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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward-looking Statements. This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements regarding Non-Invasive Monitoring Systems, Inc. (the "Company" or "NIMS," also referred to as "us", "we" or "our"). These forward-looking statements represent our expectations or beliefs concerning the Company's operations, performance, financial condition, business strategies, and other information and that involve substantial risks and uncertainties. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. The Company's actual results of operations, some of which are beyond the Company's control, could differ materially from the activities and results implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the Company's: history of operating losses and accumulated deficit; immediate need for additional financing; the Company's inability to repay the Credit Facility currently due on July 31, 2011, dependence on future sales of the Exer-Rest® motion platforms; current and future purchase commitments; competition; dependence on management; changes in healthcare rules and regulations; risks related to proprietary rights; government regulation, including regulatory approvals; other factors described herein as well as the factors contained in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended July 31, 2010. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. Overview We are primarily engaged in the development, manufacture and marketing of non-invasive, whole body periodic acceleration ("WBPA") therapeutic platforms, which are motorized platforms that move a subject repetitively from head to foot. Our acceleration therapeutic platforms are the inventions of Marvin A. Sackner, M.D., our founder, Chief Executive Officer and a director. Over thirty peer reviewed scientific publications attest to the benefits of whole body periodic acceleration in animal and human research investigations. According to those studies, the application of this technology causes release of beneficial substances such as nitric oxide from the inner lining of blood vessels throughout the vasculature for improved circulation and the reduction of inflammation. These findings are not being claimed as an intended use of the device for marketing purposes, but demonstrate a potential mechanism for its benefits. Prior to 2002, our primary business was the development of computer-assisted, non-invasive diagnostic monitoring devices and related software designed to detect abnormal respiratory, cardiac and other medical conditions from sensors placed externally on the body's surface. We assigned our patents for these ambulatory monitoring devices in 1999 to the SensorMedics Division of ViaSys (which is now a unit of CareFusion Corporation ("SensorMedics")), and to privately-held VivoMetrics, Inc. ("VivoMetrics"), both of which are required to pay us royalties on sales of these products. We continue to receive royalties from SensorMedics; however, VivoMetrics ceased operations in July 2009, filed for Chapter 11 bankruptcy protection in October 2009 and has not paid royalties since July 2009. Under VivoMetrics' proposed bankruptcy plan of reorganization, our license with VivoMetrics will be assigned to another company; however, there can be no assurance as to the future amount of royalty revenue, if any, that we may derive from this license or from our existing license with SensorMedics. In 2002, we began focusing on the research, development, manufacturing, marketing and sales of non-invasive, motorized, whole body periodic acceleration ("WBPA") platforms. These therapeutic acceleration platforms are intended for use in homes, wellness centers and clinics as an aid to improve circulation and joint mobility, relieve minor aches and pains, relieve morning stiffness, relieve troubled sleep and as a mechanical feedback device for slow rhythmic breathing exercise for stress management. Our first such platform, the AT-101, was initially registered with the United States Food and Drug Administration (the "FDA") as a Class 1 (exempt) powered exercise device and was sold to physicians and their patients. In January 2005, the FDA disagreed with our device classification, and requested that we cease commercial sales and marketing of the AT-101 until we received clearance from the FDA to market the device following submission of a 510(k) application incorporating appropriate clinical trial data. Accordingly, we ceased our commercial sales and marketing of therapeutic platforms in 2005, but continued to receive royalty revenue from sales of diagnostic monitoring hardware and software by SensorMedics and VivoMetrics. 15 -------------------------------------------------------------------------------- Table of Contents NON-INVASIVE MONITORING SYSTEMS, INC In January 2005, we began development of a less costly and more efficient second generation version of the AT-101, the Exer-Rest (now designated the Exer-Rest AT). In January 2008, we received ISO 13485 certification for Canada, the United Kingdom and Europe from SGS United Kingdom Ltd., the world's leading verification and certification body. ISO 13485 certification is recognized and accepted worldwide as a sign of design and manufacturing quality for medical devices. In addition to our ISO certification, the Exer-Rest AT acceleration therapeutic platform (Class IIa) was awarded CE0120 certification, which requires several safety-related conformity tests, including clinical assessment for safety and effectiveness. The CE0120 certification is often referred to as a "passport" that allows manufacturers from anywhere in the world to sell their goods throughout the European market, as well as in many other countries. Prior to obtaining FDA registration for the sale of our therapeutic acceleration platforms in the United States, we marketed and sold the Exer-Rest AT platforms in the United Kingdom, Canada, Europe, India and Latin America. We entered into a product development and supply agreement with Sing Lin Technology Co., Ltd. ("Sing Lin") of Taichung, Taiwan on September 4, 2007. Under this agreement that was terminated effective September 2010, Sing Lin began manufacturing the third generation versions of our patented Exer-Rest motorized platforms (designated the Exer-Rest AT3800 and the Exer-Rest AT4700). We filed a 510(k) premarket notification submission with the FDA in October 2008 for approval to market the Exer-Rest line of platforms in the United States. The submission included 23 investigational and clinical studies on the vasodilatation properties of WBPA, as well as a controlled, four week clinical trial in a group of patients with chronic aches and pains carried out at the Center of Clinical Epidemiology and Biostatistics at the University of Pennsylvania Medical School. The submission supported Exer-Rest safety and efficacy for the intended uses as an aid to temporarily increase local circulation, to provide temporary relief of minor aches and pains and to provide local muscle relaxation. The FDA informed us in January 2009 that the full Exer-Rest line of products would be registered as Class I (Exempt) Medical Devices as described in the Company's 510(k) premarket notification submission, at which time we commenced marketing the Exer-Rest in the U.S. In June 2009, the FDA notified us that the additional intended use of the Exer-Rest as an aid to reduce morning stiffness would be added to the Exer-Rest's FDA registration. We currently market and sell our Exer-Rest devices in the US, Canada, UK, Europe, India and Latin America. Prior to the 2010 termination of our development and supply agreement with them, Sing Lin marketed and sold the Exer-Rest exclusively in certain Asian markets. The development of the Exer-Rest has necessitated substantial expenditures and commitments of capital, and we anticipate experiencing losses through the end of the 2011 fiscal year as we expect to expand sales in the US, Canada, the UK, Europe, India, Latin America and the Far East. We will need to raise additional capital to fulfill our business plan, but no commitment to raise such additional capital exists or can be assured. If we are unsuccessful in our efforts to expand sales and/or raise capital, we will not be able to continue our operations. Products Exer-Rest Therapeutic Devices. The Exer-Rest AT therapeutic platform is based upon the design and concept of our original AT-101 therapeutic vibrator, but has the dimensions and appearance of a commercial extra long twin bed, is more efficient, less costly and priced lower. QTM Incorporated ("QTM"), an FDA registered manufacturer (Oldsmar, FL) manufactured the device, which was built in accordance with ISO and FDA Good Manufacturing Practices. Sales of the Exer-Rest AT began overseas in October 2007. We discontinued manufacturing of the Exer-Rest AT in July 2009, and we expect to utilize our remaining inventory of these units primarily for research purposes. The Exer-Rest AT3800 and Exer-Rest AT4700, which were manufactured for us by Sing Lin prior to the termination of our agreement with them, are next generation versions of the Exer-Rest AT and further advance the acceleration therapeutic platform technology. The AT3800 (38" wide) and AT4700 (47" wide) models combine improved drive technology for quieter operation, a more comfortable "memory-foam" mattress, more convenient operation with a multi-function wireless remote and a more streamlined look to improve the WBPA experience. Sales of the Exer-Rest AT3800 and Exer-Rest AT4700 platforms began outside the US in October 2008, and US sales commenced in February 2009. LifeShirt®. The LifeShirt is a patented Wearable Physiological Computer that incorporates transducers, electrodes and sensors into a sleeveless garment. These sensors transmit vital and physiological signs to a miniaturized, battery-powered, electronic module which saves the raw waveforms and digital data to the compact flash memory of a Personal Digital Assistant ("PDA") attached to the LifeShirt. Users of the LifeShirt can enter symptoms (with intensity), mood, and medication information directly into the PDA for integration with the physiologic information collected by the LifeShirt garment. The flash memory can then be removed from the LifeShirt and the data uploaded and converted into minute-by-minute median trends of more than 30 physical and emotional signs of health and disease. Vital and physiological signs can therefore be obtained non-invasively, continuously, cheaply, and reliably with the comfortably worn LifeShirt garment system while resting, exercising, working or sleeping. The LifeShirt was sold exclusively by VivoMetrics, but has not been marketed since VivoMetrics ceased operations in July 2009. Under VivoMetrics' proposed bankruptcy plan of reorganization, our license with VivoMetrics will be assigned to another company; however, there can be no assurance as to the future amount of LifeShirt sales, if any, that may result from this license. 16-------------------------------------------------------------------------------- Table of Contents NON-INVASIVE MONITORING SYSTEMS, INC Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations set forth below under "Results of Operations" and "Liquidity and Capital Resources" should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-Q. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to royalties, inventory, tooling and equipment and contingencies. The Company's accounting policy for loss contingencies complies with ASC 450-20-25-2. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the Financial Statements set forth in Item 8 of our Annual Report on Form 10-K for the year ended July 31, 2010. Actual results may differ from these estimates. Results of Operations In January 2005, we began developing the Exer-Rest line of acceleration therapeutic platforms, which were designed to be more efficient and less expensive than the original AT-101 platform. The Exer-Rest AT platform was first available for delivery to certain locations outside of the United States in October 2007. Our newest platforms, the Exer-Rest AT3800 and AT4700, which we developed under our former agreement with Sing Lin, became available for sale in October 2008. In January 2009, the Exer-Rest line of therapeutic platforms was registered by the FDA in the United States as Class I (Exempt) Medical Devices. We began our US and international sales activity with aggressive marketing and promotional pricing beginning in February 2009. We opened our first demonstration and therapy center in Toronto, Canada in April 2009; however we closed that facility in January 2010 to focus our marketing and sales efforts on healthcare providers as well as individuals. We currently market the Exer-Rest to hospitals, cardiac rehabilitation clinics, chiropractic and physical therapy centers, senior living communities and other healthcare providers, as well as to their patients, professional athletes and other individuals. Three and six months ended January 31, 2011 compared to three and six months ended January 31, 2010 Revenues. Total revenue for the three months ended January 31, 2011 was of $187,000, as compared to $199,000 for the three months ended January 31, 2010. The $12,000 decrease was due to an $11,000 increase in royalty revenue in the 2011 period, partially offset by a $23,000 decrease in product sale revenue. Total revenues decreased from $396,000 for the six months ended January 31, 2010, to $359,000 for the six months ended January 31, 2011. This $37,000 decrease resulted from a $54,000 decrease in product sales, offset in part by a $17,000 increase in royalty revenues. Exer-Rest platform unit sales revenue during the six months ended January 31, 2011 decreased approximately 18% over the six months ended January 31, 2010. This decrease in product sales revenue was primarily attributable to deliveries of bulk orders of Exer-Rest AT3800 models to overseas distributors in the six months ended January 31, 2010. Royalty revenue from SensorMedics and VivoMetrics was $56,000 and $104,000 for the three and six months ended January 31, 2011, respectively and was $45,000 and $87,000 for the three and six months ended January 31, 2010, respectively. The $11,000 and $17,000 respective increases for the three and six month periods are primarily attributable reasonable business growth and the $10,000 receipt from VivoMetrics in 2011. As discussed above, there can be no assurance that we will receive any future royalties from the pending assignment of our license with VivoMetrics. Cost of Sales. Cost of sales for the three and six months ended January 31, 2011 was $49,000 and $94,000, respectively, as compared to $83,000 and $150,000, respectively, for the three and six months ended January 31, 2010. These $34,000 and $56,000 respective decreases were primarily the result of the decreased number of units sold in the 2011 fiscal periods. As a percentage of revenue, cost of sales was lower in the six months ended January 31, 2011 primarily because a greater proportion of units delivered in the six months ended January 31, 2010 were sold to distributors at discounted prices. Selling, general and administrative costs and expenses. Selling, general and administrative ("SG&A") costs and expenses decreased to $403,000 and $865,000, respectively, for the three and six months ended January 31, 2011, from $453,000 and $989,000, respectively, for the three and six months ended January 31, 2010. These $50,000 and $124,000 respective decreases were primarily attributable to decreases in stock-based compensation expense, payroll expenses, advertising and trade show expenses and rent, offset in part by increased accounting and legal costs attributable to our shared services arrangement with certain affiliated companies. SG&A costs and expenses include stock-based compensation expense, which totaled $45,000 for the six months ended January 31, 2011, as compared to $53,000 for the six months ended January 31, 2010. We expect payroll and other SG&A costs and expenses to decrease throughout the remainder of the 2012 fiscal year as we implement cost-containment measures to extend the utilization of ouravailable cash and credit. 17 -------------------------------------------------------------------------------- Table of Contents NON-INVASIVE MONITORING SYSTEMS, INC Research and development costs and expenses. Research and development ("R&D") costs and expenses decreased to $22,000 for the six months ended January 31, 2011 from $55,000 for the six months ended January 31, 2010, a decrease of $33,000 and decreased to $11,000 for the three months ended January 31, 2011 from $15,000 for the three months ended January 31, 2010, a decrease of $4,000. The higher costs in the three and six months ended January 31, 2010 related primarily to costs associated with the commencement of certain clinical trials. Total operating costs and expenses. Total operating costs and expenses decreased $88,000 from $551,000 for the three months ended January 31, 2010 to $463,000 for the three months ended January 31, 2011. Total operating costs and expenses decreased $213,000 from $1,194,000 for the six months ended January 31, 2010 to $981,000 for the six months ended January 31, 2011. These decreases were primarily attributable to the decrease in cost of sales related to lower sales volume, as well as the lower SG&A and R&D costs and expenses discussed above. Interest expense, net. Net interest expense was $27,000 and $46,000 in the three and six month periods ended January 31, 2011, as compared to $0 for the three and six months ended January 31, 2010, respectively. The $46,000 net interest expense in the 2011 periods was related to balances outstanding under the credit facility described below to the accompanying unaudited condensed consolidated financial statements. Liquidity and Capital Resources Our operations have been primarily financed through private sales of our equity securities and the credit facility. At January 31, 2011, we had approximately $133,000 of cash. We expect these funds will be sufficient to support our operations only through early April, 2011. If we are not able to generate significant revenue with our current marketing efforts, we will be required to obtain additional external financing to continue operations. No assurance can be given that such additional financing will be available on acceptable terms or at all. Our ability to sell additional shares of our stock and/or borrow cash could be materially adversely affected by the current climate in the Global equity and credit markets. Current economic conditions have been, and continue to be, volatile and continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business and to replace, in a timely manner, maturing liabilities. Net cash used in operating activities was $402,000 and $683,000 for six months ended January 31, 2011 and 2010, respectively. Reduced payments to Sing Lin for inventory purchases were offset by increased use of cash for other working capital items. Net cash provided by financing activities was $369,000 for the six months ended January 31, 2011, primarily from the $400,000 proceeds from the Credit Facility described in Note 6 to the accompanying unaudited condensed consolidated financial statements. Net cash used by financing activities was $33,000 for the six months ended January 31, 2010, primarily for the repayment of notes financing insurance premiums. Under our now-terminated agreement with Sing Lin, we were committed to purchase approximately $2.6 million of Exer-Rest units within one year of acceptance of the final product, which acceptance occurred in September 2008, and an additional $4.1 million and $8.8 million of products in the second and third years following acceptance of the final product, respectively. Under the agreement, we were required to pay a portion of the product purchase price at the time production orders were placed, with the balance due upon delivery. Through January 31, 2011, we paid Sing Lin $1.7 million in connection with orders placed through that date, and we will be required to make additional payments totaling approximately $60,000 upon taking delivery of the units currently in production. As of January 31, 2011, we had not placed orders sufficient to satisfy the first-year or second-year purchase obligations under the agreement. We notified Sing Lin in June 2010 that we were terminating the agreement effective September 2010, and Sing Lin in July 2010 demanded that we place orders sufficient to fulfill the three year minimum purchase obligations in the agreement. There can be no assurance that Sing Lin will not attempt to enforce its remedies against us, or pursue other potential remedies. If Sing Lin seeks to enforce remedies against us, any such remedies could have a material adverse effect on our business, liquidity and results of operations. As of January 31, 2011, the Company has receivables from and prepayments to Sing Lin of approximately $200,000, net of payables due to Sing Lin, and tooling and equipment with a net book value of approximately $235,000 remains in possession of Sing Lin and its suppliers in Asia. The ultimate realization of these assets is dependent on our ability to resolve the issue with Sing Lin, however there can be no assurance that the value of these assets will be realized. Our discussions with Sing Lin are ongoing. 2010 Credit Facility. On March 31, 2010, we entered into a Note and Security Agreement (the "Credit Facility Agreement") with Frost Gamma and Hsu Gamma (the "2010 Lenders"), pursuant to which the 2010 Lenders granted us a revolving credit line (the "Credit Facility") in the aggregate amount of up to $1.0 million, secured by all of our personal property. We are permitted to borrow and reborrow from time to time under the Credit Facility until July 31, 2011 (the "Credit Facility Maturity Date"). The interest rate payable on amounts outstanding under the Credit Facility is 11% per annum, and increases to 16% after the Credit Facility Maturity Date or after an event of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date, and amounts outstanding are prepayable at any time. As of January 31, 2011, we had drawn an aggregate of $1,000,000 under the Credit Facility and there is no available balance remaining. 18-------------------------------------------------------------------------------- Table of Contents NON-INVASIVE MONITORING SYSTEMS, INCOur financial statements have been prepared and presented on a basis assuming we will continue as a going concern. The Company had net losses totaling $1.6 million for the year ended July 31, 2010, and $657,000 for the six months ended January 31, 2011. In addition, we have an accumulated deficit of $22.0 million as of January 31, 2011, and we have potential purchase obligations outstanding at January 31, 2011 (see Note 10 to the accompanying unaudited condensed consolidated financial statements). As of January 31, 2011, we had cash and cash equivalents of approximately $133,000, and had no credit remaining under the Credit Facility. If we are unable to generate significant revenues from sales of Exer-Rest platforms, we will have insufficient funds to repay debt and continue operations beyond early April 2011. There can be no assurance that we will be able to raise additional capital on terms acceptable to us or at all. These matters raise substantial doubt about the Company's ability to continue as a going concern. |