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 February 28, 2009
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-2871434
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
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]
Smaller Reporting Company [ ]
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 April 10, 2009
99,843,004
Page 1
Vasomedical, Inc. and Subsidiaries
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets as of
February 28, 2009 and May 31, 2008 3
Consolidated Condensed Statements of Operations for the
Nine and Three Months Ended February 28, 2009 and
February 29 2008 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended February 28, 2009, and February 29,
2008 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Item 4T - Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1A - Risk Factors 24
Item 6 - Exhibits 24
Page 2
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
February 28, 2009 May 31, 2008
--------------------- ------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 997,592 $ 2,653,999
Short-term investment 299,074 -
Accounts receivable, net of an allowance for doubtful accounts of
$101,453 at February 28, 2009, and $270,183 at May 31, 2008 684,657 717,849
Inventories, net 1,645,922 1,652,678
Other current assets 153,988 58,933
--------------------- ------------------
Total current assets 3,781,233 5,083,459
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,882,625 at February 28, 2009, and $2,178,566 at May 31, 2008 144,703 57,170
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
$182,392 at February 28, 2009, and $101,775 at May 31, 2008 386,484 407,101
OTHER ASSETS 190,058 213,336
--------------------- ------------------
$ 4,502,478 $ 5,761,066
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 594,277 $ 822,244
Sales tax payable 134,202 149,304
Deferred revenue - current portion 1,046,664 1,132,445
Deferred gain on sale-leaseback of building - current portion 53,245 53,245
Accrued professional fees 41,200 74,320
Due to related parties 200,000 -
--------------------- ------------------
Total current liabilities 2,069,588 2,231,558
--------------------- ------------------
LONG-TERM LIABILITIES
Deferred revenue 396,437 485,608
Accrued rent expense 14,541 8,656
Deferred gain on sale-leaseback of building 128,676 168,610
Other long-term liabilities 11,900 -
--------------------- ------------------
Total long term liabilities 551,554 662,874
--------------------- ------------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued - -
Common stock, $.001 par value; 200,000,000 shares authorized;
98,943,004 shares at February 28, 2009, and 93,768,004 at
May 31, 2008, issued and outstanding 98,943 93,768
Additional paid-in capital 48,264,612 48,068,432
Accumulated deficit (46,482,219) (45,295,566)
--------------------- ------------------
Total stockholders' equity 1,881,336 2,866,634
--------------------- ------------------
$ 4,502,478 $ 5,761,066
===================== ==================
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)
Nine months Nine months Three months Three months
ended February ended February ended February ended February
28, 29, 28, 29,
2009 2008 2009 2008
--------------- ---------------- --------------- ---------------
Revenues
Equipment sales $ 1,742,093 $ 1,517,985 $ 497,299 $ 427,445
Equipment rentals and services 1,717,770 2,397,600 492,018 760,249
--------------- ---------------- --------------- ---------------
Total revenues 3,459,863 3,915,585 989,317 1,187,694
--------------- ---------------- --------------- ---------------
Cost of Sales and Services
Cost of sales, equipment 1,245,601 1,174,214 354,256 409,160
Cost of equipment rentals and services 769,525 873,411 226,650 247,088
--------------- ---------------- --------------- ---------------
Total cost of sales and services 2,015,126 2,047,625 580,906 656,248
--------------- ---------------- --------------- ---------------
Gross profit 1,444,737 1,867,960 408,411 531,446
--------------- ---------------- --------------- ---------------
Operating Expenses
Selling, general and administrative 2,297,189 1,932,645 668,046 732,351
Research and development 415,108 362,315 135,154 117,313
--------------- ---------------- --------------- ---------------
Total operating expenses 2,712,297 2,294,960 803,200 849,664
--------------- ---------------- --------------- ---------------
Loss from operations (1,267,560) (427,000) (394,789) (318,218)
--------------- ---------------- --------------- ---------------
Other Income (Expenses)
Interest and financing costs - (16,605) - -
Interest and other income, net 48,670 47,513 12,135 12,275
Amortization of deferred gain on
sale-leaseback of building 39,934 31,060 13,311 13,312
--------------- ---------------- --------------- ---------------
Total other income, net 88,604 61,968 25,446 25,587
--------------- ---------------- --------------- ---------------
Loss before income taxes (1,178,956) (365,032) (369,343) (292,631)
Income tax expense, net (7,697) (14,197) (95) (3,750)
--------------- ---------------- --------------- ---------------
Net loss applicable to common stockholders $ (1,186,653) $ (379,229) $(369,438) $ (296,381)
=============== ================ =============== ===============
Net loss per common share
- basic and diluted $ (0.01) $ (0.00) $ (0.00) $ (0.00)
=============== ================ =============== ===============
Weighted average common shares outstanding
- basic and diluted 95,468,923 91,687,349 97,931,768 93,761,337
=============== ================ =============== ===============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Nine Months
Ended February Ended February
28, 29,
----------------- -----------------
2009 2008
----------------- -----------------
Cash flows used in operating activities
Net loss $ (1,186,653) $ (379,229)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization of property and equipment 74,939 149,582
Amortization of deferred gain on sale-leaseback of building (39,934) (31,060)
Provision for doubtful accounts - (27,524)
Amortization of deferred distributor costs 80,617 76,333
Expenses paid for distributor agreement - (40,490)
Stock-based compensation 141,357 81,414
Changes in operating assets and liabilities:
Accounts receivable, net 33,192 (16,645)
Inventories, net (110,222) 468,248
Other current assets (95,055) (80,487)
Accounts payable, deferred revenue accrued expenses and other
current liabilities (356,085) (210,119)
Other liabilities (89,175) (90,643)
Due to related party 200,000 -
----------------- -----------------
Net cash used in operating activities (1,347,019) (100,620)
----------------- -----------------
Cash flows provided by (used in) investing activities
Proceeds from the building sale-leaseback - 1,400,000
Expenses paid for sale-leaseback of building - (89,143)
Purchases of property and equipment (10,314) -
Purchases of short-term investments (299,074) -
----------------- -----------------
Net cash provided by (used in) investing activities (309,388) 1,310,857
----------------- -----------------
Cash flows provided by financing activities
Payments on long term debt and notes payable - (851,015)
Proceeds from Securities Purchase agreement - 1,500,000
Expenses paid in relation to Securities Purchase Agreement - (124,110)
----------------- -----------------
Net cash provided by financing activities - 524,875
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,656,407) 1,735,112
----------------- -----------------
Cash and cash equivalents - beginning of period 2,653,999 850,288
----------------- -----------------
Cash and cash equivalents - end of period $ 997,592 $ 2,585,400
================= =================
Non-cash investing and financing activities were as follows:
Inventories transferred to property and equipment, attributable
to operating leases, net $ 116,978 $ 14,672
================= =================
Common stock issued for distribution agreement $ 60,000 $ 468,386
================= =================
The accompanying notes are an integral part of these consolidated condensed
financial statements
Page 5
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
NOTE A - ORGANIZATION AND PLAN OF OPERATIONS
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock.
NOTE B - BASIS OF PRESENTATION
Basis of Presentation and Use of Estimates
The accompanying consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S.GAAP") and pursuant to the accounting and
disclosure rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and disclosures normally included in the
consolidated condensed financial statements prepared in accordance with U.S.
GAAP have been condensed or omitted pursuant to such rules and regulations.
Accordingly, these consolidated condensed financial statements should be read in
connection with the audited consolidated financial statements and related notes
thereto included in the Company's Annual Report for the year ended May 31, 2008,
as filed with the SEC on Form 10-K. These consolidated condensed financial
statements include the accounts of the Company over which it exercises control.
In the opinion of management, the accompanying consolidated condensed financial
statements reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of interim results for the Company.
The results of operations for any interim period are not necessarily indicative
of results to be expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated condensed
financial statements, the disclosure of contingent assets and liabilities in the
consolidated condensed financial statements and the accompanying notes, and the
reported amounts of revenue and expenses and cash flows during the periods
presented. Actual amounts and results could differ from those estimates. The
estimates the Company makes are based on historical factors, current
circumstances and the experience and judgment of the Company's management. The
Company evaluates its assumptions and estimates on an ongoing basis and may
employ third party experts to assist in the Company's evaluations.
NOTE C - LIQUIDITY
During the last several years, we incurred operating losses. We have
attempted to achieve profitability by reducing operating costs and halting the
trend of declining revenue, and to reduce cash usage through bringing our cost
structure more into alignment with current revenues. By engaging in
restructurings the Company has reduced personnel costs. The Company has
negotiated new terms on professional fees, facility expenses, and shipping and
supply costs. The Company is also looking to obtain a revolving line of credit
to help stabilize cash flow and generate sales by offering potential customers
extended payment terms on our EECP(R) therapy systems.
During the first quarter of fiscal year 2008, we raised capital through a
private equity financing and by the sale of our facility under a leaseback
agreement.
o On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. (Kerns). Concurrently with our entry into
the Securities Purchase Agreement, we also entered into a Distribution
Agreement and a Supplier Agreement with Living Data Technology
Corporation (Living Data), an affiliate of Kerns.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
We sold to Kerns, pursuant to the Securities Purchase Agreement,
21,428,572 shares of our common stock at $.07 per share for an
aggregate of $1,500,000, as well as a five-year warrant to purchase
4,285,714 shares of our common stock at an initial exercise price of
$.08 per share (the Warrant). The agreement further provided for the
appointment to our Board of Directors of two representatives of Kerns.
In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both
Kerns and Living Data, have been appointed members of our Board of
Directors. On October 16, 2008, Mr. Jun Ma was appointed President and
Chief Executive Officer of the Company. Pursuant to the Distribution
Agreement, we have become the exclusive distributor in the United
States of the AngioNew(R) ECP systems manufactured by Living Data. As
additional consideration for such agreement, we agreed to issue an
additional 6,990,840 shares of our common stock to Living Data.
Pursuant to the Supplier Agreement, Living Data is now the exclusive
supplier to us of the ECP therapy systems that we market under the
registered trademark EECP(R). The Distribution Agreement and the
Supplier Agreement each have an initial term extending through May 31,
2012.
Pursuant to a Registration Rights Agreement, we granted to Kerns and
Living Data, subject to certain restrictions, "piggyback registration
rights" covering the shares sold to Kerns as well as the shares
issuable upon exercise of the Warrant and the shares issued to Living
Data.
o On August 15, 2007, we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale were
approximately $425,000, after payment in full of the two secured notes
on our facility, brokers fees, closing costs, and the opening of a
certificate of deposit in accordance with the provisions of the new
lease.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock having a fair market value of
$60,000 at time of issue.
NOTE D - STOCK-BASED COMPENSATION
The Company complies with Statement of Financial Standards No. 123 (revised
2004), Share-Based Payment ("SFAS No. 123 (R)"), SFAS No. 123(R) requires all
share-based awards to employees, including grants of employee stock options, to
be recognized in the consolidated condensed financial statements based on their
estimated fair values.
During the nine-month period ended February 28, 2009, the Company's Board
of Directors did not grant any non-qualified stock options.
During the nine-month period ended February 28, 2009, the Company's Board
of Directors granted 100,000 shares of common stock to one employee of the
Company having a fair market value of $0.08 per share at the time of the
respective grant.
During the nine-month period ended February 28, 2009, the Company's Board
of Directors granted 2,000,000 shares of common stock to eight outside directors
of the Company having a fair market value of $0.06 per share at the time of the
respective grant.
During the nine-month period ended February 28, 2009, the Company's Board
of Directors granted 75,000 shares of common stock to one outside director of
the Company having a fair market value of $0.06 per share at the time of the
respective grant.
Stock-based compensation expense recognized under SFAS No. 123(R) was
$141,357 and $81,414 for the nine months ended February 28, 2009 and February
29, 2008, respectively. These expenses are included in selling, general, and
administrative in the consolidated condensed statements of operations. The stock
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
based compensation expenses for each period reflect share-based awards
outstanding during such period, including awards granted both prior and during
such period. 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-pricing model was developed for use in estimating the fair
value of share-based awards. In addition, Black-Scholes option pricing model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Share-based awards 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).
NOTE E -LOSS PER COMMON SHARE
Basic loss per common share is computed as loss applicable to common
stockholders divided by the weighted-average number of common shares outstanding
for the period. Diluted loss per common share reflects the potential dilution
that could occur if securities or other contracts to issue common shares were
exercised or converted to common stock. However, since the company had net
losses for all periods presented, diluted loss per common share is equal to
basic loss per common share for those periods, as any potentially dilutive
securities would become antidilutive.
Basic and diluted losses per common share were less than $0.01 and $0.01
for the three and nine months ended February 28, 2009 and less than $0.01 for
the three and nine months ended February 29, 2008.
Stock options and warrants, in accordance with the following table, were
excluded from the computation of diluted loss per share for the tree and nine
months ended February 28, 2009 and February 29 2008, because the effect of their
inclusion would be antidilutive.
Three and Nine Three and Nine
Months Ended Months Ended
February 28, February 29,
----------------------------------------
2009 2008
------------------ -----------------
Stock options 4,847,977 5,886,710
Warrants 6,540,252 6,540,252
------------------ -----------------
11,388,229 12,426,962
================== =================
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
NOTE F - FAIR VALUE MEASUREMENTS
The Company's assets recorded at fair value have been categorized based
upon a fair value hierarchy in accordance with SFAS No. 157.
The following table presents information about the Company's assets and
liabilities measured at fair value as of February 29, 2009:
Quoted Prices Significant
in Active Other Significant Balance
Markets for Observable Unobservable as of
Identical Assets Inputs Inputs February 28,
(Level 1) (Level 2) (Level 3) 2009
-------------------- ------------------ ----------------- ----------------
Assets
Cash equivalents invested in
money market fund $ 313,751 $ - $ - $ 313,751
-------------------- ------------------ ----------------- ----------------
$ 313,751 $ - $ - $ 313,751
==================== ================== ================= ================
The fair values of the Company's cash equivalents unvested in money market
fund are determined through market, observable and corroborated sources.
NOTE G - INVENTORIES
Inventories, net of reserves, consist of the following:
At February 28, 2009 and May 31, 2008, the Company had reserves for excess
and obsolete inventory of $581,725 and $594,042, respectively.
February 28, 2009 May 31, 2008
--------------------- ---------------------
Raw materials $ 758,352 $ 936,035
Work in process 519,558 603,925
Finished goods 368,012 112,718
--------------------- ---------------------
$ 1,645,922 $ 1,652,678
===================== =====================
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
NOTE H - DEFERRED REVENUE
The changes in the Company's deferred revenues are as follows:
Nine months Nine months Three months Three months
ended February ended February ended February ended February
28, 29, 28, 29,
2009 2008 2009 2008
----------------- ------------------ ----------------- --------------
Deferred revenue at the beginning of the period $ 1,618,053 $ 1,756,352 $ 1,486,800 $ 1,598,241
Additions:
Deferred extended service contracts 926,241 1,334,506 293,348 427,067
Deferred in-service and training 27,500 30,000 5,000 12,500
Deferred service arrangements 93,000 143,750 22,500 63,750
Deferred service arrangement obligations 600 8,850 - 1,050
Recognized as revenue:
Deferred extended service contracts (1,046,066) (1,575,282) (313,848) (497,751)
Deferred in-service and training (27,500) (17,500) (2,500) (7,500)
Deferred service arrangements (146,327) (110,796) (46,999) (38,877)
Deferred service arrangement obligations (2,400) (13,350) (1,200) (1,950)
----------------- ------------------ ----------------- --------------
Deferred revenue at end of period 1,443,101 1,556,530 1,443,101 1,556,530
Less: current portion 1,046,664 1,177,547 1,046,664 1,177,547
----------------- ------------------ ----------------- --------------
Long-term deferred revenue at end of period $ 396,437 $ 378,983 $ 396,437 $ 378,983
================= ================== ================= ==============
NOTE I - RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns. Concurrently with our entry into the Securities Purchase Agreement, we
also entered into a Distribution Agreement and a Supplier Agreement with Living
Data, an affiliate of Kerns.
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for an aggregate of $1,500,000, as
well a five-year warrant to purchase 4,285,714 shares of our common stock at an
initial exercise price of $.08 per share (the "Warrant"). The agreement further
provided for the appointment to our Board of Directors of two representatives of
Kerns. In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both Kerns
and Living Data, have been appointed members of our Board of Directors. Pursuant
to the Distribution Agreement, we have become the exclusive distributor in the
United States of the AngioNew ECP systems manufactured by Living Data. As
additional consideration for such agreement, we agreed to issue an additional
6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier
Agreement, Living Data is now the exclusive supplier to us of the ECP therapy
systems that we market under the registered trademark EECP(R). The Distribution
Agreement and the Supplier Agreement each have an initial term extending through
May 31, 2012.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock having a fair market value of
$60,000 at time of issue.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
On July 10, 2007, the Board of Directors appointed Behnam Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.
As affiliates of Living Data and Kerns, Mr. Movaseghi and Mr. Srybnik have
each been directly involved in the transactions between Living Data or Kerns, on
the one hand, and the Company, on the other hand, with respect to the Securities
Purchase Agreement, the Distribution Agreement and the Supplier Agreement, as
well as providing consulting services to the Company without compensation.
During the nine-month period ended February 28, 2009, the Company purchased
ECP therapy systems under the Supplier Agreement for $595,000 from Living Data.
Payment terms on certain purchases leave a balance of $200,000 in due to related
party - current portion on the accompanying consolidated condensed balance sheet
as of February 28, 2009. During the nine-month period ended February 29, 2008,
the Company purchased ECP therapy systems under the Supplier Agreement for
$120,000. In addition, during the nine-month periods ended February 28, 2009 and
February 29, 2008, Living Data purchased $3,162, and $5,289 worth of ECP therapy
system components from the Company, respectively.
During the nine-month period ended February 28, 2009, Living Data assigned
to the Company all of its rights and interests under its Distributorship
Agreement with a corporation organized and existing under the laws of the
People's Republic of China that manufactures Ambulatory Blood Pressure Monitors,
Ambulatory ECG (Holter) Recorders and Holter & ABPM Combiner Recorders, for
$20,000 payable to Living Data based on certain terms and conditions. The
Company has also agreed to pay to Living Data 5% of the selling price or 5% of
the cost of all goods sold (whichever is higher) and 5% of the cost of all goods
transferred but not sold under the Assignment Agreement to Living Data based on
sales of this equipment. The Company intends to sell these systems in the United
States and other countries subject to obtaining regulatory clearance.
During the nine-month period ended February 28, 2009, Living Data assigned
to the Company all of its rights and interests under its Distributorship
Agreement with a corporation organized and existing under the laws of the
People's Republic of China that manufactures Ultrasound Scanners, for $20,000
payable to Living Data based on certain terms and conditions. The Company has
also agreed to pay to Living Data 5% of the selling price or 5% of the cost of
all goods sold (whichever is higher) and 5% of the cost of all goods transferred
but not sold under the Assignment Agreement to Living Data based on sales of
this equipment. The Company intends to sell these systems in the United States
and other countries subject to obtaining regulatory clearance.
Further, Kerns provides the Company, free of charge, part-time use of one
of its Information Technology (IT) employees as well one of their IT consultants
to provide the Company with IT and database support services. In addition, a
clinical applications support specialist and a service engineer from Living Data
may were used by the Company to provide customers with clinical training and
technical service. The Company was charged $3,900 for the services of the
clinical applications support specialist and $2,700 for the services of the
service engineer during the nine-month period ended February 28, 2009.
Page 11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 28, 2009
NOTE J - COMMITMENTS
Leases
On August 15, 2007, we sold our facility under a five-year sale-leaseback
agreement. Future rental payments under the operating lease are as follows:
For the years ended:
May 31, 2009 $ 36,040
May 31, 2010 148,488
May 31, 2011 154,427
May 31, 2012 160,604
May 31, 2013 40,541
------------------
Total $ 540,100
==================
NOTE K - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements" -- changes the way the consolidated income statement is presented.
It requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. Previously, net income attributable to the
noncontrolling interest generally was reported as an expense or other deduction
in arriving at consolidated net income. It also was often presented in
combination with other financial statement amounts. Effective for fiscal years
beginning after December 15, 2008.
FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)" --
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants. Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.
FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" --
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, Goodwill and Other Intangible Assets. Paragraph
11(d) of Statement 142 precluded an entity from using its own assumptions about
renewal or extension of an arrangement where there is likely to be substantial
cost or material modifications. This FSP amends paragraph 11(d) of Statement 142
so that an entity will use its own assumptions about renewal or extension of an
arrangement, adjusted for the entity-specific factors in paragraph 11 of
Statement 142, even when there is likely to be substantial cost or material
modifications. Therefore, in determining the useful life of the asset for
amortization purposes, an entity shall consider the period of expected cash
flows used to measure the fair value of the recognized intangible asset,
adjusted for the entity-specific factors including, but are not limited to, the
entity's expected use of the asset and the entity's historical experience in
renewing or extending similar arrangements. This FSP shall be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
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 "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. The EECP(R) therapy is a non-invasive, outpatient
treatment of diseases of the cardiovascular system. The therapy serves to
increase circulation in areas of the heart with less than adequate blood supply
and helps to restore systemic vascular function. The therapy also increases
blood flow and oxygen supply to the heart muscle and other organs and decreases
the heart's workload and reduces oxygen demand, while also improving function of
the endothelium, the lining of blood vessels throughout the body, lessening
resistance to blood flow. We provide hospitals, clinics 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 therapy and systems. For more information, visit
www.vasomedical.com.
We have 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 pectoris patients with moderate to severe symptoms who are
refractory to medications and not candidates for invasive procedures. Patients
with co-morbidities of heart failure, diabetes, peripheral vascular disease,
etc. are also reimbursed under the same criteria, provided the primary diagnosis
and indication for treatment with EECP(R) therapy is angina symptoms.
During the last several years, we incurred operating losses. We have
attempted to achieve profitability by reducing operating costs and halting the
trend of declining revenue, and to reduce cash usage through bringing our cost
structure more into alignment with current revenues. By engaging in
restructurings the Company has reduced personnel costs. The Company has
negotiated new terms on professional fees, facility expenses, and shipping and
supply costs. The Company is also looking to obtain a revolving line of credit
to help stabilize cash flow and generate sales by offering potential customers
extended payment terms on our EECP(R) therapy systems.
Page 13
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Market Overview
Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare spending in nearly every
country. CVD claimed approximately 2.4 million lives in the United States in
2005 and was responsible for 1 of every 5 deaths, according to The American
Heart Association (AHA) Heart and Stroke Statistical 2009 Update (2009 Update).
Approximately 80 million Americans suffer from some form of cardiovascular
disease. Among these, 16.8 million have coronary heart disease (CHD).
We have 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 mostly 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 pectoris patients with moderate to severe
symptoms who are refractory to medications and who, in the opinion of a
cardiologist or cardiothoracic surgeon, are not candidates for invasive
procedures. Patients with co-morbidities of heart failure, diabetes, peripheral
vascular disease, etc. are also reimbursed under the same criteria, provided the
primary diagnosis and indication for treatment with EECP(R) therapy is
refractory angina symptoms.
Angina
Angina pectoris is the medical term for a recurring pain or discomfort in
the chest due to coronary artery disease (CAD). Angina is a symptom of a
condition called myocardial ischemia, which occurs when the heart muscle or
myocardium doesn't receive sufficient blood, hence as much oxygen, as it needs.
This usually happens because one or more of the heart's arteries, the blood
vessels that supply blood to the heart muscle, is narrow or blocked.
Insufficient blood supply to meet the need of the organ to function is called
ischemia.
The cardinal symptom of stable CAD is anginal chest pain or equivalent
symptoms, such as exertional dyspnea or fatigue. Angina is uncomfortable
pressure, fullness, squeezing or pain, usually occurring in the center of the
chest under the breastbone. The discomfort also may be felt in the neck, jaw,
shoulder, back or arm. Often the patient suffers not only from the discomfort of
the symptom itself but also from the accompanying limitations on activities and
the associated anxiety that the symptoms may produce. Uncertainty about
prognosis may be an additional source of anxiety. For some patients, the
predominant symptoms may be palpitations or syncope that is caused by
arrhythmias or fatigue, edema, or orthopnea caused by heart failure. Episodes of
angina occur when the heart's need for oxygen increases beyond the oxygen
available from the blood nourishing the heart. Physical exertion is the most
common trigger, but not the only one for angina. For example, running to catch a
bus could trigger an attack of angina while walking might not. Angina may happen
during exercise, periods of emotional stress, exposure to extreme cold or heat,
heavy meals, alcohol consumption or cigarette smoking. Some people, such as
those with a coronary artery spasm, may have angina when they are resting.
There are approximately 6.4 million angina patients in the United States
and our EECP(R) therapy currently competes with other technologies in the market
for approximately 100,000 to 150,000 new refractory angina patients annually who
do not adequately respond to or are not amenable to medical and surgical therapy
and have the potential to meet the guidelines for reimbursement of EECP(R)
therapy. Most angina patients are treated with medications, including beta
blockers to slow and protect the heart, and vasodilators which are often
prescribed to increase blood flow to the coronary arteries. When drugs fail or
inadequately correct the problem, the patients are considered unresponsive to
medical therapy. Most angina patients are readily amenable to invasive
revascularization procedures such as angioplasty and coronary stent placement,
as well as coronary artery bypass grafting (CABG). However, there are
approximately 100,000 to 150,000 angina patients each year whose angina can not
be stopped by medication and they are no longer readily amenable to palliative
invasive procedures.
In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that administers the Medicare program for more than 39 million
beneficiaries, issued a national coverage policy for the use of external
Page 14
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
counterpulsation therapy in the treatment of refractory angina. Medicare
reimbursement guidelines have a significant impact in determining the available
market for EECP(R) therapy. We believe that over 65% of the patients that
receive EECP(R) therapy are Medicare patients and many of the third-party payers
follow Medicare guidelines, which limit reimbursement for EECP(R) therapy to
patients who do not adequately respond to medical therapy and are not readily
amenable to invasive therapy. As a result, an important element of our strategy
is to grow the market for EECP(R) therapy by expanding reimbursement coverage to
include a broader range of angina patients than the current coverage policy
provides and enable EECP(R) therapy to compete more with other therapies for
ischemic heart disease. Please see the heading "Reimbursement" in the "Item-1
Business" section of this Form 10-KSB for a more detailed discussion of
reimbursement issues.
Congestive Heart Failure (CHF)
CHF is a condition in which the heart loses its pumping capacity to supply
the metabolic needs of all other organs. The condition affects both sexes and is
most common in people over age 50. Symptoms include angina, shortness of breath,
weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular
heartbeat and low blood pressure. Causes range from chronic high blood pressure,
heart-valve disease, heart attack, coronary artery disease, heartbeat
irregularities, severe lung disease such as emphysema, congenital disease,
cardiomyopathy, hyperthyroidism, severe anemia and others.
CHF is treated with medication and, sometimes, surgery on heart valves or
the coronary arteries and, in certain severe cases, heart transplants. Left
ventricular assist devices (LVADs) and the use of cardiac resynchronization and
implantable defibrillators are useful in selected patients with heart failure.
Still, no consensus therapy currently exists for CHF and patients must currently
suffer their symptoms chronically and have a reduced life expectancy.
According to the 2009 Update, in 2005 approximately 3.2 million men and 2.5
million women in the United States had CHF and about 670,000 new cases of the
disease occur each year. The prevalence of the disease is growing as a result of
the aging of the population and the improved survival rate of people after heart
attacks. Because the condition frequently entails visits to the emergency room
and in-patient treatment centers, two-thirds of all hospitalizations for people
over age 65 are due to CHF. The economic burden of congestive heart failure is
enormous with an estimated cost to the health care system in 2005 in the United
States of $37.2 billion. Congestive heart failure offers a good strategic fit
with our current angina business and offers an expanded market opportunity for
EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina,
as there are few consensus therapies, invasive or otherwise, beyond medical
management for the condition. It is noteworthy that data collected from the
International EECP(R) Patient Registry(TM) (IEPR) at the University of
Pittsburgh Graduate School of Public Health shows that approximately one-third
of angina patients treated with EECP(R) also have a history of CHF and 70% to
80% have demonstrated positive outcomes from EECP(R) therapy.
We 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(TM) (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. The PEECH(TM) 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 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.
Page 15
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The preliminary results of the PEECH(TM) trial were presented at the
American College of Cardiology scientific sessions in March 2005. On June 20,
2005, 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 less than or
equal to 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) less than or equal to 40%, and acute heart failure; 2)
treatment of stable angina to include CCSC II angina; 3) treatment of acute
myocardial infarction; and 4) treatment of cardiogenic shock. On September 15,
2005, the competing manufacturer also amended their request to include NYHA
Class IV heart failure.
On March 20, 2006, 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 CCSC II angina
o Heart Failure
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 40%
o NYHA Class IV heart failure
o Acute heart failure
o Cardiogenic shock
o Acute myocardial infarction."
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" for refractory angina
patients.
On August 25, 2006 the results of the PEECH(TM) trial were initially
published online by the Journal of the American College of Cardiology (JACC) and
in print in its September 19, 2006 issue. JACC is the official journal of the
American College of Cardiology.
In the November-December issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, 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.
These papers were submitted to CMS and we were advised to continue to
gather more clinical evidence for future submission.
Page 16
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a secondary
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 refractory angina or
angina equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we intend to 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 and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon the accompanying unaudited consolidated condensed
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"). The
preparation of financial statements in conformity with U.S. GAAP requires
management to make judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, expenses, and the related disclosures
at the date of the financial statements and during the reporting period.
Although these estimates are based on our knowledge of current events, our
actual amounts and results could differ from those estimates. The estimates made
are based on historical factors, current circumstances, and the experience and
judgment of our management, who continually evaluate the judgments, estimates
and assumptions and may employ outside experts to assist in the evaluations.
Certain of our accounting policies are deemed "critical," as they are both
most important to the financial statement presentation and require management's
most difficult, subjective or complex judgments as a result of the need to make
estimates about the effect of matters that are inherently uncertain. For a
discussion of our critical accounting policies, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended May 31, 2008, as management believes that there
have been no significant changes regarding our critical accounting policies
since such time.
Fair Value Measurements
Since May 31, 2008 the Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements"
("SFAS No. 157"), effective December 1, 2007. Under SFAS No. 157, fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability (i.e., the "exit price") in an orderly transaction between market
participants at the measurement date.
In determining fair value, the Company uses various valuation approaches.
SFAS No. 157 establishes a fair value hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are those that market participants would use in
pricing the asset or liability based on market data obtained from sources
independent of the Company. Unobservable inputs reflect the Company's
assumptions about the inputs market participants would use in pricing the asset
or liability developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three levels based
on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets
for identical assets or liabilities that the Company has the ability to
access. Valuation adjustments and block discounts are not applied to Level
1 securities. Since valuations are based on quoted prices that are readily
and regularly available in an active market, valuation of these securities
does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, either directly or
indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.
Page 17
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Short-term Investments
Since May 31, 2008 the Company has invested in six-month certificates of
deposit. These investments are reported on the accompanying consolidated
condensed balance sheet as "Short-term investment".
New Accounting Pronouncements
See Footnote K, "Recently Issued Accounting Pronouncements Not Yet
Effective" to our unaudited consolidated condensed financial statements for a
full description of recently issued accounting pronouncements including the date
of adoption and effects on our results of operations and financial position,
where applicable.
Consolidated Results of Operations
Three Months Ended February 28, 2009 and February 29, 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
three months ended February 28, 2009 and February 29, 2008, was $989,317 and
$1,187,694, respectively, which represented a decrease of $198,377, or 17%. We
reported a net loss attributable to common stockholders of $369,438 and $296,381
for the third quarter of fiscal 2009 and 2008, respectively. The increase in the
net loss was primarily due to a decrease in service related revenues compared to
the same period of the prior year.
Revenues
Revenue from equipment sales increased approximately 16% to $497,299 for
the three-month period ended February 28, 2009 as compared to $427,445 for the
same period in the prior year. The increase in equipment sales is due primarily
to a 9% decrease in the average blended per unit sale price offset by a slight
increase in the number of equipment shipments.
We believe the decline in the sales price per unit reflects weakened
domestic demand in the refractory angina market, coupled with increased direct
and indirect competition. We anticipate that demand for EECP(R) systems will
remain soft unless 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.
Our revenue from the sale of EECP(R) systems and related products to
international distributors in the third quarter of fiscal 2009 increased
approximately $348,895 compared to the same three-month period in the prior year
reflecting increased sales volume. We believe this reflects an expansion of our
international market.
Our revenue from equipment rental and services decreased 35% to $492,018 in
the third quarter of fiscal 2009 from $760,249 in the third quarter of fiscal
year 2008. Revenue from equipment rental and services represented 50% of total
revenue in the third quarter of fiscal 2009 and 64% in the same quarter of
fiscal 2008. The decrease in revenue generated from equipment rentals and
services is due to a decrease in the service business, with respect to service
contract sales, and service related income generated from units not under
contract, as well as, a decrease in accessories and service parts shipped
compared to the same quarter of the prior fiscal year.
Page 18
Gross Profit
Gross profit declined to $408,411, or 41% of revenues, for the third
quarter of fiscal 2009 compared to $531,446, or 45% of revenues, for the same
quarter of fiscal 2008. Gross profits are dependent on a number of factors,
particularly the mix of new and used EECP(R) systems and the mix of models sold,
their respective average selling prices, the mix of EECP(R) units sold, rented
or placed during the period, the ongoing costs of servicing EECP(R) systems, and
certain fixed period costs, including facilities, payroll and insurance.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the third quarter
of fiscal 2009 and 2008 were $668,046, or 68% of revenues, and $732,351, or 62%
of revenues, respectively, reflecting an decrease of $64,305 or approximately
9%. The decrease in SG&A expenditures in the third quarter of fiscal 2009
resulted primarily from decreased administrative expenses in wages and benefits,
professional fees, and insurance expenses.
During the third quarter of fiscal 2009 and 2008, there were no changes in
the Company's provision for doubtful accounts. The dollar amount change in the
provision is the result of bad debt that was written-off during the third
quarter of fiscal year 2009.
Research and Development
Research and development ("R&D") expenses of $135,154, or 14% of revenues,
for the third quarter of fiscal 2009 increased by $17,841, or 15%, from
$117,313, or 10% of revenues, for the third quarter of fiscal 2008. The increase
is primarily attributable to an increase in expenses paid to fund clinical
research studies, and product development costs, offset by a decrease in
regulatory affairs expenses.
Interest and Other Income, Net
Interest and other income for the third quarter of 2009 and 2008, were
$12,135 and $12,275, respectively. Interest income reflects interest earned on
the Company's cash balances.
Amortization of Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on sale-leaseback of building for the
third quarter of 2009 and 2008, were $13,311 and $13,312, respectively. The gain
resulted from the Company's sale-leaseback of its facility.
Income Tax Expense
During the third quarter of fiscal 2009 we did not record a provision for
income taxes and The Company incurred an expense of $95. During the third
quarter of fiscal 2008, we recorded a provision for income taxes of $3,750.
Nine Months Ended February 28, 2009 and February 29, 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
nine months ended February 28, 2009 and February 29, 2008, was $3,459,863 and
$3,915,585, respectively, which represented a decrease of $455,722, or 12%. We
reported a net loss attributable to common stockholders of $1,186,653 and
$379,229 for the first nine months of fiscal 2009 and 2008, respectively. The
increase in the net loss was primarily due to increases in our operating
expenses, and decreases in revenue from the comparative prior period.
Revenues Revenue from equipment sales increased $224,108, or approximately
15% to $1,742,093 for the nine-month period ended February 28, 2009 as compared
to $1,517,985 for the same period in the prior year. The increase in equipment
Page 19
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
sales is due primarily to a 23% increase in the number of equipment shipments
offset by a moderate decrease in the average blended per unit sale price.
Our revenue from the sale of EECP(R) systems and related products to
international distributors in the first nine months of fiscal 2009 increased
approximately 94% compared to the same nine-month period in the prior year
reflecting increased sales volume. We believe this reflects an expansion of our
international market.
Our revenue from equipment rental and services decreased 28% to $1,717,770
in the first nine months of fiscal 2009 from $2,397,600 in the first nine months
of fiscal year 2008. Revenue from equipment rental and services represented 50%
of total revenue in the first nine months of fiscal 2009 and 61% in the same
quarters of fiscal 2008. The decrease in revenue generated from equipment
rentals and services is due to a decrease in the service business, with respect
to service contract sales, and service related income generated from units not
under contract, as well as, a decrease in accessories and service parts shipped
compared to the same quarter of the prior fiscal year.
Gross Profit
Gross profit declined to $1,444,737, or 42% of revenues, for the first nine
months of fiscal 2009 compared to $1,867,960, or 48% of revenues, for the same
period of fiscal 2008. Gross profits are dependent on a number of factors,
particularly the mix of new and used EECP(R) systems and the mix of models sold,
their respective average selling prices, the mix of EECP(R) units sold, rented
or placed during the period, the ongoing costs of servicing EECP(R) systems, and
certain fixed period costs, including facilities, payroll and insurance.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the first nine
months of fiscal 2009 and 2008 were $2,297,189, or 66% of revenues, and
$1,932,645, or 49% of revenues, respectively, reflecting an increase of $364,544
or approximately 19%. The increase in SG&A expenditures in the first nine months
of fiscal 2009 resulted primarily from increased direct expenditures in sales
and marketing. Administrative expenses increased as a result of increased
expenditures in professional fees, and corporate expenses.
During the first nine months of fiscal 2009 there were no changes in the
Company's provision for doubtful accounts. The dollar amount change in the
provision is the result of bad debt that was written-off during the first nine
months of fiscal year 2009. In the first nine months of fiscal 2008 we reversed
the provision for doubtful accounts by $27,524.
Research and Development
Research and development ("R&D") expenses of $415,108, or 12% of revenues,
for the first nine months of fiscal 2009 increased by $52,793, or 15%, from
$362,315, or 9% of revenues, for the first nine months of fiscal 2008. The
increase is primarily attributable to an increase in expenses paid to fund
clinical research studies, and product development costs.
Interest Expense and Financing Costs
The Company had no interest expense and financing costs for the first nine
months of fiscal 2009 and $16,605 in the same period of 2008. Interest expense
primarily reflects interest on loans secured to refinance the November 2000
purchase of the Company's headquarters and warehouse facility. The decrease is a
direct result of the sale-leaseback agreements for the Company's headquarters
and warehouse facility, which occurred during the first quarter of fiscal 2008.
Page 20
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interest and Other Income, Net
Interest and other income for the first nine months of 2009 and 2008, were
$48,670 and $47,513, respectively. Interest income reflects interest earned on
the Company's cash balances.
Amortization of Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on sale-leaseback of building for the
first nine months of 2009 and 2008, were $39,934 and $31,060, respectively. The
gain resulted from the Company's sale-leaseback of its facility.
Income Tax Expense
During the first nine months of fiscal 2009 and 2008, we recorded provision
for income taxes of $7,697 and $14,197, respectively.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working capital, a private
equity financing, and by the sale of our facility under a leaseback agreement.
At February 28, 2009, we had cash and cash equivalents of $997,592 and working
capital of $1,711,645 compared to cash and cash equivalents of $2,653,999 and
working capital of $2,851,901 at May 31, 2008.
Cash used in operating activities was $1,347,019 during the first nine
months of fiscal 2009, which consisted of a net loss after non-cash adjustments
of $929,674 and cash used by operating assets and liabilities of $417,345. The
changes in the accounts balances primarily reflect increases in inventories of
$110,222, including $116,978 of inventories transferred to property and
equipment, and other current assets of $95,055, a decrease in accounts payable,
accrued expenses, and other current liabilities of $356,085, and a decrease in
other liabilities of $89,175 which were primarily offset by a decrease in
accounts receivable of $33,192 and an increase in due to related party of
$200,000. Net accounts receivable were 20% of revenues for the nine-month period
ended February 28, 2009, as compared to 18% for the nine-month period ended
February 29, 2008, and accounts receivable turnover was 5 times for the nine
months ended February 28, 2009 and February 29, 2008.
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) therapy system 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 nine-month period ended February 28,
2009 there were no revenues generated from sales in which initial payment terms
were greater than 90 days, and during the nine-month period February 29, 2008,
there were no revenues 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) therapy 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.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Investing activities during the nine-month period ended February 28, 2009
was $309,388 and consisted of a purchase of six-month certificates of deposit
for $299,074, and purchases of property and equipment of $10,314.
The Company had no financing activities during the nine-month period ended
February 28, 2009.
The following table presents the Company's expected cash requirements
for contractual obligations outstanding as of February 28, 2009.
Due thru Due thru Due thru
3/1/2009 and 3/1/2010 and 3/1/2012 and Due
Total 2/28/2010 2/29/2012 2/28/2014 Thereafter
----------------------------------------------------------------------------
Operating Leases $ 540,100 $ 147,046 $ 311,973 $ 81,082 $ -
----------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 540,100 $ 147,046 $ 311,973 $ 81,082 $ -
============================================================================
Liquidity
During the last several years, we incurred operating losses. We have
attempted to achieve profitability by reducing operating costs and halting the
trend of declining revenue, and to reduce cash usage through bringing our cost
structure more into alignment with current revenues. By engaging in
restructurings the Company has reduced personnel costs. The Company has
negotiated new terms on professional fees, facility expenses, and shipping and
supply costs. The Company is also looking to obtain a revolving line of credit
to help stabilize cash flow and generate sales by offering potential customers
extended payment terms on our EECP(R) therapy systems.
Based on our current operations and the amounts received from the
transactions described in Note C, we believe that we have sufficient working
capital to continue our operations through at least February 28, 2010.
Effects of Current Economic Conditions
We do not believe that the current lack of credit available in the market
will have an impact on our revenue or on our results of operations.
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Vasomedical, Inc. and Subsidiaries
ITEM 3. - QUANITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISKS
See Item 7A in the Company's 2008 Annual Report on Form 10-K for
information regarding quantitative and qualitative disclosures about market
risk. No material change regarding this information has occurred since that
filing.
ITEM 4T. - 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 February 28, 2009, 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 February 28, 2009 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 23
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes in the most significant risk factors in
the three months ended February 28, 2009 from those risk factor set forth in
Item 1A., "Risk Factors," to the Company's Annual Report on Form 10-K for the
year ended May 31, 2008.
ITEM 6 - EXHIBITS:
Exhibits
31 Certifications of the Chief Executive Officer and the Chief Financial
Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer and the Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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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/ Jun Ma
------------------------------------
Jun Ma
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Tarachand Singh
------------------------------------
Tarachand Singh
Chief Financial Officer
Date: April 14, 2009