UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended February 29, 2008
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 11-2871434
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Issuer's Telephone Number (516) 997-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
--- --
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
--- --
Number of Shares Outstanding of Common Stock, $.001 Par Value, at
April 14, 2008 93,768,004
Vasomedical, Inc. and Subsidiaries
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
February 29, 2008 and May 31, 2007 3
Consolidated Condensed Statements of Operations for the
Nine and Three Months Ended February 29, 2008
and February 28, 2007 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2007 to February 29, 2008 5
Consolidated Condensed Statements of Cash Flows for the
Nine and Three Months Ended February 29, 2008
and February 28, 2007 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis or Plan of Operation 14
Item 3 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 31
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3 - Defaults upon Senior Securities 31
Item 4 - Submission of Matters to a Vote of Security Holders 31
Item 5 - Other Information 31
Item 6 - Exhibits 31
Page 2
ITEM 1. FINANCIAL STATEMENTS
VASOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
February 29, May 31,
2008 2007
----------------- ----------------
(Unaudited) (Derived from
audited financial
statements)
ASSETS
CURRENT ASSETS
Cash $2,585,400 $850,288
Accounts receivable, net of an allowance for doubtful accounts of
$291,964 at February 29, 2008 and $364,809 at May 31, 2007 777,824 733,655
Inventories, net 1,664,051 2,117,627
Other current assets 115,248 34,761
--------------------------------------
Total current assets 5,142,523 3,736,331
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,177,651
at February 29, 2008 and $2,836,938 at May 31, 2007 113,172 1,286,880
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of $76,331
at February 29, 2008 432,545 --
OTHER ASSETS 225,062 260,240
--------------------------------------
$5,913,302 $5,283,451
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $661,213 $575,793
Current maturities of long-term debt and notes payable -- 65,769
Sales tax payable 157,647 159,542
Deferred revenue 1,177,547 1,286,726
Deferred gain on sale of building 53,245 --
Accrued expenses and professional fees 137,919 328,154
--------------------------------------
Total current liabilities 2,187,571 2,415,984
LONG-TERM DEBT -- 785,246
DEFERRED REVENUE 378,983 469,626
ACCRUED RENT EXPENSE 5,770 --
DEFERRED GAIN ON SALE OF BUILDING 181,922 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $.001 par value; 110,000,000 shares authorized;
93,768,004 shares issued and outstanding at February 29, 2008
and 65,198,592 at May 31, 2007 93,768 65,198
Additional paid-in capital 48,063,118 46,165,998
Accumulated deficit (44,997,830) (44,618,601)
--------------------------------------
Total stockholders' equity 3,159,056 1,612,595
--------------------------------------
$5,913,302 $5,283,451
======================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 3
VASOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------- -------------- -------------- --------------
Revenues
Equipment sales $1,517,985 $2,080,272 $427,445 $432,124
Equipment rentals and services 2,397,600 2,906,308 760,249 949,377
-------------- -------------- -------------- --------------
Total revenues 3,915,585 4,986,580 1,187,694 1,381,501
-------------- -------------- -------------- --------------
Cost of Sales and Services
Cost of sales, equipment 1,174,214 1,184,307 409,160 275,478
Cost of equipment rentals and services 873,411 1,097,766 247,088 325,377
-------------- -------------- -------------- --------------
Total cost of sales and services 2,047,625 2,282,073 656,248 600,855
-------------- -------------- -------------- --------------
Gross Profit 1,867,960 2,704,507 531,446 780,646
-------------- -------------- -------------- --------------
Operating Expenses
Selling, general and administrative 1,932,645 3,380,512 732,351 1,027,349
Research and development 362,315 722,631 117,313 253,346
-------------- -------------- -------------- --------------
Total operating expenses 2,294,960 4,103,143 849,664 1,280,695
-------------- -------------- -------------- --------------
Loss From Operations (427,000) (1,398,636) (318,218) (500,049)
Other Income (Expense)
Interest and financing costs (16,605) (54,281) -- (16,952)
Interest and other income, net 47,513 48,269 12,275 12,445
Gain on sale of assets 31,060 -- 13,312 --
-------------- -------------- -------------- --------------
Total other income (expense) 61,968 (6,012) 25,587 (4,507)
-------------- -------------- -------------- --------------
Loss Before Income Taxes (365,032) (1,404,648) (292,631) (504,556)
Income tax expense, net (14,197) (14,000) (3,750) (5,700)
-------------- -------------- -------------- --------------
Net Loss Attributable to Common Stockholders $(379,229) $(1,418,648) $(296,381) $(510,256)
============== ============== ============== ==============
Net loss per common share
- basic $(0.00) $(0.02) $(0.00) $(0.01)
============== ============== ============== ==============
- diluted $(0.00) $(0.02) $(0.00) $(0.01)
============== ============== ============== ==============
Weighted average common shares
outstanding
- basic 91,687,349 65,198,592 93,761,337 65,198,592
============== ============== ============== ==============
- diluted 91,687,349 65,198,592 93,761,337 65,198,592
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 4
VASOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ------------ ---------------- ------------------ --------------
Balance at June 1, 2007 65,198,592 $65,198 $46,165,998 $(44,618,601) $1,612,595
Common stock and warrants (net of
expenses incurred) issued for
Securities Purchase Agreement 21,428,572 21,429 1,354,461 -- 1,375,890
Common stock issued for distribution
and supply agreement 6,990,840 6,991 461,395 -- 468,386
Common Stock issued to Director 150,000 150 8,850 -- 9,000
Stock based compensation -- -- 72,414 72,414
Net loss -- -- -- (379,229) (379,229)
--------------- ------------ ---------------- ------------------ ----------------
Balance at February 29, 2008 93,768,004 $93,768 $48,063,118 $(44,997,830) $3,159,056
=============== ============ ================ ================== ================
The accompanying notes are an integral part of this consolidated condensed
financial statement.
Page 5
VASOMEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
February 29, February 28,
---------------- ----------------
2008 2007
---------------- ----------------
Cash flows from operating activities
Net loss $(379,229) $(1,418,648)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 149,582 230,192
Amortization of deferred gain on sale of building (31,059) --
Provision for doubtful accounts (27,524) (1,340)
Amortization of deferred distributor costs 76,332 --
Stock based compensation 81,414 10,326
Changes in operating assets and liabilities:
Accounts receivable (16,645) 280,959
Inventories 468,248 495,036
Other current assets (80,487) 129,865
Other assets -- (1,073)
Deferred distributor costs (40,490) --
Accounts payable, accrued expenses and other current liabilities
(210,119) (604,806)
Other liabilities (90,643) (228,005)
---------------- ----------------
278,609 311,154
---------------- ----------------
Net cash used in operating activities (100,620) (1,107,494)
---------------- ----------------
Cash flows provided by investing activities
Proceeds from the building sale 1,400,000 --
Expenses paid for sale of building (89,143) --
---------------- ----------------
Net cash provided by investing activities 1,310,857 --
---------------- ----------------
Cash flows provided by (used in) financing activities
Payments on long term debt and notes payable (851,015) (236,394)
Proceeds from Securities Purchase agreement 1,500,000 --
Expenses paid in relation to Securities Purchase Agreement (124,110) --
---------------- ----------------
Net cash provided by (used in) financing activities 524,875 (236,394)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,735,112 (1,343,888)
Cash and cash equivalents - beginning of period 850,288 2,385,778
---------------- ----------------
Cash and cash equivalents - end of period $2,585,400 $1,041,890
================ ================
Non-cash investing and financing activities were as follows:
Inventories transferred to property and equipment, attributable to
operating leases, net $14,672 $24,538
Issuance of note for purchase of insurance policy -- $192,120
Common stock issued for distribution agreement $468,386 $--
Supplemental Disclosures
Interest paid $16,605 $54,281
Income taxes paid $6,551 $6,534
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
NOTE A - ORGANIZATION AND PLAN OF OPERATIONS
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. 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) therapy equipment, treatment guidance,
training and an equipment maintenance program all designed to provide optimal
patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced
external counterpulsation therapy. For more information visit www.vasomedical.
com.
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 medication and not candidates for invasive
procedures. Patients diagnosed with comorbidities of heart failure, diabetes,
peripheral vascular disease, etc. are also reimbursed under the same criteria,
provided the indication for treatment with EECP(R) therapy is angina symptoms.
During the last two fiscal years ended May 31, 2007 and 2006 we incurred
large operating losses. The Company has attempted to achieve profitability by
reducing operating costs and halting the trend of declining revenue, to reduce
cash usage through bringing its cost structure more into alignment with current
revenues by engaging in restructurings during January 2006, March 2007 and April
2007 to substantially reduce personnel and spending on sales, marketing, and
development projects. In addition, the Company was seeking to obtain a strategic
alliance within the sales and marketing areas and/or to raise additional capital
through public or private equity or debt financings.
During the first quarter of fiscal 2008 the following events took place,
which allowed us to raise additional capital through a private equity financing
and by the sale of our facility under a leaseback agreement.
o On June 21, 2007 we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into
the Securities Purchase Agreement, we also entered into a Distribution
Agreement and a Supplier Agreement with Living Data Technology
Corporation ("Living Data"), an affiliate of Kerns.
We sold to Kerns, pursuant to the Securities Purchase Agreement,
21,428,572 shares of our common stock at $.07 per share, and 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") for a
total purchase price of $1,500,000 less expenses incurred of $124,110.
We also have an option to sell an additional $1 million of our common
stock to Kerns. The agreement further provided for the appointment to
our Board of Directors of two representatives of Kerns. In furtherance
thereof, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of both Kerns and
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
Living Data, have been appointed members of our Board of Directors. On
July 10, 2007, Mr. Benham Movaseghi, Treasurer of Kerns, was also
appointed to our Board of Directors. Pursuant to the Distribution
Agreement, we have become the exclusive distributor in the United
States of the AngioNew external counterpulsation 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,
valued at $468,386, to Living Data. Pursuant to the Supplier
Agreement, Living Data now will be the exclusive supplier to us of the
external counterpulsation therapy systems that we market under the
registered trademark EECP(R). The Distribution Agreement and the
Supplier Agreement each have an initial term extending through May 31,
2012.
Pursuant to a Registration Rights Agreement, we granted to Kerns and
Living Data, subject to certain restrictions, "piggyback registration
rights" covering the shares sold to Kerns as well as the shares
issuable upon exercise of the Warrant and the shares issued to Living
Data.
o On August 15, 2007 we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale 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.
NOTE B - STOCK-BASED COMPENSATION
As of June 1, 2006 the Company has adopted Statement of Financial Standards
No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a
revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach to accounting for share-based
payments in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Pro forma disclosure of the fair value of
share-based payments is no longer an alternative to financial statement
recognition.
Prior to first quarter of fiscal 2007 the Company accounted for stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25") and adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." Under APB No. 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Accordingly, no compensation expense has
been recognized in the consolidated financial statements in connection with
employee stock option grants prior to fiscal 2007.
During the nine-month period ended February 29, 2008, the Board of
Directors granted non-qualified stock options under the 2004 Stock Option/Stock
Issuance 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. These options vest immediately, and expire ten years from the date of
grant. During the three-month period ended February 29, 2008 there were no
non-qualified stock options granted.
During the nine and three-month periods ended February 29, 2008 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.
Stock-based compensation expense recognized under SFAS 123(R) for the nine
months ended February 29, 2008 was $81,414 and $10,326 for the nine months ended
February 28, 2007. Stock-based compensation expense recognized under SFAS 123(R)
for the three months ended February 29, 2008 was $14,164 and $5,314 for the
three months ended February 28, 2007. For purposes of estimating the fair value
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
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 the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
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).
The fair value of the Company's stock-based awards was estimated assuming
the following weighted-average assumptions:
February 29, February 28,
2008 2007
----------------- ------------------
Expected life (years) 5 5
Expected volatility 89.5% 106.17%
Risk-free interest rate 4.5% 4.5%
Expected dividend yield 0.00% 0.00%
During the nine-month period ended February 29, 2008, options to purchase
1,305,625 shares of common stock at exercise prices ranging from $0.20 - $3.96
were cancelled.
NOTE C - LOSS PER COMMON SHARE
Basic loss per share is based on the weighted average number of common
shares outstanding without consideration of potential common shares. Diluted
loss per share is based on the weighted number of common and potential 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, plus conversion of convertible preferred stock
into common shares based upon the most advantageous conversion rate during the
period.
The following table sets forth the computation of basic and diluted loss
per common share:
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
----------------- --------------- ---------------- -----------------
2008 2007 2008 2007
----------------- --------------- ---------------- -----------------
Numerator:
Net loss $(379,229) $(1,418,648) $(296,381) $(510,256)
Denominator:
Basic weighted average common shares 91,687,349 65,198,592 93,761,337 65,198,592
Stock options -- -- -- --
Warrants -- -- -- --
----------------- --------------- ---------------- -----------------
Diluted - weighted average common shares 91,687,349 65,198,592 93,761,337 65,198,592
================= =============== ================ =================
Basic and diluted loss per common share $(0.00) $(0.02) $(0.00) $(0.01)
================= =============== ================ =================
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
Options and warrants, in accordance with the following table, were excluded
from the computation of diluted loss per share for the nine and three months
ended February 29, 2008 and February 28, 2007, because the effect of their
inclusion would be antidilutive.
Nine and Three Nine and Three
Months Months
Ended Ended
February 29, February 28,
---------------- --- ----------------
2008 2007
---------------- ----------------
Options 5,886,710 6,741,150
Warrants 6,540,252 2,254,538
---------------- ----------------
12,426,962 8,995,688
================ ================
NOTE D - INVENTORIES, NET
Inventories, net consist of the following:
February 29, May 31,
2008 2007
----------------- -----------------
Raw materials $940,652 $794,188
Work in process 586,338 915,744
Finished goods 137,061 407,695
----------------- -----------------
$1,664,051 $2,117,627
================= =================
At both February 29, 2008 and May 31, 2007, the Company has recorded a
reserve for excess and obsolete inventory of $677,166.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
February 29, May 31,
2008 2007
----------------- ---------------
Land $-- $200,000
Building and improvements -- 1,394,569
Office, laboratory and other equipment 1,368,169 1,436,360
EECP therapy systems under operating leases or
under loan for clinical trials 771,013 813,020
Furniture and fixtures 151,641 162,066
Leasehold improvements -- 117,803
----------------- ---------------
2,290,823 4,123,818
Less: accumulated depreciation and amortization (2,177,651) (2,836,938)
----------------- ---------------
$113,172 $1,286,880
================= ===============
Depreciation and amortization expense for the nine months ended
February 29, 2008 and February 28, 2007 was $149,582, and $230,192,
respectively
NOTE F - LONG-TERM DEBT
Long-term debt is summarized as follows:
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
February 29, May 31,
2007 2008
---------------- ---------------
Facility loans (a) $-- $851,015
Less: current portion -- (65,769)
---------------- ---------------
$-- $785,246
================ ===============
(a) The Company purchased its headquarters and warehouse facility with
secured notes of $641,667 and $500,000, respectively, under two
programs sponsored by New York State. These notes, which bore interest
at 7.8% and 6%, respectively, were payable in monthly installments
consisting of principal and interest payments over fifteen-year terms,
expiring in September 2016 and January 2017, respectively, and were
secured by the building.
On August 15, 2007 we sold our facility for $1.4 million under a sale
with a five-year leaseback agreement. The net proceeds from the sale
was approximately $425,000 after payment in full of the two secured
notes above, brokers fees, closing costs, and the opening of a
certificate of deposit in accordance with the provisions of the new
lease.
NOTE G - DEFERRED REVENUES
The changes in the Company's deferred revenues are as follows:
Nine Nine Months Three Months Three Months
Months Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
-------------- -------------- -------------- ---------------
2008 2007 2008 2007
-------------- -------------- -------------- ---------------
Deferred revenue at the beginning of the period $1,756,352 $2,322,588 $1,598,241 $2,051,198
Additions:
Deferred extended service contracts 1,334,506 1,483,702 427,067 434,241
Deferred in-service and training 30,000 35,000 12,500 10,000
Deferred service arrangements 143,750 105,000 63,750 30,000
Deferred service contract promotion 8,850 -- 1,050 --
Recognized as revenue:
Deferred extended service contracts (1,575,282) (1,882,386) (497,751) (640,910)
Deferred in-service and training (17,500) (35,000) (7,500) (10,000)
Deferred service arrangements (110,796) (204,375) (38,877) (50,000)
Deferred service contract promotion (13,350) -- (1,950) --
-------------- -------------- -------------- ---------------
Deferred revenue at end of period 1,556,530 1,824,529 1,556,530 1,824,529
Less: current portion (1,177,547) (1,329,333) (1,177,547) (1,329,333)
-------------- -------------- -------------- ---------------
Long-term deferred revenue at end of period $378,983 $495,196 $378,983 $495,196
============== ============== ============== ===============
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 has been deferred and is being amortized to income ratably over the
term of the lease. At February 29, 2008, the unamortized deferred gain of
$235,167 is shown as "Deferred gain on sale of building" in the Company's
consolidated condensed balance sheet.
Page 11
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
NOTE I - WARRANTY COSTS
The changes in the Company's product warranty liability are as follows:
Nine Nine Three Three
Months Months Months Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
-------------- ------------- -------------- -------------
2008 2007 2008 2007
-------------- ------------- -------------- -------------
Warranty liability at the beginning of the
period $15,750 $32,000 $31,000 $26,500
Expense for new warranties issued 33,000 36,000 -- 6,000
Warranty amortization (27,750) (47,500) (10,000) (12,000)
-------------- ------------- -------------- -------------
Warranty liability at end of period 21,000 20,500 21,000 20,500
Less: current portion (21,000) (20,500) (21,000) (20,500)
-------------- ------------- -------------- -------------
Long-term warranty liability at end of period
$-- $-- $-- $--
============== ============= ============== =============
NOTE J - INCOME TAXES
During the nine-months ended February 29, 2008 and February 28, 2007, state
income taxes were $14,197 and $14,000, respectively.
As of February 29, 2008, the recorded deferred tax assets were $19,720,352,
reflecting a $103,000 increase during the third quarter of fiscal 2008. 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. The Company has 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 has recorded a
valuation allowance to bring the net deferred tax asset carrying value to zero.
At May 31, 2007 (the Company's fiscal year end), the Company had net
operating loss carryforwards for Federal and state income tax purposes of
approximately $53,400,000, expiring at various dates from 2016 through 2029.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, which
supplements Statement of Financial Accounting Standard No. 109, Accounting for
Income Taxes, by defining the confidence level that a tax position must meet in
order to be recognized in the financial statements. FIN 48 requires the tax
effect of a position to be recognized only if it is "more-likely-than-not" to be
sustained based solely on its technical merits as of the reporting date. If a
tax position is not considered more-likely-than-not to be sustained based solely
on its technical merits, no benefits of the position are recognized. This is a
different standard for recognition than was previously required. The
more-likely-than-not threshold must continue to be met in each reporting period
to support continued recognition of a benefit. At adoption, companies must
adjust their financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained as of the adoption date. Any necessary
adjustment is recorded directly to opening retained earnings in the period of
adoption and reported as a change in accounting principle. The adoption the
provisions of FIN 48 did not have a material effect on the Company's financial
position.
Page 12
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
February 29, 2008
NOTE K - 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, 2008 $34,655
May 31, 2009 142,777
May 31, 2010 148,488
May 31, 2011 154,427
May 21, 2012 160,604
May 31, 2013 40,540
-----------------
Total $681,491
=================
Litigation
The Company is currently, and has in the past been, 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.
Page 13
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. The EECP(R) therapy 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) therapy equipment, treatment guidance,
training and an equipment maintenance program all designed to provide optimal
patient outcomes. EECP(R) is a registered trademark for Vasomedical's enhanced
external counterpulsation therapy. For more information visit www.vasomedical.
com.
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. Patients diagnosed with comorbidities of heart failure,
diabetes, peripheral vascular disease, etc. are also reimbursed under the same
criteria, provided the indication for treatment with EECP(R) therapy is angina
symptoms.
During the last two fiscal years ended May 31, 2007 and 2006 we incurred
large operating losses. We attempted to achieve profitability by reducing
operating costs and halting the trend of declining revenue, to reduce cash usage
through bringing our cost structure more into alignment with current revenue by
engaging in restructurings during January 2006, March 2007, and April 2007 to
substantially reduce personnel and spending on sales, marketing, and development
projects. In addition, we sought to obtain a strategic alliance within the sales
and marketing areas and/or to raise additional capital through public or private
equity or debt financings.
During the first quarter of fiscal 2008 the following events took place,
which allowed us to raise additional capital through a private equity financing
and by the sale of our facility under a leaseback agreement.
Page 14
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
o On June 21, 2007 we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into
the Securities Purchase Agreement, we also entered into a Distribution
Agreement and a Supplier Agreement with Living Data Technology
Corporation, 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, and 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") for a
total purchase price of $1,500,000 less expenses incurred of $124,110.
We also have an option to sell an additional $1 million of our common
stock to Kerns. The agreement further provided for the appointment to
our Board of Directors of two representatives of 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
July 10, 2007, Mr. Benham Movaseghi, Treasurer of Kerns, was also
appointed to our Board of Directors. Pursuant to the Distribution
Agreement, we have become the exclusive distributor in the United
States of the AngioNew external counterpulsation 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,
valued at $468,386, to Living Data. Pursuant to the Supplier
Agreement, Living Data now will be the exclusive supplier to us of the
external counterpulsation therapy systems that we market under the
registered trademark EECP(R). The Distribution Agreement and the
Supplier Agreement each have an initial term extending through May 31,
2012.
Pursuant to a Registration Rights Agreement, we granted to Kerns and
Living Data, subject to certain restrictions, "piggyback registration
rights" covering the shares sold to Kerns as well as the shares
issuable upon exercise of the Warrant and the shares issued to Living
Data.
o On August 15, 2007 we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale 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.
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
pre-specified 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 trial were presented at the American
College of Cardiology scientific sessions in March 2005. On June 20, 2005, the
Centers for Medicare and Medicaid Services (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.
Page 15
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 Canadian Cardiovascular Society Classification (CCSC) II angina
o Heart Failure
o New York Heart Association Class II/III stable heart failure symptoms
with an ejection fraction of less than or equal to 35%
o New York Heart Association Class II/III stable heart failure symptoms
with an ejection fraction of less than or equal to 40%
o New York Heart Association Class IV heart failure
o Acute heart failure
o Cardiogenic shock
o Acute myocardial infarction."
They commented in their decision memorandum that they were not able to
apply full weight to the evidence generated by the PEECH(TM) trial, as it had
not yet been published in a peer-reviewed medical journal by the time they were
required to issue a final decision on this application. Moreover, they did not
opine on whether they would consider the results of the trial when published to
be sufficient evidence to conclude that external counterpulsation therapy is
reasonable and necessary for the treatment of New York Heart Association Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35%. 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 trial were initially published
online by the Journal of the American College of Cardiology (JACC), and in print
in its September 19, 2006 issue. JACC is the official journal of the American
College of Cardiology.
In the November-December issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, focusing on the
results of a pre-specified 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 pre-specified 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.
The above 2 papers have been submitted to CMS for reconsideration of our
application. We had met with representatives of CMS on February 28, 2007 and
presented our case. CMS has requested more data from us. We will continue to
gather the data and 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) therapy treatment
for NYHA class II and III heart failure patients.
Page 16
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a diagnosis
of heart failure, diabetes, peripheral vascular disease, etc. are also eligible
for reimbursement under the current coverage policy, provided the primary
indication for treatment with EECP(R) therapy is refractory angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
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-KSB for the year
ended May 31, 2007, 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:
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) therapy systems in the period
in which we deliver the system to the customer. Revenue from the sale of our
EECP(R) therapy 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) therapy 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. Effective September 1, 2003, we
adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables", ("EITF 00-21"), on a
prospective basis. 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) therapy
systems includes a combination of three elements that qualify as separate units
of accounting:
i. EECP(R) therapy 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
Page 17
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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) therapy 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) therapy 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)
therapy 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) therapy 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.
Revenues from the sale of EECP(R) therapy systems through our international
distributor network are generally covered by a parts only 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) therapy
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) therapy 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 February 29, 2008.
Accounts Receivable, Net
The Company's accounts receivable - trade 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 its customer base as well as changes in its
credit policies. The Company continuously monitors collections and payments from
our customers. 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 it has in the past.
Page 18
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Inventories, net
The Company values inventory at the lower of cost or estimated market, cost
being determined on a first-in, first-out basis. The Company often places
EECP(R) therapy systems at various field locations for demonstration, training,
evaluation, and other similar purposes at no charge. The cost of these EECP(R)
therapy 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) therapy 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 record 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.
Effective June 1, 2005, we adopted 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. Effective September 1, 2003, we
prospectively adopted the provisions of EITF 00-21. Upon adoption of the
provisions of EITF 00-21 we began to defer revenue related to EECP(R) therapy
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.
Effective September 1, 2003, the Company adopted the provisions of EITF 00-21 on
a prospective basis. Under EITF 00-21, for certain arrangements, a portion of
the overall system price attributable to the first year service arrangement is
deferred and recognized as revenue over the service period. As such, we no
longer accrue warranty costs upon delivery but rather recognize warranty and
related service costs as incurred.
Equipment sold to international customers through our distributor network
is generally covered by a parts only 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 include 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.
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
Page 19
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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 our long range business plan can be realized.
Stock-based Employee Compensation
In December 2004, the FASB issued Statement of Financial Standards No. 123
(revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of
SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure of the fair value of share-based
payments is no longer an alternative to financial statement recognition. The
Company has five stock-based employee compensation plans.
Prior to fiscal 2007 the Company accounted for stock-based compensation
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations ("APB No. 25") and adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." Under APB No. 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Accordingly, no compensation expense was
recognized in the consolidated financial statements in connection with employee
stock option grants prior to fiscal 2007.
As new stock options are issued, this may have a material effect on the
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 the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
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).
Page 20
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Recently Issued Accounting Pronouncements Not Yet Effective
Statement of Financial Accounting Standards No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The Company does not expect that SFAS 157 will have any significant effect on
future financial statements.
Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment to FASB
Statement No. 115. This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007, and interim periods within those fiscal years. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of FASB
Statement No. 157, Fair Value Measurements. The Company does not expect that
SFAS 159 will have any significant effect on future financial statements.
Statement of Financial Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements - An amendment of ARB No. 51 -
establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary. (Noncontrolling interest formerly called a minority
interest). Requires recognition of a noncontrolling interest as a separate item
of equity in the consolidated financial statements. Requires the parent to
recognize a gain or loss when a subsidiary is deconsolidated. Effective for
fiscal years and interim periods beginning on or after December 15, 2008. The
Company does not expect that SFAS 160 will have any significant effect on future
financial statements.
FASB Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities - an Amendment of FASB Statement 133 -- enhances required
disclosures regarding derivatives and hedging activities, including enhanced
disclosures regarding how: (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities;
and (c) derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. Specifically,
Statement 161 requires:
o Disclosure of the objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation;
o Disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format;
o Disclosure of information about credit-risk-related contingent
features; and
o Cross-reference from the derivative footnote to other footnotes in
which derivative-related information is disclosed.
Effective for fiscal years and interim periods beginning after November 15,
2008. Early application is encouraged.
Page 21
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EITF Issue 06-1, Accounting for Consideration Given by a Service Provider
to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to
Receive Service from the Service Provider. The Task Force reached a consensus
that if the consideration given by a service provider to a manufacturer or
reseller (that is not a customer of the service provider) can be linked
contractually to the benefit received by the service provider's customer, a
service provider should use the guidance in Issue 01-9 to determine the
characterization of the consideration (that is, "cash consideration" or "other
than cash" consideration). Issue 01-9 presumes that an entity should
characterize "cash consideration" as a reduction of revenue unless an entity
meets the requirements of paragraph 9 of Issue 01-9. Under Issue 01-9, "other
than cash" consideration should be characterized as an expense. In applying that
guidance, the service provider should characterize the consideration given to a
third-party manufacturer or reseller based on the form of consideration directed
by the service provider to be provided to the service provider's customer. If
the form of the consideration is directed to be anything other than "cash
consideration" (as defined in Issue 01-9), then the form of the consideration
should be characterized as "other than cash" consideration. If the service
provider does not control the form of the consideration provided to the service
provider's customer, the consideration should be characterized as "other than
cash" consideration. In reaching this conclusion, Task Force members observed
that consideration paid by a service provider that results in a customer
receiving a reduced price on equipment purchased from a manufacturer or reseller
should be characterized as "other than cash" consideration for purposes of
applying Issue 01-9. The consensus in this Issue is effective for the first
annual reporting period beginning after June 15, 2007. Earlier application is
permitted for financial statements that have not yet been issued. Entities
should recognize the effects of applying the consensus in this Issue as a change
in accounting principle through retrospective application to all prior periods
unless it is impracticable to do so. The Company does not expect that
pronouncement EITF Issue 06-1 will have any significant effect on future
financial statements.
EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. An
endorsement split-dollar life insurance should be recognized as a liability for
future benefits in accordance with Statement 106 (if, in substance, a
postretirement benefit plan exists) or Opinion 12 (if the arrangement is, in
substance, an individual deferred compensation contract) based on the
substantive agreement with the employee. The consensus in this Issue is
effective for fiscal years beginning after December 15, 2007, with earlier
application permitted. The Company does not expect that pronouncement EITF Issue
06-4 will have any significant effect on future financial statements.
Results of Operations
Three Months Ended February 29, 2008 and February 28, 2007
Net revenue from sales, leases and service of our EECP therapy systems for
the three-month periods ended February 29, 2008 and February 28, 2007, were
$1,187,694, and $1,381,501, respectively, which represented a decline of
$193,807 or 14%. We reported a net loss attributable to common shareholders of
$296,381 and $510,256 for the three-month periods ended February 29, 2008 and
February 28, 2007, respectively. The decrease in the net loss was primarily due
to the significant decrease in our operating expenses from the comparative prior
period, offset slightly by the decrease in revenue. Our net loss per common
share was $(0.00), and $(0.01) for the three-month periods ended February 29,
2008 and February 28, 2007, respectively.
Revenues
Revenue from equipment sales decreased by approximately 1%, to $427,445,
for the three-month period ended February 29, 2008 as compared to $432,124 for
the same period for the prior year. The minimal decrease in equipment sales is
due primarily to a 29% decrease in blended average selling prices, offset by a
25% increase in the number of equipment shipments. The overall decrease in
average sales prices is primarily due to the reduction in sales price due to
competition in both the domestic and international markets, from the prior
fiscal year.
Page 22
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We believe the decline in domestic average selling price 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) therapy 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 co-morbidities, 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. The average price of new systems sales declined by
39% in the three-month period ended February 29, 2008, compared to prior year
and the average sales price of used systems increased 17% in the three-month
period ended February 29, 2008. We continue to reorganize certain territory
responsibilities in our sales department due to the reduction in our sales force
and vacant and/or unproductive territories.
Our revenue from the sale of EECP(R) therapy systems and related products
to international distributors in the three-month period ended February 29, 2008
decreased approximately 92% to $11,332 compared to $137,333 in the three-month
period ending February 28, 2007.
Our revenue from equipment rental and services for the three-month period
ended February 29, 2008 declined 20% compared to the same three-month period in
the prior fiscal year. The decline is related to a decrease in the equipment
services related revenue as a result of decreased sales volume, while rental
revenue remained constant. Revenue from equipment rental and services
represented 64% of total revenues as compare to 69% of total revenues in the
prior comparative year.
Gross Profit
The gross profit declined to $531,446, or 45% of revenues, for the
three-month period ended February 29, 2008, compared to $780,646 or 57% of
revenues, for the three-month period ended February 28, 2007. The decline in
gross profit primarily reflects the decrease in the blended average selling
price, as well as the equipment service revenue decline.
Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) therapy system models sold domestically and internationally and their
respective average selling prices, the mix of EECP(R) therapy system units sold,
rented or placed during the period, the ongoing costs of servicing such units,
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 the three-months
ended February 29, 2008 and February 28, 2007, were $732,351, or 62% of
revenues, and $1,027,349 or 74% of revenues, respectively reflecting a decrease
of $249,998 or approximately 29%. The decrease in SG&A expenditures in the third
quarter of fiscal 2008 compared to fiscal 2007 resulted primarily from a
decrease of $89,548 due to reduced sales personnel and associated travel plus
lower sales commission due to reduced sales volume. Marketing expenses decreased
$187,410 due to reduced personnel in the marketing and clinical application
support areas, as well as associated travel, plus lower market research, product
Page 23
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
promotion, advertising, and trade show expenses. Administrative expenses
decreased $9,379 as a result of decreased expenditures associated with reduced
personnel and their associated costs.
Research and Development
Research and development ("R&D") expenses of $117,313, or 10% of revenues,
for the three-months ended February 29, 2008, decreased by $136,033, or 54%,
from the three-months ended February 28, 2007, which was $253,346 or 18% of
revenues. The decrease is primarily attributable to fewer engineering personnel
and lower new product development spending.
Interest Expense and Financing Costs
There were no interest expense and financing costs incurred during the
three-month period ended February 29, 2008 compared to $16,952 for the same
period in the prior year. Interest expense reflects interest on loans secured to
refinance the November 2000 purchase of the Company's headquarters and warehouse
facility. The elimination of this cost in the third quarter of fiscal 2008 is a
direct result of the sale-leaseback agreement for the Company's headquarters and
warehouse facility, which occurred during the first quarter of fiscal 2008.
Interest and Other Income, Net
Interest and other income for the three-month periods ended February 29,
2008 and February 28, 2007, were $12,275 and $12,445, respectively. Interest
income primarily reflects interest earned on the Company's cash balances.
Gain on Sale of Assets
Gain on Sale of Assets for the three-month periods ended February 29, 2008
and February 28, 2007, were $13,312 and $0, respectively. This gain is the
result of the Company's recognition on the gain on the sale-leaseback of its
facility and liquidation of equipment and fixtures used in previously leased
properties.
Income Tax Expense, Net
During the three-month periods ended February 29, 2008 and February 28,
2007, state income taxes were $3,750 and $5,700, respectively.
As of February 29, 2008, the recorded deferred tax assets were $19,720,352,
reflecting a $103,000 increase during the third quarter of fiscal 2008. 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. The Company has 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 has recorded a
valuation allowance to bring the net deferred tax asset carrying value to zero.
Results of Operations
Nine Months Ended February 29, 2008 and February 28, 2007
Net revenue from sales, leases and service of our EECP(R) therapy systems
for the nine-month periods ended February 29, 2008 and February 28, 2007, were
$3,915,585 and $4,986,580, respectively, which represented a decline of
$1,070,995, or 21%. We reported a net loss of $379,229 compared to a net loss
Page 24
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
attributable to common stockholders of $1,418,648 for the nine-month periods
ended February 29, 2008 and February 28, 2007, respectively. Our net loss per
common share was $0.00 for the nine-month period ended February 29, 2008
compared to a net loss of $0.02 per share for the nine-month period ended
February 28, 2007. The decrease in the net loss per common share was primarily
due to the significant decrease in our operating expenses from the comparative
prior period.
Revenues
Revenue from equipment sales declined approximately 27%, to $1,517,985, for
the nine-month period ended February 29, 2008 as compared to $2,080,272 for the
same period for the prior year. The decrease in equipment sales is due primarily
to a 31% decrease in blended average sales prices, offset by a 10% increase in
number of equipment shipments. The overall decrease in average sales prices is
primarily due to the reduction in sales price due to competition in both the
domestic and international markets, from the prior fiscal year.
We believe the decline in domestic units average selling prices 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) therapy 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 co-morbidities,
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. The average
price of new systems sales declined by 33%, in the nine month period ended
February 29, 2008, compared to prior year and the average sales price of used
systems declined 31% in the nine month period ended February 29, 2008. We
continue to reorganize certain territory responsibilities in our sales
department due to the reduction in our sales force and vacant and/or
unproductive territories.
Our revenue from the sale of EECP(R) therapy systems and related products
to international distributors in the nine-month period ended February 29, 2008
decreased approximately 27%, to $603,184, compared to $829,288 in the nine-month
period ending February 28, 2007.
Our revenue from equipment rental and service for the nine-month period
ended February 29, 2008 declined 18% compared to the same nine-month period in
the prior fiscal year. Rental revenues decreased 67% as a result of a decrease
in the rental installation base and equipment services revenue decreased 17% as
a result of decreased sales volume. Revenue from equipment rental and services
represented 61% of total revenue compared to 58% of total revenue in the prior
comparative year.
Gross Profit
The gross profit declined to $1,867,960, or 48% of revenues, for the
nine-month period ended February 29, 2008, compared to $2,704,507, or 54% of
revenues, for the nine-month period ended February 28, 2007. The decline in
gross profit primarily reflects the decline in the unit sales blended average
selling price as well as the equipment service revenue decline.
Page 25
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) therapy system models sold domestically and internationally and their
respective average selling prices, the mix of EECP(R) therapy system units sold,
rented or placed during the period, the ongoing costs of servicing such units,
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 the nine-months
ended February 29, 2008 and February 28, 2007, were $1,932,645, or 49% of
revenues, and $3,380,512 or 68% of revenues, respectively, reflecting a decrease
of $1,447,867, or approximately 43%. The decrease in SG&A expenditures in the
first three quarters of fiscal 2008 compared to fiscal 2007 resulted primarily
from a decrease of $628,612 due to reduced sales personnel and associated travel
plus lower sales commission due to reduced sales volume. Marketing expenses
decreased $438,731 due to reduced personnel in the marketing and clinical
application support areas, as well as associated travel, plus lower market
research, product promotion, advertising, and trade show expenses.
Administrative expenses decreased $381,864 as a result of decreased expenditures
in professional fees related to accounting and outside consulting, along with
reduced personnel and their associated costs.
Research and Development
Research and development ("R&D") expenses of $362,315, or 9% of revenues,
for the nine months ended February 29, 2008, decreased by $360,316, or 50%, from
the nine months ended February 28, 2007, which was $722,631 or 14% of revenues.
The decrease is primarily attributable to fewer engineering personnel, lower new
product development spending, and reduced spending on clinical trials.
Interest Expense and Financing Costs
Interest expense and financing costs decreased to $16,605 in the nine-month
period ended February 29, 2008, from $54,281 for the same period in the prior
year. Interest expense reflects interest on loans secured to refinance the
November 2000 purchase of the Company's headquarters and warehouse facility. The
decrease in the first three quarters of fiscal 2008 is a direct result of the
sale-leaseback agreement for the Company's headquarters and warehouse facility,
which occurred in the first quarter of fiscal 2008.
Interest and Other Income, Net
Interest and other income for the nine-month periods ended February 29,
2008 and February 28, 2007, were $47,513 and $48,269, respectively. Interest
income primarily reflects interest earned on the Company's cash balances.
Gain on Sale of Assets
Gain on Sale of Assets for the nine-month periods ended February 29, 2008
and February 28, 2007, were $31,060 and $0, respectively. This gain is the
result of the Company's recognition on the gain on the sale-leaseback of its
facility and liquidation of equipment and fixtures used in previously leased
properties.
Income Tax Expense, Net
During the nine-month periods ended February 29, 2008 and February 28,
2007, state income taxes were $14,197 and $14,000, respectively.
Page 26
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
As of February 29, 2008, the recorded deferred tax assets were $19,720,352,
reflecting a $131,000 increase during the first three quarters of fiscal 2008.
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. The Company
has 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 has
recorded a valuation allowance to bring the net deferred tax asset carrying
value to zero.
Liquidity and Capital Resources
Cash and Cash Flow
At February 29, 2008, we had cash of $2,585,400 and working capital of
$2,954,952 as compared to cash and cash equivalents of $850,288 and working
capital of $1,320,347 at May 31, 2007. Our cash and cash equivalents increased
$1,735,112 in fiscal year 2008.
Cash used in operating activities was $100,620 for the nine months ended
February 29, 2008, which consisted of net cash loss after adjustments of
$130,484 and cash provided by operating assets and liabilities of $29,864. The
changes in the account balances primarily reflect an increase in accounts
receivable of $16,645, a decrease in accounts payable, accrued expenses, and
other current liabilities of $210,119, a decrease in other liabilities of
$90,643, an increase in other current assets of $80,487, and recognition of
deferred distributor costs of $40,490, which were offset by lower inventory of
$468,248. Net accounts receivable were 20% of revenues for the nine-month period
ended February 29, 2008, as compared to 11% for the nine-month period ended
February 28, 2007, and accounts receivable turnover was 7.9 times, and 6.4 times
for the nine months ended February 29, 2008 and February 27, 2007, respectively.
Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from shipment and do not contain "right of return" provisions. We
have historically offered a variety of extended payment terms, including
sales-type leases, in certain situations and to certain customers in order to
expand the market for our EECP(R) therapy system products in the US and
internationally. Such extended payment terms were offered in lieu of price
concessions, in competitive situations, when opening new markets or geographies
and for repeat customers. Extended payment terms cover a variety of negotiated
terms, including payment in full - net 120, net 180 days or some fixed or
variable monthly payment amount for a six to twelve month period followed by a
balloon payment, if applicable. During the nine-month periods ended February 29,
2008 and February 28, 2007, there were no revenues generated from sales in which
initial payment terms were greater than 90 days and we offered no sales-type
leases during either period. In general, reserves are calculated on a formula
basis considering factors such as the aging of the receivables, time past due,
and the customer's credit history and their current financial status. In most
instances where reserves are required, or accounts are ultimately written-off,
customers have been unable to successfully implement their EECP(R) therapy
program. As we are creating a new market for the EECP(R) therapy and recognizing
the challenges that some customers may encounter, we have opted, at times, on a
customer-by-customer basis, to recover our equipment instead of pursuing other
legal remedies, which has resulted in our recording of a reserve or a write-off.
Investing activities provided net cash of $1,310,857 during the nine-month
period ended February 29, 2008, which represented proceeds received from the
building sale, net of related costs.
Our financing activities provided net cash of $524,875 during the
nine-month period ended February 29, 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.
Page 27
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of February 29, 2008.
Due as of Due as of
Due as of 2/28/10 and 2/29/12 and Due
Total 2/28/09 2/28/11 2/28/13 Thereafter
-----------------------------------------------------------------------------------------------------------
Operating Leases $681,491 $141,390 $299,974 $240,127 $--
--------------------------------------------------------------------------------
Total Contractual Cash
Obligations $681,491 $141,390 $299,974 $240,127 $--
================================================================================
Liquidity
During the first quarter of fiscal 2008 the following events took place,
which allowed us to raise additional capital through a private equity financing
and by the sale of our facility under a leaseback agreement.
o On June 21, 2007 we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. ("Kerns"). Concurrently with our entry into
the Securities Purchase Agreement, we also entered into a Distribution
Agreement and a Supplier Agreement with Living Data Technology
Corporation, 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, and 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"), for a
total purchase price of $1,500,000 less expenses incurred of $124,110.
We also have an option to sell an additional $1 million of our common
stock to Kerns. The agreement further provided for the appointment to
our Board of Directors of two representatives of 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
July 10, 2007, Mr. Benham Movaseghi, Treasurer of Kerns, was also
appointed to our Board of Directors. Pursuant to the Distribution
Agreement, we have become the exclusive distributor in the United
States of the AngioNew ECP systems manufactured by Living Data. As
additional consideration for such agreement, we agreed to issue an
additional 6,990,840 shares of our common stock to Living Data.
Pursuant to the Supplier Agreement, Living Data now will be the
exclusive supplier to us of the ECP therapy systems that we market
under the registered trademark EECP(R). The Distribution Agreement and
the Supplier Agreement each have an initial term extending through May
31, 2012.
Pursuant to a Registration Rights Agreement, we granted to Kerns and
Living Data, subject to certain restrictions, "piggyback registration
rights" covering the shares sold to Kerns as well as the shares
issuable upon exercise of the Warrant and the shares issued to Living
Data.
o On August 15, 2007 we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale 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.
Based on our current operations and the amounts received from the above
transactions, we believe that we have sufficient working capital to continue our
operations through at least the next twelve months.
Page 28
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Effects of Inflation
We believe that inflation and changing prices over the past year have not
had a significant impact on our revenue or on our results of operations.
Page 29
Vasomedical, Inc. and Subsidiaries
ITEM 3 - CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 (b).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of February 29, 2008, our disclosure controls and
procedures are effective to provide reasonable assurances that such disclosure
controls and procedures satisfy their objectives and that the information
required to be disclosed by us in the reports we file under the Exchange Act is
recorded, processed, summarized and reported within the required time periods.
There were no changes during the fiscal quarter ended February 29, 2008 in our
internal controls or in other factors that could have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Page 30
Vasomedical, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibits
31 Certifications pursuant to Rule 13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Page 31
Vasomedical, Inc. and Subsidiaries
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VASOMEDICAL, INC.
By: /s/ John C.K. Hui
------------------------------------------------
John C.K. Hui
Chief Executive Officer, Director, and Chief
Technology Officer (Principal Executive Officer)
/s/ Tricia Efstathiou
------------------------------------------------
Tricia Efstathiou
Chief Financial Officer (Principal Financial and
Accounting Officer)
Date: April 14, 2008
Page 32