UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal
year ended December 31, 2013
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18105
VASOMEDICAL, INC.
(Exact name of registrant as specified in Its Charter)
Delaware 11-2871434
(State or other
jurisdiction of
(IRS Employer
incorporation or
organization) Identification
No.)
180 Linden Avenue,
Westbury, New York 11590
(Address of Principal
Executive Offices) (Zip
Code)
Registrant’s telephone number, including area code: (516) 997-4600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value ____________OTCBB_____________
(Title of Class) Name
of each exchange on which registered
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ]
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ]
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 past 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 has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files)
Yes [ X] No
[ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405)
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. 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 ]
The aggregate market value of common stock held by non-affiliates was
approximately $40,945,000 based on the closing sales price of the common stock as quoted on
the OTCBB on March 21, 2014.
At March 21, 2014, the number of shares outstanding of the issuer's
common stock was 156,223,981.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement in connection with its Annual
Meeting of Stockholders to be held in May 2014, to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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VASOMEDICAL, INC.
INDEX TO FORM 10-K
Page
ITEM 7
– MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 8
- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM
9A - CONTROLS AND PROCEDURES
ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM......................................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
Exhibit 31.... Certifications Pursuant to Securities Exchange Act Rule 13A-14(A)/15D-14(A)
Exhibit 32.... Certification of Periodic Report
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; continuation of the GEHC agreement; 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.
In 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical device sales professionals and entered into the sales representation business as the exclusive representative for the sale of select General Electric Company (GE) diagnostic imaging equipment to specific market segments in the 48 contiguous states of the United States and the District of Columbia.
In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company, which owns and controls two Chinese operating companies - Life Enhancement Technology Ltd. and Biox Instruments Co. Ltd., respectively - to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio.
In September 2011, the Company also restructured to further align its business management structure and long-term growth strategy, and now operates through three wholly-owned subsidiaries. Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® equipment business as well as other medical equipment operations.
The Company will seek to achieve greater profitability by expanding our U.S. and international market product portfolio. In addition, the Company plans to actively pursue other accretive acquisitions or partnerships and to expand its sales representation business.
Business Segments
We manage and evaluate our operations based on the products and services we offer. Under this approach, we operate through two segments - Sales Representation and Equipment. Our principal manufacturing facilities are located domestically in New York, and internationally in China.
The Sales Representation segment currently operates under a sales representative agreement with GE Healthcare (the “GEHC Agreement”), the healthcare business unit of GE, which commenced July 1, 2010. The GEHC Agreement had an initial term of three years and in 2012 was extended for an additional two years to June 30, 2015, subject to earlier termination under certain circumstances. All revenues and expenses in this segment arise through its operations under the GEHC Agreement.
Under the GEHC Agreement, the Company earns commissions based upon achieving certain calendar year targets. Our annual commission rate increases retroactively to January 1 when targets are met as the year progresses. The progressive nature of our agreement can thus result in significantly higher commissions due us in the fourth and first quarters as compared to the second and third quarters of the calendar year.
The Equipment segment operates through two subsidiaries: Vasomedical Solutions and Vasomedical Global. The segment primarily designs, manufactures and distributes medical devices, including EECP® systems and ambulatory monitoring systems. Vasomedical Solutions maintains a manufacturing facility in New York and markets EECP® therapy systems and other medical equipment both in the United States and in select international markets. Vasomedical Global currently operates engineering development and production facilities in China. In addition to being the primary supplier of medical equipment to Vasomedical Solutions, it also sells its ambulatory monitoring products directly to end users in China and other countries.
Sales and
Marketing
We sell GEHC diagnostic imaging products to our assigned market through a nationwide team of sales employees led by a vice president of sales of VasoHealthcare and several regional managers, supported by in-house administrative and other support, as well as applicable GEHC employees.
The sales and marketing efforts of our equipment segment are led by a vice president of sales and marketing as well as a vice president of national sales and service at Vasomedical Solutions, who supervises a team of sales managers covering various regions in the United States. We market our EECP® systems internationally through distributors in various countries throughout Europe, the Middle East, Africa, Asia and Latin America. We sell our Biox™-series ambulatory monitoring systems in China by a group of sales managers as well as through distributors covering various regions of China.
Competition
In the U.S. diagnostic imaging market, our main competitors are Siemens, Philips, Toshiba, and Hologic. Key competitive factors in the market include price, quality, delivery speed, service and support, innovation, distribution network, breadth of product and service offerings and brand name recognition. We believe GEHC is a leading competitor in this market.
Though we believe that we are the industry
leader, in the United States our competitors in our EECP® business are Applied Cardiac Systems Inc.,
Cardiomedics Inc. and Scottcare Cardiovascular Solutions.
In the ambulatory monitoring system business,
there are numerous competitors of various size and strength. The Biox™ series is among few from China with
CE Mark certification, FDA clearances as well as Health Canada listing.
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 788,000
lives in the United States in 2010 and was responsible for 1 of every 3 deaths, according
to Heart Disease and Stroke Statistics - 2014 Update: A Report from
the American Heart Association (2014 Update). An
estimated 83.6
million American adults, approximately 27% of the U.S. population, suffer from some form of
cardiovascular disease.
We
have FDA clearance to market our EECP® therapy for use in the treatment of (1) congestive heart failure and (2) chronic stable
angina that is refractory to optimal anti-anginal medical therapy without
options for revascularization (refractory angina). (See also Clearance by U.S. FDA,
below.)
Medicare
and other third-party payers currently reimburse for the treatment of angina
pectoris patients with moderate to severe symptoms who are refractory to
medications and who, in the opinion of a cardiologist or cardiothoracic
surgeon, are not candidates for invasive procedures. Patients with co-morbidities of heart
failure, diabetes, peripheral vascular disease, etc. are also reimbursed under
the same criteria, provided the primary diagnosis and indication for treatment
with EECP® therapy is refractory angina symptoms.
Angina
pectoris is the medical term for a recurring pain or discomfort in the chest, neck or arm due to coronary artery disease
(CAD). The number of angina patients in the United
States in 2010 is
approximately 7.8
million, with 565,000 new cases in population of age 45 years or older,
according to the 2014 Update.
There are approximately 100,000 to 150,000 new refractory angina
patients each year who do not adequately respond to medication, and are not
amenable to invasive revascularization procedures such as percutaneous coronary
interventions (PCI) or coronary artery bypass grafting (CABG). Currently our EECP® therapy is
mostly prescribed for these patients because of the potential to meet the
guidelines for reimbursement of EECP® therapy.
In
February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that administers the Medicare program for over 50 million beneficiaries in 2013, 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® therapy. We believe
that the majority of the patients who receive EECP® therapy are
Medicare patients, and many of the younger patients are covered by third-party
payers. An important element of our strategy is
to grow the market for EECP® therapy by expanding reimbursement
coverage to include a broader range of angina patients than the current
coverage policy provides. Please see the
“Reimbursement” section of this Form 10-K for a more detailed discussion of
reimbursement issues.
CHF
is a condition in which the heart loses its pumping capacity to supply the
metabolic needs of all other organs, and the symptoms include angina, shortness
of breath, etc.
According
to the 2014 Update, approximately 5.1 million adults in the United
States were suffering from heart failure in 2010 and about 825,000 new cases of the disease occur each
year in
population of age 45 years or older. 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 and is expected to grow to approximately
8 million by 2030. 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
heart failure. In
the U.S. under the provisions of the current Patient Protection and Affordable
Care Act (PPACA), starting in October 2011, every hospital’s 30-day hospital
readmission rate for CHF, acute myocardial infarction (AMI) and pneumonia is
evaluated by CMS and if a hospital is found to be in the lowest quartile in the
annual ranking, CMS is authorized by the Hospital Readmission Reduction Program
to penalize the hospital by reducing by 1% the hospital’s entire Medicare
payment for the year. This 1% penalty will be applied for the calendar year
2013 and will be increased to 2% in 2014 and 3% in 2015.
We
will continue to educate the marketplace that EECP® therapy is a
therapy for the treatment of congestive heart failure and refractory angina and that patients with a 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® therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria. Please see the “Reimbursement” section of
this Form 10-K for a more detailed discussion of reimbursement issues.
While currently we only have FDA clearance to market EECP® therapy in the United States for the treatment of congestive heart failure and refractory angina, there are many clinical papers published in peer reviewed medical journals demonstrating the safety and effectiveness in off-label applications by physicians, both domestic and overseas. In addition, during the past several years, many studies have been conducted to provide scientific evidence-based explanation on the mechanisms of action of EECP® therapy. Results of these studies show that EECP® therapy improves endothelial function in dilating vasculature, stimulates angiogenesis in forming new blood vessels, reduces inflammatory responses in deactivating signaling proteins and attenuates the atherosclerotic process by limiting smooth muscle cells proliferation and migration. These actions have led physicians to use EECP® therapy in the treatment of many different cardiovascular symptoms, such as cerebral vascular disease, specifically ischemic stroke, cardiac syndrome X, erectile dysfunction, chronic kidney disease and diabetes mellitus. However, large randomized control studies appear to be needed to confirm the preliminary findings and drive market clearance and reimbursement.
We will continue to observe development in the use of EECP® therapy in new applications and continue to sponsor clinical studies that may lead to regulatory clearance and reimbursement.
The EECP® 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 caused by their coronary artery disease after 15 to 20 hours of therapy. As demonstrated in the clinical studies on EECP® therapy, positive effects have been shown in most patients to continue for years following a full course of therapy.
There
are around 200 papers related to EECP® therapy published in
peer-reviewed medical journals and in scientific and medical conferences all
over the world since 1992. (In 2013 there were 21 new
articles on EECP® therapy published in peer reviewed journals.) With only a few exceptions, these publications
were generated using Vasomedical EECP® therapy systems. In summary, this body of literature contains
evidence from a variety of institutions and investigators demonstrating the pathophysiological
mechanisms underlying the benefits of EECP® therapy and the
beneficial clinical outcomes of EECP® therapy.
Beneficial Clinical Outcomes
It has been well documented that the following benefits are sustained
for up to three to five years:
· Increased myocardial perfusion to ischemic regions of the heart in patients with coronary artery disease (CAD);
· Improved cardiac functions and exercise capacity in patients with CAD and heart failure;
· Elimination or reduction in angina and heart failure symptoms;
· Improved CCS angina function class and heart failure NYHA function class;
· Reduced frequency of angina episodes and nitroglycerin usage in patients with refractory angina;
· Improved quality of life in patients with angina and heart failure.
Mechanisms of Action
During
the past several years, the mechanisms of action of EECP® therapy
have been the subject of many investigations, and independent research aiming
to fully explain the precise scientific means by which EECP® therapy
achieves its long-term beneficial effects and further studies continue to be conducted and published
every year. There is evidence to suggest
that the EECP® 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. This 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 were receiving an inadequate
supply of blood. There is also evidence
to support a mechanism related to improved function of the endothelium, which
regulates the luminal size of the arteries and controls the dilation of the
arteries to ensure adequate blood flow to all organs, thus reducing
constriction of blood vessels that supply oxygenated blood to the body’s organs
and tissues. In addition, it is now
clear that during EECP® therapy the hemodynamic effect reduces
circulating proinflammatory cytokines, arterial stiffness and smooth muscle
cells proliferation and migration, slowing down the progression of atherosclerotic
processes. These evidences supporting
the mechanisms of action will lead to exploration of additional clinical
applications of EECP® therapy.
Significant Economic
Benefits
Beginning in 1998, we sponsored the
International EECP® Patient Registry (IEPR™) with the Department of Epidemiology Data Center
at the University of Pittsburgh,
Graduate School of Public Health as the coordinating center responsible for data collection, processing,
as well as performing error and consistency checks and analysis. The IEPR™ is a voluntary registry recording consecutive
patients enrolled in clinical sites undergoing for at least 1 hour of
EECP® therapy. There are at
least 27 papers published in medical peer-reviewed journals and more than 85
presentations in major scientific/clinical conferences using data collected in
the IEPR™. The IEPR™
also examined the economic impact of EECP® treatment by collecting
data on emergency department (ED) visits and hospitalizations in patients with
refractory angina and LVD. Patients with refractory
angina and LVD exert an enormous burden on health care resources primarily
because of the number of recurrent emergency department (ED) visits and
hospitalizations. Results from 450
patients with LVD (ejection fraction no more than 40%) treated with EECP® therapy for their refractory
angina with data on all-cause ED visits and hospitalization rates within six months
before EECP® therapy were compared with those at six months after
EECP® therapy, and were analyzed and published in Congestive Heart Failure in February
2007. Despite the unfavorable risk profile,
refractory angina patients with LVD achieved a substantial reduction in
all-cause ED visits and hospitalization rates at 6-month follow-up.
The mean number of 6-month ED visits per patient decreased by 78% after EECP® treatment, and 6-month hospitalizations were reduced by 73%. The significant reduction in ED visits and hospitalizations post-EECP® therapy is consistent with findings presented elsewhere. EECP® therapy has the potential to save billions of dollars in healthcare costs each year, and, as this is becoming an increasingly important issue of the nation’s healthcare system, the Company is communicating to payers of these benefits as part of its campaign to expand reimbursement for EECP® therapy.
Registry data, while considered a valuable source of complementary clinical data, is retrospective and therefore deemed by researchers and others to be less convincing than prospective data or data from randomized and controlled clinical trials. There can be no assurance that the Company will be able to obtain regulatory, reimbursement or other types of approvals, or a favorable standing in medical professional practice guidelines, based only upon results observed in patients enrolled in registries.
We
sell EECP® therapy systems and ambulatory monitoring systems to
treatment providers such as hospitals, clinics and physician private practices
in the United States through our sales managers throughout the nation
supervised by a vice president of U.S. sales and service at Vasomedical
Solutions,. The efforts of our sales organization are supported by in-house marketing, administration and clinical educators
who are responsible for training and certification of physicians and
therapists, as well as updating customers on new clinical developments,
especially relating to EECP® therapy. The Company also markets certain products,
accessories and supplies through an online store.
Our
domestic marketing activities support physician education and physician
outreach programs, exhibition at national and regional medical conferences, as
well as sponsoring
seminars at professional association meetings.
These programs are designed to support our field sales organization and
increase awareness of EECP® therapy in the medical community. Our marketing activities also include
promotion of awareness among third-party payers and potential patients of the
benefits of EECP® treatment for patients suffering from CHF as well
as angina.
We
employ service technicians for the repair and maintenance of EECP®
systems and, in some instances, on-site training of a customer’s biomedical
engineering personnel. We provide a
service arrangement at the time of equipment sale that includes: service by
factory-trained service representatives, material and labor costs, emergency
and remedial visits, software upgrades, technical phone support and preferred
response times. After the initial
service arrangement expires, we service our customers either under separately
purchased annual service contracts or on a fee-for-service basis.
We
distribute our EECP® products in the international market primarily through
a network of independent distributors. It has generally been our policy to appoint authorized distributors with marketing rights to EECP®
therapy systems in their respective countries or regions, in exchange for their
commitment to meet the duties and responsibilities required of a
distributor. Each distribution agreement
contains a number of requirements that must be met for the renewal of the agreement, including minimum performance
standards. Duties of the distributors
include registering the product and obtaining necessary regulatory or clinical
approvals to support local registration or reimbursement for EECP® therapy,
as well as clinical and technical support to the therapy providers in their
respective territories.
Our
international marketing activities include, among other things, assisting
distributors in obtaining regulatory clearance and national or third-party
healthcare insurance reimbursement approval, participating in trade shows and
medical conferences to create greater awareness and acceptance of EECP®
therapy by clinicians, and identifying additional distribution channels in
those countries in which we do not currently have a presence.
International
sales may be subject to certain risks, including export/import licenses,
tariffs, and other trade regulations. In
addition, there can be no assurance that we will be successful in maintaining
our existing distribution agreements or entering into any additional
distribution agreements, or that our international distributors will be
successful in marketing EECP® therapy.
While we believe that we are the industry leader, we
are aware of at least three direct competitors with an external
counterpulsation device on the U.S. market and two additional competitors in
the international market. Some other
companies have also received FDA 510(k) clearance for external counterpulsation
systems since 1998, although we have not seen these systems commercially available
in the marketplace. While we believe
that these competitors’ involvement in the market is limited, there can be no
assurance that these companies will not become a significant competitive factor
or that other companies will not enter the external counterpulsation market.
We
view other companies engaged in the development of device-related,
biotechnological or pharmacological approaches to the management of
cardiovascular disease as potential competitors in the marketplace as
well. These include such common and
well-established medical devices and treatments as the intra-aortic balloon
pump (IABP), ventricular assist devices (VAD), coronary artery bypass graft
surgery (CABG), coronary angioplasty, mechanical circulatory support (MCS),
transmyocardial laser revascularization (TMR), total artificial hearts, cardiac
resynchronization devices, spinal cord stimulation (SCS), ranolazine (Ranexa®) and nesiritide (Natrecorâ);
as well as newer technologies such as gene therapy.
We
are subject to extensive regulation by numerous government regulatory agencies,
including the U. S. FDA
and similar foreign agencies. We are
required to comply with applicable laws, regulations and standards governing
the development, preclinical and clinical testing, manufacturing, quality
testing, labeling, promotion, import, export, and distribution of our medical
devices.
The
Company’s initial systems received FDA premarket notification (510(k)) clearance in 1995, with later models
receiving clearance at various times between 2000 and 2004 as Class III preamendments devices.
On December 30, 2013, the FDA issued a final order that reclassified external counter-pulsating (ECP) devices for treatment of chronic stable angina for patients that are refractory to anti-anginal medical therapy and without options for revascularization from class III to class II (special controls).
In addition, FDA requires the filing of a premarket approval (PMA) or a notice of completion of a product development protocol (PDP) for ECP devices for other intended uses such as unstable angina, acute myocardial infarction, cardiogenic shock and congestive heart failure, which were previously cleared for marketing by means of 510(k) procedure. In accordance with federal regulations, ECP manufacturers may continue to commercially distribute their devices for these intended uses for a period of 90 days after the issuance of the final order. The devices may continue to be marketed only for refractory angina if a PMA or a notice of completion of a PDP is not filed before the end of the 90-day period.
In February, 2014 the Company
filed documents with the FDA ensuring its 510(k) document file for EECP®
Therapy systems is updated
and consistent with the language currently required by
the FDA for the indicated use as Class II devices. The Company continues to monitor the compliance requirements of the FDA on the proper and timely filing of documents to ensure the continuous
marketing of EECP® Therapy systems for congestive heart failure, a Class III
indication now requiring a PMA.
If
human clinical trials of a device are required, whether to support a 510(k) or
PMA application, the trials’ sponsor, which is usually the manufacturer of the
device, first must obtain the approval of the appropriate institutional review
boards. If a trial is of a significant
risk device, the sponsor also must obtain an investigational device exemption,
or IDE, from the FDA before the trial may begin. For all clinical testing, the sponsor must
obtain informed consent from the patients participating in each trial. There is no guarantee that the sponsor,
whether Vasomedical or others, will obtain all necessary approvals, exemptions
and consents before future clinical trials, and furthermore, the results of
clinical testing that a sponsor undertakes may be insufficient to obtain
clearance or approval of the tested product.
We
are also subject to other FDA regulations that apply prior to and after a
product is commercially released. These
include the current Good Manufacturing Practice (cGMP) requirements, set forth
in FDA’s Quality System Regulation (QSR), that require manufacturers to have a
quality system for the design, manufacture, packaging, labeling, storage,
installation and servicing of medical devices intended for commercial
distribution in the United States. This
regulation covers various areas including management and organization, device
design, purchase and handling of components, production and process controls
such as those related to buildings and equipment, packaging and labeling
control, distribution, installation, complaint handling, corrective and
preventive action, servicing, and records.
We are subject to periodic and random inspections by the FDA for
compliance with the cGMP requirements and Quality System Regulation.
The
FDA also enforces post-marketing controls that include the requirement to
submit medical device reports to the agency when a manufacturer becomes aware
of information suggesting that any adverse events are related to its marketed
products. The FDA relies on medical
device reports to identify product problems and utilizes these reports to
determine, among other things, whether it should exercise its enforcement
powers. The FDA also may require
post-market surveillance studies for specified devices.
We
are subject to the Federal Food, Drug, and Cosmetic Act’s, or FDCA’s, general
controls, including establishment registration, device listing, and labeling
requirements. If we fail to comply with
any requirements under the FDCA, we, including our officers and employees,
could be subject to, among other things, fines, injunctions, civil penalties,
and criminal prosecution. We also could
be subject to recalls or product corrections, total or partial suspension of
production, denial of premarket notification clearance or PMA approval, and
rescission or withdrawal of clearances and approvals. Our products could be detained or seized, the
FDA could order a recall, repair, replacement, or refund of our devices, and
the agency could require us to notify health professionals and others that the
devices present unreasonable risks of substantial harm to the public health.
The
advertising of our products is subject to regulation by the Federal Trade
Commission, or FTC. The FTC Act prohibits
unfair or deceptive acts or practices in or affecting commerce. Violations of the FTC Act, such as failure to
have substantiation for product claims, would subject us to a variety of
enforcement actions, including compulsory process, cease and desist orders and
injunctions, which can require, among other things, limits on advertising,
corrective advertising, consumer redress and restitution, as well as
substantial fines or other penalties.
As a sales channel partner, we are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws.
In
most countries to which we seek to export our EECP® systems, a local
regulatory clearance must be obtained.
The regulatory review process varies from country to country and can be
complex, costly, uncertain, and time-consuming.
Vasomedical EECP® systems are all manufactured in accordance
with ISO 13485, the international standard for medical devices. All our current systems are CE marking
certified for European Union countries, and covered by our Health Canada
license.
We
are also subject to audits by organizations authorized by foreign countries to
determine compliance with laws, regulations and standards that apply to the
commercialization of our products in those markets. Examples include auditing by a European Union
Notified Body organization (authorized by a member state’s Competent Authority)
to determine conformity with the Medical Device Directives (MDD) and by an
organization authorized by the Canadian government to determine conformity with
the Canadian Medical Devices Regulations (CMDR).
There
can be no assurance that we will obtain desired foreign authorizations to
commercially distribute our products in those markets or that we will comply
with all laws, regulations and standards that pertain to our products in those
markets. Failure to receive or delays in receipt of such authorizations or
determinations of conformity could have a material adverse effect on our
financial condition and results of operations.
Federal
and state laws protect the confidentiality of certain patient health
information, including patient records, and restrict the use and disclosure of
that protected information. The U.S.
Department of Health and Human Services (HHS) published patient privacy rules
under the Health Insurance Portability and Accountability Act of 1996 (HIPAA
privacy rule) and the regulation was finalized in October 2002. Currently, the HIPAA privacy rule affects us
only indirectly in that patient data that we access, collect and analyze may
include protected health information.
Additionally, we have signed some Business Associate Agreements with
Covered Entities that contractually bind us to protect private health
information, consistent with the HIPAA privacy rule’s requirements. We do not expect the costs and impact of the
HIPAA privacy rule to be material to our business.
Medical
professional societies periodically issue Practice Guidelines to their members
and make them available publicly. The
American College of Cardiology Foundation (ACCF) and the American Heart Association
(AHA) have jointly produced
guidelines in the area of cardiovascular since 1980. The ACCF/AHA
practice guidelines are intended to assist healthcare providers in clinical
decision making by describing a range of generally acceptable approaches to the
diagnosis, management, and prevention of specific diseases or conditions.
On November 19, 2012 the ACCF/AHA Task Force on
Practice Guidelines issued its new Guideline for the Diagnosis and Management of Patients
With Stable Ischemic Heart Disease. EECP® therapy retained the same IIb
Class of Recommendation (COR) rating it received in the ACC/AHA 2002 Guideline
Update for the Management of Patients with Chronic Stable Angina. The new Guideline also gave EECP® therapy
the same B rating for Level of Evidence (LOE) as the 2002 Guideline.
According to the Guideline, a class IIb
rating maintains that procedures and treatments may be considered for patients.
Additional studies with broad objectives are needed and further registry data
would be helpful. This classification finds that the benefits of treatments are
greater than or equal to the risk of treatment.
In August of 2013 The European Society of Cardiology issued new Guidelines on the Management of Stable Coronary Artery Disease (SCAD), in which EECP® Therapy was included for the first time and given a Class IIa Recommendation, meaning it “should be considered” as a treatment option as opposed to the “may be considered” recommendation of a IIb rating.
In
the ACC/AHA 2005 Guidelines for the
Diagnosis and Management of Chronic Heart Failure in the Adult, External
counterpulsation was listed as one of the devices. The 2006
Comprehensive Heart Failure Practice Guideline by the Heart Failure Society
of America does not include any comments on the use of external
counterpulsation therapy for treating heart failure patients.
While EECP® therapy has not been approved by FDA for the treatment of stroke, AHA and The American Stroke Association (ASA) recommended “extracorporeal counterpulsation” with a IIb rating in its Guidelines for the Early Management of Patients With Acute Ischemic Stroke published in March 2013, which stated that “augmentation of cerebral collateral blood flow is a compelling concept that may hold promise in the treatment of acute ischemic stroke.”
In summary, while there is
still some reluctance in the cardiology community about the broader use of EECP® therapy, positive evaluations
of its application for patients with chronic angina, heart failure and some
off-label applications continue to appear in presentations at major scientific
meetings, in peer-reviewed publications, as well as on educational academic and
patient oriented web sites each year. We
continue to believe that new evidences from completed and ongoing studies regarding
the efficacy of EECP® therapy and its long lasting effect will be
sufficient to warrant modification to a more favorable recommendation level in
practice guidelines. This would lead to increased acceptance by the medical
community and broader reimbursement coverage.
Reimbursement
coverage and payment rates are important factors in the sales of our products,
and we depend in large part on the availability of reimbursement programs. Medicare, Medicaid, as well as private health
care insurance and managed-care plans determine eligibility for coverage of a
product or therapy based on a number of factors, including the payer’s
determination that the product is reasonable and necessary for the diagnosis or
treatment of the illness or injury for which it is administered according to
the scope of clinical evidence available, accepted standards of medical care in
practice, the product’s cost effectiveness, whether the product is experimental
or investigational, impact on health outcomes and whether the product is not
otherwise excluded from coverage by law or regulation.
In
February 1999, CMS, the federal agency that administers the Medicare program
for over 50
million beneficiaries now, issued a national coverage policy under HCPCS code
G0166 for the use of the EECP® therapy system. The policy provided coverage for the use of
the therapy
“… for patients who have been diagnosed with disabling angina (class III or class IV, Canadian Cardiovascular Society Classification or equivalent classification) who, in the opinion of a cardiologist or cardiothoracic surgeon, are not readily amenable to surgical interventions such as balloon angioplasty and cardiac bypass because:
1. their condition is inoperable, or at high risk of operative complications or post-operative failure;
2. their coronary anatomy is not readily amenable to such procedures; or
3. they have co-morbid disease states, which create excessive risk.”
The
physician office setting and the hospital outpatient facility are the only
entities currently authorized to receive reimbursement for the EECP®
therapy under the Medicare program, and reimbursement is not permitted to other
individuals or entity types, which include, but are not limited to, nurse
practitioners, physical therapists, ambulatory surgery centers, nursing homes,
comprehensive outpatient rehabilitation facilities, outpatient dialysis
facilities, and independent diagnostic testing facilities. The 2014 national average payment rate per
hourly EECP® therapy session in the physician office setting and the
hospital outpatient facility is $137 and $106, respectively. Actual reimbursement rates vary throughout
the country and range from $120 to $194 per hourly EECP® therapy session in the
physician office setting. The national
average payment rate varied considerably (from $130 in 2000 to $208 in 2003 for
physician offices), but has become stable since 2005, as in the summary below:
Year Physician Office Hospital
2005 $138 $102
2006 $138 $104
2007 $147 $107
2008 $156 $109
2009 $150 $102
2010 $148 $104
2011 $153 $102
2012 $151 $94
2013 $144 $99
2014 $137 $106
If
there were any material change in the availability of Medicare coverage, or if
the reimbursement level for treatment procedures using the EECP®
therapy system is determined to be inadequate, it would adversely affect our
business, financial condition and results of operations. Moreover, we are unable to forecast what
additional legislation or regulation, if any, relating to the health care
industry or Medicare coverage and payment level may be enacted in the future,
or what effect such legislation or regulation would have on our business.
On
May 31, 2005, we submitted to CMS, and on June 20, 2005, CMS accepted our
application for expansion of reimbursement coverage of EECP® therapy
to include patients with 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 CCSC II, i.e. chronic, stable mild angina.
On
March 20, 2006, CMS issued their Decision Memorandum regarding the applications
with the opinion “that the evidence is not adequate to conclude that external
counterpulsation therapy is reasonable and necessary for the treatment of” the
additional indications as requested.
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. We had subsequently submitted
to CMS more data and publications from our PEECH™ study and were advised to
continue to gather more clinical evidence for future submission.
Based
on the new clinical evidence in the past several years, we have started an
initiative campaigning for a positive medical necessity decision in support of
the use of EECP® therapy in the treatment of heart failure. At the same time, we will continue to educate
the marketplace that EECP® 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® therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Since
the establishment of reimbursement for EECP® therapy by the federal
government, an increasing number of private third-party payers have routinely
provided coverage for the use of EECP® therapy for the treatment of
angina and have issued positive coverage policies, which are generally similar
to Medicare’s coverage policy in scope.
In addition, some third-party payers began limited coverage of EECP®
therapy for the treatment of CHF. On the
other hand, there are private insurance carriers that continue to adjudicate
EECP® treatment claims on a case-by-case basis. We continue to pursue a constructive dialogue with
many private insurers for the establishment of positive and expanded coverage
policies for EECP® treatment that include CHF patients.
If
there were any significant reduction in the availability of third-party private
insurers or the adequacy of the reimbursement level for treatment procedures
using the EECP® therapy system, it would adversely affect our
business, financial condition and results of operations. Moreover, we are unable to forecast what
additional legislation or regulation, if any, relating to the health care
industry or third-party private insurers’ coverage and payment levels may be
enacted in the future or what effect such legislation or regulation would have
on us.
The reimbursement environment for EECP®
therapy in international markets is fragmented and coverage varies. Our reimbursement strategy has changed to be
more proactive and create opportunities through our distribution partners. Our current efforts on behalf of EECP®
therapy in both the private and public healthcare sectors of selected
international markets are being initiated jointly by the company and its distributors
in their designated territories. While there has been some
progress with these projects to gain government and private insurance coverage
in a few countries we
do not anticipate a significant impact on financial performance in the next
fiscal year, given the long lead time from submission to approval of
international dossiers for each reimbursement authority.
Other Medical Equipment
In our effort to diversify our medical
equipment offering, in May 2008 we first obtained exclusive distribution rights
from Biox Instruments Co. Ltd., based in Wuxi, China, for the BIOXTM
series ECG Holter and ambulatory blood pressure monitoring products in the
North American market. Between April
2009 and June 2011 the Company received multiple 510(k) clearances from the US
FDA for various BIOX series ECG Holter, ambulatory blood pressure and
combination monitors, as well as the associated analysis and reporting
software. The Company now offers a
complete line of BIOXTM series diagnostic products for ambulatory
monitoring needs.
In September 2011, the Company acquired the company that controls Biox and now includes its
operations in the consolidated financial results. In March 2014, Biox annouced that the new MobiCare™
wireless multi-parameter patient monitoring system had received China FDA
approval for marketing. The Company is
in the process of preparing application for FDA clearance and CE Mark certification for the MobiCare™
system. In combination with Biox,
the Company is also promoting its joint engineering design and manufacturing
capabilities for potential OEM opportunities as well as pursuing international
sales opportunities for the product line through its global distribution
channel.
The
global market for ambulatory monitoring systems is rapidly growing ; for
example, the sales for ECG Holter systems worldwide is projected to reach
$162.7 million by 2017, according to a research report by Global Industry
Analysis, Inc. While there are multiple
competitors in the marketplace, we believe that due to the many advantages of our
products including certain
innovative features, reasonable
pricing, high production and regulation standards, and through our sales and
marketing efforts in niche markets, we should increase sales revenue and create
opportunities for all products the Company manufactures or distributes.
Strategic
Objectives
Our short- and long-term plans for the
growth of the Company and to increase stockholder value are:
a) Maintain and grow our equipment business, by
i)
Continuing
to align the cost structure with revenue growth; and
ii) Increasing our efforts to grow international
sales of all our device offerings.
b) Continue to diversify our product offerings,
by
i)
Identifying
and introducing other medical device products and opportunities that fit into
our target market; and
ii) Working with select partners to develop our
medical device OEM business; and
iii) Pursuing accretive acquisitions of and
partnerships with medical device manufacturers to expand our product portfolio.
c) Work with all stakeholders to expand
reimbursement coverage for EECP® therapy and to explore new
applications, by
i)
Submitting
up-to-date treatment effectiveness data and cost saving evidence to CMS and
third party payers for consideration of EECP® as a first line
treatment option for angina and for expansion of coverage to include heart
failure; and
ii) Possibly conducting clinical trials to expand
coverage and to explore the potential use of EECP® as a treatment
for other ailments including diabetes, chronic kidney disease, and erectile
dysfunction.
d) Maintain and improve business performance in
our sales representation segment by expanding the GE Healthcare product
modalities we represent, and possibly building new teams to represent other
vendors.
The above-listed strategic objectives are
forward-looking statements. We review,
modify and change our strategic objectives from time to time based upon
changing business conditions. There can
be no assurance that we will be able to achieve our strategic objectives and,
even if these results are achieved, risks and uncertainties could cause actual
results to differ materially from anticipated results. Financial resource availability may reduce
our ability to achieve these strategic objectives. Please see the section of this Form 10-K
entitled “Risk Factors” for a description of certain risks, among others that
may cause our actual results to vary from the forward-looking statements.
We
own eleven US patents including eight utility patents and three design patents
that expire at various times through 2023.
We will from time to time file other patent applications regarding
specific enhancements to the current EECP® models, future generation
products, and methods of treatment in the future. Moreover, trademarks have been registered for
the names “EECP”, “AngioNew”, “Natural Bypass”, “Vasomedical”, “Vasomedical
EECP” , “VasoGlobal”, “VasoSolutions” and “VasoHealthcare”.
Through
our China-based subsidiaries, we own three utility patents and various
trademarks. We also own five software
copyright certificates in China, related to Holter ECG and ambulatory blood
pressure data analysis and reporting.
We
pursue a policy of seeking patent protection, both in the US and abroad, for
our proprietary technology. We believe
that we have a solid patent foundation in the field of external
counterpulsation devices and that the number of patents and applications
demonstrates our technical leadership, dating back to the mid-1980s. Our patent portfolio focuses on the areas of
external counterpulsation control and the overall design and arrangement of the
external counterpulsation apparatus, including the console, treatment bed,
fluid distribution, and inflatable cuffs.
None of our current competitors have a significant patent portfolio in
the area of external counterpulsation devices.
There
can be no assurance that our patents will not be violated or that any issued
patents will provide protection that has commercial significance. As with any patented technology, litigation
could be necessary to protect our patent position. Such litigation can be costly and
time-consuming, and there can be no assurance that we will be successful. The loss or violation of our EECP®
patents and trademarks could have a material adverse effect upon our business.
As of
December 31, 2013,
we employed 215 full-time persons, of which 35 are employed through our facility
in Westbury, New York, 92 through our VasoHealthcare subsidiary and 88 are in China. None of our employees are represented by a
labor union. We believe that our
employee relations are good.
The
Company also uses several part-time employees and consultants from time to time
for various purposes.
Vasomedical
Solutions maintains its manufacturing facility in the Westbury, NY location to
satisfy domestic and international needs for the TS4 and Lumenair EECP®
systems, and Vasomedical Global operates production facilities at the Life
Enhancement Technology Co. Ltd. (LET) and Biox
Instruments Co. Ltd. facilities in China. LET manufactures
AngioNew® and Lumenair EECP® systems and Biox
manufactures ambulatory monitoring devices.
Our VasoHealthcare subsidiary maintains an office in Greensboro, North
Carolina.
All manufacturing operations are conducted
under the current Good Manufacturing Practice (cGMP) requirements as set forth
in the FDA Quality System Regulation as well as ISO 13485 standard, the
international quality standard for medical device manufacturers. We are also certified to conform to full
quality assurance system requirements of the EU Medical Device Directive and
can apply CE marking to all of our current product models. Lastly, we are certified to comply with the
requirements of the Canadian Medical Device Regulations (CMDR) and, for all our
EECP® systems, with all UL safety requirements. All these regulations and standards subject
us to inspections to verify compliance and require us to maintain documentation
and controls for the manufacturing and quality activities.
We believe our manufacturing capacity and warehouse facility are adequate
to meet the current and immediately foreseeable future demand for the
production of our medical devices. We
believe our suppliers of the other medical devices we distribute or represent
are capable of meeting our demand for the foreseeable future.
Investing
in our common stock involves risk. You should carefully consider the following
information about these risks together with the other information contained in
this Annual Report on Form 10-K. If any of the following risks actually occur,
our business could be harmed. This could cause the price of our stock to
decline, and you may lose part or all of your investment.
Financial Risks
Achieving profitable
operations is
dependent on several factors.
Our ability to achieve and
sustain profitability is dependent on many factors, primarily
being the sufficient and timely generation and recognition of revenue in our
Sales Representation segment, the success of our marketing and sales efforts in
the Equipment segment, as well as the success of our other strategic
initiatives, including our China acquisitions.
A significant amount of our revenue and prior periods net income arise from activities under this contract. Moreover, our growth depends partially on the territories, customer segments and product modalities assigned to us by GEHC, and thus relies on our ability to demonstrate our added value as a channel partner, and maintain a positive relationship with GEHC. There is no assurance that the agreement will be renewed before it expires or terminated prior to its expiration pursuant to its termination provisions. Should GEHC terminate or not renew the agreement, it would have a material adverse effect on our financial condition and results of operations.
The
growth of our domestic EECP® business is dependent on current
medical reimbursement policies, which provide coverage for a restricted class
of heart patients. While we continue our
dialogue with CMS and commercial payers to obtain expanded coverage for EECP®
therapy, there is no assurance that the Company will succeed in such efforts.
If
we do not receive expanded medical coverage for the use of EECP®
therapy, it will continue to adversely
affect our domestic EECP® therapy business.
Health
care providers, such as hospitals and physician private practices in the U.S.,
that purchase or lease medical devices such as the EECP® therapy
system for use on their patients generally rely on third-party payers,
principally Medicare, Medicaid and private health insurance plans, to reimburse
all or part of the costs and fees associated with the procedures performed with
these devices. If there were any significant reduction in the availability of
Medicare, Medicaid or other third-party coverage or the adequacy of the
reimbursement level for treatment procedures using the EECP® therapy
system, it would adversely affect our domestic EECP® business,
financial condition and results of operations. Moreover, we are unable to
forecast what additional legislation or regulation, if any, relating to the
health care industry or Medicare or Medicaid coverage and payment level may be
enacted in the future or what effect such legislation or regulation would have
on our business. Even if a device has
FDA clearance, Medicare, Medicaid and other third-party payers may deny
reimbursement if they conclude that the device is not “reasonable and
necessary” according to their criteria.
In addition, reimbursement may not be at, or remain at, price levels
adequate to allow medical professionals and hospitals in the U.S. to realize an
appropriate return on the purchase of our products.
While
positive evaluations of the application of EECP® therapy continue to
appear in presentations at major scientific meetings and in peer-reviewed
publications each year, there is still skepticism concerning EECP®
therapy methodology. The American Heart Association Foundation and the American
College of Cardiology Practice Guidelines continue to list EECP® as
a therapy currently under investigation for treatment of heart failure and give
EECP® a Level of Recommendation IIb rating as a treatment for angina
patients who are refractory to medical therapy and are not candidates for
percutaneous coronary intervention (PCI) or coronary artery bypass grafting
(CABG). A classification rating of IIb indicates the therapy’s benefits are greater than or equal to risk, but
additional studies with broader objectives are needed and additional registry
data would be helpful. The medical community utilizes these guidelines when
considering the various treatment options for their patients. Certain
cardiologists, in cases where the EECP® therapy is a viable
alternative, still appear to prefer percutaneous coronary interventions (e.g.
balloon angioplasty and stenting) and cardiac bypass surgery for their
patients. Additional evidence regarding the efficacy of EECP®
therapy continues to evolve, however the evidence may not be sufficient to
warrant a modification of these guidelines to a more favorable recommendation
and increased acceptance by the medical community. We are dependent on
consistency of favorable research findings about EECP® therapy and
increasing acceptance of EECP® therapy as a safe, effective and cost
effective alternative to other available products by the medical community for
growth.
We compete with other companies that market medical devices in the global medical device marketplace. We do not know whether these companies, or other potential competitors who may be developing medical devices, may succeed in developing technologies or products that are more efficient or effective than those offered by us, and that would render our technology and existing products obsolete or non-competitive. Potential new competitors may also have substantially greater financial, manufacturing and marketing resources than those possessed by us. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purpose of our products. Accordingly, the life cycles of our products are difficult to estimate. To compete successfully, we must keep pace with technological advancements, respond to evolving consumer requirements and achieve market acceptance.
If
we modify our medical devices and the modifications significantly affect safety
or effectiveness, or if we make a change to the intended use, we will be
required to submit a new premarket notification(510(k)) or premarket approval (PMA) application to
FDA. We would not be able to market the modified device in the U.S. until FDA
issues a clearance for the 510(k).
Additionally,
if FDA publishes a regulation requiring a premarket approval (PMA) application for
the medical devices we market, such as the final order on December 30, 2013
reclassifying
ECP devices, we would then need to submit a PMA, and have it filed with the
agency, by the date specified by FDA in its regulation. A PMA requires us to
prove the safety and effectiveness of a device to the FDA. The process of
obtaining PMA approval may require a clinical study and is expensive,
time-consuming, and uncertain. If we did obtain PMA approval, any change after
approval affecting the safety or effectiveness of the device will require
approval of a PMA supplement.
If
we offer new products that require 510(k) clearance or a PMA, we will not be able to commercially
distribute those products until we receive such clearance or approval. Regulatory agency approval or clearance for a
product may not be received or may entail limitations on the device’s
indications for use that could limit the potential market for the product.
Delays in receipt of, or failure to obtain or maintain, regulatory clearances
and approvals, could delay or prevent our ability to market or distribute our
products. Such delays could have a material adverse effect on our equipment business.
We also must comply with current Good Manufacturing
Practice (cGMP) requirements as set forth in the Quality System Regulation
(QSR) to receive FDA approval to market new products and to continue to market
current products. The QSR imposes certain procedural and documentation
requirements on us with respect to manufacturing and quality assurance
activities, including packaging, storage, and record keeping. Our products and
activities are subject to extensive, ongoing regulation, including regulation
of labeling and promotion activities and adverse event reporting. Also, our FDA
registered facilities are subject to inspection by the FDA and other
governmental authorities. Any failure to comply with regulatory requirements
could delay or prevent our ability to market or distribute our products. Violation
of FDA statutory or regulatory requirements could result in enforcement
actions, such as voluntary or mandatory recalls, suspension or withdrawal of
marketing clearances or approvals, seizures, injunctions, fines, civil
penalties, and criminal prosecutions, all of which could have a material
adverse effect on our business. Most states also have similar post-market
regulatory and enforcement authority for devices.
Our operations in China are also subject to the laws
of the People’s Republic of China with which we must be in compliance in order
to conduct these operations.
We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws.
We cannot predict the nature of any future laws,
regulations, interpretations, or applications, nor can we predict what effect
additional governmental regulations or administrative orders, either
domestically or internationally, when and if promulgated, would have on our
business in the future. We may be slow to adapt, or we may never adapt to
changes in existing requirements or adoption of new requirements or policies.
We may incur significant costs to comply with laws and regulations in the
future or compliance with laws or regulations may create an unsustainable
burden on our business.
We have foreign operations and are subject to the associated risks of
doing business in foreign countries.
During
the years ended December 31, 2013 and 2012, the Company had and continues to have operations in China. Operating
internationally involves additional risks relating to such things as currency
exchange rates, different legal and regulatory environments, political,
economic risks relating to the stability or predictability of foreign
governments, differences in the manner in which different cultures do business,
difficulties in staffing and managing foreign operations, differences in
financial reporting, operating difficulties, and other factors. The occurrence
of any of these risks, if severe enough, could have a material adverse effect
on the consolidated financial position, results of operations and cash flows of
the Company.
Commercial law is still
developing in China and there are limited legal precedents to follow in
commercial transactions. There are many
tax jurisdictions each of which may have changing tax laws. Applicable taxes
include value added taxes (“VAT”), corporate income tax, and social (payroll)
taxes. Regulations are often
unclear. Tax declarations (reports) are
subject to review and taxing authorities may impose fines, penalties and
interest. These facts create risks in
China.
Sales of medical devices outside the United States
are subject to foreign regulatory requirements that vary from country to
country. Premarket approval or clearance in the United States does not ensure
regulatory approval or clearance by
other jurisdictions. If we, or any of our international
distributors, fail to obtain or maintain required pre-market approvals or fail
to comply with foreign regulations, foreign regulatory authorities may require
us to file revised governmental notifications, cease commercial sales of our
products in the applicable countries or otherwise cure the problem. Such
enforcement action by regulatory authorities may be costly.
In order to sell our products within the European
Union, we must comply with the European Union’s Medical Device Directive. The
CE marking on our products attests to this compliance. Future regulatory
changes may limit our ability to use the CE mark, and any new products we
develop may not qualify for the CE mark. If we lose this authorization or fail
to obtain authorization on future products, we will not be able to sell our
products in the European Union.
We depend on suppliers for the supply of certain products.
While we now manufacture our own EECP® product
through one of our recent China acquisitions, we still depend on certain suppliers
for parts, components and certain finished goods. While we do not foresee any difficulties in
timely receiving products at competitive prices, the inability of not receiving
products in timely fashion or at competitive prices would adversely affect our
business. In addition, as a GEHC channel
partner, we could be negatively impacted by interruptions or delays to
equipment installations, production and quality issues, and other customer
concerns related to GEHC.
We are dependent on a limited number of key
management and technical personnel. The
loss of one or more of our key employees may harm our business if we are unable
to identify other individuals to provide us with similar services. We do not maintain “key person” insurance on
any of our employees. In addition, our
success depends upon our ability to attract and retain additional highly qualified
management, sales, manufacturing
and research and development personnel in our various operations. We face competition in our recruiting
activities and may not be able to attract or retain qualified personnel.
Our patents and proprietary technology may not be
able to prevent competition by others. The validity and breadth of claims in
medical technology patents involve complex legal and factual questions. Future
patent applications may not be issued, the scope of any patent protection may
not exclude competitors, and our patents may not provide competitive advantages
to us. Our patents may be found to be invalid and other companies may claim
rights in or ownership of the patents and other proprietary rights held or
licensed by us. Also, our existing patents may not cover products that we
develop in the future. Moreover, when our patents expire, the inventions will
enter the public domain. There can be no assurance that our patents will not be
violated or that any issued patents will provide protection that has commercial
significance. Litigation may be necessary to protect our patent position. Such
litigation may be costly and time-consuming, and there can be no assurance that
we will be successful in such litigation.
Since patent applications in the United States are
maintained in secrecy until such patent applications are issued, our current
product development may infringe patents that may be issued to others. If our
products were found to infringe patents held by competitors, we may have to
modify our products to avoid infringement, and it is possible that our modified
products would not be commercially successful.
Our growth could suffer if the markets into
which we sell products decline, do not grow as anticipated or experience
cyclicality.
We face the challenges that are typically faced by
companies in the medical device field. Our product line has required, and any
future products will require, substantial development efforts and compliance
with governmental clearance or approval requirements. We may encounter
unforeseen technological or scientific problems that force abandonment or
substantial change in the development of a specific product or process.
The nature of our manufacturing operations exposes
us to risks of product liability claims and product recalls. Medical devices as
complex as ours frequently experience errors or failures, especially when first
introduced or when new versions are released.
We currently maintain product liability insurance at
$5,000,000 per occurrence and $6,000,000 in the aggregate. Our product liability insurance may not be
adequate. In the future, insurance coverage may not be available on
commercially reasonable terms, or at all. In addition, product liability claims
or product recalls could damage our reputation even if we have adequate
insurance coverage.
The healthcare industry is undergoing fundamental
changes resulting from political, economic and regulatory influences. In the
United States, the Affordable Care Act was adopted
which is designed to provide increased
access to healthcare for the uninsured, control the escalation of healthcare
expenditures within the economy and use healthcare reimbursement policies to
balance the federal budget.
We expect that the United States Congress and state
legislatures will continue to review and assess the Affordable Care Act as well as various
healthcare reform proposals, and public debate of these issues will likely
continue. There have been, and we expect that there will continue to be, a
number of federal and state proposals to constrain expenditures for medical
products and services, which may affect payments for products such as ours. We
cannot predict which, if any of such reform proposals will be adopted and when
they might be effective, or the effect these proposals may have on our
business. Other countries also are considering health reform. Significant
changes in healthcare systems could have a substantial impact on the manner in
which we conduct our business and could require us to revise our strategies.
The application of the "penny stock"
rules could adversely affect the market price of our common stock and increase
your transaction costs to sell those shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
The market price of our common stock historically
has been and may continue to be highly volatile. Our stock price could be subject to wide
fluctuations in response to various factors beyond our control, including, but
not limited to:
· medical reimbursement;
· quarterly variations in operating results;
· announcements of technological innovations, new products or pricing by our competitors;
· the rate of adoption by physicians of our technology and products in targeted markets;
· the timing of patent and regulatory approvals;
· the timing and extent of technological advancements;
· results of clinical studies;
· the sales of our common stock by affiliates or other shareholders with large holdings; and
· general market conditions.
Our future operating results may fall below the
expectations of securities industry analysts or investors. Any such shortfall
could result in a significant decline in the market price of our common stock.
In addition, the stock market has experienced significant price and volume
fluctuations that have affected the market price of the stock of many medical
device companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may directly
influence the market price of our common stock.
We do not intend to pay any cash dividends on our
common stock in the foreseeable future.
Additional Information
We are subject to the reporting requirements under
the Securities Exchange Act of 1934 and are required to file reports and
information with the Securities and Exchange Commission (SEC), including
reports on the following forms: annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports
files or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of
1934.
We lease an 18,000 square
foot headquarters and manufacturing facility at 180 Linden Avenue, Westbury,
New York 11590
under a lease with a term that expires on August 31, 2015. The annual rental expense for the lease is approximately $139,000. We
believe that our current facility is adequate for foreseeable current and
future needs and that there will be no difficulty in acquiring comparable
facilities if we do not extend our current lease.
We
also lease approximately 1,500 square feet of office space in New York City
under a lease that expires on May 31, 2017.
The annual rent for this lease is approximately $40,000.
We lease our
engineering and production facilities in China.
We lease approximately 9,000 square feet at an annual cost of
approximately $46,000 in Wuxi, China and
approximately 11,000 square feet at an annual cost of approximately $23,000 in
Foshan, China.
Our Sales
Representation segment primarily operates from a facility in Greensboro, North
Carolina, where we lease 2,600 square feet of office space at an annual rental
expense of approximately $50,000. The current lease for the Greensboro, North Carolina office will expire by
the end of May, 2014, and we do not
believe there will be difficulty in relocating the office should we decide not
to renew the lease.
Our common stock
currently trades on OTCBB under the symbol VASO. The number of record holders of common stock
as of March 21,
2014, was approximately 1,100, which
does not include approximately 8,600 beneficial owners of shares held in the
name of brokers or other nominees. The
table below sets forth the range of high and low trade prices of the common
stock for the fiscal periods specified.
The last bid
price of the Company's common stock on March 21, 2014, was $0.45 per share.
We have never
paid any cash dividends on our common stock and do not intend to pay cash
dividends in the foreseeable future.
This Management’s Discussion and Analysis of
Financial Condition and Results of Operations contains descriptions of our
expectations regarding future trends affecting our business. These forward
looking statements and other forward-looking statements made elsewhere in this
document are made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Please read the section titled “Risk Factors” in
“Item One – Business” to review certain conditions, among others, which we
believe could cause results to differ materially from those contemplated by the
forward-looking statements.
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”,
“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; continuation of the GEHC
agreement; 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.
The following discussion should be read in
conjunction with the financial statements and notes thereto included in this Annual
Report on Form 10-K.
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® Enhanced External Counterpulsation
systems, based on our unique proprietary technology, to physicians and
hospitals throughout the United States and in select international markets.
In 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical device sales professionals and entered into the sales representation business as the exclusive representative for the sale of select General Electric Company (GE) diagnostic imaging equipment to specific market segments in the 48 contiguous states of the United States and the District of Columbia.
In September 2011, the Company acquired two Chinese operating companies, Life Enhancement Technologies Ltd. and Biox Instruments Co. Ltd. to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio. In September 2011, the Company also restructured to further align its business management structure and long-term growth strategy and now operates through three wholly-owned subsidiaries. Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. manages and coordinates our EECP® therapy business as well as other medical equipment operations.
Net revenues increased by $3,650,000, or 12%, to $32,890,000 in the year ended December 31, 2013, from $29,240,000 in the year ended December 31, 2012. We reported a net loss of $1,145,000 for the year ended December 31, 2013 as compared to a net loss of $3,381,000 for the year ended December 31, 2012, a reduction of $2,236,000. Our net loss was $0.01 and $0.02 per basic and diluted common share for the years ended December 31, 2013 and 2012, respectively.
Revenues
Revenue in our Equipment segment increased 4% to $6,262,000, including $1,938,000 in revenue from FGE, for the year ended December 31, 2013 from $6,023,000, including $1,472,000 in FGE revenue, for the year ended December 31, 2012. Equipment segment revenue from equipment sales increased by $382,000, or 9%, to $4,573,000 for the year ended December 31, 2013 as compared to $4,191,000 for the year ended December 31, 2012. The increase in equipment sales is due primarily to a $466,000 increase in sales by FGE, as well as a 6% increase in domestic EECP® sales, mainly a net result of increased volume and lower average selling price, partially offset by a 9% decrease in international sales, driven by lower deliveries and lower average selling price.
We anticipate that demand for EECP® systems will remain soft unless there is greater clinical acceptance for the use of EECP® therapy or a favorable change in current reimbursement policies by CMS or third party payors. We also anticipate growth in the FGE revenue due to the growing medical device market in China, the introduction of new products, and our expanded international marketing effort.
Equipment segment revenue from equipment
rental and services decreased 8% to $1,689,000 in the year ended December 31, 2013 from $1,832,000 in the year
ended December 31, 2012. Revenue from equipment rental and services represented 27% of total Equipment
segment revenue in the year ended December 31, 2013 and 30% in the year ended
December 31, 2012. The decrease in revenue
generated from equipment rentals and services is due primarily to decreased service revenues.
Commission revenues in the Sales
Representation segment increased by
$3,411,000, or 15%, to $26,628,000 in the year ended December 31, 2013, as compared to $23,217,000 in the year
ended December 31, 2012. The increase was primarily the combined results
of higher volume of GEHC equipment delivery in 2013 and higher commission rates. As discussed in Note
B, the Company defers recognition of commission revenue until underlying
equipment acceptance is complete. As of December
31, 2013,
the Company recorded on its
consolidated balance sheet a 22% increase in deferred
commission revenue, to $16,666,000, of which $6,852,000 is long-term, compared to $13,686,000 in deferred commission revenue at December
31, 2012 of which $4,370,000 was long-term.
Gross Profit
The Company recorded gross profit of $22,513,000, or 68% of revenue, for the year ended December 31, 2013 compared to $20,594,000, or 70% of revenue, for the year ended December 31, 2012. The increase of $1,919,000 was due primarily to higher revenues in both the Sales Representation and Equipment segments, partially offset by a lower gross profit rate in the Sales Representation segment.
Equipment segment gross profit increased to $3,625,000, or 58% of Equipment segment revenues, for the year ended December 31, 2013 compared to $3,324,000, or 55% of Equipment segment revenues, for the year ended December 31, 2012 due to higher sales volume and improved margins resulting from FGE operations. Equipment segment gross profits are dependent on a number of factors including the mix of EECP® products and ambulatory monitoring devices, the mix of new and refurbished EECP® systems and the mix of models sold, their respective average selling prices, the ongoing costs of servicing EECP® systems, as well as certain fixed period costs, including facilities, payroll and insurance.
Sales Representation segment gross profit was $18,888,000, or 71% of Sales Representation segment revenues, for the year ended December 31, 2013, an increase of $1,618,000, or 9%, from segment gross profit of $17,270,000, or 74% of segment revenue, for the year ended December 31, 2012. The increase in gross profit was due primarily to higher recognized revenue in 2013 as well as higher commission rates. Cost of commissions increased by $1,793,000, or 30%, to $7,740,000 for the year ended December 31, 2013, as compared to cost of commissions of $5,947,000 in 2012. Cost of commissions reflects commission expense associated with recognized commission revenues, and, starting in 2013, additional costs associated with the medical device excise tax imposed by the Patient Protection and Affordable Care Act, which was the primary cause of lower gross profit rates in 2013. Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.
Operating Loss
Operating loss was $1,290,000 for the year ended December 31, 2013 compared to a loss of $3,508,000 for the year
ended December 31, 2012, an
improvement of $2,218,000. The decrease in operating loss was primarily
attributable to the change from an
operating loss in the Sales Representation segment of $153,000 in the year
ended December 31, 2012 to operating income of $2,475,000 in that segment in
the year ended December 31, 2013. The 2013 segment operating income reflected the
impact of both higher commission rates and lower SG&A costs. Equipment segment
operating loss in the year ended December 31, 2013 was $2,418,000, as compared to an operating loss of
$1,806,000
in the year ended December 31, 2012. The increase in the Equipment segment operating
loss was primarily due to higher
SG&A costs, partially offset by higher gross profit. Operating loss after exclusion of non-cash
expenses, decreased by $1,851,000 to $473,000 in the year ended December 31,
2013 from $2,324,000 in the same period of the prior year. Such non-cash expenses were comprised of
depreciation, amortization, share-based compensation and other share-based
arrangements, and decreased to $817,000 in the year ended December 31, 2013
from $1,184,000 in the year ended December 31, 2012.
Selling, general and administrative (“SG&A”) expenses for the years ended December 31, 2013 and 2012 were $23,114,000, or 70% of revenues, and $23,526,000, or 80% of revenues, respectively, reflecting a decrease of $412,000 or approximately 2%. The decrease in SG&A expenditures in the year ended December 31, 2013 resulted primarily from lower costs incurred in conjunction with the extension of the GEHC agreement in 2013 than in 2012, which in turn led to decreased compensation expense in the Sales Representation segment, partially offset by an increase in the Equipment segment due mainly to higher sales and marketing expenses.
Research and development (“R&D”) expenses of $689,000, or 2% of revenues (or 11% of Equipment segment revenues), for the year ended December 31, 2013 increased by $113,000, or 20%, from $576,000, or 2% of revenues (or 10% of Equipment segment revenues), for the year ended December 31, 2012. The increase is primarily attributable to an increase in development costs for our EECP® systems.
Interest and Other
Income, Net
Interest and other income for the year ended December
31, 2013 and 2012, was $87,000 and $148,000, respectively, a decrease of $61,000. The decrease was due primarily to a $130,000
charge associated with a potential liability to a workers’ compensation fund
resulting from the 2007 closing of a trade association that previously provided
workers’ compensation for the Company and others, as well as lower interest
income earned on the Company’s cash balances, partially offset by higher government
grants obtained by one of the Company’s Chinese companies.
Amortization of
Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on the sale-leaseback of building for the year ended December 31, 2013 and 2012 was $0 and $31,000, respectively. The gain resulted from the Company’s sale-leaseback of its Westbury facility.
Income Tax Benefit
(Expense), Net
During the year ended December 31, 2013, we recorded an income tax benefit of $58,000, as compared to an income tax expense of $52,000 in the year ended December 31, 2012. The Company utilized $0 and $0.8 million in net operating loss carryforwards for the years ended December 31, 2013 and 2012, respectively. Income tax expense decreased mainly due to a Federal tax refund received on a prior period return.
Ultimate realization of any or all of the deferred tax assets is not assured due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carry-forward period. The Company believes it is premature to recognize additional deferred tax assets based on such uncertainties.
We have financed our operations from working capital. At December 31, 2013, we had cash and cash equivalents of $7,961,000, short-term investments of $111,000 and working capital of $6,716,000.
Cash used by
operating activities was $1,504,000 during the year ended December 31, 2013,
which consisted of the net loss after adjustments of $1,145,000 and cash used by
changes in operating assets and liabilities of $359,000. The changes in the
account balances primarily reflect increases in accounts and other receivables
of $4,547,000, partially offset by a decrease in deferred revenue of $2,417,000. These changes
in account balances are due mainly to the operations of our Sales
Representation segment. At February 28, 2014
the Company’s cash balances were approximately $13.8 million.
Cash used in investing activities during the year ended December 31, 2013 was $228,000, mainly related to the acquisition of equipment and software.
Cash used in financing activities during the year ended December 31, 2013 was $1,755,000 arising from the repurchase of common stock.
While the Company achieved substantial profitability in fiscal 2011, it has historically incurred operating losses and incurred losses for the years ended December 31, 2013 and 2012. The Company will seek to achieve profitability through our partner’s higher delivery volume of equipment booked with our Sales Representation segment, through growth in our China operations, and by expanding our product portfolio. In addition, the Company plans to pursue other accretive acquisitions and partnerships in the international and domestic markets and to expand our sales representation business. We anticipate a return to profitability in 2014.
While we expect to generate positive operating cash flows in fiscal 2014, the progressive nature of the GEHC Agreement can cause related cash inflows to vary widely during the year.
Based on our operations through December 31, 2013 and our current business outlook for 2014, we believe internally generated funds from our Equipment and Sales Representation segments will be sufficient for the Company to continue operations through at least January 1, 2015.
We do not
participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPES), which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of December 31, 2013, we are not involved in any unconsolidated SPES.
Related
Party Transactions
On February 28, 2011, David Lieberman and Edgar Rios were appointed by the Board of Directors as directors of the Company. Mr. Lieberman, a practicing attorney in the State of New York for more than 40 years specializing in corporation and securities law, was also appointed to serve as the Vice Chairman of the Board. He is currently a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which performs certain legal services for the Company. Mr. Rios currently is President of Edgary Consultants, LLC, and was appointed in conjunction with the Company’s consulting agreement with Edgary Consultants, LLC.
The consulting agreement (the “Agreement”) between Vasomedical, Inc. and Edgary Consultants, LLC (“Consultant”) commenced on March 1, 2011 and ended on February 28, 2013. The Agreement provided for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP® therapy.
In consideration for the services provided by Consultant under the Agreement, the Company had agreed to issue to Consultant or its designees, up to 18,500,000 shares of restricted common stock of the Company, 3,000,000 shares of which were issued in March 2011 and the balance was to be earned based on performance . Mr. Lieberman received 600,000 of these restricted shares from the initial issuance. No performance-based shares were issued and no additional compensation is expected to be paid under the agreement. Consultant, at its own expense, continued until August 2013 to investigate avenues through CMS and commercial payers to extend coverage and increased reimbursement for our EECP® therapy.
The Company paid $190,000 during the year ended December 31, 2012 for unsecured notes payable due to the president of LET and his spouse, collected $171,000 in loans and advance due from officers of FGE during the same period, and collected an additional $4,000 in such loans during the year ended December 31, 2013. These loans and advances are short term and do not bear interest. In addition, $30,000 in pre-acquisition earnings was distributed to current Biox management during 2012. At December 31, 2013, $3,000 remained payable to the president of LET and $21,000 remained due from officers of FGE.
We believe
that inflation and changing prices over the past two years have not had a
significant impact on our revenue or on our results of operations.
Note B of the
Notes to Consolidated Financial Statements includes a summary of our
significant accounting policies and methods used in the preparation of our
financial statements. In preparing these financial statements, we have made our
best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. Our critical accounting policies are as follows:
The Company
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred or service has been rendered, the price is fixed or determinable and
collectability is reasonably assured. In
the United States, we recognize revenue from the sale of our EECP®
systems in the period in which we deliver the system to the customer. Revenue from the sale of our EECP®
systems to international markets is recognized upon shipment of the product to
a common carrier, as are supplies, accessories and spare parts delivered to
both domestic and international customers. Returns are accepted prior to the in-service
and training subject to a 10% restocking charge or for normal warranty matters,
and we are not obligated for post-sale upgrades to these systems. In addition, we use the installment method to
record revenue based on cash receipts in situations where the account receivable
is collected over an extended period of time and in our judgment the degree of collectability
is uncertain.
In most
cases, revenue from domestic EECP® system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectability, the separability of units of accounting, and the
fair value of individual elements. We
follow the FASB Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition” (“ASC 605”) which outlines a framework
for recognizing revenue from multi-deliverable arrangements. The principles and guidance outlined in ASC
605 provide a framework to determine (a) how the arrangement consideration
should be measured (b) whether the arrangement should be divided into separate
units of accounting, and (c) how the arrangement consideration should be
allocated among the separate units of accounting. We determined that the domestic sale of our
EECP® systems includes a combination of three elements that qualify
as separate units of accounting:
·
EECP®
equipment sale;
·
provision
of in-service and training support consisting of equipment set-up and training
provided at the customer’s facilities; and
·
a
service arrangement (usually one year), consisting of: service by
factory-trained service representatives, material and labor costs, emergency
and remedial service visits, software
upgrades, technical phone support and preferred response times.
Each of these
elements represent individual units of accounting as the delivered item has value
to a customer on a stand-alone basis, objective and reliable evidence of fair
value exists for undelivered items, and arrangements normally do not contain a
general right of return relative to the delivered item. We determine fair value based on the price of
the deliverable when it is sold separately, or based on third-party evidence,
or based on estimated selling price. Assuming
all other criteria for revenue recognition have been met, we recognize revenue
for:
·
EECP®
equipment sales, when delivery and acceptance occurs based on delivery and
acceptance documentation received from independent shipping companies or
customers;
·
in-service
and training, following documented completion of the training; and
·
service
arrangement, ratably over the service period, which is generally one year.
In-service
and training generally occurs within a few weeks of shipment and our return
policy states that no returns will be accepted after in-service and training
has been completed. The amount related
to in-service and training is recognized as service revenue at the time the
in-service and training is completed and the amount related to service
arrangements is recognized ratably as service revenue over the related service
period, which is generally one year. Costs
associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of equipment sales as incurred.
The Company
also recognizes revenue generated from servicing EECP® systems that
are no longer covered by the service arrangement, or by providing sites with
additional training, in the period that these services are provided. Revenue related to future commitments under
separately priced extended service agreements on our EECP® system
are deferred and recognized ratably over the service period, generally ranging
from one year to four years. Costs
associated with the provision of service and maintenance, including salaries,
benefits, travel and spare parts, and equipment, are recognized in cost of
sales as incurred. Amounts billed in excess of revenue recognized are included
as deferred revenue in the consolidated balance sheets.
Revenues from
the sale of EECP® systems through our international distributor
network are generally covered by a one-year warranty period. For these customers we accrue a warranty
reserve for estimated costs to provide warranty parts when the equipment sale
is recognized.
Revenue and Expense Recognition for VasoHealthcare
The Company recognizes commission revenue in its Sales Representation segment when persuasive evidence of an arrangement exists, service has been rendered, the price is fixed or determinable and collectability is reasonably assured. These conditions are deemed to be met when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement. Consequently, amounts billable under the agreement with GE Healthcare in advance of the customer acceptance of the equipment are recorded as accounts receivable and deferred revenue in the consolidated balance sheet. Similarly, commissions payable to our sales force related to such billings are recorded as deferred commission expense when the associated deferred revenue is recorded. Commission expense is recognized when the corresponding commission revenue is recognized.
The Company’s
accounts receivable are due from customers engaged in the provision of medical
services and from GEHC. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts
receivable are generally due 30 to 90 days from shipment and are stated at
amounts due from customers net of allowances for doubtful accounts, returns,
term discounts and commission adjustments. Accounts that remain outstanding
longer than the contractual payment terms are considered past due. Estimates
are used in determining the allowance for doubtful accounts based on the
Company’s historical collections experience, current trends, credit policy and
a percentage of its accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. The Company
also looks at the credit quality of their customer base as well as changes in their
credit policies. The Company continuously monitors collections and payments
from our customers, and writes off receivables when all efforts at collection
have been exhausted. While credit losses have historically been within
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same credit loss rates that they have in the
past.
The Company
values inventory at the lower of cost or estimated market, with cost being
determined on a first-in, first-out basis. The Company often places EECP®
systems at various field locations for demonstration, training, evaluation, and
other similar purposes at no charge. The cost of these EECP® systems
is transferred to property and equipment and is amortized over the next two to
five years. The Company records the cost of refurbished components of EECP®
systems and critical components at cost plus the cost of refurbishment. The
Company regularly reviews inventory quantities on hand, particularly raw
materials and components, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand.
We comply
with the provisions of ASC Topic 330, “Inventory”. The statement clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and
requires the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities.
The Company
records revenue on extended service contracts ratably over the term of the
related contract period. In accordance
with the provisions of ASC Topic 605, we defer revenue related to EECP®
system sales for the fair value of installation and in-service training to the
period when the services are rendered and for warranty obligations ratably over
the service period, which is generally one year.
Amounts billable under the agreement with GE Healthcare in advance
of customer acceptance of the equipment are recorded initially as deferred
revenue, and commission revenue is subsequently recognized as customer
acceptance of such equipment is reported to us by GEHC.
Equipment sold is generally covered by a warranty period of one year. Under the provisions of ASC Topic 605, for certain arrangements, a portion of the overall system price attributable to the first year service arrangement is deferred and recognized as revenue over the service period. As such, we do not accrue warranty costs upon delivery but rather we recognize warranty and related service costs as incurred.
Equipment
sold to international customers through our distributor network is generally
covered by a one-year warranty period. For these customers the Company accrues
an allowance for estimated warranty costs of providing a parts only warranty
when the equipment sale is recognized.
The factors
affecting our warranty liability included the number of units sold and
historical and anticipated rates of claims and costs per claim.
Basic income
(loss) per share is based on the weighted average number of common shares
outstanding without consideration of potential common stock. Diluted income (loss)
per share is based on the weighted number of common and potential dilutive
common shares outstanding. The calculation takes into account the shares that
may be issued upon the exercise of stock options and warrants, reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the period. Options and warrants to purchase shares
of common stock, as well as convertible preferred stock and unvested common
stock grants, are excluded from the computation of diluted earnings per share
because the effect of their inclusion would be anti-dilutive.
Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carry forwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. In estimating future tax
consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. Deferred tax assets are
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the assets changed that it is “more likely
than not” that all of the deferred tax assets will be realized. The “more
likely than not” standard is subjective and is based upon our estimate of a
greater than 50% probability that the deferred tax asset will be realized.
Deferred tax
assets and liabilities are classified as current or non-current based on the
classification of the related asset or liability for financial reporting. A
deferred tax asset or liability that is not related to an asset or liability
for financial reporting, including deferred tax assets related to
carryforwards, are classified according to the expected reversal date of the
temporary difference.
The Company
also complies with the provisions of the ASC Topic 740, “Income Taxes”, which
prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon examination by
taxing authorities. Based on its
analysis, except for certain liabilities assumed in the FGE acquisition, the Company
has determined that it has not incurred any liability for unrecognized tax
benefits as of December
31, 2013 and December 31, 2012. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense. No amounts were accrued for the payment of interest and
penalties at December
31, 2013 and December 31, 2012. Management
is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position.
The Company
complies with ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”),
which requires all companies to recognize the cost of services received in
exchange for equity instruments, to be recognized in the financial statements
based on their fair values. For purposes
of estimating the fair value of each option on the date of grant, the Company utilizes the Black-Scholes option-pricing
model.
Equity instruments issued to
non-employees in exchange for goods, fees and services are accounted for under
the fair value-based method of ASC Topic 505 “Equity” (ASC 505).
Other Comprehensive Income: Presentation of Comprehensive Income
In February 2013, new guidance was issued that amends the current comprehensive income guidance. The new guidance requires entities to disclose the effect of each item that was reclassified in its entirety out of accumulated other comprehensive income and into net income on each affected net income line item. For reclassification items that are not reclassified in their entirety into net income a cross reference to other required disclosures is required. The adoption of this new guidance is to be applied prospectively, and for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of this new guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
The
consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this report.
Report on Disclosure Controls and Procedures
Disclosure controls and
procedures reporting as promulgated under the Exchange Act is defined as
controls and procedures that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act are recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms.
Disclosure controls and procedures include without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 and have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013.
Management’s Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be detected or prevented on a timely basis.
Because of its innate limitations, internal control over our financial statements is not intended to provide absolute guarantee that a misstatement can be detected or prevented on the statements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on this evaluation and those criteria, the Company’s CEO and CFO concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
This report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report.
The information required by Part III is intended to be included in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with our 2014 Annual Meeting of Stockholders and is incorporated herein by reference.
Financial Statements
and Financial Statement Schedules
(1)
See
Index to Consolidated Financial Statements on page F-1 at beginning of attached
financial statements.
(a)
Exhibits
(2)
(a) Restated Certificate of Incorporation (2)
(b) By-Laws (1)
(3.1) Certificate of Designations of Preferences and Rights of Series E Convertible Preferred Stock (9)
(4) (a) Specimen Certificate for Common Stock (1)
(b) Specimen Certificate for Series E Convertible Preferred Stock (11)
(10) (a) 1995 Stock Option Plan (3)
(b) Outside Director Stock Option Plan (3)
(c) 1997 Stock Option Plan, as amended (4)
(d) 1999 Stock Option Plan, as amended (5)
(e) 2004 Stock Option/Stock Issuance Plan (6)
(f) Securities Purchase Agreement dated June 21, 2007 between Registrant and Kerns Manufacturing Corp. (7)
(g) Form of Common Stock Purchase Warrant to dated June 21, 2007 (7)
(h) Registration Rights Agreement dated June 21, 2007 between Registrant, Kerns Manufacturing Corp. and Living Data Technology Corporation. (7)
(i) Purchase and Sale Agreement dated June 1, 2007 between 180 Linden Avenue Corp and 180 Linden Realty LLC. (8)
(j) Lease Agreement dated August 15, 2007 between 180 Linden Realty LLC and Registrant (8)
(k) Form of Stock Purchase Agreement (9)
(l) Redacted Sales Representative Agreement between GE Healthcare Division of General Electric Company and Vaso Diagnostics, Inc. d/b/a VasoHealthcare, a subsidiary of Vasomedical, Inc. dated as of May 19, 2010 (10).
(m) 2010 Stock Plan (11).
(n) Consulting Agreement dated March 1, 2011 between Vasomedical, Inc. and Edgary Consultants, LLC. (12)
(o) Employment Agreement entered into as of March 21, 2011 between Vasomedical, Inc. and Jun Ma, as amended. (15)
(p) Stock Purchase Agreement dated as of August 19, 2011 among Vasomedical, Inc., Fast Growth Enterprises Limited (FGE) and the FGE Shareholders (13)
(q) Amendment to Sales Representative Agreement between GE Healthcare Division of General Electric Company and Vaso Diagnostics, Inc. d/b/a VasoHealthcare, a subsidiary of Vasomedical, Inc. dated as of June 20, 2012 (14)
(21) Subsidiaries of the Registrant
Name State of Incorporation Percentage Owned by Company
Viromedics, Inc. Delaware 61%
Vaso Diagnostics, Inc. New York 100%
Vasomedical Global Corp. New York 100%
Vasomedical Solutions, Inc. New York 100%
Fast Growth Enterprises Limited British Virgin Islands 100%
(31) Certification Reports pursuant to Securities Exchange Act Rule 13a - 14
(32) Certification Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
__________________________
(1) Incorporated by reference to Registration Statement on Form S-18, No. 33-24095.
(2) Incorporated by reference to Registration Statement on Form S-1, No. 33-46377 (effective 7/12/94).
(3) Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(4) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 1999
(5) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31, 2000.
(6) Incorporated by reference to Notice of Annual Meeting of Stockholders dated October 28, 2004.
(7) Incorporated by reference to Report on Form 8-K dated June 21, 2007.
(8) Incorporated by reference to Report on Form 10-KSB for the fiscal year ended May 31, 2007.
(9) Incorporated by
reference to Report on Form 8-K dated June 21, 2010.
(10) Incorporated by
reference to Report on Form 8-K/A dated May 29, 2010 and filed November 9,
2010.
(11) Incorporated by
reference to Report on Form 10-K for the fiscal year ended May 31, 2010.
(12) Incorporated by
reference to Report on Form 8-K dated March 4, 2011.
(13) Incorporated by
reference to Report on Form 10-K for the fiscal year ended May 31, 2011.
(14) Incorporated by
reference to Report on Form 8-K dated June 20, 2012.
(15) Incorporated by
reference to Report on Form 10-K for the fiscal year ended December 31, 2012.
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 26th day of March 2014.
VASOMEDICAL, INC.
By: /s/ Jun Ma
Jun Ma
President, Chief Executive Officer,
and Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 2014, by the following persons in the capacities indicated:
/s/ Jun Ma President, Chief Executive Officer
Jun Ma and Director (Principal Executive Officer)
/s/ Michael Beecher Chief Financial Officer (Principal Financial Officer)
Michael Beecher
/s/ Simon Srybnik Chairman of the Board
Simon Srybnik
/s/ David Lieberman Vice Chairman of the Board
David
Lieberman
/s/ Randy Hill Senior Vice President and Director
Randy Hill
/s/ Edgar Rios Director
Edgar Rios
/s/ Behnam Movaseghi Director
Behnam Movaseghi
/s/ Peter C. Castle Director
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a/15d OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Jun Ma, certify that:
/s/ Jun Ma .
Jun Ma
President and Chief Executive Officer
Dated: March 26, 2014
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a/15d OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Michael Beecher, certify that:
/s/
Michael Beecher
Michael Beecher
Chief Financial Officer
Dated: March 26, 2014
Exhibit
32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jun Ma, President and Chief Executive Officer of Vasomedical, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2013 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 26, 2014
/s/
Jun Ma
Jun Ma
President and Chief Executive Officer
Exhibit
32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Beecher, Chief Financial Officer of Vasomedical, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2013 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 26, 2014
/s/
Michael Beecher
Michael Beecher
Chief Financial Officer
Vasomedical, Inc. and Subsidiaries
For the years ended December 31, 2013 and 2012
Page
Report of Independent Registered
Public Accounting Firm F-2
Financial Statements
Consolidated
Balance Sheets as of December 31, 2013 and 2012 F-3
Consolidated
Statements of Operations and Comprehensive Income (Loss)
for
the years ended December 31, 2013 and 2012 F-4
Consolidated
Statements of Changes in Stockholders’ Equity
for the years ended December 31,
2013 and 2012 F-5
Consolidated
Statements of Cash Flows
for
the years ended December 31, 2013 and 2012 F-6
Notes
to Consolidated Financial Statements F-7
– F-28
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Vasomedical, Inc.
We have audited the accompanying consolidated balance sheets of Vasomedical, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Rothstein Kass
New York, New York
March 27, 2014
Vasomedical, Inc. and
Subsidiaries
(in
thousands, except share data)
The
accompanying notes are an integral part of these consolidated financial
statements.
Vasomedical, Inc. and Subsidiaries
(in thousands, except per share data)
The
accompanying notes are an integral part of these consolidated financial
statements.
Vasomedical, Inc. and Subsidiaries
(in thousands)
The
accompanying notes are an integral part of these consolidated financial
statements.
Vasomedical, Inc. and Subsidiaries
(in thousands)
The
accompanying notes are an integral part of these consolidated financial
statements.
Vasomedical, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – DESCRIPTION OF BUSINESS AND LIQUIDITY
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 engaged in designing, manufacturing, marketing
and supporting EECP® Enhanced External Counterpulsation systems, based
on our proprietary technology, to physicians and hospitals throughout the
United States and in select international markets.
In 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical device sales professionals and entered into the sales representation business as the exclusive representative for the sale of select General Electric Company (GE) diagnostic imaging equipment to specific market segments in the 48 contiguous states of the United States and the District of Columbia.
In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company which owns and controls two Chinese operating companies - Life Enhancement Technology Ltd. and Biox Instruments Co. Ltd., respectively - to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio. In September 2011, the Company also restructured to further align its business management structure and long-term growth strategy, and now operates through three wholly-owned subsidiaries. Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. manages and coordinates our EECP® equipment business as well as other medical equipment operations.
While the Company achieved substantial profitability in fiscal 2011, it has historically incurred operating losses and incurred a loss for the years ended December 31, 2013 and 2012. The Company will seek to achieve profitability through our partner’s higher delivery volume of equipment booked with our Sales Representation segment, through growth in our China operations, and by expanding our product portfolio. In addition, the Company plans to pursue other accretive acquisitions and partnerships in the international and domestic markets and to expand our sales representation business.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of
the significant accounting policies consistently applied in the preparation of
the consolidated financial statements are as follows:
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, its inactive majority-owned subsidiary, and variable
interest entities where the Company is the primary beneficiary. Significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The
preparation of consolidated
financial statements in
conformity with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Significant estimates and assumptions relate to estimates
of collectibility of accounts receivable, the realizability of deferred tax
assets, stock-based compensation, and the adequacy of inventory and warranty
reserves. Additionally, significant estimates and assumptions impact the
Company’s accounting relative to its business combination. Actual results could differ from those
estimates.
Revenue Recognition
The Company
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred or service has been rendered, the price is fixed or determinable
and collectability is reasonably assured. In the United States, we recognize revenue
from the sale of our EECP® systems in the period in which we deliver
the system to the customer. Revenue from
the sale of our EECP® systems to international markets is recognized
upon shipment of the product to a common carrier, as are supplies, accessories
and spare parts delivered to both domestic and international customers. Returns are accepted prior to the in-service
and training, subject to a 10% restocking charge, or for normal warranty matters, and we are not
obligated for post-sale upgrades to these systems. In addition, we use the installment method to
record revenue based on cash receipts in situations where the account receivable
is collected over an extended period of time and in our judgment the degree of
collectability is uncertain.
In most
cases, revenue from domestic EECP® system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectability, the separability of units of accounting, and the
fair value of individual elements. We
follow the FASB Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”
(“ASC 605”) which outlines a framework for recognizing revenue from
multi-deliverable arrangements. The
principles and guidance outlined in ASC 605 provide a framework to determine
(a) how the arrangement consideration should be measured (b) whether the
arrangement should be divided into separate units of accounting, and (c) how
the arrangement consideration should be allocated among the separate units of
accounting. We determined that the
domestic sale of our EECP® systems includes a combination of three
elements that qualify as separate units of accounting:
·
EECP®
equipment sale;
·
provision
of in-service and training support consisting of equipment set-up and training
provided at the customer’s facilities; and
·
a
service arrangement (usually one year), consisting of: service by factory-trained
service representatives, material and labor costs, emergency and remedial
service visits, software upgrades,
technical phone support and preferred response times.
Each of these
elements represent individual units of accounting as the delivered item has
value to a customer on a stand-alone basis, objective and reliable evidence of
fair value exists for undelivered items, and arrangements normally do not
contain a general right of return relative to the delivered item. We determine fair value based on the price of
the deliverable when it is sold separately, or based on third-party evidence,
or based on estimated selling price. Assuming
all other criteria for revenue recognition have been met, we recognize revenue
for:
·
EECP®
equipment sales, when delivery and acceptance occurs based on delivery and
acceptance documentation received from independent shipping companies or
customers;
·
in-service
and training, following documented completion of the training; and
·
service
arrangement, ratably over the service period, which is generally one year.
In-service
and training generally occurs within a few weeks of shipment and our return
policy states that no returns will be accepted after in-service and training
has been completed. The amount related to
in-service and training is recognized as service revenue at the time the
in-service and training is completed and the amount related to service
arrangements is recognized ratably as service revenue over the related service
period, which is generally one year. Costs
associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of equipment sales as incurred.
The Company
also recognizes revenue generated from servicing EECP® systems that
are no longer covered by the service arrangement, or by providing sites with
additional training, in the period that these services are provided. Revenue related to future commitments under
separately priced extended service agreements on our EECP® system
are deferred and recognized ratably over the service period, generally ranging
from one year to four years. Costs
associated with the provision of service and maintenance, including salaries,
benefits, travel and spare parts, and equipment, are recognized in cost of
sales as incurred. Amounts billed in excess of revenue recognized are included
as deferred revenue in the Consolidated Balance Sheets.
Revenues from
the sale of EECP® systems through our international distributor
network are generally covered by a one-year warranty period. For these customers we accrue a warranty
reserve for estimated costs to provide warranty parts when the equipment sale
is recognized.
Revenue and Expense Recognition for the Sales Representation segment
The Company recognizes commission
revenue in its Sales Representation segment (see Note C) when persuasive
evidence of an arrangement exists, service has been rendered, the price is
fixed or determinable and collectability is reasonably assured. These conditions are deemed to be met when
the underlying equipment has been accepted at the customer site in accordance
with the specific terms of the sales agreement.
Consequently, amounts billable under the agreement with GE Healthcare in
advance of the customer acceptance of the equipment are recorded as accounts
receivable and deferred revenue in the Consolidated Balance Sheets. Similarly, commissions payable to our sales
force related to such billings are recorded as deferred commission expense when
the associated deferred revenue is recorded.
Commission expense is recognized when the corresponding commission
revenue is recognized.
Shipping and Handling Costs
All shipping
and handling expenses are charged to cost of sales. Amounts billed to customers related to
shipping and handling costs are included as a component of sales.
Research and Development
Research and development costs
attributable to development are expensed as incurred. Included in research and
development costs is amortization expense related to the capitalized cost of
EECP® systems under loan for clinical trials.
Share-Based Compensation
The Company
complies with ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”),
which requires all companies to recognize the cost of services received in
exchange for equity instruments, to be recognized in the financial statements
based on their fair values.
During the year
ended December 31, 2013, the Company granted 385,000 restricted shares of
common stock valued at $91,700 to non-officer employees, vesting at various
periods through June 2015, and granted 100,000 restricted shares of common stock
valued at $18,000 to an officer, which vested immediately.
During the year
ended December 31, 2012, the Company granted 2,392,500 restricted shares of
common stock valued at $565,000 to non-officer employees in its VasoHealthcare subsidiary,
vesting at various times through July 2013.
In addition, in 2012 we granted 1,000,000 restricted shares of common
stock valued at $250,000 to officers, of which 250,000 shares valued at $60,000
vested immediately, with the remainder vesting at various times through July
2014.
The Company did not grant any non-qualified stock options during the years ended December 31, 2013 or 2012.
Share-based
compensation expense recognized for the years ended December 31, 2013 and 2012 was $369,000 and $793,000, respectively. Expense for other share-based arrangements was
$87,000 and $545,000
for the years
ended December 31, 2013 and 2012, respectively.
Unrecognized expense related to existing share-based compensation and arrangements is approximately $91,000 at December 31, 2013 and will be recognized through June 2015.
Cash and Cash Equivalents
Cash and cash
equivalents represent cash and short-term, highly liquid investments either in
certificates of deposit, treasury bills, money market funds, or investment
grade commercial paper issued by major corporations and financial institutions
that generally have maturities of three months or less from the date of
acquisition. Dividend and interest income are recognized when earned. The cost
of securities sold is calculated using the specific identification method.
Short-Term Investments
The Company’s
short-term investments consist of certificates of deposit with original
maturities greater than three months. They are bought and held
principally for the purpose of selling them in the near-term and are classified
as trading securities. Trading securities are recorded at fair value on
the consolidated balance sheets in current assets, with the change in fair
value during the years included in earnings.
The Company’s
accounts receivable are due from customers engaged in the provision of medical
services and from GEHC. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts
receivable are generally due 30 to 90 days from shipment and are stated at amounts
due from customers net of allowances for doubtful accounts, returns, term
discounts and other allowances. Accounts that remain outstanding longer than
the contractual payment terms are considered past due. Estimates are used in
determining the allowance for doubtful accounts based on the Company’s
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company reviews historical write-offs of their receivables.
The Company also looks at the credit quality of their customer base as well as
changes in their credit policies. The Company continuously monitors collections
and payments from our customers, and writes off receivables when all efforts at
collection have been exhausted. While credit losses have historically been
within expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
they have in the past.
The changes in the Company’s allowance for doubtful
accounts and commission adjustments are as follows:
(in
thousands)
Concentrations of Credit Risk
We market our equipment principally to
hospitals and physician private practices. We perform credit evaluations of our
customers’ financial condition and, as a result, believe that our receivable credit risk exposure is limited. For the years ended December 31, 2013 and 2012, no customer in our Equipment segment accounted
for 10% or more of revenues or accounts receivable. In our Sales Representation segment, 100% of
our revenues and accounts receivable are with GE; however, we believe this risk
is acceptable based on GE’s financial position.
The Company
maintains cash balances in certain U.S. financial institutions, which, at times,
may exceed the Federal Depository Insurance Corporation (“FDIC”) coverage of
$250,000. The Company has not experienced any losses on these accounts
and believes it is not subject to any significant credit risk on these
accounts. In addition, the FDIC does not
insure the Company’s foreign bank balances, which
aggregated approximately $701,000 and $499,000 at December 31, 2013 and 2012, respectively.
Our revenues were derived from the
following geographic areas:
(in
thousands)
Inventories, net
The Company
values inventory at the lower of cost or estimated market, with cost being
determined on a first-in, first-out basis. The Company often places EECP®
systems at various field locations for demonstration, training, evaluation, and
other similar purposes at no charge. The cost of these EECP® systems
is transferred to property and equipment and is amortized over two to five
years. The Company records the cost of refurbished components of EECP®
systems and critical components at cost plus the cost of refurbishment. The
Company regularly reviews inventory quantities on hand, particularly raw
materials and components, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand.
We comply
with the provisions of ASC Topic 330 “Inventory”. The statement clarifies that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the
allocation of fixed production overhead to inventory based on the normal
capacity of the production facilities.
Property and Equipment
Property and
equipment are stated at cost less accumulated depreciation and amortization.
Major improvements are capitalized and minor replacements, maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and related accumulated depreciation are removed from the
consolidated balance sheets. Depreciation is expensed over the estimated useful
lives of the assets, which range from two to twenty years, on a straight-line
basis. Accelerated methods of depreciation are used for tax purposes. We
amortize leasehold improvements over the useful life of the related leasehold
improvement or the life of the related lease, whichever is less.
Goodwill and Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets of businesses
acquired. The Company accounts for goodwill under the guidance of the ASC Topic
350 – “Intangibles: Goodwill and Other”. Goodwill acquired in a purchase
business combination and determined to have an indefinite useful life is not
amortized, but instead tested for impairment, at least annually, in accordance
with this guidance. Intangible assets consist of
patent costs, customer lists and software. Intangible assets are amortized on a
straight-line basis over their estimated useful lives, which range from 5 to 10 years The Company
capitalizes internal use software costs incurred during the application
development stage. Costs related to preliminary project activities and post
implementation activities are expensed as incurred. The Company capitalized $155,000
and $164,000 in software development costs for the years ended December 31,
2013 and 2012, respectively.
Impairment of
Long-lived Assets
The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. If required, the Company compares the estimated fair value determined by either the undiscounted future net cash flows or appraised value to the related asset’s carrying value to determine whether there has been an impairment. If an asset is considered impaired, the asset is written down to fair value, which is based either on discounted cash flows or appraised values in the period the impairment becomes known. No assets were determined to be impaired for the years ended December 31, 2013 and 2012.
Deferred Revenue
We record
revenue on extended service contracts ratably over the term of the related service
contracts. Under the provisions of ASC
605, we began to defer revenue related to EECP® system sales for the
fair value of installation and in-service training to the period when the
services are rendered and for service obligations ratably over the service
period, which is generally one year. (See Note I)
Amounts billable under the agreement with GE Healthcare in advance
of customer acceptance of the equipment are recorded initially as deferred
revenue, and commission revenue is subsequently recognized as customer
acceptance of such equipment is reported to us by GEHC.
Warranty Costs
Equipment
sold is generally covered by a warranty period of one year. In accordance with ASC
Topic 450 “Loss Contingencies”, we accrue a warranty reserve for estimated
costs of providing a parts only warranty when the equipment sale is recognized.
The factors
affecting our warranty liability include the number of units sold and the historical
and anticipated rates of claims and costs per claim. (See Note K)
Income Taxes
Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carryforwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. In estimating future tax
consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. Deferred tax assets are
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the assets changed that it is “more likely
than not” that all of the deferred tax assets will be realized. The
“realizability” standard is subjective and is based upon our estimate of a
greater than 50% probability that the deferred tax asset can be realized.
Deferred tax
assets and liabilities are classified as current or non-current based on the
classification of the related asset or liability for financial reporting. A
deferred tax asset or liability that is not related to an asset or liability
for financial reporting, including deferred tax assets related to
carryforwards, are classified according to the expected reversal date of the
temporary difference.
The Company
also complies with the provisions of ASC Topic 740 “Income Taxes”, which
prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon examination by
the relevant taxing authority based on the technical merits. The tax benefit recognized is measured as the
largest amount of benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement with the relevant taxing authority. Derecognition of a tax benefit previously
recognized results in the Company recording a tax liability that reduces ending
retained earnings. Based on its
analysis, except for certain liabilities assumed in the FGE acquisition, the Company
has determined that it has not incurred any liability for unrecognized tax
benefits as of December
31, 2013 and December 31,
2012.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of
interest and penalties at December 31, 2013 and December 31, 2012. Generally, the Company is no longer subject to
income tax examinations by major domestic taxing authorities for years before 2010. According to the China tax regulatory
framework, there is no statute of limitations on examination of tax filings by
tax authorities. However, the general
practice is going back five years. Management
is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position.
Foreign Currency Translation
Gain and Comprehensive Income (Loss)
In countries in which the Company operates, and the functional currency is other than the U.S. dollar, assets and liabilities are translated using published exchange rates in effect at the consolidated balance sheet date. Revenues and expenses and cash flows are translated using an approximate weighted average exchange rate for the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the accompanying consolidated balance sheet. For the years ended December 31, 2013 and 2012, comprehensive income (loss) includes gains of $74,000 and $34,000, respectively, which were entirely from foreign currency translation.
Fair Value of Financial Instruments
The Company complies with the provisions of ASC 820 “Fair
Value Measurements and Disclosures” (“ASC 820”). Under ASC 820, fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
(i.e., the “exit price”) in an orderly transaction between market participants
at the measurement date.
In
determining fair value, the Company uses various valuation approaches. ASC 820 establishes a fair value hierarchy
for inputs used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available.
Observable inputs are those that market participants would use in
pricing the asset or liability based on market data obtained from sources
independent of the Company. Unobservable
inputs reflect the Company’s assumptions about the inputs market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances.
The fair value hierarchy is categorized into three levels based on the
inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has the ability to
access. Valuation adjustments and block
discounts are not applied to Level 1 securities. Since valuations are based on quoted prices
that are readily and regularly available in an active market, valuation of
these securities does not entail a significant degree of judgment.
Level
2 - Valuations based on quoted prices in markets that are not
active or for which all significant inputs are observable, either directly or
indirectly.
Level
3 - Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.
Valuation Techniques
The carrying
amounts of cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to the short-term maturities of the instruments.
Net Loss Per Common Share
Basic loss
per common share is based on the weighted average number of common shares
outstanding without consideration of potential common stock. Diluted loss per common
share is based on the weighted number of common and potential dilutive common
shares outstanding. The diluted calculation takes into account the shares that
may be issued upon the exercise of stock options and warrants, reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the year. Due to losses during the years ended December
31, 2013 and 2012, diluted loss per common share is equal to basic loss per
common share for those years.
The following
table represents common stock equivalents that were excluded from the
computation of diluted earnings per share for years ended December 31, 2013 and 2012, because the effect of their inclusion
would be anti-dilutive.
(in
thousands)
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
Recently Issued Accounting Pronouncements
The Company continually assesses any new
accounting pronouncements to determine their applicability to the Company.
Where it is determined that a new accounting pronouncement affects the
Company’s financial reporting, the Company undertakes a study to determine the
consequence of the change to its financial statements and assures that there
are proper controls in place to ascertain that the Company’s consolidated financial
statements properly reflect the change. New pronouncements assessed by the
Company recently are discussed below:
Adoption of New
Standards
Other Comprehensive Income: Presentation of Comprehensive Income
In February 2013, new guidance was issued that amends the current comprehensive income guidance. The new guidance requires entities to disclose the effect of each item that was reclassified in its entirety out of accumulated other comprehensive income and into net income on each affected net income line item. For reclassification items that are not reclassified in their entirety into net income a cross reference to other required disclosures is required. The adoption of this new guidance is to be applied prospectively, and for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of this new guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE C – SEGMENT REPORTING
The Company views its business in two segments – the Equipment segment and the Sales Representation segment. The Equipment segment is engaged in designing, manufacturing, marketing and supporting EECP® enhanced external counterpulsation systems and other medical devices both domestically and internationally. The Sales Representation segment operates through the VasoHealthcare subsidiary and is engaged solely in the execution of the Company’s responsibilities under our agreement with GEHC. The Company evaluates segment performance based on operating income. Administrative functions such as finance, human resources, and information technology are centralized and related expenses allocated to each segment. There are no intersegment revenues. Summary financial information for the segments is set forth below:
(in thousands)
For the years ended December 31. 2013 and 2012, GE Healthcare accounted for 81% and 79% of revenue, respectively. Also, GE Healthcare accounted for $12.5 million, or 92%, and $8.1 million, or 89%, of accounts and other receivables at December 31, 2013 and December 31, 2012, respectively.
NOTE D – FAIR VALUE MEASUREMENTS
The Company’s
assets recorded at fair value have been categorized based upon a fair value
hierarchy in accordance with ASC 820.
The following
table presents information about the Company’s assets measured at fair value as
of December 31, 2013:
(in
thousands)
The following
table presents information about the Company’s assets measured at fair value as
of December 31, 2012:
(in thousands)
The fair values of the Company’s cash equivalents invested in money market funds are determined through market, observable and corroborated sources.
NOTE E – ACCOUNTS AND OTHER RECEIVABLES
The following table presents information regarding the Company’s accounts and other receivables as of December 31, 2013 and 2012:
(in
thousands)
Trade receivables include amounts due for shipped products and services rendered. Amounts currently due under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change.
Allowance for doubtful accounts and commission adjustments include estimated losses resulting from the inability of our customers to make required payments, and adjustments arising from subsequent changes in sales order amounts that may reduce the amount the Company will ultimately receive under the GEHC Agreement. Due from employees primarily reflects commission advances made to sales personnel.
Inventories, net of reserves consisted
of the following:
(in
thousands)
At December 31, 2013 and 2012, the Company maintained reserves for excess and obsolete inventories of $803,000 and $576,000, respectively.
NOTE G – PROPERTY AND
EQUIPMENT
Property and equipment is summarized as follows:
(in thousands)
Depreciation expense amounted to approximately $213,000 and $193,000 for the years ended December 31, 2013 and 2012, respectively.
NOTE H – GOODWILL AND OTHER INTANGIBLES
The change in the carrying amount of goodwill
was as follows:
(in thousands)
The Company’s other intangible assets consist
of capitalized patent costs, customer lists, and software costs, as set forth
in the following:
(in thousands)
The other intangible assets are included in other assets on the Company’s consolidated balance sheets.
The Company owns eleven US patents including eight utility and three design patents that expire at various times through 2023. Costs incurred for submitting the applications to the United States Patent and Trademark Office and other foreign authorities for these patents have been capitalized. Patent costs are being amortized using the straight-line method over the related 10-year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial number and filing date from the Patent Office or other foreign authority. Customer lists and software are amortized on a straight-line basis over their expected useful lives of seven and five years, respectively.
Amortization expense amounted to $169,000 and $198,000 for the years ended December 31, 2013 and 2012, respectively. Amortization of intangibles for the next five years is:
NOTE I – DEFERRED REVENUE
The changes in the Company’s deferred revenues are
as follows:
(in thousands)
NOTE J –
SALE-LEASEBACK
NOTE K – WARRANTY LIABILITY
The changes in the Company’s product warranty liability are as follows:
(in
thousands)
Warranty liability is included in accrued expenses
and other liabilities on the Company’s Consolidated Balance Sheets.
NOTE L – RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. (“Kerns”), a stockholder of the Company. Under this agreement, a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $0.08 per shares was issued to Kerns. In March 2012, Kerns exercised its warrant and 4,285,714 shares of common stock were issued.
On February 28, 2011, David Lieberman and Edgar Rios were appointed by the Board of Directors as directors of the Company. Mr. Lieberman, a practicing attorney in the State of New York, was also appointed to serve as the Vice Chairman of the Board. He is currently a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which performs certain legal services for the Company. Fees of approximately $247,000 and $254,000 were billed by the firm for the years ended December 31, 2013 and 2012, respectively, at which dates no amounts were outstanding.
Mr. Rios currently is President of Edgary Consultants, LLC, and was appointed a director in conjunction with the Company’s consulting agreement with Edgary Consultants, LLC. The consulting agreement (the “Agreement”) between the Company and Edgary Consultants, LLC (“Consultant”) commenced on March 1, 2011 and was for a two year term and expired on February 28, 2013. The Agreement provided for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP® therapy.
In consideration for the services to be
provided by Consultant under the Agreement, the Company agreed to issue to
Consultant or its designees, up to 18,500,000 shares of restricted common
stock of the Company, 3,000,000 of which, valued at $1,020,000, were issued in
March 2011 and the balance was to be earned on performance. Mr. Lieberman
received 600,000 of these restricted shares from the initial issuance. The Company recorded the fair value of the
shares issued to Consultant as a prepaid expense and amortized the cost ratably
over the two year agreement. The
unamortized value is reported as Deferred Related Party Consulting Expense in
our accompanying Consolidated Balance Sheets as of December 31, 2012. No performance-based shares were issued and
no further compensation is expected to be paid in conjunction with the
agreement.
During the year ended December 31, 2012, a former director performed consulting services for the Company aggregating approximately $10,000. Additionally, three directors received additional compensation totaling $150,000 for services rendered in connection with the extension of the GEHC contract.
The Company paid $190,000 during the year ended December 31, 2012 for unsecured notes payable due to the president of LET and his spouse, collected $171,000 in loans and advance due from officers of FGE during the same period, and collected an additional $4,000 in such loans during the year ended December 31, 2013. These loans and advances are short term and do not bear interest. In addition, $30,000 in pre-acquisition earnings was distributed to current BIOX management during 2012. At December 31, 2013, $3,000 remained payable to the president of LET and $21,000 remained due from officers of FGE.
NOTE M – STOCKHOLDERS' EQUITY AND
WARRANTS
Common stock and warrants
See Note L for discussion of
common stock issued in the year ended December 31, 2012 in connection with
related party agreements. In addition, the
Company issued 1,787,386 shares of common stock valued at $417,000 and
2,333,586 shares of common stock valued at $546,000 to directors, officers,
employees, and consultants during the years ended December 31, 2013 and 2012, respectively.
In April 2013, the Company’s Board of Directors authorized a share repurchase program of up to $1.5 million, which was subsequently increased in July 2013 to $2.0 million, of the Company’s common stock. During the year ended December 31, 2013, the Company repurchased 9,481,401 shares at a cost of $1,755,000, which cost has been recorded as treasury stock in the accompanying consolidated balance sheet as of December 31, 2013.
In September 2011, the Company issued 5,000,000 shares of restricted common stock and a two year common stock purchase warrant for 1,500,000 shares at an exercise price of $0.50 per share as partial consideration for the acquisition of FGE. In addition, up to 2,400,000 shares of common stock were contingently issuable should FGE attain certain operating targets for the twelve months ended December 31, 2011. In September 2012, the Company determined FGE had met its targets and issued 2,400,000 shares to the prior owners of FGE. The aggregate value of the aforementioned noncash consideration relative to the FGE acquisition was $2,979,000.
Warrant activity for the years ended
December 31, 2013 and 2012 is summarized as follows:
Preferred stock
At December 31, 2013 and 2012, the Company had 1,000,000 shares of preferred stock authorized. There were no shares issued and outstanding at December 31, 2013 and 2012. Pursuant to its conversion terms, all outstanding Series E Convertible Preferred Stock (“Series E Preferred”) was deemed automatically converted to common stock effective July 1, 2011. As of December 31, 2011, 29,956,100 shares of common stock had been issued for 299,561 shares of Series E Preferred, with 712,350 shares yet to be issued. The remaining 712,350 shares were issued in 2012.
Chinese subsidiaries dividends and statutory
reserves
The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Based on People’s Republic of China (PRC) accounting standards, our Chinese subsidiaries are also required to set aside at least 10% of after-tax profit each year to their general reserves until the accumulative amount of such reserves reaches 50% of the registered capital. These reserves are not distributable as cash dividends. In addition, they are required to allocate a portion of their after-tax profit to their staff welfare and bonus fund at the discretion of their respective boards of directors. Moreover, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Distribution of dividends from the Chinese operating companies to foreign shareholders is subject to a 10% withholding tax.
1999 Stock Option Plan
In July 1999,
the Company’s Board of Directors approved the 1999 Stock Option Plan (“the 1999
Plan”), for which the Company reserved an aggregate of 2,000,000 shares of
common stock. The 1999 Plan provides that a committee of the Board of
Directors of the Company will administer it and that the committee will have
full authority to determine the identity of the recipients of the options and
the number of shares subject to each option. Options granted under the 1999
Plan may be either incentive stock options or non-qualified stock options. The
option price shall be 100% of the fair market value of the common stock on the
date of the grant (or in
the case of incentive stock options granted to any individual principal
stockholder who owns stock possessing more than 10% of the total combined
voting power of all voting stock of the Company, 110% of such fair market value). The
term of any option may be fixed by the committee but in no event shall exceed
ten years from the date of grant. Options are exercisable upon payment in full
of the exercise price, either in cash or in common stock valued at fair market
value on the date of exercise of the option. In July 2000, the Company’s Board
of Directors increased the number of shares authorized for issuance under the
1999 Plan by 1,000,000 shares to 3,000,000 shares. In December 2001, the Board of Directors of the
Company increased the number of shares authorized for issuance under the 1999
Plan by 2,000,000 shares to 5,000,000 shares.
In May 2006,
the Board of Directors accelerated the vesting period for all unvested options
to May 31, 2006.
The
term for which options may be granted under the 1999 Plan expired July 12,
2009.
During
the year ended December 31, 2013, options to purchase 30,000 shares of
common stock under the 1999 Plan at an exercise price ranging from $0.71 to $0.91 were retired.
2004 Stock Option and Stock Issuance Plan
In October
2004, the Company’s stockholders approved the 2004 Stock Option and Stock
Issuance Plan (“the 2004 Plan”), for which the Company reserved an aggregate of
2,500,000 shares of common stock. The 2004 Plan is divided into two
separate equity programs: (i) the Option Grant Program under which eligible
persons (“Optionees”) may, at the discretion of the Board of Directors, be
granted options to purchase shares of common stock; and (ii) the Stock Issuance
Program under which eligible persons (“Participants”) may, at the discretion of
the Board of Directors, be issued shares of common stock directly, either
through the immediate purchase of such shares or as a bonus for services
rendered to the Company.
Options
granted under the 2004 Plan shall be non-qualified or incentive stock options
and the exercise price is the fair market value of the common stock on the date
of grant except that for incentive stock options it shall be 110% of the fair
market value if the Optionee owns 10% or more of our common stock. The term of any
option may be fixed by the Board of Directors or committee but in no event
shall exceed ten years from the date of grant. Stock options granted under the 2004 Plan may become
exercisable in one or more installments in the manner and at the time or times
specified by the committee. Options are exercisable upon payment in full of the
exercise price, either in cash or in common stock valued at fair market value
on the date of exercise of the option. The term for which options may be granted
under the 2004 Plan expires July 12, 2014.
Under the
stock issuance program, the purchase price per share shall be fixed by the Board
of Directors or committee but cannot be less than the fair market value of the
common stock on the issuance date. Payment for the shares may be made in cash
or check payable to us, or for past services rendered to us and all shares of
common stock issued thereunder shall vest upon issuance unless otherwise
directed by the committee. The number of shares issuable is also subject to
adjustments upon the occurrence of certain events, including stock dividends,
stock splits, mergers, consolidations, reorganizations, recapitalizations, or
other capital adjustments.
The 2004 Plan provides that a committee of the Board of
Directors of the Company will administer it and that the committee will have
full authority to determine
and designate the individuals who are to be granted stock options or qualify to
purchase shares of common stock under the 2004 Plan, the number of shares to be
subject to options or to be purchased and the nature and terms of the options
to be granted. The committee also has authority to interpret the 2004 Plan and
to prescribe, amend and rescind the rules and regulations relating to the 2004
Plan.
In May 2006,
the Board of Directors accelerated the vesting period for all unvested options
to May 31, 2006.
There
was no activity under the 2004 plan during the years ended December 31, 2013
and 2012.
At December 31,
2013, there were 785,224 shares available
for future grants under the 2004 Plan.
2010 Stock Option and
Stock Issuance Plan
On June 17, 2010 the Board of Directors approved the 2010 Stock Plan (the “2010 Plan”) for officers, directors, employees and consultants of the Company. The stock issuable under the 2010 Plan shall be shares of the Company’s authorized but unissued or reacquired common stock. The maximum number of shares of common stock which may be issued under the 2010 Plan is 5,000,000 shares.
The 2010 Plan is comprised of two separate equity programs, the Options Grant Program, under which eligible persons may be granted options to purchase shares of common stock, and the Stock Issuance Program, under which eligible persons may be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company.
The 2010 Plan provides that the Board of Directors, or a committee of the Board of Directors, will administer it with full authority to determine the identity of the recipients of the options or shares and the number of options or shares. Options granted under the 2010 Plan may be either incentive stock options or non-qualified stock options. The option price shall be 100% of the fair market value of the common stock on the date of the grant ( or in the case of incentive stock options granted to any individual stockholder possessing more than 10% of the total combined voting power of all voting stock of the Company, 110% of such fair market value). The term of any option may be fixed by the Board of Directors, or its authorized committee, but in no event shall it exceed five years from the date of grant. Options are exercisable upon payment in full of the exercise price, either in cash or in common stock valued at fair market value on the date of exercise of the option.
In the year ended December 31, 2012, 500,000 restricted shares of common stock were granted under the 2010 Plan to officers of the Company, of which 250,000 shares vested immediately with the remainder vesting over a one year period. As of December 31, 2012, 355,000 additional shares were forfeited and 245,552 additional shares were withheld for withholding taxes.
During the year ended December 31, 2013, 85,000 restricted shares of common stock were granted under the 2010 Plan to employees of the Company, all of which vested immediately. As of December 31, 2013, 105,000 additional shares were forfeited and 204,662 additional shares were withheld for withholding taxes.
No options were issued under the 2010 Plan during the years ended December 31, 2013 and 2012.
2013 Stock Option and Stock Issuance Plan
On October 30, 2013, the Board of Directors approved the 2013 Stock Plan (the “2013 Plan”) for officers, directors, employees and consultants of the Company. The stock issuable under the 2013 Plan shall be shares of the Company’s authorized but unissued or reacquired common stock. The maximum number of shares of common stock which may be issued under the 2013 Plan is 7,500,000 shares.
The 2013 Plan is comprised of two separate equity programs, the Options Grant Program, under which eligible persons may be granted options to purchase shares of common stock, and the Stock Issuance Program, under which eligible persons may be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company.
No shares were granted or options issued under the
2013 Plan
during the years ended December 31, 2013 and 2012.
Stock option and
stock grant activity under all the plans for the years ended December 31, 2013 and 2012 is summarized as follows:
The following table summarizes information about stock options outstanding and exercisable at December 31, 2013:
There were 74,138,396 remaining authorized shares of common stock after reserves for all stock option plans and stock warrants.
As
of December 31, 2013, the recorded
deferred tax assets were $19,041,000, reflecting an increase of $894,000 during the year ended December 31, 2013, which was offset by a valuation allowance the same
amount. The Company also recorded a net deferred tax liability of $112,000 as of
December 31, 2013
and 2012, which arose from
pre-acquisition FGE operations, primarily related to revenue recognized for book
prior to recognition for tax.
The Company’s deferred tax assets are
summarized as follows:
(in
thousands)
At December 31,
2013, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $42.9 million expiring at various dates
from 2019 through 2033. Approximately $4.4 million and $6.1 million of net operating loss carryforwards
expired in the
years ended December 31, 2013 and 2012, respectively.
Future expirations of net operating loss carryforwards are approximately
as follows:
(in thousands)
The Company recorded an income tax benefit of $58,000 for the
year ended December 31, 2013 arising from a Federal refund of $97,000 related
to a prior period amended return, partially offset by $52,000 in foreign income
tax expense. Income tax expense for the year ended
December 31, 2012 was $52,000 and consisted mainly of state income taxes.
Under current tax law, the utilization
of tax attributes will be restricted if an ownership change, as defined, were
to occur. Section 382 of the Internal Revenue Code provides, in general, that
if an “ownership change” occurs with respect to a corporation with net operating
and other loss carryforwards, such carryforwards will be available to offset
taxable income in each taxable year after the ownership change only up to the
“Section 382 Limitation” for each year (generally, the product of the fair
market value of the corporation’s stock at the time of the ownership change,
with certain adjustments, and a specified long-term tax-exempt bond rate at
such time). The Company’s ability to use its loss carryforwards will be limited
in the event of an ownership change.
The
following is a reconciliation of the effective income tax rate to the federal
statutory rate:
The foreign tax effective rate increased mainly due to the expiration of certain tax advantages applicable to our Biox subsidiary. The alternative minimum tax (AMT) rate decreased due to a Federal AMT refund on an amended prior period return.
NOTE P - COMMITMENTS AND CONTINGENCIES
Sales
representation agreement
In June 2012, the Company concluded an
amendment of the GEHC Agreement with GE Healthcare, originally signed on May
19, 2010. The amendment, effective July
1, 2012, extends the initial term of three years commencing July 1, 2010 to
five years through June 30, 2015, subject to earlier termination under certain
circumstances. These circumstances
include not materially achieving certain sales goals, not maintaining a minimum
number of sales representatives, and various legal and GEHC policy
requirements. Under the terms of the
agreement, the Company is required to lease dedicated computer equipment from
GEHC for connectivity to their network.
Facility Leases
On August 15, 2007, we sold our facility in Westbury, New York under a five-year leaseback agreement, which expired in August 2012. In September 2012, the term of the lease was extended for an additional three years. The Company also leases offices in New York City under a five year agreement expiring May 2017. VasoHealthcare also leases facilities in Greensboro, North Carolina pursuant to a lease which expires in May 2014. FGE leases facilities in Wuxi, China, pursuant to leases expiring in February 2014 and March 2018, and a facility in Foshan, China, pursuant to a lease that expires in April 2016.
Vehicle Lease
Agreement
In June 2011, the Company began taking deliveries under a closed-end master lease agreement for the provision of vehicles to the sales team of its Sales Representation segment. Vehicles obtained under the terms of the agreement are leased generally for a 36 month term, and payments are fixed for each year of the agreement, subject to readjustment at the beginning of the second and third year.
Future rental payments under these operating leases aggregate approximately as follows:
For the years ended December 31,
(in thousands)
Employment Agreement
On March 21, 2011, the Company entered into an Employment Agreement with its President and Chief Executive Officer, Dr. Jun Ma, for a three-year term ending on March 14, 2014. The Employment Agreement currently provides for annual compensation of $275,000. Dr. Ma shall be eligible to receive a bonus for each fiscal year thereafter during the employment term. The amount and the occasion for payment of such bonus, if any, shall be at the discretion of the Board of Directors. Dr. Ma shall also be eligible for an award under any long-term incentive compensation plan and grants of options and awards of shares of the Company’s stock, as determined at the Board of Directors’ discretion. The Employment Agreement further provides for reimbursement of certain expenses, and certain severance benefits in the event of termination prior to the expiration date of the Employment Agreement. Dr. Ma’s agreement, as modified, is for a continuing three year term, unless earlier terminated by the Company, but in no event can extend beyond March 21, 2019.
Litigation
The Company
is currently, and has been in the past, a party to various routine legal
proceedings incident to the ordinary course of business. The Company believes
that the outcome of all such pending legal proceedings in the aggregate is
unlikely to have a material adverse effect on the business or consolidated
financial condition of the Company.
Foreign operations
During the years ended December 31, 2013 and 2012, the Company had and continues to have operations in China. Operating internationally involves additional risks relating to
such things as currency exchange rates, different legal and regulatory
environments, political, economic risks relating to the stability or
predictability of foreign governments, differences in the manner in which
different cultures do business, difficulties in staffing and managing foreign
operations, differences in financial reporting, operating difficulties, and
other factors. The occurrence of any of these risks, if severe enough, could have
a material adverse effect on the consolidated financial position, results of
operations and cash flows of the Company.
Commercial law is still developing in China and there are limited legal precedents to follow in commercial transactions. There are many tax jurisdictions each of which may have changing tax laws. Applicable taxes include value added taxes (“VAT”), corporate income tax, and social (payroll) taxes. Regulations are often unclear. Tax declarations (reports) are subject to review and taxing authorities may impose fines, penalties and interest. These facts create risks in China.
In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary deductions for eligible employees. Employees are eligible to participate in the next quarter enrollment period after employment. Participants may make voluntary contributions to the plan up to 80% of their compensation. In the years ended December 31, 2013 and 2012 the Company made discretionary contributions of approximately $62,000 and $81,000, respectively, to match a percentage of employee contributions.