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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended May 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____ to _____
Commission File No. 0-18105
---------------------------
VASOMEDICAL, INC.
(Exact name of registrant as specified in Its Charter)
Delaware 11-2871434
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
180 Linden Avenue, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 997-4600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value OTC:BB
----------------------------- -----------------------------------------
(Title of Class) Name of each exchange on which registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files)
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The aggregate market value of common stock held by non-affiliates was
approximately $4,234,912 based on the closing sales price of the common stock as
quoted on the OTC-BB on August 12, 2009.
At August 12, 2009, the number of shares outstanding of the issuer's common
stock was 99,843,004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement in connection with its
Annual Meeting of Stockholders to be held in September 2009, to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
EXPLANATORY NOTE
Vasomedical, Inc. (the "Company," "we,", "us" or "our") is filing this Amendment
No. 1 on Form 10-K/A to our report on Form 10-K for the fiscal year ended May
31, 2009 (the "Report") for the purpose of correcting an error in Exhibit 31.
Except as described above, no other amendments are being made to the Report.
This Form 10-K/A does not reflect events occurring after the August 21, 2009
filing of our Report or modify or update the disclosure contained in the Report
in any way other than as required to reflect the amendment discussed above.
This amendment should be read in conjunction with our Report on Form 10-K for
the fiscal year ended May 31, 2009 as filed on August 21, 2009.
VASOMEDICAL, INC.
INDEX TO FORM 10-K
Page
PART I............................................................................................................2
ITEM 1 -BUSINESS...............................................................................................2
ITEM 1A.- RISK FACTORS........................................................................................19
ITEM 2 - PROPERTIES...........................................................................................25
ITEM 3 - LEGAL PROCEEDINGS....................................................................................25
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................25
PART II..........................................................................................................25
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES...........................................................................................25
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................26
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................36
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................36
ITEM 9A- CONTROLS AND PROCEDURES..............................................................................36
ITEM 9A(T)- CONTROLS AND PROCEDURES...........................................................................37
ITEM 9B - OTHER INFORMATION...................................................................................37
PART III.........................................................................................................37
PART IV..........................................................................................................38
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..........................................................38
SIGNATURES.......................................................................................................39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................................................F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................................................F-3
CONSOLIDATED BALANCE SHEETS..................................................................................F-4
CONSOLIDATED STATEMENTS OF OPERATIONS........................................................................F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY...................................................F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................................................F-7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ........................................................F-8
-i-
PART I
ITEM 1 -BUSINESS
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) Enhanced External
Counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina, congestive heart
failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and
cardiogenic shock. The EECP(R) therapy is a non-invasive, outpatient treatment
of diseases of the cardiovascular system. The therapy serves to increase
circulation in areas of the heart with less than adequate blood supply and helps
restore systemic vascular function. The therapy also increases blood flow and
oxygen supply to the heart muscle and other organs and decreases the heart's
workload and reduces oxygen demand, while also improving function of the
endothelium, the lining of blood vessels throughout the body, lessening
resistance to blood flow. We provide hospitals, clinics and physician private
practices with EECP(R) equipment, treatment guidance, and a staff training and
equipment maintenance program designed to provide optimal patient outcomes.
EECP(R) is a registered trademark for Vasomedical's Enhanced External
Counterpulsation therapy and systems. For more information, visit
www.vasomedical.com.
We have FDA clearance to market our EECP(R) therapy for use in the
treatment of stable and unstable angina, congestive heart failure, acute
myocardial infarction, and cardiogenic shock; however, our current marketing
efforts are limited mostly to the treatment of chronic stable angina and
congestive heart failure. Medicare and other third-party payers currently
reimburse for the treatment of angina pectoris patients with moderate to severe
symptoms who are refractory to medications and not candidates for invasive
procedures. Patients with co-morbidities of heart failure, diabetes, peripheral
vascular disease, etc., are also reimbursed under the same criteria, provided
the primary diagnosis and indication for treatment with EECP(R) therapy is
angina symptoms.
During the last several years, 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. The Company has reduced
personnel costs by reorganization. The Company has negotiated new terms on
professional fees, facility expenses, and shipping and supply costs. The Company
is also looking to obtain a revolving line of credit to help stabilize cash flow
and to respond to customers requests for flexible payment terms on our EECP(R)
therapy systems.
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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, and shortness of breath and fatigue. Often the patient
suffers not only from the discomfort of the symptom itself but also from the
accompanying limitations on activities and the associated anxiety that the
symptoms may produce. Uncertainty about prognosis may be an additional source of
anxiety. For some patients, the predominant symptoms may be palpitations or
syncope that is caused by arrhythmias or fatigue, edema, or orthopnea caused by
heart failure. Episodes of angina occur when the heart's need for oxygen
increases beyond the oxygen available from the blood nourishing the heart.
Physical exertion is the most common trigger, but not the only one for angina.
For example, running to catch a bus could trigger an attack of angina while
walking might not. Angina may happen during exercise, periods of emotional
stress, exposure to extreme cold or heat, heavy meals, alcohol consumption or
cigarette smoking. Some people, such as those with a coronary artery spasm, may
have angina when they are resting.
There are approximately 6.4 million angina patients in the United States
and our EECP(R) therapy currently competes with other technologies in the market
for approximately 100,000 to 150,000 new refractory angina patients annually who
do not adequately respond to or are not amenable to medical and surgical therapy
and have the potential to meet the guidelines for reimbursement of EECP(R)
therapy. Most angina patients are treated with medications, including beta
blockers to slow and protect the heart, and vasodilators which are often
prescribed to increase blood flow to the coronary arteries. When drugs fail or
inadequately correct the problem, the patients are considered unresponsive to
medical therapy. Most angina patients are readily amenable to invasive
revascularization procedures such as angioplasty and coronary stent placement,
as well as coronary artery bypass grafting (CABG). However, there are
approximately 100,000 to 150,000 angina patients each year whose angina cannot
be stopped by medication and they are no longer readily amenable to palliative
invasive procedures.
In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that administers the Medicare program for more than 39 million
beneficiaries, issued a national coverage policy for the use of external
counterpulsation therapy in the treatment of refractory angina. Medicare
reimbursement guidelines have a significant impact in determining the available
market for EECP(R) therapy. We believe that over 65% of the patients that
receive EECP(R) therapy are Medicare patient, and many of the balance are
covered by third-party payers. Medicare guidelines, limit reimbursement for
3
EECP(R) therapy to patients who do not adequately respond to medical therapy and
are not readily amenable to invasive therapy. As a result, an important element
of our strategy is to grow the market for EECP(R) therapy by expanding
reimbursement coverage to include a broader range of angina patients than the
current coverage policy provides and enable EECP(R) therapy to compete more with
other therapies for ischemic heart disease. Please see the heading
"Reimbursement" in the "Item-1 Business" section of this Form 10-K for a more
detailed discussion of reimbursement issues.
Congestive Heart Failure (CHF)
CHF is a condition in which the heart loses its pumping capacity to supply
the metabolic needs of all other organs. The condition affects both sexes and is
most common in people over age 50. Symptoms include angina, shortness of breath,
weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular
heartbeat and low blood pressure. Causes range from chronic high blood pressure,
heart-valve disease, heart attack, coronary artery disease, heartbeat
irregularities, severe lung disease such as emphysema, congenital disease,
cardiomyopathy, hyperthyroidism, severe anemia and others.
CHF is treated with medication and, sometimes, surgery on heart valves or
the coronary arteries and, in certain severe cases, heart transplants. Left
ventricular assist devices (LVADs) and the use of cardiac resynchronization and
implantable defibrillators are useful in selected patients with heart failure.
Still, no consensus therapy currently exists for CHF and patients must currently
suffer their symptoms chronically and have a reduced life expectancy.
According to the 2009 Update, in 2005 approximately 3.2 million men and 2.5
million women in the United States had CHF and about 670,000 new cases of the
disease occur each year. The prevalence of the disease is growing as a result of
the aging of the population and the improved survival rate of people after heart
attacks. Because the condition frequently entails visits to the emergency room
and in-patient treatment centers, two-thirds of all hospitalizations for people
over age 65 are due to CHF. The economic burden of congestive heart failure is
enormous with an estimated cost to the health care system in 2005 in the United
States of $37.2 billion. Congestive heart failure offers a good strategic fit
with our current angina business and offers an expanded market opportunity for
EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina,
as there are few consensus therapies, invasive or otherwise, beyond medical
management for the condition. It is noteworthy that data collected from the
International EECP(R) Patient Registry(TM) (IEPR) at the University of
Pittsburgh Graduate School of Public Health shows that approximately one-third
of angina patients treated with EECP(R) also have a history of CHF and 70% to
80% have demonstrated positive outcomes from EECP(R) therapy.
We sponsored a pivotal, randomized clinical trial to demonstrate the
efficacy of EECP(R) therapy in the most prevalent types of heart failure
patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in
Congestive Heart Failure), was intended to provide additional evidence of the
safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate
heart failure and to support our application for expansion of the Medicare
national reimbursement coverage policy to include mild-to-moderate heart failure
as a primary indication. The PEECH(TM) trial was a positive clinical trial,
having met the statistical requirement of meeting at least one of its co-primary
endpoints, a significant difference in the proportion of patients satisfying a
prespecified threshold of improvement in exercise duration. The trial also
demonstrated significant improvements in favor of EECP(R) therapy on several
important secondary endpoints, including exercise duration and improvement in
symptom status and quality of life. Measures of change in peak oxygen
consumption were not statistically significant in the overall study population,
though a trend favoring EECP(R) therapy was present in early follow-up. Patients
in the trial who had an ischemic etiology (i.e. pre-existing coronary artery
disease), demonstrated a greater response to EECP(R) therapy than those who had
an idiopathic (non-ischemic) etiology.
The preliminary results of the PEECH(TM) trial were presented at the
American College of Cardiology scientific sessions in March 2005. On June 20,
2005, CMS accepted our application for expansion of reimbursement coverage of
EECP(R) therapy to include patients with New York Heart Association (NYHA) Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35% (i.e. chronic, stable, mild-to-moderate systolic heart failure as a
primary indication), as well as patients with Canadian Cardiovascular Society
Classification (CCSC) II (i.e. chronic, stable mild angina).
4
On March 20, 2006, CMS issued their Decision Memorandum regarding this
reconsideration with the opinion that the evidence was not adequate to support
an extension of coverage.
They did, however, reiterate in the decision memorandum that "Current
coverage as described in Section 20.20 of the Medicare National Coverage
Determination (NCD) manual will remain in effect" for refractory angina
patients.
On August 25, 2006 the results of the PEECH(TM) trial were initially
published online by the Journal of the American College of Cardiology (JACC) and
in print in its September 19, 2006 issue. JACC is the official journal of the
American College of Cardiology.
In the November-December 2006 issue of the journal Congestive Heart
Failure, a second report of results from the PEECH(TM) trial was published,
focusing on the results of a prespecified subgroup analysis in trial patients
age 65 and over. This analysis demonstrated a statistically positive response on
both co-primary endpoints of the trial in patients receiving EECP(R) therapy
versus those who did not, i.e. a significantly larger proportion of patients
undergoing EECP(R) therapy met or exceeded prespecified thresholds of
improvement in exercise duration and peak oxygen consumption. Moreover, the
patients age 65 and older who received EECP(R) therapy demonstrated the greatest
differences in exercise duration, peak oxygen consumption and functional class
(symptom status) compared with those who did not receive EECP(R) therapy.
These papers were submitted to CMS and we were advised to continue to
gather more clinical evidence for future submission.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
The EECP(R) Therapy Systems
The EECP(R) therapy systems are noninvasive treatment systems utilizing
fundamental hemodynamic principles to augment coronary blood flow and, at the
same time, reduce the workload of the heart while improving the overall vascular
function. The treatment is completely noninvasive and is administered to
patients on an outpatient basis, usually in daily one-hour sessions, five days
per week over seven weeks for a total of 35 treatments. The procedure is well
tolerated and most patients begin to experience relief of chest pain due to
their coronary artery disease after 15 to 20 hours of therapy. As demonstrated
in our clinical studies, positive effects have been shown in most patients to
continue for years following a full course of therapy.
During EECP(R) therapy, the patient lies on a contoured treatment table
while three sets of inflatable pressure cuffs, resembling oversized blood
pressure cuffs, are wrapped around the calves, and the lower and upper thighs,
including the buttocks. The system is synchronized to the individual patient's
cardiac cycle triggering the system to inflate the cuffs rapidly and
sequentially -- via computer-interpreted ECG signals -- starting from the calves
and proceeding upward to the buttocks during the relaxation phase of each
heartbeat (diastole). This has the effect of creating a strong retrograde
arterial wave in the arterial system, forcing freshly oxygenated blood towards
the heart and coronary arteries at a time when resistance to coronary blood flow
is at its lowest level. The inflation of cuffs also simultaneously increases the
volume of venous blood that is returned to the heart when the heart is filling
up for ejection in the contracting phase. Just prior to the next heartbeat when
the heart begins to eject blood by contracting (systole), all three cuffs
simultaneously deflate, leaving an empty vascular space to receive blood
ejecting from the heart, thereby significantly reducing the workload of the
heart. This is achieved because the vascular beds in the lower extremities are
relatively empty when the cuffs are deflated, significantly lowering the
resistance, and provide vascular space to receive the blood ejected by the
heart, reducing the amount of work the heart must do to pump oxygenated blood to
the rest of the body. The inflation/deflation activity is monitored constantly
and coordinated by a computerized console that interprets electrocardiogram
signals from the patient's heart, monitors heart rhythm and rate information,
and actuates the inflation and deflation in synchronization with the cardiac
cycles. The end result of this sequential "squeezing" of the legs is to create a
5
pressure wave that significantly increases peak diastolic pressure benefiting
circulation to the heart muscle and other organs, increases venous return so
that the heart has more blood volume to eject out, and increases cardiac output.
The release of external pressure produces reduction of systolic pressure,
thereby reducing the workload of the heart. This reduction of vascular
resistance insures that the heart does not have to work as hard to pump large
amounts of blood through the body to help supply its metabolic needs.
While not all of the precise scientific means by which EECP(R) therapy
achieves its long-term beneficial effects have been explained, there is evidence
to suggest that the EECP(R) therapy triggers a neurohormonal response that
induces the production of growth and vasodilatation factors that promotes
recruitment of new arteries and dilates existing blood vessels. The recruitment
of new arteries known as "collateral blood vessels" bypass blocked or narrowed
vessels and increase blood flow to ischemic areas of the heart muscle that are
receiving an inadequate supply of blood. There is also evidence to support a
mechanism related to improved function of the endothelium (the inner lining of
the blood vessels), which regulates the luminal size of the arteries and
controls the dilation of the arteries to insure adequate blood flow to all
organs, thus reducing constriction of blood vessels that supply oxygenated blood
to the body's organs and tissues and as a result the required workload of the
heart.
Clinical Studies
Early History
Early experiments with counterpulsation at Harvard in the 1950s
demonstrated that this technique markedly reduces the workload, and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past forty years in both animal experiments and in patients. The clinical
benefits of external counterpulsation were not consistently achieved in early
studies because the equipment used then lacked some of the features found in the
current EECP(R) systems, such as the computerized electrocardiographic signal
for triggering, and the use of pneumatic versus hydraulic actuating media that
makes sequential cuff inflation possible. As the technology improved, however,
it became apparent that both internal (i.e. intra-aortic balloon pumping) and
external forms of counterpulsation were capable of improving survival in
patients with cardiogenic shock following myocardial infarction. Later, in the
1980s, Dr. Zheng and colleagues in China reported on their extensive experience
in treating angina using the newly developed "enhanced" sequentially inflating
EECP(R) device that incorporated three sets of cuffs including the buttocks cuff
instead of a single cuff used in the previous system. The Chinese investigators
were able to show that a 36-hour course of treatment with the EECP(R) system
reduced the frequency and severity of anginal symptoms during normal daily
functions and also during exercise, and also that the improvements were
sustained for years after therapy.
These results prompted a group of investigators at the State University of
New York at Stony Brook (Stony Brook) to undertake a number of open label
studies with the EECP(R) system between 1989 and 1996 to reproduce the Chinese
results, using both subjective and objective endpoints. These studies, though
open label and non-randomized, showed significant improvement in exercise
tolerance by patients as evidenced by exercise treadmill stress testing,
improvement in the perfusion of ischemic regions of the heart muscle by thallium
radionuclide imaging stress testing, and partial or complete resolution of
coronary perfusion defects. All of these results have been reported in medical
literature and support the assertion that EECP(R) therapy is an effective and
durable treatment for patients suffering from chronic angina pectoris.
The MUST-EECP(R) Study
In 1995, we began a randomized, controlled and double-blinded multicenter
clinical study (MUST-EECP(R)) at seven leading university hospitals in the
United States to confirm the patient benefits observed in the open studies
conducted at Stony Brook and to provide definitive scientific evidence of
EECP(R) therapy's effectiveness. MUST-EECP(R) was completed in July 1997 and the
results presented at the annual meetings of the American Heart Association in
November 1997 and the American College of Cardiology in March 1998. The results
of MUST-EECP(R) were published in the Journal of the American College of
Cardiology (JACC), a major peer-review medical journal, in June 1999.
6
This 139 patient study, which included a sham-EECP(R) control group,
demonstrated that patients treated with EECP(R) therapy were able to increase
the amount of time on exercise testing before they showed signs of cardiac
ischemia (i.e. ST-segment depression on their electrocardiogram) and experienced
a reduction in the frequency of their angina attacks compared to patients who
did not receive EECP(R) therapy. In 1999, physician collaborators completed a
quality-of-life study with the EECP(R) system in a subset of the same patients
that participated in MUST-EECP(R). Two highly regarded standardized means of
measurement were used to gauge changes in patients' outlook and ability to
participate in normal daily living during the treatment phase and for up to 12
months after treatment. Results of this study, which have been presented at
major scientific meetings and published in the January 2002 Journal of
Investigative Medicine, show that after one-year of follow-up the group of
patients receiving EECP(R) therapy enjoyed significantly improved aspects of
health-related quality of life compared to those who received a sham treatment.
The PEECH(TM) Study
As part of our program to expand the therapy's indications for use beyond
the treatment of angina, we applied for and received FDA approval in April 1998
to study, under an Investigational Device Exemption (IDE) protocol, the
application of EECP(R) therapy in the treatment of CHF. A 32 patient feasibility
study was conducted simultaneously at the University of Pittsburgh, the
University of California San Francisco and the Grant/Riverside Methodist
Hospitals in Columbus, Ohio. The results of this study were presented at the
49th Scientific Sessions of the American College of Cardiology in March 2000 and
the Heart Failure Society of America's Annual Meeting in September 2000 and were
published in the July/August 2002 issue of Congestive Heart Failure. This study
indicated that EECP(R) therapy could improve exercise capacity, increase
functional capacity was beneficial to left ventricular function in patients with
NYHA Class II and III (i.e. mild to moderate) heart failure and a reduced left
ventricular ejection fraction (i.e. LVEF = 35% or less).
In summer 2000, an IDE supplement to proceed with a pivotal study to
demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart
failure patients was approved. This study, known as PEECH(TM), began patient
enrollment in March 2001. The PEECH(TM) clinical trial involved nearly thirty
centers including: the Cleveland Clinic, Mayo Clinic, Scripps Clinic, Thomas
Jefferson University Hospital, the University of North Carolina at Chapel Hill,
the Minnesota Heart Failure Consortium, Advocate Christ Hospital, Hull Infirmary
(UK), the University of California at San Diego Medical Center, the University
of Pittsburgh Medical Center, the Lindner Clinical Trial Center and the
Cardiovascular Research Institute. Vasomedical obtained 510(k) clearance for CHF
from FDA in June 2002, obviating the need to continue this trial for FDA
regulatory reasons. However, we decided to complete the clinical trial in order
to use the anticipated clinical outcomes to help establish the clinical
validation of EECP(R) therapy as a treatment for CHF and to provide additional
scientific support for Medicare, Medicaid and other third-party payers to expand
reimbursement coverage of EECP(R) therapy to include the CHF indication.
The protocol for the study required that patients have NYHA II or III
symptoms, have an LVEF of 35% or less, be able to undergo exercise testing and
complete patient examinations 1-week, 3-months and 6-months following treatment
that evaluated changes from baseline in exercise capacity, symptom status and
quality of life. Patients were randomized to receive either optimal (i.e.
guideline-recommended) pharmaceutical therapy (OPT) or EECP(R) therapy in
addition to OPT. Enrollment of patients into the PEECH(TM) trial was completed
in February 2004, with 187 patients, and the six-month follow-up examinations
were completed by the end of December 2004.
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 NYHA Class II/III stable heart failure
symptoms with an ejection fraction of less than or equal to 35%, (i.e., chronic,
stable, mild-to-moderate systolic heart failure as a primary indication), as
well as patients with CCSC II, (i.e., chronic, stable mild angina).
In designing the PEECH(TM) trial, success was demonstrated if the
difference between EECP(R) therapy combined with OPT compared to OPT alone
achieved a p-value less than 0.025 in at least one of two pre-defined co-primary
endpoints:
1. percentage of subjects with greater than or equal to 60 seconds
improvement in exercise duration from baseline to six months, or
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2. percentage of subjects with at least 1.25 mL/kg/min increase in peak
oxygen consumption from baseline to six months.
Additional secondary endpoints were actual changes in exercise duration and
peak oxygen consumption, changes in NYHA functional classification, changes in
quality of life, adverse experiences and pre-defined clinical outcomes.
The study was a positive clinical trial on the basis that a significantly
greater proportion of patients who underwent EECP(R) therapy improved their
exercise duration by 60 seconds or more six months following completion of
therapy compared to those who received OPT alone (35.4% vs. 25.3%, p=0.016). The
proportion of patients achieving a 1.25 mL/kg/min improvement in peak oxygen
consumption was not significantly different between the two groups at six
months.
Consistent with the results on the primary endpoint of exercise duration,
statistically significant differences favoring the EECP(R)-treated group were
seen in changes in average exercise duration, symptom status and quality of life
during follow-up. Average peak oxygen consumption showed a trend favoring the
EECP(R) group at 1 week, but there were no differences detected at later
follow-up. Results in patients with heart failure of ischemic etiology were
noted to be clearly superior to those patients of idiopathic etiology though the
benefit in these later patients could not be ruled out statistically. Lastly,
EECP(R) therapy was deemed safe and well tolerated in this group of patients, as
patients in the EECP(R)-treated group did not suffer more adverse events than
those in the control group.
Moreover, results of a predefined subgroup analysis showed that patients 65
years of age or older not only had a significantly greater response rate
(co-primary endpoint) and average change in exercise duration favoring
EECP(R)-treated patients, but the response rate (co-primary endpoint) and
average change in peak oxygen consumption were also significantly better out to
completion of the study at six months follow-up.
The results of the PEECH(TM) trial indicate that EECP(R) therapy provides
beneficial adjunctive therapy in patients with NYHA Class II-III systolic heart
failure receiving optimal pharmacological therapy, especially in those 65 years
of age or older. There can be no assurance that the results of the PEECH(TM)
clinical trial will be sufficient to expand reimbursement coverage or the
adoption by the medical community of EECP(R) therapy for use in the treatment of
congestive heart failure.
The International EECP(R) Patient Registry (IEPR(TM))
The International EECP(R) Patient Registry at the University of Pittsburgh
Graduate School of Public Health was established in January 1998 to track the
outcomes of angina patients who have undergone EECP(R) therapy. More than one
hundred centers have participated in the registry and data from more than 5,000
patients from an initial cohort enrolled between 1998 and 2001 (IEPR-1) have
been tabulated and reported in several peer-reviewed publications.
The American Journal of Cardiology published a report in February of 2004
on the two-year outcomes after EECP(R) therapy observed in 1,097 patients with
two-year follow-up enrolled in IEPR-1. The authors noted that 73% of patients in
this cohort had a decrease in their angina symptom status upon completion of
EECP(R) therapy and that the average number of angina episodes for the group was
reduced from 10.6 to 2.8 per week. They characterized this improvement as a
"significant and dramatic reduction in CCSC" and stated that the adverse
clinical event rate was low. (CCSC is a rating scale used by physicians to
assess the limitations imposed on patients' lives by angina.) Patients also
reported improvement in health status, quality of life and satisfaction with
life.
At two-years follow-up, 74.9% of patients reported their angina symptom
status (CCSC class) was improved compared to before EECP(R) therapy, and the
accompanying improvements in angina frequency and quality of life measures were
largely sustained as well. Nine percent of patients had died over the two-year
follow-up and 15% had undergone a revascularization procedure (angioplasty,
stenting or coronary bypass surgery).
The authors summarize the results by stating "Most patients experienced a
significant reduction in angina and improvement in quality of life after EECP(R)
therapy, and this reduction was sustained in most patients at 2-year follow-up."
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In a separate report that appeared in The American Journal of Cardiology in
2005, physician investigators participating in the IEPR(TM) reported on the
results of EECP(R) therapy in patients with angina who also had severe left
ventricular dysfunction (LVD, a reduced pumping capacity of the heart).
Previously it was thought that such patients, and those with a diagnosis of
heart failure, would be put at risk if treated with EECP(R) therapy, due to the
increase in venous return to the heart caused by compression of the leg veins by
enhanced external counterpulsation.
The 363 patients in this cohort had long-standing and extensive coronary
artery disease, had a high prevalence of cardiovascular disease risk factors,
were not amenable to invasive revascularization procedures, and suffered from
severe angina. Following completion of EECP(R) treatment, 77% decreased their
CCSC angina class by at least one severity rating. The average number of angina
episodes per week was greatly reduced and many were able to discontinue the use
of nitroglycerin pills designed to relieve angina. As in the overall IEPR
population, measures of quality of life were significantly improved after
treatment.
The rate of major adverse clinical events, while somewhat more frequent in
this group of patients with significant comorbid disease, was characterized as
low over the course of EECP(R) therapy. Exacerbation of heart failure was
significantly more frequent in patients who did not complete therapy compared to
those who did (16% vs. 0%) in patients with a previous history of heart failure.
At two-years of follow-up, 83% remained alive and 70% were free of death,
heart attack or invasive revascularization procedures (coronary artery bypass
surgery, angioplasty and/or stenting) during that period. The majority of
patients experienced sustained relief of their angina and improved quality of
life. Twenty per cent of the group underwent repeat EECP(R) therapy during the
two-year follow-up, mostly due to failure to complete the original course of
therapy.
A second phase of enrollment into the registry (IEPR-2) enrolled
approximately 2,500 patients between 2002 and 2004 and these patients were
followed to 2-year follow-up. IEPR-2 incorporated sub-studies regarding
treatment beyond 35 hours, possible predictors of response, effects on certain
aspects of peripheral vascular disease and sexual dysfunction in men. Notably,
the data set was modified in February 2003 to capture information on changes in
heart failure symptom status, occurrence of clinical events due to heart failure
and to include a heart failure-specific quality of life questionnaire in IEPR-2
patients with concomitant heart failure.
Vasomedical considers the IEPR(TM) to be a vital source of information
about the effectiveness and safety of EECP(R) therapy in a real-world
environment for the medical community at large. To date, twenty full-length
articles reporting data from the IEPR(TM) have been published in peer-reviewed
medical journals and more than seventy-eight abstracts have been presented at a
variety of major cardiovascular scientific conferences. For this reason, we
continue to provide an ongoing grant to fund the analysis of the registry data
to be published in medical journals.
Registry data, while considered a valuable source of complementary clinical
data, is deemed by scientific cardiologists and others to be less convincing
than data from randomized, blinded, clinical trials and from certain other
well-controlled clinical study designs. There can be no assurance that the
Company will be able to obtain regulatory, reimbursement or other types of
approvals, or a favorable standing in medical professional practice guidelines,
based upon results observed in patients enrolled in registries.
Other studies and publications
A search on the term "external counterpulsation" of the PubMed database
available through the National Library of Medicine conducted on August 14, 2009,
identified two-hundred-fifty-four (254) citations of articles published in the
medical scientific literature, including 28 review articles. Over 95% of these
publications have reported results in patients with chronic stable angina and/or
heart failure treated with EECP(R) therapy, while others have reported use of
the device in other cardiovascular or non-cardiovascular indications. With only
a few exceptions, these reports are generated using Vasomedical EECP(R) therapy
systems and equipment. In summary, this body of literature contains evidence
from a variety of institutions and investigators demonstrating that EECP(R)
therapy can provide benefit to appropriate patients in the following ways:
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o Enhancement of coronary and peripheral circulation, myocardial
perfusion, ventricular function and hemodynamics,
o Improvement in endothelial function and vascular reactivity
o Elimination or reduction of cardiac ischemia,
o Elimination or reduction in symptoms and improved functional class in
angina and heart failure,
o Resolution of reversible ischemic defects found on quantitative
myocardial perfusion studies,
o Increased exercise duration and increased time to ischemic changes
during treadmill exercise in angina and increased exercise duration
and peak oxygen consumption in heart failure in properly selected
patients,
o Elimination or reduction in use of anti-angina medications,
o Improved quality of life in patients with angina and heart failure.
Strategic Objectives
Our short-and long-term plans are to:
a) Maintain our cost structure alignment with current revenues in the
short term by:
i) continuing to monitor, reduce, or eliminate spending on all but
critical new product development and clinical research projects,
ii) focusing on rebuilding our revenue base through supporting our
direct sales effort and expanding our use of independent sales
representatives, and
iii) maintaining tight cost control on all areas of personnel cost and
spending.
b) Pursue possible strategic investments and creative partnerships with
others who have distinctive competencies or delivery capabilities for
serving the cardiovascular and disease management marketplace, as
opportunities become available.
c) Increase market penetration in the domestic reimbursable user base for
EECP(R) therapy by:
i) expanding reimbursement to include coverage for the treatment of
ischemic NYHA Class II and III CHF patients,
ii) marketing directly to third-party payers to increase third-party
reimbursement, and
iii) expanding reimbursement coverage in the angina market to include
patients with CCS Class II angina.
d) Increase the clinical and scientific understanding of EECP(R) therapy
by:
i) resubmitting data to insurers, including Medicare, for favorable
coverage policies;
ii) continuing to support on a limited basis academic reference
centers in the United States and overseas in order to accelerate
the growth and prestige of EECP(R) therapy and
e) Increase awareness of the benefits of the EECP(R) therapy in the
medical community by:
i) developing campaigns to market the benefits of EECP(R) therapy
directly to clinicians, third-party payers and patients;
ii) engaging in educational campaigns for providers and medical
directors of third-party insurers designed to highlight the
cost-effectiveness and quality-of-life advantages of EECP(R)
therapy; and
iii) continuing the development of EECP(R) therapy in certain
international markets, principally through the expansion of our
distribution network and obtaining of reimbursement approvals.
f) Maintain development efforts to improve the EECP(R) system and expand
its intellectual property estate.
These listed strategic objectives are forward-looking statements. We
review, modify and change our strategic objectives from time to time based upon
changing business conditions. There can be no assurance that we will be able to
achieve our strategic objectives and even if these results are achieved risks
and uncertainties could cause actual results to differ materially from
anticipated results. To a large extent, limited financial resource availability
reduces our ability to achieve these strategic objectives. Please see the
section of this Form 10-K entitled "Risk Factors" for a description of certain
risks, among others that may cause our actual results to vary from the
forward-looking statements.
10
Sales and Marketing
Domestic Operations
We sell EECP(R) therapy systems to treatment providers such as hospitals,
clinics and physician private practices in the United States through a direct
and indirect sales force. Our sales force has consisted of a combination of
employees and independent sales representatives managed by a vice president of
sales, and the national sales director, along with in-house administrative
support.
The efforts of our sales organization are further supported by clinical
educators who are responsible for the onsite training of physicians and
therapists as new centers are established. This clinical applications group is
also engaged in training and certification of new personnel at each site, as
well as for updating providers on new clinical developments relating to EECP(R)
therapy.
Our marketing activities support physician education and physician outreach
programs, exhibition at national, international and regional medical
conferences, as well as sponsorship of seminars at professional association
meetings. These programs are designed to support our field sales organization
and increase awareness of EECP(R) therapy in the medical community. Additional
marketing activities include creating awareness among third-party payers of the
benefits of EECP(R) treatment for patients suffering from CHF as well as angina.
We employ service technicians responsible for the repair and maintenance of
EECP(R) systems and, in some instances, on-site training of a customer's
biomedical engineering personnel. We provide a service arrangement (usually one
year) that includes: service by factory-trained service representatives,
material and labor costs, emergency and remedial visits, software upgrades,
technical phone support and preferred response times. We service our customers
after the service arrangement expires either under separately purchased annual
service contracts or on a fee-for-service basis.
International Operations
We distribute our product internationally through a network of independent
distributors. It has generally been our policy to appoint distributors with
exclusive marketing rights to EECP(R) therapy systems in their respective
countries, in exchange for their commitment to meet the duties and
responsibilities required of a distributor. Each distribution agreement contains
a number of requirements that must be met for the distributor to retain
exclusivity, including minimum performance standards. Duties of the distributors
include registering the product and obtaining any required regulatory or
clinical approvals to support local registration or reimbursement for EECP(R)
therapy.
Revenues from international operations were 31% and 16% of total revenue
for the fiscal years ended May 31, 2009 and 2008, respectively. Our
international marketing activities include, among other things, assisting in
obtaining national or third-party healthcare insurance reimbursement approval
and participating in medical conferences to create greater awareness and
acceptance of EECP(R) therapy by clinicians.
International sales may be subject to certain risks, including
export/import licenses, tariffs, and other trade regulations. However, tariff
and trade policies, domestic and foreign tax and economic policies, currency
exchange rate fluctuations and international monetary conditions have not
significantly affected our business to date. In addition, there can be no
assurance that we will be successful in maintaining our existing distribution
agreements or entering into any additional distribution agreements, or that our
international distributors will be successful in marketing EECP(R) therapy.
Competition
Presently, we are aware of at least three direct competitors with an
external counterpulsation device on the market. In addition, other companies
have received FDA 510(k) clearance for external counterpulsation systems since
1998, although we have not seen these systems commercially in the marketplace.
While we believe that these competitors' involvement in the market is limited,
there can be no assurance that these companies will not become a significant
competitive factor or that other companies will not enter the external
counterpulsation market.
11
We view other companies engaged in the development of device-related,
biotechnology and pharmacological approaches to the management of cardiovascular
disease as potential competitors in the marketplace as well. These include such
common and well-established medical devices and treatments as the intra-aortic
balloon pump (IABP), ventricular assist devices (VAD), coronary artery bypass
graft surgery (CABG), coronary angioplasty, mechanical circulatory support
(MCS), transmyocardial laser revascularization (TMR), total artificial hearts,
cardiac resynchronization devices, ranolazine and nesiritide (Natrecor(R)); as
well as newer technologies currently in FDA-approved clinical trials such as
gene therapy and spinal cord stimulation (SCS). There can be no assurance that
other companies will not develop new technologies or enter the market intended
for EECP(R) therapy systems. Such other companies may have substantially greater
financial, manufacturing and marketing resources and technological expertise
than those possessed by us and may, therefore, succeed in developing
technologies or products that are more efficient than those offered by
Vasomedical and that would render our technology and existing products obsolete
or noncompetitive.
Government Regulations
We are subject to extensive regulation by numerous government regulatory
agencies, including the FDA and similar foreign agencies. Where applicable, we
are required to comply with laws, regulations and standards governing the
development, preclinical and clinical testing, manufacturing, quality testing,
labeling, promotion, import, export, and distribution of our medical devices.
Device Classification
FDA regulates medical devices, including the requirements for premarket
review, according to their classification. Class I devices are generally lower
risk products for which general regulatory controls are sufficient to provide
reasonable assurance of safety and effectiveness. Most Class I devices are
exempt from the requirement of 510(k) premarket notification clearance; however,
510(k) clearance is necessary prior to marketing a non-510(k) exempt Class I
device in the United States. Class II devices are devices for which general
regulatory controls are insufficient, but for which there is sufficient
information to establish special controls, such as guidance documents or
standards, to provide reasonable assurance of safety and effectiveness. A
premarket notification clearance is necessary prior to marketing a non-510(k)
exempt Class II device in the United States. Class III devices are devices for
which there is insufficient information demonstrating that general and special
controls will provide reasonable assurance of safety and effectiveness and which
are life-sustaining, life-supporting or implantable devices, are of substantial
importance in preventing impairment of human health, or pose a potential
unreasonable risk of illness or injury. The FDA generally must approve a
premarket approval or PMA application prior to marketing a Class III device in
the United States.
A medical device is considered by FDA to be a preamendments device, and
generally not subject to premarket review, if it was commercially distributed
before May 28, 1976, the date the Medical Device Amendments of 1976 became law.
A postamendments device is one that was first distributed commercially on or
after May 28, 1976. Postamendments device versions of preamendments Class III
devices are subject to the same requirements as those preamendments devices. FDA
may require a PMA for a preamendments Class III device only after it publishes a
regulation calling for such PMA submissions. Persons who market preamendments
devices must submit a PMA, and have it filed by FDA, by a date specified by FDA
in order to continue marketing the device. Prior to the effective date of a
regulation requiring a PMA, devices must have a cleared premarket notification
or 510(k) for marketing.
Certain external counterpulsation devices were commercially distributed
prior to May 28, 1976. Our external counterpulsation devices were marketed after
1976; however, they were found to be substantially equivalent to a preamendments
Class III device and therefore are subject to the same requirements as the
preamendments external counterpulsation devices.
Premarket Review
The 510(k) premarket notification process requires an applicant to give
notice to FDA of its intent to introduce its device into commerce. In its
premarket notification, the applicant must demonstrate that its new or modified
medical device is substantially equivalent to a legally marketed or predicate
device marketed before May 28, 1976. Prior to beginning commercialization of the
new or modified product it must receive an order from the FDA classifying the
12
device under section 510(k) in the same classification as the predicate device,
and as a result, the new device will be cleared for marketing. Modifications to
a previously cleared medical device that do not significantly affect its safety
and effectiveness or constitute a major change in the intended use can be made
without having to submit a new 510(k). In February 1995, the Company received
510(k) clearance to market the second-generation version of its EECP(R) therapy
system, the MC2, which incorporated a number of technological improvements over
the predicate system. In addition, in December 2000, the Company received 510(k)
clearance to market its third generation system, the TS3. The FDA's clearance in
these cases was for the use of EECP(R) therapy in the treatment of patients
suffering from stable or unstable angina pectoris, acute myocardial infarction
and cardiogenic shock. In June 2002, the FDA granted 510(k) market clearance for
an upgraded TS3, which incorporated the Company's patented CHF treatment and
oxygen saturation monitoring technologies, and provided for a new indication for
the use of EECP(R) in CHF, which applied to all then-current models of the
Company's EECP(R) therapy systems.
Modifications to a previously cleared medical device that do not
significantly affect its safety and effectiveness or constitute a major change
in the intended use can be made without having to submit a new 510(k). FDA
publishes guidance for medical device manufacturers on the types of changes that
meet the requirements for a new 510(k) prior to introduction of a device for
marketing distribution. Vasomedical followed FDA's guidance on when to submit a
new 510(k) for changes to a device and concluded that the changes incorporated
into its Model TS4 did not require a new 510(k) prior to its introduction to
market. Vasomedical subsequently obtained a 510(k) that applied to the Model TS4
and all of its models in March 2004, when it made changes to the labeling of all
of its EECP(R) therapy systems. In November 2004, the Company introduced its
Model Lumenair, and again concluded that the changes did not require a new
510(k) at that time. There can be no assurance that the FDA will agree with
Vasomedical's conclusions that a new 510(k) was unnecessary on these occasions
or in other similar instances, or that our products will not be subject to a
regulation requiring a PMA for preamendments Class III external counterpulsation
devices.
If a device does not receive a clearance order because the FDA determines
that the device is not substantially equivalent to a predicate device and thus
the device automatically is considered a Class III device, the applicant may ask
the FDA to make a risk-based classification to place the device in Class I or
II. However, if a timely request for risk-based classification is not made, or
if the FDA determines that a Class III designation is appropriate, an approved
PMA will be required before the device may be marketed.
The more rigorous premarket review process is the PMA process. The FDA
approves a PMA if the applicant has provided sufficient valid scientific
evidence to prove that the device is safe and effective for its intended use(s).
Applications for premarket approval generally contain human clinical data. This
process is usually much more complex, time-consuming and expensive than the
510(k) process, and is uncertain. Both 510(k)s and PMAs now require the
submission of user fees in most circumstances.
There can be no assurance that all the necessary FDA clearances or
approvals, including approval of any PMA required by the promulgation of a
regulation, will be granted for our products, future-generation upgrades or
newly developed products, on a timely basis or at all. Failure to receive, or
delays in receipt of such clearances, could have a material adverse effect on
our financial condition and results of operations.
Clinical Trials
If human clinical trials of a device are required, whether to support a
510(k) or PMA application, the trials' sponsor, which is usually the
manufacturer of the device, first must obtain the approval of the appropriate
institutional review boards. If a trial is of a significant risk device, the
sponsor also must obtain an investigational device exemption or IDE from FDA
before the trial may begin. A significant risk device is a device that presents
a potential for serious risk to the subject and is an implant; is
life-sustaining or life-supporting; or is for a use of substantial importance in
diagnosing, curing, mitigating, or treating disease, or otherwise preventing
impairment of human health. For all clinical testing, the sponsor must obtain
informed consent from the patients participating in each trial. The results of
clinical testing that a sponsor undertakes may be insufficient to obtain
clearance or approval of the tested product.
13
Pervasive and Continuing FDA Regulation
We are also subject to other FDA regulations that apply prior to and after
a product is commercially released. These include current Good Manufacturing
Practice (GMP) requirements set forth in FDA's Quality System Regulation (QSR),
that require manufacturers to have a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of medical devices
intended for commercial distribution in the United States. This regulation
covers various areas including management and organization, device design,
purchase and handling of components, production and process controls such as
those related to buildings and equipment, packaging and labeling control,
distribution, installation, complaint handling, corrective and preventive
action, servicing, and records. We are subject to periodic inspection by the FDA
for compliance with the GMP requirements and Quality System Regulation.
The FDA also enforces post-marketing controls that include the requirement
to submit medical device reports to the agency when a manufacturer becomes aware
of information suggesting that any of its marketed products may have caused or
contributed to a death or serious injury, or any of its products has
malfunctioned and that a recurrence of the malfunction would likely cause or
contribute to a death or serious injury. The FDA relies on medical device
reports to identify product problems and utilizes these reports to determine,
among other things, whether it should exercise its enforcement powers. The FDA
also may require postmarket surveillance studies for specified devices.
We are subject to the Federal Food, Drug, and Cosmetic Act's, or FDCA's,
general controls, including establishment registration, device listing, and
labeling requirements. If we fail to comply with any requirements under the
FDCA, we, including our officers and employees, could be subject to, among other
things, fines, injunctions, civil penalties, and criminal prosecution. We also
could be subject to recalls or product corrections, total or partial suspension
of production, denial of premarket notification clearance or PMA approval, and
rescission or withdrawal of clearances and approvals. Our products could be
detained or seized, the FDA could order a recall, repair, replacement, or refund
of our devices, and the agency could require us to notify health professionals
and others that the devices present unreasonable risks of substantial harm to
the public health.
The advertising of our products is subject to regulation by the Federal
Trade Commission, or FTC. The FTC Act prohibits unfair or deceptive acts or
practices in or affecting commerce. Violations of the FTC Act, such as failure
to have substantiation for product claims, would subject us to a variety of
enforcement actions, including compulsory process, cease and desist orders and
injunctions, which can require, among other things, limits on advertising,
corrective advertising, consumer redress and restitution, as well as substantial
fines or other penalties.
Foreign Regulation
In most countries to which we seek to export the EECP(R) system, a local
regulatory clearance must be obtained. The regulatory review process varies from
country to country and can be complex, markings costly, uncertain, and
time-consuming. Current Vasomedical EECP(R) systems are all CE marking certified
for European Union countries as well as covered by our Health Canada license.
We are also subject to periodic audits by organizations authorized by
foreign countries to determine compliance with laws, regulations and standards
that apply to the commercialization of our products in those markets. Examples
include auditing by a European Union Notified Body organization (authorized by a
member state's Competent Authority) to determine conformity with the Medical
Device Directives (MDD) and by an organization authorized by the Canadian
government to determine conformity with the Canadian Medical Devices Regulations
(CMDR).
There can be no assurance that we will obtain desired foreign
authorizations to commercially distribute our products in those markets or that
we will comply with all laws, regulations and standards that pertain to our
products in those markets. Failure to receive or delays in receipt of such
authorizations or determinations of conformity could have a material adverse
effect on our financial condition and results of operations.
14
Patient Privacy
Federal and state laws protect the confidentiality of certain patient
health information, including patient records, and restrict the use and
disclosure of that protected information. The U.S. Department of Health and
Human Services (HHS) published patient privacy rules under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA privacy rule) and the
regulation was finalized in October 2002. The HIPAA privacy rule governs the use
and disclosure of protected health information by "Covered Entities," which are
(1) health plans, (2) health care clearinghouses, and (3) health care providers
that transmit health information in electronic form in connection with certain
health care transactions such as benefit claims. Currently, the HIPAA privacy
rule affects us only indirectly in that patient data that we access, collect and
analyze may include protected health information. Additionally, we have signed
some Business Associate agreements with Covered Entities that contractually bind
us to protect protected health information, consistent with the HIPAA privacy
rule's requirements. We do not expect the costs and impact of the HIPAA privacy
rule to be material to our business.
Practice Guidelines
Medical professional societies periodically issue Practice Guidelines to
their members and make them available publicly. The American College of
Cardiology (ACC) and the American Heart Association (AHA) have jointly engaged
in developing practice guidelines since 1980 to critically evaluate the use of
diagnostic procedures and therapies in the management or prevention of
cardiovascular diseases. These guidelines are meant to "improve the
effectiveness of care, optimize patient outcomes and affect the overall cost of
care favorably by focusing resources on the most effective strategies".
Recommendations incorporated into the guidelines are based upon an assessment of
the strength of evidence for or against a treatment or procedure and estimates
of expected health outcomes stemming from a formal review of peer-reviewed
published literature. These guidelines may not be updated for some time.
The "ACC/AHA 2002 Guideline Update for the Management of Patients with
Chronic Stable Angina" was issued in 2003. Comments on external counterpulsation
appear in a section entitled "Recommendations for Alternative Therapies for
Chronic Stable Angina in Patients Refractory to Medical Therapy Who Are Not
Candidates for Percutaneous Intervention or Surgical Revascularization" and
include a so-called Class IIb recommendation. ACC/AHA guideline classifications
I, II and III are used to "provide final recommendations for both patient
evaluation and therapy" and a Class IIb rating is defined as
"Usefulness/efficacy is less well established by evidence/opinion".
The ACC/AHA 2005 Guidelines for the Diagnosis and Management of Chronic
Heart Failure in the Adult were issued in 2005. External counterpulsation is
listed as one of the devices under investigation in a section entitled "Drugs
and Interventions Under Active Investigation".
The 2006 Comprehensive Heart Failure Practice Guideline, issued in February
2006 by the Heart Failure Society of America, does not include any comments on
the use of external counterpulsation therapy for treating heart failure
patients.
In summary, while evaluations of the use of EECP(R) therapy in patients
with chronic angina and heart failure continue to appear in oral or poster
presentations at major scientific meetings and in peer-reviewed publications
each year, there continues to be skepticism in the cardiology community about
its broader use. Additional evidence regarding the efficacy of EECP(R) therapy
continues to appear, however the evidence may not be sufficient to warrant a
modification of practice guidelines to a more favorable recommendation and
increased acceptance by the medical community.
Reimbursement
In addition to regulatory approvals for commercialization by government
agencies, reimbursement coverage and payment rates are factors in the sales of
our products and we depend in large part on the availability of reimbursement
programs. Medicare, Medicaid, as well as private health care insurance and
managed-care plans determine eligibility for coverage of a product or therapy
based on a number of factors, including the payer's determination that the
product is reasonable and necessary for the diagnosis or treatment of the
illness or injury for which it is administered according to the scope of
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clinical evidence available, accepted standards of medical care in practice, the
product's cost effectiveness, whether the product is experimental or
investigational, impact on health outcomes and whether the product is not
otherwise excluded from coverage by law or regulation. The coverage process for
Medicare reimbursement is legislated by Congress and administered by the Centers
for Medicare and Medicaid Services (CMS), and is highly variable in the
commercial market. There may be significant delays in obtaining coverage for
newly-approved products, and coverage may be more limited than the purposes for
which the product is approved or cleared by FDA. Even when we obtain
authorization from the FDA or a foreign authority to begin commercial
distribution, there may be limited demand for the device until reimbursement
approval has been obtained from governmental and private third-party payers.
Moreover, eligibility for coverage does not imply that a product will be
reimbursed in all cases or at a rate that allows us to market our EECP(R)
systems at a price that will enable us to make a profit or even cover our costs.
Reimbursement rates may vary according to the use of the product and the
clinical setting in which it is used, may be based on payments allowed for
lower-cost products that are already reimbursed, may be incorporated into
existing payments for other products or services, and may reflect budgetary
constraints and/or imperfections in Medicare or Medicaid data. Even if
successful, demand for products may be driven more by the scope of peer-reviewed
evidence and acceptance, endorsement by regulatory and clinical bodies, or
foreign country authorities than by the reimbursement rates available. Securing
coverage at adequate reimbursement rates from government and third party payers
can be a time consuming and costly process that could require us to provide
supporting scientific, clinical, and cost-effectiveness data for the use of our
products to each payer. Our inability to promptly obtain coverage and profitable
reimbursement rates from government-funded and private payers for our products
could have a material adverse effect on our financial condition and operating
results.
Our reimbursement strategies are currently focused in the following primary
areas: expanding Medicare coverage to include congestive heart failure and mild
angina, expanding coverage with other third-party payers, expanding Medicare
coverage for angina and obtaining coverage in selected international markets.
Current Medicare Coverage in Angina
In February 1999, CMS, the federal agency that administers the Medicare
program for more than 39 million beneficiaries, issued a national coverage
policy under HCPCS code G0166 for the use of the EECP(R) therapy system. Key
excerpts from the coverage read as follows:
"Although ECP devices are cleared by the Food and Drug Administration (FDA)
for use in treating a variety of cardiac conditions, including stable or
unstable angina pectoris, acute myocardial infarction and cardiogenic
shock, the use of this device to treat cardiac conditions other than stable
angina pectoris is not covered, since only that use has developed
sufficient evidence to demonstrate its medical effectiveness."
"for patients who have been diagnosed with disabling angina (class III or
class IV, Canadian Cardiovascular Society Classification or equivalent
classification) who, in the opinion of a cardiologist or cardiothoracic
surgeon, are not readily amenable to surgical interventions such as balloon
angioplasty and cardiac bypass because:
1. their condition is inoperable, or at high risk of operative
complications or post-operative failure;
2. their coronary anatomy is not readily amenable to such
procedures; or
3. they have co-morbid states, which create excessive risk."
The 2009 national average payment rate per hourly session in the physician
office setting and the hospital outpatient facility is approximately $150.04 and
$102.23, respectively. Reimbursement rates vary throughout the country and range
from $105 to $215 per hourly session. The 2008 national average payment rate per
hourly session in the physician office setting and the hospital outpatient
facility was approximately $156.15 and $109.47, respectively. Under the Medicare
program, physician reimbursement of the provision of EECP(R) therapy is higher
if the therapy is performed in a physician office setting as compared to a
hospital outpatient facility in order to reflect higher costs associated with
the physician office. Since January 2000, the national average payment rate has
varied considerably. The initial national average payment rate for the physician
office setting and the hospital outpatient facility in 2000 was approximately
$130 and $112, respectively per hourly session. The average payment rate for the
physician office setting climbed to $208 per treatment session in 2003 before
being reduced approximately 37% in 2004 to $132 per treatment session. In 2005
the physician rate increased approximately 5% and remained unchanged in 2006.
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The average payment rate for the hospital outpatient facility declined steadily
to 2005 before increasing approximately 2% in 2006.
In order to bill and receive payment from Medicare, an individual or entity
must be enrolled in the Medicare program for EECP(R) therapy. The physician
office setting and the hospital outpatient facility are the only entities
currently authorized to receive reimbursement for the EECP(R) therapy under the
Medicare program and reimbursement is not permitted to other individuals or
entity types, which include, but are not limited to, nurse practitioners,
physical therapists, ambulatory surgery centers, nursing homes, comprehensive
outpatient rehabilitation facilities, outpatient dialysis facilities, and
independent diagnostic testing facilities. For each of these provider types
there is statutory authorization and accompanying regulations that govern the
terms and conditions of Medicare program participation.
If there were any material change in the availability of Medicare coverage,
or if the reimbursement level for treatment procedures using the EECP(R) therapy
system is determined to be inadequate, it would adversely affect our business,
financial condition and results of operations. Moreover, we are unable to
forecast what additional legislation or regulation, if any, relating to the
health care industry or Medicare coverage and payment level may be enacted in
the future, or what effect such legislation or regulation would have on us.
Application to Expand Medicare Coverage to include Class II Angina and Class
II/III CHF
On May 31, 2005, we submitted an application to CMS to expand the national
coverage policy for external counterpulsation treatment to patients with
Canadian Cardiovascular Class II stable angina and to patients with NYHA Class
II and III stable heart failure symptoms with an ejection fraction less than
35%.
On June 20, 2005, CMS accepted our application for expansion of
reimbursement coverage of EECP(R) therapy to include patients with NYHA Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a
primary indication, as well as patients with CCSC II, i.e. chronic, stable mild
angina.
On 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; 4) treatment of cardiogenic shock. On September 15, 2005,
they 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
0 NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%
0 NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 40%
0 NYHA Class IV heart failure
0 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.
17
On August 25, 2006, the results of the trial were initially published on
line 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.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc., are
also eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
Expanding Coverage with Other Third-Party Payers
Some private insurance carriers continue to adjudicate EECP(R) treatment
claims on a case-by-case basis. Since the establishment of reimbursement by the
federal government, however, an increasing number of these private carriers now
routinely pay for use of EECP(R) therapy for the treatment of angina and have
issued positive coverage policies, which are generally similar to Medicare's
coverage policy in scope. We estimate that over 300 private insurers are
reimbursing for EECP(R) therapy for the treatment of angina today at favorable
payment levels and we expect that the number of private insurers and their
related health plans that provide for EECP(R) therapy as a covered benefit will
continue to increase. In addition, we are aware of two third-party payers that
have begun limited coverage of EECP(R) therapy for the treatment of CHF.
We intend to pursue a constructive dialogue with many private insurers for
the establishment of positive and expanded coverage policies for EECP(R)
treatment that include CHF patients. If there were any material change in the
availability of third-party private insurers or the adequacy of the
reimbursement level for treatment procedures using the EECP(R) therapy system,
it would adversely affect our business, financial condition and results of
operations. Moreover, we are unable to forecast what additional legislation or
regulation, if any, relating to the health care industry or third-party private
insurers coverage and payment levels may be enacted in the future or what effect
such legislation or regulation would have on us.
Reimbursement in International Markets
The reimbursement environment for EECP(R) therapy in international markets
is fragmented and coverage varies as a mix of available private and public
healthcare providers may not yet be aware of coverage of this therapy. Our
reimbursement strategy has been opportunistic and responsive to the selling
opportunities presented through our distribution partners. During this fiscal
year our efforts on behalf of EECP(R) therapy in both the private and public
healthcare sectors of selected international markets have been initiated by our
distributors, in support of the therapy, in their designated territory.
Additionally, efforts have been initiated to obtain coverage in the public
sector in certain overseas markets; however, we do not anticipate an impact on
financial performance in the next fiscal year, given the long lead times from
submission to approval of international dossiers for each reimbursement
authority.
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Patents and Trademarks
We own thirteen US patents including eight utility and three design patents
that expire at various times between 2009 and 2023. In addition, more than 20
foreign patents have been issued that expire at various times from 2009 to 2023.
We are also planning to file other patent applications regarding specific
enhancements to the current EECP(R) models, future generation products, and
methods of treatment in the future. Moreover, trademarks have been registered
for the names "EECP(R)" and "Natural Bypass".
We pursue a policy of seeking patent protection, both in the US and abroad,
for our proprietary technology. We believe that we have a solid patent
foundation in the field of external counterpulsation devices and that the number
of patents and applications demonstrates our technical leadership, dating back
to the mid-1980s. Our patent portfolio focuses on the areas of external
counterpulsation control and the overall design and arrangement of the external
counterpulsation apparatus, including the console, treatment bed, fluid
distribution, and inflatable cuffs. None of our current competitors have a
significant patent portfolio in the area of external counterpulsation devices.
There can be no assurance that our patents will not be violated or that any
issued patents will provide protection that has commercial significance. As with
any patented technology, litigation could be necessary to protect our patent
position. Such litigation can be costly and time-consuming, and there can be no
assurance that we will be successful. The loss or violation of our EECP(R)
patents and trademarks could have a material adverse effect upon our business.
Employees
As of May 31, 2009, we employed 25 full-time persons with 5 in direct
sales, sales and clinical applications support, 10 in manufacturing, quality
control and technical service, 3 in marketing and customer support, 2 in
engineering, regulatory and clinical research and 5 in administration. None of
our employees are represented by a labor union. We believe that our employee
relations are good.
Manufacturing
Under our Supplier Agreement with Living Data Technology Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that we market under the registered trademark EECP(R). However, Vasomedical will
continue the manufacturing operations to fulfill certain obligations and needs.
Under the agreement with Living Data, we continue to manufacture
products from our existing inventory, as well as other products, at our leased
facility located in Westbury, New York.
ITEM 1A. RISK FACTORS
Investing in our common stock involves risk. You should carefully consider
the following information about these risks together with the other information
contained in this Report. If any of the following risks actually occur, our
business could be harmed. This could cause the price of our stock to decline,
and you may lose part or all of your investment.
Financial Risks
We have incurred recurring losses over the past few years and may continue
to sustain losses, which could result in a further decline in the value of our
common stock.
During the last few fiscal years we incurred large operating losses. We
currently anticipate that we may continue to sustain operating losses. Our
ability to achieve profitability is largely dependent on our ability to reduce
operating costs sufficiently, as well as halting the current trend of declining
revenue. Our ability to maintain our current base of revenue and increase
revenue is largely dependent upon restructuring our sales and marketing efforts
in the angina market where reimbursement is currently available and operating in
a more efficient manner.
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Risks Related to Our Business
We are materially dependent on medical reimbursement for treatment
procedures using EECP(R) therapy on patients with congestive heart failure in
order to achieve growth.
We are currently dependent on a single product platform which, based on
current medical reimbursement policies, provides coverage for a restricted class
of heart patients. On May 31, 2005, we submitted an application to CMS to expand
the national coverage policy for external counterpulsation treatment to patients
with Canadian Cardiovascular Class II stable angina and to patients with New
York Heart Association (NYHA) Class II and III stable heart failure symptoms
with an ejection fraction less than 35%. The application was accepted by CMS
effective June 20, 2005, and CMS announced their decision to maintain the
existing coverage as stated prior to the application and not to expand it to
include Class II Angina and Class II/III CHF on March 20, 2006. Results of the
PEECH(TM) trial have been published in the Journal of the American College of
Cardiology in September 2006, and the subgroup analysis of CHF patients age 65
and over has also been published in the November-December 2006 issue of the
Journal of Congestive Heart Failure. These two papers have been submitted to CMS
for reconsideration of our application. We had met with representatives from CMS
in February 2007 and presented our case. CMS has requested additional data from
us. We will continue our dialogue with CMS to obtain coverage for heart failure
patients. However, there is no assurance that the Company will have sufficient
resources to gather the necessary data to be sufficient to support expansion of
the Medicare National Coverage Policy for EECP(R) treatment for NYHA class II
and III heart failure patients.
If we do not receive medical coverage for treatment procedures using
EECP(R) therapy on patients with CHF, it will adversely affect our future
business prospects.
Material changes in the availability of Medicare, Medicaid or third-party
reimbursement at adequate price levels could adversely affect our business.
Health care providers, such as hospitals and physician private practices,
that purchase or lease medical devices such as the EECP(R) therapy system for
use on their patients generally rely on third-party payers, principally
Medicare, Medicaid and private health insurance plans, to reimburse all or part
of the costs and fees associated with the procedures performed with these
devices. If there were any material change in the availability of Medicare,
Medicaid or other third-party coverage or the adequacy of the reimbursement
level for treatment procedures using the EECP(R) therapy system, it would
adversely affect our business, financial condition and results of operations.
Moreover, we are unable to forecast what additional legislation or regulation,
if any, relating to the health care industry or Medicare or Medicaid coverage
and payment level may be enacted in the future or what effect such legislation
or regulation would have on our business. Even if a device has FDA clearance,
Medicare, Medicaid and other third-party payers may deny reimbursement if they
conclude that the device is not "reasonable and necessary" according to their
criteria. In addition, reimbursement may not be at, or remain at, price levels
adequate to allow medical professionals and hospitals to realize an appropriate
return on the purchase of our products.
Increased acceptance by the medical community is important for growth.
While many abstracts and publications are presented each year at major
scientific meetings worldwide with respect to EECP(R) treatment efficacy, there
is continued skepticism concerning EECP(R) therapy methodology. The American
Heart Association and the American College of Cardiology Practice Guidelines
currently list EECP(R) as a therapy currently under investigation for treatment
of heart failure and have a classification rating of IIb as a treatment for
patients who are refractory to medical therapy and are not candidates for
percutaneous intervention or revascularization. A classification rating of IIb
indicates the usefulness/efficacy of EECP(R) therapy is less well established by
evidence/opinion. The medical community utilizes these guidelines when
considering the various treatment options for their patients. Certain
cardiologists, in cases where the EECP(R) therapy is a viable alternative, still
appear to prefer percutaneous coronary interventions (e.g. balloon angioplasty
and stenting) and cardiac bypass surgery for their patients. Additional evidence
regarding the efficacy of EECP(R) therapy continues to evolve, however the
evidence may not be sufficient to warrant a modification of these guidelines to
a more favorable recommendation and increased acceptance by the medical
community. We are dependent on consistency of favorable research findings about
20
EECP(R) therapy and increasing acceptance of EECP(R) therapy as a safe,
effective and cost effective alternative to other available products by the
medical community for growth.
We face competition from other companies and technologies.
We compete with at least three other companies that are marketing external
counterpulsation devices. We do not know whether these companies or other
potential competitors who may be developing external counterpulsation devices,
may succeed in developing technologies or products that are more efficient than
those offered by us, and that would render our technology and existing products
obsolete or non-competitive. Potential new competitors may also have
substantially greater financial, manufacturing and marketing resources than
those possessed by us. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purpose of our products. Accordingly, the life cycles of our products
are difficult to estimate. To compete successfully, we must keep pace with
technological advancements, respond to evolving consumer requirements and
achieve market acceptance.
As of June 2007, the Company entered into a distribution and supplier
agreement with Living Data Technology Corporation, a competitor as of May 31,
2007. This arrangement has subsequently reduced the competitors to at least four
other companies.
We may not continue to receive necessary FDA clearances or approvals, which
could hinder our ability to market and sell our products.
If we modify our external counterpulsation devices and the modifications
significantly affect safety or effectiveness, or if we make a change to the
intended use, we will be required to submit a new premarket notification or
510(k) to FDA. We would be unable to market the modified device until FDA issues
a clearance for the 510(k).
Additionally, if FDA publishes a regulation requiring a premarket approval
application or PMA for external counterpulsation devices, we would then need to
submit a PMA, and have it filed by the agency, by the date specified by FDA in
its regulation. A PMA requires us to prove the safety and effectiveness of a
device to the FDA. The process of obtaining PMA approval is expensive,
time-consuming, and uncertain. If FDA were to require a PMA application, we may
be required to undertake a clinical study, which likely will be expensive and
require lengthy follow-up, to demonstrate the effectiveness of the device. If we
did obtain PMA approval, any change after approval affecting the safety or
effectiveness of the device will require approval of a PMA supplement.
If we offer new products that require 510(k) clearance or PMA approval, we
will not be able to commercially distribute those products until we receive such
clearance or approval. Regulatory agency approval or clearance for a product may
not be received or may entail limitations on the device's indications for use
that could limit the potential market for any such product. Delays in receipt
of, or failure to obtain or maintain, regulatory clearances and approvals, could
delay or prevent our ability to market or distribute our products. Such delays
could have a material adverse effect on our business.
If we are unable to comply with applicable governmental regulation, we may
not be able to continue our operations.
We also must comply with Current Good Manufacturing Practice (CGMP)
requirements as set forth in the Quality System Regulation (QSR) to receive FDA
approval to market new products and to continue to market current products. The
QSR imposes certain procedural and documentation requirements on us with respect
to manufacturing and quality assurance activities, including packaging, storage,
and record keeping. Our products and activities are subject to extensive,
ongoing regulation, including regulation of labeling and promotion activities
and adverse event reporting. Also, our FDA registered facilities are subject to
inspection by the FDA and other governmental authorities. Any failure to comply
with regulatory requirements could delay or prevent our ability to market or
distribute our products. Violation of FDA statutory or regulatory requirements
could result in enforcement actions, such as voluntary or mandatory recalls,
suspension or withdrawal of marketing clearances or approvals, seizures,
injunctions, fines, civil penalties, and criminal prosecutions, all of which
could have a material adverse effect on our business. Most states also have
similar postmarket regulatory and enforcement authority for devices.
21
We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. We may be slow to adapt, or we may
never adapt to changes in existing requirements or adoption of new requirements
or policies. We may incur significant costs to comply with laws and regulations
in the future or compliance with laws or regulations may create an unsustainable
burden on our business.
We may not receive approvals by foreign regulators that are necessary for
international sales.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. Premarket approval or
clearance in the United States does not ensure regulatory approval by other
jurisdictions. If we, or any international distributor, fail to obtain or
maintain required pre-market approvals or fail to comply with foreign
regulations, foreign regulatory authorities may require us to file revised
governmental notifications, cease commercial sales of our products in the
applicable countries or otherwise cure the problem. Such enforcement action by
regulatory authorities may be costly.
In order to sell our products within the European Union, we must comply
with the European Union's Medical Device Directive. The CE marking on our
products attests to this compliance. Future regulatory changes may limit our
ability to use the CE mark, and any new products we develop may not qualify for
the CE mark. If we lose this authorization or fail to obtain authorization on
future products, we will not be able to sell our products in the European Union.
We depend on suppliers for the supply of our ECP therapy systems.
Under our Supplier Agreement with Living Data Technology Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that we market under the registered trademark EECP(R). With certain exceptions,
including the use of existing inventory, we are required to purchase this
product from Living Data at specified prices. While we do not foresee any
difficulties in timely receiving products at competitive prices, this inability
would adversely affect our business.
We depend on management and other key personnel.
We are dependent on a limited number of key management and technical
personnel. The loss of one or more of our key employees may harm our business if
we are unable to identify other individuals to provide us with similar services.
We do not maintain "key person" insurance on any of our employees. In addition,
our success depends upon our ability to attract and retain additional highly
qualified sales, management, manufacturing and research and development
personnel. We face competition in our recruiting activities and may not be able
to attract or retain qualified personnel.
We may not have adequate intellectual property protection.
Our patents and proprietary technology may not be able to prevent
competition by others. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions. Future patent applications
may not be issued, the scope of any patent protection may not exclude
competitors, and our patents may not provide competitive advantages to us. Our
patents may be found to be invalid and other companies may claim rights in or
ownership of the patents and other proprietary rights held or licensed by us.
Also, our existing patents may not cover products that we develop in the future.
Moreover, when our patents expire, the inventions will enter the public domain.
There can be no assurance that our patents will not be violated or that any
issued patents will provide protection that has commercial significance.
Litigation may be necessary to protect our patent position. Such litigation may
be costly and time-consuming, and there can be no assurance that we will be
successful in such litigation.
22
The loss or violation of certain of our patents and trademarks could have a
material adverse effect upon our business.
Since patent applications in the United States are maintained in secrecy
until such patent applications are issued, our current product development may
infringe patents that may be issued to others. If our products were found to
infringe patents held by competitors, we may have to modify our products to
avoid infringement, and it is possible that our modified products would not be
commercially successful.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any cash dividends on our common stock in the
foreseeable future.
Risks Related to Our Industry
Technological change is difficult to predict and to manage.
We face the challenges that are typically faced by companies in the medical
device field. Our product line has required, and any future products will
require, substantial development efforts and compliance with governmental
clearance or approval requirements. We may encounter unforeseen technological or
scientific problems that force abandonment or substantial change in the
development of a specific product or process.
We are subject to product liability claims and product recalls that may not
be covered by insurance.
The nature of our business exposes us to risks of product liability claims
and product recalls. Medical devices as complex as ours frequently experience
errors or failures, especially when first introduced or when new versions are
released.
We currently maintain product liability insurance at $7,000,000 per
occurrence and $7,000,000 in the aggregate. Our product liability insurance may
not be adequate. In the future, insurance coverage may not be available on
commercially reasonable terms, or at all. In addition, product liability claims
or product recalls could damage our reputation even if we have adequate
insurance coverage.
We do not know the effects of healthcare reform proposals.
The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been suggested seeking to increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.
We expect that the United States Congress and state legislatures will
continue to review and assess various healthcare reform proposals, and public
debate of these issues will likely continue. There have been, and we expect that
there will continue to be, a number of federal and state proposals to constrain
expenditures for medical products and services, which may affect payments for
products such as ours. We cannot predict which, if any of such reform proposals
will be adopted and when they might be effective, or the effect these proposals
may have on our business. Other countries also are considering health reform.
Significant changes in healthcare systems could have a substantial impact on the
manner in which we conduct our business and could require us to revise our
strategies.
23
Risks Related to our Securities
The application of the "penny stock" rules could adversely affect the
market price of our common stock and increase your transaction costs to sell
those shares.
As long as the trading price of our common shares is below $5 per share,
the open-market trading of our common shares will be subject to the "penny
stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell our common shares, and may
result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other
securities.
Our common stock is subject to price volatility.
The market price of our common stock historically has been and may continue
to be highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including, but not limited to:
o medical reimbursement;
o quarterly variations in operating results;
o announcements of technological innovations, new products or pricing by
our competitors;
o the rate of adoption by physicians of our technology and products in
targeted markets;
o the timing of patent and regulatory approvals;
o the timing and extent of technological advancements;
o results of clinical studies;
o the sales of our common stock by affiliates or other shareholders with
large holdings; and
o general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market price of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may directly influence the market price of our common stock.
Additional Information
We are subject to the reporting requirements under the Securities Exchange
Act of 1934 and are required to file reports and information with the Securities
and Exchange Commission (SEC), including reports on the following forms: annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports files or furnished pursuant to Section
13(a) or 15(d) of the Securities Act of 1934.
24
ITEM 2 - PROPERTIES
We historically owned our 18,000 square foot headquarters and manufacturing
facility at 180 Linden Avenue, Westbury, New York 11590.
On August 15, 2007, we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale was approximately
$425,000, after payment in full of the two secured notes on our facility,
brokers fees, closing costs, and the opening of a certificate of deposit in
accordance with the provisions of the new lease. The annual rental expense for
the lease is approximately $144,200. We believe that our current facility is
adequate to meet our current needs and should continue to be adequate for the
immediately foreseeable future.
ITEM 3 - LEGAL PROCEEDINGS
There were no material legal proceedings under applicable rules.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the Over-the-Counter Bulletin Board
under the symbol VASO.OB. On May 26, 2006, our common stock ceased trading on
the Nasdaq Capital Market tier of the Nasdaq Stock Market and began trading on
the NASD Pink Sheets. Effective June 20, 2006, our common stock began trading on
the Over-the- Counter Bulletin Board (OTCBB). The number of record holders of
common stock as of August 12, 2009, was approximately 1,050, which does not
include approximately 14,930 beneficial owners of shares held in the name of
brokers or other nominees. The table below sets forth the range of high and low
trade prices of the common stock for the fiscal periods specified.
Fiscal 2009 Fiscal 2008
------------------ -----------------
High Low High Low
First Quarter $0.10 $0.06 $0.19 $0.06
Second Quarter $0.08 $0.02 $0.13 $0.06
Third Quarter $0.03 $0.02 $0.10 $0.05
Fourth Quarter $0.09 $0.02 $0.09 $0.07
The last bid price of the Company's common stock on August 12, 2009, was
$0.07 per share.
Dividend Policy
We have never paid any cash dividends on our common stock and do not intend
to pay cash dividends in the foreseeable future.
Entry Into A Material Definitive Agreement
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, an affiliate of
Kerns (Living Data).
25
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for a total purchase price of
$1,500,000, as well a five-year warrant to purchase 4,285,714 shares of our
common stock at an initial exercise price of $.08 per share (the Warrant). The
agreement further provided for the appointment to our Board of Directors of two
representatives from Kerns. In furtherance thereof, Dr. Jun Ma and Mr. Simon
Srybnik, Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors. On October 15, 2008, Dr. Jun Ma was appointed Chief
Executive Officer. Pursuant to the Distribution Agreement, we have become the
exclusive distributor in the United States of the AngioNew ECP systems
manufactured by Living Data. As additional consideration for such agreement, we
agreed to issue an additional 6,990,840 shares of our common stock to Living
Data. Pursuant to the Supplier Agreement, Living Data now is the exclusive
supplier to us of the ECP therapy systems that we market under the registered
trademark EECP(R). The Distribution Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock having a fair market value of
$60,000 at time of issue.
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis or Plan of Operations contains
descriptions of our expectations regarding future trends affecting our business.
These forward looking statements and other forward-looking statements made
elsewhere in this document are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Please read the section titled
"Risk Factors" in "Item One - Business" to review certain conditions, among
others, which we believe could cause results to differ materially from those
contemplated by the forward-looking statements.
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" 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.
The following discussion should be read in conjunction with the financial
statements and notes thereto included in this Annual Report on Form 10-K.
Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina, congestive heart
failure (CHF), acute myocardial infarction (i.e., heart attack, (MI)) and
26
cardiogenic shock. The EECP(R) therapy is a non-invasive, outpatient treatment
of diseases of the cardiovascular system. The therapy serves to increase
circulation in areas of the heart with less than adequate blood supply and helps
restore systemic vascular function. The therapy also increases blood flow and
oxygen supply to the heart muscle and other organs and decreases the heart's
workload and reduces oxygen demand, while also improving function of the
endothelium, the lining of blood vessels throughout the body, lessening
resistance to blood flow. We provide hospitals, clinics and physician private
practices with EECP(R) equipment, treatment guidance, and a staff training and
equipment maintenance program designed to provide optimal patient outcomes.
EECP(R) is a registered trademark for Vasomedical's Enhanced External
Counterpulsation therapy and systems. For more information, visit
www.vasomedical.com.
We have FDA clearance to market our EECP(R) therapy for use in the
treatment of stable and unstable angina, congestive heart failure, acute
myocardial infarction, and cardiogenic shock; however, our current marketing
efforts are limited mostly to the treatment of chronic stable angina and
congestive heart failure. Medicare and other third-party payers currently
reimburse for the treatment of angina pectoris patients with moderate to severe
symptoms who are refractory to medications and not candidates for invasive
procedures. Patients with co-morbidities of heart failure, diabetes, peripheral
vascular disease, etc. are also reimbursed under the same criteria, provided the
primary diagnosis and indication for treatment with EECP(R) therapy is angina
symptoms.
During the last several years, 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. The Company has reduced
personnel costs by reorganization. The Company has negotiated new terms on
professional fees, facility expenses, and shipping and supply costs. The Company
is also looking to obtain a revolving line of credit to help stabilize cash flow
and to respond to customers requests for flexible payment terms on our EECP(R)
therapy systems.
Results of Operations
Fiscal Years Ended May 31, 2009 and 2008
Net revenue from sales, leases and service of our EECP(R) systems for the
fiscal years ended May 31, 2009 and 2008, was $4,471,186 and $5,182,768,
respectively, which represented a decline of $711,582, or 14%. We reported a net
loss attributable to common stockholders of $1,524,711 and $676,695 for fiscal
2009 and 2008, respectively. The increase in the net loss was primarily due to
the increase in our operating expenses from the comparative prior period,
combined with a decrease in revenue. Our net loss per basic and diluted common
share was $0.02 for the fiscal year ended May 31, 2009 compared to a net loss of
$0.01 per diluted common share for the fiscal year ended May 31, 2008.
Revenues
Revenue from equipment sales increased approximately 6% to $2,219,729 for
the fiscal year ended May 31, 2009 as compared to $2,087,365 for the prior year.
The increase in equipment sales is due primarily to a 5% increase in the total
number of units sold. The average sales price of EECP(R) systems decreased
slightly. The number of unit sales for new and used equipment increased by
approximately 73% within the international market and decreased by 32% within
the domestic market.
We believe the decline in the sales price per unit reflects weakened demand
in the refractory angina market as existing capacity is more fully utilized,
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. Despite this, many cardiology clinicians appear
to be waiting for approval of reimbursement coverage for heart failure as a
primary indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent symptoms. Reluctance to bill for
ischemic heart failure patients under the current coverage guidelines, and
failure to get or maintain adequate reimbursement coverage for angina and heart
failure would adversely affect our business prospects. We anticipate that a
prevailing trend of declining prices will continue in the immediate future as
our competition attempts to capture greater market share through pricing
discounts.
27
Our revenue from the sale of EECP(R) systems and related products to
international distributors in fiscal 2009 increased approximately 67% to
$1,392,401 compared to $835,546 in the prior year reflecting increased sales
volume.
Our revenue from equipment rental and services decreased 27% to $2,251,457
in fiscal 2009 from $3,095,403 in fiscal year 2008. Revenue from equipment
rental and services represented 50% and 60% of total revenue in fiscal 2009 and
2008 respectively. The decrease in revenue generated from equipment rentals and
services is due to a decrease in the service business compared to the prior
fiscal year. The decline was also due to a decrease in the rental install base
from the prior fiscal year ended May 31, 2008.
Gross Profit
Gross profit in total declined to $1,905,370, or 43% of revenues for fiscal
2009 compared to $2,352,398 or 45% of revenues for fiscal 2008. The decline in
total gross profit when compared to prior year in absolute dollars is
principally due to lower service contract sales of $600,923 or 33% as compared
to fiscal year 2008. For equipment sales in fiscal year 2009 there is an
increase in gross profit in absolute dollars of $225,363 or 55% when compared to
fiscal year 2008. This is due mainly to decreased manufacturing overhead costs.
Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) models sold domestically and internationally and their respective
average selling prices, the mix of EECP(R) units sold, rented or placed during
the period, service contract sales, and the ongoing costs of service, and
certain fixed period costs, including facilities, payroll and insurance. Gross
profit margins are generally less on non-domestic business due to the use of
distributors resulting in lower selling prices. Consequently, the gross profit
realized during the current period may not be indicative of future margins.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for fiscal 2009 and
2008 were $3,013,276, or 67% of revenues, and $2,626,045, or 51% of revenues,
respectively, reflecting an increase of $387,231 or approximately 15%. The
increase in SG&A expenditures in fiscal 2009 resulted primarily from increased
direct expenditures of $191,853 due to increased corporate expenses, and
Director's fees, offset by decreases in insurance and accounting fees. Marketing
expenses increased $154,266 due to increased expenditures in personnel and their
associated costs in the marketing and clinical application support areas, as
well as associated travel, plus increased market research, product promotion,
advertising, and trade show expenses. Sales expenses increased $41,112 as a
result of increased expenditures in personnel and their associated costs.
During fiscal 2009 the Company recorded a provision for doubtful accounts
of $537 compared to fiscal 2008 when the Company reversed its provision for
doubtful accounts by $42,837. The reversal of the provision is primarily a
result of the fiscal 2008 decrease in accounts receivable balances in addition
to the continuous efforts to ensure collection of accounts receivable.
Research and Development
Research and development ("R&D") expenses of $519,509 or 12% of revenues
for fiscal 2009 increased by $45,398, or 10%, from $474,111, or 9% of revenues
for fiscal 2008. The increase is primarily attributable to more engineering
consulting and associated expenditures and new product spending, offset by a
slight decrease in spending on clinical trials.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to zero for fiscal 2009 from
$16,616 for the prior year. 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.
28
Interest and Other Income, Net
Interest and other income for fiscal 2009 and 2008 were $55,334 and
$61,083, respectively. Interest income primarily reflects interest earned on the
Company's cash balances. Other income has been derived primarily from the
liquidation of equipment and fixtures used in previously leased properties.
Amortization of Deferred Gain on Sale-leaseback of Building
The amortization of deferred gain on sale-leaseback of building for fiscal
2009 and 2008 were $53,245 and $44,371, respectively. The gain resulted from the
Company's sale-leaseback of its facility.
Income Tax Expense, Net
During fiscal 2009 and 2008 we recorded a provision for income taxes of
$5,875 and $18,045, respectively.
As of May 31, 2009, the recorded deferred tax assets were $20,336,652,
reflecting an increase of $517,300 during the fiscal year ended May 31, 2009,
which was offset by a valuation allowance of the same amount.
Ultimate realization of any or all of the deferred tax assets is not
assured due to significant uncertainties and material assumptions associated
with estimates of future taxable income during the carryforward period. In
November 2005, we concluded that, based upon the weight of available evidence,
it was "more likely than not" that the net deferred tax asset would not be
realized and increased the valuation allowance to bring the net deferred tax
asset carrying value to zero.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working capital and in
fiscal years 2009 and 2008, from a private equity financing and by the sale of
our facility under a leaseback agreement. At May 31, 2009, we had cash and cash
equivalents and short-term investments in the form of certificates of deposit of
$914,580 and working capital of $1,300,647 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 $1,716,860 during fiscal 2009, which
consisted of a net cash loss after adjustments of $1,180,039 and cash used by
operating assets and liabilities of $536,821. The changes in the accounts
balances primarily reflect a decrease in accounts receivable of $233,510,
increased inventory of $180,441 and an increased in trade payable to related
party of $260,000, offset by an increase in other assets of $119,278, and
decreases in Accounts payable, deferred revenue, accrued expenses and other
liabilities of $717,996, and an increase in Other liabilities of $7,384. Net
accounts receivable were 15% of revenues for the period ended May 31, 2009, as
compared to 14% for the period ended May 31, 2008, and accounts receivable
turnover decreased to 6.5 times as of May 31, 2009, as compared to 7.1 times as
of May 31, 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) 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 fiscal 2009 and 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)
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.
29
Investing activities used cash of $393,082 during the fiscal year ended May
31, 2009, which represented investments on equipment of $22,559 and the purchase
of short-term investments of $370,523. Investing activities during the fiscal
year ended May 31, 2008, provided net cash of $1,310,857, which represented
proceeds received from the building sale, net of related costs.
Our financing activities provided net cash of $524,875 during the fiscal
year ended May 31, 2008, reflecting proceeds, net of related expenses, of
$1,375,890 from the Securities Purchase Agreement, which was offset by loan
repayments on the building of $851,015.
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. The Company has reduced
personnel costs by reorganization. The Company has negotiated new terms on
professional fees, facility expenses, and shipping and supply costs. The Company
is also looking to obtain a revolving line of credit to help stabilize cash flow
and to respond to customers requests for flexible payment terms on our EECP(R)
therapy systems.
Based on our current operations we believe that we have sufficient working
capital to continue our operations through at least May 31, 2010.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities (SPES), which
would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of May 31,
2009, we are not involved in any unconsolidated SPES.
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, an affiliate of
Kerns (Living Data).
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 from Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon
Srybnik, Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors. On October 15, 2008, Dr. Jun Ma was appointed Chief
Executive Officer. Pursuant to the Distribution Agreement, we have become the
exclusive distributor in the United States of the AngioNew ECP systems
manufactured by Living Data. As additional consideration for such agreement, we
agreed to issue an additional 6,990,840 shares of our common stock to Living
Data. Pursuant to the Supplier Agreement, Living Data now is the exclusive
supplier to us of the ECP therapy systems that we market under the registered
trademark EECP(R). The Distribution Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock having a fair market value of
$60,000 at time of issue.
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
30
On July 10, 2007, the Board of Directors appointed Mr. Behnam Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.
As affiliates of Living Data and Kerns, Dr. Ma, Mr. Movaseghi and Mr.
Srybnik have each been directly involved in the transactions between Living Data
and Kerns, and the Company, with respect to the Securities Purchase Agreement,
the Distribution Agreement and the Supplier Agreement, as well as consulting
services to the Company with no compensation.
During fiscal 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 $160,000 in Trade Payable to Related Party -
current portion on the accompanying consolidated balance sheet as of May 31,
2009. In addition, during fiscal 2009, Living Data purchased $3,118, worth of
ECP therapy system components from the Company.
During fiscal 2009 Living Data assigned to Vasomedical, Inc. all of its
rights and interests under its Distributorship Agreement with a corporation
organized and existing under the laws of the People's Republic of China, that
manufactures Ambulatory Blood Pressure Monitors, Ambulatory ECG Recorders and
Holter & ABPM Combiner Recorders, for $20,000 payable to Living Data based on
certain terms and conditions. Vasomedical Inc., also must pay to Living Data 5%
of the selling price or 5% of the cost of all goods sold (whichever is higher),
and 5% of the cost of all goods transferred but not sold under the Assignment
Agreement to Living Data based on sales of this equipment. The Company will sell
these systems in the United States and other countries now that regulatory
clearance had been obtained.
During fiscal 2009 Living Data assigned to Vasomedical, Inc. all of its
rights and interests under its Distributorship Agreement with a corporation
organized and existing under the laws of the People's Republic of China, that
manufactures Ultrasound Scanners, for $20,000 payable to Living Data based on
certain terms and conditions. Vasomedical Inc., also must 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 fiscal 2009.
Effects of Inflation
We believe that inflation and changing prices over the past two years have
not had a significant impact on our revenue or on our results of operations.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, or SEC, in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note B of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended May 31, 2009, includes a summary of our significant accounting policies
and methods used in the preparation of our financial statements. In preparing
these financial statements, we have made our best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. Our critical
accounting policies are as follows:
31
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectibility is reasonably assured. In the United States,
we recognize revenue from the sale of our EECP(R) systems in the period in which
we deliver the system to the customer. Revenue from the sale of our EECP(R)
systems to international markets is recognized upon shipment of the product to a
common carrier, as are supplies, accessories and spare parts delivered to both
domestic and international customers. Returns are accepted prior to the
in-service and training subject to a 10% restocking charge or for normal
warranty matters, and we are not obligated for post-sale upgrades to these
systems. In addition, we use the installment method to record revenue based on
cash receipts in situations where the account receivable is collected over an
extended period of time and in our judgment the degree of collectibility is
uncertain.
In most cases, revenue from domestic EECP(R) system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectibility, the separability of units of accounting, and the
fair value of individual elements. We follow the provisions of Emerging Issues
Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). The principles and guidance outlined in EITF 00-21
provide a framework to determine (a) how the arrangement consideration should be
measured (b) whether the arrangement should be divided into separate units of
accounting, and (c) how the arrangement consideration should be allocated among
the separate units of accounting. We determined that the domestic sale of our
EECP(R) systems includes a combination of three elements that qualify as
separate units of accounting:
i. EECP(R) equipment sale,
ii. provision of in-service and training support consisting of equipment
set-up and training provided at the customer's facilities, and
iii. a service arrangement (usually one year), consisting of: service by
factory-trained service representatives, material and labor costs,
emergency and remedial service visits, software upgrades, technical
phone support and preferred response times.
Each of these elements represent individual units of accounting as the
delivered item has value to a customer on a stand-alone basis, objective and
reliable evidence of fair value exists for undelivered items, and arrangements
normally do not contain a general right of return relative to the delivered
item. We determine fair value based on the price of the deliverable when it is
sold separately or based on third-party evidence. In accordance with the
guidance in EITF 00-21, we use the residual method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
i. EECP(R) equipment sales, when delivery and acceptance occurs based on
delivery and acceptance documentation received from independent
shipping companies or customers,
ii. in-service and training, following documented completion of the
training, and
iii. the service arrangement, ratably over the service period, which is
generally one year.
In-service and training generally occurs within a few weeks of shipment and
our return policy states that no returns will be accepted after in-service and
training has been completed. The amount related to in-service and training is
recognized as service revenue at the time the in-service and training is
completed and the amount related to service arrangements is recognized ratably
as service revenue over the related service period, which is generally one year.
Costs associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of equipment sales as incurred.
The Company also recognizes revenue generated from servicing EECP(R)
systems that are no longer covered by the service arrangement, or by providing
sites with additional training, in the period that these services are provided.
Revenue related to future commitments under separately priced extended service
agreements on our EECP(R) system are deferred and recognized ratably over the
service period, generally ranging from one year to four years. Costs associated
with the provision of service and maintenance, including salaries, benefits,
travel, spare parts and equipment, are recognized in cost of sales as incurred.
Amounts billed in excess of revenue recognized are included as deferred revenue
in the consolidated balance sheets.
32
Revenues from the sale of EECP(R) systems through our international
distributor network are generally covered by a one-year warranty period. For
these customers we accrue a warranty reserve for estimated costs to provide
warranty parts when the equipment sale is recognized.
The Company has also entered into lease agreements for our EECP(R) systems,
generally for terms of one year or less, that are classified as operating
leases. Revenues from operating leases are generally recognized, in accordance
with the terms of the lease agreements, on a straight-line basis over the life
of the respective leases. For certain operating leases in which payment terms
are determined on a "fee-per-use" basis, revenues are recognized as incurred
(i.e., as actual usage occurs). The cost of the EECP(R) system utilized under
operating leases is recorded as a component of property and equipment and is
amortized to cost of sales over the estimated useful life of the equipment, not
to exceed five years. There were no significant minimum rental commitments on
these operating leases at May 31, 2009.
Accounts Receivable, net
The Company's accounts receivable are due from customers engaged in the
provision of medical services. Credit is extended based on evaluation of a
customer's financial condition and, generally, collateral is not required.
Accounts receivable are generally due 30 to 90 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts, returns,
term discounts and other allowances. Accounts that remain outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. The Company
also looks at the credit quality of their customer base as well as changes in
their credit policies. The Company continuously monitors collections and
payments from our customers, and writes off receivables when all efforts at
collection have been exhausted. While credit losses have historically been
within expectations and the provisions established, the Company cannot guarantee
that it will continue to experience the same credit loss rates that they has in
the past.
Inventories, net
The Company values inventory at the lower of cost or estimated market, with
cost being determined on a first-in, first-out basis. The Company often places
EECP(R) systems at various field locations for demonstration, training,
evaluation, and other similar purposes at no charge. The cost of these EECP(R)
systems is transferred to property and equipment and is amortized over the next
two to five years. The Company records the cost of refurbished components of
EECP(R) systems and critical components at cost plus the cost of refurbishment.
The Company regularly reviews inventory quantities on hand, particularly raw
materials and components, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand.
We comply with the provisions of Statement of Financial Accounting
Standards No. 151, "Inventory Costs", on a prospective basis. The statement
clarifies that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities.
Deferred Revenues
The Company records revenue on extended service contracts ratably over the
term of the related contract period. In accordance with the provisions of EITF
00-21, we began to defer revenue related to EECP(R) system sales for the fair
value of installation and in-service training to the period when the services
are rendered and for warranty obligations ratably over the service period, which
is generally one year.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year. Under
the provisions of EITF 00-21, for certain arrangements, a portion of the overall
33
system price attributable to the first year service arrangement is deferred and
recognized as revenue over the service period. As such, we do not accrue
warranty costs upon delivery but we rather recognize warranty and related
service costs as incurred.
Equipment sold to international customers through our distributor network
is generally covered by a one-year warranty period. For these customers the
Company accrues a warranty reserve for estimated costs of providing a parts only
warranty when the equipment sale is recognized.
The factors affecting our warranty liability included the number of units
sold and historical and anticipated rates of claims and costs per claim.
Net Loss per Common Share
Basic loss per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted loss
per share is based on the weighted number of common and potential dilutive
common shares outstanding. The calculation takes into account the shares that
may be issued upon the exercise of stock options and warrants, reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the period. Options and warrants to purchase shares
of common stock are excluded from the computation of diluted earnings per share
because the effect of their inclusion would be antidilutive.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. The deferred tax asset is
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the asset changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not" standard is subjective, and is based upon our estimate of a greater
than 50% probability that the deferred tax asset will be realized.
Deferred tax assets and liabilities are classified as current or
non-current based on the classification of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference. The deferred tax asset the Company previously
recorded, and then reversed fully in fiscal 2006, related primarily to the
realization of net operating loss carryforwards, of which the allocation of the
current portion, if any, reflected the expected utilization of such net
operating losses for the following twelve months. Such allocation was based on
the Company's internal financial forecast and may be subject to revision based
upon actual results.
The Company also complies with the provisions of the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits as income tax expense. No amounts were accrued for the payment of
interest and penalties at May 31, 2009. Management is currently unaware of any
issues under review that could result in significant payments, accruals or
material deviations from its position.
34
Stock-based Employee Compensation
The Company complies with Statement of Financial Standards (SFAS) No. 123
(revised 2004), "Share-Based Payment"
SFAS No. 123(R) requires all companies to recognize the cost of services
received in exchange for equity instruments, to be recognized in the financial
statements based on their fair values.
In May 2006, the compensation committee of the board of directors
accelerated the vesting provision of all outstanding stock options and warrants
so that they were fully vested at May 31, 2006, and as a result the adoption of
SFAS No. 123(R) did not have an immediate material effect on the financial
statements. However, as new stock options are issued by the Company this may
have a material effect on its quarterly and annual financial statements, in the
form of additional compensation expense. It is not possible to precisely
determine the expense impact of adoption since a portion of the ultimate expense
that is recorded will likely relate to awards that have not yet been granted.
The expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date.
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 valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. 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 measure of the fair value of its employee
stock options.
Equity instruments 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).
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to
determine their applicability to the Company. Where it is determined that a new
accounting pronouncement affects the Company's financial reporting, the Company
undertakes a study to determine the consequence of the change to its financial
statements and assures that there are proper controls in place to ascertain that
the Company's financials properly reflect the change. New pronouncements
assessed by the Company recently are discussed below:
In December 2007, the Financial Accoutning Standards Board ("FASB") issued
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements",
which changes the way the consolidated income statement is presented. It
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. Previously, net income attributable to the
noncontrolling interest generally was reported as an expense or other deduction
in arriving at consolidated net income. It also was often presented in
combination with other financial statement amounts.
In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS No. 107-1
and Accounting Principles Board ("APB") Opinion No. 28-1 ("APB No. 28-1"),
"Interim Disclosures about Fair Value of Financial Instruments," which amends
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and
requires disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. FSP SFAS No. 107-1 and APB No. 28-1 also amends APB Opinion No. 28,
"Interim Financial Reporting," to require those disclosures in summarized
financial information for interim reporting periods. FSP SFAS No. 107-1 and APB
No. 28-1 is effective for interim reporting periods ending after June 15, 2009.
The Company is in the process of evaluating the impact of FSP SFAS No. 107-1 and
APB No. 28-1 on our financial position and results of operations.
In May 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 165, "Subsequent Events" ("SFAS 165"). This standard is intended to
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
35
are available to be issued. Specifically, this standard sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. SFAS
165 is effective for fiscal years and interim periods ended after June 15, 2009
and will be applied prospectively. We adopted SFAS 165 during the second quarter
of 2009, and its adoption did not have a material impact on our results of
operations and financial position.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles--a
replacement of FASB Statement No. 162 ("SFAS 168"). The statement confirmed that
the FASB Accounting Standards Codification (the "Codification") will become the
single official source of authoritative U.S. GAAP (other than guidance issued by
the SEC), superseding existing FASB, American Institute of Certified Public
Accountants, Emerging Issues Task Force ("EITF"), and related literature. After
that date, only one level of authoritative U.S. GAAP will exist. All other
literature will be considered non-authoritative. The Codification does not
change U.S. GAAP; instead, it introduces a new structure that is organized in an
easily accessible, user-friendly online research system. The Codification, which
changes the referencing of financial standards, becomes effective for interim
and annual periods ending on or after September 15, 2009. We will apply the
Codification beginning in the third quarter of fiscal 2009. The adoption of SFAS
168 is not expected to have any substantive impact on our condensed consolidated
financial statements or related footnotes.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Report on Disclosure Controls and Procedures
Disclosure controls and procedures reporting as promulgated under the
Exchange Act is defined as controls and procedures that are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. Disclosure
controls and procedures include without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Our CEO and our CFO have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of May 31, 2009 and have
concluded that the Company's disclosure controls and procedures were effective
as of May 31, 2009.
36
ITEM 9A(T) - CONTROLS AND PROCEDURES
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company as defined in Rule
13a-15(f) of the Exchange Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control
involves maintaining records that accurately represent our business
transactions, providing reasonable assurance that receipts and expenditures of
company assets are made in accordance with management authorization, and
providing reasonable assurance that unauthorized acquisition, use or disposition
of company assets that could have a material affect on our financial statements
would be detected or prevented on a timely basis.
Because of its innate limitations, internal control over our financial
statements is not intended to provide absolute guarantee that a misstatement can
be detected or prevented on the statements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also projections of any
evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in condition, or that the degree of
compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this evaluation and those criteria, the
Company's CEO and CFO concluded that the Company's internal control over
financial reporting was effective as of May 31, 2009. This annual report does
not include an attestation report of the Company's Independent Registered Public
Accounting Firm regarding internal control over financial reporting.
This annual report does not include an attestation report of the Company's
Independent Registered Public Accounting Firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's Independent Registered Public Accounting Firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only Management's report in this Annual Report.
ITEM 9B - OTHER INFORMATION
None.
PART III
The information required by Part III is intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with our 2009 Annual Meeting of Stockholders and is
incorporated herein by reference.
37
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Financial Statement Schedules
------------------------------------------------------
(1) See Index to Consolidated Financial Statements on page F-1 at beginning
of attached financial statements.
(b) Exhibits
--------
(3) (a) Restated Certificate of Incorporation (2)
(b) By-Laws (1)
(4) (a) Specimen Certificate for Common Stock (1)
(10 (a) 1995 Stock Option Plan (3)
(b) Outside Director Stock Option Plan (3)
(c) 1997 Stock Option Plan, as amended (4)
(d) 1999 Stock Option Plan, as amended (5)
(e) 2004 Stock Option/Stock Issuance Plan (6)
(f) Securities Purchase Agreement dated June 21, 2007 between Registrant
and Kerns Manufacturing Corp. (7)
(g) Form of Common Stock Purchase Warrant to dated June 21, 2007 (7)
(h) Registration Rights Agreement dated June 21, 2007 between Registrant,
Kerns Manufacturing Corp. and Living Data Technology Corporation. (7)
(i) Purchase and Sale Agreement dated June 1, 2007 between 180 Linden
Avenue Corp and 180 Linden Realty LLC. (8)
(j) Lease Agreement dated August 15, 2007 between 180 Linden Realty LLC
and Registrant (8)
(21) Subsidiaries of the Registrant
Percentage
Name State of Incorporation Owned by Company
---- ---------------------- ----------------
Viromedics, Inc. Delaware 61%
180 Linden Avenue Corp. New York 100%
(23.1) Consent of Rothstein Kass & Company, P.C.
(23.2) Consent of Miller, Ellin & Company, LLP
(31) Certification Reports pursuant to Securities Exchange Act Rule 13a -
14
(32) Certification Reports pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
--------------------------
(1) Incorporated by reference to Registration Statement on Form S-18, No.
33-24095.
(2) Incorporated by reference to Registration Statement on Form S-1, No.
33-46377 (effective 7/12/94).
(3) Incorporated by reference to Report on Form 8-K dated January 24,
1995.
(4) Incorporated by reference to Report on Form 10-K for the fiscal year
ended May 31, 1999
(5) Incorporated by reference to Report on Form 10-K for the fiscal year
ended May 31, 2000.
(6) Incorporated by reference to Notice of Annual Meeting of Stockholders
dated October 28, 2004.
(7) Incorporated by reference to Report on Form 8-K dated June 21, 2007.
(8) Incorporated by reference to Report on Form 10-KSB for the fiscal year
ended May 31, 2007.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 21st day of August 2009.
VASOMEDICAL, INC.
By: /s/ Jun Ma
-------------------------------------------
Jun Ma
President, Chief Executive Officer, and
Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on August 21, 2009, by the following persons in the
capacities indicated:
/s/ Jun Ma President, Chief Executive Officer
---------------------------------- and Director (Principal Executive
Jun Ma Officer)
/s/ Abraham E. Cohen Chairman of the Board
-----------------------------------
Abraham E. Cohen
/s/ John C. K. Hui Vice Chairman of the Board, Chief
----------------------------------- Technology Officer
John C. K. Hui
/s/ Tarachand Singh Chief Financial Officer (Principal
----------------------------------- Financial and Accounting Officer)
Tarachand Singh
/s/ Derek Enlander Director
-----------------------------------
Derek Enlander
/s/ Behnam Movaseghi Director
-----------------------------------
Behnam Movaseghi
/s/ Photios T. Paulson Director
-----------------------------------
Photios T. Paulson
/s/ Simon Srybnik Director
-----------------------------------
Simon Srybnik
/s/ Martin Zeiger Director
-----------------------------------
Martin Zeiger
39
Vasomedical, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2009 and 2008
Page
----
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Financial Statements
Consolidated Balance Sheets as of May 31, 2009 and 2008 F-4
Consolidated Statements of Operations for the years ended
May 31, 2009 and 2008 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended May 31, 2009 and 2008 F-6
Consolidated Statements of Cash Flows for the years ended
May 31, 2009 and 2008 F-7
Notes to Consolidated Financial Statements F-8 - F-26
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vasomedical, Inc
We have audited the accompanying consolidated balance sheet of Vasomedical, Inc.
and Subsidiaries, (collectively, the "Company") as of May 31, 2009, and the
related consolidated statement of operations, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vasomedical, Inc. and Subsidiaries as of May 31, 2009, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Rothstein, Kass & Company P.C.
Roseland, New Jersey
August 20, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Vasomedical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Vasomedical, Inc.
and Subsidiaries (the "Company") as of May 31, 2008 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vasomedical, Inc. and Subsidiaries as of May 31, 2008 and the consolidated
results of their operations and their consolidated cash flow for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Miller, Ellin & Company, LLP
MILLER, ELLIN & COMPANY, LLP
New York, New York
August 20, 2008
F-3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
May 31, 2009 May 31, 2008
-------------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 544,057 $ 2,653,999
Short-term investments, at fair value 370,523 -
Accounts receivable, net of an allowance for doubtful accounts of
$94,973 at May 31, 2009, and $270,183 at May 31, 2008 659,551 717,849
Inventories, net 1,479,724 1,652,678
Other current assets 175,511 58,933
-------------------- -----------------
Total current assets 3,229,366 5,083,459
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,562,891 at May 31, 2009, and $2,178,566 at May 31, 2008 180,409 57,170
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
$213,234 at May 31, 2009, and $101,776 at May 31, 2008 375,643 407,101
OTHER ASSETS 178,332 213,336
-------------------- -----------------
$ 3,963,750 $ 5,761,066
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 504,773 $ 822,244
Sales tax payable 143,693 149,304
Deferred revenue - current portion 957,258 1,132,445
Deferred gain on sale-leaseback of building - current portion 53,245 53,245
Accrued professional fees 9,750 74,320
Trade Payable to related parties 260,000 -
-------------------- -----------------
Total current liabilities 1,928,719 2,231,558
-------------------- -----------------
LONG-TERM LIABILITIES
Deferred revenue, less current portion 330,449 485,608
Accrued rent expense 16,040 8,656
Deferred gain on sale-leaseback of building , net of current portion 115,365 168,610
Other long-term liabilities 11,900 -
-------------------- -----------------
Total long-term liabilities 473,754 662,874
-------------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued - -
Common stock, $.001 par value; 110,000,000 shares authorized;
99,843,004 shares at May 31, 2009, and 93,768,004 at
May 31, 2008, issued and outstanding 99,843 93,768
Additional paid-in capital 48,281,711 48,068,432
Accumulated deficit (46,820,277) (45,295,566)
-------------------- -----------------
Total stockholders' equity 1,561,277 2,866,634
-------------------- -----------------
$ 3,963,750 $ 5,761,066
==================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 31,
----------------------------------
2009 2008
--------------- ----------------
Revenues
Equipment sales $ 2,219,729 $ 2,087,365
Equipment rentals and services 2,251,457 3,095,403
--------------- ----------------
Total revenues 4,471,186 5,182,768
--------------- ----------------
Cost of Sales and Services
Cost of sales, equipment 1,586,633 1,679,632
Cost of equipment rentals and services 979,183 1,150,738
--------------- ----------------
Total cost of sales and services 2,565,816 2,830,370
--------------- ----------------
Gross profit 1,905,370 2,352,398
--------------- ----------------
Operating Expenses
Selling, general and administrative 3,013,276 2,626,045
Research and development 519,509 474,111
--------------- ----------------
Total operating expenses 3,532,785 3,100,156
--------------- ----------------
Loss from operations (1,627,415) (747,758)
--------------- ----------------
Other Income (Expenses)
Interest and financing costs - (16,616)
Interest and other income, net 55,334 61,083
Amortization of deferred gain on
sale-leaseback of building 53,245 44,371
--------------- ----------------
Total other income (expense), net 108,579 88,838
--------------- ----------------
Loss before income taxes, net (1,518,836) (658,920)
Income tax expense, net (5,875) (18,045)
--------------- ----------------
Net loss applicable to common stockholders $(1,524,711) $ (676,965)
=============== ================
Net loss per common share
- basic and diluted $ (0.02) $ (0.01)
=============== ================
Weighted average common shares outstanding
- basic and diluted 99,556,191 92,211,788
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Paid-in Accumulated Total Stockholders'
Shares Amount Capital Deficit Equity
------------ ------------- ----------------- ------------------ ------------------
Balances at May 31, 2007 65,198,592 $ 65,198 $ 46,165,998 $ (44,618,601) $ 1,612,595
Common stock and warrants
(net of expenses incurred)
issued pursuant to Securities
Purchase Agreement 21,428,572 21,429 1,354,461 - 1,375,890
Common stock and warrants
issued for Distribution and
Supply agreement 6,990,840 6,991 461,395 - 468,386
Common stock issued to a
Director 150,000 150 8,850 - 9,000
Stock based compensation - - 77,728 - 77,728
Net-loss - - - (676,965) (676,965)
------------ ------------- ----------------- ------------------ ------------------
Balances at May 31, 2008 93,768,004 93,768 48,068,432 (45,295,566) 2,866,634
Common stock issued
pursuant to Distribution
and Supply agreement 3,000,000 3,000 57,000 - 60,000
Common stock issued to
Directors for fiscal year
2008 compensation 2,075,000 2,075 122,424 - 124,499
Stock-based compensation 1,000,000 1,000 33,855 - 34,855
Net-loss - - - (1,524,711) (1,524,711)
------------ ------------- ----------------- ------------------ ------------------
Balance at May 31, 2009 99,843,004 $ 99,843 $ 48,281,711 $ (46,820,277) $ 1,561,277
============ ============= ================= ================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31,
2009 2008
------------- -------------
Cash flows from operating activities
Net loss $ (1,524,711) $ (676,965)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization of patent, property and
equipment 102,245 187,628
Amortization of deferred gain on sale-leaseback of building (53,245) (44,371)
Provision for doubtful accounts (175,210) 42,837
Amortization of deferred distributor costs 111,458 101,776
Reserves for obsolete inventory 200,070 (83,124)
Stock-based compensation 159,354 86,728
Changes in operating assets and liabilities:
Accounts receivable 233,510 (27,031)
Inventories (180,441) 592,427
Deferred distributor costs (20,000) (40,490)
Other assets (119,278) (24,172)
Accounts payable, accrued expenses, and other
current liabilities (387,650) (24,947)
Deferred revenue (330,346) (138,299)
Other liabilities 7,384 15,982
Trade payable to related party 260,000 -
------------- -------------
Net cash used in operating activities (1,716,860) (32,021)
------------- -------------
Cash flows from 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 (22,559) -
Purchases of short-term investments (370,523) -
------------- -------------
Net cash provided by (used in) investing activities (393,082) 1,310,857
------------- -------------
Cash flows from 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 (2,109,942) 1,803,711
Cash and cash equivalents - beginning of the fiscal year 2,653,999 850,288
------------- -------------
Cash and cash equivalents - end of the fiscal year $ 544,057 $ 2,653,999
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION:
Interest paid $ - $ 16,616
============= =============
Income taxes paid $ - $ 11,685
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Inventories transferred to property and equipment,
attributable to operating leases, net $ 153,325 $ (44,354)
============= =============
Common stock issued for distribution agreement $ 60,000 $ 468,386
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
NOTE A - DESCRIPTION OF BUSINESS AND LIQUIDITY
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been 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 system is a non-invasive,
outpatient therapy for the 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 need for oxygen, 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 our enhanced external
counterpulsation systems.
We have Food and Drug Administration (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 symptoms in patients with moderate to
severe symptoms who are refractory to medications and not candidates for
invasive procedures, including patients with serious comorbidities, such as
heart failure, diabetes, and peripheral vascular disease. Patients with primary
diagnoses of heart failure, diabetes, and peripheral vascular disease are also
reimbursed under the same criteria, provided the primary 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. The Company has reduced
personnel costs by reorganization. The Company has negotiated new terms on
professional fees, facility expenses, and shipping and supply costs. The Company
is also looking to obtain a revolving line of credit to help stabilize cash flow
and to respond to customers requests for flexible payment terms on our EECP(R)
therapy systems.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary and its inactive majority-owned subsidiary.
Significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Significant
estimates and assumptions relate to estimates of collectibility of accounts
receivable, the realizability of deferred tax assets, and the adequacy of
inventory and warranty reserves. Actual results could differ from those
estimates.
F-8
Vasomedical, Inc. and Subsidiaries
+
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectibility is reasonably assured. In the United States,
we recognize revenue from the sale of our EECP(R) systems in the period in which
we deliver the system to the customer. Revenue from the sale of our EECP(R)
systems to international markets is recognized upon shipment, during the period
in which we deliver the product to a common carrier, as are supplies,
accessories and spare parts delivered to both domestic and international
customers. Returns are accepted prior to the in-service and training subject to
a 10% restocking charge or for normal warranty matters, and we are not obligated
for post-sale upgrades to these systems. In addition, we use the installment
method to record revenue based on cash receipts in situations where the account
receivable is collected over an extended period of time and in our judgment the
degree of collectibility is uncertain.
In most cases, revenue from domestic EECP(R) system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectibility, the separability of units of accounting, and the
fair value of individual elements. We follow the provisions of Emerging Issues
Task Force Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"). The principles and guidance outlined in EITF 00-21 provide a
framework to determine (a) how the arrangement consideration should be measured
(b) whether the arrangement should be divided into separate units of accounting,
and (c) how the arrangement consideration should be allocated among the separate
units of accounting. We determined that the domestic sale of our EECP(R) systems
includes a combination of three elements that qualify as separate units of
accounting:
i. EECP(R) equipment sale,
ii. provision of in-service and training support consisting of equipment
set-up and training provided at the customer's facilities, and
iii. a service arrangement (usually one year), consisting of: service by
factory-trained service representatives, material and labor costs,
emergency and remedial service visits, software upgrades, technical
phone support and preferred response times.
Each of these elements represent individual units of accounting as the
delivered item has value to a customer on a stand-alone basis, objective and
reliable evidence of fair value exists for undelivered items, and arrangements
normally do not contain a general right of return relative to the delivered
item. We determine fair value based on the price of the deliverable when it is
sold separately or based on third-party evidence. In accordance with the
guidance in EITF 00-21, we use the residual method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
i. EECP(R) equipment sales, when delivery and acceptance occurs based on
delivery and acceptance documentation received from independent
shipping companies or customers,
ii. in-service and training, following documented completion of the
training, and
iii. the service arrangement, ratably over the service period, which is
generally one year.
In-service and training generally occurs within a few weeks of shipment and
our return policy states that no returns will be accepted after in-service and
training has been completed. The amount related to in-service and training is
recognized as service revenue at the time the in-service and training is
completed and the amount related to service arrangements is recognized ratably
as service revenue over the related service period, which is generally one year.
Costs associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of equipment sales as incurred.
The Company also recognizes revenue generated from servicing EECP(R)
systems that are no longer covered by the service arrangement, or by providing
sites with additional training, in the period that these services are provided.
Revenue related to future commitments under separately priced extended service
agreements on our EECP(R) system are deferred and recognized ratably over the
service period, generally ranging from one year to four years. Costs associated
with the provision of service and maintenance, including salaries, benefits,
F-9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
travel, spare parts and equipment, are recognized in cost of sales as incurred.
Amounts billed in excess of revenue recognized are included as deferred revenue
in the consolidated balance sheets.
Revenues from the sale of EECP(R) systems through our international
distributor network are generally covered by a one-year warranty period. For
these customers we accrue a warranty reserve for estimated costs to provide
warranty parts when the equipment sale is recognized.
The Company has also entered into lease agreements for our EECP(R) systems,
generally for terms of one year or less, that are classified as operating
leases. Revenues from operating leases are generally recognized, in accordance
with the terms of the lease agreements, on a straight-line basis over the life
of the respective leases. For certain operating leases in which payment terms
are determined on a "fee-per-use" basis, revenues are recognized as incurred
(i.e., as actual usage occurs). The cost of the EECP(R) system utilized under
operating leases is recorded as a component of property and equipment and is
amortized to cost of sales over the estimated useful life of the equipment, not
to exceed five years. There were no significant minimum rental commitments on
these operating leases at May 31, 2009.
Shipping and Handling Costs
All shipping and handling expenses are charged to cost of sales. Amounts
billed to customers related to shipping and handling costs are included as a
component of sales.
Research and Development
Research and development costs attributable to development are expensed as
incurred. Included in research and development costs is amortization expense
related to the capitalized cost of EECP(R) systems under loan for clinical
trials.
Stock-Based Employee Compensation
The Company complies with Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R)
requires all companies to recognize the cost of services received in exchange
for awards of equity instruments in the financial statements based on their fair
values.
During the fiscal year ended May 31, 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,
700,000 shares to two officers of the Company having a fair market value of
$0.02 per share at the time of the respective grant, and 200,000 shares to one
employee of the Company having a fair market value of $0.02 per share at the
time of the respective grant.
Stock-based compensation expense recognized under SFAS 123(R) for the
fiscal year ended May 31, 2009 was $159,354 and $86,728 for the fiscal year
ended May 31, 2008, which was comprised of the fair value of the common stock
issued during the year and the costs of prior years' grants of stock options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. 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.
F-10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
The fair value of the Company's stock options were estimated using the
following weighted-average assumptions for options granted during the year ended
May 31, 2008:
Expected life (years) 5
Expected volatility 103.25%
Risk-free interest rate 4.95%
Expected dividend yield 0.0%
No stock options were issued during the year ended May 31, 2009.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid
investments either in certificates of deposit, treasury bills, money market
funds, and investment grade commercial paper issued by major corporations and
financial institutions that generally have maturities of three months or less
from the date of acquisition. Dividend and interest income are recognized when
earned. The cost of securities sold is calculated using the specific
identification method.
Short-Term Investments
The Company's short-term investments consist of certificates of deposit
with original maturities greater than 3 months. They are bought and held
principally for the purpose of selling them in the near-term and are classified
as trading securities. Trading securities are recorded at fair value on the
balance sheets in current assets, with the change in fair value during the years
included in earnings.
Accounts Receivable, net
The Company's accounts receivable are due from customers engaged in the
provision of medical services. Credit is extended based on evaluation of a
customer's financial condition and, generally, collateral is not required.
Accounts receivable are generally due 30 to 90 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts, returns,
term discounts and other allowances. Accounts that remain outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company reviews historical write-offs of their receivables. The
Company also looks at the credit quality of their customer base as well as
changes in their credit policies. The Company continuously monitors collections
and payments from our customers, and writes off receivables when all efforts at
collection have been exhausted. While credit losses have historically been
within expectations and the provisions established, the Company cannot guarantee
that it will continue to experience the same credit loss rates that they have in
the past.
The changes in the Company's allowance for doubtful accounts are as
follows:
May 31, 2009 May 31, 2008
---------------- ----------------
Beginning balance $ 270,183 $ 364,809
Provision for losses on accounts receivable - (53,142)
Direct write-offs, net of recoveries (175,210) (41,484)
---------------- ----------------
Ending balance $ 94,973 $ 270,183
================ ================
F-11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
Concentrations of Credit Risk
We market the EECP(R) system principally to hospitals and physician private
practices. We perform credit evaluations of our customers' financial condition
and, as a consequence, believe that our receivable credit risk exposure is
limited. For the years ended May 31, 2009 and 2008, no customer accounted for
10% or more of revenues or accounts receivable.
The Company maintains cash balances in certain financial institutions,
which, at time, may exceed federally insured limits. The Company has not
experienced any losses on these accounts and believes it is not subject to any
significant credit risk on these accounts.
Our revenues were derived from the following geographic areas:
Years ended May31,
--------------------------------------
2009 2008
--------------- ----------------
Domestic (United States) $ 3,078,785 $ 4,347,222
Non-domestic (foreign) 1,392,401 835,546
--------------- ----------------
$ 4,471,186 $ 5,182,768
=============== ================
Inventories, net
The Company values inventory at the lower of cost or estimated market, with
cost being determined on a first-in, first-out basis. The Company often places
EECP(R) systems at various field locations for demonstration, training,
evaluation, and other similar purposes at no charge. The cost of these EECP(R)
systems is transferred to property and equipment and is amortized over two to
five years. The Company records the cost of refurbished components of EECP(R)
systems and critical components at cost plus the cost of refurbishment. The
Company regularly reviews inventory quantities on hand, particularly raw
materials and components, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand.
We comply with the provisions of SFAS No. 151, "Inventory Costs" (SFAS
151). The statement clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overhead
to inventory based on the normal capacity of the production facilities.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Major improvements are capitalized and minor replacements,
maintenance and repairs are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the consolidated balance sheet. Depreciation is provided over the estimated
useful lives of the assets, which range from two to twenty years, on a
straight-line basis. Accelerated methods of depreciation are used for tax
purposes. We amortize leasehold improvements over the useful life of the related
leasehold improvement or the life of the related lease, whichever is less. (See
Note E.)
Deferred Revenue
We record revenue on extended service contracts ratably over the term of
the related warranty contracts. Under the provisions of EITF 00-21, we began to
defer revenue related to EECP(R) system sales for the fair value of installation
and in-service training to the period when the services are rendered and for
warranty obligations ratably over the service period, which is generally one
year. (See Note G.)
F-12
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
Warranty Costs
Equipment sold is generally covered by a warranty period of one year. In
accordance with SFAS No. 5 "Accounting for Contingencies", we accrue a warranty
reserve for estimated costs of providing a parts only warranty when the
equipment sale is recognized.
The factors affecting our warranty liability include the number of units
sold and the historical and anticipated rates of claims and costs per claim.
(See Note I.)
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. The deferred tax asset is
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the asset changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The
"realizability" standard is subjective and is based upon our estimate of a
greater than 50% probability that the deferred tax asset can be realized.
Deferred tax assets and liabilities are classified as current or
non-current based on the classification of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference.
The Company also complies with the provisions of the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by the relevant taxing
authority based on the technical merits. The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as income tax expense. No
amounts were accrued for the payment of interest and penalties at May 31, 2009.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position.
Fair Value of Financial Instruments
The Company adopted the provisions of SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), effective June 1, 2008. Under SFAS 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 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
F-13
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
1 securities. Since valuations are based on quoted prices that are readily
and regularly available in an active market, valuation of these securities
does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, either directly or
indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.
Valuation Techniques
The Company values investments in securities and securities sold short that
are freely tradable and are listed on a national securities exchange or reported
on the NASDAQ national market at their last sales price as of the last business
day of the fiscal year.
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term maturities of the
instruments.
Net Loss Per Common Share
Basic loss per common share is based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted loss per common share is based on the weighted number of common and
potential dilutive common shares outstanding. The diluted calculation takes into
account the shares that may be issued upon the exercise of stock options and
warrants, reduced by the shares that may be repurchased with the funds received
from the exercise, based on the average price during the period.
Options and warrants to purchase 10,275,183 and 12,000,462 shares of common
stock were excluded from the computation of diluted earnings per share for the
years ended May 31, 2009 and 2008, respectively, because the effect of their
inclusion would be antidilutive.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform
with the current year's presentation.
Recently Issued Accounting Pronouncements Not Yet Effective
The Company continually assesses any new accounting pronouncements to
determine their applicability to the Company. Where it is determined that a new
accounting pronouncement affects the Company's financial reporting, the Company
undertakes a study to determine the consequence of the change to its financial
statements and assures that there are proper controls in place to ascertain that
the Company's financials properly reflect the change. New pronouncements
assessed by the Company recently are discussed below:
In December 2007, the Financial Accoutning Standards Board ("FASB") issued
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements",
which changes the way the consolidated income statement is presented. It
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. Previously, net income attributable to the
noncontrolling interest generally was reported as an expense or other deduction
in arriving at consolidated net income. It also was often presented in
combination with other financial statement amounts.
In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS No. 107-1
and Accounting Principles Board ("APB") Opinion No. 28-1 ("APB No. 28-1"),
"Interim Disclosures about Fair Value of Financial Instruments," which amends
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and
requires disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
F-14
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
statements. FSP SFAS No. 107-1 and APB No. 28-1 also amends APB Opinion No. 28,
"Interim Financial Reporting," to require those disclosures in summarized
financial information for interim reporting periods. FSP SFAS No. 107-1 and APB
No. 28-1 is effective for interim reporting periods ending after June 15, 2009.
The Company is in the process of evaluating the impact of FSP SFAS No. 107-1 and
APB No. 28-1 on our financial position and results of operations.
In May 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 165, "Subsequent Events" ("SFAS 165"). This standard is intended to
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. Specifically, this standard sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. SFAS
165 is effective for fiscal years and interim periods ended after June 15, 2009
and will be applied prospectively. We adopted SFAS 165 during the second quarter
of 2009, and its adoption did not have a material impact on our results of
operations and financial position.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles--a
replacement of FASB Statement No. 162 ("SFAS 168"). The statement confirmed that
the FASB Accounting Standards Codification (the "Codification") will become the
single official source of authoritative U.S. GAAP (other than guidance issued by
the SEC), superseding existing FASB, American Institute of Certified Public
Accountants, Emerging Issues Task Force ("EITF"), and related literature. After
that date, only one level of authoritative U.S. GAAP will exist. All other
literature will be considered non-authoritative. The Codification does not
change U.S. GAAP; instead, it introduces a new structure that is organized in an
easily accessible, user-friendly online research system. The Codification, which
changes the referencing of financial standards, becomes effective for interim
and annual periods ending on or after September 15, 2009. We will apply the
Codification beginning in the third quarter of fiscal 2009. The adoption of SFAS
168 is not expected to have any substantive impact on our condensed consolidated
financial statements or related footnotes.
NOTE C - FAIR VALUE MEASUREMENTS
The Company's assets recorded at fair value have been categorized based
upon a fair value hierarchy in accordance with SFAS 157.
The following table presents information about the Company's assets and
liabilities measured at fair value as of May 31, 2009:
Quoted Prices Significant
in Active Other Significant Balance
Markets for Observable Unobservable as of
Identical Assets Inputs Inputs May 31,
(Level 1) (Level 2) (Level 3) 2009
------------------ ------------------ ----------------- ------------
Assets
Cash equivalents invested in
money market fund (included
in cash and cash equivalents) $ 315,002 $ - $ - $ 315,002
Investment in certificates of
deposit (included in short-
term investments) 370,523 - - 370,523
-----------------------------------------------------------------------
Total $ 685,525 $ - $ - $ 685,525
-----------------------------------------------------------------------
F-15
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
The fair values of the Company's cash equivalents invested in money market
fund are determined through market, observable and corroborated sources.
NOTE D - INVENTORIES, NET
Inventories, net of reserves consisted of the following:
May 31, 2009 May 31, 2008
--------------------- ---------------------
Raw materials $ 646,775 $ 936,035
Work in process 522,823 603,925
Finished goods 310,126 112,718
--------------------- ---------------------
$ 1,479,724 $ 1,652,678
===================== =====================
At May 31, 2009 and 2008, the Company maintains reserves for excess and
obsolete inventories of $393,972 and $594,042, respectively.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
May 31, 2009 May 31, 2008
--------------------- ---------------------
Office, laboratory and other equipment $ 919,435 $ 1,368,170
EECP(R) systems under operating leases
or under loan for clinical trials 674,400 719,401
Furniture and fixtures 149,465 148,165
--------------------- ---------------------
1,743,300 2,235,736
Less: accumulated depreciation 1,562,891 2,178,566
--------------------- ---------------------
Property and equipment - net $ 180,409 $ 57,170
===================== =====================
Depreciation expense amounted to $52,232 and $104,724 for the years ended
May 31, 2009 and 2008, respectively.
NOTE F - INTANGIBLE ASSETS
The Company owns thirteen US patents including eight utility and three
design patents that expire at various times between 2009 and 2023. In addition,
more than 20 foreign patents have been issued that expire at various times from
2009 to 2023. Cost incurred for submitting the applications to the United States
Patent and Trademark Office and other foreign authorities for these patents have
been capitalized. Patent costs are being amortized using the straight-line
method over the related 10 year lives. The company begins amortizing patent
costs once a filing receipt is received stating the patent serial number and
filing date from the Patent Office or other foreign authority.
The changes in the Company's intangible assets are as follows:
May 31, 2009 May 31, 2008
---------------- -----------------
Patent costs
Costs $ 469,043 $ 469,043
Accumulated Amortization (303,649) (256,745)
---------------- -----------------
$ 165,394 $ 212,298
================ =================
F-16
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
Intangible assets are included in other assets on the Company's
consolidated balance sheets.
NOTE G - DEFERRED REVENUE
The changes in the Company's deferred revenues are as follows:
Years Ended May 31,
-----------------------------------------
2009 2008
----------------- -----------------
Deferred revenue at the beginning of the fiscal year $ 1,618,053 $ 1,756,351
Additions:
Deferred extended service contracts 1,086,968 1,849,831
Deferred in-service and training 37,500 47,500
Deferred service arrangement obligations 133,500 213,750
Deferred service arrangement promotion 600 9,150
Recognized as revenue:
Deferred extended service contracts (1,366,062) (2,046,823)
Deferred in-service and training (35,000) (40,000)
Deferred service arrangement obligations (185,452) (157,756)
Deferred service arrangement promotion (2,400) (13,950)
----------------- -----------------
Deferred revenue at end of the fiscal year 1,287,707 1,618,053
Less: current portion 957,258 1,132,445
----------------- -----------------
Long-term deferred revenue at end of the fiscal year $ 330,449 $ 485,608
================= =================
NOTE H - SALE-LEASEBACK
In August 2007, the Company sold its warehouse and corporate facility for
$1,400,000. Under the agreement, the Company is leasing back the property from
the purchaser over a period of five years. The Company is accounting for the
leaseback as an operating lease. The gain of $266,226 realized in this
transaction was deferred and is being amortized to income ratably over the term
of the lease. The unamortized deferred gain of $168,610 and $221,855 as of May
21, 2009 and 2008, respectively, is shown as "Deferred gain on sale-leaseback of
building" in the Company's consolidated balance sheets. The short-term portion
of $53,245 is shown in current liabilities and the long-term portion is in other
long-term liabilities. The amount recognized as amortization in fiscal 2009, and
2008 was $53,245 and $44,371 respectively.
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
For the years ended May 31, 2009 and 2008 accounts payable and accrued
expenses consisted of the following:
2009 2008
-------------- ----------------
Accounts Payable $ 142,748 $ 610,199
Accrued Expenses 328,525 156,487
Other 33,500 55,558
------------------ ----------------
$ 504,773 $ 822,244
=============== ================
F-17
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
NOTE J - WARRANTY LIABILITY
The changes in the Company's product warranty liability are as follows:
Years ended May31,
2009 2008
----------------- -----------------
Warranty liability at the beginning of the fiscal year $ 17,250 $ 15,750
Expense for new warranties issued 81,800 49,500
Warranty claims (75,800) (48,000)
----------------- -----------------
Warranty liability at the end of the fiscal year $ 23,250 $ 17,250
================= =================
Warranty liability is included in accounts payable and accrued expenses on
the Company's consolidated balance sheets.
NOTE K - RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. (Kerns). Concurrently with our entry into the
Securities Purchase Agreement, we also entered into a Distribution Agreement and
a Supplier Agreement with Living Data Technology Corporation (Living Data), an
affiliate of Kerns.
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for a total purchase price of
$1,500,000, as well as a five-year warrant to purchase 4,285,714 shares of our
common stock at an initial exercise price of $.08 per share (the Warrant). The
agreement further provided for the appointment to our Board of Directors of two
representatives from Kerns. In furtherance thereof, Dr. Jun Ma and Mr. Simon
Srybnik, Chairman of both Kerns and Living Data, were appointed members of our
Board of Directors. On October 15, 2008, Dr. Jun Ma was appointed Chief
Executive Officer. Pursuant to the Distribution Agreement, we have become the
exclusive distributor in the United States of the AngioNew ECP systems
manufactured by Living Data. As additional consideration for such agreement, we
agreed to issue an additional 6,990,840 shares of our common stock to Living
Data. Pursuant to the Supplier Agreement, Living Data now is the exclusive
supplier to us of the ECP therapy systems that we market under the registered
trademark EECP(R). The Distribution Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock having a fair market value of
$60,000 at time of issue.
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
On July 10, 2007, the Board of Directors appointed Mr. Behnam Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.
As affiliates of Living Data and Kerns, Mr. Ma, Mr. Movaseghi and Mr.
Srybnik have each been directly involved in the transactions between Living Data
and Kerns, and the Company, with respect to the Securities Purchase Agreement,
the Distribution Agreement and the Supplier Agreement, as well as consulting
services to the Company with no compensation.
F-18
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
During fiscal 2008, the Company purchased ECP therapy systems under the
Supplier Agreement for $120,000 from Living Data, which was paid in full by the
Company as of June 2008. In addition, Living Data purchased $5,000 worth of ECP
therapy system components from the Company, which was paid in full by Living
Data as of June 2008.
During fiscal 2009, the Company purchased ECP therapy systems under the
Supplier Agreement for $595,000 from Living Data. Payment terms on certain
purchases leave a balance of $260,000 in Trade Payable to Related Party -
current portion on the accompanying consolidated condensed balance sheet as of
May 31, 2009. In addition, during fiscal year 2009 Living Data purchased $3,118
worth of ECP therapy system components from the Company.
During fiscal 2009, Living Data assigned to Vasomedical, Inc. all of its
rights and interests under its distributorship Agreement with a corporation
organized and existing under the laws of the People's Republic of China that
manufactures Ambulatory Blood Pressure Monitors, Ambulatory ECG Recorders and
Holter & ABPM Combiner Recorders, for $20,000 payable to Living Data based on
certain terms and conditions. The Company must also pay to Living Data 5% of the
selling price or 5% of the cost of all goods sold (whichever is higher), and 5%
of the cost of all goods transferred but not sold under the Assignment Agreement
to Living Data based on sales of this equipment. The Company will sell these
systems in the United States and other countries now that regulatory clearance
had been obtained.
During fiscal 2009, Living Data assigned to Vasomedical, Inc. all of its
rights and interests under its Distributorship Agreement with a corporation
organized and existing under the laws of the People's Republic of China, that
manufactures Ultrasound Scanners, for $20,000 payable to Living Data based on
certain terms and conditions. The Company must also pay to Living Data 5% of the
selling price or 5% of the cost of all goods sold (whichever is higher), and 5%
of the cost of all goods transferred but not sold under the Assignment Agreement
to Living Data based on sales of this equipment. The Company intends to sell
these systems in the United States and other countries subject to obtaining
regulatory clearance.
Further, Kerns provides the Company, free of charge, part-time use of one
of its Information Technology (IT) employees as well one of their IT consultants
to provide the Company with IT and database support services. In addition, a
clinical applications support specialist and a service engineer from Living Data
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 fiscal year 2009.
NOTE L - STOCKHOLDERS' EQUITY AND WARRANTS
Common stock
See Note K for discussion of common stock issued in fiscal 2009 and 2008 in
connection with related party agreements. Additionally during fiscal year 2009
and 2008, the Company issued 3,075,000, and 150,000 share of common stock,
respectively, to directors, officers, employees, and/or consultants.
On June 21, 2007, a five-year warrant to purchase 4,285,714 shares of our
common stock at an initial exercise price of $.08 per share to Kerns under the
Securities Purchase Agreement.
On July 19, 2005, we granted warrants for the purchase of 2,254,538 shares
of common stock to investors and consultants. The warrants may be exercised at a
price of $0.69 per share for a term of five years, ending July 19, 2010.
Preferred stock
At May 31, 2009 the Company had 1,000,000 shares of preferred stock
authorized, with no shares issued and outstanding. There are 850,000 shares that
have been designated to a series as shown in the table below, 150,000 shares are
available to be designated.
F-19
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
The following table illustrates the various series of preferred stock and
their stated value:
Authorized Shares Stated Value per share
----------------- ----------------------
Series A 500,000 NONE
Series B 150,000 $20.00
Series C 175,000 $20.00
Series D 25,000 $100.00
Series A preferred stock shares are convertible into two shares of common
stock to the extent the Company has, at the time of conversion, sufficient
authorized but unissued shares of common stock.
Series B preferred stock shares are convertible into shares of common stock
at a conversion ratio of the stated value plus accrued but unpaid dividends,
over the conversion price, which is equal to the lesser of $2.18 or 85% of the
average per share market value for the five (5) trading days immediately
preceding the conversion date.
Series C preferred stock shares are convertible into shares of common stock
at a conversion ratio of the stated value plus accrued but unpaid dividends,
over the conversion price which, is equal to the lesser of $2.08 or 85% of the
average per share market value for the five (5) trading days immediately
preceding the conversion date.
Series D preferred stock shares are convertible into shares of common stock
at a conversion ratio equal to the stated value over the conversion price. The
conversion price is equal to 85% of the market value, defined as the weighted
average price of the common stock during the five (5) trading days immediately
preceding the conversion date. In no event shall the conversion price be less
than $0.40 per share or exceed $0.6606 per share.
The Series A preferred stock has voting rights equal to two (2) votes per
share. The holders of Series B, Series C, and Series D have no voting rights.
Series A, preferred stock share holders are not entitled to dividends.
Series B and Series C preferred stock share holders are entitled to
cumulative dividends of 5% per share per annum (as a percentage of stated value
per share) payable in cash or shares of common stock, quarterly in arrears, but
in no event later than the conversion date. Dividends on the Series B preferred
stock shall accrue daily commencing on the original issue date, and shall be
deemed to accrue on such date whether or not earned or declared and whether or
not there are profits, surplus, or other funds of the Company legally available
for payment of dividends.
Series D preferred stock share holders are entitled to a per share dividend
of the stated value of the shares times the higher of (i) the prime rate as
reported by The Wall Street Journal on the first day of the month plus three (3)
percent, or (ii) 8.5%. The dividend shall be paid monthly in arrears on the last
day of each month in cash, and prorated for any partial month periods. The
dividend shall be calculated on the basis of a 360-day year.
Series D has a preference in liquidation to the Series C, Series B, and
Series A, common stock and any other capital stock of the Company. Series C,
Series B and Series A have preference in liquidation to the common stock and any
other capital stock of the Company. Upon liquidation or dissolution, the amount
to be paid to Series D, Series C, Series B and Series A are the Series D Stated
Value, Series C Stated Value, Series B Stated Value, as indicated above, and
Series A at $0.80 per share.
F-20
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
Warrants
Warrant activity for the years ended May 31, 2008 and 2009 is summarized as
follows:
Number of Shares Weighted Average Price
-----------------------------------------------
Balance at May 31, 2007 2,254,538 $0.69
Warrants Expired -
Warrants Issued 4,285,714 $0.08
-----------------------------------------------
Balance at May 31, 2008 6,540,252 $0.29
Warrants Expired -
Warrants Issued -
-----------------------------------------------
Number of shares exercisable at May 31, 2009 6,540,252 $0.29
===============================================
NOTE M - OPTION PLANS
1995 Stock Option Plan
In May 1995, the Company's stockholders approved the 1995 Stock Option Plan
for officers and employees of the Company for which the Company reserved an
aggregate of 1,500,000 shares of common stock. In December 1997, the Company's
Board of Directors terminated the 1995 Stock Option Plan with respect to new
option grants.
In fiscal 2009 and 2008, there was no activity under the 1995 Stock Option
Plan.
Outside Director Stock Option Plan
In May 1995, the Company's stockholders approved an Outside Director Stock
Option Plan (the OD Plan) for non-employee directors of the Company, for which
the Company reserved an aggregate of 300,000 shares of common stock. In December
1997, the Company's Board of Directors terminated the OD Plan with respect to
new option grants.
In fiscal 2009 and 2008, there was no activity under the OD Plan.
1997 Stock Option Plan
In December 1997, the Company's stockholders approved the 1997 Stock Option
Plan (the 1997 Plan) for officers, directors, employees and consultants of the
Company for which the Company has reserved an aggregate of 1,800,000 shares of
common stock. The 1997 Plan provides that a committee of the Board of Directors
of the Company will administer it and that the committee will have full
authority to determine the identity of the recipients of the options and the
number of shares subject to each option. Options granted under the 1997 Plan may
be either incentive stock options or non-qualified stock options. The option
price shall be 100% of the fair market value of the common stock on the date of
the grant (or in the case of incentive stock options granted to any individual
principal stockholder who owns stock possessing more than 10% of the total
combined voting power of all voting stock of the Company, 110% of such fair
market value). The term of any option may be fixed by the committee but in no
event shall exceed ten years from the date of grant. Options are exercisable
upon payment in full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the option. The term for
which options may be granted under the 1997 Plan expired on August 6, 2007.
In January 1999, the Company's Board of Directors increased the number of
shares authorized for issuance under the 1997 Plan by 1,000,000 shares to
2,800,000 shares.
In May 2006, the Board of Directors accelerated the vesting period for
all unvested options to May 31, 2006.
F-21
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
In fiscal 2008, the Board of Directors did not grant any non-qualified
stock options under the 1997 plan, and there were no options to purchase shares
of common stock under the 1997 plan. In fiscal 2008, options to purchase 714,601
shares of common stock under the 1997 Plan at exercise prices ranging $0.88 to
$1.91 were retired or cancelled.
In fiscal 2009, the Board of Directors did not grant any non-qualified
stock options under the 1997 plan, and there were no options to purchase shares
of common stock under the 1997 plan. In fiscal 2009, options to purchase 357,668
shares of common stock under the 1997 Plan at exercise prices ranging $0.88 to
$1.09 were retired or cancelled.
1999 Stock Option Plan
In July 1999, the Company's Board of Directors approved the 1999 Stock
Option Plan (the 1999 Plan), for which the Company reserved an aggregate of
2,000,000 shares of common stock. The 1999 Plan provides that a committee of the
Board of Directors of the Company will administer it and that the committee will
have full authority to determine the identity of the recipients of the options
and the number of shares subject to each option. Options granted under the 1999
Plan may be either incentive stock options or non-qualified stock options. The
option price shall be 100% of the fair market value of the common stock on the
date of the grant (or in the case of incentive stock options granted to any
individual principal stockholder who owns stock possessing more than 10% of the
total combined voting power of all voting stock of the Company, 110% of such
fair market value). The term of any option may be fixed by the committee but in
no event shall exceed ten years from the date of grant. Options are exercisable
upon payment in full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the option. The term for
which options may be granted under the 1999 Plan expired July 12, 2009. In July
2000, the Company's Board of Directors increased the number of shares authorized
for issuance under the 1999 Plan by 1,000,000 shares to 3,000,000 shares. In
December 2001, the Board of Directors of the Company increased the number of
shares authorized for issuance under the 1999 Plan by 2,000,000 shares to
5,000,000 shares.
In May 2006, the Board of Directors accelerated the vesting period for all
unvested options to May 31, 2006.
In fiscal 2008, the Board of Directors did not grant any non-qualified
stock options under the 1999 Plan. In fiscal 2008, there were no options to
purchase shares of common stock under the 1999 Plan. In fiscal 2008, options to
purchase 1,006,500 shares of common stock under the 1999 Plan at exercise prices
ranging from $0.20 to $5.00 were retired or cancelled.
In fiscal 2009, the Board of Directors did not grant any non-qualified
stock options under the 1999 Plan. In fiscal 2009, there were no options to
purchase shares of common stock under the 1999 Plan. In fiscal 2009, options to
purchase 1,411,832 shares of common stock under the 1999 Plan at exercise prices
ranging from $0.22 to $4.28 were retired or cancelled.
At May 31, 2009, there were 2,480,364 shares available for future grants
under the 1999 Plan.
2004 Stock Option and Stock Issuance Plan
In October 2004, the Company's stockholders approved the 2004 Stock Option
and Stock Issuance Plan (the 2004 Plan), for which the Company reserved an
aggregate of 2,500,000 shares of common stock. The 2004 Plan is divided into two
separate equity programs: (i) the Option Grant Program under which eligible
persons ("Optionees") may, at the discretion of the board of directors, be
granted options to purchase shares of common stock; and (ii) the Stock Issuance
Program under which eligible persons ("Participants") may, at the discretion of
the board or directors, be issued shares of common stock directly, either
through the immediate purchase of such shares or as a bonus for services
rendered to the Corporation.
Options granted under the 2004 Stock Plan shall be non-qualified or
incentive stock options and the exercise price is the fair market value of the
common stock on the date of grant except that for incentive stock options it
shall be 110% of the fair market value if the Optionee owns 10% or more of our
F-22
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
common stock. The term of any option may be fixed by the board of directors or
committee but in no event shall exceed ten years from the date of grant. Stock
options granted under the 2004 Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
Options are exercisable upon payment in full of the exercise price, either in
cash or in common stock valued at fair market value on the date of exercise of
the option. The term for which options may be granted under the 2004 Plan
expires July 12, 2014.
Under the stock issuance program, the purchase price per share shall be
fixed by the board of directors or committee but cannot be less than the fair
market value of the common stock on the issuance date. Payment for the shares
may be made in cash or check payable to us, or for past services rendered to us
and all shares of common stock issued thereunder shall vest upon issuance unless
otherwise directed by the committee. The number of shares issuable is also
subject to adjustments upon the occurrence of certain events, including stock
dividends, stock splits, mergers, consolidations, reorganizations,
recapitalizations, or other capital adjustments. The term for which shares may
be issued under the 2004 Plan expires July 12, 2014.
The 2004 Plan provides that a committee of the Board of Directors of the
Company will administer it and that the committee will have full authority to
determine and designate the individuals who are to be granted stock options or
qualify to purchase shares of common stock under the 2004 Stock Plan, the number
of shares to be subject to options or to be purchased and the nature and terms
of the options to be granted. The committee also has authority to interpret the
2004 Plan and to prescribe, amend and rescind the rules and regulations relating
to the 2004 Plan.
In May 2006, the Board of Directors accelerated the vesting period for all
unvested options to May 31, 2006.
In fiscal 2008, the Company's Board of Directors granted non-qualified
stock options under the 2004 Plan to four directors to purchase an aggregate of
600,000 shares of common stock, at an exercise price of $0.12 per share (which
represented the fair market value of the underlying common stock at the time of
the respective grants) and the Company's Board of Directors granted 150,000
shares of common stock under the 2004 Plan to one director of the Company having
a fair market value of $0.06 per share at the time of the respective grant.
These options expire ten years from the date of grant. In fiscal 2008, options
to purchase 236,461 shares of common stock under the 2004 Plan at exercise
prices $0.57 and $0.58 were retired or cancelled.
In fiscal 2009, the Board of Directors did not grant any non-qualified
stock options under the 2004 Plan. In fiscal 2009, there were no options to
purchase shares of common stock under the 2004 Plan. In fiscal 2009, options to
purchase 692,471 shares of common stock under the 2004 Plan at exercise prices
ranging from $0.09 to $0.58 were retired or cancelled.
At May 31, 2009, there were 1,286,399 shares available for future grants
under the 2004 Plan.
Stock option activity under all the plans for the years ended May 31, 2008
and 2009 is summarized as follows:
Outstanding Options
---------------------------------------------------
Shares Range of Weighted
Available for Number of Exercise Price Average Exercise
Grant Shares per Share Price
------------ --------- ------------- ----------------
Balance at May 31, 2007 1,697,859 6,592,338 $0.20 - $5.00 $1.04
Common Shares Granted (150,000)
Options Granted (600,000) 600,000 $0.12 $0.12
Options cancelled 714,601 (1,737,128) $0.20 - $3.96 $1.29
--------------------------------------------------------------------
Balance at May 31, 2008 1,662,460 5,455,210 $0.09 - $4.28 $0.86
Options cancelled 2,104,303 (2,461,971) $0.09 - $4.28 $0.99
--------------------------------------------------------------------
Balance at May 31, 2009 3,766,763 2,993,239 $0.09 - $3.96 $0.74
====================================================================
F-23
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
The following table summarizes information about stock options
outstanding and exercisable at May 31, 2009:
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------------------
Number Weighted Average Weighted Number Weighted
Outstanding at Remaining Contractual Average Exercisable at Average Exercise
Range of Exercise Prices May 31, 2009 Life (yrs.) Exercise Price May 31, 2009 Price
---------------------------- ------------------------------------------------------------- -----------------------------------
$0.09 - $0.58 1,729,239 7.1 $0.14 1,729,239 $0.19
$0.71 - $0.95 320,000 4.1 $0.24 320,000 $0.88
$1.00 - $1.31 690,000 2.3 $0.44 690,000 $1.09
$1.69 - $2.49 10,000 0.1 $1.69 10,000 $1.69
$2.91 - $3.96 244,000 2 $3.50 244,000 $3.50
------------------------------------------------------------- -----------------------------------
2,993,239 5.3 $0.74 2,993,239 $0.74
============================================================= ===================================
The weighted-average fair value exercise price of options and warrants
granted during fiscal years 2008 was $0.08. At May 31, 2009, there were no
remaining authorized shares of common stock after reserves for all stock option
plans and stock warrants.
NOTE N - INCOME TAXES
During fiscal 2009 and 2008, the Company recorded a provision for income
taxes of $5,875 and $18,045, respectively.
As of May 31, 2009, the recorded deferred tax assets were $20,336,652,
reflecting an increase of $517,300 during the fiscal year ended May 31, 2009,
which was offset by a valuation allowance of the same amount.
The Company's deferred tax assets (liabilities) are summarized as follows:
2009 2008
------------------- -------------------
Net operating loss carryforwards 20,123,742 19,422,422
Depreciation and amortization (16,110) (17,900)
Deferred rent 5,450 2,940
Deferred gain on sale of building 57,330 75,430
Gain on sale of asset - (31,110)
Cost of goods sold - 98,980
Allowance for doubtful accounts 32,290 91,860
Reserve for obsolete inventory 133,950 176,730
------------------- -------------------
Total gross deferred tax assets 20,336,652 19,819,352
Valuation allowance (20,336,652) (19,819,352)
------------------- -------------------
Net deferred tax assets - -
=================== ===================
F-24
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
At May 31, 2009, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $53,411,000, expiring at
various dates from 2010 through 2029. In fiscal 2009, $470,994 of net operating
loss carryforwards expired. Future expirations of net operating loss
carryforwards are as follows:
Fiscal Year Amount
---------------------------------------
2010 $ 2,454,009
2011 5,449,010
2012 6,084,026
2013 4,386,716
2014 -
Thereafter 35,037,459
-------------------------
Total $ 53,411,220
=========================
The components of income tax benefit for the years ended May 31, 2009 and
2008 are as follows:
2009 2008
--------------- ---------------
Federal $ 496,608 $ 138,000
State 20,692 92,000
--------------- ---------------
$ 517,300 $ 230,000
=============== ===============
Under current tax law, the utilization of tax attributes will be
restricted if an ownership change, as defined, were to occur. Section 382 of the
Internal Revenue Code provides, in general, that if an "ownership change" occurs
with respect to a corporation with net operating and other loss carryforwards,
such carryforwards will be available to offset taxable income in each taxable
year after the ownership change only up to the "Section 382 Limitation" for each
year (generally, the product of the fair market value of the corporation's stock
at the time of the ownership change, with certain adjustments, and a specified
long-term tax-exempt bond rate at such time). The Company's ability to use its
loss carryforwards will be limited in the event of an ownership change.
The following is a reconciliation of the effective income tax rate to
the federal statutory rate:
2009 2008
% %
----------------- ----------------
Federal statutory rate (34.0) (34.0)
State taxes, net 0.0 2.7
Permanent differences 0.0 1.8
Change in valuation allowance
relating to operations 34.0 28.6
Other 0.0 (1.8)
----------------- ----------------
0.0 2.7
================= ================
F-25
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2009 and 2008
NOTE O - COMMITMENTS AND CONTINGENCIES
Leases
On August 15, 2007, we sold our facility under a five-year leaseback
agreement. Future rental payments under the operating lease are as follows:
For the years ended:
May 31, 2010 $ 148,488
May 31, 2011 154,427
May 31, 2012 160,604
May 31, 2013 40,541
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Total $ 504,060
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Litigation
The Company is currently, and has been in the past, a party to various
routine legal proceedings incident to the ordinary course of business. The
Company believes that the outcome of all such pending legal proceedings in the
aggregate is unlikely to have a material adverse effect on the business or
consolidated financial condition of the Company.
NOTE P - 401(K) PLAN
In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan to
provide retirement benefits for its employees. As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides tax-deferred salary deductions
for eligible employees. Employees are eligible to participate in the next
quarter enrollment period after employment. Participants may make voluntary
contributions to the plan up to 15% of their compensation. In fiscal year 2009
and 2008, the Company made discretionary contributions of approximately $9,850
and $9,000, respectively, to match a percentage of employee contributions.
F-2
