-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, STC7aTa6ExN4NQ+8gQcbEuHTz+M/nBOO+aoNF+/NJvKDGzX0KLFd+xOfbeYkn+IL VW/r6CKr9IIE1cvOxVHK5A== 0001201800-09-000058.txt : 20090414 0001201800-09-000058.hdr.sgml : 20090414 20090414160616 ACCESSION NUMBER: 0001201800-09-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20090228 FILED AS OF DATE: 20090414 DATE AS OF CHANGE: 20090414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASOMEDICAL INC CENTRAL INDEX KEY: 0000839087 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 112871434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18105 FILM NUMBER: 09748803 BUSINESS ADDRESS: STREET 1: 180 LINDEN AVENUE CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5169974600 MAIL ADDRESS: STREET 1: 150 MOTOR PARKWAY STREET 2: SUITE 408 CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /NY/ DATE OF NAME CHANGE: 19920506 10-Q 1 vaso10q-feb2009.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 28, 2009 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ______________ Commission File Number: 0-18105 VASOMEDICAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2871434 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 180 Linden Ave., Westbury, New York 11590 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's Telephone Number (516) 997-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --- -- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X] Smaller Reporting Company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] --- -- Number of Shares Outstanding of Common Stock, $.001 Par Value, at April 10, 2009 99,843,004 Page 1 Vasomedical, Inc. and Subsidiaries INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Condensed Balance Sheets as of February 28, 2009 and May 31, 2008 3 Consolidated Condensed Statements of Operations for the Nine and Three Months Ended February 28, 2009 and February 29 2008 4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended February 28, 2009, and February 29, 2008 5 Notes to Consolidated Condensed Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23 Item 4T - Controls and Procedures 23 PART II - OTHER INFORMATION Item 1A - Risk Factors 24 Item 6 - Exhibits 24 Page 2 ITEM 1. FINANCIAL STATEMENTS Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS
February 28, 2009 May 31, 2008 --------------------- ------------------ ASSETS (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 997,592 $ 2,653,999 Short-term investment 299,074 - Accounts receivable, net of an allowance for doubtful accounts of $101,453 at February 28, 2009, and $270,183 at May 31, 2008 684,657 717,849 Inventories, net 1,645,922 1,652,678 Other current assets 153,988 58,933 --------------------- ------------------ Total current assets 3,781,233 5,083,459 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,882,625 at February 28, 2009, and $2,178,566 at May 31, 2008 144,703 57,170 DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of $182,392 at February 28, 2009, and $101,775 at May 31, 2008 386,484 407,101 OTHER ASSETS 190,058 213,336 --------------------- ------------------ $ 4,502,478 $ 5,761,066 ===================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 594,277 $ 822,244 Sales tax payable 134,202 149,304 Deferred revenue - current portion 1,046,664 1,132,445 Deferred gain on sale-leaseback of building - current portion 53,245 53,245 Accrued professional fees 41,200 74,320 Due to related parties 200,000 - --------------------- ------------------ Total current liabilities 2,069,588 2,231,558 --------------------- ------------------ LONG-TERM LIABILITIES Deferred revenue 396,437 485,608 Accrued rent expense 14,541 8,656 Deferred gain on sale-leaseback of building 128,676 168,610 Other long-term liabilities 11,900 - --------------------- ------------------ Total long term liabilities 551,554 662,874 --------------------- ------------------ COMMITMENTS STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued - - Common stock, $.001 par value; 200,000,000 shares authorized; 98,943,004 shares at February 28, 2009, and 93,768,004 at May 31, 2008, issued and outstanding 98,943 93,768 Additional paid-in capital 48,264,612 48,068,432 Accumulated deficit (46,482,219) (45,295,566) --------------------- ------------------ Total stockholders' equity 1,881,336 2,866,634 --------------------- ------------------ $ 4,502,478 $ 5,761,066 ===================== ==================
The accompanying notes are an integral part of these consolidated condensed financial statements Page 3 Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Nine months Nine months Three months Three months ended February ended February ended February ended February 28, 29, 28, 29, 2009 2008 2009 2008 --------------- ---------------- --------------- --------------- Revenues Equipment sales $ 1,742,093 $ 1,517,985 $ 497,299 $ 427,445 Equipment rentals and services 1,717,770 2,397,600 492,018 760,249 --------------- ---------------- --------------- --------------- Total revenues 3,459,863 3,915,585 989,317 1,187,694 --------------- ---------------- --------------- --------------- Cost of Sales and Services Cost of sales, equipment 1,245,601 1,174,214 354,256 409,160 Cost of equipment rentals and services 769,525 873,411 226,650 247,088 --------------- ---------------- --------------- --------------- Total cost of sales and services 2,015,126 2,047,625 580,906 656,248 --------------- ---------------- --------------- --------------- Gross profit 1,444,737 1,867,960 408,411 531,446 --------------- ---------------- --------------- --------------- Operating Expenses Selling, general and administrative 2,297,189 1,932,645 668,046 732,351 Research and development 415,108 362,315 135,154 117,313 --------------- ---------------- --------------- --------------- Total operating expenses 2,712,297 2,294,960 803,200 849,664 --------------- ---------------- --------------- --------------- Loss from operations (1,267,560) (427,000) (394,789) (318,218) --------------- ---------------- --------------- --------------- Other Income (Expenses) Interest and financing costs - (16,605) - - Interest and other income, net 48,670 47,513 12,135 12,275 Amortization of deferred gain on sale-leaseback of building 39,934 31,060 13,311 13,312 --------------- ---------------- --------------- --------------- Total other income, net 88,604 61,968 25,446 25,587 --------------- ---------------- --------------- --------------- Loss before income taxes (1,178,956) (365,032) (369,343) (292,631) Income tax expense, net (7,697) (14,197) (95) (3,750) --------------- ---------------- --------------- --------------- Net loss applicable to common stockholders $ (1,186,653) $ (379,229) $(369,438) $ (296,381) =============== ================ =============== =============== Net loss per common share - basic and diluted $ (0.01) $ (0.00) $ (0.00) $ (0.00) =============== ================ =============== =============== Weighted average common shares outstanding - basic and diluted 95,468,923 91,687,349 97,931,768 93,761,337 =============== ================ =============== ===============
The accompanying notes are an integral part of these consolidated condensed financial statements. Page 4 Vasomedical, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Nine Months Ended February Ended February 28, 29, ----------------- ----------------- 2009 2008 ----------------- ----------------- Cash flows used in operating activities Net loss $ (1,186,653) $ (379,229) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization of property and equipment 74,939 149,582 Amortization of deferred gain on sale-leaseback of building (39,934) (31,060) Provision for doubtful accounts - (27,524) Amortization of deferred distributor costs 80,617 76,333 Expenses paid for distributor agreement - (40,490) Stock-based compensation 141,357 81,414 Changes in operating assets and liabilities: Accounts receivable, net 33,192 (16,645) Inventories, net (110,222) 468,248 Other current assets (95,055) (80,487) Accounts payable, deferred revenue accrued expenses and other current liabilities (356,085) (210,119) Other liabilities (89,175) (90,643) Due to related party 200,000 - ----------------- ----------------- Net cash used in operating activities (1,347,019) (100,620) ----------------- ----------------- Cash flows provided by (used in) investing activities Proceeds from the building sale-leaseback - 1,400,000 Expenses paid for sale-leaseback of building - (89,143) Purchases of property and equipment (10,314) - Purchases of short-term investments (299,074) - ----------------- ----------------- Net cash provided by (used in) investing activities (309,388) 1,310,857 ----------------- ----------------- Cash flows provided by financing activities Payments on long term debt and notes payable - (851,015) Proceeds from Securities Purchase agreement - 1,500,000 Expenses paid in relation to Securities Purchase Agreement - (124,110) ----------------- ----------------- Net cash provided by financing activities - 524,875 ----------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,656,407) 1,735,112 ----------------- ----------------- Cash and cash equivalents - beginning of period 2,653,999 850,288 ----------------- ----------------- Cash and cash equivalents - end of period $ 997,592 $ 2,585,400 ================= ================= Non-cash investing and financing activities were as follows: Inventories transferred to property and equipment, attributable to operating leases, net $ 116,978 $ 14,672 ================= ================= Common stock issued for distribution agreement $ 60,000 $ 468,386 ================= =================
The accompanying notes are an integral part of these consolidated condensed financial statements Page 5 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 NOTE A - ORGANIZATION AND PLAN OF OPERATIONS Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP(R) enhanced external counterpulsation systems based on our unique proprietary technology currently indicated for use in cases of stable or unstable angina (i.e., chest pain), congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and cardiogenic shock. NOTE B - BASIS OF PRESENTATION Basis of Presentation and Use of Estimates The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.GAAP") and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and disclosures normally included in the consolidated condensed financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these consolidated condensed financial statements should be read in connection with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report for the year ended May 31, 2008, as filed with the SEC on Form 10-K. These consolidated condensed financial statements include the accounts of the Company over which it exercises control. In the opinion of management, the accompanying consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of interim results for the Company. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated condensed financial statements, the disclosure of contingent assets and liabilities in the consolidated condensed financial statements and the accompanying notes, and the reported amounts of revenue and expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company's management. The Company evaluates its assumptions and estimates on an ongoing basis and may employ third party experts to assist in the Company's evaluations. NOTE C - LIQUIDITY During the last several years, we incurred operating losses. We have attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, and to reduce cash usage through bringing our cost structure more into alignment with current revenues. By engaging in restructurings the Company has reduced personnel costs. The Company has negotiated new terms on professional fees, facility expenses, and shipping and supply costs. The Company is also looking to obtain a revolving line of credit to help stabilize cash flow and generate sales by offering potential customers extended payment terms on our EECP(R) therapy systems. During the first quarter of fiscal year 2008, we raised capital through a private equity financing and by the sale of our facility under a leaseback agreement. o 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. Page 6 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000, as well as a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the Warrant). The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. On October 16, 2008, Mr. Jun Ma was appointed President and Chief Executive Officer of the Company. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew(R) ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data is now the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. o On August 15, 2007, we sold our facility under a five-year leaseback agreement for $1.4 million. The net proceeds from the sale were 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. On November 20, 2008, the Company entered into an Amendment to the Distribution Agreement with Living Data to expand the territory covered in the Distribution Agreement to provide for exclusive distribution rights worldwide. In consideration for these rights, the Company agreed to issue Living Data 3,000,000 restricted shares of its common stock having a fair market value of $60,000 at time of issue. NOTE D - STOCK-BASED COMPENSATION The Company complies with Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), SFAS No. 123(R) requires all share-based awards to employees, including grants of employee stock options, to be recognized in the consolidated condensed financial statements based on their estimated fair values. During the nine-month period ended February 28, 2009, the Company's Board of Directors did not grant any non-qualified stock options. During the nine-month period ended February 28, 2009, the Company's Board of Directors granted 100,000 shares of common stock to one employee of the Company having a fair market value of $0.08 per share at the time of the respective grant. During the nine-month period ended February 28, 2009, the Company's Board of Directors granted 2,000,000 shares of common stock to eight outside directors of the Company having a fair market value of $0.06 per share at the time of the respective grant. During the nine-month period ended February 28, 2009, the Company's Board of Directors granted 75,000 shares of common stock to one outside director of the Company having a fair market value of $0.06 per share at the time of the respective grant. Stock-based compensation expense recognized under SFAS No. 123(R) was $141,357 and $81,414 for the nine months ended February 28, 2009 and February 29, 2008, respectively. These expenses are included in selling, general, and administrative in the consolidated condensed statements of operations. The stock Page 7 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 based compensation expenses for each period reflect share-based awards outstanding during such period, including awards granted both prior and during such period. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of share-based awards. In addition, Black-Scholes option pricing model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Share-based awards issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123(R). NOTE E -LOSS PER COMMON SHARE Basic loss per common share is computed as loss applicable to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common stock. However, since the company had net losses for all periods presented, diluted loss per common share is equal to basic loss per common share for those periods, as any potentially dilutive securities would become antidilutive. Basic and diluted losses per common share were less than $0.01 and $0.01 for the three and nine months ended February 28, 2009 and less than $0.01 for the three and nine months ended February 29, 2008. Stock options and warrants, in accordance with the following table, were excluded from the computation of diluted loss per share for the tree and nine months ended February 28, 2009 and February 29 2008, because the effect of their inclusion would be antidilutive.
Three and Nine Three and Nine Months Ended Months Ended February 28, February 29, ---------------------------------------- 2009 2008 ------------------ ----------------- Stock options 4,847,977 5,886,710 Warrants 6,540,252 6,540,252 ------------------ ----------------- 11,388,229 12,426,962 ================== =================
Page 8 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 NOTE F - FAIR VALUE MEASUREMENTS The Company's assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with SFAS No. 157. The following table presents information about the Company's assets and liabilities measured at fair value as of February 29, 2009:
Quoted Prices Significant in Active Other Significant Balance Markets for Observable Unobservable as of Identical Assets Inputs Inputs February 28, (Level 1) (Level 2) (Level 3) 2009 -------------------- ------------------ ----------------- ---------------- Assets Cash equivalents invested in money market fund $ 313,751 $ - $ - $ 313,751 -------------------- ------------------ ----------------- ---------------- $ 313,751 $ - $ - $ 313,751 ==================== ================== ================= ================
The fair values of the Company's cash equivalents unvested in money market fund are determined through market, observable and corroborated sources. NOTE G - INVENTORIES Inventories, net of reserves, consist of the following: At February 28, 2009 and May 31, 2008, the Company had reserves for excess and obsolete inventory of $581,725 and $594,042, respectively.
February 28, 2009 May 31, 2008 --------------------- --------------------- Raw materials $ 758,352 $ 936,035 Work in process 519,558 603,925 Finished goods 368,012 112,718 --------------------- --------------------- $ 1,645,922 $ 1,652,678 ===================== =====================
Page 9 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 NOTE H - DEFERRED REVENUE The changes in the Company's deferred revenues are as follows:
Nine months Nine months Three months Three months ended February ended February ended February ended February 28, 29, 28, 29, 2009 2008 2009 2008 ----------------- ------------------ ----------------- -------------- Deferred revenue at the beginning of the period $ 1,618,053 $ 1,756,352 $ 1,486,800 $ 1,598,241 Additions: Deferred extended service contracts 926,241 1,334,506 293,348 427,067 Deferred in-service and training 27,500 30,000 5,000 12,500 Deferred service arrangements 93,000 143,750 22,500 63,750 Deferred service arrangement obligations 600 8,850 - 1,050 Recognized as revenue: Deferred extended service contracts (1,046,066) (1,575,282) (313,848) (497,751) Deferred in-service and training (27,500) (17,500) (2,500) (7,500) Deferred service arrangements (146,327) (110,796) (46,999) (38,877) Deferred service arrangement obligations (2,400) (13,350) (1,200) (1,950) ----------------- ------------------ ----------------- -------------- Deferred revenue at end of period 1,443,101 1,556,530 1,443,101 1,556,530 Less: current portion 1,046,664 1,177,547 1,046,664 1,177,547 ----------------- ------------------ ----------------- -------------- Long-term deferred revenue at end of period $ 396,437 $ 378,983 $ 396,437 $ 378,983 ================= ================== ================= ==============
NOTE I - RELATED-PARTY TRANSACTIONS On June 21, 2007, we entered into a Securities Purchase Agreement with Kerns. Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data, an affiliate of Kerns. We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572 shares of our common stock at $.07 per share for an aggregate of $1,500,000, as well a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $.08 per share (the "Warrant"). The agreement further provided for the appointment to our Board of Directors of two representatives of Kerns. In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both Kerns and Living Data, have been appointed members of our Board of Directors. Pursuant to the Distribution Agreement, we have become the exclusive distributor in the United States of the AngioNew ECP systems manufactured by Living Data. As additional consideration for such agreement, we agreed to issue an additional 6,990,840 shares of our common stock to Living Data. Pursuant to the Supplier Agreement, Living Data is now the exclusive supplier to us of the ECP therapy systems that we market under the registered trademark EECP(R). The Distribution Agreement and the Supplier Agreement each have an initial term extending through May 31, 2012. On November 20, 2008, the Company entered into an Amendment to the Distribution Agreement with Living Data to expand the territory covered in the Distribution Agreement to provide for exclusive distribution rights worldwide. In consideration for these rights, the Company agreed to issue Living Data 3,000,000 restricted shares of its common stock having a fair market value of $60,000 at time of issue. Page 10 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 Pursuant to a Registration Rights Agreement, we granted to Kerns and Living Data, subject to certain restrictions, "piggyback registration rights" covering the shares sold to Kerns as well as the shares issuable upon exercise of the Warrant and the shares issued to Living Data. On July 10, 2007, the Board of Directors appointed Behnam Movaseghi, Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our Board of Directors. As affiliates of Living Data and Kerns, Mr. Movaseghi and Mr. Srybnik have each been directly involved in the transactions between Living Data or Kerns, on the one hand, and the Company, on the other hand, with respect to the Securities Purchase Agreement, the Distribution Agreement and the Supplier Agreement, as well as providing consulting services to the Company without compensation. During the nine-month period ended February 28, 2009, the Company purchased ECP therapy systems under the Supplier Agreement for $595,000 from Living Data. Payment terms on certain purchases leave a balance of $200,000 in due to related party - current portion on the accompanying consolidated condensed balance sheet as of February 28, 2009. During the nine-month period ended February 29, 2008, the Company purchased ECP therapy systems under the Supplier Agreement for $120,000. In addition, during the nine-month periods ended February 28, 2009 and February 29, 2008, Living Data purchased $3,162, and $5,289 worth of ECP therapy system components from the Company, respectively. During the nine-month period ended February 28, 2009, Living Data assigned to the Company all of its rights and interests under its Distributorship Agreement with a corporation organized and existing under the laws of the People's Republic of China that manufactures Ambulatory Blood Pressure Monitors, Ambulatory ECG (Holter) Recorders and Holter & ABPM Combiner Recorders, for $20,000 payable to Living Data based on certain terms and conditions. The Company has also agreed to pay to Living Data 5% of the selling price or 5% of the cost of all goods sold (whichever is higher) and 5% of the cost of all goods transferred but not sold under the Assignment Agreement to Living Data based on sales of this equipment. The Company intends to sell these systems in the United States and other countries subject to obtaining regulatory clearance. During the nine-month period ended February 28, 2009, Living Data assigned to the Company all of its rights and interests under its Distributorship Agreement with a corporation organized and existing under the laws of the People's Republic of China that manufactures Ultrasound Scanners, for $20,000 payable to Living Data based on certain terms and conditions. The Company has also agreed to pay to Living Data 5% of the selling price or 5% of the cost of all goods sold (whichever is higher) and 5% of the cost of all goods transferred but not sold under the Assignment Agreement to Living Data based on sales of this equipment. The Company intends to sell these systems in the United States and other countries subject to obtaining regulatory clearance. Further, Kerns provides the Company, free of charge, part-time use of one of its Information Technology (IT) employees as well one of their IT consultants to provide the Company with IT and database support services. In addition, a clinical applications support specialist and a service engineer from Living Data may were used by the Company to provide customers with clinical training and technical service. The Company was charged $3,900 for the services of the clinical applications support specialist and $2,700 for the services of the service engineer during the nine-month period ended February 28, 2009. Page 11 Vasomedical, Inc. and Subsidiaries NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) February 28, 2009 NOTE J - COMMITMENTS Leases On August 15, 2007, we sold our facility under a five-year sale-leaseback agreement. Future rental payments under the operating lease are as follows: For the years ended: May 31, 2009 $ 36,040 May 31, 2010 148,488 May 31, 2011 154,427 May 31, 2012 160,604 May 31, 2013 40,541 ------------------ Total $ 540,100 ==================
NOTE K - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" -- changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Previously, net income attributable to the noncontrolling interest generally was reported as an expense or other deduction in arriving at consolidated net income. It also was often presented in combination with other financial statement amounts. Effective for fiscal years beginning after December 15, 2008. FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" -- clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" -- amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. Paragraph 11(d) of Statement 142 precluded an entity from using its own assumptions about renewal or extension of an arrangement where there is likely to be substantial cost or material modifications. This FSP amends paragraph 11(d) of Statement 142 so that an entity will use its own assumptions about renewal or extension of an arrangement, adjusted for the entity-specific factors in paragraph 11 of Statement 142, even when there is likely to be substantial cost or material modifications. Therefore, in determining the useful life of the asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the recognized intangible asset, adjusted for the entity-specific factors including, but are not limited to, the entity's expected use of the asset and the entity's historical experience in renewing or extending similar arrangements. This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Page 12 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; uncertainties about the acceptance of a novel therapeutic modality by the medical community; and the risk factors reported from time to time in the Company's SEC reports. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments. General Overview Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP(R) enhanced external counterpulsation systems based on our unique proprietary technology currently indicated for use in cases of stable or unstable angina (i.e., chest pain), congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and cardiogenic shock. The EECP(R) therapy is a non-invasive, outpatient treatment of diseases of the cardiovascular system. The therapy serves to increase circulation in areas of the heart with less than adequate blood supply and helps to restore systemic vascular function. The therapy also increases blood flow and oxygen supply to the heart muscle and other organs and decreases the heart's workload and reduces oxygen demand, while also improving function of the endothelium, the lining of blood vessels throughout the body, lessening resistance to blood flow. We provide hospitals, clinics and physician private practices with EECP(R) equipment, treatment guidance, and a staff training and equipment maintenance program designed to provide optimal patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced external counterpulsation therapy and systems. For more information, visit www.vasomedical.com. We have FDA clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock; however, our current marketing efforts are limited to the treatment of chronic stable angina and congestive heart failure. Medicare and other third-party payers currently reimburse for the treatment of angina pectoris patients with moderate to severe symptoms who are refractory to medications and not candidates for invasive procedures. Patients with co-morbidities of heart failure, diabetes, peripheral vascular disease, etc. are also reimbursed under the same criteria, provided the primary diagnosis and indication for treatment with EECP(R) therapy is angina symptoms. During the last several years, we incurred operating losses. We have attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, and to reduce cash usage through bringing our cost structure more into alignment with current revenues. By engaging in restructurings the Company has reduced personnel costs. The Company has negotiated new terms on professional fees, facility expenses, and shipping and supply costs. The Company is also looking to obtain a revolving line of credit to help stabilize cash flow and generate sales by offering potential customers extended payment terms on our EECP(R) therapy systems. Page 13 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Market Overview Cardiovascular disease (CVD) is the leading cause of death in the world and is among the top three diseases in terms of healthcare spending in nearly every country. CVD claimed approximately 2.4 million lives in the United States in 2005 and was responsible for 1 of every 5 deaths, according to The American Heart Association (AHA) Heart and Stroke Statistical 2009 Update (2009 Update). Approximately 80 million Americans suffer from some form of cardiovascular disease. Among these, 16.8 million have coronary heart disease (CHD). We have FDA clearance to market our EECP(R) therapy for use in the treatment of stable and unstable angina, congestive heart failure, acute myocardial infarction, and cardiogenic shock; however, our current marketing efforts are 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(R) therapy is refractory angina symptoms. Angina Angina pectoris is the medical term for a recurring pain or discomfort in the chest due to coronary artery disease (CAD). Angina is a symptom of a condition called myocardial ischemia, which occurs when the heart muscle or myocardium doesn't receive sufficient blood, hence as much oxygen, as it needs. This usually happens because one or more of the heart's arteries, the blood vessels that supply blood to the heart muscle, is narrow or blocked. Insufficient blood supply to meet the need of the organ to function is called ischemia. The cardinal symptom of stable CAD is anginal chest pain or equivalent symptoms, such as exertional dyspnea or fatigue. Angina is uncomfortable pressure, fullness, squeezing or pain, usually occurring in the center of the chest under the breastbone. The discomfort also may be felt in the neck, jaw, shoulder, back or arm. Often the patient suffers not only from the discomfort of the symptom itself but also from the accompanying limitations on activities and the associated anxiety that the symptoms may produce. Uncertainty about prognosis may be an additional source of anxiety. For some patients, the predominant symptoms may be palpitations or syncope that is caused by arrhythmias or fatigue, edema, or orthopnea caused by heart failure. Episodes of angina occur when the heart's need for oxygen increases beyond the oxygen available from the blood nourishing the heart. Physical exertion is the most common trigger, but not the only one for angina. For example, running to catch a bus could trigger an attack of angina while walking might not. Angina may happen during exercise, periods of emotional stress, exposure to extreme cold or heat, heavy meals, alcohol consumption or cigarette smoking. Some people, such as those with a coronary artery spasm, may have angina when they are resting. There are approximately 6.4 million angina patients in the United States and our EECP(R) therapy currently competes with other technologies in the market for approximately 100,000 to 150,000 new refractory angina patients annually who do not adequately respond to or are not amenable to medical and surgical therapy and have the potential to meet the guidelines for reimbursement of EECP(R) therapy. Most angina patients are treated with medications, including beta blockers to slow and protect the heart, and vasodilators which are often prescribed to increase blood flow to the coronary arteries. When drugs fail or inadequately correct the problem, the patients are considered unresponsive to medical therapy. Most angina patients are readily amenable to invasive revascularization procedures such as angioplasty and coronary stent placement, as well as coronary artery bypass grafting (CABG). However, there are approximately 100,000 to 150,000 angina patients each year whose angina can not be stopped by medication and they are no longer readily amenable to palliative invasive procedures. In February 1999, the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program for more than 39 million beneficiaries, issued a national coverage policy for the use of external Page 14 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS counterpulsation therapy in the treatment of refractory angina. Medicare reimbursement guidelines have a significant impact in determining the available market for EECP(R) therapy. We believe that over 65% of the patients that receive EECP(R) therapy are Medicare patients and many of the third-party payers follow Medicare guidelines, which limit reimbursement for EECP(R) therapy to patients who do not adequately respond to medical therapy and are not readily amenable to invasive therapy. As a result, an important element of our strategy is to grow the market for EECP(R) therapy by expanding reimbursement coverage to include a broader range of angina patients than the current coverage policy provides and enable EECP(R) therapy to compete more with other therapies for ischemic heart disease. Please see the heading "Reimbursement" in the "Item-1 Business" section of this Form 10-KSB for a more detailed discussion of reimbursement issues. Congestive Heart Failure (CHF) CHF is a condition in which the heart loses its pumping capacity to supply the metabolic needs of all other organs. The condition affects both sexes and is most common in people over age 50. Symptoms include angina, shortness of breath, weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular heartbeat and low blood pressure. Causes range from chronic high blood pressure, heart-valve disease, heart attack, coronary artery disease, heartbeat irregularities, severe lung disease such as emphysema, congenital disease, cardiomyopathy, hyperthyroidism, severe anemia and others. CHF is treated with medication and, sometimes, surgery on heart valves or the coronary arteries and, in certain severe cases, heart transplants. Left ventricular assist devices (LVADs) and the use of cardiac resynchronization and implantable defibrillators are useful in selected patients with heart failure. Still, no consensus therapy currently exists for CHF and patients must currently suffer their symptoms chronically and have a reduced life expectancy. According to the 2009 Update, in 2005 approximately 3.2 million men and 2.5 million women in the United States had CHF and about 670,000 new cases of the disease occur each year. The prevalence of the disease is growing as a result of the aging of the population and the improved survival rate of people after heart attacks. Because the condition frequently entails visits to the emergency room and in-patient treatment centers, two-thirds of all hospitalizations for people over age 65 are due to CHF. The economic burden of congestive heart failure is enormous with an estimated cost to the health care system in 2005 in the United States of $37.2 billion. Congestive heart failure offers a good strategic fit with our current angina business and offers an expanded market opportunity for EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina, as there are few consensus therapies, invasive or otherwise, beyond medical management for the condition. It is noteworthy that data collected from the International EECP(R) Patient Registry(TM) (IEPR) at the University of Pittsburgh Graduate School of Public Health shows that approximately one-third of angina patients treated with EECP(R) also have a history of CHF and 70% to 80% have demonstrated positive outcomes from EECP(R) therapy. We sponsored a pivotal, randomized clinical trial to demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart failure patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in Congestive Heart Failure), was intended to provide additional evidence of the safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate heart failure and to support our application for expansion of the Medicare national reimbursement coverage policy to include mild-to-moderate heart failure as a primary indication. The PEECH(TM) trial was a positive clinical trial, having met the statistical requirement of meeting at least one of its co-primary endpoints, a significant difference in the proportion of patients satisfying a prespecified threshold of improvement in exercise duration. The trial also demonstrated significant improvements in favor of EECP(R) therapy on several important secondary endpoints, including exercise duration and improvement in symptom status and quality of life. Measures of change in peak oxygen consumption were not statistically significant in the overall study population, though a trend favoring EECP(R) therapy was present in early follow-up. Patients in the trial who had an ischemic etiology (i.e. pre-existing coronary artery disease), demonstrated a greater response to EECP(R) therapy than those who had an idiopathic (non-ischemic) etiology. Page 15 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The preliminary results of the PEECH(TM) trial were presented at the American College of Cardiology scientific sessions in March 2005. On June 20, 2005, CMS accepted our application for expansion of reimbursement coverage of EECP(R) therapy to include patients with New York Heart Association (NYHA) Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35% (i.e. chronic, stable, mild-to-moderate systolic heart failure as a primary indication), as well as patients with Canadian Cardiovascular Society Classification (CCSC) II (i.e. chronic, stable mild angina). On June 23, 2005, CMS also received a request from a competing manufacturer of external counterpulsation therapy equipment to reconsider the reimbursement coverage policy. They requested expansion of coverage to include 1) treatment of congestive heart failure, to include NYHA Class II, III with a left ventricular ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2) treatment of stable angina to include CCSC II angina; 3) treatment of acute myocardial infarction; and 4) treatment of cardiogenic shock. On September 15, 2005, the competing manufacturer also amended their request to include NYHA Class IV heart failure. On March 20, 2006, CMS issued their Decision Memorandum regarding this reconsideration with the opinion "that the evidence is not adequate to conclude that external counterpulsation therapy is reasonable and necessary for the treatment of: o CCSC II angina o Heart Failure o NYHA Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 35% o NYHA Class II/III stable heart failure symptoms with an ejection fraction of less than or equal to 40% o NYHA Class IV heart failure o Acute heart failure o Cardiogenic shock o Acute myocardial infarction." They did, however, reiterate in the decision memorandum that "Current coverage as described in Section 20.20 of the Medicare National Coverage Determination (NCD) manual will remain in effect" for refractory angina patients. On August 25, 2006 the results of the PEECH(TM) trial were initially published online by the Journal of the American College of Cardiology (JACC) and in print in its September 19, 2006 issue. JACC is the official journal of the American College of Cardiology. In the November-December issue of the journal Congestive Heart Failure, a second report of results from the PEECH(TM) trial was published, focusing on the results of a prespecified subgroup analysis in trial patients age 65 and over. This analysis demonstrated a statistically positive response on both co-primary endpoints of the trial in patients receiving EECP(R) therapy versus those who did not, i.e. a significantly larger proportion of patients undergoing EECP(R) therapy met or exceeded prespecified thresholds of improvement in exercise duration and peak oxygen consumption. Moreover, the patients age 65 and older who received EECP(R) therapy demonstrated the greatest differences in exercise duration, peak oxygen consumption and functional class (symptom status) compared with those who did not receive EECP(R) therapy. These papers were submitted to CMS and we were advised to continue to gather more clinical evidence for future submission. Page 16 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We will continue to educate the marketplace that EECP(R) therapy is a therapy for ischemic cardiovascular disease and that patients with a secondary diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also eligible for reimbursement under the current coverage policy, provided the primary indication for treatment with EECP(R) therapy is refractory angina or angina equivalent symptoms and the patient satisfies other listed criteria. Additionally, we intend to continue to pursue expansion of coverage for EECP(R) therapy with Medicare and other third-party payers as evidence of its clinical utility develops. 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, 2008, as management believes that there have been no significant changes regarding our critical accounting policies since such time. Fair Value Measurements Since May 31, 2008 the Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"), effective December 1, 2007. Under SFAS No. 157, 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. SFAS No. 157 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. Page 17 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Short-term Investments Since May 31, 2008 the Company has invested in six-month certificates of deposit. These investments are reported on the accompanying consolidated condensed balance sheet as "Short-term investment". New Accounting Pronouncements See Footnote K, "Recently Issued Accounting Pronouncements Not Yet Effective" to our unaudited consolidated condensed financial statements for a full description of recently issued accounting pronouncements including the date of adoption and effects on our results of operations and financial position, where applicable. Consolidated Results of Operations Three Months Ended February 28, 2009 and February 29, 2008 Net revenue from sales, leases and service of our EECP(R) systems for the three months ended February 28, 2009 and February 29, 2008, was $989,317 and $1,187,694, respectively, which represented a decrease of $198,377, or 17%. We reported a net loss attributable to common stockholders of $369,438 and $296,381 for the third quarter of fiscal 2009 and 2008, respectively. The increase in the net loss was primarily due to a decrease in service related revenues compared to the same period of the prior year. Revenues Revenue from equipment sales increased approximately 16% to $497,299 for the three-month period ended February 28, 2009 as compared to $427,445 for the same period in the prior year. The increase in equipment sales is due primarily to a 9% decrease in the average blended per unit sale price offset by a slight increase in the number of equipment shipments. We believe the decline in the sales price per unit reflects weakened domestic demand in the refractory angina market, coupled with increased direct and indirect competition. We anticipate that demand for EECP(R) systems will remain soft unless there is greater clinical acceptance for the use of EECP(R) therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines or an expansion of the current CMS national reimbursement policy to include some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others. Our revenue from the sale of EECP(R) systems and related products to international distributors in the third quarter of fiscal 2009 increased approximately $348,895 compared to the same three-month period in the prior year reflecting increased sales volume. We believe this reflects an expansion of our international market. Our revenue from equipment rental and services decreased 35% to $492,018 in the third quarter of fiscal 2009 from $760,249 in the third quarter of fiscal year 2008. Revenue from equipment rental and services represented 50% of total revenue in the third quarter of fiscal 2009 and 64% in the same quarter of fiscal 2008. The decrease in revenue generated from equipment rentals and services is due to a decrease in the service business, with respect to service contract sales, and service related income generated from units not under contract, as well as, a decrease in accessories and service parts shipped compared to the same quarter of the prior fiscal year. Page 18 Gross Profit Gross profit declined to $408,411, or 41% of revenues, for the third quarter of fiscal 2009 compared to $531,446, or 45% of revenues, for the same quarter of fiscal 2008. Gross profits are dependent on a number of factors, particularly the mix of new and used EECP(R) systems and the mix of models sold, their respective average selling prices, the mix of EECP(R) units sold, rented or placed during the period, the ongoing costs of servicing EECP(R) systems, and certain fixed period costs, including facilities, payroll and insurance. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the third quarter of fiscal 2009 and 2008 were $668,046, or 68% of revenues, and $732,351, or 62% of revenues, respectively, reflecting an decrease of $64,305 or approximately 9%. The decrease in SG&A expenditures in the third quarter of fiscal 2009 resulted primarily from decreased administrative expenses in wages and benefits, professional fees, and insurance expenses. During the third quarter of fiscal 2009 and 2008, there were no changes in the Company's provision for doubtful accounts. The dollar amount change in the provision is the result of bad debt that was written-off during the third quarter of fiscal year 2009. Research and Development Research and development ("R&D") expenses of $135,154, or 14% of revenues, for the third quarter of fiscal 2009 increased by $17,841, or 15%, from $117,313, or 10% of revenues, for the third quarter of fiscal 2008. The increase is primarily attributable to an increase in expenses paid to fund clinical research studies, and product development costs, offset by a decrease in regulatory affairs expenses. Interest and Other Income, Net Interest and other income for the third quarter of 2009 and 2008, were $12,135 and $12,275, respectively. Interest income reflects interest earned on the Company's cash balances. Amortization of Deferred Gain on Sale-leaseback of Building The amortization of deferred gain on sale-leaseback of building for the third quarter of 2009 and 2008, were $13,311 and $13,312, respectively. The gain resulted from the Company's sale-leaseback of its facility. Income Tax Expense During the third quarter of fiscal 2009 we did not record a provision for income taxes and The Company incurred an expense of $95. During the third quarter of fiscal 2008, we recorded a provision for income taxes of $3,750. Nine Months Ended February 28, 2009 and February 29, 2008 Net revenue from sales, leases and service of our EECP(R) systems for the nine months ended February 28, 2009 and February 29, 2008, was $3,459,863 and $3,915,585, respectively, which represented a decrease of $455,722, or 12%. We reported a net loss attributable to common stockholders of $1,186,653 and $379,229 for the first nine months of fiscal 2009 and 2008, respectively. The increase in the net loss was primarily due to increases in our operating expenses, and decreases in revenue from the comparative prior period. Revenues Revenue from equipment sales increased $224,108, or approximately 15% to $1,742,093 for the nine-month period ended February 28, 2009 as compared to $1,517,985 for the same period in the prior year. The increase in equipment Page 19 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS sales is due primarily to a 23% increase in the number of equipment shipments offset by a moderate decrease in the average blended per unit sale price. Our revenue from the sale of EECP(R) systems and related products to international distributors in the first nine months of fiscal 2009 increased approximately 94% compared to the same nine-month period in the prior year reflecting increased sales volume. We believe this reflects an expansion of our international market. Our revenue from equipment rental and services decreased 28% to $1,717,770 in the first nine months of fiscal 2009 from $2,397,600 in the first nine months of fiscal year 2008. Revenue from equipment rental and services represented 50% of total revenue in the first nine months of fiscal 2009 and 61% in the same quarters of fiscal 2008. The decrease in revenue generated from equipment rentals and services is due to a decrease in the service business, with respect to service contract sales, and service related income generated from units not under contract, as well as, a decrease in accessories and service parts shipped compared to the same quarter of the prior fiscal year. Gross Profit Gross profit declined to $1,444,737, or 42% of revenues, for the first nine months of fiscal 2009 compared to $1,867,960, or 48% of revenues, for the same period of fiscal 2008. Gross profits are dependent on a number of factors, particularly the mix of new and used EECP(R) systems and the mix of models sold, their respective average selling prices, the mix of EECP(R) units sold, rented or placed during the period, the ongoing costs of servicing EECP(R) systems, and certain fixed period costs, including facilities, payroll and insurance. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the first nine months of fiscal 2009 and 2008 were $2,297,189, or 66% of revenues, and $1,932,645, or 49% of revenues, respectively, reflecting an increase of $364,544 or approximately 19%. The increase in SG&A expenditures in the first nine months of fiscal 2009 resulted primarily from increased direct expenditures in sales and marketing. Administrative expenses increased as a result of increased expenditures in professional fees, and corporate expenses. During the first nine months of fiscal 2009 there were no changes in the Company's provision for doubtful accounts. The dollar amount change in the provision is the result of bad debt that was written-off during the first nine months of fiscal year 2009. In the first nine months of fiscal 2008 we reversed the provision for doubtful accounts by $27,524. Research and Development Research and development ("R&D") expenses of $415,108, or 12% of revenues, for the first nine months of fiscal 2009 increased by $52,793, or 15%, from $362,315, or 9% of revenues, for the first nine months of fiscal 2008. The increase is primarily attributable to an increase in expenses paid to fund clinical research studies, and product development costs. Interest Expense and Financing Costs The Company had no interest expense and financing costs for the first nine months of fiscal 2009 and $16,605 in the same period of 2008. Interest expense primarily reflects interest on loans secured to refinance the November 2000 purchase of the Company's headquarters and warehouse facility. The decrease is a direct result of the sale-leaseback agreements for the Company's headquarters and warehouse facility, which occurred during the first quarter of fiscal 2008. Page 20 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Other Income, Net Interest and other income for the first nine months of 2009 and 2008, were $48,670 and $47,513, respectively. Interest income reflects interest earned on the Company's cash balances. Amortization of Deferred Gain on Sale-leaseback of Building The amortization of deferred gain on sale-leaseback of building for the first nine months of 2009 and 2008, were $39,934 and $31,060, respectively. The gain resulted from the Company's sale-leaseback of its facility. Income Tax Expense During the first nine months of fiscal 2009 and 2008, we recorded provision for income taxes of $7,697 and $14,197, respectively. Liquidity and Capital Resources Cash and Cash Flow We have financed our operations primarily from working capital, a private equity financing, and by the sale of our facility under a leaseback agreement. At February 28, 2009, we had cash and cash equivalents of $997,592 and working capital of $1,711,645 compared to cash and cash equivalents of $2,653,999 and working capital of $2,851,901 at May 31, 2008. Cash used in operating activities was $1,347,019 during the first nine months of fiscal 2009, which consisted of a net loss after non-cash adjustments of $929,674 and cash used by operating assets and liabilities of $417,345. The changes in the accounts balances primarily reflect increases in inventories of $110,222, including $116,978 of inventories transferred to property and equipment, and other current assets of $95,055, a decrease in accounts payable, accrued expenses, and other current liabilities of $356,085, and a decrease in other liabilities of $89,175 which were primarily offset by a decrease in accounts receivable of $33,192 and an increase in due to related party of $200,000. Net accounts receivable were 20% of revenues for the nine-month period ended February 28, 2009, as compared to 18% for the nine-month period ended February 29, 2008, and accounts receivable turnover was 5 times for the nine months ended February 28, 2009 and February 29, 2008. 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(R) therapy system 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 nine-month period ended February 28, 2009 there were no revenues generated from sales in which initial payment terms were greater than 90 days, and during the nine-month period February 29, 2008, there were no revenues generated from sales in which initial payment terms were greater than 90 days and we offered no sales-type leases during either period. 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(R) therapy program. As we are creating a new market for the EECP(R) 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. Page 21 Vasomedical, Inc. and Subsidiaries ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investing activities during the nine-month period ended February 28, 2009 was $309,388 and consisted of a purchase of six-month certificates of deposit for $299,074, and purchases of property and equipment of $10,314. The Company had no financing activities during the nine-month period ended February 28, 2009. The following table presents the Company's expected cash requirements for contractual obligations outstanding as of February 28, 2009.
Due thru Due thru Due thru 3/1/2009 and 3/1/2010 and 3/1/2012 and Due Total 2/28/2010 2/29/2012 2/28/2014 Thereafter ---------------------------------------------------------------------------- Operating Leases $ 540,100 $ 147,046 $ 311,973 $ 81,082 $ - ---------------------------------------------------------------------------- Total Contractual Cash Obligations $ 540,100 $ 147,046 $ 311,973 $ 81,082 $ - ============================================================================
Liquidity During the last several years, we incurred operating losses. We have attempted to achieve profitability by reducing operating costs and halting the trend of declining revenue, and to reduce cash usage through bringing our cost structure more into alignment with current revenues. By engaging in restructurings the Company has reduced personnel costs. The Company has negotiated new terms on professional fees, facility expenses, and shipping and supply costs. The Company is also looking to obtain a revolving line of credit to help stabilize cash flow and generate sales by offering potential customers extended payment terms on our EECP(R) therapy systems. Based on our current operations and the amounts received from the transactions described in Note C, we believe that we have sufficient working capital to continue our operations through at least February 28, 2010. Effects of Current Economic Conditions We do not believe that the current lack of credit available in the market will have an impact on our revenue or on our results of operations. Page 22 Vasomedical, Inc. and Subsidiaries ITEM 3. - QUANITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISKS See Item 7A in the Company's 2008 Annual Report on Form 10-K for information regarding quantitative and qualitative disclosures about market risk. No material change regarding this information has occurred since that filing. ITEM 4T. - CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of February 28, 2009, our disclosure controls and procedures are effective to provide reasonable assurances that such disclosure controls and procedures satisfy their objectives and that the information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the required time periods. There were no changes during the fiscal quarter ended February 28, 2009 in our internal controls or in other factors that could have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Page 23 PART II - OTHER INFORMATION ITEM 1A - RISK FACTORS There have been no material changes in the most significant risk factors in the three months ended February 28, 2009 from those risk factor set forth in Item 1A., "Risk Factors," to the Company's Annual Report on Form 10-K for the year ended May 31, 2008. ITEM 6 - EXHIBITS: Exhibits 31 Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 24 Vasomedical, Inc. and Subsidiaries In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VASOMEDICAL, INC. By: /s/ Jun Ma ------------------------------------ Jun Ma President & Chief Executive Officer (Principal Executive Officer) /s/ Tarachand Singh ------------------------------------ Tarachand Singh Chief Financial Officer Date: April 14, 2009 EX-31 2 vaso10qfeb2009-ex31.txt CERTIFICATIONS Exhibit 31 CERTIFICATION BY JUN MA PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Jun Ma, certify that: 1. I have reviewed this report on Form 10-Q of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: April 14, 2009 /s/ Jun Ma --------------------------------- Jun Ma President & Chief Executive Officer Exhibit 31 CERTIFICATION BY TARACHAND SINGH PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Tarachand Singh, certify that: 1. I have reviewed this report on Form 10-Q of Vasomedical, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15e) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: April 14, 2009 /s/ Tarachand Singh --------------------------- Tarachand Singh Chief Financial Officer EX-32 3 vaso10qfeb2009-ex32.txt CERTIFICATIONS Exhibit 32 CERTIFICATION OF PERIODIC REPORT I, Jun Ma, 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 Quarterly Report on Form 10-Q of the Company for the three months ended February 28, 2009 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); 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 14, 2009 /s/ Jun Ma -------------------------------------- Jun Ma President & Chief Executive Officer I, Tarachand Singh, 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 Quarterly Report on Form 10-Q of the Company for the three months ended February 28, 2009 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); 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 14, 2009 /s/ Tarachand Singh ------------------------------------------ Tarachand Singh Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----