VSM MedTech reports second quarter 2006 results

Vancouver, British Columbia, August 10:  VSM MedTech Ltd. (TSX:VSM), the leading provider of magnetoencephalography (MEG) systems and solutions for functional brain imaging, today reported financial results for the second quarter ended June 30, 2006.

“We are taking substantial and decisive action to strengthen our core business,” said Paul Murdoch, VSM’s President and CEO. “We believe that a rapid turnaround in our financial performance is achievable and will be maximized with the execution of a strong business plan going forward.”

Financial Results

Consolidated revenue for the second quarter of 2006 was $3.9 million, up 192% from $1.3 million for the same period in 2005. This growth was mainly attributable to revenue recognition of two MEG systems during the quarter, compared to negligible MEG product revenue recognized in the second quarter of 2005. Partially offsetting this gain was a 28% decrease for Vital Signs Monitoring compared with a year earlier.

Consolidated net loss for the second quarter ended June 30, 2006 was $5.5 million or $0.13 per share, compared with $3.8 million or $0.09 per share for the same period in 2005. The Company’s consolidated net loss for the second quarter of 2006 before one-time adjustments for deferred share issue costs write-off, restructuring charge, and impairment of goodwill was $4.3 million or $0.10 per share.

Cash and cash equivalents at June 30, 2006 totaled $2.5 million compared with $5.4 million at December 31, 2005. Restricted cash totaled $2.0 million at June 30, 2006 compared with $1.1 million at December 31, 2005.  Restricted cash involves deposits pledged as collateral to financial institutions for standby letters of credit provided to customers and suppliers.

Financing Update

The Company requires additional financing to fund its obligations. At a special meeting of shareholders held on August 3, 2006 shareholders approved a resolution supporting the issuance of securities in connection with a proposed financing transaction with Mass Financial. The proposed transaction includes a $5 million private placement of units consisting of common shares and warrants, and a $15 million revolving line of credit that would also be convertible in units.

Under the private placement, VSM will issue 79,617,834 units at a price of $0.0628 per unit to raise gross proceeds of $5 million. Each unit will consist of one common share and one common share purchase warrant exercisable for a period of three years at an exercise price of $0.0628 per share. Mass Financial has committed to purchase 19.9% or 15,843,949 of the units and has guaranteed the entire private placement of the units.

Under the revolving line of credit, Mass Financial, or an affiliate, will issue a $15 million revolving line of credit to the Company. The line of credit will be repayable with interest equivalent to the bank prime rate and will be secured against all assets of the Company. The line of credit is convertible into units at a conversion price of $0.0628 per unit for a period of ten years. It was proposed that each unit would consist of one newly created Class A Non-Voting Common Share (“Class A Share”) and one warrant to purchase an additional Class A Share at an exercise price of $0.0628 per share for a period of three years. However, a special resolution to amend the Company’s articles to create the Class A shares was narrowly defeated. Mass Financial has advised VSM that it will work together with the Company to find an acceptable alternative to the original proposal for convertible debt extended under the revolving line of credit.

Financial Outlook

For the third quarter of 2006, VSM expects consolidated revenues from product sales and services to exceed $7.0 million, which is a 192% increase from the $2.4 million in the third quarter of 2005. The revenue outlook for the third quarter of 2006 assumes installation, acceptance and revenue recognition of four MEG systems compared to two for the third quarter of 2005. VSM had originally estimated that the MEG system contracted to the University of Hamburg, Germany would be delivered, installed, accepted and recognized in the second quarter of 2006. However, system acceptance and revenue recognition has been postponed to the third quarter of 2006.

For the full year 2006, VSM confirms its prior outlook from May 2006 that consolidated revenue should exceed $17 million. This includes MEG segment revenue in excess of $15 million, compared to $9 million in the prior year, based on orders in hand combined with anticipated MEG service and research revenue. VSM expects revenue of close to $2 million for the Vital Signs Monitoring segment compared to $2 million in the prior year.

Restructuring Update

In May 2006, the Company announced that as part of its corporate reorganization and ongoing initiatives to reduce costs, it has committed to a restructuring program to reduce the number of employees throughout the organization, including certain executives. During the three months ended June 30, 2006, the Company laid off or provided working notices to approximately 40 employees. Subsequent to the period end, the Company provided working notices to approximately 10 additional employees.

On July 17, 2006, the Company also announced the resignation of six members of the Board of Directors and the change of President and Chief Executive Officer. Concurrently, the Company appointed three new members of the Board of Directors and a new President and Chief Executive Officer. 

Financial Highlights
VSM MedTech Ltd.
Second Quarter ended June 30

The complete Consolidated Interim Financial Statements, including notes, and the associated Management's Discussion and Analysis for the second quarter of 2006 are available at the VSM web site www.vsmmedtech.com in PDF format at the Financial and Regulatory Reports tab in the Investors menu.

No Conference Call Scheduled
The Company will not conduct a conference call to review second quarter 2006 financial results.

About VSM MedTech Ltd.

VSM MedTech is the leading global provider of magnetoencephalography (MEG) systems and solutions for functional brain imaging. Targeting significant global market opportunities, VSM equips innovative healthcare providers and neuroscience centers of excellence with superior MEG technology and industry-leading customer service solutions. VSM is ISO 13485 certified for medical device manufacturing.

Cautionary Note on Forward Looking Statements

This document may contain forward-looking statements, relating to the Company's operations or to the environment in which it operates, which are based on VSM’s operations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict, or are beyond VSM’s control. A number of important factors, including those set forth in the 2005 Management's Discussion and Analysis, the latest Annual Information Form and other public filings, could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. Consequently, readers should not place any undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. VSM disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.