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 August 31, 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
October 12, 2009 99,843,004
Vasomedical, Inc. and Subsidiaries
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
August 31, 2009 and May 31, 2009 3
Consolidated Condensed Statements of Operations for the
Three Months Ended August 31, 2009 and
August 31, 2008 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 2009 and August 31, 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 20
Item 4T - Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1A - Risk Factors 21
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits 22
Page 2
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, 2009 May 31, 2009
------------------- -----------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 682,800 $ 544,057
Short-term investments, at fair value 139,651 370,523
Accounts receivable, net of an allowance for doubtful accounts of
$63,838 at August 31, 2009, and $94,973 at May 31, 2009 874,051 659,551
Inventories, net 1,592,889 1,479,724
Other current assets 105,371 175,511
------------------ ----------------
Total current assets 3,394,762 3,229,366
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,569,222 at August 31, 2009, and $1,562,891 at May 31, 2009 183,665 180,409
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
$244,629 at August 31, 2009, and $213,234 at May 31, 2009 344,247 375,643
OTHER ASSETS 166,606 178,332
------------------ ----------------
$ 4,089,280 $ 3,963,750
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 247,712 $ 144,467
Accrued expenses 385,349 360,306
Sales tax payable 144,610 143,693
Deferred revenue - current portion 865,185 957,258
Deferred gain on sale-leaseback of building - current portion 53,245 53,245
Accrued professional fees 37,072 9,750
Trade payable due to related parties 250,000 260,000
------------------ ----------------
Total current liabilities 1,983,173 1,928,719
------------------ ----------------
LONG-TERM LIABILITIES
Deferred revenue, less current portion 311,576 330,449
Accrued rent expense 17,539 16,040
Deferred gain on sale-leaseback of building, net of current portion 102,054 115,365
Other long-term liabilities 11,900 11,900
------------------ ----------------
Total long-term liabilities 443,069 473,754
------------------ ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued - -
Common stock, $.001 par value; 110,000,000 shares authorized;
99,843,004 shares at August 31, 2009 and May 31, 2009,
issued and outstanding 99,843 99,843
Additional paid-in capital 48,281,711 48,281,711
Accumulated deficit (46,642,618) (46,744,379)
Non-controlling interest (75,898) (75,898)
------------------ ----------------
Total stockholders' equity 1,663,038 1,561,277
------------------ ----------------
$ 4,089,280 $ 3,963,750
================== ================
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)
Three months ended August 31,
----------------------------------
2009 2008
--------------- ---------------
Revenues
Equipment sales $ 794,648 $ 656,496
Equipment rentals and services 521,436 655,225
--------------- ---------------
Total revenues 1,316,084 1,311,721
--------------- ---------------
Cost of Sales and Services
Cost of sales, equipment 325,968 528,281
Cost of equipment rentals and services 252,543 282,878
--------------- ---------------
Total cost of sales and services 578,511 811,159
--------------- ---------------
Gross profit 737,573 500,562
--------------- ---------------
Operating Expenses
Selling, general and administrative 648,327 943,759
Research and development 102,071 132,347
--------------- ---------------
Total operating expenses 750,398 1,076,106
--------------- ---------------
Loss from operations (12,825) (575,544)
--------------- ---------------
Other Income (Expenses)
Interest and other income, net 83,970 16,012
Amortization of deferred gain on
sale-leaseback of building 13,311 13,311
--------------- ---------------
Total other income, net 97,281 29,323
--------------- ---------------
Income/(loss) before income taxes 84,456 (546,221)
Income tax benefit/(expense), net 17,306 (3,750)
--------------- ---------------
Net income/(loss) applicable to common stockholders $ 101,762 $ (549,971)
=============== ===============
Net income/(loss) per common share
- basic and diluted $ 0.00 $ (0.01)
=============== ===============
Weighted average common shares outstanding
- basic and diluted 99,843,004 93,768,004
=============== ===============
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)
Three months ended August 31,
-------------------------------------
2009 2008
----------------- -----------------
Cash flows from operating activities
Net income/(loss) $ 101,762 $ (549,971)
Adjustments to reconcile net income/(loss) to net cash
used in operating activities
Depreciation and amortization of property and equipment 25,976 29,497
Amortization of deferred gain on sale-leaseback of building (13,311) (13,311)
Provision for doubtful accounts (31,135) -
Amortization of deferred distributor costs 31,396 25,444
Stock-based compensation - 5,314
Changes in operating assets and liabilities:
Accounts receivable (183,365) (163,836)
Inventories, net (111,408) (193,041)
Other assets 70,140 (76,377)
Accounts payable, accrued expenses and other current liabilities 156,527 296,549
Deferred revenue (110,947) 44,629
Other liabilities 1,499 82,866
Trade payable due to related party (10,000) -
----------------- -----------------
Net cash used in operating activities (72,866) (512,237)
----------------- -----------------
Cash flows from investing activities
Purchases of property and equipment (19,263) (1,379)
Purchase of short-term investments (68,850) -
Redemption of short-term investments 299,722 -
----------------- -----------------
Net cash provided by (used in) investing activities 211,609 (1,379)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 138,743 (513,616)
----------------- -----------------
Cash and cash equivalents - beginning of period 544,057 2,653,999
----------------- -----------------
Cash and cash equivalents - end of period $ 682,800 $ 2,140,383
================= =================
Non-cash investing and financing activities were as follows:
Inventories transferred to property and equipment, attributable
to operating leases, net $ (1,758) $ 19,274
================= =================
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)
August 31, 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.
Significant 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 significant accounting policies used in the preparation of financial
statements. The following policies are effective as of June 1, 2009 and have
been implemented by the company for the three months ended August 31, 2009.
Effective June 1, 2009, the Company adopted Financial Accoutning 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.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2009
Effective June 1, 2009, the Company adopted 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," and requires disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. FSP SFAS No. 107-1 and APB No. 28-1 also
amends APB Opinion No. 28, "Interim Financial Reporting," to require those
disclosures in summarized financial information for interim reporting periods.
Effective June 1, 2009, the Company adopted 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.
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 and projected revenues. The Company
has reduced personnel costs by reorganization. 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 to respond to customers requests for flexible payment
terms on our EECP(R) therapy systems.
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 three-month period ended August 31, 2009, the Company's Board of
Directors did not grant any non-qualified stock options.
During the three-month period ended August 31, 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 SFAS No. 123(R) was
$5,314 for the three months ended August 31, 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
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.
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2009
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 - INCOME/(LOSS) PER COMMON SHARE
Basic income/(loss) per common share is computed as income/(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.
Basic and diluted income/(loss) per common share were income of less than
$0.01 and a loss of $0.01 for the three months ended August 31, 2009 and August
31, 2008, respectively.
Stock options and warrants, in accordance with the following table, were
excluded from the computation of diluted income/(loss) per share for the three
months ended August 31, 2009 and August 31, 2008.
Three months ended Three months ended
August 31, August 31
2009 2008
--------------------- --------------------
Stock options 2,983,239 5,460,210
Warrants 6,540,252 6,540,252
--------------------- --------------------
9,523,491 12,000,462
===================== ====================
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 August 31, 2009:
Quoted Prices Significant Balance
in Active Other Significant as of
Markets for Observable Unobservable August 31,
Identical Assets Inputs Inputs 2009
-------------------- ------------------ ----------------- -----------------
Assets
Cash equivalents invested in
money market fund (included
in cash and cash equivalents)
$ 166,797 $ - $ - $ 166,797
Investments in certificates of
deposit (included in short term
investments) 139,651 - - 139,651
-------------------- ------------------ ----------------- -----------------
$ 306,448 $ - $ - $ 306,448
==================== ================== ================= =================
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)
August 31, 2009
NOTE G - INVENTORIES
Inventories, net of reserves, consist of the following:
August 31, 2009 May 31, 2009
--------------------- ---------------------
Raw materials $ 636,792 $ 646,775
Work in process 545,086 522,823
Finished goods 411,011 310,126
--------------------- ---------------------
$ 1,592,889 $ 1,479,724
===================== =====================
At August 31, 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:
Three months Three months
ended August 31, ended August 31,
2009 2008
-------------------- ------------------
Deferred revenue at the beginning of the period $ 1,268,834 $ 1,618,053
Additions:
Deferred extended service contracts 234,677 446,834
Deferred in-service and training 10,000 17,500
Deferred service arrangements 42,500 52,500
Deferred service arrangement obligations - 600
Recognized as revenue:
Deferred extended service contracts (334,455) (410,126)
Deferred in-service and training (10,000) (12,500)
Deferred service arrangements (34,795) (49,579)
Deferred service arrangement obligations - (600)
-------------------- --------------------
Deferred revenue at end of period 1,176,761 1,662,682
Less: current portion 865,185 1,151,556
-------------------- --------------------
Long-term deferred revenue at end of period $ 311,576 $ 511,126
==================== ====================
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
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
August 31, 2009
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
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. Payment terms on certain
purchases leave a balance of $250,000 in Trade payable to related party -
current portion on the accompanying consolidated condensed balance sheet as of
August 31, 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)
August 31, 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, 2010 $ 112,447
May 31, 2011 154,427
May 31, 2012 160,604
May 31, 2013 40,541
------------------
Total $ 468,019
==================
NOTE K - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
SFAS No. 168, The FASB Accounting Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles--a replacement of FASB
Statement No. 162 ("SFAS 168"). The statement 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. We will apply the
Codification beginning in the second quarter of fiscal 2010. The adoption of
SFAS 168 is not expected to have any substantive impact on our condensed
consolidated financial statements or related footnotes.
NOTE L - SUBSEQUENT EVENTS
The company has evaluated subsequent events through October 15, 2009, the
date of issuance of these financial statements as required by SFAS 165.
On September 30, 2009 the Annual Meeting of Stockholders of Vasomedical,
Inc. was held. At this meeting the shareholders voted in favor of amending the
Company's certificate of incorporation to increase the number of authorized
shares of common stock to 250,000,000.
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.
We have attempted to achieve profitability by halting the trend of declining
revenue and reducing operating costs, and to reduce cash usage through bringing
our cost structure more into alignment with current and projected revenues. We
have started to see the effect of these efforts as evidenced by the improved
results of the current quarter.
Page 12
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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,
Page 13
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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.
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.
Page 14
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
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
Page 15
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Since June 1, 2009 the Company adopted 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.
Since June 1, 2009 the Company adopted 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," and
requires disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. FSP SFAS No. 107-1 and APB No. 28-1 also amends APB Opinion No. 28,
"Interim Financial Reporting," to require those disclosures in summarized
financial information for interim reporting periods. FSP SFAS No. 107-1 and APB
No. 28-1 is effective for interim reporting periods ending after June 15, 2009.
Page 16
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company adopted 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.
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 August 31, 2009 and August 31, 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
three months ended August 31, 2009 and August 31, 2008, was $1,316,084 and
$1,311,721, respectively, which represented an increase of $4,363, or less than
1%. We reported net income attributable to common stockholders of $101,762 for
the first quarter of fiscal year 2010 compared to a net loss attributable to
common stockholders of $549,971 for the first quarter of fiscal 2009. The change
from a net loss to net income was primarily attributed to the increase in
equipment revenues, decrease in operating expenses, and an increase in other
income.
Revenues
Revenue from equipment sales increased approximately 21% to $794,648 for
the three-month period ended August 31, 2009 as compared to $656,496 for the
same period in the prior year. The increase in equipment sales is due primarily
to an increase in the average blended per unit sale price.
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 quarter of fiscal 2010 decreased
approximately $43,063 compared to the same three-month period in the prior year
reflecting decreased sales volume.
Our revenue from equipment rental and services decreased 20% to $521,436 in
the first quarter of fiscal 2010 from $655,225 in the first quarter of fiscal
year 2009. Revenue from equipment rental and services represented 40% of total
revenue in the first quarter of fiscal 2010 and 50% 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
Page 17
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $737,573, or 56% of revenues, for the first
quarter of fiscal 2010 compared to $500,562, or 38% 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 first quarter
of fiscal 2010 and 2009 were $648,327, or 49% of revenues, and $943,759, or 72%
of revenues, respectively, reflecting a decrease of $295,432 or approximately
31%. The decrease in SG&A expenditures in the first quarter of fiscal 2010
resulted primarily from decreased administrative expenses in wages and benefits,
professional fees, and insurance expenses.
During the first quarter of fiscal 2010 the Company's provision for
doubtful accounts was reduced by $31,000 as compared to the first quarter 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 $102,071, or 8% of revenues,
for the first quarter of fiscal 2010 decreased by $30,276, or 23%, from
$132,347, or 10% of revenues, for the first quarter of fiscal 2009. The decrease
is primarily attributable to a decrease in regulatory affairs expenses.
Interest and Other Income, Net
Interest and other income for the first quarter of 2010 and 2009, were
$83,970 and $16,012, respectively. In the first quarter 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 quarter of fiscal years 2010 and 2009, were $13,311 and $13,311,
respectively. The gain resulted from the Company's sale-leaseback of its
facility.
Income Tax Expense
During the first quarter of fiscal year 2010 we reversed the provision for
income taxes by $17,335 and the Company incurred an expense of $29. During the
first quarter of fiscal year 2009, we recorded a provision for income taxes of
$3,750.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working capital. At August
31, 2009, we had cash and cash equivalents of $682,800, short-term investments
of $139,651 and working capital of $1,411,589 compared to cash and cash
Page 18
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
equivalents of $544,057, short-term investments of $370,523 and working capital
of $1,300,645 at May 31, 2009.
Cash used in operating activities was $72,866 during the first three months
of fiscal year 2010, which consisted of a net gain after non-cash adjustments of
$114,688 and cash used by operating assets and liabilities of $187,554. The
changes in the accounts balances primarily reflect increases in accounts
receivable of $183,365, inventories of $111,408, including $1,758 of inventories
transferred from property and equipment, decreases in deferred revenue of
$110,947, and trade payable due to related party of $10,000 partially offset by
a decrease in other assets of $70,140, an increase in accounts payable, accrued
expenses and other current liabilities of $156,527, and an increase in other
liabilities of $1,499. Net accounts receivable were 66% of revenues for the
three-month period ended August 31, 2009, as compared to 67% for the three-month
period ended August 31, 2008, and accounts receivable turnover was 5.8 times for
the three months ended August 31, 2009 as compared to 6.5 times for the three
months ended August 31, 2008.
Investing activities during the three-month period ended August 31, 2009
provided cash of $211,609 and consisted of the redemption of six-month
certificates of deposit in the amount of $299,722 offset by the purchase of a
twelve-month certificate of deposit for $68,850, and purchases of property and
equipment of $19,263.
The Company had no financing activities during the three-month period ended
August 31, 2009.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of August 31, 2009.
Due thru Due thru Due thru
9/1/2009 and 9/1/2010 and 9/1/2012 and Due
Total 8/31/2010 8/31/2012 8/31/2014 Thereafter
------------------------------------------------------------------------------------
Operating Leases $ 468,019 $ 149,929 $ 318,090 $ - $ -
------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 468,019 $ 149,929 $ 318,090 $ - $ -
====================================================================================
Liquidity
During the last several years, the Company has incurred operating losses.
We have attempted to achieve profitability by halting the trend of declining
revenue and reducing operating costs, and to reduce cash usage through bringing
our cost structure more into alignment with current revenues. We have started to
see the effect of these efforts as evidenced by the improved results of the
current quarter.
Based on our current operations, we believe that we have sufficient working
capital to continue our operations through at least May 31, 2010.
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.
Page 19
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 August 31, 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 August 31, 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 20
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 August 31, 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Stockholders on September 30,
2009.
(b) Eight directors were elected at the Annual Meeting to serve for a term of
one year. The names of these directors and votes cast in favor of their
election and shares withheld are as follows:
Name Votes For Votes Withheld
---- --------- --------------
Abraham E. Cohen 80,798,427 3,235,728
Derek Enlander 81,173,101 2,861,054
John C. K. Hui 79,807,243 4,226,912
Jun Ma 80,350,036 3,684,119
Behnam Movaseghi 80,282,700 3,751,455
Photios T. Paulson 46,553,391 37,480,764
Simon Srybnik 80,431,574 3,602,581
Martin Zeiger 80,502,231 3,531,924
There were no broker non-votes as to the election of directors.
(c) (i) An amendment to the Company's Certificate of Incorporation to increase
the number of authorized shares of common stock from 110,000,000 to
250,000,000 was approved at the Annual Meeting by the following vote:
Votes For Votes Against Abstained
--------- ------------- ---------
72,781,064 10,668,400 584,691
There were no broker non-votes as to this matter.
(ii) Ratification of the appointment of Rothstein, Kass & Company as the
Company's independent registered public accountants for the year ending May
31, 2010 was approved at the Annual Meeting by the following vote:
Votes For Votes Against Abstained
--------- ------------- ---------
80,944,270 1,242,910 1,846,975
There were no broker non-votes as to this matter.
(d) Not applicable.
Page 21
ITEM 6 - EXHIBITS:
Exhibits
3 Certificate of Amendment of the Certificate of Incorporation as filed with
the Secretary of State of Delaware on October 2, 2009.
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.
Page 22
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: October 15, 2009
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