NOTE A – DESCRIPTION OF BUSINESS, LIQUIDITY AND CHANGE IN FISCAL YEAR END
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 engaged in designing, manufacturing, marketing and supporting EECP
®
Enhanced External Counterpulsation systems, based on our proprietary technology, to physicians and hospitals throughout the United States and in select international markets.
In 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical device sales professionals and entered into the sales representation business as the exclusive representative for the sale of select General Electric Company (GE) diagnostic imaging equipment to specific market segments in the 48 contiguous states of the United States and the District of Columbia.
In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company which owns and controls two Chinese operating companies - Life Enhancement Technology Ltd. and Biox Instruments Co. Ltd., respectively - to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio. Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy, and now operates through three wholly-owned subsidiaries. Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP
®
equipment business as well as other medical equipment operations.
While the Company achieved substantial profitability for the year ended December 31, 2011
(per unaudited financial data – see Note S),
it has historically incurred operating losses and incurred a loss for the year ended December 31, 2012. The Company will seek to achieve profitability through growth in our China operations and by expanding our product portfolio. In addition, the Company plans to pursue other accretive acquisitions in the international and domestic markets and to expand our sales representation business.
Based on our operations through December 31, 2012 and our current business outlook for 2013, we believe internally generated funds from our Equipment and Sales Representation segments will be sufficient for the Company to continue operations through at least January 1, 2014.
On June 15, 2011, the Board of Directors approved a change of the Company’s fiscal year end from May 31 to December 31. As a result of this change, the Company filed a Transition Report on Form 10-K for the seven-month transition period ended December 31, 2011. This Annual Report on Form 10-K is the first full-year report after the fiscal year change.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the consolidated financial statements are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, its inactive majority-owned subsidiary, and variable interest entities where the Company is the primary beneficiary. Significant intercompany accounts and transactions have been eliminated.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions relate to estimates of collectibility of accounts receivable, the realizability of deferred tax assets, stock-based compensation, and the adequacy of inventory and warranty reserves. Additionally, significant estimates and assumptions impact the Company’s accounting relative to its business combination. Actual results could differ from those estimates.
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 collectability is reasonably assured. In the United States, we recognize revenue from the sale of our EECP
®
systems in the period in which we deliver the system to the customer. Revenue from the sale of our EECP
®
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 collectability is uncertain.
In most cases, revenue from domestic EECP
®
system sales is generated from multiple-element arrangements that require judgment in the areas of customer acceptance, collectability, the separability of units of accounting, and the fair value of individual elements. We follow the FASB Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition” (“ASC 605”) which outlines a framework for recognizing revenue from multi-deliverable arrangements. The principles and guidance outlined in ASC 605 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
®
systems includes a combination of three elements that qualify as separate units of accounting:
·
|
provision of in-service and training support consisting of equipment set-up and training provided at the customer’s facilities; and
|
·
|
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, or based on estimated selling price. Assuming all other criteria for revenue recognition have been met, we recognize revenue for:
·
|
EECP
®
equipment sales, when delivery and acceptance occurs based on delivery and acceptance documentation received from independent shipping companies or customers;
|
·
|
in-service and training, following documented completion of the training; and
|
·
|
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.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also recognizes revenue generated from servicing EECP
®
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
®
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 and 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
®
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.
Revenue and Expense Recognition for VasoHealthcare
The Company recognizes commission revenue in its Sales Representation segment (see Note C) when persuasive evidence of an arrangement exists, service has been rendered, the price is fixed or determinable and collectability is reasonably assured. These conditions are deemed to be met when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement. Consequently, amounts billable under the agreement with GE Healthcare in advance of the customer acceptance of the equipment are recorded as accounts receivable and deferred revenue in the Consolidated Balance Sheets. Similarly, commissions payable to our sales force related to such billings are recorded as deferred commission expense when the associated deferred revenue is recorded. Commission expense is recognized when the corresponding commission revenue is recognized.
Shipping and Handling Costs
All shipping and handling expenses are charged to cost of sales. Amounts billed to customers related to shipping and handling costs are included as a component of sales.
Research and Development
Research and development costs attributable to development are expensed as incurred. Included in research and development costs is amortization expense related to the capitalized cost of EECP
®
systems under loan for clinical trials.
Share-Based Compensation
The Company complies with ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”), which requires all companies to recognize the cost of services received in exchange for equity instruments, to be recognized in the financial statements based on their fair values.
During the year ended December 31, 2012, the Company granted 2,392,500 restricted shares of common stock valued at $565,000 to non-officer employees in its VasoHealthcare subsidiary, vesting at various times through July 2013. In addition, in 2012 we granted 1,000,000 restricted shares of common stock valued at $250,000 to officers, of which 250,000 shares valued at $60,000 vested immediately, with the remainder vesting at various times through July 2014.
During the year ended May 31, 2011, the Company granted, under the 2010 Stock Plan (see Note O), 4,440,000 restricted shares of common stock valued at $876,000 to employees and consultants. 355,000 shares valued at $72,000 vested immediately and the remainder vest over three years. Also during the year ended May 31, 2011, 4,116,279 shares of common stock valued at $1,325,000 were granted to outside directors and consultants, of which 250,000 shares valued at $78,000 will vest over one year.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company did not grant any non-qualified stock options during the year ended December 31, 2012, the seven months ended December 31, 2011, or the year ended May 31, 2011.
Share-based compensation expense recognized for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011 was $793,000, $208,000, and $446,000, respectively. Expense for other share-based arrangements was $545,000, $370,000 and $154,000 for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, respectively. Unrecognized expense related to existing share-based compensation and arrangements is approximately $0.5 million at December 31, 2012 and will be recognized through July 2014.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments either in certificates of deposit, treasury bills, money market funds, or investment grade commercial paper issued by major corporations and financial institutions that generally have maturities of three months or less from the date of acquisition. Dividend and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method.
Short-Term Investments
The Company’s short-term investments consist of certificates of deposit with original maturities greater than three months. They are bought and held principally for the purpose of selling them in the near-term and are classified as trading securities. Trading securities are recorded at fair value on the consolidated balance sheets in current assets, with the change in fair value during the years included in earnings.
Accounts Receivable, net
The Company’s accounts receivable are due from customers engaged in the provision of medical services and from GEHC. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due 30 to 90 days from shipment and are stated at amounts due from customers net of allowances for doubtful accounts, returns, term discounts and other allowances. Accounts that remain outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company’s historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company reviews historical write-offs of their receivables. The Company also looks at the credit quality of their customer base as well as changes in their credit policies. The Company continuously monitors collections and payments from our customers, and writes off receivables when all efforts at collection have been exhausted. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that they have in the past.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the Company’s allowance for doubtful accounts and commission adjustments are as follows:
|
|
For the year ended
December 31, 2012
|
|
|
For the seven
months ended
December 31, 2011
|
|
|
For the year ended
May 31, 2011
|
|
Beginning Balance
|
|
$
|
2,163
|
|
|
$
|
1,297
|
|
|
$
|
147
|
|
Provision for losses on accounts receivable
|
|
|
(2
|
)
|
|
|
55
|
|
|
|
(1
|
)
|
Direct write-offs, net of recoveries
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(58
|
)
|
Commission adjustments
|
|
|
1,020
|
|
|
|
811
|
|
|
|
1,209
|
|
Ending Balance
|
|
$
|
3,179
|
|
|
$
|
2,163
|
|
|
$
|
1,297
|
|
Concentrations of Credit Risk
We market our equipment principally to hospitals and physician private practices. We perform credit evaluations of our customers’ financial condition and, as a result, believe that our receivable credit risk exposure is limited. For the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, no customer in our Equipment segment accounted for 10% or more of revenues or accounts receivable. In our Sales Representation segment, 100% of our revenues and accounts receivable are with GE; however, we believe this risk is acceptable based on GE’s financial position.
The Company maintains cash balances in certain U.S. financial institutions, which, at times, may exceed the Federal Depository Insurance Corporation (“FDIC”) coverage of $250,000. The Company has not experienced any losses on these accounts and believes it is not subject to any significant credit risk on these accounts. In addition, the FDIC does not insure the Company’s foreign cash, which aggregated approximately $499,000 and $493,000 at December 31, 2012 and 2011, respectively.
Our revenues were derived from the following geographic areas:
(in thousands)
|
|
For the year ended
December 31, 2012
|
|
|
For the seven
months ended
December 31, 2011
|
|
|
For the year ended
May 31, 2011
|
|
Domestic (United States)
|
|
|
26,103
|
|
|
|
22,391
|
|
|
|
14,414
|
|
Non-domestic (foreign)
|
|
|
3,137
|
|
|
|
1,098
|
|
|
|
1,959
|
|
|
|
|
29,240
|
|
|
|
23,489
|
|
|
|
16,373
|
|
Inventories, net
The Company values inventory at the lower of cost or estimated market, with cost being determined on a first-in, first-out basis. The Company often places EECP
®
systems at various field locations for demonstration, training, evaluation, and other similar purposes at no charge. The cost of these EECP
®
systems is transferred to property and equipment and is amortized over two to five years. The Company records the cost of refurbished components of EECP
®
systems and critical components at cost plus the cost of refurbishment. The Company regularly reviews inventory quantities on hand, particularly raw materials and components, and records a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to its products as well as forecasts of future product demand.
We comply with the provisions of ASC Topic 330 “Inventory”. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheets. Depreciation is expensed over the estimated useful lives of the assets, which range from two to twenty years, on a straight-line basis. Accelerated methods of depreciation are used for tax purposes. We amortize leasehold improvements over the useful life of the related leasehold improvement or the life of the related lease, whichever is less.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. The Company accounts for goodwill under the guidance of the ASC Topic 350 – “Intangibles: Goodwill and Other”. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but instead tested for impairment, at least annually, in accordance with this guidance.
Impairment of Long-lived Assets
The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. If required, the Company compares the estimated fair value determined by either the undiscounted future net cash flows or appraised value to the related asset’s carrying value to determine whether there has been an impairment. If an asset is considered impaired, the asset is written down to fair value, which is based either on discounted cash flows or appraised values in the period the impairment becomes known. No assets were determined to be impaired for the year ended December 31, 2012, the seven months ended December 31, 2011, or the year ended May 31, 2011.
Deferred Revenue
We record revenue on extended service contracts ratably over the term of the related service contracts. Under the provisions of ASC 605, we began to defer revenue related to EECP
®
system sales for the fair value of installation and in-service training to the period when the services are rendered and for service obligations ratably over the service period, which is generally one year. (See Note J)
Amounts billable under the agreement with GE Healthcare in advance of customer acceptance of the equipment are recorded initially as deferred revenue, and commission revenue is subsequently recognized as customer acceptance of such equipment is reported to us by GEHC.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year. In accordance with ASC Topic 450 “Loss Contingencies”, we accrue a warranty reserve for estimated costs of providing a parts only warranty when the equipment sale is recognized.
The factors affecting our warranty liability include the number of units sold and the historical and anticipated rates of claims and costs per claim. (See Note L)
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. Deferred tax assets are 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 assets changed that it is “more likely than not” that all of the deferred tax assets will be realized. The “realizability” standard is subjective and is based upon our estimate of a greater than 50% probability that the deferred tax asset can be realized.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference.
The Company also complies with the provisions of ASC Topic 740 “Income Taxes”, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the relevant taxing authority based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. Derecognition of a tax benefit previously recognized results in the Company recording a tax liability that reduces ending retained earnings. Based on its analysis, except for certain liabilities assumed in the FGE acquisition, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of December 31, 2012 and December 31, 2011. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at December 31, 2012 and December 31, 2011. Generally, the Company is no longer subject to income tax examinations by major domestic taxing authorities for years before 2009. According to the China tax regulatory framework, there is no statute of limitations on examination of tax filings by tax authorities. However, the general practice is going back five years. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Foreign Currency Translation Gain and Comprehensive Income (Loss)
In countries in which the Company operates, and the functional currency is other than the U.S. dollar, assets and liabilities are translated using published exchange rates in effect at the consolidated balance sheet date. Revenues and expenses and cash flows are translated using an approximate weighted average exchange rate for the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the accompanying consolidated balance sheet. For the year ended December 31, 2012 , comprehensive income (loss) includes a gain of $34,000, which is entirely from foreign currency translation.
Fair Value of Financial Instruments
The Company complies with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1
- Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2
- Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation Techniques
The Company values investments in securities and securities sold short that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the fiscal year.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of the instruments.
Net Income (Loss) Per Common Share
Basic income (loss) per common share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted income (loss) per common share is based on the weighted number of common and potential dilutive common shares outstanding. The diluted calculation takes into account the shares that may be issued upon the exercise of stock options and warrants, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period.
Due to losses during the years ended December 31, 2012 and May 31, 2011, diluted loss per common share is equal to basic loss per common share for those periods.
Diluted earnings per share were computed based on the weighted average number of shares outstanding plus all potentially dilutive common shares. A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:
(in thousands)
|
|
Year ended
December 31, 2012
|
|
|
Seven months ended
December 31,
2011
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
158,366
|
|
|
|
146,549
|
|
|
|
111,978
|
|
Dilutive effect of share-based compensation and warrants
|
|
|
-
|
|
|
|
5,124
|
|
|
|
-
|
|
Dilutive effect of contingently issuable shares
|
|
|
-
|
|
|
|
1,984
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
158,366
|
|
|
|
153,657
|
|
|
|
111,978
|
|
The following table represents common stock equivalents that were excluded from the computation of diluted earnings per share for year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, because the effect of their inclusion would be anti-dilutive.
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
May 31, 2011
|
|
Stock options
|
|
|
1,810
|
|
|
|
260
|
|
|
|
1,864
|
|
Warrants
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
4,286
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
30,545
|
|
Common stock grants
|
|
|
3,448
|
|
|
|
375
|
|
|
|
3,912
|
|
|
|
|
6,758
|
|
|
|
2,135
|
|
|
|
40,607
|
|
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adoption of New Standards
Other Comprehensive Income: Presentation of Comprehensive Income
In June 2011, new guidance was issued that amends the current comprehensive income guidance. The new guidance allows the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single or continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The new guidance is to be applied retrospectively and is effective for fiscal years, and interim periods, beginning after December 15, 2011, with early adoption permitted.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Intangibles—Goodwill and Other: Testing Goodwill for Impairment
In September 2011, an accounting standard update regarding testing of goodwill for impairment was issued. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance is to be applied prospectively effective for annual and interim goodwill impairment tests beginning after December 15, 2011, with early adoption permitted.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Standards Issued But Not Yet Effective
In February 2013, new guidance was issued that amends the current comprehensive income guidance. The new guidance requires entities to disclose the effect of each item that was reclassified in its entirety out of accumulated other comprehensive income and into net income on each affected net income line item. For reclassification items that are not reclassified in their entirety into net income a cross reference to other required disclosures is required. The adoption of this new guidance is to be applied prospectively, and for annual reporting periods beginning after December 15, 2012 and interim periods within those years. The adoption of this new guidance will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE C – SEGMENT REPORTING
The Company views its business in two segments – the Equipment segment and the Sales Representation segment. The Equipment segment is engaged in designing, manufacturing, marketing and supporting EECP
®
enhanced external counterpulsation systems and other medical devices both domestically and internationally. The Sales Representation segment operates through the VasoHealthcare subsidiary and is engaged solely in the execution of the Company’s responsibilities under our agreement with GEHC. The Company evaluates segment performance based on operating income. Administrative functions such as finance, human resources, and information technology are centralized and related expenses allocated to each segment. There are no intersegment revenues. Summary financial information for the segments is set forth below:
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
|
|
As of or for the year ended December 31, 2012
|
|
|
|
Equipment Segment
|
|
Sales Representation Segment
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
6,023
|
|
|
$
|
23,217
|
|
|
$
|
-
|
|
|
$
|
29,240
|
|
Operating income/(loss)
|
|
$
|
(1,805
|
)
|
|
$
|
(153
|
)
|
|
$
|
(1,550
|
)
|
|
$
|
(3,508
|
)
|
Total assets
|
|
$
|
10,069
|
|
|
$
|
23,615
|
|
|
$
|
(1,303
|
)
|
|
$
|
32,381
|
|
Accounts and other receivables, net
|
|
$
|
900
|
|
|
$
|
8,245
|
|
|
$
|
-
|
|
|
$
|
9,145
|
|
Deferred commission expense
|
|
$
|
-
|
|
|
$
|
4,580
|
|
|
$
|
-
|
|
|
$
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the seven months ended December 31, 2011
|
|
|
Equipment Segment
|
|
Sales Representation Segment
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,576
|
|
|
$
|
20,913
|
|
|
$
|
-
|
|
|
$
|
23,489
|
|
Operating income/(loss)
|
|
$
|
(1,603
|
)
|
|
$
|
7,417
|
|
|
$
|
(625
|
)
|
|
$
|
5,189
|
|
Total assets
|
|
$
|
9,207
|
|
|
$
|
22,877
|
|
|
$
|
2,251
|
|
|
$
|
34,335
|
|
Accounts and other receivables, net
|
|
$
|
901
|
|
|
$
|
19,200
|
|
|
$
|
-
|
|
|
$
|
20,101
|
|
Deferred commission expense
|
|
$
|
-
|
|
|
$
|
3,185
|
|
|
$
|
-
|
|
|
$
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended May 31, 2011
|
|
|
|
Equipment Segment
|
|
Sales Representation Segment
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
5,260
|
|
|
$
|
11,113
|
|
|
$
|
-
|
|
|
$
|
16,373
|
|
Operating income/(loss)
|
|
$
|
(530
|
)
|
|
$
|
(2,962
|
)
|
|
$
|
(441
|
)
|
|
$
|
(3,933
|
)
|
Total assets
|
|
$
|
4,504
|
|
|
$
|
5,920
|
|
|
$
|
8,130
|
|
|
$
|
18,554
|
|
Accounts and other receivables, net
|
|
$
|
932
|
|
|
$
|
3,087
|
|
|
$
|
-
|
|
|
$
|
4,019
|
|
Deferred commission expense
|
|
$
|
-
|
|
|
$
|
2,723
|
|
|
$
|
-
|
|
|
$
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31. 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, GE Healthcare accounted for 79%, 89% and 68% of revenue, respectively. Also, GE Healthcare accounted for $8.1 million, or 89%, and $19.1 million, or 95%, of accounts and other receivables at December 31, 2012 and December 31, 2011, respectively.
NOTE D – FAIR VALUE MEASUREMENTS
The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC 820.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about the Company’s assets measured at fair value as of December 31, 2012:
(in thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
(Level 3)
|
|
|
Balance
as of
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents invested in money market funds
(included in cash and cash equivalents)
|
|
$
|
9,124
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,124
|
|
Investment in certificates of deposit (included in
short-term investments)
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
$
|
9,234
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,234
|
|
The following table presents information about the Company’s assets measured at fair value as of December 31, 2011:
(in thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
(Level 3)
|
|
|
Balance
as of
December 31
,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents invested in money market funds
(included in cash and cash equivalents)
|
|
$
|
1,313
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,313
|
|
Investment in certificates of deposit (included in
short-term investments)
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
$
|
1,423
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,423
|
|
The fair values of the Company’s cash equivalents invested in money market funds are determined through market, observable and corroborated sources.
NOTE E – ACCOUNTS AND OTHER RECEIVABLES
The following table presents information regarding the Company’s accounts and other receivables as of December 31, 2012 and 2011:
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Trade receivables
|
|
$
|
12,193
|
|
|
$
|
22,143
|
|
Due from employees
|
|
|
131
|
|
|
|
121
|
|
Allowance for doubtful accounts and
|
|
|
|
|
|
|
|
|
commission adjustments
|
|
|
(3,179
|
)
|
|
|
(2,163
|
)
|
|
|
$
|
9,145
|
|
|
$
|
20,101
|
|
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trade receivables include amounts due for shipped products and services rendered. Amounts currently due under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change.
Allowance for doubtful accounts and commission adjustments include estimated losses resulting from the inability of our customers to make required payments, and adjustments arising from subsequent changes in sales order amounts that may reduce the amount the Company will ultimately receive under the GEHC Agreement. Due from employees primarily reflects commission advances made to sales personnel.
NOTE F – INVENTORIES, NET
Inventories, net of reserves consisted of the following:
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
909
|
|
|
$
|
842
|
|
Work in process
|
|
|
483
|
|
|
|
528
|
|
Finished goods
|
|
|
774
|
|
|
|
1,051
|
|
|
|
$
|
2,166
|
|
|
$
|
2,421
|
|
At December 31, 2012 and 2011, the Company maintained reserves for excess and obsolete inventories of $576,000 and $412,000, respectively.
NOTE G– BUSINESS COMBINATION
On September 2, 2011, Vasomedical Global successfully completed the purchase of all the outstanding capital stock of privately-held Fast Growth Enterprises Limited (“FGE”), a British Virgin Islands company that owns and controls Life Enhancement Technology Limited (“LET”) and Biox Instruments Co. Ltd. (“Biox”), respectively, as per the stock purchase agreement signed on August 19, 2011. The consideration of this acquisition included a cash payment of $1 million as well as the issuance of 5 million restricted shares of the Company’s common stock, up to 2.4 million shares of common stock contingently issuable upon the achievement of certain operating performance targets, and warrants covering 1.5 million shares of common stock. The Company completed its evaluation of FGE’s calendar year 2011 performance targets and determined the targets were met, resulting in the issuance of 2.4 million shares to the prior owners in September 2012.
LET, based in Foshan, Guangdong, China, was Vasomedical’s supplier for its proprietary Enhanced External Counterpulsation (EECP
®
) systems, including certain Lumenair systems and all AngioNew
®
systems. Biox, a developer and manufacturer of ambulatory monitoring devices in China, is located in Wuxi, Jiangsu, China, and was Vasomedical’s partner on the BIOX series ECG Holter recorder and analysis software as well as ambulatory blood pressure monitoring systems. Prior to the acquisition, Vasomedical had obtained FDA clearance to market these products in the United States. The acquisition of LET provided Vasomedical with consolidated technical and manufacturing capability in its EECP business and has significantly increased gross margins on the EECP
®
systems, and will enable the Company to meet anticipated increasing demand for its EECP systems. Management believes that the acquisition of Biox greatly enhanced Vasomedical's distribution network, technology and product portfolio, and with combined market and sales efforts of the two companies, has improved the performance and profitability of Vasomedical's equipment segment.
The operating results of FGE are included in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) and Cash Flows for the year ended December 31, 2012, and the seven months ended December 31, 2011. The acquisition date fair value of the total consideration transferred was $3.979 million, which consisted of the following:
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Cash
|
|
$
|
1,000
|
|
Vasomedical, Inc. common stock
|
|
|
2,100
|
|
Vasomedical, Inc. warrants to purchase common stock
|
|
|
304
|
|
Contingent issuance of Vasomedical, Inc. common stock
|
|
|
575
|
|
Total purchase price
|
|
$
|
3,979
|
|
The fair value of the common shares issued and the contingently issuable common shares was based on the closing price of the shares on September 2, 2011, as quoted on the Nasdaq OTC pink sheets, which was $0.42 (“closing price”). The fair value of the warrants issued was computed using a Black Scholes Merton option pricing model, which utilized the following assumptions: expected term of two years which is the contractual term of the warrants; risk-free rate of 0.20%; 0% expected dividend yield; 100.67% expected volatility; the closing price; and an exercise price of $0.50. The fair value of the contingent consideration recognized on the acquisition date was estimated based on a probability model.
In accordance with ASC 805, Business Combinations, the total purchase consideration is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of September 2, 2011 (the acquisition date). The purchase price was allocated based on the information available as of the acquisition date, and subsequently adjusted (measurement period adjustments) after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions of preliminary estimates. The measurement period adjustments were completed during the year ended December 31, 2012. The accompanying Consolidated Balance Sheet as of December 31, 2011 has been retroactively adjusted to include the effect of the measurement period adjustment. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(in thousands)
|
|
As initially reported
|
|
|
Measurement period adjustments
|
|
|
As adjusted
|
|
Cash and cash equivalents
|
|
$
|
442
|
|
|
$
|
-
|
|
|
$
|
442
|
|
Accounts receivable and other current assets
|
|
|
591
|
|
|
|
(308
|
)
|
|
|
283
|
|
Inventories
|
|
|
670
|
|
|
|
(194
|
)
|
|
|
476
|
|
Property and equipment
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Goodwill
|
|
|
3,175
|
|
|
|
(7
|
)
|
|
|
3,168
|
|
Customer lists
|
|
|
-
|
|
|
|
800
|
|
|
|
800
|
|
Accounts payable and other current liabilites
|
|
|
(931
|
)
|
|
|
(291
|
)
|
|
|
(1,222
|
)
|
Net assets acquired
|
|
$
|
3,979
|
|
|
$
|
-
|
|
|
$
|
3,979
|
|
The goodwill is attributable to the synergies expected to arise after the Company’s acquisition of FGE as well as to FGE’s projected growth and profitability. The goodwill is not deductible for tax purposes. Customer lists were valued based on sales history of certain recurring customers and the timing of expected future revenues, and are being amortized over a seven year period.
During the seven month period ended December 31, 2011, the Company expensed $122,000 of acquisition-related costs. These costs are included in the line item Selling, General & Administrative costs in the accompanying Consolidated Statement of Operations and Comprehensive Income (Loss) and are comprised of accounting and legal fees.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After elimination of intercompany transactions, the amounts of revenue, net income (loss), and earnings (loss) per share of FGE included in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2012 and the seven months ended December 31, 2011 are set forth below:
(in thousands, except per share amounts)
|
|
Year ended
December 31, 2012
|
|
|
Seven Months ended December 31, 2011
|
|
Revenue
|
|
$
|
1,472
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(195
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of FGE had occurred June 1, 2009:
(in thousands, except per share amounts)
|
|
Year ended
December 31, 2012
|
|
|
Seven Months ended
December 31, 2011
|
|
|
Year ended
May 31, 2011
|
|
Revenue
|
|
$
|
29,240
|
|
|
$
|
23,600
|
|
|
$
|
17,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3,186
|
)
|
|
|
4,980
|
|
|
|
(3,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
NOTE H – PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Office, laboratory and other equipment
|
|
$
|
969
|
|
|
$
|
827
|
|
EECP
®
systems under operating leases
|
|
|
|
|
|
|
|
|
or under loan for clinical trials
|
|
|
437
|
|
|
|
795
|
|
Furniture and fixtures
|
|
|
228
|
|
|
|
203
|
|
|
|
|
1,634
|
|
|
|
1,826
|
|
Less: accumulated depreciation
|
|
|
(1,161
|
)
|
|
|
(1,409
|
)
|
Property and equipment, net
|
|
$
|
473
|
|
|
$
|
416
|
|
Depreciation expense amounted to approximately $193,000, $81,000, and $102,000 for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, respectively.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I – GOODWILL AND OTHER INTANGIBLES
The change in the carrying amount of goodwill was as follows:
(in thousands)
|
|
Carrying Amount
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
3,168
|
|
Foreign currency translation
|
|
|
44
|
|
Balance at December 31, 2012
|
|
$
|
3,212
|
|
The Company’s other intangible assets consist of capitalized patent costs, customer lists, and software costs, as set forth in the following:
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
as adjusted (see Note G)
|
|
Patents
|
|
|
|
|
|
|
Costs
|
|
$
|
469
|
|
|
$
|
469
|
|
Accumulated amortization
|
|
|
(438
|
)
|
|
|
(413
|
)
|
|
|
|
31
|
|
|
|
56
|
|
Customer lists
|
|
|
|
|
|
|
|
|
Costs
|
|
|
800
|
|
|
|
800
|
|
Accumulated amortization
|
|
|
(152
|
)
|
|
|
-
|
|
|
|
|
648
|
|
|
|
800
|
|
Software
|
|
|
|
|
|
|
|
|
Costs
|
|
|
541
|
|
|
|
378
|
|
Accumulated amortization
|
|
|
(386
|
)
|
|
|
(365
|
)
|
|
|
|
155
|
|
|
|
13
|
|
|
|
$
|
834
|
|
|
$
|
869
|
|
|
|
|
|
|
|
|
|
|
The other intangible assets are included in other assets on the Company’s consolidated balance sheets.
The Company owns eleven US patents including eight utility and three design patents that expire at various times between now and 2023. Costs incurred for submitting the applications to the United States Patent and Trademark Office and other foreign authorities for these patents have been capitalized. Patent costs are being amortized using the straight-line method over the related 10-year lives. The Company begins amortizing patent costs once a filing receipt is received stating the patent serial number and filing date from the Patent Office or other foreign authority. Customer lists (see Note G) and software are amortized on a straight-line basis over their expected useful lives of seven and five years, respectively.
Amortization expense amounted to $198,000, $20,000, and $43,000 for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, respectively. Amortization of intangibles for the next five years is:
Amortization of Intangibles
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
166
|
|
|
$
|
160
|
|
|
$
|
154
|
|
|
$
|
151
|
|
|
$
|
129
|
|
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J – DEFERRED REVENUE
The changes in the Company’s deferred revenues are as follows:
(in thousands)
|
|
For the year ended
December 31, 2012
|
|
|
For the seven months ended
December 31, 2011
|
|
|
For the year ended
May 31, 2011
|
|
Deferred revenue at the beginning of the period
|
|
$
|
15,227
|
|
|
$
|
11,922
|
|
|
$
|
1,027
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred extended service contracts
|
|
|
1,241
|
|
|
|
691
|
|
|
|
1,281
|
|
Deferred in-service and training
|
|
|
38
|
|
|
|
18
|
|
|
|
33
|
|
Deferred service arrangements
|
|
|
85
|
|
|
|
29
|
|
|
|
98
|
|
Deferred commission revenues
|
|
|
10,515
|
|
|
|
13,497
|
(a)
|
|
|
19,283
|
(a)
|
Recognized as revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred extended service contracts
|
|
|
(1,113
|
)
|
|
|
(639
|
)
|
|
|
(1,239
|
)
|
Deferred in-service and training
|
|
|
(38
|
)
|
|
|
(25
|
)
|
|
|
(23
|
)
|
Deferred service arrangements
|
|
|
(87
|
)
|
|
|
(48
|
)
|
|
|
(61
|
)
|
Deferred commission revenues
|
|
|
(10,266
|
)
|
|
|
(10,218
|
)(a)
|
|
|
(8,477
|
)(a)
|
Deferred revenue at end of period
|
|
|
15,602
|
|
|
|
15,227
|
|
|
|
11,922
|
|
Less: current portion
|
|
|
10,580
|
|
|
|
8,890
|
|
|
|
10,918
|
|
Long-term deferred revenue at end of period
|
|
$
|
5,022
|
|
|
$
|
6,337
|
|
|
$
|
1,004
|
|
(a) Reclassified to reflect net activity. No change to deferred revenue balances.
NOTE K – SALE-LEASEBACK
In August 2007, the Company sold its warehouse and corporate facility for $1,400,000. Under the agreement, the Company leased back the property from the purchaser over a period of five years and accounted for the leaseback as an operating lease. The gain of $266,000 realized in this transaction was deferred and amortized to income ratably over the term of the lease, which expired in August 2012. The unamortized deferred gain of $0 and $31,000 as of December 31, 2012 and December 31, 2011, respectively, is shown as deferred gain on sale-leaseback of building in the Company’s Consolidated Balance Sheets. The amount amortized in both the year ended December 31, 2012 and the seven months ended December 31, 2011 was $31,000, and the amount amortized in year ended May 31, 2011 was $53,000.
NOTE L – WARRANTY LIABILITY
The changes in the Company’s product warranty liability are as follows:
(in thousands)
|
|
For the year ended
December 31, 2012
|
|
|
For the seven months ended
December 31, 2011
|
|
|
For the year ended
May 31, 2011
|
|
Warranty liability at the beginning of the period
|
|
$
|
20
|
|
|
$
|
30
|
|
|
$
|
27
|
|
Expense for new warranties issued
|
|
|
63
|
|
|
|
22
|
|
|
|
75
|
|
Warranty claims
|
|
|
(56
|
)
|
|
|
(32
|
)
|
|
|
(72
|
)
|
Warranty liability at the end of the period
|
|
|
26
|
|
|
|
20
|
|
|
|
30
|
|
Long-term warranty liability at the end of the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warranty liability is included in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – RELATED-PARTY TRANSACTIONS
On June 21, 2007, we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. (“Kerns”), a stockholder of the Company. Under this agreement, a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $0.08 per share was issued to Kerns. In March 2012, Kerns exercised its warrant and 4,285,714 shares of common stock were issued. Concurrently with our entry into the Securities Purchase Agreement, we also entered into a Distribution Agreement and a Supplier Agreement with Living Data Technology Corporation (“Living Data”), an affiliate of Kerns. Pursuant to the Distribution Agreement, as amended, we became the exclusive worldwide distributor of the AngioNew EECP
®
systems manufactured through Living Data. The Distribution Agreement had an initial term extending through May 31, 2012. Effective September 2, 2011, the Company acquired Life Enhancement Technology (LET) (see Note G), the manufacturer of the AngioNew EECP
®
system. Consequently, the Distribution Agreement is no longer effective, and the Company wrote-off the remaining unamortized balance of Deferred Distributor Costs during the seven months ended December 31, 2011.
On February 28, 2011, David Lieberman and Edgar Rios were appointed by the Board of Directors as directors of the Company. Mr. Lieberman, a practicing attorney in the State of New York, was also appointed to serve as the Vice Chairman of the Board. He is currently a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which performs certain legal services for the Company. Fees of approximately $254,000 and $166,000 were billed by the firm for the year ended December 31, 2012 and the seven months ended December 31, 2011, respectively, at which dates no amounts were outstanding.
Mr. Rios currently is President of Edgary Consultants, LLC, and was appointed a director in conjunction with the Company’s consulting agreement with Edgary Consultants, LLC. The consulting agreement (the “Agreement”) between the Company and Edgary Consultants, LLC (“Consultant”) commenced on March 1, 2011 and was for a two year term and expired on February 28, 2013. The Agreement provided for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP
®
therapy.
In consideration for the services to be provided by Consultant under the Agreement, the Company agreed to issue to Consultant or its designees, up to 18,500,000 shares of restricted common stock of the Company, 3,000,000 of which, valued at $1,020,000, were issued in March 2011 and the balance was to be earned on performance. Mr. Lieberman received 600,000 of these restricted shares from the initial issuance. The Company recorded the fair value of the shares issued to Consultant as a prepaid expense and is amortizing the cost ratably over the two year agreement. The unamortized value is reported as Deferred Related Party Consulting Expense in our accompanying Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011. No performance-based shares were issued and no further compensation is expected to be paid in conjunction with the agreement.
During the year ended December 31, 2012, a former director performed consulting services for the Company aggregating approximately $10,000. Additionally, three directors received additional compensation totaling $150,000 for services rendered in connection with the extension of the GEHC contract.
During the seven months ended December 31, 2011, a director performed consulting services for the Company aggregating approximately $95,000, and the Company accrued dividends of $15,000 on Series E Preferred Stock (see Note N) to directors, management, and other related parties of the Company.
During the year ended May 31, 2011, the Company sold, or issued as dividends, 246,870 shares of Series E Preferred Stock (see Note N) to directors, management, and other related parties of the Company. In addition, two directors performed consulting services for the Company during the year ended May 31, 2011, aggregating approximately $57,000.
Through the Company’s acquisition of FGE in September 2011, it assumed the liability for $288,000 in unsecured notes payable to the President of LET and his spouse, of which $95,000 was repaid in December 2011, and $190,000, bearing interest at 6% per annum, was paid in full in March 2012. In addition, $30,000 and $10,000 in pre-acquisition earnings were distributed to current BIOX management during the year ended December 31, 2012 and the seven months ended December 31, 2011, respectively. The Company also recorded $196,000 in loans and advances made to officers of FGE during the seven months ended December 31, 2011, of which $25,000 remained outstanding at December 31, 2012. These loans and advances are short term and do not bear interest.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N – STOCKHOLDERS' EQUITY AND WARRANTS
Common stock and warrants
See Note M for discussion of common stock issued in the year ended May 31, 2011 in connection with related party agreements. The Company also issued 2,333,586, 1,151,492, and 1,861,279 shares of common stock to directors, officers, employees, and consultants during the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, respectively.
On June 21, 2007, we granted warrants for the purchase of 428,571 shares of common stock to a consultant in conjunction with the Kerns Securities Purchase Agreement. The initial exercise price was $0.07 per share for a term of five years, and a cashless exercise was made in April 2011 resulting in the issuance of 383,790 shares of common stock.
In September 2011, the Company issued 5,000,000 shares of restricted common stock and a two year common stock purchase warrant for 1,500,000 shares at an exercise price of $0.50 per share as partial consideration for the acquisition of FGE (see Note G). In addition, up to 2,400,000 shares of common stock were contingently issuable should FGE attain certain operating targets for the twelve months ended December 31, 2011. In September 2012, the Company determined FGE had met its targets and issued 2,400,000 shares to the prior owners of FGE. The aggregate value of the aforementioned noncash consideration relative to the FGE acquisition was $2,979,000 (see Note G for valuation assumptions and methodology).
Warrant activity for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011 is summarized as follows:
|
|
Employees
|
|
|
Consultants
|
|
|
Total
|
|
|
Weighted Average Price
|
|
Balance at May 31, 2010
|
|
|
-
|
|
|
|
6,968,823
|
|
|
|
6,968,823
|
|
|
$
|
0.27
|
|
Warrants expired
|
|
|
-
|
|
|
|
(2,254,538
|
)
|
|
|
(2,254,538
|
)
|
|
$
|
0.69
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
|
(428,571
|
)
|
|
|
(428,571
|
)
|
|
$
|
0.07
|
|
Number of shares exercisable at May 31, 2011
|
|
|
-
|
|
|
|
4,285,714
|
|
|
|
4,285,714
|
|
|
$
|
0.08
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants issued
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
$
|
0.50
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Number of shares exercisable at December 31, 2011
|
|
|
-
|
|
|
|
5,785,714
|
|
|
|
5,785,714
|
|
|
$
|
0.19
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Warrants exercised
|
|
|
-
|
|
|
|
(4,285,714
|
)
|
|
|
(4,285,714
|
)
|
|
$
|
0.08
|
|
Number of shares exercisable at December 31, 2012
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
$
|
0.50
|
|
Preferred stock
At December 31, 2012 and 2011, the Company had 1,000,000 shares of preferred stock authorized. During the year ended May 31, 2011, the Company issued an aggregate 314,649 shares of its Series E preferred stock. There were no shares issued and outstanding at December 31, 2012 and 2011.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 24, 2010, the Company filed a Certificate of Designations of Preferences and Rights of Series E Convertible Preferred Stock (“Certificate of Designations”), as authorized by the Board of Directors, designating 350,000 shares of its 1,000,000 shares of preferred stock as Series E Convertible Preferred Stock (“Series E Preferred”). The conversion rights of the Series E Preferred are that each share will be convertible at any time on or after January 1, 2011, at the holder’s option into 100 shares of common stock (an exercise price of $.16 per share of common stock, the “Conversion Price”), subject to anti-dilution adjustment as set forth below. Each share of outstanding Series E Preferred Stock shall automatically be converted into shares of common stock on or after July 1, 2011, at the then effective applicable conversion ratio, if, at any time following the Issuance Date, the price of the common stock for any 30 consecutive trading days equals or exceeds three times the Conversion Price and the average daily trading volume for the Company’s common stock for the 30 consecutive trading days exceeds 250,000 shares.
Pursuant to its conversion terms, the Series E Preferred was deemed automatically converted to common stock effective July 1, 2011. As of December 31, 2011, 29,956,100 shares of common stock had been issued for 299,561 shares of Series E Preferred, with 712,350 shares of common stock yet to be issued. The remaining 712,350 shares were issued during 2012.
For the seven months ended December 31, 2011 and the year ended May 31, 2011, the Company recorded dividends totaling $1,221,000 and $429,000, respectively. Included in these amounts is the recognition of the value of the embedded beneficial conversion feature of the Series E Preferred, which reflects the difference between the conversion price and the market price at time of investment. The amounts included in the dividends reported attributable to this beneficial conversion feature are $1,201,000 and $225,000 for the seven months ended December 31, 2011 and the year ended May 31, 2011, respectively. These are noncash dividends requiring no payment and ceased on conversion of the Series E Preferred to common stock.
Chinese subsidiaries dividends and statutory reserves
The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with People's Republic of China ("PRC") accounting standards and regulations. Based on PRC accounting standards, our Chinese subsidiaries are also required to set aside at least 10% of after-tax profit each year to their general reserves until the accumulative amount of such reserves reaches 50% of the registered capital. These reserves are not distributable as cash dividends. In addition, they are required to allocate a portion of their after-tax profit to their staff welfare and bonus fund at the discretion of their respective boards of directors. Moreover, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Distribution of dividends from the Chinese operating companies to foreign shareholders is subject to a 10% withholding tax.
NOTE O - OPTION PLANS
1999 Stock Option Plan
In July 1999, the Company’s Board of Directors approved the 1999 Stock Option Plan (“the 1999 Plan”), for which the Company reserved an aggregate of 2,000,000 shares of common stock.
The 1999 Plan provides that a committee of the Board of Directors of the Company will administer it and that the committee will have full authority to determine the identity of the recipients of the options and the number of shares subject to each option. Options granted under the 1999 Plan may be either incentive stock options or non-qualified stock options. The option price shall be 100% of the fair market value of the common stock on the date of the grant
(or in the case of incentive stock options granted to any individual principal stockholder who owns stock possessing more than 10% of the total combined voting power of all voting stock of the Company, 110% of such fair market value
). The term of any option may be fixed by the committee but in no event shall exceed ten years from the date of grant. Options are exercisable upon payment in full of the exercise price, either in cash or in common stock valued at fair market value on the date of exercise of the option. In July 2000, the Company’s Board of Directors increased the number of shares authorized for issuance under the 1999 Plan by 1,000,000 shares to 3,000,000 shares.
In December 2001, the Board of Directors of the Company increased the number of shares authorized for issuance under the 1999 Plan by 2,000,000 shares to 5,000,000 shares.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2006, the Board of Directors accelerated the vesting period for all unvested options to May 31, 2006.
The term for which options may be granted under the 1999 Plan expired July 12, 2009.
During the year ended May 31, 2011, options to purchase 1,100,000 shares of common stock under the 1999 Plan at an exercise price ranging from $0.09 to $3.88 were retired or cancelled.
In the seven months ended December 31, 2011, options to purchase 54,000 shares of common stock under the 1999 Plan at an exercise price of $3.96 were retired or cancelled.
2004 Stock Option and Stock Issuance Plan
In October 2004, the Company’s stockholders approved the 2004 Stock Option and Stock Issuance Plan (“the 2004 Plan”), for which the Company reserved an aggregate of 2,500,000 shares of common stock.
The 2004 Plan is divided into two separate equity programs: (i) the Option Grant Program under which eligible persons (“Optionees”) may, at the discretion of the Board of Directors, be granted options to purchase shares of common stock; and (ii) the Stock Issuance Program under which eligible persons (“Participants”) may, at the discretion of the Board of Directors, be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company.
Options granted under the 2004 Plan shall be non-qualified or incentive stock options and the exercise price is the fair market value of the common stock on the date of grant except that for incentive stock options it shall be 110% of the fair market value if the
Optionee
owns 10% or more of our common stock.
The term of any option may be fixed by the Board of Directors or committee but in no event shall exceed ten years from the date of grant.
Stock options granted under the 2004 Plan may become exercisable in one or more installments in the manner and at the time or times specified by the committee.
Options are exercisable upon payment in full of the exercise price, either in cash or in common stock valued at fair market value on the date of exercise of the option. The term for which options may be granted under the 2004 Plan expires July 12, 2014.
Under the stock issuance program, the purchase price per share shall be fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. Payment for the shares may be made in cash or check payable to us, or for past services rendered to us and all shares of common stock issued thereunder shall vest upon issuance unless otherwise directed by the committee. The number of shares issuable is also subject to adjustments upon the occurrence of certain events, including stock dividends, stock splits, mergers, consolidations, reorganizations, recapitalizations, or other capital adjustments.
The 2004 Plan provides that a committee of the Board of Directors of the Company will administer it and that the committee will have full authority to
determine and designate the individuals who are to be granted stock options or qualify to purchase shares of common stock under the 2004 Plan, the number of shares to be subject to options or to be purchased and the nature and terms of the options to be granted. The committee also has authority to interpret the 2004 Plan and to prescribe, amend and rescind the rules and regulations relating to the 2004 Plan.
In May 2006, the Board of Directors accelerated the vesting period for all unvested options to May 31, 2006.
There was no activity under the 2004 plan during the year ended December 31, 2012, the seven months ended December 31, 2011, or the year ended May 31, 2011.
At December 31, 2012, there were 785,224 shares available for future grants under the 2004 Plan.
2010 Stock Option and Stock Issuance Plan
On June 17, 2010 the Board of Directors approved the 2010 Stock Plan (the “2010 Plan”) for officers, directors, employees and consultants of the Company. The stock issuable under the 2010 Plan shall be shares of the Company’s authorized but unissued or reacquired common stock. The maximum number of shares of common stock which may be issued under the 2010 Plan is 5,000,000 shares.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2010 Plan is comprised of two separate equity programs, the Options Grant Program, under which eligible persons may be granted options to purchase shares of common stock, and the Stock Issuance Program, under which eligible persons may be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company.
The 2010 Plan provides that the Board of Directors, or a committee of the Board of Directors, will administer it with full authority to determine the identity of the recipients of the options or shares and the number of options or shares. Options granted under the 2010 Plan may be either incentive stock options or non-qualified stock options. The option price shall be 100% of the fair market value of the common stock on the date of the grant ( or in the case of incentive stock options granted to any individual stockholder possessing more than 10% of the total combined voting power of all voting stock of the Company, 110% of such fair market value). The term of any option may be fixed by the Board of Directors, or its authorized committee, but in no event shall it exceed five years from the date of grant. Options are exercisable upon payment in full of the exercise price, either in cash or in common stock valued at fair market value on the date of exercise of the option.
During the year ended May 31, 2011, 3,790,000 restricted shares of common stock were granted under the 2010 Plan to non-officer employees and consultants of the Company, of which 355,000 shares vested immediately with the remainder vesting over a three year period, and of which 360,000 shares were forfeited. Additionally, 650,000 restricted shares of common stock, vesting over a three year period, were granted to company officers.
During the seven months ended December 31, 2011, 475,000 restricted shares of common stock were granted under the 2010 Plan to an officer, of which 100,000 shares vested immediately with the remainder vesting over a three year period. As of December 31, 2011, 125,000 additional shares were forfeited and 196,008 were withheld for withholding taxes.
In the year ended December 31, 2012, 500,000 restricted shares of common stock were granted under the 2010 Plan to officers of the Company, of which 250,000 shares vested immediately with the remainder vesting over a one year period. As of December 31, 2012, 355,000 additional shares were forfeited and 245,552 additional shares were withheld for withholding taxes.
No options were issued under the 2010 Plan during the year ended December 31, 2012, the seven months ended December 31, 2011, or the year ended May 31, 2011.
Stock option and stock grant activity under all the plans for the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011 is summarized as follows:
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares Available
for Grant
|
|
|
Number of Shares
|
|
|
Range of Exercise Price per Share
|
|
|
Weighted Average Exercise Price
|
|
Balance at May 31, 2010
|
|
|
785,224
|
|
|
|
2,963,776
|
|
|
$
|
0.08 - $3.96
|
|
|
$
|
0.57
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
-
|
|
|
|
(1,100,000
|
)
|
|
$
|
0.09 - $3.88
|
|
|
$
|
0.94
|
|
Available under 2010 Plan
|
|
|
920,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2011
|
|
|
1,705,224
|
|
|
|
1,863,776
|
|
|
$
|
0.08 - $3.96
|
|
|
$
|
0.34
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
-
|
|
|
|
(54,000
|
)
|
|
$
|
3.96
|
|
|
$
|
3.96
|
|
Granted under 2010 Plan
|
|
|
(475,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled under 2010 Plan
|
|
|
321,008
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
1,551,232
|
|
|
|
1,809,776
|
|
|
$
|
0.08 - $1.11
|
|
|
$
|
0.23
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Granted under 2010 Plan
|
|
|
(500,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled under 2010 Plan
|
|
|
600,552
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
1,651,784
|
|
|
|
1,809,776
|
|
|
$
|
0.08 - $1.11
|
|
|
$
|
0.23
|
|
The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Number Outstanding at December 31, 2012
|
|
|
Weighted Average Remaining Contractual Life (yrs.)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable at
December 31, 2012
|
|
|
Weighted Average Exercise Price
|
|
Range of Exercise Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.08 - $0.58
|
|
|
|
1,689,776
|
|
|
|
3.3
|
|
|
$
|
0.18
|
|
|
|
1,689,776
|
|
|
$
|
0.18
|
|
$
|
0.71 - $1.11
|
|
|
|
120,000
|
|
|
|
1.2
|
|
|
$
|
1.04
|
|
|
|
120,000
|
|
|
$
|
1.04
|
|
|
|
|
|
|
1,809,776
|
|
|
|
3.2
|
|
|
$
|
0.23
|
|
|
|
1,809,776
|
|
|
$
|
0.23
|
|
There were 82,120,444 remaining authorized shares of common stock after reserves for all stock option plans and stock warrants.
NOTE P - INCOME TAXES
As of December 31, 2012, the recorded deferred tax assets were $18,147,000, reflecting a decrease of $1,481,000 during the year ended December 31, 2012, which was offset by a valuation allowance the same amount. The Company also recorded a net deferred tax liability of $112,000 as of December 31, 2012 and 2011, which arose from pre-acquisition FGE operations, primarily related to revenue recognized for book prior to recognition for tax.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s deferred tax assets are summarized as follows:
(in thousands)
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Net operating loss carryforwards
|
|
$
|
15,584
|
|
|
$
|
18,030
|
|
Depreciation and amortization
|
|
|
143
|
|
|
|
59
|
|
Deferred rent
|
|
|
-
|
|
|
|
3
|
|
Deferred gain on sale of building
|
|
|
-
|
|
|
|
12
|
|
Allowance for doubtful accounts
|
|
|
50
|
|
|
|
54
|
|
Reserve for obsolete inventory
|
|
|
195
|
|
|
|
165
|
|
Tax credits
|
|
|
358
|
|
|
|
358
|
|
Expense accruals
|
|
|
482
|
|
|
|
545
|
|
Deferred revenue
|
|
|
1,335
|
|
|
|
402
|
|
Total gross deferred taxes
|
|
|
18,147
|
|
|
|
19,628
|
|
Valuation allowance
|
|
|
(18,147
|
)
|
|
|
(19,628
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2012, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $39.0 million expiring at various dates from 2013 through 2031. In the year ended December 31, 2012, the seven months ended December 31, 2011 and the year ended May 31, 2011, approximately $6.1 million, $0.5 million, and $5.4 million, respectively, of net operating loss carryforwards expired. Future expirations of net operating loss carryforwards are approximately as follows:
(in thousands)
Calendar Year
|
|
Amount
|
|
2013
|
|
$
|
4,400
|
|
2014
|
|
|
-
|
|
2015
|
|
|
-
|
|
2016
|
|
|
-
|
|
2017
|
|
|
-
|
|
Thereafter
|
|
|
34,600
|
|
Total
|
|
$
|
39,000
|
|
Income tax expense for the year ended December 31, 2012 was $52,000 and consisted mainly of state income taxes. For the seven months ended December 31, 2011, income tax expense was $276,000 and consisted mainly of Federal Alternative Minimum Tax and income tax in states with income in excess of available net operating loss carry forwards. Income tax expense for the year ended May 31, 2011 consists primarily of accruals for state taxes and adjustments for amounts paid or accrued in excess of actual income tax liabilities.
The Company has recorded a provision of $500,000 for the seven months ended December 31, 2011 for the potential liability that may arise from the business of FGE prior to its acquisition by the Company. Under the acquisition agreement of FGE by Vasomedical, the former shareholders of FGE have fully indemnified Vasomedical against any undisclosed liabilities and the Company believes that any liability that may arise should be recoverable from these former shareholders.
Under current tax law, the utilization of tax attributes will be restricted if an ownership change, as defined, were to occur. Section 382 of the Internal Revenue Code provides, in general, that if an “ownership change” occurs with respect to a corporation with net operating and other loss carryforwards, such carryforwards will be available to offset taxable income in each taxable year after the ownership change only up to the “Section 382 Limitation” for each year (generally, the product of the fair market value of the corporation’s stock at the time of the ownership change, with certain adjustments, and a specified long-term tax-exempt bond rate at such time). The Company’s ability to use its loss carryforwards will be limited in the event of an ownership change.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the effective income tax rate to the federal statutory rate:
|
|
For the year ended
December 31, 2012
|
|
|
For the seven months ended
December 31, 2011
|
|
|
For the year ended
May 31, 2011
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Federal statutory rate
|
|
|
34.00
|
|
|
|
34.00
|
|
|
|
(34.00
|
)
|
State income taxes
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
(6.00
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
relating to operations
|
|
|
-
|
|
|
|
-
|
|
|
|
40.00
|
|
Utilizations of net operating loss carryforward
|
|
|
(40.00
|
)
|
|
|
(40.00
|
)
|
|
|
-
|
|
Foreign taxes
|
|
|
0.20
|
|
|
|
1.17
|
|
|
|
-
|
|
Alternative minimum tax
|
|
|
(0.37
|
)
|
|
|
2.10
|
|
|
|
-
|
|
Other
|
|
|
1.73
|
|
|
|
1.84
|
|
|
|
0.17
|
|
|
|
|
1.56
|
|
|
|
5.12
|
|
|
|
0.17
|
|
NOTE Q - COMMITMENTS AND CONTINGENCIES
Sales representation agreement
In June 2012, the Company concluded an amendment of the GEHC Agreement with GE Healthcare, originally signed on May 19, 2010. The amendment, effective July 1, 2012, extends the initial term of three years commencing July 1, 2010 to five years through June 30, 2015, subject to earlier termination under certain circumstances. These circumstances include not materially achieving certain sales goals, not maintaining a minimum number of sales representatives, and various legal and GEHC policy requirements. Under the terms of the agreement, the Company is required to lease dedicated computer equipment from GEHC for connectivity to their network.
In conjunction with the extension of the GEHC Agreement, the Company granted VasoHealthcare employees both stock and cash-based performance incentives for the ensuing year. The incentives provide for cash payments of up to $2.4 million and grants of restricted common stock of the Company up to 2.4 million shares, vesting at various times through July 1, 2013. A condition of the incentives is that the employees remain continuously employed through the vesting dates.
For the year ended December 31, 2012, approximately $2.2 million was recorded as SG&A expense on the consolidated statements of operations and comprehensive income (loss) in conjunction with the incentive plan.
As of December 31, 2012, approximately $1.5 million and 1.5 million shares remain unvested.
Facility Leases
On August 15, 2007, we sold our facility in Westbury, New York under a five-year leaseback agreement, which expired in August 2012. In September 2012, the term of the lease was extended for an additional three years. The Company also leases offices in New York City under a five year agreement expiring May 2017. VasoHealthcare also leases facilities in Greensboro, North Carolina pursuant to a lease which expires in May 2013. FGE leases facilities in Wuxi, China, pursuant to leases expiring in December 2013, February 2014, and March 2018, and a facility in Foshan, China, pursuant to a lease that expires in April 2016.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vehicle Lease Agreement
In June 2011, the Company began taking deliveries under a closed-end master lease agreement for the provision of vehicles to the sales team of its Sales Representation segment. Vehicles obtained under the terms of the agreement are leased generally for a 36 month term, and payments are fixed for each year of the agreement, subject to readjustment at the beginning of the second and third year.
Future rental payments under these operating leases aggregate approximately as follows:
For the years ended December 31,
(in thousands)
|
|
Vehicles
|
|
|
Facilities
|
|
|
Total
|
|
2013
|
|
$
|
325
|
|
|
$
|
307
|
|
|
$
|
632
|
|
2014
|
|
|
198
|
|
|
|
254
|
|
|
|
452
|
|
2015
|
|
|
33
|
|
|
|
212
|
|
|
|
245
|
|
2016
|
|
|
-
|
|
|
|
95
|
|
|
|
95
|
|
2017
|
|
|
-
|
|
|
|
65
|
|
|
|
65
|
|
Thereafter
|
|
|
-
|
|
|
|
12
|
|
|
|
12
|
|
Total
|
|
$
|
556
|
|
|
$
|
945
|
|
|
$
|
1,501
|
|
Employment Agreement
On March 21, 2011, the Company entered into an Employment Agreement with its President and Chief Executive Officer, Dr. Jun Ma, for a three-year term ending on March 14, 2014. The Employment Agreement currently provides for annual compensation of $275,000. Dr. Ma shall be eligible to receive a bonus for each fiscal year thereafter during the employment term. The amount and the occasion for payment of such bonus, if any, shall be at the discretion of the Board of Directors. Dr. Ma shall also be eligible for an award under any long-term incentive compensation plan and grants of options and awards of shares of the Company’s stock, as determined at the Board of Directors’ discretion. The Employment Agreement further provides for reimbursement of certain expenses, and certain severance benefits in the event of termination prior to the expiration date of the Employment Agreement.
Dr Ma’s agreement, as modified, is for a continuing three year term, unless earlier terminated by the Company, but in no event can extend beyond March 21, 2019.
Litigation
The Company is currently, and has been in the past, a party to various routine legal proceedings incident to the ordinary course of business. The Company believes that the outcome of all such pending legal proceedings in the aggregate is unlikely to have a material adverse effect on the business or consolidated financial condition of the Company.
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign operations
During the years ended December 31, 2012 and 2011, the Company had and continues to have operations in China. Operating internationally involves additional risks relating to such things as currency exchange rates, different legal and regulatory environments, political, economic risks relating to the stability or predictability of foreign governments, differences in the manner in which different cultures do business, difficulties in staffing and managing foreign operations, differences in financial reporting, operating difficulties, and other factors. The occurrence of any of these risks, if severe enough, could have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
Commercial law is still developing in China and there are limited legal precedents to follow in commercial transactions. There are many tax jurisdictions each of which may have changing tax laws. Applicable taxes include value added taxes (“VAT”), corporate income tax, and social (payroll) taxes. Regulations are often unclear. Tax declarations (reports) are subject to review and taxing authorities may impose fines, penalties and interest. These facts create risks in China.
NOTE R - 401(K) PLAN
In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary deductions for eligible employees. Employees are eligible to participate in the next quarter enrollment period after employment. Participants may make voluntary contributions to the plan up to 15% of their compensation. In the year ended December 31, 2012, the seven months ended December 31, 2011, and the year ended May 31, 2011, the Company made discretionary contributions of approximately $81,000, $25,000, and $27,000, respectively, to match a percentage of employee contributions.
NOTE S - TRANSITION PERIOD COMPARATIVE DATA (UNAUDITED)
The following table presents certain financial information for the years ended December 31, 2012 and 2011, and for the seven months ended December 31, 2011 and 2010.
(in thousands except per share data)
|
|
For the years ended December 31,
|
|
|
For the seven months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
29,240
|
|
|
$
|
31,112
|
|
|
$
|
23,489
|
|
|
$
|
8,741
|
|
Gross profit
|
|
|
20,594
|
|
|
|
21,917
|
|
|
|
16,756
|
|
|
|
5,820
|
|
Operating income (loss)
|
|
|
(3,508
|
)
|
|
|
3,701
|
|
|
|
5,189
|
|
|
|
(2,445
|
)
|
Total other income, net
|
|
|
179
|
|
|
|
208
|
|
|
|
199
|
|
|
|
40
|
|
Income (loss) before income taxes
|
|
|
(3,329
|
)
|
|
|
3,909
|
|
|
|
5,388
|
|
|
|
(2,405
|
)
|
Net income (loss)
|
|
|
(3,381
|
)
|
|
|
3,634
|
|
|
|
5,112
|
|
|
|
(2,413
|
)
|
Preferred stock dividends
|
|
|
-
|
|
|
|
(1,459
|
)
|
|
|
(1,221
|
)
|
|
|
(191
|
)
|
Net income (loss) applicable to common stockholders
|
|
|
(3,381
|
)
|
|
|
2,175
|
|
|
|
3,891
|
|
|
|
(2,604
|
)
|
Comprehensive income (loss)
|
|
$
|
(3,347
|
)
|
|
$
|
2,175
|
|
|
$
|
3,891
|
|
|
$
|
(2,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
- diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
158,366
|
|
|
|
132,918
|
|
|
|
146,549
|
|
|
|
110,833
|
|
- diluted
|
|
|
158,366
|
|
|
|
140,414
|
|
|
|
153,657
|
|
|
|
110,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operations
|
|
$
|
9,431
|
|
|
$
|
114
|
|
|
$
|
(5,103
|
)
|
|
$
|
(1,032
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(402
|
)
|
|
|
(682
|
)
|
|
|
(638
|
)
|
|
|
(132
|
)
|
Net cash provided by (used in) financing activities
|
|
|
153
|
|
|
|
(238
|
)
|
|
|
(95
|
)
|
|
|
3,783
|
|
Effect of exchange rate differences on cash
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
9,175
|
|
|
$
|
(806
|
)
|
|
$
|
(5,836
|
)
|
|
$
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|