing coronary artery disease, demonstrated a greater response to EECP(R) therapy than those who had an idiopathic (non-ischemic) etiology. Very recently, a second report of results from the PEECH trial was published in the November-December 2006 issue of the journal Congestive Heart Failure, focusing on the results of a prespecified subgroup analysis in trial patients age 65 and over. This analysis demonstrated a statistically positive response on both co-primary endpoints of the trial in patients receiving EECP(R) therapy versus those who did not, i.e. a significantly larger proportion of patients undergoing EECP(R) therapy met or exceeded prespecified thresholds of improvement in exercise duration and peak oxygen consumption. Moreover, the patients age 65 and older who received EECP(R) therapy demonstrated the greatest differences in exercise duration, peak oxygen consumption and functional class (symptom status) compared with those who did not receive EECP(R) therapy. The preliminary results of the PEECH trial were presented at the American College of Cardiology scientific sessions in March 2005. On June 20, 2005, the Centers for Medicare and Medicaid Services (CMS) accepted our application for expansion of reimbursement coverage of EECP(R) therapy to include patients with New York Heart Association (NYHA) Class II/III stable heart failure symptoms with an ejection fraction of <, or = 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a primary indication, as well as patients with Canadian Cardiovascular Society Classification (CCSC) II, i.e. chronic, stable mild angina. On June 23, 2005, CMS also received a request from a competing manufacturer of external counterpulsation therapy equipment, to reconsider the reimbursement coverage policy. They requested expansion of coverage to include 1) treatment of congestive heart failure, to include NYHA Class II, III with a left ventricular ejection fraction (LVEF) <, or = 40%, and acute heart failure; 2) treatment of stable angina to include CCSC II angina; 3) treatment of acute myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005, they amended their request to include NYHA Class IV heart failure. On March 20, 2006, the Centers for Medicare and Medicaid Services (CMS) issued their Decision Memorandum regarding this reconsideration with the opinion "that the evidence is not adequate to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of: o Canadian Cardiovascular Society Classification (CCSC) II angina o Heart Failure - New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of <, or = 35% - New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of <, or = 40% - New York Heart Association Class IV heart failure - Acute heart failure o Cardiogenic shock o Acute myocardial infarction." They commented in their decision memorandum that they were not able to apply full weight to the evidence generated by the PEECH trial, as it had not yet been published in a peer-reviewed medical journal by the time they were required to issue a final decision on this application. Moreover, they did not opine on whether they would consider the results of the trial when published to be sufficient evidence to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of New York Heart Association Class II/III stable heart failure symptoms with an ejection fraction of <, or = 35%. They did, however, reiterate in the decision memorandum that "Current coverage as described in Section 20.20 of the Medicare National Coverage Determination (NCD) manual will remain in effect." We will continue to educate the marketplace that EECP(R) therapy is a therapy for ischemic cardiovascular disease and that patients with a primary Page 14 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also eligible for reimbursement under the current coverage policy, provided the primary indication for treatment with EECP(R) therapy is angina or angina equivalent symptoms and the patient satisfies other listed criteria. Additionally, we will continue to pursue expansion of coverage for EECP(R)therapy with Medicare and other third-party payers as evidence of its clinical utility develops. Critical Accounting Policies Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission, or SEC, in December 2001, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note A of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2006, includes a summary of our significant accounting policies and methods used in the preparation of our financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Our critical accounting policies are as follows: Revenue Recognition We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably assured. In the United States, we recognize revenue from the sale of our EECP(R) systems in the period in which we deliver the system to the customer. Revenue from the sale of our EECP(R) systems to international markets is recognized upon shipment, during the period in which we deliver the product to a common carrier, as are supplies, accessories and spare parts delivered to both domestic and international customers. Returns are accepted prior to the in-service and training subject to a 10% restocking charge or for normal warranty matters, and we are not obligated for post-sale upgrades to these systems. In addition, we use the installment method to record revenue based on cash receipts in situations where the account receivable is collected over an extended period of time and in our judgment the degree of collectibility is uncertain. In most cases, revenue from domestic EECP(R) system sales is generated from multiple-element arrangements that require judgment in the areas of customer acceptance, collectibility, the separability of units of accounting, and the fair value of individual elements. Effective September 1, 2003, we adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", ("EITF 00-21"), on a prospective basis. The principles and guidance outlined in EITF 00-21 provide a framework to determine (a) how the arrangement consideration should be measured (b) whether the arrangement should be divided into separate units of accounting, and (c) how the arrangement consideration should be allocated among the separate units of accounting. We determined that the domestic sale of our EECP(R) systems includes a combination of three elements that qualify as separate units of accounting: i. EECP(R) equipment sale, ii. provision of in-service and training support consisting of equipment set-up and training provided at the customer's facilities, and iii. a service arrangement (usually one year), consisting of: service by factory-trained service representatives, material and labor costs, emergency and remedial service visits, preventative maintenance, software upgrades, technical phone support and preferred response times. Each of these elements represent individual units of accounting as the delivered item has value to a customer on a stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements normally do not contain a general right of return relative to the delivered item. We determine fair value based on the price of the deliverable when it is sold separately or based on third-party evidence. In accordance with the guidance in EITF 00-21, we use the residual method to allocate the arrangement consideration when it does not have fair value of the EECP(R) system sale. Under the residual method, the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered items. Assuming all other criteria for revenue recognition have been met, we recognize revenue for: Page 15 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS i. EECP(R) equipment sales, when delivery and acceptance occurs based on delivery and acceptance documentation received from independent shipping companies or customers, ii. in-service and training, following documented completion of the training, and iii. the service arrangement, ratably over the service period, which is generally one year. In-service and training generally occurs within three weeks of shipment and our return policy states that no returns will be accepted after in-service and training has been completed. The amount related to in-service and training is recognized as revenue at the time the in-service and training is completed and the amount related to service arrangements is recognized as service revenue ratably over the related service period, which is generally one year. Costs associated with the provision of in-service and training and the service arrangement, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as incurred . We also recognize revenue generated from servicing EECP(R) systems that are no longer covered by the service arrangement, or by providing sites with additional training, in the period that these services are provided. Revenue related to future commitments under separately priced extended service agreements on our EECP(R) system are deferred and recognized ratably over the service period, generally ranging from one year to four years. Costs associated with the provision of service and maintenance, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the consolidated balance sheets. Revenues from the sale of EECP(R) systems through our international distributor network are generally covered by a one-year warranty period. For these customers we accrue a warranty reserve for estimated costs to provide warranty parts when the equipment sale is recognized. We have also entered into lease agreements for our EECP(R) systems, generally for terms of one year or less, that are classified as operating leases. Revenues from operating leases are generally recognized, in accordance with the terms of the lease agreements, on a straight-line basis over the life of the respective leases. For certain operating leases in which payment terms are determined on a "fee-per-use" basis, revenues are recognized as incurred (i.e., as actual usage occurs). The cost of the EECP(R) system utilized under operating leases is recorded as a component of property and equipment and is amortized to cost of sales over the estimated useful life of the equipment, not to exceed five years. There were no significant minimum rental commitments on these operating leases at November 30, 2006. Accounts Receivable, net The Company's accounts receivable - trade are due from customers engaged in the provision of medical services. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due 30 to 90 days from shipment and are stated at amounts due from customers net of allowances for doubtful accounts, returns, term discounts and other allowances. Accounts outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of our accounts receivable by aging category. In determining these percentages, we look at historical write-offs of our receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Inventories, net The Company values inventory at the lower of cost or estimated market, cost being determined on a first-in, first-out basis. The Company often places EECP(R) systems at various field locations for demonstration, training, evaluation, and other similar purposes at no charge. The cost of these EECP(R) Page 16 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS systems is transferred to property and equipment and is amortized over the next two to five years. The Company records the cost of refurbished components of EECP(R) systems and critical components at cost plus the cost of refurbishment. The Company regularly reviews inventory quantities on hand, particularly raw materials and components, and records a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to our products as well as forecasts of future product demand. Effective June 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards No. 151, "Inventory Costs", on a prospective basis. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. As a result of adopting SFAS No. 151, we absorbed approximately $89,000 less in fixed production overhead into inventory. Deferred Revenues We record revenue on extended service contracts ratably over the term of the related warranty contracts. Effective September 1, 2003, we prospectively adopted the provisions of EITF 00-21. Upon adoption of the provisions of EITF 00-21 we began to defer revenue related to EECP(R) system sales for the fair value of installation and in-service training to the period when the services are rendered and for warranty obligations ratably over the service period, which is generally one year. Warranty Costs Equipment sold is generally covered by a warranty period of one year. Effective September 1, 2003, we adopted the provisions of EITF 00-21 on a prospective basis. Under EITF 00-21, for certain arrangements, a portion of the overall system price attributable to the first year service arrangement is deferred and recognized as revenue over the service period. As such, we no longer accrue warranty costs upon delivery but rather recognize warranty and related service costs as incurred. Prior to September 1, 2003, we accrued a warranty reserve for estimated costs to provide warranty services when the equipment sale was recognized. Equipment sold to international customers through our distributor network is generally covered by a one year warranty period. For these customers we accrue a warranty reserve for estimated costs of providing a parts only warranty when the equipment sale is recognized. The factors affecting our warranty liability included the number of units sold and historical and anticipated rates of claims and costs per claim. Net Loss per Common Share Basic loss per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted loss per share are based on the weighted number of common and potential dilutive common shares outstanding. The calculation takes into account the shares that may be issued upon the exercise of stock options and warrants, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period. Income Taxes Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. In estimating future tax consequences, we generally consider all expected future events other than an enactment of changes in the tax laws or rates. The deferred tax asset is continually evaluated for realizability. To the extent our judgment regarding the realization of the deferred tax assets change, an adjustment to the allowance is recorded, with an offsetting increase or decrease, as appropriate, in income tax expense. Such adjustments are recorded in the period in which our estimate as to the realizability of the asset changed that it is "more likely than not" that all of the deferred tax assets will be realized. The "more likely than not" standard is subjective, and is based upon our estimate of a greater than 50% probability that our long range business plan can be realized. Page 17 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference. The deferred tax asset we recorded relates primarily to the realization of net operating loss carryforwards, of which the allocation of the current portion, if any, reflects the expected utilization of such net operating losses in next twelve months. Such allocation is based on our internal financial forecast and may be subject to revision based upon actual results. Stock-based Employee Compensation In December 2004, the FASB issued Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition. The Company has five stock-based employee compensation plans. Prior to second quarter of fiscal 2007 the Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, no compensation expense has been recognized in the consolidated financial statements in connection with employee stock option grants prior to fiscal 2007. In May 2006, the compensation committee of the board of directors accelerated the vesting provision of all outstanding stock options and warrants so that they were fully vested at May 31, 2006, and as a result the Company expects that the adoption of SFAS No. 123(R) will not have an immediate material effect on its financial statements, however as new stock options are issued the Company has adopted SFAS No 123(R) and this will have a material effect on its quarterly and annual financial statements, in the form of additional compensation expense. It is not possible to precisely determine the expense impact of adoption since a portion of the ultimate expense that is recorded will likely relate to awards that have not yet been granted. The expense associated with these future awards can only be determined based on factors such as the price for the Company's common stock, volatility of the Company's stock price and risk free interest rates as measured at the grant date. However, the pro forma disclosures related to SFAS No. 123 included in the Company's historic financial statements are relevant data points for gauging the potential level of expense that might be recorded in future periods. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price Page 18 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123 (R). Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing Transactions", an amendment of FASB Statements No. 66 and 67 (SFAS 152) was issued in December 2004 and becomes effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that SFAS 152 will have an effect on future financial statements. In December 2004, the FASB issued FASB Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29". SFAS No. 153 amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods after June 15, 2005. The Company does not expect the adoption of SFAS No. 153 to have a material impact on the Company's consolidated financial statements. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 ("SFAS No. 154"), "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. The Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140, was issued in February 2006 and is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. Certain parts of this Statement may be applied prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not expect that SFAS 155 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140, pertains to the servicing of financial assets and was issued in March 2006 and should be adopted as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect that SFAS 156 will have any significant effect on future financial statements. In March 2005, FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective application for interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged. The Company does not expect that FIN 47 will have any significant effect on future financial statements. Page 19 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In December 2004, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) issued Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions (SOP 04-2). SOP 04-2 is effective for financial statements issued for fiscal years beginning after June 15, 2005, with earlier application encouraged. The Company does not expect that SOP 04-2 will have any effect on future financial statements. In September 2005, AcSEC issued Statement of Position 05-1: Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 is effective for fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company does not expect that SOP 05-1 will have any effect on future financial statements. FASB Staff Position (FSP) FAS 13-1--Accounting for Rental Costs Incurred during a Construction Period, was issued on October 6, 2005, and becomes effective for new transactions or arrangements entered into after the beginning of the first fiscal quarter following the date that the final FSP is posted by the FASB. The Company does not expect that FSP 13-1 will have any significant effect on future financial statements. On June 29, 2005, the FASB ratified the consensus reached for Emerging Issues Task Force (EITF) Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements). The consensus in this Issue should be applied to fiscal years beginning after December 15, 2005, and reported as a change in accounting estimate effected by a change in accounting principle as described in paragraph 19 of FASB Statement 154. The Company does not expect that EITF 05-5 will have any significant effect on future financial statements. On September 28, 2005, the FASB ratified the consensus reached for EITF Issue No. 05-7, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues. The provisions of this Issue should be applied to future modifications of debt instruments beginning in the first interim or annual reporting period beginning after December 15, 2005. The Company expects that the application of EITF 05-7 could have an effect on interest and debt valuations in future financial statements. It is not possible to determine the impact, if any, from the application since the Company does not presently have any convertible debt. On July 13, 2006, the FASB issued Interpretation No. 48 for Uncertainty in Income Taxes and Interpretation of FASB Statement 109. Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial statements disclosure of tax position taken or expected to be taken on a tax return. Additionally, Interpretation No. 48 provides guidance on depreciation, classification, interest and penalties accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is currently evaluating whether the adoption of Interpretation No. 48 will have a material effect on our consolidated financial position, results of operations and cash flows. In July 2006, the FASB issued Staff Position ("FSB") on FAS 13, FSP FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. FSP FAS 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease and amends FAS 13 Accounting for Leases. FSP FAS 13-2 is effective for fiscal years beginning December 15, 2006, with earlier application permitted. The Company does not expect that FSP FAS 13-2 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Page 20 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company does not expect that this pronouncement will have any significant effect on future financial statements. FASB Staff Position (FSP) No. FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. Posted on April 13, 2006. An enterprise shall apply the guidance in this FSP prospectively to all entities (including newly created entities) with which that enterprise first becomes involved and to all entities previously required to be analyzed under Interpretation 46(R) when a reconsideration event has occurred pursuant to paragraph 7 of Interpretation 46(R) beginning the first day of the first reporting period beginning after June 15, 2006. Early application is permitted for periods for which financial statements have not yet been issued. Retrospective application to the date of the initial application of Interpretation 46(R) is permitted but not required. Retrospective application, if elected, must be completed no later than the end of the first annual reporting period ending after July 15, 2006. The Company does not expect that this pronouncement will have any significant effect on future financial statements. FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143 (FIN 47) was issued in March 2005. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective application for interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged. The Company does not expect that FIN 47 will have any significant effect on future financial statements. FASB Staff Position (FSP) No. FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors, was posted in March 27, 2006 and is effective for fiscal years beginning after June 15, 2006. It provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. This FSP also amends certain provisions of FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, and FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company does not expect that (FSP) No. FTB 85-4-1 will have any effect on future financial statements. Results of Operations Three Months Ended November 30, 2006 and 2005 Net revenue from sales, leases and service of our EECP(R) systems for the three-month periods ended November 30, 2006 and 2005, was 1,523,223 and $2,680,184, respectively, which represented a decline of $1,156,961 or 43%. We reported a net loss of $368,935 compared to $8,632,635 for the three-month periods ended November 30, 2006 and 2005, respectively. Our net loss per common share was $0.00 for the three-month period ended November 30, 2006 compared to a net loss of $0.15 per share for the three-month period November 30, 2005. The decrease in the net loss per share is due primarily to a $7,103,000 income tax expense valuation reserve recorded in November 30, 2005 for the remaining value of the deferred tax asset. Revenues Revenue from equipment sales declined approximately 67% to $574,932 for the three-month period ended November 30, 2006 as compared to $1,734,409 for the same period for the prior year. The decline in equipment sales is due primarily Page 21 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS to a 59% decline in the number of equipment shipments and a 68% decrease in average sales prices. A higher mix of used equipment versus both newer model equipment and new equipment was the primary cause of the decrease in average sales prices. We believe the decline in domestic units shipped reflects weakened demand in the refractory angina market as existing capacity is more fully utilized, coupled with increased direct and indirect competition. We anticipate that demand for EECP(R) systems will remain soft until there is greater clinical acceptance for the use of EECP(R) therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines or an expansion of the current CMS national reimbursement policy to include some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others. Despite this, many cardiology clinicians appear to be waiting for approval of reimbursement coverage for heart failure as a primary indication before they will move forward with the treatment of ischemic heart failure patients with angina equivalent symptoms. Reluctance to bill for ischemic heart failure patients under the current coverage guidelines, failure to get or maintain adequate reimbursement coverage for angina and heart failure would adversely affect our business prospects. We anticipate that a prevailing trend of declining prices will continue in the immediate future as our competition attempts to capture greater market share through pricing discounts. We sold an unusually high percentage of used equipment in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006, which reduced the average selling price in that period. The average price of new systems sales declined approximately 67% in the second quarter of fiscal 2007 compared to the same period in the prior year. Lastly, we continue to reorganize certain territory responsibilities in our sales department due to vacant and/or unproductive territories. Our revenue from the sale of EECP(R) systems to international distributors in the second quarter of fiscal 2007 increased approximately 255% to $230,000 compared to $90,000 in same period of the prior year reflecting increased volume. The above decline in revenue was also partially offset by a less than 1% increase in revenue from equipment rental and services for the three-month period ended November 30, 2006, from the same three-month period in the prior year. Revenue from equipment rental and services represented 62% of total revenue in the second quarter of fiscal 2007 compared to 56% in the second quarter of fiscal 2006. The increase in the absolute amounts and the increase in the percentage of total revenue resulted primarily from a 1% change in service related revenue, offset by a 64% decline in rental revenue. The decline was due to a decrease in the rental install base from the prior period ended November 30, 2005. Gross Profit The gross profit declined to $806,615 or 53% of revenues for the three-month period ended November 30, 2006, compared to $1,582,355 or 59% of revenues for the three-month period ended November 30, 2005. Gross profit margin as a percentage of revenue for the three-month period ended November 30, 2006, decreased compared to the same period of the prior fiscal year mainly due to the higher fixed production unit costs associated with reduced production in the last two fiscal quarters. In addition, adoption of SFAS No. 151 lowered the amount of fixed overhead costs absorbed into inventory in the second quarter of fiscal 2007. The decline in gross profit when compared to the prior year in absolute dollars is principally due to the lower sales volume. Gross profits are dependent on a number of factors, particularly the mix of EECP(R) models sold and their respective average selling prices, the mix of EECP(R) units sold, rented or placed during the period, the ongoing costs of servicing such units, and certain fixed period costs, including facilities, payroll and insurance. Gross profit margins are generally less on non-domestic business due to the use of distributors resulting in lower selling prices. Consequently, the gross profit realized during the current period may not be indicative of future margins. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the three-months ended November 30, 2006 and 2005, were $1,033,338 or 68% of revenues and $2,508,624 or 94% of revenues, respectively reflecting a decrease of $1,475,286 or approximately 59%. The decrease in SG&A expenditures in the second quarter of Page 22 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS fiscal 2007 compared to fiscal 2006 resulted primarily from decreased sales and marketing expenditures reflecting lower sales and marketing personnel and travel, plus reduced market research and advertising costs. Research and Development Research and development ("R&D") expenses of $140,790 or 9% of revenues for the three months ended November 30, 2006, decreased by $462,906 or 77%, from $603,696 or 23% of revenues for the three months ended November 30 2005. The decrease is primarily attributable to lower new product development spending and reduced spending on clinical trials. Provision for Doubtful Accounts During the three-month period ended November 30, 2006, the Company reversed $5,682 from its provision for doubtful accounts as compared to not recording a charge during the three-month period ended November 30, 2005. The decrease in the provision is a direct result of the second quarter of fiscal 2007 decrease in accounts receivable and sales from the corresponding quarter ended November 30, 2005. Interest Expense and Financing Costs Interest expense and financing costs decreased to $18,440 in the three-month period ended November 30, 2006, from $21,444 for the same period in the prior year. Interest expense primarily reflects interest on loans secured to refinance the November 2000 purchase of the Company's headquarters and warehouse facility, as well as on loans secured to finance the cost and implementation of a new management information system. As of November 30, 2006 the loans related to the cost and implementation of the management information system have been paid in full. Interest and Other Income, Net Interest and other income for the three months ended November 30 2006 and 2005, were $15,086 and $21,774 respectively. Income Tax Expense, Net During the three-months ended November 30, 2006 and 2005, we recorded a provision for state income taxes of $3,750 and $10,000, respectively. As of November 30, 2006, the recorded deferred tax assets were $19,865,489, reflecting an increase of $123,836 during the three months ended November 30, 2006, which was offset by the valuation allowance of the same amount. Ultimate realization of any or all of the deferred tax assets is not assured, due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carryforward period. In February 2006, we concluded that, based upon the weight of available evidence, it was "more likely than not" that the net deferred tax asset would not be realized and increased the valuation allowance to bring the net deferred tax asset carrying value to zero. Six Months Ended November 30, 2006 and 2005 Net revenue from sales, leases and service of our EECP(R) systems for the six-month periods ended November 30, 2006 and 2005, was $3,605,079 and $6,216,555, respectively, which represented a decline of $2,611,476 or 42%. We reported a net loss of $908,392 compared to $9,525,497 for the six-month periods ended November 30, 2006 and 2005, respectively. Our net loss per common share was $0.01 for the six-month period ended November 30, 2006 compared to a net loss of $0.18 per share for the six-month period November 30, 2005. The decrease in the net loss per share is due primarily to a $7,112,826 income tax valuation reserve established in November 2005 for the remaining value of the deferred tax asset. Page 23 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues Revenue from equipment sales declined approximately 61% to $1,648,148 for the six-month period ended November 30, 2006 as compared to $4,191,318 for the same period for the prior year. The decline in equipment sales is due primarily to a 51% decline in the number of equipment shipments, and a 63% decrease in average sales prices. A higher mix of used equipment sold versus both newer model equipment and new equipment was the primary cause of the decrease in average sales prices. We believe the decline in domestic units shipped reflects weakened demand in the refractory angina market as existing capacity is more fully utilized, coupled with increased direct and indirect competition. We anticipate that demand for EECP(R) systems will remain soft until there is greater clinical acceptance for the use of EECP(R) therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines or an expansion of the current CMS national reimbursement policy to include some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others. Despite this, many cardiology clinicians appear to be waiting for approval of reimbursement coverage for heart failure as a primary indication before they will move forward with the treatment of ischemic heart failure patients with angina equivalent symptoms. Reluctance to bill for ischemic heart failure patients under the current coverage guidelines, failure to get or maintain adequate reimbursement coverage for angina and heart failure would adversely affect our business prospects. We anticipate that a prevailing trend of declining prices will continue in the immediate future as our competition attempts to capture greater market share through pricing discounts. We sold an unusually high percentage of used equipment in the second half of fiscal 2007 compared to the second half of fiscal 2006, which reduced the average selling price in that period. The average price of new systems sales declined approximately 72% in the first and second quarters of fiscal 2007 compared to the same period in the prior year. Lastly, we continue to reorganize certain territory responsibilities in our sales department due to vacant and/or unproductive territories. Our revenue from the sale of EECP(R) systems to international distributors in the first and second quarters of fiscal 2007 increased approximately 64% to $647,760 compared $395,000 in same period of the prior year reflecting increased volume. The above decline in revenue was also partially due to a 3% decrease in revenue from equipment rental and services for the six-month period ended November 30, 2006, from the same six-month period in the prior year. Revenue from equipment rental and services represented 54% of total revenue in the first and second quarter of fiscal 2007 compared to 33% in the first and second quarters of fiscal 2006. The decrease in the absolute amounts and the increase in the percentage of total revenue resulted primarily from a less than a 1% change in service related revenue, offset by a 69% decline in rental revenue. The decline was due to a decrease in the rental installed base from the prior period ended November 30, 2005. Gross Profit The gross profit declined to $1,923,861 or 53% of revenues for the six-month period ended November 30, 2006, compared to $3,695,542 or 59% of revenues for the six-month period ended November 30, 2005. Gross profit margin as a percentage of revenue for the six-month period ended November 30, 2006, decreased compared to the same period of the prior fiscal year mainly due to the higher fixed production unit costs associated with reduced production in the last two fiscal quarters. In addition, adoption of SFAS No. 151 lowered the amount of fixed overhead costs absorbed into inventory in the first and second quarters of fiscal 2007. The decline in gross profit when compared to the prior year in absolute dollars is a direct result of the lower sales volume. Gross profits are dependent on a number of factors, particularly the mix of EECP(R) models sold and their respective average selling prices, the mix of EECP(R) units sold, rented or placed during the period, the ongoing costs of servicing such units, and certain fixed period costs, including facilities, payroll and insurance. Gross profit margins are generally less on non-domestic business due to the use of distributors resulting in lower selling prices. Consequently, the gross profit realized during the current period may not be indicative of future margins. Page 24 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the six-months ended November 30, 2006 and 2005, were $2,357,164 or 65% of revenues and $4,917,773 or 79% of revenues, respectively reflecting a decrease of $2,560,609 or approximately 52%. The decrease in SG&A expenditures in the first half of fiscal 2007 compared to fiscal 2006 resulted primarily from decreased sales and marketing expenditures reflecting fewer sales and marketing personnel and reduced travel, plus lower market research, and advertising costs. Research and Development Research and development ("R&D") expenses of $469,285 or 13% of revenues for the six months ended November 30, 2006, decreased by $646,417 or 58%, from the six months ended November 30 2005, of $1,115,702 or 18% of revenues. The decrease is primarily attributable to lower new product development spending and reduced spending on clinical trials. Provision for Doubtful Accounts During the six-month period ended November 30, 2006, the Company reversed $4,001 from its provision for doubtful accounts as compared to recording $70,575 during the six-month period ended November 30, 2005. The decrease in the provision is a direct result of the first half of fiscal 2007 decrease in accounts receivable and sales from the corresponding quarter ended November 30, 2005. Interest Expense and Financing Costs Interest expense and financing costs decreased to $37,329 in the six-month period ended November 30, 2006, from $44,953 for the same period in the prior year. Interest expense primarily reflects interest on loans secured to refinance the November 2000 purchase of the Company's headquarters and warehouse facility, as well as on loans secured to finance the cost and implementation of a new management information system. As of November 30, 2006 the loans related to the cost and implementation of the management information system have been paid in full. Interest and Other Income, Net Interest and other income for the first half of fiscal 2007 and fiscal 2006, were $35,824 and $40,790, respectively. Income Tax Expense, Net During the six-months ended November 30, 2006 and 2005, we recorded a provision for state income taxes of $8,300 and $20,000, respectively. As of November 30, 2006, the recorded deferred tax assets were $19,865,489, reflecting an increase of $306,031 during the six months ended November 30, 2006, which was offset by the valuation allowance of the same amount. Ultimate realization of any or all of the deferred tax assets is not assured, due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carryforward period. In February 2006, we concluded that, based upon the weight of available evidence, it was "more likely than not" that the net deferred tax asset would not be realized and increased the valuation allowance to bring the net deferred tax asset carrying value to zero. Liquidity and Capital Resources We have financed our operations in fiscal 2007 and fiscal 2006 from working capital mainly provided by the issuance of preferred stock. At November 30, 2006, we had cash, and cash equivalents of $1,441,816 and working capital of $1,932,300 as compared to cash, cash equivalents, and certificates of deposit totalling $2,385,778 and working capital of $2,867,288 at May 31, 2006. Our cash, cash equivalents, and certificates of deposit balances decreased $943,962 in fiscal year 2007 primarily due to cash used in operating activities of $781,248 and cash used in financing activities of $162,714. Page 25 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The decrease in cash used in operating activities during the first half of fiscal year 2007 resulted primarily from the net loss of $908,392 plus adjustments to reconcile net loss to net cash used in operating activities of $781,248. Changes in our operating assets and liabilities were $66,666. The changes in the asset components primarily reflect an increase in accounts receivable of $40,512, lower inventory of $358,654 and an increase in other current assets of $33,792. The changes in our operating liability components reflect a decrease in accounts payable and accrued liabilities of $318,219 and a decrease in other liabilities of $172,041. Non-cash adjustments amounted to $193,810 which partially offset the above. Net accounts receivable were 22% of revenues for the six-month period ended November 30, 2006, compared to 14% at the end of the six-month period ended November 30, 2005, and accounts receivable turnover was 6 times as of November 30, 2006, and November 30, 2005. Standard payment terms on our domestic equipment sales are generally net 30 to 90 days from shipment and do not contain "right of return" provisions. We have historically offered a variety of extended payment terms, including sales-type leases, in certain situations and to certain customers in order to expand the market for our EECP(R) products in the US and internationally. Such extended payment terms were offered in lieu of price concessions, in competitive situations, when opening new markets or geographies and for repeat customers. Extended payment terms cover a variety of negotiated terms, including payment in full - net 120, net 180 days or some fixed or variable monthly payment amount for a six to twelve month period followed by a balloon payment, if applicable. During the first half of fiscal 2007 and 2006, less than 1% of revenues were generated from sales in which initial payment terms were greater than 90 days and we offered no sales-type leases during either period. In general, reserves are calculated on a formula basis considering factors such as the aging of the receivables, time past due, and the customer's credit history and their current financial status. In most instances where reserves are required, or accounts are ultimately written-off, customers have been unable to successfully implement their EECP(R) program. As we are creating a new market for the EECP(R) therapy and recognizing the challenges that some customers may encounter, we have opted, at times, on a customer-by-customer basis, to recover our equipment instead of pursuing other legal remedies, which has resulted in our recording of a reserve or a write-off. There were no investing activities during the six-month period ended November 30, 2006. Our financing activities used cash of $162,714 during the six-month period ended November 30, 2006, reflecting payments on our outstanding notes and loans. We have incurred large declines in revenue and significant operating losses during the last four fiscal years and our ability to continue operating as a going concern is dependent upon achieving profitability or through additional debt or equity financing. Achieving profitability is largely dependent on sufficiently reducing operating costs and halting the current trend of declining revenue. Our ability to halt the declines in revenue and restore our revenue base is largely dependent upon increasing the demand in the refractory angina market and operating in a more efficient manner. If we are not able to restore our revenue base and sufficiently reduce operating costs to generate an adequate cash inflow, or raise additional capital, we will not be able to continue as a going concern. We believe that our projected cash flow from operations together with our current cash reserves and working capital will be sufficient to fund our business plan and projected capital requirements through at least May 2007, assuming current revenue rate. However, we have incurred significant losses during the last four fiscal years and our ability to maintain current operations is dependent upon achieving profitable operations or through additional debt or equity financing. Future capital funding, if available, may result in dilution to current shareholders. Page 26 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents the Company's expected cash requirements for contractual obligations outstanding as of November 30, 2006.
Due as of Due as of Due as of 11/30/08 and 11/30/10 and Due Total 11/30/07 11/30/09 11/30/11 Thereafter - -------------------------------------------------------------------------------------------------------------------- Long-Term Debt $882,219 $63,515 $142,038 $136,966 $539,700 Notes Payable 97,685 97,685 - - - Employment Agreements 470,167 260,000 210,167 - - ----------------------------------------------------------------------------------- Total Contractual Cash $1,450,071 $421,200 $352,205 $136,966 $539,700 Obligations ===================================================================================
Effects of Inflation We believe that inflation and changing prices over the past three years have not had a significant impact on our revenue or on our results of operations. Page 27 Vasomedical, Inc. and Subsidiaries ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain financial market risks, including changes in interest rates. All of our revenue, expenses and capital spending are transacted in US dollars. Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalent balances. The majority of our investments are in short-term instruments and subject to fluctuations in US interest rates. Due to the nature of our short-term investments, we believe that there is no material risk exposure. ITEM 4 - CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of November 30, 2006, our disclosure controls and procedures are effective to provide reasonable assurances that such disclosure controls and procedures satisfy their objectives and that the information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the required time periods. There were no changes during the fiscal quarter ended November 30, 2006 in our internal controls or in other factors that could have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Page 28 Vasomedical, Inc. and Subsidiaries PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS: None. ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS: None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION: None ITEM 6 - EXHIBITS Exhibits 31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 29 Vasomedical, Inc. and Subsidiaries In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VASOMEDICAL, INC. By: /s/ Thomas Glover ------------------------------------- Thomas Glover Chief Executive Officer and Director (Principal Executive Officer) /s/ Tricia Efstathiou ------------------------------------- Tricia Efstathiou Chief Financial Officer (Principal Financial and Accounting Officer) Date: January 16, 2007 Page 30 EX-31 2 vaso10q-nov06ex31.txt CERTIFICATIONS Exhibit 31 CERTIFICATION BY THOMAS GLOVER PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Thomas Glover, certify that: 1. I have reviewed this report on Form 10-Q of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: January 16, 2007 /s/ Thomas Glover ---------------------------------- Thomas Glover Chief Executive Officer Exhibit 31 CERTIFICATION BY TRICIA EFSTATHIOU PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Tricia Efstathiou, certify that: 1. I have reviewed this report on Form 10-Q of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: January 16, 2007 /s/ Tricia Efstathiou ----------------------------------- Tricia Efstathiou Chief Financial Officer EX-32 3 vaso10q-nov06ex32.txt CERTIFICATIONS Exhibit 32 CERTIFICATION OF PERIODIC REPORT I, Thomas Glover, Chief Executive Officer of Vasomedical, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the three months ended November 30, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 16, 2007 /s/ Thomas Glover ------------------------------------- Thomas Glover Chief Executive Officer I, Tricia Efstathiou, Chief Financial Officer of Vasomedical, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the three months ended November 30, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 16, 2007 /s/ Tricia Efstathiou ------------------------------------- Tricia Efstathiou Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----