UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
[ ] ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal
year ended _________
[ X ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from June 1, 2011 to December 31, 2011
Commission File No. 0-18105
VASOMEDICAL, INC.
(Exact name of registrant as specified in Its Charter)
(State or other
jurisdiction of
(IRS Employer
incorporation or organization) Identification
No.)
(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 ____________OTCQB_____________
(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 $23,729,000 based on the closing sales price of the common stock
as quoted on the OTCQB on April 23, 2012.
At April 23, 2012, the number of shares outstanding of the issuer's common
stock was 158,682,110.
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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 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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.
Vasomedical,
Inc. was incorporated in
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, through its subsidiaries, 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. Also in September 2011, the Company 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 newly-acquired Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® therapy business as well as other medical equipment operations.
We have achieved profitability through the operations of the VasoHealthcare business. The Company will seek to achieve greater profitability through our recent accretive acquisition of the two Chinese medical device companies and by expanding our U.S. market product portfolio. In addition, the Company plans to actively pursue other accretive acquisitions in the international market and is in preliminary discussions to secure a credit facility for up to $25 million to be utilized for this purpose.
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 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 has an initial term of three years, subject to extension and also 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 commission rate increases as targets are met, resulting in higher rates, should we meet our targets, 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 Company has been successfully meeting its obligations under the GEHC Agreement since inception.
Sales and Marketing
We sell diagnostic imaging products to our assigned market through a nationwide team of sales employees led by a vice president of sales and several regional managers, supported by in-house administrative and other support, as well as applicable GEHC employees.
Competition
In the U.S. diagnostic imaging market, our main competitors are Hologic, Philips, Siemens, and Toshiba. 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.
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 812,000 lives in the United States in 2008 and was responsible
for 1 of every 3 deaths, according to The American Heart Association (AHA) Heart and Stroke Statistical 2012 Update
(2012 Update). An estimated 82.6 million American adults suffer from some
form of cardiovascular disease. Among
these, 16.3 million have coronary heart disease (CHD).
We
have FDA clearance to market our EECP® therapy for use in the
treatment of stable and unstable angina, congestive heart failure, acute myocardial
infarction, and cardiogenic shock; however, our current marketing efforts are
mostly limited to the treatment of chronic stable angina and congestive heart
failure. Medicare and other third-party
payers currently reimburse for the treatment of angina pectoris patients with
moderate to severe symptoms who are refractory to medications and who, in the
opinion of a cardiologist or cardiothoracic surgeon, are not candidates for
invasive procedures. Patients with
co-morbidities of heart failure, diabetes, peripheral vascular disease, etc.
are also reimbursed under the same criteria, provided the primary diagnosis and
indication for treatment with EECP® therapy is refractory angina symptoms.
Angina
pectoris is the medical term for a recurring pain or discomfort in the chest or
near the neck due to coronary artery disease (CAD). The
number of angina patients in the United States is approximately 9.0 million,
according to the 2011 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), with angioplasty and coronary
stent placement 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 approximately 47.7 million
beneficiaries in 2011, 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. Medicare guidelines
limit reimbursement for EECP® therapy to patients who do not
adequately respond to medical therapy and are not readily amenable to invasive
therapy. As a result, an important
element of our strategy is to grow the market for EECP® therapy by
expanding reimbursement coverage to include a broader range of angina patients
than the current coverage policy provides and enable EECP® therapy
to compete more with other therapies for ischemic heart disease. To this end, we have engaged a consulting
firm in a two-year agreement to assist us in promoting EECP therapy as a first
line option in the treatment of CCS Class III/IV angina with both Medicare and
a major healthcare third-party payer, and extending Medicare coverage to heart
failure and Class II angina. 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. The
condition affects both sexes and is most common in people over age 50. Symptoms include angina, shortness of breath,
weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular
heartbeat and low blood pressure. CHF is
treated with medication surgery, and, in certain severe cases, heart
transplants. Left ventricular assist
devices (LVADs) and the use of cardiac resynchronization and implantable
defibrillators are useful in selected patients with heart failure. Still, no consensus therapy currently exists
for CHF and patients must currently suffer their symptoms chronically and have
a reduced life expectancy.
According
to the 2012 Update, in 2008 approximately
5.7 million adults in the United States were suffering heart failure and about
670,000 new cases of the disease occur each year. The prevalence of the disease is growing as a
result of the aging of the population and the improved survival rate of people
after heart attacks. Because the
condition frequently entails visits to the emergency room and in-patient
treatment centers, two-thirds of all hospitalizations for people over age 65
are due to heart failure. Congestive
heart failure offers a good strategic fit with our current angina business and
offers an expanded market opportunity for EECP® therapy. Unmet clinical needs in CHF are greater than
those for angina, as there are few consensus therapies, invasive or otherwise,
beyond medical management for the condition.
It is noteworthy that data collected from the International EECP®
Patient Registry™ (IEPR) at the University of Pittsburgh Graduate
School of Public Health shows that approximately one-third of angina patients
treated with EECP® also have a history of CHF and 70% to 80% have
demonstrated positive outcomes from EECP® therapy.
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. Additionally, we have engaged
a consulting firm in a two-year agreement to assist us in extending CMS
coverage and reimbursement to NYHA Class II/III heart failure. 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 stable and unstable angina, congestive heart failure, acute myocardial infarction and cardiogenic shock, 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. During the past several years, many studies have been carried out 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, demonstrated in scientific studies and published in peer reviewed medical society journals, 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
·
Diabetes
mellitus
It is believed that there is sufficient clinical and scientific evidence in these and other potential applications to demonstrate EECP® therapy’s safety and efficacy. 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 may continue to sponsor clinical studies seeking regulatory clearance and reimbursement as funding becomes available.
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 at least 160 papers published in peer-reviewed medical journals related to EECP®
therapy since 1992, and many more published in scientific and medical
conferences all over the world. Most of
these journal publications are clinical reports on the results in patients with
chronic stable angina and/or heart failure.
With only a few exceptions, these reports are 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, as follows:
Mechanisms of Action
In
the past several years, the mechanisms of action of EECP® therapy
have been the subjects of many investigations. It is now clear that during EECP®
therapy the hemodynamic effect increases the pressure gradient across coronary
stenosis, induces higher shear stress on the endothelial monolayer, promotes
angiogenesis and collateral development, improves endothelial functions, and
reduces circulating proinflammatory cytokines,
arterial stiffness and smooth muscle cells proliferation and migration, slowing
down the progression of atherosclerotic processes. EECP® therapy:
· produces significant increase in coronary blood flow, cardiac output, left ventricular unloading documented by in intracoronary pressure ultrasound Doppler study;
· stimulates development of angiogenesis and arteriogenesis resulting in recruitment of collateral circulation documented by intracoronary pressure wire measurements;
improves endothelial function by increased plasmas nitric oxide and decreased endothelin-1 levels, producing vasodilation;
neutralizes reactive oxygen species by reduction of 8-isoprostance and asymmetrical dimethylarginine, reducing cells injury;
reduces inflammatory cytokines including tumor necrosis factor-α, monocyte chemoattractant protein-1, soluble vascular cell adhesion molecule and high-sensitivity C-reactive protein;
increases release of endothelial progenitor cell, improves endothelial functions and reduces smooth muscle cells migration and proliferation;
increases release of neurohormonal factors including angiotensin-II, ANP, BNP, improving control of vascular tone;
reduces arterial stiffness, reducing blood pressure and resistance to blood flow; and
increases flow-mediated dilation of the brachial and femoral arteries.
Beneficial Clinical Outcomes of EECP®
Therapy
·
Benefits
are sustained for up to three to five years.
Independent
research aiming to fully explain the precise scientific means by which EECP®
therapy achieves its long-term beneficial effects continues 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. The recruitment of new arteries, known as
collateral blood vessels, bypass blocked or narrowed vessels and increase blood
flow to ischemic areas of the heart muscle that were receiving an inadequate
supply of blood. There is also evidence
to support a mechanism related to improved function of the endothelium (the
inner lining of the blood vessels), which regulates the luminal size of the
arteries and controls the dilation of the arteries to ensure adequate blood
flow to all organs, thus reducing constriction of blood vessels that supply
oxygenated blood to the body’s organs and tissues and as a result the reduced workload
of the heart.
Significant Economic
Benefits of EECP® Therapy
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 26 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 ED visits per patient decreased from 0.9±2.0 pre-EECP to 0.2±0.7 at 6 months, and hospitalizations were reduced from 1.1±1.7 to 0.3±0.9. 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 in healthcare costs each year, and the Company is educating payers on these benefits as part of its campaign to expand reimbursement.
Registry
data, while considered a valuable source of complementary clinical data, is
deemed by researchers and others to be less convincing than data from
randomized and blinded clinical trials and from certain other well-controlled
clinical study designs. 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, ambulatory monitoring devices and
patient management devices to treatment providers such as hospitals, clinics
and physician private practices in the United States through a combination of
employees and independent sales representatives managed by a vice president of
sales and marketing, along with in-house administrative support. The efforts of our sales organization are
further supported by clinical educators who are responsible for the onsite
training of physicians and therapists as new centers are established. This clinical applications group also engages
in training and certification of new personnel at each site, as well as in
updating providers on new clinical developments relating to EECP®
therapy. The Company also markets
certain products, accessories and supplies through an online store.
Our
marketing activities support physician education and physician outreach
programs, exhibition at national, international and regional medical
conferences, as well as sponsorship of 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.
In 2011, we also retained the
services of a public relations group to assist us in promoting awareness for
potential future growth as well as to support our current medical providers.
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 service
arrangement expires, we service our customers after the service arrangement
expires 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
distributors with exclusive 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 distributor to
retain exclusivity, 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
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 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.
Our
EECP® therapy systems are currently classified by the US FDA as
Class III devices, which include devices for which there is insufficient
information demonstrating that general and special controls will provide
reasonable assurance of safety and effectiveness, and which are
life-sustaining, life-supporting or implantable devices, are of substantial
importance in preventing impairment of human health, or pose a potential
unreasonable risk of illness or injury.
The FDA generally must clear a Class III device for marketing in the
United States by a premarket approval (PMA), unless it is considered as a preamendments device – device that was commercially
distributed before May 28, 1976 – and thus can be cleared by premarket
notification, or 510(k). The Company’s initial
system received FDA 510 (k) clearance in 1995, with later models receiving
clearance at various times between 2000 and 2004.
Modifications
to a previously cleared medical device that do not significantly affect its
safety and effectiveness or constitute a major change in the intended use can
be made without having to submit a new 510(k).
Vasomedical followed relevant FDA guidance and concluded that the
changes incorporated into its Model TS4 did not require a new 510(k) prior to
its introduction to market. Vasomedical
subsequently obtained a 510(k) that applied to the Model TS4 and all of its
models in March 2004, when it made changes to the labeling of all of its EECP®
therapy systems. In November 2004, Model
Lumenair and AngioNew®-VI
were introduced, and again it was concluded that the changes did not require a
new 510(k).
There
can be no assurance that all the necessary FDA clearances or approvals,
including approval of any PMA required by the promulgation of a regulation,
will be granted for our products, future-generation upgrades or newly developed
products, on a timely basis or at all.
Failure to receive, or delays in receipt of such clearances, could have
a material adverse effect on our financial condition and results of operations.
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 (ACC) and the American Heart Association (AHA)
have jointly engaged in developing practice guidelines since 1980 to critically
evaluate the use of diagnostic procedures and therapies in the management or
prevention of cardiovascular diseases.
These guidelines are meant to “improve the effectiveness of care,
optimize patient outcomes and affect the overall cost of care favorably by
focusing resources on the most effective strategies.” Recommendations incorporated into the
guidelines are based upon an assessment of the strength of evidence for or
against a treatment or procedure and estimates of expected health outcomes
stemming from a formal review of peer-reviewed published literature. These guidelines may not be updated for some
time.
The
ACC/AHA 2002 Guideline Update for the
Management of Patients with Chronic Stable Angina was issued in 2003. Comments on external counterpulsation
appear in a section entitled Recommendations for Alternative Therapies for
Chronic Stable Angina in Patients Refractory to Medical Therapy Who Are Not
Candidates for Percutaneous Intervention or Surgical Revascularization and
include a so-called Class IIb recommendation. ACC/AHA guideline classifications I, II and
III are used to “provide final recommendations for both patient evaluation and
therapy” and a Class IIb rating is defined as
“Usefulness/efficacy is less well established by evidence/opinion.”
An
Update to the 2002 ACC/AHA Guidelines has been under review by the ACC
Guidelines Committee for the Guideline Update for the Management of Patients
with Chronic Stable Angina and was originally scheduled for release in spring
2011. Based upon the publication of numerous randomized, controlled studies in
the last several years on the mechanisms of action of EECP® therapy, the Company
made a formal request, and has contacted all domestic EECP® providers and key opinion leaders in the field of cardiology to
support its request, for an upgrade from the Class IIb
classification to a IIa level, consistent with the
current published scientific evidence. The update has been delayed; however, we
have been advised by the ACC that a new release date has been scheduled for
mid-summer 2012.
The
ACC/AHA 2005 Guidelines for the Diagnosis
and Management of Chronic Heart Failure in the Adult was issued in
2005. External counterpulsation
is listed as one of the devices under investigation in a section entitled
“Drugs and Interventions Under Active Investigation.” The 2006
Comprehensive Heart Failure Practice Guideline, issued in February 2006 by
the Heart Failure Society of America, does not include any comments on the use
of external counterpulsation therapy for treating
heart failure patients.
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 and heart failure continue to appear in presentations at major
scientific meetings and in peer-reviewed publications each year. We believe the new evidence from completed and
ongoing studies regarding the efficacy of EECP® therapy and its long
lasting effect will be sufficient to warrant a modification of practice
guidelines to a more favorable recommendation, 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 approximately 47.7 million beneficiaries now, issued a national coverage
policy under HCPCS code G0166 for the use of the EECP® therapy
system. Key excerpts from the coverage
read as follows:
“Although ECP devices are cleared by the Food and Drug Administration (FDA) for use in treating a variety of cardiac conditions, including stable or unstable angina pectoris, acute myocardial infarction and cardiogenic shock, the use of this device to treat cardiac conditions other than stable angina pectoris is not covered, since only that use has developed sufficient evidence to demonstrate its medical effectiveness.”
“… 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 2012 national average payment rate per
hourly EECP® therapy session in the physician office setting and the
hospital outpatient facility is $151 and $94, respectively. Actual reimbursement rates vary throughout
the country and range from $126 to $204 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 2004, as in
the summary below:
Year Physician Office Hospital
2004 $137 $113
2005 $138 $102
2006 $138 $104
2007 $147 $107
2008 $156 $109
2009 $150 $102
2010 $148 $104
2011 $153 $102
2012 $151 $94
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 five 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 and have engaged a consulting firm to
assist us in co-sponsoring a study with a major commercial healthcare
third-party payer demonstrating the efficacy, efficiency, and/or cost
effectiveness of EECP® therapy for NYHA Class II/III heart failure.
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. 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
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. The Company now offers a
complete line of BIOXTM series diagnostic products for ambulatory
monitoring needs.
In
September 2011, the Company acquired BIOX and now includes its operations in
its consolidated financial results. In
combination with BIOX, the Company is also promoting its joint R&D and
manufacturing capabilities to secure OEM opportunities in the United States as
well as pursuing international sales opportunities for the product line through
its global distribution channel.
The
growing market for ECG Holter and ambulatory blood
pressure monitoring products worldwide is expected to exceed $150 million by 2015.
While there are multiple competitors in
the marketplace, we believe that due to certain special features of our
products, and through our sales and marketing efforts in niche markets, we will
increase sales revenue and create opportunities for other products the Company
manufactures or distributes.
The BIOXTM series ECG
Holter and ambulatory blood pressure monitoring
products are manufactured by Biox Instruments Co.
Ltd. (BIOX) in Wuxi, China, 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. Biox’s
manufacturing facility has also been certified to conform to full quality
assurance system requirements of the EU Medical Device Directive and other
requirements by various government authorities. These medical products have
been classified by the U.S. FDA as Class II products.
Additionally, the Company continues to distribute a line of private label patient management products first introduced in April 2009. These products include the hand held EZ ECG™ Monitor, the EZ O2™ Adult and EZ O2™ Pediatric Pulse Oximeters, and the EZ O2™ Wrist Oximeter.
Strategic
Objectives
Our short- and long-term plans for the growth
of the Company and its stockholder value are:
a) Maintain and grow our equipment business, by
i)
Continuing
to align the cost structure with revenue growth, including increased funding of
marketing initiatives;
ii) Expanding our direct sales force to
significantly increase revenue, particularly from EECP® equipment
and service sales; and
iii) Increasing our international efforts to grow
international sales of all our device offerings; and
iv) Pursuing accretive acquisitions of medical
device companies in the international marketplace.
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.
c) Work with consultants to expand
reimbursement coverage for EECP® therapy, 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, including 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 between now and 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” 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. 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, 2011, we employed approximately 175 full-time persons, of which 28
are employed through our facility in Westbury, New York, 82 through our
VasoHealthcare subsidiary and 65 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 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.
Recent
Development
We have scheduled a meeting with GEHC to discuss the recent resignations of three members of management of our Vaso Healthcare subsidiary, including its Chief Operating Officer. The COO resigned effective immediately and the other two members of management resigned effective mid-May 2012. While the Company is in the process of filling these positions, and has engaged on an interim basis a consultant to supervise the business operations, we will be discussing with GEHC, among other things, the impact of these resignations on the GEHC relationship. The agreement with GEHC remains in full force and effect.
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
The sustainability of the profit achieved
in the current period is dependent on several factors.
Our ability to sustain the
profitability achieved in the current period 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.
The significant amount of our current period and fiscal 2011 revenue and net income arose from activities under this contract. Moreover, our growth depends partially on the territories assigned to VasoHealthcare 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. See also Recent Development above.
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 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 and the American College of
Cardiology Practice Guidelines currently list EECP® as a therapy
currently under investigation for treatment of heart failure and have a
classification rating of IIb 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
usefulness/efficacy of EECP® therapy is less well established by
evidence/opinion. 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 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, or 510(k), 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, 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 PMA approval, 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.
Sales of medical devices outside the
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 sales, management, 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
We do not intend to pay any cash dividends on our
common stock in the foreseeable future.
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
We expect that the United States Congress and state
legislatures will continue to review and assess 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.
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 owned our
18,000 square foot headquarters and manufacturing facility at 180 Linden
Avenue, Westbury, New York 11590, until August 15, 2007 when we sold it under a
five-year leaseback agreement for $1.4 million.
The net proceeds from the sale was approximately $425,000, after payment
in full of the two secured notes on our facility, brokers fees, closing costs,
and the opening of a certificate of deposit in accordance with the provisions
of the new lease. The annual rental
expense for the lease is approximately $150,000. Our Westbury lease expires in August 2012 at
which time we will either extend the lease or seek nearby facilities. 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 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 and approximately 11,000 square feet at an annual cost of
approximately $23,000 in Foshan.
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 $48,000.
Our common
stock currently trades on OTCQB, the middle tier of the OTC marketplace
reserved for fully reporting issuers, under the symbol VASO.PK. On May 26, 2006, our common stock ceased
trading on the NASDAQ Capital Market tier of the NASDAQ Stock Market and began
trading on the NASD Pink Sheets.
Effective June 20, 2006, our common stock began trading on the
Over-the-Counter Bulletin Board (OTCBB).
On February 22, 2011, our common stock was delisted from OTCBB and was
quoted solely on OTC Link. The number of
record holders of common stock as of April 23, 2012, 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 April 23, 2012, was $0.26 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 Transition
Report on Form 10-K.
Vasomedical,
Inc. was incorporated in
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. Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy and will operate through three wholly-owned subsidiaries. Vaso Diagnostics d/b/a VasoHealthcare will continue as an operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. will operate the Company’s newly-acquired Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® therapy business as well as other medical equipment operations.
We have achieved profitability through the operation of the VasoHealthcare business. The Company will seek to achieve greater profitability through our recent accretive acquisition of the two Chinese medical device companies and by expanding our U.S. market portfolio. In addition, the Company plans to actively pursue other accretive acquisitions in the international market and is in preliminary discussions to secure a credit facility for up to $25 million to be utilized for this purpose.
Net revenues increased by $14,748,000, or 169%, to $23,489,000 in the seven months ended December 31, 2011, from $8,741,000 in the seven months ended December 31, 2010. We reported net income applicable to common stockholders of $3,891,000 in the seven months ended December 31, 2011 as compared to a loss of $2,604,000 in the seven months ended December 31, 2010. Our total net income (loss) was $0.03 and $(0.02) per basic and diluted common share for the seven months ended December 31, 2011 and 2010, respectively.
Revenues
Revenue in our Equipment segment decreased 23% to $2,576,000, including $413,000 in FGE revenue, for the seven months ended December 31, 2011 from $3,328,000 for the seven months ended December 31, 2010. Equipment segment revenue from equipment sales decreased approximately 27% to $1,473,000 for the seven months ended December 31, 2011 as compared to $2,025,000 for the seven months ended December 31, 2010. The decrease in equipment sales is due primarily to a 59% decrease in the number of EECP® units sold internationally, coupled with a minor reduction in average selling price, as well as a 10% reduction in domestic sales driven mainly by lower average selling prices on certain used systems shipped. In addition, excluding FGE sales, revenue from other medical equipment increased 18% in the seven months ended December 31, 2011 as compared to the seven months ended December 31, 2010.
We anticipate that demand for EECP® systems will remain soft domestically unless there is greater clinical acceptance for the use of EECP® therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines, or a favorable change in current reimbursement policies by CMS or third party payors to consider EECP therapy as a first-line treatment option for angina or cover some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others.
Equipment segment revenue from equipment
rental and services decreased 15% to $1,103,000 in the seven months ended
December 31, 2011 from $1,304,000 in the seven months ended December 31, 2010.
Revenue from equipment rental and services represented 43% of total Equipment
segment revenue in the seven months ended December 31, 2011 and 39% in the
seven months ended December 31, 2010.
The decrease in revenue generated from equipment rentals and services is
due primarily to decreased field service and recognized service contract
revenues.
Commission revenues in the Sales
Representation segment were $20,913,000 in the seven months ended December 31,
2011, compared to $5,413,000 in the seven months ended December 31, 2010. As discussed in Note B, the Company defers
recognition of commission revenue until underlying equipment acceptance is
complete. As of December 31, 2011, $14,085,000
in deferred commission revenue was recorded in the Company’s consolidated
condensed balance sheet, of which $5,378,000 is long-term.
Gross Profit
The Company recorded gross profit of $16,756,000, or 71% of revenue, in the seven months ended December 31, 2011 compared to $5,820,000, or 67% of revenue, in the seven months ended December 31, 2010. The increase of $10,936,000 was due primarily to higher revenue in the Sales Representation segment, partially offset by lower gross profit rates resulting from higher commission expense..
Equipment segment gross profit decreased to $1,243,000, or 48% of Equipment segment revenues, for the seven months ended December 31, 2011 compared to $1,532,000, or 46% of Equipment segment revenues, for the seven months ended December 31, 2010 due mainly to lower sales volume. The decrease in absolute dollars was partially offset by an increase in gross profit percentage, which arose primarily from the inclusion of higher margins on FGE sales. Equipment segment gross profits are dependent on a number of factors, particularly 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, and certain fixed period costs, including facilities, payroll and insurance.
Sales Representation segment gross profit was $15,513,000 for the seven months ended December 31, 2011. Cost of commissions of $5,400,000 reflects commission expense associated with recognized commission revenues. Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.
Operating Income
Operating income was $5,189,000 for the seven months ended December 31, 2011 as compared to an operating loss of $2,445,000 for the seven months ended December 31, 2010. The change from an operating loss to operating income was primarily attributable to operating income of $7,417,000 in our Sales Representation segment for the seven months ended December 31, 2011, as compared to an operating loss of $2,234,000 for the seven months ended December 31, 2010 in that segment. The 2010 segment loss reflects additional start-up costs and the deferral of commission revenue and expense in the seven months ended December 31, 2010. Equipment segment operating loss in the seven months ended December 31, 2011 was $1,603,000, including $578,000 in shared-based expenses, as compared to an operating loss of $59,000, including $226,000 in shared-based expenses, in the seven months ended December 31, 2010. The increase in operating loss was primarily due to lower gross profit and higher SG&A costs.
Selling, general and administrative (“SG&A”) expenses for the seven months ended December 31, 2011 and 2010 were $11,243,000, or 48% of revenues, and $8,004,000, or 92% of revenues, respectively, reflecting an increase of $3,239,000 or approximately 40%. The increase in SG&A expenditures in the seven months ended December 31, 2011 resulted primarily from increased wages, benefits, travel, and insurance expenses related to the Sales Representation segment, which was in its start-up phase during the seven months ended December 31, 2010. SG&A also increased in the Equipment segment due to higher sales and marketing expenses mainly related to reimbursement consulting, and the inclusion of FGE costs, as well as higher corporate expenses, mainly accounting, legal and director’s fees.
During the seven months ended December 31, 2011, the Company recorded a provision for doubtful accounts and commission adjustments of $866,000 as compared to the seven months ended December 31, 2010 when the Company recorded a provision for doubtful accounts and commission adjustments of $1,150,000. Of the seven months ended December 31, 2011 provision, $55,000 was to accrue for bad debt expense and $811,000 was to reduce gross deferred revenues for estimated adjustments.
Research and development (“R&D”) expenses of $324,000, or 1% of revenues, for the seven months ended December 31, 2011 increased by $63,000, or 24%, from $261,000, or 3% of revenues, for the seven months ended December 31, 2010. The increase is primarily attributable to an increase in clinical research expenses.
Interest and
Financing Costs
Interest and financing costs for the
seven months ended December 31, 2011 was $9,000 compared to $8,000 in the seven months ended December 31, 2010. Interest and financing costs consisted of
interest on a short-term note to finance the Company’s insurance premiums and
interest charged on trade payable to related party.
Interest and Other
Income, Net
Interest and other income for the seven months ended
December 31, 2011 and 2010, were $177,000 and $17,000, respectively. In the seven months ended December 31,
2011 other income primarily consisted of a government
grant obtained by one of the Company’s Chinese companies. Interest income reflects interest earned on
the Company’s cash balances and financing receivables.
Amortization of
Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on sale-leaseback of building for the seven months ended December 31, 2011 and 2010 was $31,000. The gain resulted from the Company’s sale-leaseback of its facility.
Income Tax Benefit (Expense),
Net
During the seven months ended December 31, 2011, we recorded income tax expense of $276,000 compared to the seven months ended December 31, 2010, when the Company recorded an income tax expense of $8,000. The Company utilized $6.1 million in net reporting loss carryforwards for the seven month period ended December 31, 2011. Income tax expense increased mainly due to Federal Alternative Minimum Tax liability and certain state tax liabilities in excess of net operating loss carryforwards.
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. However, such assessments may change as the representation business of VasoHealthcare matures.
Net revenues increased by $12,167,000, or 289%, to $16,373,000 in fiscal 2011, from $4,206,000 in fiscal 2010. We reported a net loss applicable to common stockholders of $4,320,000 in fiscal 2011 as compared to $1,892,000 in fiscal 2010. Our total net loss was $0.04 and $0.02 per basic and diluted common share for the years ended May 31, 2011 and 2010, respectively.
Revenue in our Equipment segment increased 25% to $5,260,000 for the fiscal year ended May 31, 2011 from $4,206,000 for the fiscal year ended May 31, 2010. Equipment segment revenue from equipment sales increased approximately 43% to $3,029,000 for fiscal 2011 as compared to $2,119,000 for fiscal 2010. The increase in equipment sales is due primarily to a 55% increase in the number of EECP® units sold internationally, as well as a 33% increase in domestic EECP® units shipped. In addition, revenue from other medical equipment increased 363% in fiscal year 2011 as compared to the prior fiscal year.
Average selling prices for EECP equipment were slightly higher in fiscal 2011. We anticipate that demand for EECP® systems would remain soft domestically unless there is greater clinical acceptance for the use of EECP® therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines, or a favorable change in current reimbursement policies by CMS or third party payors to consider EECP therapy as a first-line treatment option for angina or cover some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others.
Equipment segment revenue from equipment
rental and services increased 7% to $2,231,000 in fiscal 2011 from $2,087,000
in fiscal year 2010. Revenue from equipment rental and services represented 42%
of total Equipment segment revenue in fiscal 2011 and 50% in fiscal 2010. The increase in revenue generated from
equipment rentals and services is due primarily to increased on-demand service
and equipment rental revenues.
Commission revenues in the Sales
Representation segment were $11,113,000 in fiscal 2011. No revenues were recorded in fiscal 2010 as
the GEHC contract had not yet begun. As
discussed in Note B, the Company defers recognition of commission revenue until
underlying equipment acceptance is complete.
As of May 31, 2011, $10,806,000 in deferred commission revenue was
recorded in the Company’s consolidated condensed balance sheet, of which $756,000
is long-term.
The Company recorded gross profit of $10,912,000, or 67% of revenue, in fiscal 2011 compared to $2,212,000, or 53% of revenue, in fiscal 2010. The increase of $8,701,000 was due primarily to both higher gross profit rates and higher absolute dollars in the Sales Representation segment.
Equipment segment gross profit increased to $2,413,000, or 46% of Equipment segment revenues, for fiscal 2011 compared to $2,212,000, or 53% of Equipment segment revenues, for fiscal 2010 due mainly to higher sales volume. The increase in absolute dollars was partially offset by a decrease in gross profit percentage, which arose primarily from higher manufacturing overhead costs, including personnel and transportation charges. Equipment segment gross profits are dependent on a number of factors, particularly 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, and certain fixed period costs, including facilities, payroll and insurance.
Sales Representation segment gross profit was $8,499,000 for fiscal 2011. Cost of commissions of $2,614,000 reflects commission expense associated with recognized commission revenues. Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.
Operating
Loss
Operating loss was $3,933,000 for fiscal 2011 as compared to an operating loss of $1,980,000 for fiscal 2010. The increase in the operating loss was primarily attributable to an operating loss of $2,962,000 in our Sales Representation segment for fiscal 2011, as compared to an operating loss of $1,057,000 for fiscal 2010 in that segment. The increased segment loss reflects additional start-up costs and the deferral of commission revenue and expense in fiscal 2011. Equipment segment operating loss in fiscal 2011 was $525,000, including $309,000 in shared-based expenses, as compared to an operating loss of $490,000, including $55,000 in shared-based expenses, in fiscal 2010.
Selling, general and administrative (“SG&A”) expenses for fiscal 2011 and 2010 were $14,383,000, or 88% of revenues, and $3,773,000, or 90% of revenues, respectively, reflecting an increase of $10,610,000 or approximately 281%. The increase in SG&A expenditures in fiscal 2011 resulted primarily from increased wages, benefits, commissions, and insurance expenses related to the Sales Representation segment, which began operations in the last two months of fiscal 2010 and ramped up in early fiscal 2011.
During fiscal 2011, the Company recorded a provision for doubtful accounts and commission adjustments of $1,150,000 as compared to fiscal year 2010 when the Company recorded a provision for doubtful accounts and commission adjustments of $71,000. Of the fiscal 2011 provision, $1,000 was to reverse the accrual for bad debt expense, $58,000 were direct write-offs, net of recovery, and $1,209,000 was to reduce gross deferred revenues for estimated adjustments.
Research and development (“R&D”) expenses of $462,000, or 3% of revenues, for fiscal 2011 increased by $43,000, or 10%, from $419,000, or 10% of revenues, for fiscal 2010. The increase is primarily attributable to an increase in product development expenses.
Interest and financing costs for fiscal
2011 was $32,000 compared to $5,000 in fiscal 2010. Interest and financing costs consisted of
interest on a short-term note to finance the Company’s insurance premiums and
interest charged on trade payable to related party.
Interest
and Other Income, Net
Interest and other income for fiscal 2011 and 2010,
were $28,000 and $80,000, respectively. In
fiscal year 2010 other income primarily consisted of a cash settlement of a
lawsuit against one of the Company’s competitors. Interest income reflects interest earned on
the Company’s cash balances and financing receivables.
Amortization
of Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on sale-leaseback of building for fiscal years 2011 and 2010 was $53,000. The gain resulted from the Company’s sale-leaseback of its facility.
Income
Tax Benefit/(Expense), Net
During fiscal year 2011, we recorded income tax expense of $7,000 compared to fiscal year 2010, when the Company recorded an income tax benefit of $36,000. The fiscal 2010 income tax benefit was primarily a research and development credit associated with the federal stimulus package of 2009.
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. In the future, such assessments may change due to the introduction of the distribution and representation business of VasoHealthcare.
We have financed our operations primarily from working capital. At December 31, 2011, we had cash and cash equivalents of $2,294,000, short-term investments of $110,000 and working capital of $11,354,000.
Cash used in
operating activities was $5,103,000 during the seven months ended December 31,
2011, which consisted of net income after adjustments to reconcile net income
to net cash of $6,745,000, and cash used by operating
assets and liabilities of $11,848,000. The changes in the account balances primarily
reflect increases in other assets of $1,074,000 and accounts and other
receivables of $16,986,000, partially offset by an increase in accrued
commissions of $1,925,000, and deferred revenue of $3,305,000. These changes
in account balances are due mainly to the operations of our Sales
Representation segment. At March 31,
2012 the Company’s cash balances were approximately $12.5 million.
Standard
payment terms on our domestic equipment sales are generally net 30 to 90 days
from shipment and do not contain “right of return” provisions. We have historically offered a variety of
extended payment terms, including sales-type leases, in certain situations and
to certain customers in order to expand the market for our EECP®
products in the US and internationally.
Such extended payment terms were offered in lieu of price concessions,
in competitive situations, when opening new markets or geographies and for
repeat customers. Extended payment terms
cover a variety of negotiated terms, including payment in full - net 120, net
180 days or some fixed or variable monthly payment amount for a six to twelve
month period followed by a balloon payment, if applicable. During the seven
months ended December 31 2011
and 2010, there were $210,000 and $0, respectively, in revenues generated from
sales in which initial payment terms were greater than 90 days. During the seven months ended December 31, 2011 one sales-type lease with a period of three
years generated $2,000 in interest income.
During the seven months ended December 31, 2010 one sales-type lease with a period
of three years generated $42,000 in revenue and $1,000 in interest income. In general, reserves are calculated on a
formula basis considering factors such as the aging of the receivables, time
past due, and the customer’s credit history and their current financial status.
In most instances where reserves are required, or accounts are ultimately
written-off, customers have been unable to successfully implement their EECP®
program. As we are creating a new market
for the EECP® therapy and recognizing the challenges that some
customers may encounter, we have opted, at times, on a customer-by-customer
basis, to recover our equipment instead of pursuing other legal remedies, which
has resulted in our recording of a reserve or a write-off.
Investing activities during the seven months ended December 31, 2011 used cash of $638,000, mainly related to the acquisition of FGE.
Financing activities during the seven months ended December 31, 2011 used cash of $95,000 for the repayment of notes payable to a related party.
While the Company has achieved substantial profitability for the seven months ended December 31, 2011, it has historically incurred operating losses. We have achieved profitability through the operations of the VasoHealthcare business. The Company will seek to achieve greater profitability through our recent accretive acquisition of the two Chinese medical device companies and by expanding our U.S. market product portfolio to include ambulatory monitoring devices (the BIOX series ECG Holter recorders, ambulatory blood pressure monitors and analysis software) and patient management devices (the EZ ECG and EZ O2 products). In addition, the Company plans to pursue other accretive acquisitions in the international market and is in preliminary discussions to secure a credit facility for up to $25 million to be utilized for this purpose.
While we expect to continue to generate significant operating cash flows in fiscal 2012, the progressive nature of the GEHC Agreement can cause related cash inflows to vary widely during the year.
Based on our current operations through December 31, 2011, 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, 2013.
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, 2011, 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 in excess of 35 years specializing in corporation and securities law, was 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 firm 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 terminates on February 28, 2013. The Agreement provides for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP® therapy. More specifically, Consultant will be assisting the Company in the following areas:
1. Engaging the adoption of EECP® therapy as a first line option for FDA cleared indications as it relates to CCS Class III/IV angina with a major commercial healthcare third-party payer.
2. Engaging a major commercial healthcare payer to formally collaborate and co-sponsor a study with Vasomedical for the efficacy, efficiency and/or cost effectiveness of the EECP® therapy for NYHA Class II/III heart failure.
3. Engaging final approval from the Centers for Medicare and Medicaid Services (“CMS”) of EECP® therapy as a first line treatment for CCS Class III/IV angina.
4. Engaging final approval from CMS to extend coverage and provide for the reimbursement of EECP® therapy for CCS Class II angina; and
5. Engaging final approval from CMS to extend coverage and provide for the reimbursement of EECP® therapy for NYHA Class II/III heart failure.
In consideration for the services to be provided by Consultant under the Agreement, the Company has agreed to issue to Consultant or its designees, approximately 10% of the outstanding capital stock of the Company, of which the substantial portion (in excess of 82%) is performance based as referenced above. In conjunction with the Agreement, 3,000,000 shares of restricted common stock valued at $1,020,000 were issued in March 2011. In connection with this Agreement, Mr. Lieberman received 600,000 of these restricted shares. The Company has recorded the fair value of the shares issued to Consultant as a prepaid expense and is amortizing the cost ratably over the two year agreement. The unamortized value is reported as Deferred Related Party Consulting Expense in our accompanying consolidated balance sheet as of December 31, 2011.
Through the Company’s acquisition of FGE in September 2011, it assumed the liability for $288,000 in unsecured notes payable to the President of LET and his spouse, of which $95,000 was repaid in December 2011, and $190,000, bearing interest at 6% per annum, matured March 31, 2012. In addition, $10,000 in pre-acquisition earnings were distributed to current BIOX management and during the seven months ended December 31, 2011. The Company also recorded $196,000 in loans and advances made to officers of FGE during the seven months ended December 31, 2011. These loans are short term and do not bear interest.
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
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 Recognized” (“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 condensed 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, 2011, May 31, 2011 and May 31, 2010. 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,
2011, May 31, 2011 and May 31, 2010.
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
utilized the Black-Scholes option-pricing model.
Vasomedical accounts for share-based compensation in
accordance with fair value recognition provisions, under which the Company uses
the Black-Scholes option pricing model which requires the input of subjective
assumptions. These assumptions include estimating the length of time employees
will retain their stock options before exercising them (“expected
term”), the estimated volatility of the Company’s common stock price over the
expected term and the number of options that will ultimately not complete their
vesting requirements. The Company estimates the expected term and forfeitures
based on the terms set forth in the option agreements and no assumption that
any options will not complete their vesting period, which approximates actual
historical behavior, and it estimates volatility of the Company’s stock based
on the Company’s historical stock price performance over the past five years. Changes in the subjective
assumptions could materially affect the estimate of fair value of stock-based
compensation; however management believes changes in certain assumptions that
could be reasonably possible in the near term, would not have a material effect
on the expense recognized for fiscal 2011.
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 June 2011, new guidance was issued that amends the current comprehensive income guidance. The new guidance allows the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single or continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The new guidance is to be applied retrospectively and is effective for fiscal years, and interim periods, beginning after December 15, 2011, with early adoption permitted. The Company has elected early adoption of this guidance and does not expect that it will have a material impact on the Company’s consolidated financial statements.
Intangibles—Goodwill and Other: Testing Goodwill for Impairment
In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance is to be applied prospectively effective for annual and interim goodwill impairment tests beginning after December 15, 2011, with early adoption permitted. The Company has elected early adoption of this guidance and does not expect that it will have a material impact on the Company’s consolidated financial statements.
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, 2011 and have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2011 due to the deficiencies described in Management’s Report on Internal Control over Financial Reporting below. The Company intends to engage additional accounting personnel, including an accounting controller, and strengthen its internal controls with regard to its closing process, related disclosures, and the approval of certain transactions.
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 not effective as of December 31, 2011, due to the following deficiencies at the Company’s Fast Growth Enterprises (FGE) subsidiary and at the two Chinese operating companies FGE owns or controls:
·
Insufficient controls and management
review over the recording of certain transactions.
· Lack of accounting personnel with appropriate level of knowledge and experience in accounting principles generally accepted in the United States of America and related accounting systems and closing process.
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 Transition Report.
Directors of the Registrant
As of April 23, 2012, the members of our Board of Directors are:
The following is a brief account of the business experience for at least the past five years of our directors:
Simon Srybnik has been a director since June 2007 and Chairman of the Board since June 2010. He is the Chairman of the Board of Kerns Manufacturing Corp. and Living Data Technology Corp. A lifetime entrepreneur and industrialist, Mr. Srybnik has founded and managed many companies in various industries including machinery and process equipment, aerospace and defense, biotechnology and healthcare.
David Lieberman has
been a director of the Company and the Vice Chairman of the Board, since
February 2011. Mr. Lieberman has been a practicing attorney in the State of New
York for more than 35 years, specializing in corporation and securities law. He
is currently a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which firm performs
certain legal services for the Company. Mr. Lieberman is a former Chairman of
the Board of Herley Industries, Inc., which company
was sold in March, 2011.
Jun Ma, PhD has been a director since June 2007 and was appointed President and Chief Executive Officer of the Company on October 16, 2008. Dr. Ma has been an associate professor in engineering at New York Institute of Technology since 1997 and an assistant professor from 1993 to 1997. Previously Dr. Ma provided technology and business consulting services to several companies in aerospace, automotive, biomedical, medical device, and other industries, including Kerns Manufacturing Corp. and Living Data Technology Corp., both of which are stockholders of our Company.
Behnam Movaseghi has been a director since July 2007. Mr. Movaseghi has been treasurer of Kerns Manufacturing Corporation since 2000, and controller from 1990 to 2000. For approximately ten years prior thereto Mr. Movaseghi was a tax and financial consultant. Mr. Movaseghi is a Certified Public Accountant.
Edgar G. Rios has been a director of the
Company since February 2011. 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. Mr. Rios is co-founder and managing director of Wenzi Capital Partners, a venture capital and private
equity firm. Mr. Rios was Executive Vice President, General Counsel, Secretary,
and Director of AmeriChoice Corporation from its
inception in 1989 through its acquisition by UnitedHealthcare
in 2002. He is a co-founder of AmeriChoice and was
part of the management team that grew revenues to $675 million in 2001. Prior
to co-founding AmeriChoice, Mr. Rios was a co-founder of a number of
businesses that provided technology services and non-technology products to
government purchasers. Over the years, Mr. Rios also has been an investor,
providing seed capital to various technology and nontechnology start-ups. Mr.
Rios also serves as a member of the Board of Trustees of Meharry
Medical School and as a director and secretary of the An-Bryce Foundation. Mr.
Rios holds a J.D. from Columbia University Law School and an A.B. from
Princeton University.
Peter Castle has been a director since August 2010. Mr. Castle is currently the President and Chief Operating Officer of NetWolves Corporation, where he has been employed since 1998. Mr. Castle also held the position of Chief Financial Officer from 2001 until October 2009, Vice President of Finance since January 2000, Controller from August 1998 until December 1999 and Treasurer and Secretary from August 1999. NetWolves is a global telecommunications and Internet managed services provider offering single-source network solutions that provides multi-carrier and multi-vendor implementation to over 1,000 customers worldwide.
Committees of the Board of Directors
Executive Committee
The primary purpose of the Executive Committee is to function when the Board of Directors is not in session. During the intervals between meetings of the Board, the Committee shall have and may exercise the powers of the Board, except as limited by Delaware statute. It will also take such other action and do such other things as may be referred to it from time to time by the Board.
Audit Committee and Audit Committee Financial Expert
The Board has a standing Audit Committee. The Board has affirmatively determined that each director who serves on the Audit Committee is independent, as the term is defined by applicable Securities and Exchange Commission ("SEC") rules. During the seven months ended December 31, 2011, (“Transition Period”) the Audit Committee consisted of Peter Castle, who has served as the committee chair since August 2010, and Behnam Movaseghi, who joined the committee in November 2011. The members of the Audit Committee have substantial experience in assessing the performance of companies, gained as members of the Company’s Board of Directors and Audit Committee, as well as by serving in various capacities in other companies or governmental agencies. As a result, they each have an understanding of financial statements. The Board believes that Peter Castle fulfills the role of the financial expert on this committee.
The Audit Committee regularly meets with our independent registered public accounting firm outside the presence of management.
The Audit Committee operates under a charter approved by the Board of Directors. The Audit Committee charter is available on our website.
Compensation Committee
Our Compensation Committee annually establishes, subject to the approval of the Board of Directors and any applicable employment agreements, the compensation that will be paid to our executive officers during the coming year, as well as administers our stock-based benefit plans. During the seven months ended December 31, 2011, the Compensation Committee consisted of Behnam Movaseghi, who served as the committee chair, and Peter Castle. None of these persons were our officers or employees during the Transition Period or, except as otherwise disclosed, had any relationship requiring disclosure herein.
The Compensation Committee operates under a charter approved by the Board of Directors. The Compensation Committee charter is available on our website.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During the seven months ended December 31, 2011 there were:
·
3 meetings of the
Board of Directors
·
2 meetings of the
Audit Committee
The Compensation
Committee did not hold any meetings during the seven months ended December 31,
2011.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors, executive officers and persons who beneficially own more than 10% of our common stock (collectively, “Reporting Persons”) to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC. Reporting Persons are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on our review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, we believe that during the Transition Period, all Reporting Persons timely complied with all applicable filing requirements.
Corporate
Governance - Code of Ethics
We have adopted a Corporate Code of Business Ethics (the "Code") that applies to all employees, including our principal executive officer, principal financial officer, and directors of the Company. A copy of the Code can be found on our website, www.vasomedical.com. The Code is broad in scope and is intended to foster honest and ethical conduct, including accurate financial reporting, compliance with laws and the like. If any substantive amendments are made to the Code or if there is any grant of waiver, including any implicit waiver, from a provision of the Code to our Chief Executive Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver in a Current Report on Form 8-K.
Executive
Officers of the Registrant
As of April 23, 2012 our executive officers are:
Michael J. Beecher, CPA, joined the Company as Chief Financial Officer in September 2011. Prior to joining Vasomedical, Mr. Beecher was Chief Financial Officer of Direct Insite Corp., a publicly held company, from December 2003 to September 2011. Prior to his position at Direct Insite, Mr. Beecher was Chief Financial Officer and Treasurer of FiberCore, Inc., a publicly held company in the fiber-optics industry. From 1989 to 1995 he was Vice-President Administration and Finance at the University of Bridgeport. Mr. Beecher began his career in public accounting with Haskins & Sells, an international public accounting firm. He is a graduate of the University of Connecticut, a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Jonathan P. Newton served as Chief Financial Officer of the Company from September 1, 2010 to September 8, 2011, and is currently Vice President of Finance and Controller. From June 2006 to August 2010, Mr. Newton was Director of Budgets and Financial Analysis for Curtiss-Wright Flow Control. Prior to his position at Curtiss-Wright Flow Control, Mr. Newton was Vasomedical’s Director of Budgets and Analysis from August 2001 to June 2006. Prior positions included Controller of North American Telecommunications Corp., Accounting Manager for Luitpold Pharmaceuticals, positions of increasing responsibility within the internal audit function of the Northrop Grumman Corporation and approximately three and one half years as an accountant for Deloitte Haskins & Sells, during which time Mr. Newton became a Certified Public Accountant. Mr. Newton holds a B.S. in Accounting from SUNY at Albany, and a B.S. in Mechanical Engineering from Hofstra University.
The following table sets forth the annual and long-term compensation of our Chief Executive Officer and each of our most highly compensated officers and employees who were serving as executive officers or employees at the end of the last completed fiscal year, and certain former executive officers as required under SEC rules (collectively, the “Named Executive Officers”) for services rendered for the seven months ended December 31, 2011, the year ended May 31, 2011 (“fiscal 2011”), and the year ended May 31, 2010 (“fiscal 2010”).
Summary
Compensation Table
1. Represents fair value on the date of grant. See Note B to the Consolidated Financial Statements included in our Form 10–K for the seven months ended December, 2011 for a discussion of the relevant assumptions used in calculating grant date fair value.
2. Represents tax gross-ups, vehicle allowances, and amounts matched in the Company’s 401(k) Plan.
3. Dr. Ma has served as President and Chief Executive Officer since October 16, 2008.
4. Mr. Newton served as Chief Financial Officer from September 1, 2010 to September 8, 2011, and is currently Vice President of Finance and Controller.
5. Dr. Hui was Senior Vice President and Chief Technology Officer from October 16, 2008 to November 14, 2011 and President and Chief Executive Officer from April 30, 2007 to October 15, 2008.
6. Mr. Barron served as Chief Operating Officer of VasoHealthcare from April 1, 2010 to April 5, 2012.
7. Mr. Singh was Chief Financial Officer from March 11, 2009 to August 26, 2010.
Outstanding
Equity Awards at Last Fiscal Year End
The following table provides information concerning outstanding options, unvested stock and equity incentive plan awards for our Named Executive Officers at December 31, 2011:
On March 21, 2011, the Company entered into an Employment Agreement with its President and Chief Executive Officer, Jun Ma, for a three-year term ending on March 14, 2014 (the “Agreement”). The Agreement provides for annual compensation of $200,000. Dr. Ma shall be eligible to receive a bonus for the fiscal year ended May 31, 2011, and 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 Agreement further provides for reimbursement of certain expenses, and certain severance benefits in the event of termination prior to the expiration date of the Agreement.
Pursuant to the terms of his employment agreement with the Company, at the recommendation of the Compensation Committee, the Executive Committee of the Company approved an increase in his annual salary to $275,000, awarded him a $50,000 bonus, and awarded him 500,000 restricted shares of common stock, of which one-half vests immediately and the remainder in one year.
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 subject to legal restrictions. In the seven months ended December 31, 2011, and for fiscal years 2011 and 2010, the Company made discretionary contributions of approximately $25,000, $29,000 and $3,000, respectively, to match a percentage of employee contributions.
Director's Compensation
Non-employee
directors receive a fee of $2,500 for each Board of Directors and Committee
meeting attended. Committee chairs
receive an annual fee of $5,000.
Non-employee directors also receive an annual fee of $30,000. These fees are either paid in cash, or common
stock valued at the fair market value of the common stock on the date of grant,
which is the meeting date. During the seven months ended December 31,
2011 the Audit Committee chairman received an additional 50,000 shares.
Compensation Committee Interlocks and Insider Participation
During the seven months ended December 31, 2011, the Compensation Committee consisted of Behnam Movaseghi, who served as the committee chair, and Peter Castle. None of these persons were our officers or employees during the seven months ended December 31, 2011 or, except as otherwise disclosed, had any relationship requiring disclosure herein.
The
following table sets forth the beneficial ownership of shares of our common
stock as of April 23, 2012 of (i) each person known by us to beneficially own
5% or more of the shares of outstanding common stock, based solely on filings
with the SEC, (ii) each of our executive officers and directors, and (iii) all
of our executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investment and voting power
is held by the persons named as owners. To our knowledge, except under community property laws or as otherwise
noted, the persons and entities named in the table
have sole voting and sole investment power over their shares of our common
stock. Unless otherwise indicated, each beneficial owner listed below maintains
a mailing address of c/o Vasomedical, Inc., 180 Linden Avenue, Westbury, New
York 11590.
*Less than 1%
of the Company's common stock
1. No officer or director owns more than one percent of the issued and outstanding common stock of the Company unless otherwise indicated. Includes beneficial ownership of the following numbers of shares that may be acquired within 60 days of April 23, 2012 pursuant to stock options awarded under our stock plans:
2. Applicable percentages are based on 158,682,110 shares of common stock outstanding as of April 23, 2012, adjusted as required by rules promulgated by the SEC.
3. Simon Srybnik and his brother Louis Srybnik are the sole directors and the Chairman of the Board and President, respectively of Kerns, which is the record holder of 25,714,286 shares. They are the sole shareholders of Kerns, each holding 50% of the shares. The reporting persons, accordingly, share voting and dispositive powers over the 25,714,286 shares held by Kerns. As a result, they may be deemed to be the co-beneficial owners of an aggregate of 25,714,286 shares. Mr. Simon Srybnik also holds sole dispositive power over 150,000 shares underlying the option he was granted upon being appointed to the Board of Directors, 598,125 shares of common stock awarded him as of December 31, 2011, as well as 11,460,900 additional shares of common stock. Mr. Louis Srybnik holds sole dispositive power over 1,636,700 shares of common stock.
4. Simon Srybnik and his brother Louis Srybnik are the sole directors and officers of Living Data Technology Corporation (“Living Data”). They also each own 35% of the outstanding shares of Living Data. The reporting persons, accordingly, share voting and dispositive powers over the 17,815,007 shares of our common stock owned by Living Data and, as a result, may be deemed to be the co-beneficial owners thereof.
Equity Compensation Plan Information
We maintain various stock plans under which stock options and stock grants are awarded at the discretion of our Board of Directors or its Compensation Committee. The purchase price of the shares under the plans and the shares subject to each option granted is not less than the fair market value on the date of the grant. The term of each option is generally five years and is determined at the time of the grant by our board of directors or the compensation committee. The participants in these plans are officers, directors, employees, and consultants of the Company and its subsidiaries and affiliates.
(1) Includes 4,605,714 shares issuable upon
exercise of options and warrants, 62,500 shares issuable under a consulting
agreement with a former director, and 2,325,000 shares of restricted common
stock granted, but unissued, under the 2010 Plan. The weighted average exercise price of the options
and warrants is $0.11, and the exercise price for the stock grants is
zero. 766,008 shares remain available
for future grants under the 2010 Plan.
The following information is provided about our current stock plans not approved by stockholders:
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. The term for which options
may be granted under the 1999 Plan expired July 12, 2009. In May 2006, the Board of Directors
accelerated the vesting period for all unvested options to May 31, 2006.
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.
As of December 31, 2011, 3,790,000 restricted shares of common stock were granted under the 2010 Plan to non-officer employees and consultants of the Company. As of December 31, 2011, 485,000 shares have been forfeited and 198,006 were withheld for withholding taxes. In September 2010, 650,000 restricted shares of common stock were granted under the 2010 Plan to officers of the Company. In September 2011, 475,000 restricted shares of common stock were granted under the 2010 Plan to an officer, of which 100,000 vested immediately with the remainder vesting over a three year period. No options were issued under the 2010 Plan during the seven months ended December 31, 2011 and fiscal 2011 or 2010. At December 31, 2011, 766,008 shares remain available for future issuance under the 2010 Plan.
On February 28, 2011, David Lieberman was appointed by the Board of Directors as directors of the Company. Mr. Lieberman, a practicing attorney in the State of New York, was 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 $166,000 were paid to the firm through the seven months ended December 31, 2011, at which time no unpaid amounts were outstanding.
William Dempsey, a director of the Company until January, 2012, was a consultant to the Company’s Vaso Diagnostics subsidiary during 2011. For the seven months ended December 31, 2011, the accrued amount for consulting services was $165,853.
Director Independence
We have adopted the NASDAQ
Stock Market’s standards for determining the independence of directors. Under
these standards, an independent director means a person other than an executive
officer or one of our employees or any other individual having a relationship
which, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director. In addition, the following persons shall not be considered
independent:
·
a
director who is, or at any time during the past three years was, employed by
us;
·
a
director who accepted or who has a family member who accepted any compensation
from us in excess of $100,000 during any period of twelve consecutive months
within the three years preceding the determination of independence, other than
the following:
·
compensation
for service on the Board of Directors or any committee thereof;
·
compensation
paid to a family member who is one of our employees (other than an executive
officer); or
·
under
a tax-qualified retirement plan, or non-discretionary compensation;
·
a
director who is a family member of an individual who is, or at any time during
the past three years was, employed by us as an executive officer;
·
a
director who is, or has a family member who is, a partner in, or a controlling stockholder
or an executive officer of, any organization to which we made, or from which we
received, payments for property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient's consolidated gross
revenues for that year, or $200,000, whichever is more, other than the
following:
·
payments
arising solely from investments in our securities; or
·
payments
under non-discretionary charitable contribution matching programs;
·
a
director who is, or has a family member who is, employed as an executive
officer of another entity where at any time during the past three years any of
our executive officers served on the compensation committee of such other
entity; or
·
a director who is, or has a family member who is, a
current partner of our outside auditor, or was a partner or employee of our
outside auditor who worked on our audit at any time during any of the past
three years.
For
purposes of the NASDAQ independence standards, the term “family member” means a
person's spouse, parents, children and siblings, whether by blood, marriage or
adoption, or anyone residing in such person's home.
The Board of Directors
has assessed the independence of each non-employee director under the
independence standards of the NASDAQ Stock Market set forth above, and has
affirmatively determined that two of our non-employee directors (Mr. Castle and
Mr. Movaseghi) are independent.
We expect each
director to attend every meeting of the Board and the committees on which he
serves as well as the annual meeting. In
the seven months ended December 31, 2011, all directors except William Dempsey
attended both the annual meeting and at least 75% of the meetings of the Board
and the committees on which they served.
ITEM 14 -
PRINCIPAL ACCOUNTING FEES AND SERVICES
Rothstein, Kass & Company, P.C. is our independent registered public accounting firm and performed the audits of our consolidated financial statements for the seven months ended December 31, 2011, and fiscal years 2011 and 2010. The following table sets forth all fees for the seven months ended December 31, 2011, and for the fiscal years ended May 31, 2011 and 2010:
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the Company’s independent auditor. Accordingly, the Audit Committee must approve the permitted service before the independent auditor is engaged to perform it. In accordance with such policies, the Audit Committee approved 100% of the services relative to the above fees.
Rothstein, Kass & Company, P.C. rendered other non-audit services related to the Company’s acquisition of Fast Growth Enterprises, Ltd. during the seven months ended December 31, 2011.
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 (13).
(p) Stock Purchase Agreement dated as of August 19, 2011 among Vasomedical, Inc., Fast Growth Enterprises Limited (FGE) and the FGE Shareholders (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 8-K dated March 21, 2011.
(14) Incorporated by
reference to Report on Form 10-K for the fiscal year ended May 31, 2011
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 30th day of April 2012.
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 April 30, 2012, 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/ 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: April 30, 2012
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: April 30, 2012
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 Transition Report on Form 10-K of the Company for the transition period from June 1, 2011 to December 31, 2011 (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: April 30, 2012
/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 Transition Report on Form 10-K of the Company for the transition period from June 1, 2011 to December 31, 2011 (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: April 30, 2012
/s/
Michael Beecher
Michael Beecher
Chief Financial Officer
Vasomedical, Inc. and Subsidiaries
For the seven months ended December 31, 2011 and for the years ended May 31, 2011 and 2010
Page
Report of Independent Registered
Public Accounting Firm F-2
Financial Statements
Consolidated
Balance Sheets as of December 31, 2011, May 31, 2011,
and May 31, 2010 F-3
Consolidated
Statements of Operations and Comprehensive Income (Loss)
for the seven months
ended December 31, 2011 and for the years
ended May 31, 2011 and 2010 F-4
Consolidated
Statements of Changes in Stockholders’ Equity
for the
seven months ended December 31, 2011 and for the
years ended May 31, 2011 and 2010 F-5
Consolidated
Statements of Cash Flows for the seven months ended
December
31, 2011 and for the years ended May 31, 2011
and 2010 F-6
Notes
to Consolidated Financial Statements F-7
– F-27
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, 2011, May 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the seven month period ended December 31, 2011 and for the years ended May 31, 2011 and 2010. 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 did not audit the consolidated financial statements of a certain wholly-owned subsidiary, which statements reflect total assets of approximately $1.4 million as of December 31, 2011, and total revenues of approximately $0.8 million for the four months ended December 31, 2011. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the wholly-owned subsidiary, is based solely on the report of the other auditors. The opinion of the other auditors was qualified for certain assets and liabilities of the wholly-owned subsidiary; however, in our opinion, the effects of that qualification are not material in relation to the consolidated financial statements.
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 audits 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 audits 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 and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vasomedical, Inc. and Subsidiaries as of December 31, 2011, May 31, 2011 and 2010, and the results of their operations and their cash flows for the seven month period ended December 31, 2011 and for the years ended May 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.
/s/ Rothstein Kass
New York, New York
April 27, 2012
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,
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
December 31, 2011, May 31, 2011 and 2010
NOTE A – DESCRIPTION OF BUSINESS, LIQUIDITY AND CHANGE IN FISCAL YEAR END
Vasomedical,
Inc. was incorporated in
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, through its subsidiaries, 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. Also in September 2011, the Company 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 newly-acquired Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® therapy business as well as other medical equipment operations.
We have achieved profitability through the operations of the VasoHealthcare business. The Company will seek to achieve greater profitability through our recent accretive acquisition of the two Chinese medical device companies and by expanding our U.S. market product portfolio. In addition, the Company plans to actively pursue other accretive acquisitions in the international market and is in preliminary discussions to secure a credit facility for up to $25 million to be utilized for this purpose.
Based on our current operations through December 31, 2011, 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, 2013.
On June 15, 2011, the Board of Directors approved a change of the Company’s fiscal year end from May 31st to December 31st. As a result of this change, the Company is filing a Transition Report on Form 10-K for the seven-month transition period ended December 31, 2011. References to any of our fiscal years means the fiscal year ending May 31, 2011 or 2010. Financial information in these notes with respect to the seven months ended December 31, 2010 is unaudited.
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 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
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 (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 fiscal 2011, the Company’s Board of Directors granted, under the 2010 Stock Plan (see Note P), 4,440,000 restricted shares of common stock valued at $876,000 to employees and consultants. 355,000 shares valued at $72,000 vested immediately and the remainder vest over three years. During fiscal 2011, 4,116,279 shares of common stock valued at $1,325,000 were granted to outside directors and consultants, of which 250,000 shares valued at $78,000 will vest over one year. During the fiscal year ended May 31, 2010, the Company’s Board of Directors granted 666,668 shares of common stock to two officers of the Company in lieu of a portion of their calendar year 2010 salaries, which was amortized over the remainder of calendar year 2010.
During fiscal 2011, the Company’s Board of Directors did not grant any
non-qualified stock options. During fiscal year 2010, the Company’s
Board of Directors granted options for 250,000 shares of common stock to one
officer and options for 200,000 shares to one director of the Company, pursuant
to the 2004 Stock Option Plan. These
options have an exercise price of $0.08 per share and expire five years from
date of grant.
Share-based
compensation expense recognized for the seven months
ended December 31, 2011 and
fiscal years ended May 31, 2011 and 2010 was $208,000, $446,000, and $218,000,
respectively. Expense for other share-based
arrangements was $370,000 and $154,000 for the seven
months ended December 31, 2011 and for the year ended May 31, 2011, respectively.
Unrecognized expense related to existing share-based arrangements is
approximately $0.9 million at December 31, 2011 and will be recognized ratably
through July 2013.
Vasomedical accounts for share-based compensation in
accordance with fair value recognition provisions, under which the Company uses
the Black-Scholes Merton option pricing model which requires the input of
subjective assumptions. These assumptions include estimating the length of time
employees will retain their stock options before exercising them
(“expected term”), the estimated volatility of the Company’s common stock price
over the expected term and the number of options that will ultimately not
complete their vesting requirements. The Company estimates the expected term
and forfeitures based on the terms set forth in the option agreements and no
assumption that any options will not complete their vesting period, which
approximates actual historical behavior, and it
estimates volatility of the Company’s stock based on the Company’s historical
stock price performance over the past five years. Changes in the subjective assumptions could materially
affect the estimate of fair value of share-based compensation; however
management believes changes in certain assumptions that could be reasonably
possible in the near term, would not have a material effect on the expense
recognized for the seven months ended December 31, 2011.
The fair value of the Company’s stock
options was estimated using the following weighted-average assumptions for
options granted during the year ended May 31, 2010:
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 consequence, believe that our
receivable credit risk exposure is limited. For the seven months
ended December 31, 2011 and
the years ended May 31, 2011 and 2010, 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 cash, which aggregated approximately $493,000
(including approximately $186,000 maintained in the names of officers of BIOX
at December 31, 2011, which accounts are properly recorded in the books and records
of the Company).
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. (See Note H)
Goodwill
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.
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 J)
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 L)
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, 2011, May 31, 2011 and May 31, 2010. 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, 2011, May 31, 2011 and May 31, 2010. Generally, the Company is no longer subject to
income tax examinations by major domestic taxing authorities for years before 2008.
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 (Loss) 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 consolidated balance sheet. For the seven months ended December 31, 2011, comprehensive income (loss) includes a loss of $108, which is 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 Company
values investments in securities and securities sold short that are freely
tradable and are listed on a national securities exchange or reported on the
NASDAQ national market at their last sales price as of the last business day of
the fiscal year.
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 Income (Loss) Per Common Share
Basic income (loss)
per common share is based on the weighted average number of common shares
outstanding without consideration of potential common stock. Diluted income (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 period.
Diluted
earnings per share were computed based on the weighted average number of shares
outstanding plus all potentially dilutive common shares. A reconciliation of basic to diluted shares
used in the earnings per share calculation is as follows:
(in thousands)
The following
table represents common stock equivalents that were excluded from the
computation of diluted earnings per share for the seven months ended December
31, 2011 and for the fiscal years ended May 31, 2011 and 2010, 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 June 2011, new guidance was issued that amends the current comprehensive income guidance. The new guidance allows the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single or continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The new guidance is to be applied retrospectively and is effective for fiscal years, and interim periods, beginning after December 15, 2011, with early adoption permitted. The Company has elected early adoption of this guidance and does not expect that it will have a material impact on the Company’s consolidated financial statements.
Intangibles—Goodwill and Other: Testing Goodwill for Impairment
In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance is to be applied prospectively effective for annual and interim goodwill impairment tests beginning after December 15, 2011, with early adoption permitted. The Company has elected early adoption of this guidance and does not expect that it will have a material impact on the Company’s consolidated financial statements.
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 seven months ended December 31, 2011 and the year ended May 31, 2011, GE Healthcare accounted for 89% and 68% of revenue, respectively. Also, GE Healthcare accounted for $19.7 million, or 95%, and $3.0 million, or 74%, of accounts and other receivables at December 31, 2011 and May 31, 2011, 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 and liabilities measured
at fair value as of December 31, 2011:
(in
thousands)
The following
table presents information about the Company’s assets and liabilities measured
at fair value as of May 31, 2011:
(in thousands)
The following table presents information about the Company’s assets and liabilities measured at fair value as of May 31, 2010:
(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, 2011; May 31, 2011 and May 31, 2010:
(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, 2011, May 31, 2011 and May 31, 2010, the Company maintained reserves for excess and obsolete inventories of $606,000, $409,000 and $359,000, respectively.
NOTE G– BUSINESS COMBINATION
On August 19, 2011, the Company, through its newly formed
subsidiary, Vasomedical Global, signed an agreement to purchase Life
Enhancement Technology Limited and Biox Instruments
Co., Ltd., both of which are based in the
People’s Republic of China.
On September 2, 2011, Vasomedical Global successfully completed the purchase of all the outstanding capital stock of privately-held Fast Growth Enterprises Limited (“FGE”), a British Virgin Islands company that owns subsidiaries which own and control Life Enhancement Technology Limited (“LET”) and Biox Instruments Co. Ltd. (“Biox”), respectively, as per the stock purchase agreement signed on August 19, 2011. The consideration of this acquisition includes a cash payment of $1 million as well as the issuance of 5 million restricted shares of the Company’s common stock, up to 2.4 million shares of common stock contingently issuable upon the achievement of certain operating performance targets, and warrants covering 1.5 million shares of common stock.
LET, based in Foshan, Guangdong, China, has been Vasomedical’s supplier for its proprietary Enhanced External Counterpulsation (EECP®) systems, including certain Lumenair systems and all AngioNew® systems. Biox, a developer and manufacturer of ambulatory monitoring devices in China, is located in Wuxi, Jiangsu, China, and has been Vasomedical’s partner on the BIOX series ECG Holter recorder and analysis software as well as ambulatory blood pressure monitoring systems. Vasomedical has obtained FDA clearance to market these products in the United States. The acquisition of LET provides Vasomedical with consolidated technical and manufacturing capability in its EECP business which should significantly increase gross margins and enable the Company to meet anticipated increasing demand for its EECP systems. Management believes the acquisition of Biox greatly enhances Vasomedical's distribution network, technology and product portfolio, and with combined market and sales efforts of the two companies, should help improve performance and profitability of Vasomedical's equipment segment.
The operating results of FGE from September 2, 2011 to December 31, 2011 are included in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) and Cash Flows for the seven months ended December 31, 2011. The accompanying Consolidated Balance Sheet as of December 31, 2011 reflects the acquisition of FGE, effective September 2, 2011. The acquisition date fair value of the total consideration transferred was $3.979 million, which consisted of the following:
(in thousands)
The fair value of the common shares issued and the contingently issuable common shares was based on the closing price of the shares on September 2, 2011, as quoted on the Nasdaq OTC pink sheets, which was $0.42 (“closing price”). The fair value of the warrants issued was computed using a Black Scholes Merton option pricing model, which utilized the following assumptions: expected term of two years which is the contractual term of the warrants; risk-free rate of 0.20%; 0% expected dividend yield; 100.67% expected volatility; the closing price; and an exercise price of $0.50. The fair value of the contingent consideration recognized on the acquisition date was estimated based on a probability model.
In accordance with Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"), the total purchase consideration is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of September 2, 2011 (the acquisition date). The purchase price was allocated based on the information currently available, and may be adjusted after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions of preliminary estimates. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(in thousands)
The goodwill is attributable to the synergies expected to arise after the Company’s acquisition of FGE as well as to FGE’s projected growth and profitability. The goodwill is not expected to be deductible for tax purposes.
During the seven month period ended December 31, 2011, the Company expensed $122,000 of acquisition-related costs. These costs are included in the line item Selling, General & Administrative costs in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss) and are comprised of accounting and legal fees.
After elimination of intercompany transactions, the amounts of revenue and net income of FGE included in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the seven months ended December 31, 2011 was $413,000 and $35,000, respectively. Earnings per share was less than $0.01. Prior to elimination of the intercompany transactions, the amounts of revenue and net income recognized by FGE from the acquisition date to December 31, 2011 was $852,000 and $350,000, respectively.
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of FGE had occurred June 1, 2009 (amounts in thousands, except per share amounts):
(in thousands)
An adjustment was made to the unaudited pro forma financial information to reflect the acquisition-related costs in the year ended May 31, 2010.
NOTE H – PROPERTY
AND EQUIPMENT
Property and equipment is summarized as follows:
(in
thousands)
Depreciation expense amounted to approximately $81,000, $102,000, and $77,000 for the seven months ended December 31, 2011 and for the years ended May 31, 2011 and 2010, respectively.
NOTE I – GOODWILL AND OTHER INTANGIBLES
The change in the carrying amount of goodwill
was as follows:
(in thousands)
The Company owns eleven US patents including eight utility and three design patents that expire at various times between now and 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.
The Company’s other intangible assets consist
of capitalized patent 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.
Amortization expense amounted to $20,000, $43,000, and $47,000 for the seven months ended December 31, 2011 and for the years ended May 31, 2011 and 2010, respectively.
NOTE J – DEFERRED REVENUE
The changes in the Company’s deferred revenues are
as follows:
(in thousands)
NOTE K –
SALE-LEASEBACK
NOTE L – 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 M – NOTES PAYABLE
At May 31, 2010, the Company had $1,250,000 in notes payable to finance the start-up costs related to VasoHealthcare. Certain of the Company’s beneficial owners executed promissory notes with the Company on various dates during April and May of 2010 carrying an interest rate of 5% per annum and maturing on various dates in July 2010. These promissory notes were settled in June 2010 through the issuance of Series E preferred stock (see Note O).
NOTE N – RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. (“Kerns”). Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation (“Living Data”), an affiliate of Kerns. Pursuant to the Distribution Agreement, as amended, we became the exclusive worldwide distributor of the AngioNew EECP® systems manufactured through Living Data. The Distribution Agreement had an initial term extending through May 31, 2012. Effective September 2, 2011 the Company acquired Life Enhancement Technology (LET) (see Note G), the manufacturer of the AngioNew EECP® system. Consequently, the Distribution Agreement is no longer effective, and the Company wrote-off the remaining unamortized balance of Deferred Distributor Costs during the seven months ended December 31, 2011.
Pursuant to the Supplier Agreement, Living Data became our exclusive supplier of the external counterpulsation therapy systems that we market under the registered trademark EECP®. On February 28, 2010, the Supplier Agreement was terminated and, in connection with the termination, the Company purchased Living Data’s remaining inventory at cost ($469,000), which was paid in 7,824,167 shares of common stock valued at the closing price on the termination date. Prior to termination, the Company purchased in fiscal 2010 additional EECP® therapy systems for $40,000 from Living Data. Payment terms on certain purchases prior to 2010, plus $3,000 in commissions for sales of certain BIOX products, leave a balance of $0, $266,000, and $240,000 in Trade Payable due to Related Party on the accompanying Consolidated Balance Sheets as of December 31, 2011, May 31, 2011 and May 31, 2010, respectively. The payable balance due Living Data included interest charges of $24,000 at May 31, 2011 and was satisfied through a cash payment in August 2011.
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 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 firm performs certain legal services for the Company. Fees of approximately $166,000 were billed by the firm for the seven months ended December 31, 2011, at which date 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 runs for a two year term.. The Agreement provides for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP® therapy. More specifically, Consultant will be assisting the Company in the following areas:
1. Engaging the adoption of EECP® therapy as a first line option for FDA cleared indications as it relates to CCS Class III/IV angina with a major commercial healthcare third-party payer.
2. Engaging a major commercial healthcare payer to formally collaborate and co-sponsor a study with Vasomedical for the efficacy, efficiency and/or cost effectiveness of the EECP® therapy for NYHA Class II/III heart failure.
3. Engaging final approval from the Centers for Medicare and Medicaid Services (“CMS”) of EECP® therapy as a first line treatment for CCS Class III/IV angina.
4. Engaging final approval from CMS to extend coverage and provide for the reimbursement of EECP® therapy for CCS Class II angina; and
5. Engaging final approval from CMS to extend coverage and provide for the reimbursement of EECP® therapy for NYHA Class II/III heart failure.
In consideration for the services to be provided by Consultant under the Agreement, the Company has agreed to issue to Consultant or its designees, approximately 10% of the outstanding capital stock of the Company, of which the substantial portion (in excess of 82%) is performance based as referenced above. In conjunction with the Agreement, 3,000,000 shares of restricted common stock valued at $1,020,000 were issued in March 2011. In connection with the Agreement, Mr. Lieberman received 600,000 of these restricted shares. The Company has recorded the fair value of the shares issued to Consultant as a prepaid expense and is amortizing 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, 2011 and May 31, 2011.
During the seven months ended December 31, 2011, a director performed consulting services for the Company aggregating approximately $95,000, and the Company accrued dividends of $15,000 on Series E Preferred Stock (see Note O) to directors, management, and other related parties of the Company.
During fiscal 2011, the Company sold, or issued as dividends, 246,870 shares of Series E Preferred Stock (see Note O) to directors, management, and other related parties of the Company. In addition, two directors performed consulting services for the company during fiscal 2011, aggregating approximately $57,000.
Through the Company’s acquisition of FGE in September 2011, it assumed the liability for $288,000 in unsecured notes payable to the President of LET and his spouse, of which $95,000 was repaid in December 2011, and $190,000, bearing interest at 6% per annum, was paid in full in March 2012. In addition, $10,000 in pre-acquisition earnings were distributed to current BIOX management and during the seven months ended December 31, 2011. The Company also recorded $196,000 in loans and advances made to officers of FGE during the seven months ended December 31, 2011. These loans are short term and do not bear interest.
NOTE O – STOCKHOLDERS' EQUITY AND
WARRANTS
Common stock and warrants
See Note N for discussion of
common stock issued in fiscal 2011 and 2010 in connection with related party
agreements. The Company also issued
1,151,492, 1,861,279, and 2,603,960 shares of common stock to directors, officers,
employees, and/or consultants during the seven months ended December 31, 2011
and for the fiscal years 2011 and 2010, respectively.
On July 19, 2005, we granted warrants for the purchase of 2,254,538 shares of common stock to investors and consultants. The warrants, with an exercise price of $0.69 per share for a term of five years, expired unexercised on July 19, 2010.
On June 21, 2007, a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $0.08 per share was issued to Kerns under the Securities Purchase Agreement. Additionally, we granted warrants for the purchase of 428,571 shares of common stock to a consultant in conjunction with the Kerns Securities Purchase Agreement. The initial exercise price was $0.07 per share for a term of five years, and a cashless exercise was made in April 2011 resulting in the issuance of 383,790 shares of common stock.
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 (see Note G). In addition, up to 2,400,000 shares of common stock are contingently issuable should FGE attain certain operating targets for the twelve months ending December 31, 2011. The Company is completing its evaluation of FGE’s calendar year 2011 results and believes it is likely that the targets have been met. The aggregate value of the aforementioned noncash consideration relative to the FGE acquisition was $2,979,000 (see Note G for valuation assumptions and methodology).
Warrant activity for the seven months
ended December 31, 2011 and for the years ended May 31, 2011 and 2010 is
summarized as follows:
Preferred stock
At December 31, 2011, May 31, 2011 and 2010, the Company had 1,000,000 shares of preferred stock authorized. During the year ended May 31, 2011 the Company issued an aggregate 314,649 shares of its Series E preferred stock. 78,123 of the shares were issued to cover the cancellation of the notes payable outstanding at May 31, 2010 (see Note M). There were 299,024 shares of Series E preferred stock issued and outstanding at May 31, 2011 and no shares issued and outstanding at December 31, 2011 and May 31, 2010.
On June 24, 2010, the Company filed a Certificate of Designations of Preferences and Rights of Series E Convertible Preferred Stock (“Certificate of Designations”), as authorized by the Board of Directors, designating 350,000 shares of its 1,000,000 shares of preferred stock as Series E Convertible Preferred Stock (“Series E Preferred”). The conversion rights of the Series E Preferred are that each share will be convertible at any time on or after January 1, 2011, at the holder’s option into 100 shares of common stock (an exercise price of $.16 per share of common stock, the “Conversion Price”), subject to anti-dilution adjustment as set forth below. Each share of outstanding Series E Preferred Stock shall automatically be converted into shares of common stock on or after July 1, 2011, at the then effective applicable conversion ratio, if, at any time following the Issuance Date, the price of the common stock for any 30 consecutive trading days equals or exceeds three times the Conversion Price and the average daily trading volume for the Company’s common stock for the 30 consecutive trading days exceeds 250,000 shares.
Pursuant to its conversion terms, the 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 of common stock yet to be issued.
For the seven months ended December 31, 2011 and the year ended May 31, 2011, the Company recorded dividends totaling $1,221,000 and $429,000, respectively. Included in these amounts is the recognition of the value of the embedded beneficial conversion feature of the Series E Preferred, which reflects the difference between the conversion price and the market price at time of investment. The amounts included in the dividends reported attributable to this beneficial conversion feature are $1,201,000 and $225,000 for the seven months ended December 31, 2011 and the year ended May 31, 2011, respectively. These are noncash dividends requiring no payment and ceased on conversion of the Series E Preferred to common stock.
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. Our Chinese subsidiaries are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reaches 50% of their 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.
In fiscal
2010, options to purchase 30,000 shares of common stock under the 1999 Plan at
an exercise price of $1.69 were retired or cancelled.
In fiscal
2011, options to purchase 1,100,000 shares of common stock under the 1999 Plan
at an exercise price ranging from $0.09 to $3.88 were retired or cancelled.
In the seven
months ended December 31, 2011, options to purchase 54,000 shares of common
stock under the 1999 Plan at an exercise price of $3.96 were retired or
cancelled.
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 term for which shares may be issued under the 2004 Plan
expires July 12, 2014.
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.
In fiscal
2010, the Company’s Board of Directors granted non-qualified stock options
under the 2004 Plan to one director to purchase an aggregate of 200,000 shares
of common stock, at an exercise price of $0.08 per share (which represented the
fair market value of the underlying common stock at the time of the respective
grants) and the Company’s Board of Directors granted non-qualified stock
options under the 2004 Plan to one officer to purchase an aggregate of 250,000
shares of common stock, at an exercise price of $0.08 per share (which
represented the fair market value of the underlying common stock at the time of
the respective grants). These options expire five years from the date of grant.
In fiscal 2010, options to purchase 449,463 shares of common stock under the
2004 Plan at exercise prices ranging from $0.57 to $3.96 were retired or
cancelled.
In fiscal
2011 there was no activity under the 2004 plan.
In the seven
months ended December 31, 2011, there was no activity under the 2004 plan.
At December 31,
2011, 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.
As of December 31, 2011, 3,790,000 restricted shares of common stock were granted under the 2010 Plan to non-officer employees and consultants of the Company. As of December 31, 2011, 485,000 shares have been forfeited and 198,006 were withheld for withholding taxes. In September 2010, 650,000 restricted shares of common stock were granted under the 2010 Plan to officers of the Company. In September 2011, 475,000 restricted shares of common stock were granted under the 2010 Plan to an officer, of which 100,000 vested immediately with the remainder vesting over a three year period. No options were issued under the 2010 Plan during the seven months ended December 31, 2011 and fiscal 2011 or 2010.
Stock option and
stock grant activity under all the plans for the seven months ended December
31, 2011 and for the years ended May 31, 2010 and 2011 is summarized as
follows:
The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:
There were 86,954,632 remaining authorized shares of common stock after reserves for all stock option plans and stock warrants.
As
of December 31, 2011, the recorded deferred tax assets were $19,628,000,
reflecting an increase of $132,000 during the seven months ended December
31, 2011, which was offset by a valuation allowance the same amount. The Company also recorded a deferred tax
liability of $112,000 as of December 31, 2011, 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,
2011, the Company had net operating loss carryforwards for federal and state
income tax purposes of approximately $45.1 million expiring at various dates
from 2012 through 2031. In the seven months ended December 31, 2011 and for the
fiscal years 2011 and 2010, approximately $0.5 million, $5.4 million and $2.5
million, respectively, of net operating loss carryforwards expired. Future expirations of net operating loss
carryforwards are approximately as follows:
(in thousands)
Income tax expense for the seven months ended December 31, 2011 was $276,000
and consisted mainly of Federal Alternative Minimum Tax and income tax in states with income in excess of applicable
net operating loss carry forwards. Income
tax expense for the year ended May 31, 2011 consists primarily of accruals for
state taxes and adjustments for amounts paid or accrued in excess of actual
income tax liabilities. The components
of income tax benefit for the year ended May 31, 2010 include federal research
and development credits of approximately $17,400. The remaining income tax benefit for the year
ended May 31, 2010 consist primarily of federal and state refunds and
adjustments for amounts paid or accrued in excess of actual income tax
liabilities.
The Company has recorded a provision of $500,000 for the potential liability that may arise from the business of FGE prior to its acquisition by the Company. Under the acquisition agreement of FGE by Vasomedical, the former shareholders of FGE have fully indemnified Vasomedical against any undisclosed liabilities and the Company believes that any liability that may arise should be recoverable from these former shareholders.
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:
NOTE R - COMMITMENTS AND CONTINGENCIES
Sales
representation agreement
The GEHC Agreement is for an initial term of three years commencing July 1, 2010, subject to extension and also 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. VasoHealthcare also leases facilities in Greensboro, North Carolina pursuant to a lease which expires in May 2013. FGE leases facilities in Wuxi, China, pursuant to leases that expiring in December 2013 and February 2015, and a facility in Foshan, China, pursuant to a lease that expires in April 2013.
Our Westbury
lease expires in August 2012 at which time we will either extend the lease or
seek nearby facilities. 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.
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, for a three-year term ending on March 14, 2014 (the “Employment Agreement”). The Employment Agreement provides for annual compensation of $200,000, eligibility for annual bonuses and long-term incentive awards, and certain severance benefits in the event of termination prior to the expiration date of the Employment Agreement.
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.
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 15% of their compensation. In the seven months ended December 31, 2011 and for fiscal years 2011 and 2010, the Company made discretionary contributions of approximately $25,000, $27,000 and $3,000, respectively, to match a percentage of employee contributions.
NOTE T - TRANSITION PERIOD COMPARATIVE DATA (UNAUDITED)
The following table presents certain financial information for the seven months ended December 31, 2011 and 2010.
(in thousands except per share data)
NOTE U – SUBSEQUENT EVENTS
Exercise of Warrant
In March 2012, Kerns Manufacturing Corp. exercised its warrant to purchase 4,285,714 shares of common stock at $0.08 per share.
Employment Agreement of President and Chief
Executive Officer
Pursuant to the terms of his employment agreement with the Company, at the recommendation of the Compensation Committee, the Executive Committee of the Company approved an increase in his annual salary to $275,000, awarded him a $50,000 bonus, and awarded him 500,000 restricted shares of common stock, of which one-half vests immediately and the remainder in one year.