NOTE A - ORGANIZATION
AND PLAN OF OPERATIONS
Vasomedical, Inc. was incorporated in Delaware in July
1987. Unless the context requires otherwise, all references to “we”, “our”,
“us”, “Company”, “registrant”, “Vasomedical” or “management” refer to
Vasomedical, Inc. and its subsidiaries (See Note P). Since 1995, we have been
primarily engaged in designing, manufacturing, marketing and supporting EECP®
enhanced external counterpulsation systems based on our unique proprietary
technology currently indicated for use in cases of stable or unstable angina
(i.e., chest pain), congestive heart failure (“CHF”), acute myocardial
infarction (i.e., heart attack, (MI)) and cardiogenic shock. In April 2010, the Company, through a wholly-owned
subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical
device sales professionals in anticipation of entering into the sales and
representation business for other equipment manufacturers. On May 19, 2010, VasoHealthcare signed a
sales representative agreement with GE Healthcare (the “GEHC Agreement”), the
healthcare business unit of General Electric Company (NYSE: GE), for the sale
of select GE Healthcare Diagnostic Imaging products. Under the GEHC Agreement, VasoHealthcare has
been appointed the exclusive representative for these products to specific
market segments in the 48 contiguous states of the United States and the District
of Columbia. The GEHC Agreement has an
initial term of three years commencing July 1, 2010, subject to extension and
also subject to earlier termination under certain circumstances. We now report VasoHealthcare activities under
our Sales Representation reportable segment and EECP® and other
medical device operations under our Equipment reportable segment (See Note D).
NOTE B - BASIS OF PRESENTATION AND CRITICAL ACCOUNTING
POLICIES
Basis of Presentation and Use of
Estimates
The accompanying consolidated condensed financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") and
pursuant to the accounting and disclosure rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information
and disclosures normally included in the consolidated condensed financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations. Accordingly, these consolidated condensed
financial statements should be read in connection with the audited consolidated
financial statements and related notes thereto included in the Company's Annual
Report on Form 10-K for the year ended May 31, 2011, as filed with the SEC.
These consolidated condensed financial statements include the accounts of the companies
over which we exercise control. In the opinion of management, the accompanying
consolidated condensed financial statements reflect all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
of interim results for the Company. The results of operations for any interim
period are not necessarily indicative of results to be expected for any other
interim period or the full year.
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated condensed
financial statements, the disclosure of contingent assets and liabilities in
the consolidated condensed financial statements and the accompanying notes, and
the reported amounts of revenues, expenses and cash flows during the periods
presented. Actual amounts and results could differ from those estimates. The
estimates and assumptions the Company makes are based on historical factors,
current circumstances and the experience and judgment of the Company's
management. The Company evaluates its estimates and assumptions on an ongoing
basis.
Significant
Accounting Policies
Note B of the Notes to Consolidated Financial Statements,
included in the Annual Report on Form 10-K for the year ended May 31, 2011,
includes a summary of the significant accounting policies used in the
preparation of the consolidated condensed financial statements.
Reclassifications
Certain reclassifications have been made to prior period amounts
to conform with the current period presentation.
NOTE C - LIQUIDITY
During the last several years, the Company has
incurred operating losses. We have sought to achieve profitability by launching
the VasoHealthcare business, 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 fiscal 2011, the Company issued Series E
convertible preferred stock (see Note N) to finance the initial operation of
its Sales Representation segment and ultimately generated in excess of $4.1
million in operating cash flow by fiscal year end. 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 fiscal
year.
In addition, under the terms of our agreement with
GEHC, we are entitled to commissions on certain undelivered sales orders
received by GEHC prior to our agreement and transferred to us from GEHC as of
September 30, 2010. These transferred orders, though subject to various risks
including potential cancellation and changes in credit worthiness and
availability, as well as the Company's continued compliance under the GEHC
Agreement, generated commission revenue of $2.8 million from October 2010 to August
2011, and $0.5 million for the three months ended August 31, 2011, and are
expected to generate additional commission revenues estimated to range from $1.9
million to $2.3 million over approximately one or more years.
Based on our current operations through August 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 September 1, 2012.
NOTE D – SEGMENT REPORTING AND CONCENTRATIONS
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 both domestically and
internationally, as well as the marketing of other medical devices. 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:
For the
three months ended August 31, 2011 and 2010, GE Healthcare accounted for 82%
and 1% of revenue, respectively. Also,
GE Healthcare accounted for $3,596,106, or 81%, and $2,990,978, or 74%, of
accounts and other receivables at August 31, 2011 and May 31, 2011,
respectively.
NOTE E – SHARE-BASED COMPENSATION
The Company complies with ASC Topic 718 “Compensation –
Stock Compensation” (“ASC 718”), which requires all share-based awards to
employees, including grants of employee stock options, to be recognized in the
consolidated condensed financial statements based on their estimated fair
values.
During the three-month period ended August 31, 2011, the Company’s Board
of Directors granted 50,000 restricted shares of common stock, valued at $23,500
to an outside director. During the three-month period ended August 31, 2010, the Company’s Board
of Directors granted, under the 2010 Stock Plan (see Note M), 3,750,000
restricted shares of common stock valued at $712,500 to non-officer employees
and consultants. Shares valued at
$65,550 vested immediately with the remainder vesting over three years.
During the three-month period ended August 31, 2011 and 2010, the
Company’s Board of Directors did not grant any non-qualified stock options
Share-based compensation expense recognized for the three
months ended August 31, 2011 and 2010 was $58,788 and $92,506, respectively. These expenses are included in cost of
revenues; selling, general, and administrative expenses; and research and
development expenses in the consolidated condensed statements of
operations. Expense for share-based
arrangements was $181,089 for the three months ended August 31, 2011 and $0 for
the three months ending August 31, 2010.
Unrecognized expense related to existing share-based arrangements is
approximately $1.3 million at August 31, 2011 and will be recognized ratably
through July 2013.
NOTE F – LOSS PER COMMON SHARE
Basic loss per common share is computed as
loss applicable to common stockholders divided by the weighted-average number
of common shares outstanding for the period.
Diluted loss per common share reflects the potential dilution that could
occur if securities or other contracts to issue common shares were exercised or
converted to common stock.
Basic and diluted loss per common share was $0.01
and $0.02 for the three months ended August 31, 2011 and 2010, respectively.
The following table represents common stock equivalents
that were excluded from the computation of diluted earnings per share for the three
months ended August 31, 2011 and 2010, because the effect of their inclusion
would be anti-dilutive.
NOTE G – FAIR VALUE
MEASUREMENTS
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.
The
following tables present information about the
Company’s assets and liabilities measured at fair value as of August 31,
2011 and May 31, 2011:
The fair values of
the Company’s cash equivalents invested in money market funds are determined
through market, observable and corroborated sources.
NOTE H – ACCOUNTS AND OTHER
RECEIVABLES, NET
The
following table presents information regarding the Company’s accounts and other
receivables as of August 31, 2011 and May 31, 2011:
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, consist of the following:
At August 31, 2011
and May 31, 2011, the Company had reserves for excess and obsolete inventory of
$393,907 and $409,490, respectively.
NOTE J – FINANCING RECEIVABLES,
NET
At August 31, 2011, the Company had financing receivables
of $41,097, net of unearned interest of $3,903.
These financing receivables were generated by a sales-type lease of our
EECP® equipment in our Equipment Segment for a term of
three years ending September 1, 2013. At
August 31, 2011, there were no past due amounts on these financing receivables
and the Company has consequently made no provision for credit loss. At May 31, 2011, the Company had financing
receivables of $45,558, net of unearned interest of $4,842.
The changes
in the Company’s deferred revenues are as follows:
NOTE L –
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.
Subsequent to August 31, 2011 the Company acquired Life Enhancement
Technology (LET) (see Note P), 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, totaling $93,077,
in the quarter ended August 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 ($469,450), 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 $3,359 in commissions for sales of
certain BIOX products, leave a balance of $3,359 and $265,863 in Trade Payable due
to Related Party on the accompanying consolidated condensed balance sheets as
of August 31, 2011 and May 31, 2011, respectively. The payable balance due Living Data included
interest charges of $23,603 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 $109,000 were billed by the firm through the three
months ending August 31, 2011, at which date $75,000 was 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 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 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 condensed balance sheets as of August 31, 2011
and May 31, 2011.
During the first
quarter of fiscal 2012, two directors performed consulting services for the Company
aggregating approximately $54,000, and the Company accrued dividends of $14,734
on Series E Preferred Stock (see Note M) to directors, management, and other
related parties of the Company.
NOTE M – STOCKHOLDERS’ EQUITY
Common
Stock
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 August 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 August 31, 2011, 405,000 shares have been forfeited. In September 2010, 650,000 restricted shares
of common stock were granted under the 2010 Plan to officers of the Company. No options
were issued under the 2010 Plan during the three months ended August 31, 2011
and 2010.
In
September 2011, 475,000 shares of restricted common stock were granted under
the 2010 Plan to an officer, of which 100,000 vest immediately with the
remainder vesting over a three year period.
Also, during September 2011, the Company issued 5 million shares of
restricted common stock as partial consideration for the acquisition of Fast
Growth Enterprises Ltd (see Note P).
Preferred
Stock
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 following is a summary of the powers, designations,
preferences and other rights of the Series E Preferred.
i.
Face Amount. The face amount per share of the Series E
Preferred is $16.00.
ii.
Dividends. Cumulative dividends will accrue at a rate
of 5% per annum, payable semi-annually in additional shares of the Series E
Preferred. Dividends on the Series E Preferred will be paid in preference to
any dividends paid to the holders of the Company’s Common Stock or any other
series of the Company’s preferred stock made junior to the Series E Preferred.
iii.
Liquidation Preference. On any liquidation, dissolution
or winding-up of the Company, the holders of the Series E Preferred will
receive payment of twice the aggregate face amount thereof, plus all accrued
and unpaid dividends, before any payments or distributions are paid or provided
for the Company’s common stock or any other series of the Company’s preferred
stock made junior to the Series E Preferred. In the event of a sale of all or
substantially all the Company’s stock or assets, the holders of the Series E
Preferred will receive payment of 1.2 times the aggregate face amount thereof,
plus all accrued and unpaid dividends, before any payments or distributions are
paid or provided for the Company’s common stock or any other series of the
Company’s preferred stock made junior to the Series E Preferred.
iv.
Conversion Rights.
Each share of the Series E 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. Notwithstanding the foregoing, the Series E
Preferred shall be automatically converted into common stock on June 1, 2015.
v.
Voting Rights. Investors in the Series E Preferred will
have voting rights in the ratio of 100 votes for each share of Series E
Preferred and shall vote together with the common stock as a single class.
vi.
Anti-Dilution Adjustments. The 100-to-1 conversion
ratio of the Series E Preferred will be subject to proportional adjustment for
stock dividends, stock splits and other similar changes in capitalization. If
the Company issues or sells shares of its capital stock for consideration of a
price of less than the lesser of its then current market price or the applicable
Conversion Price, the Conversion Price shall be adjusted to be such lower price
at which the Company issued or sold shares of its capital stock; provided,
however, that the Company shall have the right to issue shares and options
under its option plans.
Dividends
totaling $19,935 and $27,308 have been accrued for the three months ended
August 31, 2011 and 2010, respectively.
Additional dividends totaling $65,558 were recorded in recognition of
the embedded beneficial conversion feature associated with the Series E
Preferred during the three months ended August 31, 2011.
The
Series E Preferred was subject to automatic conversion on or after July 1, 2011
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. This condition was met in the 30 trading days
ended May 10, 2011. As a result, the
Company expects to convert all preferred shares to common stock. As of October 7, 2011, 294,376 shares of
Series E Preferred had converted to 29,437,600 shares of common stock.
NOTE N – 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.
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 May 31:
NOTE O - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET
EFFECTIVE
As
of August 31, 2011, the Company believes that there are no recently issued
accounting pronouncements not yet effective that will have an impact on the
Company’s consolidated condensed financial statements.
NOTE P – SUBSEQUENT EVENTS
Corporate Structure
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 Healthcare diagnostic
imaging products; Vasomedical Global Corp. will operate the Company’s newly-acquired
Chinese companies; and Vasomedical Solutions, Inc. has been formed to manage
and coordinate its EECP® therapy business as well as other medical
equipment operations.
Business Combination
Effective 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, a British Virgin Islands company that owns
Life Enhancement Technology Limited (“LET”) and Biox Instruments Co. Ltd.
(“Biox”), 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 up to 7.4 million restricted shares of the Company’s common
stock, part of which is performance based, and warrants.
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 leading 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.
.
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.
General Overview
Vasomedical, Inc.
was incorporated in Delaware
in July 1987. Unless the context
requires otherwise, all references to “we”, “our”, “us”, “Company”,
“registrant”, “Vasomedical” or “management” refer to Vasomedical, Inc. and its
subsidiaries (See Note P). Since 1995,
we have been primarily engaged in designing, manufacturing, marketing and
supporting EECP® Enhanced External Counterpulsation systems based on
our unique proprietary technology currently indicated by the United States Food
& Drug Administration (FDA) for use in cases of stable or unstable angina,
congestive heart failure (CHF), acute myocardial infarction (i.e., heart
attack, (MI)) and cardiogenic shock. In
April 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics
d/b/a VasoHealthcare, organized a group of medical device sales professionals
in anticipation of entering into the sales representation business for other
equipment manufacturers. On May 19,
2010, VasoHealthcare signed a sales representative agreement with GE Healthcare
(the “GEHC Agreement”), the healthcare business unit of General Electric
Company (NYSE: GE), for the sale of select GE Healthcare Diagnostic Imaging
products. Under the GEHC Agreement,
VasoHealthcare has been appointed the exclusive representative for these
products to specific market segments in the 48 contiguous states of the United
States and the District of Columbia. The
GEHC Agreement has an initial term of three years commencing July 1, 2010,
subject to extension and also subject to earlier termination under certain
circumstances. We report VasoHealthcare
activities under our Sales Representation reportable segment and EECP®
and other medical device operations under our Equipment reportable segment (see
Note D).
During the
last several years, the Company has incurred operating losses. We have sought
to achieve profitability by launching the VasoHealthcare business, 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). We will continue to look for
opportunities of accretive acquisitions in the medical device market.
Critical Accounting
Policies and Estimates
Our discussion and
analysis of our financial condition and results of operations are based upon
the accompanying unaudited consolidated condensed financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”). The preparation of financial statements in
conformity with U.S. GAAP requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses, and the related disclosures at the date of the financial statements
and during the reporting period. Although these estimates are based on our
knowledge of current events, our actual amounts and results could differ from
those estimates. The estimates made are based on historical factors, current
circumstances, and the experience and judgment of our management, who
continually evaluate the judgments, estimates and assumptions and may employ
outside experts to assist in the evaluations.
Certain of our
accounting policies are deemed “critical”, as they are both most important to
the financial statement presentation and require management’s most difficult,
subjective or complex judgments as a result of the need to make estimates about
the effect of matters that are inherently uncertain. For a discussion of our
critical accounting policies, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended May 31, 2011.
New Accounting Pronouncements
As of August 31, 2011, the Company believes
that there are no recently issued accounting pronouncements not yet effective
that will have an impact on the Company’s consolidated condensed financial
statements.
Consolidated Results
of Operations
Three Months Ended August 31, 2011 and August 31, 2010
Total revenue
for the three months ended August 31, 2011 and August 31, 2010, was $4,328,436
and $1,275,847, respectively, which represented an increase of $3,052,589, or 239%.
We reported a net loss applicable to common stockholders of $1,738,544 for the first
quarter of fiscal year 2012 compared to a net loss applicable to common
stockholders of $2,597,531 for the first quarter of fiscal 2011. The decrease
in the net loss was primarily attributable to a decrease in operating loss of
$1,638,471 in our Sales Representation segment partially offset by an increase in
operating loss of $587,600 in our Equipment segment. Our total net loss was $0.01 and $0.02 per
basic and diluted common share for the three months ended August 31, 2011 and
2010, respectively.
Revenues
Revenue in our Equipment segment decreased 40% to $761,948
for the three-month period ended August 31, 2011 from $1,268,411 for the same
period of the prior year. Equipment
segment revenue from equipment sales decreased approximately 62% to $274,960
for the three-month period ended August
31, 2011 as compared to $724,519 for the same period in the prior year. The decrease in equipment sales is due primarily to
a decrease in the number of EECP® units shipped. The decrease in shipments is due, in part, to
economic conditions in the Middle East and Africa and the effect these
conditions have had on foreign exchange rates resulting in delayed shipments to
distributors in these regions. A decrease
in the sales price per EECP® unit, reflecting a shift in the product
mix to more refurbished equipment sold, also contributed to the decreased
equipment sales, partially offset by an increase in sales of other medical
equipment.
Current demand for EECP® systems will likely remain
soft until 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 payers 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. As described in Note L,
we are pursuing initiatives to expand reimbursement that we expect will
ultimately increase overall market demand for our EECP® systems.
Equipment segment revenue from equipment rental and
services decreased 10% to $486,988 in the first quarter of fiscal 2012 from $543,892
in the first quarter of fiscal year 2011. Revenue from equipment rental and
services represented 64% of total Equipment segment revenue in the first quarter
of fiscal 2012 and 43% in the same quarter of fiscal 2011. The decrease in revenue generated from
equipment rentals and services is due primarily to decreased service revenue,
partially offset by higher accessory part and rental revenue.
Commission revenues in the Sales Representation segment
were $3,566,488 in the first quarter of fiscal 2012, as compared to $7,436 in
the first quarter of fiscal 2011. The
increase in commission revenue in the first quarter of fiscal 2012 is due both
to the Company having just begun operating under the GEHC agreement in July
2010, and the Company’s accounting policy of deferring recognition of
commission revenue until underlying equipment acceptance is complete. Due to the nature of our commission structure
under the GEHC Agreement, wherein the Company earns progressively higher
commission rates as calendar year targets are met, revenues were recognized in
the current fiscal quarter at a lower commission rate than in prior quarters,
and additional amounts associated with currently recognized revenue are
expected to be recognized in future quarters as we meet our targets and thus
earn higher commission rates. As we achieve these targets the higher commission
rates are retroactive to the beginning of the calendar year, and therefore we
anticipate earning and recognizing greater revenue in the fourth quarter of the
calendar year. As of August 31, 2011, $11,020,983 in deferred commission revenue
was recorded in the Company’s consolidated condensed balance sheet, of which $780,100
is long-term. At August 31, 2010,
$671,078 in deferred commission revenue was recorded in the Company’s
consolidated condensed balance sheet, of which none was long-term.
Gross Profit
The Company had a gross profit of $2,826,527 in the first quarter
of fiscal 2012 compared to $637,875 in the first quarter of the prior fiscal
year, an increase of 343%. Equipment
segment gross profit decreased to $362,147, or 48% of Equipment segment revenues,
for the first quarter of fiscal 2012 compared to $632,389, or 50% of Equipment
segment revenues, for the same quarter of fiscal 2011. Gross profit in the
equipment segment is 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 mix of EECP® units sold,
rented or placed during the period, the ongoing costs of servicing EECP®
systems, and certain fixed period costs, including facilities, payroll and
insurance.
Sales Representation segment gross profit was $2,464,380
for the three months ended August 31, 2011 as compared to $5,486 for the three
months ended August 31, 2010. Cost of
commissions of $1,102,108 and $1,950, for the three months ended August 31,
2011 and 2010, respectively, 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 $1,683,487 for
the three months ended August 31, 2011 as compared to an operating loss of $2,577,193
for the three months ended August 31, 2010, a decrease of 35%. The decrease in operating loss was primarily
attributable to a decrease in operating loss of $1,638,471 in our Sales
Representation segment partially offset by an increase in operating loss of $587,600
in our Equipment segment.
Selling, general and administrative (“SG&A”) expenses
for the first quarter of fiscal 2012 and 2011 were $4,374,885, or 101% of
revenues, and $3,104,679, or 243% of revenues, respectively, reflecting an increase
of $1,270,206 or approximately 41%. The increase
in SG&A expenditures in the first quarter of fiscal 2012 resulted primarily
from increased wages, benefits, commissions, and insurance expenses related to
the Sales Representation segment.
During the first quarter
of fiscal 2012, the Company recorded a provision for doubtful accounts and commission
adjustments of $20,178 as compared to the first quarter of fiscal year 2011 when
the Company recorded a provision for doubtful accounts and commission adjustments
of $74,564. The fiscal 2011 provision was
primarily to reduce gross deferred revenues for estimated adjustments.
Research and
development (“R&D”) expenses of $135,129, or 3% of revenues, for the first quarter
of fiscal 2012 increased by $24,740, or 22%, from $110,389, or 9% of revenues,
for the first quarter of fiscal 2011. The increase is primarily attributable to
an increase in clinical research expenses.
Interest
and Financing Costs
Interest and financing costs for the first quarters of fiscal
2012 and 2011 were $2,260 and $3,643, respectively. Interest and financing costs for the first
quarter of fiscal 2012 consisted of interest on the trade payable due to
related party and was satisfied through a cash payment in August 2011. Interest and financing costs for the first
quarter of fiscal 2011 consisted of interest on a short-term note to finance
the Company’s insurance premiums.
Interest
and Other Income, Net
Interest and other income for the first quarters of
fiscal 2012 and 2011, was $21,185 and $3,532, respectively.
The increase of $17,653 in the first quarter of fiscal 2012 is due primarily to
interest earned on the Company’s higher cash balances.
Amortization
of Deferred Gain on Sale-leaseback of Building
The amortization
of deferred gain on sale-leaseback of
building for the first quarter of fiscal years 2012 and 2011 was $13,311. The gain resulted from the Company’s
sale-leaseback of its facility.
Income
Tax Expense, Net
During the first quarters
of fiscal year 2012 and 2011, we recorded a provision for income taxes of $1,800
and $5,830, respectively.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working
capital, and, in fiscal 2011, from the issuance of the Company’s Series E
Preferred Stock. At August 31, 2011,
we had cash and cash equivalents of $6,274,740, short-term investments of $110,148
and working capital of $1,656,233 compared to cash and cash equivalents of $8,130,031,
short-term investments of $109,709 and working capital of $2,836,505 at May 31,
2011.
Cash used in operating activities was $1,838,708 during
the first three months of fiscal year 2012, which consisted of a net loss after
adjustments to reconcile net loss to net cash of $1,241,720, and cash used by
operating assets and liabilities of $596,988. The changes in the account
balances primarily reflect increases in accrued expenses and other liabilities
of $322,285. This change was offset by a
decrease in trade payable to related party of $262,504 and an increase in
accounts and other receivables of $453,264 and deferred commission expense of $323,728. As noted above, under the GEHC Agreement the
Company earns progressively higher commission rates as calendar year targets
are met, which also has a significant impact on our cash flows. As we achieve
these targets the higher commission rates are retroactive to the beginning of
the calendar year, and therefore, we anticipate significantly higher commission
billings and recognized revenue, and receiving payment for such billings, in the
fourth quarter of calendar year 2011 and the first quarter of calendar year
2012. This should result in
significantly greater cash flow in these quarters.
Investing
activities during the three-month period ended August 31, 2011 used cash of $16,583 for purchases of property and
equipment and reinvestment of interest earned on a certificate of deposit.
There were no financing
activities during the three-month period ended August 31, 2011.
Liquidity
During the last several years, the Company has
incurred operating losses. We have sought to achieve profitability by launching
the VasoHealthcare business, 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 fiscal 2011, the Company issued Series E
convertible preferred stock (see Note N) to finance the initial operation of
its Sales Representation segment and ultimately generated in excess of $4.1
million in operating cash flow by fiscal year end. 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 fiscal
year.
In addition, under the terms of our agreement with
GEHC, we are entitled to commissions on certain undelivered sales orders
received by GEHC prior to our agreement and transferred to us from GEHC as of
September 30, 2010. These transferred orders, though subject to various risks
including potential cancellation and changes in credit worthiness and
availability, as well as the Company's continued compliance under the GEHC
Agreement, generated commission revenue of $2.8 million from October 2010 to August
2011, and $0.5 million for the three months ended August 31, 2011, and are
expected to generate additional commission revenues estimated to range from $1.9
million to $2.3 million over approximately one or more years.
Based on our current operations through August 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 September 1, 2012.
