UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended November 30, 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 registrant 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)
Registrant's Telephone Number (516) 997-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
--- --
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ]
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
January 12, 2009 - 98,943,004
Page 1
Vasomedical, Inc. and Subsidiaries
INDEX
Page
PART I - FINANCIAL INFORMATION ----
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Balance Sheets as of
November 30, 2008 and May 31, 2008 3
Consolidated Condensed Statements of Operations for the
Six and Three Months Ended November 30, 2008 and 2007 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended November 30, 2008 and 2007 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Controls and Procedures 26
PART II - OTHER INFORMATION
Item 6 - Exhibits 27
Page 2
ITEM 1. FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, 2008 May 31, 2008
--------------------- -------------------
ASSETS (Unaudited) (Derived from
audited financial
statements)
CURRENT ASSETS
Cash and cash equivalents $ 1,873,689 $ 2,653,999
Accounts receivable, net of an allowance for doubtful accounts of
$108,953 at November 30, 2008, and $270,183 at May 31, 2008 503,324 717,849
Inventories, net 1,702,108 1,652,678
Other current assets 105,266 58,933
--------------------- -------------------
Total current assets 4,184,387 5,083,459
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$2,067,153 at November 30, 2008, and $2,178,566 at May 31, 2008 134,802 57,170
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
$152,663 at November 30, 2008, and $101,775 at May 31, 2008 356,213 407,101
OTHER ASSETS 189,884 213,336
--------------------- -------------------
$ 4,865,286 $ 5,761,066
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 514,040 $ 822,244
Sales tax payable 128,714 149,304
Deferred revenue 1,067,069 1,132,445
Deferred gain on sale of building 53,245 53,245
Accrued professional fees 76,683 74,320
Due to related party-current portion 240,000 -
--------------------- -------------------
Total current liabilities 2,079,751 2,231,558
--------------------- -------------------
LONG-TERM LIABILITIES
Deferred revenue 419,731 485,608
Accrued rent expense 13,041 8,656
Deferred gain on sale of building 141,987 168,610
Due to related party-long-term portion 20,000 -
--------------------- -------------------
Total long term liabilities 594,759 662,874
--------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value; 200,000,000 shares authorized;
95,943,004 shares at November 30, 2008, and 93,768,004 at
May 31, 2008, issued and outstanding 95,943 93,768
Additional paid-in capital 48,207,614 48,068,432
Accumulated deficit (46,112,781) (45,295,566)
--------------------- -------------------
Total stockholders' equity 2,190,776 2,866,634
--------------------- -------------------
$ 4,865,286 $ 5,761,066
===================== ===================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended November 30, Three months ended November 30,
------------------------------------- ---------------------------------
2008 2007 2008 2007
----------------- ----------------- ----------------- --------------
Revenues
Equipment sales $ 1,244,794 $ 1,090,540 $ 588,298 $ 597,272
Equipment rentals and services 1,225,752 1,637,351 570,527 790,543
----------------- ----------------- ---------------- -------------
Total revenues 2,470,546 2,727,891 1,158,825 1,387,815
----------------- ----------------- ---------------- -------------
Cost of Sales and Services
Cost of sales, equipment 891,345 765,054 363,064 424,416
Cost of equipment rentals and services 542,875 626,323 259,997 311,624
----------------- ----------------- ---------------- -------------
Total cost of sales and services 1,434,220 1,391,377 623,061 736,040
----------------- ----------------- ---------------- -------------
Gross profit 1,036,326 1,336,514 535,764 651,775
----------------- ----------------- ---------------- -------------
Operating Expenses
Selling, general and administrative 1,629,143 1,200,294 685,384 642,138
Research and development 279,954 245,002 147,607 105,827
----------------- ----------------- ---------------- -------------
Total operating expenses 1,909,097 1,445,296 832,991 747,965
----------------- ----------------- ---------------- -------------
Loss from operations (872,771) (108,782) (297,227) (96,190)
----------------- ----------------- ---------------- -------------
Other Income (Expenses)
Interest and financing costs - (16,605) - -
Interest and other income, net 36,535 35,238 20,523 22,967
Recognition of deferred gain on sale of building 26,623 17,748 13,312 13,311
----------------- ----------------- ---------------- -------------
Total other income (expenses) 63,158 36,381 33,835 36,278
----------------- ----------------- ---------------- -------------
Loss before income taxes (809,613) (72,401) (263,392) (59,912)
Income tax expense, net (7,602) (10,447) (3,852) (4,151)
----------------- ----------------- ---------------- -------------
Net loss $ (817,215) $ (82,848) $ (267,244) $ (64,063)
================= ================= ================ =============
Net loss per common share
- basic $ (0.01) $ (0.00) $ (0.00) $ (0.00)
================= ================= ================ =============
- diluted $ (0.01) $ (0.00) $ (0.00) $ (0.00)
================= ================= ================ =============
Weighted average common shares outstanding
- basic 94,261,960 90,667,355 94,766,893 93,618,004
================= ================= ================ =============
- diluted 94,261,960 90,667,355 94,766,893 93,618,004
================= ================= ================ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended November 30,
----------------------------
2008 2007
---------- ----------
Cash flows provided by (used in) operating activities
Net loss $ (817,215) $ (82,848)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 51,179 104,214
Amortization of deferred gain on sale of building (26,623) (17,748)
Provision for doubtful accounts - (27,524)
Amortization of deferred distributor costs 50,888 50,888
Expenses paid for distributor agreement - (40,490)
Stock based compensation 141,357 67,100
Changes in operating assets and liabilities:
Accounts receivable 214,525 (104,679)
Inventories (145,351) 408,197
Other current assets (46,333) (166,148)
Accounts payable, accrued expenses and other current liabilities (387,422) (163,447)
Other liabilities (65,877) (157,787)
Due to related party 260,000 -
----------- -----------
46,343 (47,424)
----------- -----------
Net cash used in operating activities (770,872) (130,272)
----------- -----------
Cash flows provided by (used in) investing activities
Proceeds from the building sale - 1,400,000
Expenses paid for sale of building - (89,143)
Purchases of fixed assets (9,438) -
----------- -----------
Net cash provided by (used in) investing activities (9,438) 1,310,857
----------- -----------
Cash flows provided by (used in) financing activities
Payments on long term debt and notes payable - (851,015)
Proceeds from Securities Purchase agreement - 1,500,000
Expenses paid in relation to Securities Purchase Agreement - (124,110)
----------- -----------
Net cash provided by financing activities - 524,875
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (780,310) 1,705,460
----------- -----------
Cash and cash equivalents - beginning of period 2,653,999 850,288
----------- -----------
Cash and cash equivalents - end of period $1,873,689 $2,555,748
=========== ===========
Non-cash investing and financing activities were as follows:
Inventories transferred to property and equipment, attributable
to operating leases, net $ 95,921 $ (38,531)
Common stock issued for distribution agreement $ - $ 468,386
Supplemental Disclosures
Interest paid $ - $ 16,605
Income taxes paid $ 790 $ 2,983
The accompanying notes are an integral part of these consolidated condensed
financial statements
Page 5
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 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 is a non-invasive, outpatient
treatment of diseases of the cardiovascular system. The therapy serves to
increase circulation in areas of the heart with less than adequate blood supply
and helps to restore systemic vascular function. The therapy also increases
blood flow and oxygen supply to the heart muscle and other organs and decreases
the heart's workload and need for oxygen, while also improving function of the
endothelium, the lining of blood vessels throughout the body, lessening
resistance to blood flow. We provide hospitals, clinics and physician private
practices with EECP(R) equipment, treatment guidance, and a staff training and
equipment maintenance program designed to provide optimal patient outcomes.
EECP(R) is a registered trademark for our enhanced external counterpulsation
therapy and systems. 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 pectoris patients with moderate to severe
symptoms who are refractory to medications and not candidates for invasive
procedures, including patients with serious co-morbidities, such as heart
failure, diabetes, and peripheral vascular disease. Patients with primary
diagnoses of heart failure, diabetes, and peripheral vascular disease are also
reimbursed under the same criteria, provided the primary indication for
treatment with EECP(R) therapy is angina symptoms.
During the last several years, we incurred operating losses. We have
attempted to achieve profitability by reducing operating costs and halting the
trend of declining revenue, and to reduce cash usage through bringing our cost
structure more into alignment with current revenues. By engaging in
restructurings during March 2007 and April 2007, the Company has substantially
reduced personnel and spending on sales, marketing and development projects. In
addition, during the first quarter of fiscal year 2008, we raised 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 for an
aggregate of $1,500,000, as well as a five-year warrant to purchase
4,285,714 shares of our common stock at an initial exercise price of
$.08 per share (the Warrant). The agreement further provided for the
appointment to our Board of Directors of two representatives of Kerns.
In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both
Kerns and Living Data, have been appointed members of our Board of
Directors. On October 16, 2008 Mr. Jun Ma was appointed President and
Chief Executive Officer of the Company. Pursuant to the Distribution
Agreement, we have become the exclusive distributor in the United
States of the AngioNew ECP systems manufactured by Living Data. As
additional consideration for such agreement, we agreed to issue an
additional 6,990,840 shares of our common stock to Living Data.
Pursuant to the Supplier Agreement, Living Data is now the exclusive
supplier to us of the ECP therapy systems that we market under the
registered trademark EECP(R). The Distribution Agreement and the
Supplier Agreement each have an initial term extending through May 31,
2012.
Page 6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2008
Pursuant to a Registration Rights Agreement, we granted to Kerns and
Living Data, subject to certain restrictions, "piggyback registration
rights" covering the shares sold to Kerns as well as the shares
issuable upon exercise of the Warrant and the shares issued to Living
Data.
o On August 15, 2007, we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale were
approximately $425,000, after payment in full of the two secured notes
on our facility, brokers fees, closing costs, and the opening of a
certificate of deposit in accordance with the provisions of the new
lease.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock.
NOTE B - STOCK-BASED COMPENSATION
As of June 1, 2006, the Company 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.
During the six-month period ended November 30, 2008, the Board of Directors
did not grant any non-qualified stock options.
During the six-month period ended November 30, 2008, the Company's Board of
Directors granted 100,000 shares of common stock to one employee of the Company
having a fair market value of $0.08 per share at the time of the respective
grant.
Stock-based compensation expense recognized under SFAS 123(R) was $141,357
and $67,100 for the six months endedd November 30, 2008 and 2007, respectively.
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 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).
NOTE C - LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share:
Page 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2008
Six months ended November 30, Three months ended November 30,
-------------------------------------- ----------------------------------
2008 2007 2008 2007
----------------- ----------------- ----------------- --------------
Numerator:
Net loss $ (817,215) $ (82,848) $ (267,244) $ (64,063)
================= ================= ================ ===============
Denominator:
Basic - weighted average common shares 94,261,960 90,667,355 94,766,893 93,618,004
Stock options - - - -
Warrants - - - -
----------------- ----------------- ---------------- ----------------
Diluted - weighted average common shares 94,261,960 90,667,355 94,766,893 93,618,004
================= ================= ================= ==============
Loss per share - basic $ (0.01) $ (0.00) $ (0.00) $ (0.00)
================= ================= ================= ==============
- diluted $ (0.01) $ (0.00) $ (0.00) $ (0.00)
================= ================= ================= ==============
Options and warrants, in accordance with the following table, were excluded
from the computation of diluted loss per share for the six months ended November
30, 2008 and 2007, because the effect of their inclusion would be antidilutive.
As of November 30,
----------------------------------------
2008 2007
------------------ -----------------
Options 5,134,877 5,886,710
Warrants 6,540,252 6,540,252
------------------ -----------------
11,675,129 12,426,962
================== =================
NOTE D - INVENTORIES, NET
Inventories, net of reserves consist of the following:
November 30, 2008 May 31, 2008
--------------------- ---------------------
Raw materials $ 872,541 $ 936,035
Work in process 456,874 603,925
Finished goods 372,693 112,718
--------------------- ---------------------
$ 1,702,108 $ 1,652,678
===================== =====================
At November 30, 2008 and May 31, 2008, the Company had reserves for excess
and obsolete inventory of $581,725 and $594,042, respectively.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Page 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2008
November 30, 2008 May 31, 2008
--------------------- ---------------------
Office, laboratory and other equipment $ 1,238,830 $ 1,368,170
EECP(R) systems under operating leases
or under loan for clinical trials 815,320 719,401
Furniture and fixtures 148,165 148,165
--------------------- ---------------------
2,202,315 2,235,736
Less: accumulated depreciation 2,067,513 2,178,566
--------------------- ---------------------
Property and equipment - net $ 134,802 $ 57,170
===================== =====================
Depreciation expense amounted to $9,957 and $30,504 for the
three-month period ended November 30, 2008 and 2007, respectively. For the
six-month period ended November 30, 2008 and 2007, depreciation expense was
$27,729 and $89,238 respectively.
NOTE F - DEFERRED REVENUE
The changes in the Company's deferred revenues are as follows:
Six Months Ended November 30, Three Months Ended November 30,
-------------------------------------- --------------------------------------
2008 2007 2008 2007
----------------- ------------------ ----------------- -----------------
Deferred revenue at the beginning of the period $ 1,618,053 $ 1,756,351 $ 1,662,682 $ 1,619,631
Additions:
Deferred extended service contracts 632,893 914,254 186,058 502,353
Deferred in-service and training 22,500 17,500 5,000 7,500
Deferred service arrangements 79,500 80,000 27,000 30,000
Deferred service arrangement obligations 600 7,800 - 3,300
Recognized as revenue:
Deferred extended service contracts (732,218) (1,084,345) (322,091) (518,341)
Deferred in-service and training (25,000) (10,000) (12,500) (2,500)
Deferred service arrangements (108,328) (71,919) (58,749) (35,752)
Deferred service arrangement obligations (1,200) (11,400) (600) (7,950)
----------------- ------------------ ----------------- -----------------
Deferred revenue at end of period 1,486,800 1,598,241 1,486,800 1,598,241
Less: current portion 1,067,069 1,289,289 1,067,069 1,289,289
----------------- ------------------ ----------------- -----------------
Long-term deferred revenue at end of period $ 419,731 $ 308,952 $ 419,731 $ 308,952
================= ================== ================= =================
NOTE G - 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 November 30, 2008 the unamortized deferred gain of
$195,232 is shown as "Deferred gain on sale of building" in the Company's
consolidated condensed balance sheet. The short-term portion of $53,245 is shown
in current liabilities and the long-term portion of $141,987 is in long-term
liabilities. The amount recognized as a gain in the first six months of fiscal
2009 was $26,623.
NOTE H - WARRANTY LIABILITY
The changes in the Company's product warranty liability are as follows:
Page 9
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2008
Six Months Ended November 30, Three Months Ended November 30,
-------------------------------------- -------------------------------
2008 2007 2008 2007
----------------- ----------------- ----------------- -----------
Warranty liability at the beginning of the period $ 17,250 $ 15,750 $ 23,500 $ 30,000
Expense for new warranties issued 42,000 33,000 24,000 9,000
Warranty claims (26,000) (17,750) (14,250) (12,500)
----------------- ----------------- ----------------- -----------
Warranty liability at the end of the period 33,250 31,000 33,250 26,500
----------------- ----------------- ----------------- -----------
Long-term warranty liability at the end of the period $ - $ - $ - $ -
================= ================= ================= ===========
NOTE I - RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns. Concurrently with our entry into the Securities Purchase Agreement, we
also entered into a Distribution Agreement and a Supplier Agreement with Living
Data, an affiliate of Kerns.
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for an aggregate of $1,500,000, as
well a five-year warrant to purchase 4,285,714 shares of our common stock at an
initial exercise price of $.08 per share (the "Warrant"). The agreement further
provided for the appointment to our Board of Directors of two representatives of
Kerns. In furtherance thereof, Jun Ma and Simon Srybnik, Chairman of both Kerns
and Living Data, have been appointed members of our Board of Directors. On
October 16, 2008 Mr. Jun Ma was appointed President and Chief Executive Officer
of the Company. Pursuant to the Distribution Agreement, we have become the
exclusive distributor in the United States of the AngioNew ECP systems
manufactured by Living Data. As additional consideration for such agreement, we
agreed to issue an additional 6,990,840 shares of our common stock to Living
Data. Pursuant to the Supplier Agreement, Living Data is now the exclusive
supplier to us of the ECP therapy systems that we market under the registered
trademark EECP(R). The Distribution Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.
On November 20, 2008, the Company entered into an Amendment to the
Distribution Agreement with Living Data to expand the territory covered in the
Distribution Agreement to provide for exclusive distribution rights worldwide.
In consideration for these rights, the Company agreed to issue Living Data
3,000,000 restricted shares of its common stock.
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
On July 10, 2007, the Board of Directors appointed Behnam Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.
As affiliates of Living Data and Kerns, Mr. Movaseghi and Mr. Srybnik have
each been directly involved in the transactions between Living Data or Kerns, on
the one hand, and the Company, on the other hand, with respect to the Securities
Purchase Agreement, the Distribution Agreement and the Supplier Agreement, as
well as providing consulting services to the Company without compensation.
During the six-month period ended November 30, 2008, the Company purchased
ECP therapy systems under the Supplier Agreement for $505,000 from Living Data.
Payment terms on certain purchases leave a balance of $20,000 in due to related
party-long term portion and $240,000 in due to related party-current portion on
the accompanying balance sheet. In addition, Living Data purchased $3,162 worth
of ECP therapy system components from the Company.
Page 10
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
November 30, 2008
During the six-month period ended November 30, 2008, Living Data assigned
to the Company all of its rights and interests under its Distributorship
Agreement with a corporation organized and existing under the laws of the
People's Republic of China that manufactures Ambulatory Blood Pressure Monitors,
Ambulatory ECG Recorders and Holter & ABPM Combiner Recorders, for $20,000
payable to Living Data based on certain terms and conditions. The Company has
also agreed to pay to Living Data 5% of the selling price or 5% of the cost of
all goods sold (whichever is higher) and 5% of the cost of all goods transferred
but not sold under the Assignment Agreement to Living Data based on sales of
this equipment. The Company intends to sell these systems in the United States
and other countries subject to obtaining regulatory clearance.
During the six-month period ended November 30, 2008, Living Data assigned
to the Company all of its rights and interests under its Distributorship
Agreement with a corporation organized and existing under the laws of the
People's Republic of China that manufactures Ultrasound Scanners, for $20,000
payable to Living Data based on certain terms and conditions. The Company has
also agreed to pay to Living Data 5% of the selling price or 5% of the cost of
all goods sold (whichever is higher) and 5% of the cost of all goods transferred
but not sold under the Assignment Agreement to Living Data based on sales of
this equipment. The Company intends to sell these systems in the United States
and other countries subject to obtaining regulatory clearance.
Further, Kerns provides the Company, free of charge, part-time use of one
of its Information Technology (IT) employees as well one of their IT consultants
to provide the Company with IT and database support services. In addition, a
clinical applications support specialist and a service engineer from Living Data
may be used by the Company to provide customers with clinical training and
technical service. The Company was charged $3,900 for the services of the
clinical applications support specialist and $2,700 for the services of the
service engineer during the six-month period ended November 30, 2008.
NOTE J - INCOME TAXES
During the six-month period ended November 30, 2008 and August 31, 2007,
state income taxes were $7,500 and $10,447, respectively.
As of November 30, 2008, the recorded deferred tax assets were $20,095,252,
reflecting a $275,900 increase during the first six months of fiscal 2009. The
deferred tax assets were offset by a valuation allowance of the same amount.
Ultimate realization of any or all of the deferred tax assets is not assured,
due to significant uncertainties and material assumptions associated with
estimates of future taxable income during the carryforward period. Management
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.
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, 2009 $ 72,081
May 31, 2010 148,488
May 31, 2011 154,427
May 31, 2012 160,604
May 31, 2013 40,541
------------------
Total $ 576,141
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. The EECP(R) therapy is a non-invasive, outpatient
treatment of diseases of the cardiovascular system. The therapy serves to
increase circulation in areas of the heart with less than adequate blood supply
and helps to restore systemic vascular function. The therapy also increases
blood flow and oxygen supply to the heart muscle and other organs and decreases
the heart's workload and reduces oxygen demand, while also improving function of
the endothelium, the lining of blood vessels throughout the body, lessening
resistance to blood flow. We provide hospitals, clinics and physician private
practices with EECP(R) equipment, treatment guidance, and a staff training and
equipment maintenance program designed to provide optimal patient outcomes.
EECP(R) is a registered trademark for Vasomedical's enhanced external
counterpulsation therapy and systems. For more information, visit
www.vasomedical.com.
We have FDA clearance to market our EECP(R) therapy for use in the
treatment of stable and unstable angina, congestive heart failure, acute
myocardial infarction, and cardiogenic shock; however, our current marketing
efforts are limited to the treatment of chronic stable angina and congestive
heart failure. Medicare and other third-party payers currently reimburse for the
treatment of angina pectoris patients with moderate to severe symptoms who are
refractory to medications and not candidates for invasive procedures. Patients
with co-morbidities of heart failure, diabetes, peripheral vascular disease,
etc. are also reimbursed under the same criteria, provided the primary diagnosis
and indication for treatment with EECP(R) therapy is angina symptoms.
During the last several years, we incurred operating losses. We have
attempted to achieve profitability by reducing operating costs and halting the
trend of declining revenue, and to reduce cash usage through bringing our cost
structure more into alignment with current revenues. By engaging in
restructurings during March 2007 and April 2007, the Company has substantially
reduced personnel and spending on sales, marketing and development projects. In
addition, during the first quarter of fiscal year 2008, we raised additional
capital through a private equity financing and by the sale of our facility under
a leaseback agreement. See Note A for details of these events.
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Market Overview
Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare spending in nearly every
country. CVD claimed approximately 2.4 million lives in the United States in
2005 and was responsible for 1 of every 5 deaths, according to The American
Heart Association (AHA) Heart and Stroke Statistical 2009 Update (2009 Update).
Approximately 80 million Americans suffer from some form of cardiovascular
disease. Among these, 16.8 million have coronary heart disease (CHD).
We have FDA clearance to market our EECP(R) therapy for use in the
treatment of stable and unstable angina, congestive heart failure, acute
myocardial infarction, and cardiogenic shock; however, our current marketing
efforts are mostly limited to the treatment of chronic stable angina and
congestive heart failure. Medicare and other third-party payers currently
reimburse for the treatment of angina pectoris patients with moderate to severe
symptoms who are refractory to medications and not candidates for invasive
procedures. Patients with co-morbidities of heart failure, diabetes, peripheral
vascular disease, etc. are also reimbursed under the same criteria, provided the
primary diagnosis and indication for treatment with EECP(R) therapy is
refractory angina symptoms.
Angina
Angina pectoris is the medical term for a recurring pain or discomfort in
the chest due to coronary artery disease (CAD). Angina is a symptom of a
condition called myocardial ischemia, which occurs when the heart muscle or
myocardium doesn't receive sufficient blood, hence as much oxygen, as it needs.
This usually happens because one or more of the heart's arteries, the blood
vessels that supply blood to the heart muscle, is narrow or blocked.
Insufficient blood supply to meet the need of the organ to function is called
ischemia.
The cardinal symptom of stable CAD is anginal chest pain or equivalent
symptoms, such as exertional dyspnea or fatigue. Angina is uncomfortable
pressure, fullness, squeezing or pain, usually occurring in the center of the
chest under the breastbone. The discomfort also may be felt in the neck, jaw,
shoulder, back or arm. Often the patient suffers not only from the discomfort of
the symptom itself but also from the accompanying limitations on activities and
the associated anxiety that the symptoms may produce. Uncertainty about
prognosis may be an additional source of anxiety. For some patients, the
predominant symptoms may be palpitations or syncope that is caused by
arrhythmias or fatigue, edema, or orthopnea caused by heart failure. Episodes of
angina occur when the heart's need for oxygen increases beyond the oxygen
available from the blood nourishing the heart. Physical exertion is the most
common trigger, but not the only one for angina. For example, running to catch a
bus could trigger an attack of angina while walking might not. Angina may happen
during exercise, periods of emotional stress, exposure to extreme cold or heat,
heavy meals, alcohol consumption or cigarette smoking. Some people, such as
those with a coronary artery spasm, may have angina when they are resting.
There are approximately 6.4 million angina patients in the United States
and our EECP(R) therapy currently competes with other technologies in the market
for approximately 100,000 to 150,000 new refractory angina patients annually who
do not adequately respond to or are not amenable to medical and surgical therapy
and have the potential to meet the guidelines for reimbursement of EECP(R)
therapy. Most angina patients are treated with medications, including beta
blockers to slow and protect the heart, and vasodilators which are often
prescribed to increase blood flow to the coronary arteries. When drugs fail or
inadequately correct the problem, the patients are considered unresponsive to
medical therapy. Most angina patients are readily amenable to invasive
revascularization procedures such as angioplasty and coronary stent placement,
as well as coronary artery bypass grafting (CABG). However, there are
approximately 100,000 to 150,000 angina patients each year whose angina can not
be stopped by medication and they are no longer readily amenable to palliative
invasive procedures.
In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that administers the Medicare program for more than 39 million
beneficiaries, issued a national coverage policy for the use of external
counterpulsation therapy in the treatment of refractory angina. Medicare
reimbursement guidelines have a significant impact in determining the available
market for EECP(R) therapy. We believe that over 65% of the patients that
receive EECP(R) therapy are Medicare patients and many of the third-party payers
follow Medicare guidelines, which limit reimbursement for EECP(R) therapy to
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
patients who do not adequately respond to or are not amenable to medical therapy
and are not readily amenable to invasive therapy. As a result, an important
element ofour strategy is to grow the market for EECP(R) therapy by expanding
reimbursement coverage to include a broader range of angina patients than the
current coverage policy provides and enable EECP(R) therapy to compete more with
other therapies for ischemic heart disease. Please see the heading
"Reimbursement" in the "Item-1 Business" section of this Form 10-KSB for a more
detailed discussion of reimbursement issues.
Congestive Heart Failure (CHF)
CHF is a condition in which the heart loses its pumping capacity to supply
the metabolic needs of all other organs. The condition affects both sexes and is
most common in people over age 50. Symptoms include angina, shortness of breath,
weakness, fatigue, swelling of the abdomen, legs and ankles, rapid or irregular
heartbeat and low blood pressure. Causes range from chronic high blood pressure,
heart-valve disease, heart attack, coronary artery disease, heartbeat
irregularities, severe lung disease such as emphysema, congenital disease,
cardiomyopathy, hyperthyroidism, severe anemia and others.
CHF is treated with medication and, sometimes, surgery on heart valves or
the coronary arteries and, in certain severe cases, heart transplants. Left
ventricular assist devices (LVADs) and the use of cardiac resynchronization and
implantable defibrillators are useful in selected patients with heart failure.
Still, no consensus therapy currently exists for CHF and patients must currently
suffer their symptoms chronically and have a reduced life expectancy.
According to the 2009 Update, in 2005 approximately 3.2 million men and 2.5
million women in the United States had CHF and about 670,000 new cases of the
disease occur each year. The prevalence of the disease is growing as a result of
the aging of the population and the improved survival rate of people after heart
attacks. Because the condition frequently entails visits to the emergency room
and in-patient treatment centers, two-thirds of all hospitalizations for people
over age 65 are due to CHF. The economic burden of congestive heart failure is
enormous with an estimated cost to the health care system in 2005 in the United
States of $37.2 billion. Congestive heart failure offers a good strategic fit
with our current angina business and offers an expanded market opportunity for
EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina,
as there are few consensus therapies, invasive or otherwise, beyond medical
management for the condition. It is noteworthy that data collected from the
International EECP(R) Patient Registry(TM) (IEPR) at the University of
Pittsburgh Graduate School of Public Health shows that approximately one-third
of angina patients treated with EECP(R) also have a history of CHF and 70% to
80% have demonstrated positive outcomes from EECP(R) therapy.
We sponsored a pivotal, randomized clinical trial to demonstrate the
efficacy of EECP(R) therapy in the most prevalent types of heart failure
patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in
Congestive Heart Failure), was intended to provide additional evidence of the
safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate
heart failure and to support our application for expansion of the Medicare
national reimbursement coverage policy to include mild-to-moderate heart failure
as a primary indication. The PEECH(TM) trial was a positive clinical trial,
having met the statistical requirement of meeting at least one of its co-primary
endpoints, a significant difference in the proportion of patients satisfying a
prespecified threshold of improvement in exercise duration. The trial also
demonstrated significant improvements in favor of EECP(R) therapy on several
important secondary endpoints, including exercise duration and improvement in
symptom status and quality of life. Measures of change in peak oxygen
consumption were not statistically significant in the overall study population,
though a trend favoring EECP(R) therapy was present in early follow-up. Patients
in the trial who had an ischemic etiology (i.e. pre-existing coronary artery
disease), demonstrated a greater response to EECP(R) therapy than those who had
an idiopathic (non-ischemic) etiology.
The preliminary results of the PEECH(TM) trial were presented at the
American College of Cardiology scientific sessions in March 2005. On June 20,
2005, CMS accepted our application for expansion of reimbursement coverage of
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EECP(R) therapy to include patients with New York Heart Association (NYHA) Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35% (i.e. chronic, stable, mild-to-moderate systolic heart failure as a
primary indication), as well as patients with Canadian Cardiovascular Society
Classification (CCSC) II (i.e. chronic, stable mild angina).
On June 23, 2005, CMS also received a request from a competing manufacturer
of external counterpulsation therapy equipment to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure, to include NYHA Class II, III with a left ventricular
ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2)
treatment of stable angina to include CCSC II angina; 3) treatment of acute
myocardial infarction; and 4) treatment of cardiogenic shock. On September 15,
2005, the competing manufacturer also amended their request to include NYHA
Class IV heart failure.
On March 20, 2006, CMS issued their Decision Memorandum regarding this
reconsideration with the opinion "that the evidence is not adequate to conclude
that external counterpulsation therapy is reasonable and necessary for the
treatment of:
o CCSC II angina
o Heart Failure
0 NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%
0 NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 40%
0 NYHA Class IV heart failure
0 Acute heart failure
o Cardiogenic shock
o Acute myocardial infarction."
They did, however, reiterate in the decision memorandum that "Current
coverage as described in Section 20.20 of the Medicare National Coverage
Determination (NCD) manual will remain in effect" for refractory angina
patients.
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 prespecified subgroup analysis in trial patients age 65 and over.
This analysis demonstrated a statistically positive response on both co-primary
endpoints of the trial in patients receiving EECP(R) therapy versus those who
did not, i.e. a significantly larger proportion of patients undergoing EECP(R)
therapy met or exceeded prespecified thresholds of improvement in exercise
duration and peak oxygen consumption. Moreover, the patients age 65 and older
who received EECP(R) therapy demonstrated the greatest differences in exercise
duration, peak oxygen consumption and functional class (symptom status) compared
with those who did not receive EECP(R) therapy.
These papers were submitted to CMS and we were advised to continue to
gather more clinical evidence for future submission.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
primary indication for treatment with EECP(R) therapy is refractory angina or
angina equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we intend to continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, (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
Condensed Financial Statements included in our Annual Report on Form 10-KSB for
the year ended May 31, 2008, 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) systems in the period in which
we deliver the system to the customer. Revenue from the sale of our EECP(R)
systems to international markets is recognized upon shipment of the product to a
common carrier, as are supplies, accessories and spare parts delivered to both
domestic and international customers. Returns are accepted prior to the
in-service and training subject to a 10% restocking charge or for normal
warranty matters, and we are not obligated for post-sale upgrades to these
systems. In addition, we use the installment method to record revenue based on
cash receipts in situations where the account receivable is collected over an
extended period of time and in our judgment the degree of collectibility is
uncertain.
In most cases, revenue from domestic EECP(R) system sales is generated from
multiple-element arrangements that require judgment in the areas of customer
acceptance, collectibility, the separability of units of accounting, and the
fair value of individual elements. We follow the provisions of Emerging Issues
Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). The principles and guidance outlined in EITF 00-21
provide a framework to determine (a) how the arrangement consideration should be
measured (b) whether the arrangement should be divided into separate units of
accounting, and (c) how the arrangement consideration should be allocated among
the separate units of accounting. We determined that the domestic sale of our
EECP(R) systems includes a combination of three elements that qualify as
separate units of accounting:
i. EECP(R) equipment sale,
ii. provision of in-service and training support consisting of
equipment set-up and training provided at the customer's
facilities, and
iii. a service arrangement (usually one year), consisting of: service
by factory-trained service representatives, material and labor
costs, emergency and remedial service visits, software upgrades,
technical phone support and preferred response times.
Each of these elements represent individual units of accounting as the
delivered item has value to a customer on a stand-alone basis, objective and
reliable evidence of fair value exists for undelivered items, and arrangements
normally do not contain a general right of return relative to the delivered
item. We determine fair value based on the price of the deliverable when it is
sold separately or based on third-party evidence. In accordance with the
guidance in EITF 00-21, we use the residual method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
i. EECP(R) equipment sales, when delivery and acceptance occurs based on
delivery and acceptance documentation received from independent
shipping companies or customers,
ii. in-service and training, following documented completion of the
training, and
iii. the service arrangement, ratably over the service period, which is
generally one year.
In-service and training generally occurs within a few weeks of shipment and
our return policy states that no returns will be accepted after in-service and
training has been completed. The amount related to in-service and training is
recognized as service revenue at the time the in-service and training is
completed and the amount related to service arrangements is recognized ratably
as service revenue over the related service period, which is generally one year.
Costs associated with the provision of in-service and training and the service
arrangement, including salaries, benefits, travel, spare parts and equipment,
are recognized in cost of equipment sales as incurred.
The Company also recognizes revenue generated from servicing EECP(R)
systems that are no longer covered by the service arrangement, or by providing
sites with additional training, in the period that these services are provided.
Revenue related to future commitments under separately priced extended service
agreements on our EECP(R) system are deferred and recognized ratably over the
service period, generally ranging from one year to four years. Costs associated
with the provision of service and maintenance, including salaries, benefits,
travel, spare parts and equipment, are recognized in cost of sales as incurred.
Amounts billed in excess of revenue recognized are included as deferred revenue
in the consolidated condensed balance sheets.
Revenues from the sale of EECP(R) systems through our international
distributor network are generally covered by a one-year warranty period. For
these customers we accrue a warranty reserve for estimated costs to provide
warranty parts when the equipment sale is recognized.
The Company has also entered into lease agreements for our EECP(R) systems,
generally for terms of one year or less, that are classified as operating
leases. Revenues from operating leases are generally recognized, in accordance
with the terms of the lease agreements, on a straight-line basis over the life
of the respective leases. For certain operating leases in which payment terms
are determined on a "fee-per-use" basis, revenues are recognized as incurred
(i.e., as actual usage occurs). The cost of the EECP(R) system utilized under
operating leases is recorded as a component of property and equipment and is
amortized to cost of sales over the estimated useful life of the equipment, not
to exceed five years. There were no significant minimum rental commitments on
these operating leases at November 30, 2008.
Accounts Receivable, net
The Company's accounts receivable are due from customers engaged in the
provision of medical services. Credit is extended based on evaluation of a
customer's financial condition and, generally, collateral is not required.
Accounts receivable are generally due 30 to 90 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts, returns,
term discounts and other allowances. Accounts that remain outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. The Company
also looks at the credit quality of 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.
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) systems at various field locations for demonstration, training,
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
evaluation, and other similar purposes at no charge. The cost of these EECP(R)
systems is transferred to property and equipment and is amortized over the next
two to five years. The Company records the cost of refurbished components of
EECP(R) systems and critical components at cost plus the cost of refurbishment.
The Company regularly reviews inventory quantities on hand, particularly raw
materials and components, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand.
We have 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. As a result of
adopting SFAS No. 151, we absorbed approximately $73,000 more in fixed
production overhead into inventory during the first six months of fiscal year
2009 as compared to the same period in fiscal 2008.
Deferred Revenues
The Company records revenue on extended service contracts ratably over the
term of the related contract period. In accordance with the provisions of EITF
00-21, we began to defer revenue related to EECP(R) system sales for the fair
value of installation and in-service training to the period when the services
are rendered and for warranty obligations ratably over the service period, which
is generally one year.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year. Under
the provisions of EITF 00-21, for certain arrangements, a portion of the overall
system price attributable to the first year service arrangement is deferred and
recognized as revenue over the service period. As such, we do not accrue
warranty costs upon delivery but we rather recognize warranty and related
service costs as incurred.
Equipment sold to international customers through our distributor network
is generally covered by a one-year warranty period. For these customers the
Company accrues a warranty reserve for estimated costs of providing a parts only
warranty when the equipment sale is recognized.
The factors affecting our warranty liability included the number of units
sold and historical and anticipated rates of claims and costs per claim.
Net Loss per Common Share
Basic loss per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted loss
per share is based on the weighted number of common and potential dilutive
common shares outstanding. The calculation takes into account the shares that
may be issued upon the exercise of stock options and warrants, reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the period.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, we generally consider all expected future events other than an
enactment of changes in the tax laws or rates. The deferred tax asset is
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
continually evaluated for realizability. To the extent our judgment regarding
the realization of the deferred tax assets changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which our
estimate as to the realizability of the asset changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not" standard is subjective, and is based upon our estimate of a greater
than 50% probability that the deferred tax asset will be realized.
Deferred tax assets and liabilities are classified as current or
non-current based on the classification of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference. The deferred tax asset the Company previously
recorded, and then reversed fully in fiscal 2006, related primarily to the
realization of net operating loss carryforwards, of which the allocation of the
current portion, if any, reflected the expected utilization of such net
operating losses for the following twelve months. Such allocation was based on
the Company's internal financial forecast and may be subject to revision based
upon actual results.
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.
As new stock options are issued by the Company this may have a material
effect on its quarterly and annual financial statements, in the form of
additional compensation expense. It is not possible to precisely determine the
expense impact of adoption since a portion of the ultimate expense that is
recorded will likely relate to awards that have not yet been granted. The
expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date.
For purposes of estimating the fair value of each option on the date of
grant, the Company utilizes the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable measure of the fair value of its employee
stock options.
Equity instruments issued to non-employees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123
(R).
Recently Issued Accounting Pronouncements Not Yet Effective
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements" -- changes the way the consolidated income statement is presented.
It requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
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Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. Previously, net income attributable to the
noncontrolling interest generally was reported as an expense or other deduction
in arriving at consolidated net income. It also was often presented in
combination with other financial statement amounts. Effective for fiscal years
beginning after December 15, 2008.
FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)" --
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants. Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.
FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" --
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, Goodwill and Other Intangible Assets. Paragraph
11(d) of Statement 142 precluded an entity from using its own assumptions about
renewal or extension of an arrangement where there is likely to be substantial
cost or material modifications. This FSP amends paragraph 11(d) of Statement 142
so that an entity will use its own assumptions about renewal or extension of an
arrangement, adjusted for the entity-specific factors in paragraph 11 of
Statement 142, even when there is likely to be substantial cost or material
modifications. Therefore, in determining the useful life of the asset for
amortization purposes, an entity shall consider the period of expected cash
flows used to measure the fair value of the recognized intangible asset,
adjusted for the entity-specific factors including, but are not limited to, the
entity's expected use of the asset and the entity's historical experience in
renewing or extending similar arrangements. This FSP shall be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
Results of Operations
Three Months Ended November 30, 2008 and 2007
Net revenue from sales, leases and service of our EECP(R) systems for the
three months ended November 30, 2008 and 2007, was $1,158,825 and $1,387,815,
respectively, which represented a decrease of $228,990, or 17%. We reported a
net loss attributable to common stockholders of $267,244 and $64,063 for the
second quarter of fiscal 2009 and 2008, respectively. The increase in the net
loss was primarily due to a decrease in service related revenues compared to the
same period of the prior year.
Revenues
Revenue from equipment sales decreased approximately 2% to $588,298 for the
three-month period ended November 30, 2008 as compared to $597,292 for the same
period in the prior year. The decrease in equipment sales is due primarily to a
13% decrease in the average blended per unit sale price offset by a slight
increase in the number of equipment shipments.
We believe the decline in the sales price per unit reflects weakened
domestic demand in the refractory angina market as existing capacity is more
fully utilized, coupled with increased direct and indirect competition. We
anticipate that demand for EECP(R) systems will remain soft unless there is
greater clinical acceptance for the use of EECP(R) therapy in treating patients
with angina or angina equivalent symptoms who meet the current reimbursement
guidelines or an expansion of the current CMS national reimbursement policy to
include some or all Class II & III heart failure patients. Patients with angina
or angina equivalent symptoms eligible for reimbursement under current policies
Page 20
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
include many with serious comorbidities, such as heart failure, diabetes,
peripheral vascular disease and/or others.
Our revenue from the sale of EECP(R) systems and related products to
international distributors in the second quarter of fiscal 2009 increased
approximately 13% compared to the same three-month period in the prior year
reflecting increased sales volume. We believe this reflects an expansion of our
international market.
Our revenue from equipment rental and services decreased 28% to $570,527 in
the second quarter of fiscal 2009 from $790,543 in the second quarter of fiscal
year 2008. Revenue from equipment rental and services represented 49% of total
revenue in the second quarter of fiscal 2009 and 57% in the same quarter of
fiscal 2008. The decrease in revenue generated from equipment rentals and
services is due to a decrease in the service business, with respect to service
contract sales, and service related income generated from units not under
contract, as well as, a decrease in accessories and service parts shipped
compared to the same quarter of the prior fiscal year.
Gross Profit
Gross profit declined to $535,764, or 46% of revenues, for the second
quarter of fiscal 2009 compared to $651,775, or 47% of revenues, for the same
quarter of fiscal 2008. Gross profits are dependent on a number of factors,
particularly the mix of new and used EECP(R) systems and the mix of models sold,
their respective average selling prices, the mix of EECP(R) units sold, rented
or placed during the period, the ongoing costs of servicing EECP(R) systems, and
certain fixed period costs, including facilities, payroll and insurance.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the second
quarter of fiscal 2009 and 2008 were $685,384, or 59% of revenues, and $642,138,
or 46% of revenues, respectively, reflecting an increase of $43,246 or
approximately 7%. The increase in SG&A expenditures in the second quarter of
fiscal 2009 resulted primarily from increased direct expenditures in sales and
marketing. Administrative expenses decreased as a result of decreased
expenditures in wages and benefits, professional fees, and insurance expenses.
During the second quarter of fiscal 2009 and 2008, there were no changes in
the Company's provision for doubtful accounts.
Research and Development
Research and development ("R&D") expenses of $147,607, or 13% of revenues,
for the second quarter of fiscal 2009 increased by $41,780, or 39%, from
$105,827, or 8% of revenues, for the second quarter of fiscal 2008. The increase
is primarily attributable to an increase in expenses paid to fund clinical
research studies, and product development costs, offset by a decrease in
regulatory affairs expenses.
Interest and Other Income, Net
Interest and other income for the second quarter of 2009 and 2008, were
$20,523 and $22,967, respectively. Interest income reflects interest earned on
the Company's cash balances.
Recognition of Deferred Gain on Sale of Building
The recognition of deferred gain on sale of building for the second quarter
of 2009 and 2008, were $13,312 and $13,311, respectively. The gain resulted from
the Company's sale-leaseback of its facility. See Note G.
Page 21
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense, Net
During the second quarter of fiscal 2009 and 2008, we recorded a provision
for income taxes of $3,852 and $4,151, respectively.
As of November 30, 2008, the recorded deferred tax assets were $20,095,252,
reflecting an increase of $93,400 during the second quarter of fiscal 2009,
which was offset by a valuation allowance of the same amount.
Ultimate realization of any or all of the deferred tax assets is not
assured due to significant uncertainties and material assumptions associated
with estimates of future taxable income during the carryforward period. In
November 2005, we concluded that, based upon the weight of available evidence,
it was "more likely than not" that the net deferred tax asset would not be
realized and increased the valuation allowance to bring the net deferred tax
asset carrying value to zero.
Six Months Ended November 30, 2008 and 2007
Net revenue from sales, leases and service of our EECP(R) systems for the
six months ended November 30, 2008 and 2007, was $2,470,546 and $2,727,891,
respectively, which represented a decrease of $257,345, or 9%. We reported a net
loss attributable to common stockholders of $817,215 and $82,848 for the first
six months of fiscal 2009 and 2008, respectively. The increase in the net loss
was primarily due to increases in our operating expenses, and decreases in
revenue from the comparative prior period.
Revenues
Revenue from equipment sales increased $154,254, or approximately 14% to
$1,244,794 for the six-month period ended November 30, 2008 as compared to
$1,090,540 for the same period in the prior year. The increase in equipment
sales is due primarily to a 23% increase in the number of equipment shipments
offset by a moderate decrease in the average blended per unit sale price.
Our revenue from the sale of EECP(R) systems and related products to
international distributors in the first six months of fiscal 2009 increased
approximately 37% compared to the same six-month period in the prior year
reflecting increased sales volume. We believe this reflects an expansion of our
international market.
Our revenue from equipment rental and services decreased 26% to $1,225,752
in the first six months of fiscal 2009 from $1,637,351 in the first six months
of fiscal year 2008. Revenue from equipment rental and services represented 50%
of total revenue in the first six months of fiscal 2009 and 60% in the same
quarters of fiscal 2008. The decrease in revenue generated from equipment
rentals and services is due to a decrease in the service business, with respect
to service contract sales, and service related income generated from units not
under contract, as well as, a decrease in accessories and service parts shipped
compared to the same quarter of the prior fiscal year.
Gross Profit
Gross profit declined to $1,036,326, or 42% of revenues, for the first six
months of fiscal 2009 compared to $1,336,514, or 49% of revenues, for the same
period of fiscal 2008. Gross profits are dependent on a number of factors,
particularly the mix of new and used EECP(R) systems and the mix of models sold,
their respective average selling prices, the mix of EECP(R) units sold, rented
or placed during the period, the ongoing costs of servicing EECP(R) systems, and
certain fixed period costs, including facilities, payroll and insurance.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the first six
months of fiscal 2009 and 2008 were $1,629,143, or 66% of revenues, and
$1,200,294, or 44% of revenues, respectively, reflecting an increase of $428,849
Page 22
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
or approximately 36%. The increase in SG&A expenditures in the first six months
of fiscal 2009 resulted primarily from increased direct expenditures in sales
and marketing. Administrative expenses increased as a result of increased
expenditures in wages and benefits, professional fees, and corporate expenses.
During the first six months of fiscal 2009 and 2008, there were no changes
in the Company's provision for doubtful accounts.
Research and Development
Research and development ("R&D") expenses of $279,954, or 11% of revenues,
for the first six months of fiscal 2009 increased by $34,952, or 14%, from
$245,002, or 9% of revenues, for the first six months of fiscal 2008. The
increase is primarily attributable to an increase in expenses paid to fund
clinical research studies, and product development costs.
Interest Expense and Financing Costs
The Company had no interest expense and financing costs for the first six
months of fiscal 2009 and $16,605 in the same period of 2008. Interest expense
primarily reflects interest on loans secured to refinance the November 2000
purchase of the Company's headquarters and warehouse facility. The decrease is a
direct result of the sale-leaseback agreements for the Company's headquarters
and warehouse facility, which occurred during the first quarter of fiscal 2008
Interest and Other Income, Net
Interest and other income for the first six months of 2009 and 2008, were
$36,535 and $35,238, respectively. Interest income reflects interest earned on
the Company's cash balances.
Recognition of Deferred Gain on Sale of Building
The recognition of deferred gain on sale of building for the first six
months of 2009 and 2008, were $26,623 and $17,748, respectively. The gain
resulted from the Company's sale-leaseback of its facility. See Note G.
Income Tax Expense, Net
During the first six months of fiscal 2009 and 2008, we recorded a
provision for income taxes of $7,602 and $10,447, respectively.
As of November 30, 2008, the recorded deferred tax assets were $20,095,252,
reflecting an increase of $275,900 during the first six months of fiscal 2009,
which was offset by a valuation allowance of the same amount.
Ultimate realization of any or all of the deferred tax assets is not
assured due to significant uncertainties and material assumptions associated
with estimates of future taxable income during the carryforward period. In
November 2005, we concluded that, based upon the weight of available evidence,
it was "more likely than not" that the net deferred tax asset would not be
realized and increased the valuation allowance to bring the net deferred tax
asset carrying value to zero.
Liquidity and Capital Resources
Page 23
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash and Cash Flow
We have financed our operations primarily from working capital, a private
equity financing, and by the sale of our facility under a leaseback agreement.
At November 30, 2008, we had cash and cash equivalents of $1,873,689 and working
capital of $2,104,636 compared to cash and cash equivalents of $2,653,999 and
working capital of $2,851,901 at May 31, 2008.
Cash used in operating activities was $770,872 during the first six months
of fiscal 2009, which consisted of a net cash loss after adjustments of $600,414
and cash used by operating assets and liabilities of $170,458. The changes in
the accounts balances primarily reflects increases in inventory of $145,351,
including $95,921 of inventories transferred to property and equipment, and
other current assets of $46,333, a decrease in accounts payable, accrued
expenses, and other current liabilities of $387,422, and a decrease in other
liabilities of $65,877 which were primarily offset by a decrease in accounts
receivable of $214,525 and due to related party of $260,000. Net accounts
receivable were 20% of revenues for the six-month period ended November 30,
2008, as compared to 32% for the six-month period ended November 30, 2007, and
accounts receivable turnover was 6 times for the six months ended November 30,
2008 and November 30, 2007.
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 six-month periods ended November 30,
2008 and 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 used net cash of $9,438 for the purchase of fixed
assets during the six-month period ended November 30, 2008.
The Company had no financing activities during the six-month period ended
November 30, 2008.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of November 30, 2008.
Page 24
Vasomedical, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Due thru Due thru Due thru
12/1/2008 and 12/1/2009 and 12/1/2011 and Due
Total 11/30/2009 11/30/2011 11/30/2013 Thereafter
--------------------------------------------------------------------------------
Operating Leases $ 576,141 $ 145,604 $ 308,914 $ 121,623 $ -
Due to related party 260,000 240,000 20,000 - -
--------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 836,141 $ 385,604 $ 328,914 $ 121,623 $ -
================================================================================
Liquidity
During the first quarter of fiscal 2008, events took place that allowed us
to raise additional capital through a private equity financing and by the sale
of our facility under a leaseback agreement. See Note A for details of these
events.
Based on our current operations and the amounts received from the
transactions described in Note A, we believe that we have sufficient working
capital to continue our operations through at least November 30, 2009.
Effects of Current Economic Conditions
We do not believe that the current lack of credit available in the market
will have an impact on our revenue or on our results of operations.
Page 25
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
Accountant, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Accountant concluded that, as
of November 30, 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 November, 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 26
Vasomedical, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS:
Exhibits
31 Certifications pursuant to Rules 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 27
Vasomedical, Inc. and Subsidiaries
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VASOMEDICAL, INC.
By: /s/ Jun Ma
-----------------------------------
Jun Ma
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Dave Singh
-----------------------------------
Dave Singh
Chief Accountant
Date: January 14, 2009