UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended November 30, 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 [ ]
Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
--- --
Number of Shares Outstanding of Common Stock, $.001 Par Value, at January 12,
2010 99,843,004
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Vasomedical, Inc. and Subsidiaries
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
November 30, 2009 and May 31, 2009 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended November 30, 2009 and
November 30, 2008 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended November 30, 2009 and
November 30, 2008 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
Item 4T - Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1A - Risk Factors 23
Item 6 - Exhibits 23
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, 2009 May 31, 2009
------------------ ----------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 353,601 $ 544,057
Short-term investments, at fair value 68,850 370,523
Accounts receivable, net of an allowance for doubtful accounts of
$57,765 at November 30, 2009, and $94,973 at May 31, 2009 626,039 659,551
Inventories, net 1,699,779 1,479,724
Other current assets 158,417 175,511
------------------ ----------------
Total current assets 2,906,686 3,229,366
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,586,371 at November 30, 2009, and $1,562,891 at May 31, 2009 186,906 180,409
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
$276,025 at November 30, 2009, and $213,234 at May 31, 2009 312,851 375,643
OTHER ASSETS 154,880 178,332
------------------ ----------------
$ 3,561,323 $ 3,963,750
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 143,162 $ 144,467
Accrued expenses 360,656 360,306
Sales tax payable 148,133 143,693
Deferred revenue - current portion 871,766 957,258
Deferred gain on sale-leaseback of building - current portion 53,245 53,245
Accrued professional fees 11,175 9,750
Trade payable due to related parties 240,000 260,000
------------------ ----------------
Total current liabilities 1,828,137 1,928,719
------------------ ----------------
LONG-TERM LIABILITIES
Deferred revenue, net of current portion 251,721 330,449
Accrued rent expense 17,593 16,040
Deferred gain on sale-leaseback of building, net of current portion 88,742 115,365
Other long-term liabilities 11,900 11,900
------------------ ----------------
Total long-term liabilities 369,956 473,754
------------------ ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued - -
Common stock, $.001 par value; 250,000,000 shares authorized;
99,843,004 shares at November 30, 2009 and May 31, 2009,
issued and outstanding 99,843 99,843
Additional paid-in capital 48,281,711 48,281,711
Accumulated deficit (46,942,426) (46,744,379)
Non-controlling interest (75,898) (75,898)
------------------ ----------------
Total stockholders' equity 1,363,230 1,561,277
------------------ ----------------
$ 3,561,323 $ 3,963,750
================== ================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended November 30, Three months ended November 30,
-------------------------------------------------------------------
2009 2008 2009 2008
--------------- -------------- -------------- --------------
Revenues
Equipment sales $ 1,111,157 $ 1,244,794 $ 316,509 $ 588,298
Equipment rentals and services 1,044,344 1,225,752 522,908 570,527
--------------- -------------- -------------- --------------
Total revenues 2,155,501 2,470,546 839,417 1,158,825
--------------- -------------- -------------- --------------
Cost of Sales and Services
Cost of sales, equipment 510,066 891,345 184,098 363,064
Cost of equipment rentals and services 468,935 542,875 216,392 259,997
--------------- -------------- -------------- --------------
Total cost of sales and services 979,001 1,434,220 400,490 623,061
--------------- -------------- -------------- --------------
Gross profit 1,176,500 1,036,326 438,927 535,764
--------------- -------------- -------------- --------------
Operating Expenses
Selling, general and administrative 1,299,032 1,629,143 650,705 685,384
Research and development 204,393 279,954 102,322 147,607
--------------- -------------- -------------- --------------
Total operating expenses 1,503,425 1,909,097 753,027 832,991
--------------- -------------- -------------- --------------
Loss from operations (326,925) (872,771) (314,100) (297,227)
--------------- -------------- -------------- --------------
Other Income (Expenses)
Interest and other income, net 86,452 36,535 2,480 20,523
Amortization of deferred gain on
sale-leaseback of building 26,623 26,623 13,312 13,312
--------------- -------------- -------------- --------------
Total other income, net 113,075 63,158 15,792 33,835
--------------- -------------- -------------- --------------
Loss before income taxes (213,850) (809,613) (298,308) (263,392)
Income tax benefit/(expense), net 15,804 (7,602) (1,500) (3,852)
--------------- -------------- -------------- --------------
Net loss applicable to common stockholders $ (198,046) $ (817,215) $ (299,808) $ (267,244)
=============== ============== ============== ==============
Net loss per common share
- basic and diluted $ (0.00) $ (0.01) (0.00) (0.00)
=============== ============== ============== ==============
Weighted average common shares outstanding
- basic and diluted 99,843,004 94,261,960 99,843,004 94,766,893
=============== ============== ============== ==============
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
(Unaudited)
Six months ended November 30,
-------------------------------------
2009 2008
----------------- -----------------
Cash flows from operating activities
Net loss $ (198,046) $ (817,215)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 54,851 51,179
Amortization of deferred gain on sale-leaseback of building (26,623) (26,623)
Provision for doubtful accounts (37,208) -
Amortization of deferred distributor costs 62,792 50,888
Stock-based compensation - 141,357
Changes in operating assets and liabilities:
Accounts receivable 70,720 214,525
Inventories, net (238,297) (145,351)
Other assets 17,094 (46,333)
Accounts payable, accrued expenses and other current liabilities 4,909 (326,431)
Deferred revenue (164,220) (131,253)
Accrued rent expense 1,553 4,385
Trade payable due to related party (20,000) 260,000
----------------- -----------------
Net cash used in operating activities (472,475) (770,872)
----------------- -----------------
Cash flows from investing activities
Purchases of property and equipment (19,654) (9,438)
Purchase of short-term investments (68,850) -
Redemption of short-term investments 370,523 -
----------------- -----------------
Net cash provided by (used in) investing activities 282,019 (9,438)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (190,456) (780,310)
----------------- -----------------
Cash and cash equivalents - beginning of period 544,057 2,653,999
----------------- -----------------
Cash and cash equivalents - end of period $ 353,601 $ 1,873,689
================= =================
Non-cash investing and financing activities were as follows:
Inventories transferred to property and equipment, attributable
to operating leases, net $ 18,242 $ 95,921
================= =================
Supplemental Disclosures
Income taxes paid $ 3,202 $ 790
================= =================
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)
November 30, 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 AND CRITICAL ACCOUNTING POLICIES
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, 2009,
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.
Reclassification
Certain account balances have been reclassified to conform to current
reporting formats.
Critical Accounting Policies
Note B of the Notes to Consolidated Financial Statements, included in the
Annual Report on Form 10-K for the year ended May 31, 2009, includes a summary
of the critical accounting policies used in the preparation of consolidated
financial statements. The following policies are effective as of June 1, 2009
and have been implemented by the company for the six months ended November 30,
2009.
Effective June 1, 2009, the Company implemented Accounting Standards
Codification ("ASC") 810, formally Financial Accounting Standards Board ("FASB")
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements",
which 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
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2009
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 June 1, 2009, the Company implemented ASC 825, formally FASB
Staff Position ("FSP") SFAS No. 107-1 and Accounting Principles Board ("APB")
Opinion No. 28-1 ("APB No. 28-1"), "Interim Disclosures about Fair Value of
Financial Instruments," which amends SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The ASC requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements.
Effective June 1, 2009, the Company implemented ASC 855, formally FASB
Statement of Financial Accounting Standards ("SFAS") No. 165, "Subsequent
Events" ("SFAS 165"). This standard is intended to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
Specifically, this standard sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
Effective July 1, 2009, the FASB confirmed that the FASB Accounting
Standards Codification (the "Codification") will become the single official
source of authoritative U.S. GAAP (other than guidance issued by the SEC),
superseding existing FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force ("EITF"), and related literature. After that date,
only one level of authoritative U.S. GAAP will exist. All other literature will
be considered non-authoritative. The Codification does not change U.S. GAAP;
instead, it introduces a new structure that is organized in an easily
accessible, user-friendly online research system. The Codification, which
changes the referencing of financial standards, becomes effective for interim
and annual periods ending on or after September 15, 2009.
NOTE C - LIQUIDITY
During the last several years, the Company has incurred operating losses.
The Company has attempted to halt the trend of declining revenue by; (i)
expanding their international market by enlisting new distributors in new
markets, (ii) expanding their domestic sales force with the addition of new
personnel and independent representatives, and (iii) the introduction of
e-commerce to our website. Additionally, the Comany is also in the process of
diversifying its product line and intends to introduce new products in the near
future. The Company has also reduced operating costs by reducing personnel and
related benefit costs, professional fees, business operating expenses, and
renegotiated contract terms for leases and services.
NOTE D - STOCK-BASED COMPENSATION
The Company complies with U.S. GAAP, which 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 six-month period ended November 30, 2009, the Company's Board of
Directors did not grant any non-qualified stock options.
During the six-month period ended November 30, 2009, the Company's Board of
Directors did not grant any shares of common stock to employees, outside
directors, or outside consultants.
Stock-based compensation expense recognized under U.S. GAAP was $141,357
for the six months ended November 30, 2008. These expenses are included in
selling, general, and administrative in the consolidated condensed statements of
operations. The stock-based compensation expenses for such period reflect
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2009
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. The 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 U.S. GAAP.
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.
Stock options and warrants, in accordance with the following table, were
excluded from the computation of diluted loss per share for the six and three
months ended November 30, 2009 and November 30, 2008.
November 30, 2009 November 30, 2008
------------------------ ----------------------
Stock options 2,598,239 5,134,877
Warrants 6,540,252 6,540,252
------------------------ ----------------------
9,138,491 11,675,129
======================== ======================
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 U.S. GAAP.
The following table presents information about the Company's assets and
liabilities measured at fair value as of November 30, 2009:
Quoted Prices Significant Balance
in Active Other Significant as of
Markets for Observable Unobservable November 30,
Identical Assets Inputs Inputs 2009
------------------- ----------------- ----------------- -----------------
Assets
Cash equivalents invested in
money market fund (included in
cash and cash equivalents) $ 166,828 $ - $ - $ 166,828
Investments in certificates of
deposit (included in short-term
investments) 68,850 - - 68,850
------------------- ----------------- ----------------- -----------------
$ 235,678 $ - $ - $ 235,678
=================== ================= ================= =================
The fair values of the Company's cash equivalents invested in money market
fund are determined through market, observable and corroborated sources.
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2009
NOTE G - INVENTORIES
Inventories, net of reserves, consist of the following:
November 30, 2009 May 31, 2009
--------------------- ---------------------
Raw materials $ 574,480 $ 646,775
Work in process 591,541 522,823
Finished goods 533,758 310,126
--------------------- ---------------------
$ 1,699,779 $ 1,479,724
===================== =====================
At November 30, 2009 and May 31, 2009, the Company had reserves for excess
and obsolete inventory of $358,972 and $393,972, respectively.
NOTE H - DEFERRED REVENUE
The changes in the Company's deferred revenues are as follows:
Six months ended Six months ended Three months ended Three months ended
November 30 November 30 November 30 November 30
2009 2008 2009 2008
---------------- ---------------- ------------------- -------------------
Deferred revenue at the beginning of the period $ 1,268,834 $ 1,618,053 $ 1,176,761 $ 1,662,682
Additions:
Deferred extended service contracts 542,894 632,893 308,217 186,058
Deferred in-service and training 12,500 22,500 2,500 5,000
Deferred service arrangements 52,500 79,500 10,000 27,000
Deferred service arrangement obligations - 600 - -
Recognized as revenue:
Deferred extended service contracts (666,437) (732,218) (331,982) (322,091)
Deferred in-service and training (20,000) (25,000) (10,000) (12,500)
Deferred service arrangements (66,804) (108,328) (32,009) (58,749)
Deferred service arrangement obligations - (1,200) - (600)
---------------- ---------------- ------------------- -------------------
Deferred revenue at end of period 1,123,487 1,486,800 1,123,487 1,486,800
Less: current portion 871,766 1,067,069 871,766 1,067,069
---------------- ---------------- ------------------- -------------------
Long-term deferred revenue at end of period $ 251,721 $ 419,731 $ 251,721 $ 419,731
================ ================ =================== ===================
NOTE I - RELATED-PARTY TRANSACTIONS
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.
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for a total purchase price 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 from Kerns. In furtherance thereof, Dr. Jun Ma and Mr. Simon
Srybnik, Chairman of both Kerns and Living Data, were appointed members of our
Board of Directors. On October 15, 2008, Dr. Jun Ma was appointed Chief
Executive Officer. 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 now is the exclusive
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2009
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.
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 Mr. Behnam Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.
As affiliates of Living Data and Kerns, Dr. Ma, Mr. Movaseghi and Mr.
Srybnik were each directly involved in the transactions between Living Data and
Kerns, and the Company, with respect to the Securities Purchase Agreement, the
Distribution Agreement and the Supplier Agreement, as well as consulting
services to the Company with no compensation.
During Fiscal 2008, the Company purchased ECP therapy systems under the
Supplier Agreement for $120,000 from Living Data, which was paid in full by the
Company as of June 2008. In addition, Living Data purchased $5,000 worth of ECP
therapy system components from the company, which was paid in full by Living
Data as of June 2008.
During fiscal 2009, the Company purchased ECP therapy systems under the
Supplier Agreement for $595,000 from Living Data. During fiscal 2010, the
Company purchased additional ECP therapy systems under the Supplier Agreement
for $40,000 from Living Data. Payment terms on certain purchases leave a balance
of $240,000 in Trade payable to related party on the accompanying consolidated
condensed balance sheet as of November 30, 2009.
During fiscal 2009, Living Data assigned to Vasomedical, Inc. 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 Recorders and
Holter & ABPM Combiner Recorders, for $20,000 payable to Living Data based on
certain terms and conditions. The Company must also 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 will sell these
systems in the United States and other countries now that regulatory clearance
had been obtained.
During fiscal 2009, Living Data assigned to Vasomedical, Inc. 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 must also 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.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2009
NOTE J - COMMITMENTS
Leases
On August 15, 2007, the Company sold its facility under a five-year
sale-leaseback agreement. Future rental payments under the operating lease are
as follows:
For the years ended:
May 31, 2010 $ 74,965
May 31, 2011 154,427
May 31, 2012 160,604
May 31, 2013 40,541
------------------
Total $ 430,537
==================
NOTE K - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
As of November 30, 2009, there are no recently issued accounting
pronouncements that have an impact on the Company's consolidated condensed
financial statements.
NOTE L - SUBSEQUENT EVENTS
The company has evaluated subsequent events through January 12, 2010, as
required by US GAAP.
On December 17, 2009 a meeting of the Company's compensation committee was
held and the following stock options were granted:
Behnam Movaseghi, a member of the board of directors was granted fully
vested options with a term of five years to purchase 200,000 shares of the
Company's common stock at an exercise price of $0.08 per share.
Jun Ma, president and chief executive officer of the company was grated
fully vested shares with a term of five years to purchase 250,000 shares of the
Company's common stock at an exercise price of $0.08 per share.
On December 17, 2009, the Company started negotiations to purchase from
Living Data its inventory of AngioNew 5 and AngioNew 6 model ECP therapy systems
in exchange for shares of the Company's common stock.
Page 11
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, 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
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.
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 limited mostly 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, the Company has incurred operating losses.
The Company has attempted to halt the trend of declining revenue by; (i)
expanding their international market by enlisting new distributors in new
markets, (ii) expanding their domestic sales force with the addition of new
personnel and independent representatives, and (iii) the introduction of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
e-commerce to our website. Additionally, the Comany is also in the process of
diversifying its product line and intends to introduce new products in the near
future. The Company has also reduced operating costs by reducing personnel and
related benefit costs, professional fees, business operating expenses, and
renegotiated contract terms for leases and services.
Market Overview
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, and shortness of breath and fatigue. 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 cannot
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 44 million
beneficiaries now, issued a national coverage policy for the use of external
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 patient, and many of the balance are
covered by third-party payers. Medicare guidelines, 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-K for a more
detailed discussion of reimbursement issues.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 2010 Update, in 2006 approximately 3.1 million men and 2.7
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 2006 in the United
States of $39.2 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.
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 March 20, 2006, CMS issued their Decision Memorandum regarding this
reconsideration with the opinion that the evidence was not adequate to support
an extension of coverage.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 2006 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.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
The EECP(R) Therapy Systems
The EECP(R) therapy systems are noninvasive treatment systems utilizing
fundamental hemodynamic principles to augment coronary blood flow and, at the
same time, reduce the workload of the heart while improving the overall vascular
function. The treatment is completely noninvasive and is administered to
patients on an outpatient basis, usually in daily one-hour sessions, five days
per week over seven weeks for a total of 35 treatments. The procedure is well
tolerated and most patients begin to experience relief of chest pain due to
their coronary artery disease after 15 to 20 hours of therapy. As demonstrated
in our clinical studies, positive effects have been shown in most patients to
continue for years following a full course of therapy.
During EECP(R) therapy, the patient lies on a contoured treatment table
while three sets of inflatable pressure cuffs, resembling oversized blood
pressure cuffs, are wrapped around the calves, and the lower and upper thighs,
including the buttocks. The system is synchronized to the individual patient's
cardiac cycle triggering the system to inflate the cuffs rapidly and
sequentially -- via computer-interpreted ECG signals -- starting from the calves
and proceeding upward to the buttocks during the relaxation phase of each
heartbeat (diastole). This has the effect of creating a strong retrograde
arterial wave in the arterial system, forcing freshly oxygenated blood towards
the heart and coronary arteries at a time when resistance to coronary blood flow
is at its lowest level. The inflation of cuffs also simultaneously increases the
volume of venous blood that is returned to the heart when the heart is filling
up for ejection in the contracting phase. Just prior to the next heartbeat when
the heart begins to eject blood by contracting (systole), all three cuffs
simultaneously deflate, leaving an empty vascular space to receive blood
ejecting from the heart, thereby significantly reducing the workload of the
heart. This is achieved because the vascular beds in the lower extremities are
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
relatively empty when the cuffs are deflated, significantly lowering the
resistance, and provide vascular space to receive the blood ejected by the
heart, reducing the amount of work the heart must do to pump oxygenated blood to
the rest of the body. The inflation/deflation activity is monitored constantly
and coordinated by a computerized console that interprets electrocardiogram
signals from the patient's heart, monitors heart rhythm and rate information,
and actuates the inflation and deflation in synchronization with the cardiac
cycles. The end result of this sequential "squeezing" of the legs is to create a
pressure wave that significantly increases peak diastolic pressure benefiting
circulation to the heart muscle and other organs, increases venous return so
that the heart has more blood volume to eject out, and increases cardiac output.
The release of external pressure produces reduction of systolic pressure,
thereby reducing the workload of the heart. This reduction of vascular
resistance insures that the heart does not have to work as hard to pump large
amounts of blood through the body to help supply its metabolic needs.
While scientific and clinical studies are continued to be published to
explain the precise scientific means by which EECP(R) therapy achieves its
long-term beneficial effects, there is evidence to suggest that the EECP(R)
therapy triggers a neurohormonal response that induces the production of growth
and vasodilatation factors that promotes recruitment of new arteries and dilates
existing blood vessels. The recruitment of new arteries known as "collateral
blood vessels" bypass blocked or narrowed vessels and increase blood flow to
ischemic areas of the heart muscle that are receiving an inadequate supply of
blood. There is also evidence to support a mechanism related to improved
function of the endothelium (the inner lining of the blood vessels), which
regulates the luminal size of the arteries and controls the dilation of the
arteries to insure adequate blood flow to all organs, thus reducing constriction
of blood vessels that supply oxygenated blood to the body's organs and tissues
and as a result the required workload of the heart.
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, 2009. The following accounting policies
are effective for the current interim reporting period.
Effective June 1, 2009, the Company implemented Accounting Standards
Codification ("ASC") 810, formally Financial Accounting Standards Board ("FASB")
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements",
which 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 June 1, 2009, the Company implemented ASC 825, formally FASB
Staff Position ("FSP") SFAS No. 107-1 and Accounting Principles Board ("APB")
Opinion No. 28-1 ("APB No. 28-1"), "Interim Disclosures about Fair Value of
Financial Instruments," which amends SFAS No. 107, "Disclosures about Fair Value
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of Financial Instruments." The ASC requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements.
Effective June 1, 2009, the Company implemented ASC 855, formally FASB
Statement of Financial Accounting Standards ("SFAS") No. 165, "Subsequent
Events" ("SFAS 165"). This standard is intended to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
Specifically, this standard sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
Effective July 1, 2009, the FASB confirmed that the FASB Accounting
Standards Codification (the "Codification") will become the single official
source of authoritative U.S. GAAP (other than guidance issued by the SEC),
superseding existing FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force ("EITF"), and related literature. After that date,
only one level of authoritative U.S. GAAP will exist. All other literature will
be considered non-authoritative. The Codification does not change U.S. GAAP;
instead, it introduces a new structure that is organized in an easily
accessible, user-friendly online research system. The Codification, which
changes the referencing of financial standards, becomes effective for interim
and annual periods ending on or after September 15, 2009.
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 November 30, 2009 and November 30, 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
three months ended November 30, 2009 and November 30, 2008, was $839,417 and
$1,158,825, respectively, which represented a decrease of $319,408, or
approximately 28%. We reported a net loss attributable to common stockholders of
$299,808 for the second quarter of fiscal year 2010 compared to a net loss
attributable to common stockholders of $267,244 for the second quarter of fiscal
2009. The increase in the net loss is attributed to lower revenues offset by
decreases in operating expenses.
Revenues
Revenue from equipment sales decreased approximately 46% to $316,509 for
the three-month period ended November 30, 2009 as compared to $588,298 for the
same period in the prior year. The decrease in equipment sales reflects
decreased sales volume.
The increase in the sales price per unit reflects a shift in the product
mix towards newer models in the domestic and international markets. 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.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our revenue from the sale of EECP(R) systems and related products to
international distributors in the second quarter of fiscal 2010 decreased
approximately $333,426 compared to the same three-month period in the prior year
reflecting decreased sales volume.
Our revenue from equipment rental and services decreased 8% to $522,908 in
the second quarter of fiscal 2010 from $570,527 in the second quarter of fiscal
year 2009. Revenue from equipment rental and services represented 62% of total
revenue in the second quarter of fiscal 2010 and 49% in the same quarter of
fiscal 2009. The decrease in revenue generated from equipment rentals and
services is due to a decrease in the service business, with respect to 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 decreased to $438,927, or 52% of revenues, for the second
quarter of fiscal 2010 compared to $535,764, or 46% of revenues, for the same
quarter of fiscal 2009. 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 second
quarter of fiscal 2010 and 2009 were $650,705, or 78% of revenues, and $685,384,
or 59% of revenues, respectively, reflecting a decrease of $34,679 or
approximately 5%. The decrease in SG&A expenditures in the second quarter of
fiscal 2010 resulted primarily from decreased administrative expenses in wages
and benefits, professional fees, and insurance expenses.
During the second quarter of fiscal 2010 and 2009 there was no change in
the Company's provision for doubtful accounts.
Research and Development
Research and development ("R&D") expenses of $102,322, or 12% of revenues,
for the second quarter of fiscal 2010 decreased by $45,285, or 31%, from
$147,607, or 13% of revenues, for the second quarter of fiscal 2009. The
decrease is primarily attributable to a decrease in regulatory affairs and
personnel expenses.
Interest and Other Income, Net
Interest and other income for the second quarter of 2010 and 2009, were
$2,480 and $20,523, 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
second quarter of fiscal years 2010 and 2009, were $13,312. The gain resulted
from the Company's sale-leaseback of its facility.
Income Tax Expense
During the second quarter of fiscal year 2010 we recorded a provision for
income taxes of $1,500. During the second quarter of fiscal year 2009, we
recorded a provision for income taxes of $3,750 and incurred an additional
expense of $102.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Ended November 30, 2009 and November 30, 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
six months ended November 30, 2009 and November 30, 2008, was $2,155,501 and
$2,470,546, respectively, which represented a decrease of $315,045, or
approximately 13%. We reported net loss attributable to common stockholders of
$198,046 for the first two quarters of fiscal year 2010 compared to a net loss
attributable to common stockholders of $817,215 for the first two quarters of
fiscal 2009. The decrease in the net loss was primarily attributed to the
decrease in operating expenses, and an increase in other income.
Revenues
Revenue from equipment sales decreased approximately 11% to $1,111,157 for
the six-month period ended November 30, 2009 as compared to $1,244,794 for the
same period in the prior year. The decrease in equipment sales reflects
decreased sales volume.
The increase in the sales price per unit reflects a shift in the product
mix towards newer models in the domestic and international markets. 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 first two quarters of fiscal 2010 decreased
approximately $375,440 compared to the same six-month period in the prior year
reflecting decreased sales volume.
Our revenue from equipment rental and services decreased 15% to $1,044,344
in the first two quarters of fiscal 2010 from $1,225,752 in the first two
quarters of fiscal year 2009. Revenue from equipment rental and services
represented 48% of total revenue in the first two quarters of fiscal 2010 and
50% in the same two quarters of fiscal 2009. The decrease in revenue generated
from equipment rentals and services is due to a decrease in the service
business, with respect to service contract sale, 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 increased to $1,176,500, or 55% of revenues, for the first two
quarters of fiscal 2010 compared to $1,036,326, or 42% of revenues, for the same
two quarters of fiscal 2009. 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 two
quarters of fiscal 2010 and 2009 were $1,299,032, or 60% of revenues, and
$1,629,143, or 66% of revenues, respectively, reflecting a decrease of $330,111
or approximately 20%. The decrease in SG&A expenditures in the first two
quarters of fiscal 2010 resulted primarily from decreased administrative
expenses in wages and benefits, professional fees, and insurance expenses.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first two quarters of fiscal 2010 the Company's provision for
doubtful accounts was reduced by $31,000 as compared to the first two quarters
of fiscal year 2009 when there was no change in the Company's provision for
doubtful accounts.
Research and Development
Research and development ("R&D") expenses of $204,393, or 9% of revenues,
for the first two quarters of fiscal 2010 decreased by $75,561, or 27%, from
$279,954, or 11% of revenues, for the first two quarters of fiscal 2009. The
decrease is primarily attributable to a decrease in regulatory affairs and
personnel expenses.
Interest and Other Income, Net
Interest and other income for the first two quarters of 2010 and 2009, were
$86,452 and $36,535, respectively. In the first two quarters of fiscal year 2010
other income primarily consisted of a cash settlement of a lawsuit against one
of the Company's competitors. 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 two quarters of fiscal years 2010 and 2009, were $26,623. The gain
resulted from the Company's sale-leaseback of its facility.
Income Tax Expense
During the first two quarters of fiscal year 2010 we reversed the provision
for income taxes by $15,833 and the Company incurred an additional expense of
$29. During the first quarter of fiscal year 2009, we recorded a provision for
income taxes of $7,500 and the Company incurred an additional expense of $102.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working capital. At November
30, 2009, we had cash and cash equivalents of $353,601, short-term investments
of $68,850 and working capital of $1,078,549 compared to cash and cash
equivalents of $544,057, short-term investments of $370,523 and working capital
of $1,300,647 at May 31, 2009.
Cash used in operating activities was $472,475 during the first six months
of fiscal year 2010, which consisted of a net loss after non-cash adjustments of
$144,234 and cash used by operating assets and liabilities of $328,241. The
changes in the accounts balances primarily reflects decreases in accounts
receivable of $70,720, Other assets of $17,094, and an increase in accounts
payable of $4,909 and accrued rent expense of 1,553, offset by an increase in
inventories of $238,297, and decreases in deferred revenue of $164,220 and trade
payable due to related party of $20,000. Net accounts receivable were 29% of
revenues for the six-month period ended November 30, 2009, as compared to 27%
for the six-month period ended November 30, 2008, and accounts receivable
turnover was 2.41 times for the six months ended November 30, 2009 as compared
to 2.84 times for the six months ended November 30, 2008.
Investing activities during the six-month period ended November 30, 2009
provided cash of $282,019 and consisted of the redemption of six-month
certificates of deposit in the amount of $370,523 offset by the purchase of a
twelve-month certificate of deposit for $68,850, and purchases of property and
equipment of $19,654.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company had no financing activities during the six-month period ended
November 30, 2009.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of November 30, 2009.
Due thru Due thru Due thru
12/1/2009 and 12/1/2010 and 12/1/2012 and Due
Total 11/30/2010 11/30/2012 11/30/2014 Thereafter
------------------------------------------------------------------------------------
Operating Leases $ 430,537 $ 151,429 $ 279,108 $ - $ -
------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 430,537 $ 151,429 $ 279,108 $ - $ -
====================================================================================
Liquidity
During the last several years, the Company has incurred operating losses.
The Company has attempted to halt the trend of declining revenue by; (i)
expanding their international market by enlisting new distributors in new
markets, (ii) expanding their domestic sales force with the addition of new
personnel and independent representatives, and (iii) the introduction of
e-commerce to our website. Additionally, the Comany is also in the process of
diversifying its product line and intends to introduce new products in the near
future. The Company has also reduced operating costs by reducing personnel and
related benefit costs, professional fees, business operating expenses, and
renegotiated contract terms for leases and services.
Effects of Current Economic Conditions
We do not believe that the current lack of credit available in the market
will have a significant 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 2009 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 November 30, 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 November 30, 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 22
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes in the most significant risk factors in
the six months ended November 30, 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, 2009.
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: January 14, 2010