Vasomedical, Inc - Recent Material Event
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INDEX TO FORM 10-KSB
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PART I
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Item 1. Description of Business...........................................................................1
Item 2. Description of Property..........................................................................24
Item 3. Legal Proceedings................................................................................25
Item 4. Submission of Matters to a Vote of Security Holders..............................................25
PART II
Item 5. Market for Registrant's Common Equity, and Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities............................................................26
Item 6. Management's Discussion and Analysis or Plan of Operation........................................26
Item 7. Financial Statements.............................................................................41
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............41
Item 8A. Controls and Procedures..........................................................................41
Item 8A.(T) Controls and Procedures..........................................................................42
Item 8B. Other Information................................................................................42
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act....................................43
Item 10. Executive Compensation...........................................................................43
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..43
Item 12. Certain Relationships and Related Transactions, and Director Independence........................43
Item 13. Exhibits.........................................................................................43
Item 14. Principal Accountant Fees and Services...........................................................44
Signatures .................................................................................................45
EXHIBITS
Exhibit 23 Consent of Independent Registered Public Accounting Firm........................................E-1
Exhibit 31 Certifications Pursuant to Securities Exchange Act Rule 13A-14(A)/15D-14(A).....................E-2
Exhibit 32 Certification of Periodic Report................................................................E-4
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. The EECP(R) therapy system is a non-invasive,
outpatient therapy for the treatment of diseases of the cardiovascular system.
The therapy serves to increase circulation in areas of the heart with less than
adequate blood supply and helps to restore systemic vascular function. The
therapy also increases blood flow and oxygen supply to the heart muscle and
other organs and decreases the heart's workload and 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 Food and Drug Administration (FDA) clearance to market our EECP(R)
therapy for use in the treatment of stable and unstable angina, congestive heart
failure, acute myocardial infarction, and cardiogenic shock; however, our
current marketing efforts are limited to the treatment of chronic stable angina
and congestive heart failure. Medicare and other third-party payers currently
reimburse for the treatment of angina symptoms in patients with moderate to
severe symptoms who are refractory to medications and not candidates for
invasive procedures. Patients 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 two fiscal years ended May 31, 2008 and 2007 we incurred
large operating losses. We attempted to achieve profitability by reducing
operating costs and halting the trend of declining revenues, to reduce cash
usage by bringing our cost structure more into alignment with current revenue by
engaging in restructurings during January 2006, March 2007 and April 2007 to
substantially reduce personnel and spending on sales, marketing and development
projects. In addition, we were seeking to obtain a strategic alliance within the
sales and marketing areas and/or to raise additional capital through public or
private equity or debt financings.
During the first quarter of fiscal year 2008, the following events took
place which allowed us to raise additional capital through a private equity
financing and by the sale of our facility under a leaseback agreement.
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o On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. (Kerns). Concurrently with our entry into
the Securities Purchase Agreement, we also entered into a Distribution
Agreement and a Supplier Agreement with Living Data Technology
Corporation, an affiliate of Kerns (Living Data).
We sold to Kerns, pursuant to the Securities Purchase Agreement,
21,428,572 shares of our common stock at $.07 per share 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, Mr. Jun Ma and Mr. Simon Srybnik, Chairman of
both Kerns and Living Data, have been appointed members of our Board
of Directors. Pursuant to the Distribution Agreement, we have become
the exclusive distributor in the United States of the AngioNew ECP
systems manufactured by Living Data. As additional consideration for
such agreement, we agreed to issue an additional 6,990,840 shares of
our common stock to Living Data. Pursuant to the Supplier Agreement,
Living Data now is the exclusive supplier to us of the ECP therapy
systems that we market under the registered trademark EECP(R). The
Distribution Agreement and the Supplier Agreement each have an initial
term extending through May 31, 2012.
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.
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
2003 and was responsible for 1 of every 2.7 deaths, according to The American
Heart Association (AHA) Heart and Stroke Statistical 2006 Update (2006 Update).
Approximately 71.3 million Americans suffer from some form of cardiovascular
disease. Among these, 12.0 million have coronary heart disease (CHD).
We have Food and Drug Administration (FDA) clearance to market our EECP(R)
therapy for use in the treatment of stable and unstable angina, congestive heart
failure, acute myocardial infarction, and cardiogenic shock; however, our
current marketing efforts are limited to the treatment of chronic stable angina
and congestive heart failure. Medicare and other third-party payers currently
reimburse for the treatment of angina symptoms in patients with moderate to
severe symptoms who are refractory to medications and not candidates for
invasive procedures. Patients 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.
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 or peripheral vascular disease are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
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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 130,000 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 angina. Medicare reimbursement
guidelines have a significant impact in determining the available market for
EECP(R) therapy. We believe that over 65% of the patients that receive EECP(R)
therapy are Medicare patients and many of the third-party payers follow Medicare
guidelines, which limit reimbursement for EECP(R) therapy to patients who do not
adequately respond to or are not amenable to medical therapy and are not readily
amenable to invasive therapy. As a result, an important element of our strategy
is to grow the market for EECP(R) therapy by expanding reimbursement coverage to
include a broader range of angina patients than the current coverage policy
provides and enable EECP(R) therapy to compete more with other therapies for
ischemic heart disease. Please see the heading "Reimbursement" in the "Item-1
Business" section of this Form 10-KSB for a more detailed discussion of
reimbursement issues.
Congestive Heart Failure
CHF is a condition in which the heart loses its full 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
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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 2006 Update, in 2003 approximately 2.4 million men and 2.6
million women in the United States had CHF and about 550,000 new cases of the
disease occur each year. Deaths caused by the disease increased 20.5% from 1993
to 2003. 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 $29.6 billion. Congestive heart failure offers a good strategic fit
with our current angina business and offers an expanded market opportunity for
EECP(R) therapy. Unmet clinical needs in CHF are greater than those for angina,
as there are few consensus therapies, invasive or otherwise, beyond medical
management for the condition. It is noteworthy that data collected from the
International EECP(R) Patient Registry(TM) (IEPR) at the University of
Pittsburgh Graduate School of Public Health shows that approximately one-third
of angina patients treated with EECP(R) also have a history of CHF and 70% to
80% have demonstrated positive outcomes from EECP(R) therapy.
We sponsored a pivotal, randomized clinical trial to demonstrate the
efficacy of EECP(R) therapy in the most prevalent types of heart failure
patients. This trial, known as PEECH(TM) (Prospective Evaluation of EECP(R) in
Congestive Heart Failure), was intended to provide additional evidence of the
safety and efficacy of EECP(R) therapy in the treatment of mild-to-moderate
heart failure and to support our application for expansion of the Medicare
national reimbursement coverage policy to include mild-to-moderate heart failure
as a primary indication. The PEECH(TM) trial was a positive clinical trial,
having met the statistical requirement of meeting at least one of its co-primary
endpoints, a significant difference in the proportion of patients satisfying a
prespecified threshold of improvement in exercise duration. The trial also
demonstrated significant improvements in favor of EECP(R) therapy on several
important secondary endpoints, including exercise duration and improvement in
symptom status and quality of life. Measures of change in peak oxygen
consumption were not statistically significant in the overall study population,
though a trend favoring EECP(R) therapy was present in early follow-up. Patients
in the trial who had an ischemic etiology (i.e. pre-existing coronary artery
disease), demonstrated a greater response to EECP(R) therapy than those who had
an idiopathic (non-ischemic) etiology.
The preliminary results of the PEECH(TM) trial were presented at the
American College of Cardiology scientific sessions in March 2005. On June 20,
2005, CMS accepted our application for expansion of reimbursement coverage of
EECP(R) therapy to include patients with New York Heart Association (NYHA) Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35% (i.e. chronic, stable, mild-to-moderate systolic heart failure as a
primary indication), as well as patients with Canadian Cardiovascular Society
Classification (CCSC) II (i.e. chronic, stable mild angina).
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, they amended their request to include NYHA Class IV heart failure.
On March 20, 2006, CMS issued their Decision Memorandum regarding this
reconsideration with the opinion "that the evidence is not adequate to conclude
that external counterpulsation therapy is reasonable and necessary for the
treatment of:
o CCSC II angina
o Heart Failure
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 40%
o NYHA Class IV heart failure
o Acute heart failure
o Cardiogenic shock
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o Acute myocardial infarction."
They commented in their decision memorandum that they were not able to
apply full weight to the evidence generated by the PEECH(TM) trial as it had not
yet been published in a peer-reviewed medical journal by the time they were
required to issue a final decision on this application. Moreover, they did not
opine on whether they would consider the results of the trial when published to
be sufficient evidence to conclude that external counterpulsation therapy is
reasonable and necessary for the treatment of NYHA Class II/III stable heart
failure symptoms with an ejection fraction of less than or equal to 35%. They
did, however, reiterate in the decision memorandum that "Current coverage as
described in Section 20.20 of the Medicare National Coverage Determination (NCD)
manual will remain in effect" for refractory angina patients.
On August 25, 2006 the results of the trial were initially published online
by the Journal of the American College of Cardiology (JACC) and in print in its
September 19, 2006 issue. JACC is the official journal of the American College
of Cardiology.
In the November-December issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, focusing on the
results of a prespecified subgroup analysis in trial patients age 65 and over.
This analysis demonstrated a statistically positive response on both co-primary
endpoints of the trial in patients receiving EECP(R) therapy versus those who
did not, i.e. a significantly larger proportion of patients undergoing EECP(R)
therapy met or exceeded prespecified thresholds of improvement in exercise
duration and peak oxygen consumption. Moreover, the patients age 65 and older
who received EECP(R) therapy demonstrated the greatest differences in exercise
duration, peak oxygen consumption and functional class (symptom status) compared
with those who did not receive EECP(R) therapy.
These papers were submitted to CMS and we were advised to continue to
gather more clinical evidence for future submission.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
The EECP(R) Therapy Systems
The EECP(R) therapy systems are noninvasive treatment systems utilizing
fundamental hemodynamic principles to augment coronary blood flow and, at the
same time, reduce the workload of the heart while improving the overall vascular
function. The treatment is completely noninvasive and is administered to
patients on an outpatient basis, usually in daily one-hour sessions, five days
per week over seven weeks for a total of 35 treatments. The procedure is well
tolerated and most patients begin to experience relief of chest pain due to
their coronary artery disease after 15 to 20 hours of therapy. As demonstrated
in our clinical studies, positive effects have been shown in most patients to
continue for years following a full course of therapy.
During EECP(R) therapy, the patient lies on a contoured treatment table
while three sets of inflatable pressure cuffs, resembling oversized blood
pressure cuffs, are wrapped around the calves, and the lower and upper thighs,
including the buttocks. The system is synchronized to the individual patient's
cardiac cycle triggering the system to inflate the cuffs rapidly and
sequentially -- via computer-interpreted ECG signals -- starting from the calves
and proceeding upward to the buttocks during the relaxation phase of each
heartbeat (diastole). This has the effect of creating a strong retrograde
arterial wave in the arterial system, forcing freshly oxygenated blood towards
the heart and coronary arteries at a time when resistance to coronary blood flow
is at its lowest level. The inflation of cuffs also simultaneously increases the
volume of venous blood that is returned to the heart when the heart is filling
up for ejection in the contracting phase. Just prior to the next heartbeat when
the heart begins to eject blood by contracting (systole), all three cuffs
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simultaneously deflate, leaving an empty vascular space to receive blood
ejecting from the heart, thereby significantly reducing the workload of the
heart. This is achieved because the vascular beds in the lower extremities are
relatively empty when the cuffs are deflated, significantly lowering the
resistance, and provide vascular space to receive the blood ejected by the
heart, reducing the amount of work the heart must do to pump oxygenated blood to
the rest of the body. The inflation/deflation activity is monitored constantly
and coordinated by a computerized console that interprets electrocardiogram
signals from the patient's heart, monitors heart rhythm and rate information,
and actuates the inflation and deflation in synchronization with the cardiac
cycles. The end result of this sequential "squeezing" of the legs is to create a
pressure wave that significantly increases peak diastolic pressure benefiting
circulation to the heart muscle and other organs, increases venous return so
that the heart has more blood volume to eject out, and increases cardiac output.
The release of external pressure produces reduction of systolic pressure,
thereby reducing the workload of the heart. This reduction of vascular
resistance insures that the heart does not have to work as hard to pump large
amounts of blood through the body to help supply its metabolic needs.
While the precise scientific means by which EECP(R) therapy achieves its
long-term beneficial effects are only partially explained, there is evidence to
suggest that the EECP(R) therapy triggers a neurohormonal response that induces
the production of growth and vasodilatation factors that promotes recruitment of
new arteries and dilates existing blood vessels. The recruitment of new arteries
known as "collateral blood vessels" bypass blocked or narrowed vessels and
increase blood flow to ischemic areas of the heart muscle that are receiving an
inadequate supply of blood. There is also evidence to support a mechanism
related to improved function of the endothelium (the inner lining of the blood
vessels), which regulates the luminal size of the arteries and controls the
dilation of the arteries to insure adequate blood flow to all organs, thus
reducing constriction of blood vessels that supply oxygenated blood to the
body's organs and tissues and as a result the required workload of the heart.
Clinical Studies
Early History
Early experiments with counterpulsation at Harvard in the 1950s
demonstrated that this technique markedly reduces the workload, and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past forty years in both animal experiments and in patients. The clinical
benefits of external counterpulsation were not consistently achieved in early
studies because the equipment used then lacked some of the features found in the
current EECP(R) systems, such as the computerized electrocardiographic signal
for triggering, and the use of pneumatic versus hydraulic actuating media that
makes sequential cuff inflation possible. As the technology improved, however,
it became apparent that both internal (i.e. intra-aortic balloon pumping) and
external forms of counterpulsation were capable of improving survival in
patients with cardiogenic shock following myocardial infarction. Later, in the
1980s, Dr. Zheng and colleagues in China reported on their extensive experience
in treating angina using the newly developed "enhanced" sequentially inflating
EECP(R) device that incorporated three sets of cuffs including the buttocks cuff
instead of a single cuff used in the previous system. The Chinese investigators
were able to show that a 36-hour course of treatment with the EECP(R) system
reduced the frequency and severity of anginal symptoms during normal daily
functions and also during exercise, and also that the improvements were
sustained for years after therapy.
These results prompted a group of investigators at the State University of
New York at Stony Brook (Stony Brook) to undertake a number of open label
studies with the EECP(R) system between 1989 and 1996 to reproduce the Chinese
results, using both subjective and objective endpoints. These studies, though
open label and non-randomized, showed significant improvement in exercise
tolerance by patients as evidenced by exercise treadmill stress testing,
improvement in the perfusion of ischemic regions of the heart muscle by thallium
radionuclide imaging stress testing, and partial or complete resolution of
coronary perfusion defects. All of these results have been reported in medical
literature and support the assertion that EECP(R) therapy is an effective and
durable treatment for patients suffering from chronic angina pectoris.
The MUST-EECP(R) Study
In 1995, we began a randomized, controlled and double-blinded multicenter
clinical study (MUST-EECP(R)) at seven leading university hospitals in the
United States to confirm the patient benefits observed in the open studies
conducted at Stony Brook and to provide definitive scientific evidence of
EECP(R) therapy's effectiveness. MUST-EECP(R) was completed in July 1997 and the
results presented at the annual meetings of the American Heart Association in
November 1997 and the American College of Cardiology in March 1998. The results
of MUST-EECP(R) were published in the Journal of the American College of
Cardiology (JACC), a major peer-review medical journal, in June 1999.
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This 139 patient study, which included a sham-EECP(R) control group,
demonstrated that patients treated with EECP(R) therapy were able to increase
the amount of time on exercise testing before they showed signs of cardiac
ischemia (i.e. ST-segment depression on their electrocardiogram) and experienced
a reduction in the frequency of their angina attacks compared to patients who
did not receive EECP(R) therapy. In 1999, physician collaborators completed a
quality-of-life study with the EECP(R) system in a subset of the same patients
that participated in MUST-EECP(R). Two highly regarded standardized means of
measurement were used to gauge changes in patients' outlook and ability to
participate in normal daily living during the treatment phase and for up to 12
months after treatment. Results of this study, which have been presented at
major scientific meetings and published in the January 2002 Journal of
Investigative Medicine, show that after one-year of follow-up the group of
patients receiving EECP(R) therapy enjoyed significantly improved aspects of
health-related quality of life compared to those who received a sham treatment.
The PEECH(TM) Study
As part of our program to expand the therapy's indications for use beyond
the treatment of angina, we applied for and received FDA approval in April 1998
to study, under an Investigational Device Exemption (IDE) protocol, the
application of EECP(R) therapy in the treatment of CHF. A 32 patient feasibility
study was conducted simultaneously at the University of Pittsburgh, the
University of California San Francisco and the Grant/Riverside Methodist
Hospitals in Columbus, Ohio. The results of this study were presented at the
49th Scientific Sessions of the American College of Cardiology in March 2000 and
the Heart Failure Society of America's Annual Meeting in September 2000 and were
published in the July/August 2002 issue of Congestive Heart Failure. This study
indicated that EECP(R) therapy could improve exercise capacity, increase
functional capacity was beneficial to left ventricular function in patients with
NYHA Class II and III (i.e. mild to moderate) heart failure and a reduced left
ventricular ejection fraction (i.e. LVEF = 35% or less).
In summer 2000, an IDE supplement to proceed with a pivotal study to
demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart
failure patients was approved. This study, known as PEECH(TM), began patient
enrollment in March 2001. The PEECH(TM) clinical trial involved nearly thirty
centers including: the Cleveland Clinic, Mayo Clinic, Scripps Clinic, Thomas
Jefferson University Hospital, the University of North Carolina at Chapel Hill,
the Minnesota Heart Failure Consortium, Advocate Christ Hospital, Hull Infirmary
(UK), the University of California at San Diego Medical Center, the University
of Pittsburgh Medical Center, the Lindner Clinical Trial Center and the
Cardiovascular Research Institute. Vasomedical obtained 510(k) clearance for CHF
from FDA in June 2002, obviating the need to continue this trial for FDA
regulatory reasons. However, we decided to complete the clinical trial in order
to use the anticipated clinical outcomes to help establish the clinical
validation of EECP(R) therapy as a treatment for CHF and to provide additional
scientific support for Medicare, Medicaid and other third-party payers to expand
reimbursement coverage of EECP(R) therapy to include the CHF indication.
The protocol for the study required that patients have NYHA II or III
symptoms, have an LVEF of 35% or less, be able to undergo exercise testing and
complete patient examinations 1-week, 3-months and 6-months following treatment
that evaluated changes from baseline in exercise capacity, symptom status and
quality of life. Patients were randomized to receive either optimal (i.e.
guideline-recommended) pharmaceutical therapy (OPT) or EECP(R) therapy in
addition to OPT. Enrollment of patients into the PEECH(TM) trial was completed
in February 2004, with 187 patients, and the six-month follow-up examinations
were completed by the end of December 2004.
The preliminary results of the PEECH(TM) trial were presented at the
American College of Cardiology scientific sessions in March 2005. On June 20,
2005, CMS accepted our application for expansion of reimbursement coverage of
EECP(R) therapy to include patients with NYHA Class II/III stable heart failure
symptoms with an ejection fraction of less than or equal to 35%, (i.e., chronic,
stable, mild-to-moderate systolic heart failure as a primary indication), as
well as patients with CCSC II, (i.e., chronic, stable mild angina).
In designing the PEECH(TM) trial, success was demonstrated if the
difference between EECP(R) therapy combined with OPT compared to OPT alone
achieved a p-value less than 0.025 in at least one of two pre-defined co-primary
endpoints:
7
1. percentage of subjects with greater than or equal to 60 seconds
improvement in exercise duration from baseline to six months, or
2. percentage of subjects with at least 1.25 mL/kg/min increase in peak
oxygen consumption from baseline to six months.
Additional secondary endpoints were actual changes in exercise duration and
peak oxygen consumption, changes in NYHA functional classification, changes in
quality of life, adverse experiences and pre-defined clinical outcomes.
The study was a positive clinical trial on the basis that a significantly
greater proportion of patients who underwent EECP(R) therapy improved their
exercise duration by 60 seconds or more six months following completion of
therapy compared to those who received OPT alone (35.4% vs. 25.3%, p=0.016). The
proportion of patients achieving a 1.25 mL/kg/min improvement in peak oxygen
consumption was not significantly different between the two groups at six
months.
Consistent with the results on the primary endpoint of exercise duration,
statistically significant differences favoring the EECP(R)-treated group were
seen in changes in average exercise duration, symptom status and quality of life
during follow-up. Average peak oxygen consumption showed a trend favoring the
EECP(R) group at 1 week, but there were no differences detected at later
follow-up. Results in patients with heart failure of ischemic etiology were
noted to be clearly superior to those patients of idiopathic etiology though the
benefit in these later patients could not be ruled out statistically. Lastly,
EECP(R) therapy was deemed safe and well tolerated in this group of patients, as
patients in the EECP(R)-treated group did not suffer more adverse events than
those in the control group.
Moreover, results of a predefined subgroup analysis showed that patients 65
years of age or older not only had a significantly greater response rate
(co-primary endpoint) and average change in exercise duration favoring
EECP(R)-treated patients, but the response rate (co-primary endpoint) and
average change in peak oxygen consumption were also significantly better out to
completion of the study at six months follow-up.
The results of the PEECH(TM) trial indicate that EECP(R) therapy provides
beneficial adjunctive therapy in patients with NYHA Class II-III systolic heart
failure receiving optimal pharmacological therapy, especially in those 65 years
of age or older. There can be no assurance that the results of the PEECH(TM)
clinical trial will be sufficient to expand reimbursement coverage or the
adoption by the medical community of EECP(R) therapy for use in the treatment of
congestive heart failure.
The International EECP(R) Patient Registry (IEPR(TM))
The International EECP(R) Patient Registry at the University of Pittsburgh
Graduate School of Public Health was established in January 1998 to track the
outcomes of angina patients who have undergone EECP(R) therapy. More than one
hundred centers have participated in the registry and data from more than 5,000
patients from an initial cohort enrolled between 1998 and 2001 (IEPR-1) have
been tabulated and reported in several peer-reviewed publications.
The American Journal of Cardiology published a report in February of 2004
on the two-year outcomes after EECP(R) therapy observed in 1,097 patients with
two-year follow-up enrolled in IEPR-1. The authors noted that 73% of patients in
this cohort had a decrease in their angina symptom status upon completion of
EECP(R) therapy and that the average number of angina episodes for the group was
reduced from 10.6 to 2.8 per week. They characterized this improvement as a
"significant and dramatic reduction in CCSC" and stated that the adverse
clinical event rate was low. (CCSC is a rating scale used by physicians to
assess the limitations imposed on patients' lives by angina.) Patients also
reported improvement in health status, quality of life and satisfaction with
life.
At two-years follow-up, 74.9% of patients reported their angina symptom
status (CCSC class) was improved compared to before EECP(R) therapy, and the
accompanying improvements in angina frequency and quality of life measures were
largely sustained as well. Nine percent of patients had died over the two-year
follow-up and 15% had undergone a revascularization procedure (angioplasty,
stenting or coronary bypass surgery).
8
The authors summarize the results by stating "Most patients experienced a
significant reduction in angina and improvement in quality of life after EECP(R)
therapy, and this reduction was sustained in most patients at 2-year follow-up."
In a separate report that appeared in The American Journal of Cardiology in
2005, physician investigators participating in the IEPR(TM) reported on the
results of EECP(R) therapy in patients with angina who also had severe left
ventricular dysfunction (LVD, a reduced pumping capacity of the heart).
Previously it was thought that such patients, and those with a diagnosis of
heart failure, would be put at risk if treated with EECP(R) therapy, due to the
increase in venous return to the heart caused by compression of the leg veins by
enhanced external counterpulsation.
The 363 patients in this cohort had long-standing and extensive coronary
artery disease, had a high prevalence of cardiovascular disease risk factors,
were not amenable to invasive revascularization procedures, and suffered from
severe angina. Following completion of EECP(R) treatment, 77% decreased their
CCSC angina class by at least one severity rating. The average number of angina
episodes per week was greatly reduced and many were able to discontinue the use
of nitroglycerin pills designed to relieve angina. As in the overall IEPR
population, measures of quality of life were significantly improved after
treatment.
The rate of major adverse clinical events, while somewhat more frequent in
this group of patients with significant comorbid disease, was characterized as
low over the course of EECP(R) therapy. Exacerbation of heart failure was
significantly more frequent in patients who did not complete therapy compared to
those who did (16% vs. 0%) in patients with a previous history of heart failure.
At two-years of follow-up, 83% remained alive and 70% were free of death,
heart attack or invasive revascularization procedures (coronary artery bypass
surgery, angioplasty and/or stenting) during that period. The majority of
patients experienced sustained relief of their angina and improved quality of
life. Twenty per cent of the group underwent repeat EECP(R) therapy during the
two-year follow-up, mostly due to failure to complete the original course of
therapy.
A second phase of enrollment into the registry (IEPR-2) enrolled
approximately 2,500 patients between 2002 and 2004 and these patients were
followed to 2-year follow-up. IEPR-2 incorporated sub-studies regarding
treatment beyond 35 hours, possible predictors of response, effects on certain
aspects of peripheral vascular disease and sexual dysfunction in men. Notably,
the data set was modified in February 2003 to capture information on changes in
heart failure symptom status, occurrence of clinical events due to heart failure
and to include a heart failure-specific quality of life questionnaire in IEPR-2
patients with concomitant heart failure.
Vasomedical considers the IEPR(TM) to be a vital source of information
about the effectiveness and safety of EECP(R) therapy in a real-world
environment for the medical community at large. To date, twenty full-length
articles reporting data from the IEPR(TM) have been published in peer-reviewed
medical journals and more than seventy-eight abstracts have been presented at a
variety of major cardiovascular scientific conferences. For this reason, we
continue to provide an ongoing grant to fund the analysis of the registry data
to be published in medical journals.
Registry data, while considered a valuable source of complementary clinical
data, is deemed by scientific cardiologists and others to be less convincing
than data from randomized, blinded, clinical trials and from certain other
well-controlled clinical study designs. There can be no assurance that the
Company will be able to obtain regulatory, reimbursement or other types of
approvals, or a favorable standing in medical professional practice guidelines,
based upon results observed in patients enrolled in registries.
Other studies and publications
A search on the term "external counterpulsation" of the PubMed database
available through the National Library of Medicine conducted on August 21, 2006,
identified one-hundred-ninety-eight (198) citations of articles published in the
medical scientific literature, including 28 review articles. Over 99% of these
publications have reported results in patients with chronic stable angina and/or
heart failure treated with EECP(R) therapy, while others have reported use of
the device in other cardiovascular or non-cardiovascular indications. The vast
majority of these reports are generated using Vasomedical EECP(R) therapy
systems and equipment. In summary, this body of literature contains evidence
9
from a variety of institutions and investigators demonstrating that EECP(R)
therapy can provide benefit to appropriate patients in the following ways:
o Enhancement of coronary and peripheral circulation, myocardial
perfusion, ventricular function and hemodynamics,
o Improvement in endothelial function and vascular reactivity
o Elimination or reduction of cardiac ischemia,
o Elimination or reduction in symptoms and improved functional class in
angina and heart failure,
o Resolution of reversible ischemic defects found on quantitative
myocardial perfusion studies,
o Increased exercise duration and increased time to ischemic changes
during treadmill exercise in angina and increased exercise duration
and peak oxygen consumption in heart failure in properly selected
patients,
o Elimination or reduction in use of anti-angina medications,
o Improved quality of life in patients with angina and heart failure.
Strategic Initiatives
Our short-and long-term plans are to:
a) Maintain our cost structure alignment with current revenues in the
short term by:
i) continuing to monitor, reduce, or eliminate spending on all but
critical new product development and clinical research projects,
ii) focusing on rebuilding our revenue base through supporting our
direct sales effort and expanding our use of independent sales
representatives, and
iii) maintaining tight cost control on all areas of personnel cost and
spending.
b) Pursue possible strategic investments and creative partnerships with
others who have distinctive competencies or delivery capabilities for
serving the cardiovascular and disease management marketplace, as
opportunities become available.
c) Increase market penetration in the domestic reimbursable user base for
EECP(R) therapy by:
i) expanding reimbursement to include coverage for the treatment of
ischemic NYHA Class II and III CHF patients,
ii) marketing directly to third-party payers to increase third-party
reimbursement, and
iii) expanding reimbursement coverage in the angina market to include
patients with CCS Class II angina.
d) Increase the clinical and scientific understanding of EECP(R) therapy
by:
i) resubmitting data to insurers, including Medicare, for favorable
coverage policies;
ii) continuing to support on a limited basis academic reference
centers in the United States and overseas in order to accelerate
the growth and prestige of EECP(R) therapy and
e) Increase awareness of the benefits of the EECP(R) therapy in the
medical community by:
i) developing campaigns to market the benefits of EECP(R) therapy
directly to clinicians, third-party payers and patients;
ii) engaging in educational campaigns for providers and medical
directors of third-party insurers designed to highlight the
cost-effectiveness and quality-of-life advantages of EECP(R)
therapy; and
iii) continuing the development of EECP(R) therapy in certain
international markets, principally through the expansion of our
distribution network and obtaining of reimbursement approvals.
f) Maintain development efforts to improve the EECP(R) system and expand
its intellectual property estate by filing for additional patents in
the United States and other countries.
These listed strategic objectives are forward-looking statements. We
review, modify and change our strategic objectives from time to time based upon
changing business conditions. There can be no assurance that we will be able to
achieve our strategic objectives and even if these results are achieved risks
and uncertainties could cause actual results to differ materially from
anticipated results. To a large extent, limited financial resource availability
reduces our ability to achieve these strategic objectives. Please see the
section of this Form 10-KSB entitled "Risk Factors" for a description of certain
risks, among others that may cause our actual results to vary from the
forward-looking statements.
10
Sales and Marketing
Domestic Operations
We sell EECP(R) therapy systems to treatment providers such as hospitals,
clinics and physician private practices in the United States through a direct
and indirect sales force. Our sales force has consisted of a combination of
employees and independent sales representatives managed by a vice president of
sales plus in-house administrative support.
The efforts of our sales organization are further supported by clinical
educators who are responsible for the onsite training of physicians and
therapists as new centers are established. This clinical applications group is
also engaged in training and certification of new personnel at each site, as
well as for updating providers on new clinical developments relating to EECP(R)
therapy.
Our marketing activities support physician education and physician outreach
programs, exhibition at national, international and regional medical
conferences, as well as sponsorship of seminars at professional association
meetings. These programs are designed to support our field sales organization
and increase awareness of EECP(R) therapy in the medical community. Additional
marketing activities include creating awareness among third-party payers of the
benefits of EECP(R) treatment for patients suffering from CHF as well as angina.
We employ service technicians responsible for the repair and maintenance of
EECP(R) systems and, in some instances, on-site training of a customer's
biomedical engineering personnel. We provide a service arrangement (usually one
year) that includes: service by factory-trained service representatives,
material and labor costs, emergency and remedial visits, software upgrades,
technical phone support and preferred response times. We service our customers
after the service arrangement expires either under separately purchased annual
service contracts or on a fee-for-service basis.
International Operations
We distribute our product internationally through a network of independent
distributors. It has generally been our policy to appoint distributors with
exclusive marketing rights to EECP(R) therapy systems in their respective
countries, in exchange for their commitment to meet the duties and
responsibilities required of a distributor. Each distribution agreement contains
a number of requirements that must be met for the distributor to retain
exclusivity, including minimum performance standards. In most cases,
distributors must assist us either to obtain an FDA-equivalent marketing
clearance, country registration or to establish confirmatory clinical trials,
conducted by local key opinion leaders in cardiology, required to obtain
Ministry of Health approval, certification or reimbursement. Each distributor is
responsible for registering the product and obtaining any required regulatory or
clinical approvals, supporting local reimbursement efforts for EECP(R) therapy
and maintaining an infrastructure to provide post-sales support.
Revenues from international operations is 16% of total revenue for the
fiscal years ended May 31, 2008 and 2007. Our international marketing activities
include, among other things, assisting in obtaining national or third-party
healthcare insurance reimbursement approval and participating in medical
conferences to create greater awareness and acceptance of EECP(R) therapy by
clinicians.
International sales may be subject to certain risks, including
export/import licenses, tariffs, other trade regulations and local medical
regulations. Tariff and trade policies, domestic and foreign tax and economic
policies, exchange rate fluctuations and international monetary conditions have
not significantly affected our business to date. In addition, there can be no
assurance that we will be successful in maintaining our existing distribution
agreements or entering into any additional distribution agreements, or that our
international distributors will be successful in marketing EECP(R) therapy.
11
Competition
Presently, we are aware of at least five direct competitors with an
external counterpulsation device on the market. In addition, other companies
have received FDA 510(k) clearance for external counterpulsation systems since
1998, although we have not seen these systems commercially in the marketplace.
While we believe that these competitors' involvement in the market is limited,
there can be no assurance that these companies will not become a significant
competitive factor or that other companies will not enter the external
counterpulsation market.
We view other companies engaged in the development of device-related,
biotechnology and pharmacological approaches to the management of cardiovascular
disease as potential competitors in the marketplace as well. These include such
common and well-established medical devices and treatments as the intra-aortic
balloon pump (IABP), ventricular assist devices (VAD), coronary artery bypass
graft surgery (CABG), coronary angioplasty, mechanical circulatory support
(MCS), transmyocardial laser revascularization (TMR), total artificial hearts,
cardiac resynchronization devices, ranolazine and nesiritide (Natrecor(R)); as
well as newer technologies currently in FDA-approved clinical trials such as
gene therapy and spinal cord stimulation (SCS). There can be no assurance that
other companies will not develop new technologies or enter the market intended
for EECP(R) therapy systems. Such other companies may have substantially greater
financial, manufacturing and marketing resources and technological expertise
than those possessed by us and may, therefore, succeed in developing
technologies or products that are more efficient than those offered by
Vasomedical and that would render our technology and existing products obsolete
or noncompetitive.
Government Regulations
We are subject to extensive regulation by numerous government regulatory
agencies, including the FDA and similar foreign agencies. Where applicable, we
are required to comply with laws, regulations and standards governing the
development, preclinical and clinical testing, manufacturing, quality testing,
labeling, promotion, import, export, and distribution of our medical devices.
Device Classification
FDA regulates medical devices, including the requirements for premarket
review, according to their classification. Class I devices are generally lower
risk products for which general regulatory controls are sufficient to provide
reasonable assurance of safety and effectiveness. Most Class I devices are
exempt from the requirement of 510(k) premarket notification clearance; however,
510(k) clearance is necessary prior to marketing a non-510(k) exempt Class I
device in the United States. Class II devices are devices for which general
regulatory controls are insufficient, but for which there is sufficient
information to establish special controls, such as guidance documents or
standards, to provide reasonable assurance of safety and effectiveness. A
premarket notification clearance is necessary prior to marketing a non-510(k)
exempt Class II device in the United States. Class III devices are devices for
which there is insufficient information demonstrating that general and special
controls will provide reasonable assurance of safety and effectiveness and which
are life-sustaining, life-supporting or implantable devices, are of substantial
importance in preventing impairment of human health, or pose a potential
unreasonable risk of illness or injury. The FDA generally must approve a
premarket approval or PMA application prior to marketing a Class III device in
the United States.
A medical device is considered by FDA to be a preamendments device, and
generally not subject to premarket review, if it was commercially distributed
before May 28, 1976, the date the Medical Device Amendments of 1976 became law.
A postamendments device is one that was first distributed commercially on or
after May 28, 1976. Postamendments device versions of preamendments Class III
devices are subject to the same requirements as those preamendments devices. FDA
may require a PMA for a preamendments Class III device only after it publishes a
regulation calling for such PMA submissions. Persons who market preamendments
devices must submit a PMA, and have it filed by FDA, by a date specified by FDA
in order to continue marketing the device. Prior to the effective date of a
regulation requiring a PMA, devices must have a cleared premarket notification
or 510(k) for marketing.
Certain external counterpulsation devices were commercially distributed
prior to May 28, 1976. Our external counterpulsation devices were marketed after
12
1976; however, they were found to be substantially equivalent to a preamendments
Class III device and therefore are subject to the same requirements as the
preamendments external counterpulsation devices.
Premarket Review
The 510(k) premarket notification process requires an applicant to give
notice to FDA of its intent to introduce its device into commerce. In its
premarket notification, the applicant must demonstrate that its new or modified
medical device is substantially equivalent to a legally marketed or predicate
device marketed before May 28, 1976. Prior to beginning commercialization of the
new or modified product it must receive an order from the FDA classifying the
device under section 510(k) in the same classification as the predicate device,
and as a result, the new device will be cleared for marketing. Modifications to
a previously cleared medical device that do not significantly affect its safety
and effectiveness or constitute a major change in the intended use can be made
without having to submit a new 510(k). In February 1995, the Company received
510(k) clearance to market the second-generation version of its EECP(R) therapy
system, the MC2, which incorporated a number of technological improvements over
the predicate system. In addition, in December 2000, the Company received 510(k)
clearance to market its third generation system, the TS3. The FDA's clearance in
these cases was for the use of EECP(R) therapy in the treatment of patients
suffering from stable or unstable angina pectoris, acute myocardial infarction
and cardiogenic shock. In June 2002, the FDA granted 510(k) market clearance for
an upgraded TS3, which incorporated the Company's patented CHF treatment and
oxygen saturation monitoring technologies, and provided for a new indication for
the use of EECP(R) in CHF, which applied to all then-current models of the
Company's EECP(R) therapy systems.
Modifications to a previously cleared medical device that do not
significantly affect its safety and effectiveness or constitute a major change
in the intended use can be made without having to submit a new 510(k). FDA
publishes guidance for medical device manufacturers on the types of changes that
meet the requirements for a new 510(k) prior to introduction of a device for
marketing distribution. Vasomedical followed FDA's guidance on when to submit a
new 510(k) for changes to a device and concluded that the changes incorporated
into its Model TS4 did not require a new 510(k) prior to its introduction to
market. Vasomedical subsequently obtained a 510(k) that applied to the Model TS4
and all of its models in March 2004, when it made changes to the labeling of all
of its EECP(R) therapy systems. In November 2004, the Company introduced its
Model Lumenair, and again concluded that the changes did not require a new
510(k) at that time. There can be no assurance that the FDA will agree with
Vasomedical's conclusions that a new 510(k) was unnecessary on these occasions
or in other similar instances, or that our products will not be subject to a
regulation requiring a PMA for preamendments Class III external counterpulsation
devices.
If a device does not receive a clearance order because the FDA determines
that the device is not substantially equivalent to a predicate device and thus
the device automatically is considered a Class III device, the applicant may ask
the FDA to make a risk-based classification to place the device in Class I or
II. However, if a timely request for risk-based classification is not made, or
if the FDA determines that a Class III designation is appropriate, an approved
PMA will be required before the device may be marketed.
The more rigorous premarket review process is the PMA process. The FDA
approves a PMA if the applicant has provided sufficient valid scientific
evidence to prove that the device is safe and effective for its intended use(s).
Applications for premarket approval generally contain human clinical data. This
process is usually much more complex, time-consuming and expensive than the
510(k) process, and is uncertain. Both 510(k)s and PMAs now require the
submission of user fees in most circumstances.
There can be no assurance that all the necessary FDA clearances or
approvals, including approval of any PMA required by the promulgation of a
regulation, will be granted for our products, future-generation upgrades or
newly developed products, on a timely basis or at all. Failure to receive, or
delays in receipt of such clearances, could have a material adverse effect on
our financial condition and results of operations.
Clinical Trials
If human clinical trials of a device are required, whether to support a
510(k) or PMA application, the trials' sponsor, which is usually the
manufacturer of the device, first must obtain the approval of the appropriate
institutional review boards. If a trial is of a significant risk device, the
sponsor also must obtain an investigational device exemption or IDE from FDA
before the trial may begin. A significant risk device is a device that presents
a potential for serious risk to the subject and is an implant; is
13
life-sustaining or life-supporting; or is for a use of substantial importance in
diagnosing, curing, mitigating, or treating disease, or otherwise preventing
impairment of human health. For all clinical testing, the sponsor must obtain
informed consent from the patients participating in each trial. The results of
clinical testing that a sponsor undertakes may be insufficient to obtain
clearance or approval of the tested product.
Pervasive and Continuing FDA Regulation
We are also subject to other FDA regulations that apply prior to and after
a product is commercially released. These include Current Good Manufacturing
Practice (CGMP) requirements set forth in FDA's Quality System Regulation (QSR),
that require manufacturers to have a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of medical devices
intended for commercial distribution in the United States. This regulation
covers various areas including management and organization, device design,
purchase and handling of components, production and process controls such as
those related to buildings and equipment, packaging and labeling control,
distribution, installation, complaint handling, corrective and preventive
action, servicing, and records. We are subject to periodic inspection by the FDA
for compliance with the CGMP requirements and Quality System Regulation.
The FDA also enforces post-marketing controls that include the requirement
to submit medical device reports to the agency when a manufacturer becomes aware
of information suggesting that any of its marketed products may have caused or
contributed to a death or serious injury, or any of its products has
malfunctioned and that a recurrence of the malfunction would likely cause or
contribute to a death or serious injury. The FDA relies on medical device
reports to identify product problems and utilizes these reports to determine,
among other things, whether it should exercise its enforcement powers. The FDA
also may require postmarket surveillance studies for specified devices.
We are subject to the Federal Food, Drug, and Cosmetic Act's, or FDCA's,
general controls, including establishment registration, device listing, and
labeling requirements. If we fail to comply with any requirements under the
FDCA, we, including our officers and employees, could be subject to, among other
things, fines, injunctions, civil penalties, and criminal prosecution. We also
could be subject to recalls or product corrections, total or partial suspension
of production, denial of premarket notification clearance or PMA approval, and
rescission or withdrawal of clearances and approvals. Our products could be
detained or seized, the FDA could order a recall, repair, replacement, or refund
of our devices, and the agency could require us to notify health professionals
and others that the devices present unreasonable risks of substantial harm to
the public health.
The advertising of our products is subject to regulation by the Federal
Trade Commission, or FTC. The FTC Act prohibits unfair or deceptive acts or
practices in or affecting commerce. Violations of the FTC Act, such as failure
to have substantiation for product claims, would subject us to a variety of
enforcement actions, including compulsory process, cease and desist orders and
injunctions, which can require, among other things, limits on advertising,
corrective advertising, consumer redress and restitution, as well as substantial
fines or other penalties.
Foreign Regulation
In most countries to which we seek to export the EECP(R) system, we must
first obtain approval from the local medical device regulatory authority. The
regulatory review process varies from country to country and can be complex,
costly, uncertain, and time-consuming.
We are also subject to periodic audits by organizations authorized by
foreign countries to determine compliance with laws, regulations and standards
that apply to the commercialization of our products in those markets. Examples
include auditing by a European Union Notified Body organization (authorized by a
member state's Competent Authority) to determine conformity with the Medical
Device Directives (MDD) and by an organization authorized by the Canadian
government to determine conformity with the Canadian Medical Devices Regulations
(CMDR).
There can be no assurance that we will obtain desired foreign
authorizations to commercially distribute our products in those markets or that
we will comply with all laws, regulations and standards that pertain to our
14
products in those markets. Failure to receive or delays in receipt of such
authorizations or determinations of conformity could have a material adverse
effect on our financial condition and results of operations.
Patient Privacy
Federal and state laws protect the confidentiality of certain patient
health information, including patient records, and restrict the use and
disclosure of that protected information. The U.S. Department of Health and
Human Services (HHS) published patient privacy rules under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA privacy rule) and the
regulation was finalized in October 2002. The HIPAA privacy rule governs the use
and disclosure of protected health information by "Covered Entities," which are
(1) health plans, (2) health care clearinghouses, and (3) health care providers
that transmit health information in electronic form in connection with certain
health care transactions such as benefit claims. Currently, the HIPAA privacy
rule affects us only indirectly in that patient data that we access, collect and
analyze may include protected health information. Additionally, we have signed
some Business Associate agreements with Covered Entities that contractually bind
us to protect protected health information, consistent with the HIPAA privacy
rule's requirements. We do not expect the costs and impact of the HIPAA privacy
rule to be material to our business.
Practice Guidelines
Medical professional societies periodically issue Practice Guidelines to
their members and make them available publicly. The American College of
Cardiology (ACC) and the American Heart Association (AHA) have jointly engaged
in developing practice guidelines since 1980 to critically evaluate the use of
diagnostic procedures and therapies in the management or prevention of
cardiovascular diseases. These guidelines are meant to "improve the
effectiveness of care, optimize patient outcomes and affect the overall cost of
care favorably by focusing resources on the most effective strategies".
Recommendations incorporated into the guidelines are based upon an assessment of
the strength of evidence for or against a treatment or procedure and estimates
of expected health outcomes stemming from a formal review of peer-reviewed
published literature. These guidelines may not be updated for some time.
The "ACC/AHA 2002 Guideline Update for the Management of Patients with
Chronic Stable Angina" was last issued in 2003. Comments on external
counterpulsation appear in a section entitled "Recommendations for Alternative
Therapies for Chronic Stable Angina in Patients Refractory to Medical Therapy
Who Are Not Candidates for Percutaneous Intervention or Surgical
Revascularization" and include a so-called Class IIb recommendation. ACC/AHA
guideline classifications I, II and III are used to "provide final
recommendations for both patient evaluation and therapy" and a Class IIb rating
is defined as "Usefulness/efficacy is less well established by
evidence/opinion".
The ACC/AHA 2005 Guidelines for the Diagnosis and Management of Chronic
Heart Failure in the Adult were issued in 2005. External counterpulsation is
listed as one of the devices under investigation in a section entitled "Drugs
and Interventions Under Active Investigation".
The 2006 Comprehensive Heart Failure Practice Guideline, issued in February
2006 by the Heart Failure Society of America, does not include any comments on
the use of external counterpulsation therapy for treating heart failure
patients.
In summary, while evaluations of the use of EECP(R) therapy in patients
with chronic angina and heart failure continue to appear in several oral or
poster presentations at major scientific meetings and in peer-reviewed
publications each year, there continues to be skepticism in the cardiology
community about its broader use. Additional evidence regarding the efficacy of
EECP(R) therapy continues to appear, however the evidence may not be sufficient
to warrant a modification of practice guidelines to a more favorable
recommendation and increased acceptance by the medical community.
Reimbursement
In addition to regulatory approvals for commercialization by government
agencies, reimbursement coverage and payment rates are factors in the sales of
our products and we depend in large part on the availability of reimbursement
15
programs. Medicare, Medicaid, as well as private health care insurance and
managed-care plans determine eligibility for coverage of a product or therapy
based on a number of factors, including the payer's determination that the
product is reasonable and necessary for the diagnosis or treatment of the
illness or injury for which it is administered according to the scope of
clinical evidence available, accepted standards of medical care in practice, the
product's cost effectiveness, whether the product is experimental or
investigational, impact on health outcomes and whether the product is not
otherwise excluded from coverage by law or regulation. The coverage process for
Medicare reimbursement is legislated by Congress and administered by the Centers
for Medicare and Medicaid Services (CMS), and is highly variable in the
commercial market. There may be significant delays in obtaining coverage for
newly-approved products, and coverage may be more limited than the purposes for
which the product is approved or cleared by FDA. Even when we obtain
authorization from the FDA or a foreign authority to begin commercial
distribution, there may be limited demand for the device until reimbursement
approval has been obtained from governmental and private third-party payers.
Moreover, eligibility for coverage does not imply that a product will be
reimbursed in all cases or at a rate that allows us to market our EECP(R)
systems at a price that will enable us to make a profit or even cover our costs.
Reimbursement rates may vary according to the use of the product and the
clinical setting in which it is used, may be based on payments allowed for
lower-cost products that are already reimbursed, may be incorporated into
existing payments for other products or services, and may reflect budgetary
constraints and/or imperfections in Medicare or Medicaid data. Even if
successful, demand for products may be driven more by the scope of peer-reviewed
evidence and acceptance, endorsement by regulatory and clinical bodies, or
foreign country authorities than by the reimbursement rates available. Securing
coverage at adequate reimbursement rates from government and third party payers
can be a time consuming and costly process that could require us to provide
supporting scientific, clinical, and cost-effectiveness data for the use of our
products to each payer. Our inability to promptly obtain coverage and profitable
reimbursement rates from government-funded and private payers for our products
could have a material adverse effect on our financial condition and operating
results.
Our reimbursement strategies are currently focused in the following primary
areas: expanding Medicare coverage to include congestive heart failure and mild
angina, expanding coverage with other third-party payers, expanding Medicare
coverage for angina and obtaining coverage in selected international markets.
Current Medicare Coverage in Angina
In February 1999, CMS, the federal agency that administers the Medicare
program for more than 39 million beneficiaries, issued a national coverage
policy under HCPCS code G0166 for the use of the EECP(R) therapy system. Key
excerpts from the coverage read as follows:
"Although ECP devices are cleared by the Food and Drug Administration
(FDA) for use in treating a variety of cardiac conditions, including
stable or unstable angina pectoris, acute myocardial infarction and
cardiogenic shock, the use of this device to treat cardiac conditions
other than stable angina pectoris is not covered, since only that use
has developed sufficient evidence to demonstrate its medical
effectiveness."
"for patients who have been diagnosed with disabling angina (class III
or class IV, Canadian Cardiovascular Society Classification or
equivalent classification) who, in the opinion of a cardiologist or
cardiothoracic surgeon, are not readily amenable to surgical
interventions such as balloon angioplasty and cardiac bypass because:
1. their condition is inoperable, or at high risk of operative
complications or post-operative failure;
2. their coronary anatomy is not readily amenable to such
procedures; or
3. they have co-morbid states, which create excessive risk."
The 2008 national average payment rate per hourly session in the physician
office setting and the hospital outpatient facility is approximately $156.16 and
$109.47, respectively. Reimbursement rates vary throughout the country and range
from $98 to $215 per hourly session. The 2007 national average payment rate per
hourly session in the physician office setting and the hospital outpatient
facility was approximately $147 and $107, respectively. Reimbursement rates
varied throughout the country and range from $98 to $215 per hourly session.
Under the Medicare program, physician reimbursement of the provision of EECP(R)
therapy is higher if the therapy is performed in a physician office setting as
compared to a hospital outpatient facility in order to reflect higher costs
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associated with the physician office. Since January 2000, the national average
payment rate has varied considerably. The initial national average payment rate
for the physician office setting and the hospital outpatient facility in 2000
was approximately $130 and $112, respectively per hourly session. The average
payment rate for the physician office setting climbed to $208 per treatment
session in 2003 before being reduced approximately 37% in 2004 to $132 per
treatment session. In 2005 the physician rate increased approximately 5% and
remained unchanged in 2006. The average payment rate for the hospital outpatient
facility declined steadily to 2005 before increasing approximately 2% in 2006.
In order to bill and receive payment from Medicare, an individual or entity
must be enrolled in the Medicare program for EECP(R) therapy. The physician
office setting and the hospital outpatient facility are the only entities
currently authorized to receive reimbursement for the EECP(R) therapy under the
Medicare program and reimbursement is not permitted to other individuals or
entity types, which include, but are not limited to, nurse practitioners,
physical therapists, ambulatory surgery centers, nursing homes, comprehensive
outpatient rehabilitation facilities, outpatient dialysis facilities, and
independent diagnostic testing facilities. For each of these provider types
there is statutory authorization and accompanying regulations that govern the
terms and conditions of Medicare program participation.
If there were any material change in the availability of Medicare coverage,
or if the reimbursement level for treatment procedures using the EECP(R) therapy
system is determined to be inadequate, it would adversely affect our business,
financial condition and results of operations. Moreover, we are unable to
forecast what additional legislation or regulation, if any, relating to the
health care industry or Medicare coverage and payment level may be enacted in
the future, or what effect such legislation or regulation would have on us.
Application to Expand Medicare Coverage to include Class II Angina and Class
II/III CHF
On May 31, 2005, we submitted an application to CMS to expand the national
coverage policy for external counterpulsation treatment to patients with
Canadian Cardiovascular Class II stable angina and to patients with NYHA Class
II and III stable heart failure symptoms with an ejection fraction less than
35%.
On June 20, 2005, CMS accepted our application for expansion of
reimbursement coverage of EECP(R) therapy to include patients with NYHA Class
II/III stable heart failure symptoms with an ejection fraction of less than or
equal to 35%, i.e. chronic, stable, mild-to-moderate systolic heart failure as a
primary indication, as well as patients with CCSC II, i.e. chronic, stable mild
angina.
On June 23, 2005, CMS also received a request from a competing manufacturer
of external counterpulsation therapy equipment, to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure, to include NYHA Class II, III with a left ventricular
ejection fraction (LVEF) less than or equal to 40%, and acute heart failure; 2)
treatment of stable angina to include CCSC II angina; 3) treatment of acute
myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005,
they amended their request to include NYHA Class IV heart failure.
On March 20, 2006, CMS issued their Decision Memorandum regarding this
reconsideration with the opinion "that the evidence is not adequate to conclude
that external counterpulsation therapy is reasonable and necessary for the
treatment of:
o CCSC II angina
o Heart Failure
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 35%
o NYHA Class II/III stable heart failure symptoms with an ejection
fraction of less than or equal to 40%
o NYHA Class IV heart failure
o Acute heart failure
o Cardiogenic shock
o Acute myocardial infarction."
They commented in their decision memorandum that they were not able to
apply full weight to the evidence generated by the PEECH(TM) trial, as it had
not yet been published in a peer-reviewed medical journal by the time they were
required to issue a final decision on this application. Moreover, they did not
17
opine on whether they would consider the results of the trial when published to
be sufficient evidence to conclude that external counterpulsation therapy is
reasonable and necessary for the treatment of NYHA Class II/III stable heart
failure symptoms with an ejection fraction of less than or equal to 35%. They
did, however, reiterate in the decision memorandum that "Current coverage as
described in Section 20.20 of the Medicare National Coverage Determination (NCD)
manual will remain in effect" for refractory angina patients.
On August 25, 2006, the results of the trial were initially published on
line by the Journal of the American College of Cardiology (JACC), and in print
in its September 19, 2006 issue. JACC is the official journal of the American
College of Cardiology.
In the November-December issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, focusing on the
results of a prespecified subgroup analysis in trial patients age 65 and over.
This analysis demonstrated a statistically positive response on both co-primary
endpoints of the trial in patients receiving EECP(R) therapy versus those who
did not, i.e. a significantly larger proportion of patients undergoing EECP(R)
therapy met or exceeded prespecified thresholds of improvement in exercise
duration and peak oxygen consumption. Moreover, the patients age 65 and older
who received EECP(R) therapy demonstrated the greatest differences in exercise
duration, peak oxygen consumption and functional class (symptom status) compared
with those who did not receive EECP(R) therapy.
These papers were submitted to CMS and we were advised to continue to
gather more clinical evidence for future submission.
We will continue to educate the marketplace that EECP(R) therapy is a
therapy for ischemic cardiovascular disease and that patients with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible for reimbursement under the current coverage policy, provided the
primary indication for treatment with EECP(R) therapy is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.
Additionally, we will continue to pursue expansion of coverage for EECP(R)
therapy with Medicare and other third-party payers as evidence of its clinical
utility develops.
Expanding Coverage with Other Third-Party Payers
Some private insurance carriers continue to adjudicate EECP(R) treatment
claims on a case-by-case basis. Since the establishment of reimbursement by the
federal government, however, an increasing number of these private carriers now
routinely pay for use of EECP(R) therapy for the treatment of angina and have
issued positive coverage policies, which are generally similar to Medicare's
coverage policy in scope. We estimate that over 300 private insurers are
reimbursing for EECP(R) therapy for the treatment of angina today at favorable
payment levels and we expect that the number of private insurers and their
related health plans that provide for EECP(R) therapy as a covered benefit will
continue to increase. In addition, we are aware of two third-party payers that
have begun limited coverage of EECP(R) therapy for the treatment of CHF.
We intend to pursue a constructive dialogue with many private insurers for
the establishment of positive and expanded coverage policies for EECP(R)
treatment that include CHF patients. If there were any material change in the
availability of third-party private insurers or the adequacy of the
reimbursement level for treatment procedures using the EECP(R) therapy system,
it would adversely affect our business, financial condition and results of
operations. Moreover, we are unable to forecast what additional legislation or
regulation, if any, relating to the health care industry or third-party private
insurers coverage and payment levels may be enacted in the future or what effect
such legislation or regulation would have on us.
Reimbursement in International Markets
The reimbursement environment for EECP(R) therapy in international markets
is fragmented and coverage varies as a mix of available private and public
healthcare providers may not yet be aware of coverage of this therapy. Our
reimbursement strategy has been opportunistic and responsive to the selling
opportunities presented through our distribution partners. During this fiscal
18
year our efforts on behalf of EECP(R) therapy in both the private and public
healthcare sectors of selected international markets have been initiated by our
distributors, in support of the therapy, in their designated territory.
Additionally, efforts have been initiated to obtain coverage in the public
sector in certain overseas markets; however, we do not anticipate an impact on
financial performance in the next fiscal year, given the long lead times from
submission to approval of international dossiers for each reimbursement
authority.
Patents and Trademarks
We own eleven US patents including eight utility and three design patents
that expire at various times between 2008 and 2021. In addition, more than 20
foreign patents have been issued that expire at various times from 2008 to 2022.
We are also planning to file other patent applications regarding specific
enhancements to the current EECP(R) models, future generation products, and
methods of treatment in the future. Moreover, trademarks have been registered
for the names "EECP(R)" and "Natural Bypass".
We pursue a policy of seeking patent protection, both in the US and abroad,
for our proprietary technology. We believe that we have a solid patent
foundation in the field of external counterpulsation devices and that the number
of patents and applications demonstrates our technical leadership, dating back
to the mid-1980s. Our patent portfolio focuses on the areas of external
counterpulsation control and the overall design and arrangement of the external
counterpulsation apparatus, including the console, treatment bed, fluid
distribution, and inflatable cuffs. None of our current competitors have a
significant patent portfolio in the area of external counterpulsation devices.
There can be no assurance that our patents will not be violated or that any
issued patents will provide protection that has commercial significance. As with
any patented technology, litigation could be necessary to protect our patent
position. Such litigation can be costly and time-consuming, and there can be no
assurance that we will be successful. The loss or violation of our EECP(R)
patents and trademarks could have a material adverse effect upon our business.
Employees
As of May 31, 2008, we employed 24 full-time and 1 part-time persons with 4
in direct sales, sales and clinical applications support, 9 in manufacturing,
quality control and technical service, 3 in marketing and customer support, 2 in
engineering, regulatory and clinical research and 7 in administration. None of
our employees are represented by a labor union. We believe that our employee
relations are good.
Manufacturing
Under our Supplier Agreement with Living Data Technology Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that we market under the registered trademark EECP(R). Living Data has
represented to us that it is in compliance in all material respects with all
applicable laws, rules and regulations, and has obtained all the necessary
licenses, permits, consents and approvals necessary for it to provide the
products and services specified under the Supplier Agreement.
Under the agreement with Living Data, we continue to manufacture products
from our existing inventory, as well as other products, at our leased facility
located in Westbury, New York.
RISK FACTORS
Investing in our common stock involves risk. You should carefully consider
the following information about these risks together with the other information
contained in this Report. If any of the following risks actually occur, our
business could be harmed. This could cause the price of our stock to decline,
and you may lose part or all of your investment.
19
Financial Risks
We have incurred recurring losses over the past few years and may continue
to sustain losses, which could result in a further decline in the value of our
common stock.
During the last few fiscal years we incurred large operating losses. We
currently anticipate that we may continue to sustain operating losses. Our
ability to achieve profitability is largely dependent on our ability to reduce
operating costs sufficiently, as well as halting the current trend of declining
revenue. Our ability to maintain our current base of revenue and increase
revenue is largely dependent upon restructuring our sales and marketing efforts
in the angina market where reimbursement is currently available and operating in
a more efficient manner.
Risks Related to Our Business
We are materially dependent on medical reimbursement for treatment
procedures using EECP(R) therapy on patients with congestive heart failure in
order to achieve growth.
We are currently dependent on a single product platform which, based on
current medical reimbursement policies, provides coverage for a restricted class
of heart patients. On May 31, 2005, we submitted an application to CMS to expand
the national coverage policy for external counterpulsation treatment to patients
with Canadian Cardiovascular Class II stable angina and to patients with New
York Heart Association (NYHA) Class II and III stable heart failure symptoms
with an ejection fraction less than 35%. The application was accepted by CMS
effective June 20, 2005, and CMS announced their decision to maintain the
existing coverage as stated prior to the application and not to expand it to
include Class II Angina and Class II/III CHF on March 20, 2006. Results of the
PEECH(TM) trial have been published in the Journal of the American College of
Cardiology in September 2006, and the subgroup analysis of CHF patients age 65
and over has also been published in the November-December 2006 issue of the
Journal of Congestive Heart Failure. These two papers have been submitted to CMS
for reconsideration of our application. We had met with representatives from CMS
in February 2007 and presented our case. CMS has requested additional data from
us. We will continue our dialogue with CMS to obtain coverage for heart failure
patients. However, there is no assurance that the Company will have sufficient
resources to gather the necessary data to be sufficient to support expansion of
the Medicare National Coverage Policy for EECP(R) treatment for NYHA class II
and III heart failure patients.
If we do not receive medical coverage for treatment procedures using
EECP(R) therapy on patients with CHF, it will adversely affect our future
business prospects.
Material changes in the availability of Medicare, Medicaid or third-party
reimbursement at adequate price levels could adversely affect our business.
Health care providers, such as hospitals and physician private practices,
that purchase or lease medical devices such as the EECP(R) therapy system for
use on their patients generally rely on third-party payers, principally
Medicare, Medicaid and private health insurance plans, to reimburse all or part
of the costs and fees associated with the procedures performed with these
devices. If there were any material change in the availability of Medicare,
Medicaid or other third-party coverage or the adequacy of the reimbursement
level for treatment procedures using the EECP(R) therapy system, it would
adversely affect our business, financial condition and results of operations.
Moreover, we are unable to forecast what additional legislation or regulation,
if any, relating to the health care industry or Medicare or Medicaid coverage
and payment level may be enacted in the future or what effect such legislation
or regulation would have on our business. Even if a device has FDA clearance,
Medicare, Medicaid and other third-party payers may deny reimbursement if they
conclude that the device is not "reasonable and necessary" according to their
criteria. In addition, reimbursement may not be at, or remain at, price levels
adequate to allow medical professionals and hospitals to realize an appropriate
return on the purchase of our products.
Increased acceptance by the medical community is important for growth.
While many abstracts and publications are presented each year at major
scientific meetings worldwide with respect to EECP(R) treatment efficacy, there
is continued skepticism concerning EECP(R) therapy methodology. The American
Heart Association and the American College of Cardiology Practice Guidelines
20
currently list EECP(R) as a therapy currently under investigation for treatment
of heart failure and have a classification rating of IIb as a treatment for
patients who are refractory to medical therapy and are not candidates for
percutaneous intervention or revascularization. A classification rating of IIb
indicates the usefulness/efficacy of EECP(R) therapy is less well established by
evidence/opinion. The medical community utilizes these guidelines when
considering the various treatment options for their patients. Certain
cardiologists, in cases where the EECP(R) therapy is a viable alternative, still
appear to prefer percutaneous coronary interventions (e.g. balloon angioplasty
and stenting) and cardiac bypass surgery for their patients. Additional evidence
regarding the efficacy of EECP(R) therapy continues to evolve, however the
evidence may not be sufficient to warrant a modification of these guidelines to
a more favorable recommendation and increased acceptance by the medical
community. We are dependent on consistency of favorable research findings about
EECP(R) therapy and increasing acceptance of EECP(R) therapy as a safe,
effective and cost effective alternative to other available products by the
medical community for growth.
We face competition from other companies and technologies.
We compete with at least five other companies that are marketing external
counterpulsation devices. We do not know whether these companies or other
potential competitors who may be developing external counterpulsation devices,
may succeed in developing technologies or products that are more efficient than
those offered by us, and that would render our technology and existing products
obsolete or non-competitive. Potential new competitors may also have
substantially greater financial, manufacturing and marketing resources than
those possessed by us. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purpose of our products. Accordingly, the life cycles of our products
are difficult to estimate. To compete successfully, we must keep pace with
technological advancements, respond to evolving consumer requirements and
achieve market acceptance.
As of June 2007, the Company entered into a distribution and supplier
agreement with Living Data Technology Corporation, a competitor as of May 31,
2007. This arrangement has subsequently reduced the competitors to at least four
other companies.
We may not continue to receive necessary FDA clearances or approvals, which
could hinder our ability to market and sell our products.
If we modify our external counterpulsation devices and the modifications
significantly affect safety or effectiveness, or if we make a change to the
intended use, we will be required to submit a new premarket notification or
510(k) to FDA. We would be unable to market the modified device until FDA issues
a clearance for the 510(k).
Additionally, if FDA publishes a regulation requiring a premarket approval
application or PMA for external counterpulsation devices, we would then need to
submit a PMA, and have it filed by the agency, by the date specified by FDA in
its regulation. A PMA requires us to prove the safety and effectiveness of a
device to the FDA. The process of obtaining PMA approval is expensive,
time-consuming, and uncertain. If FDA were to require a PMA application, we may
be required to undertake a clinical study, which likely will be expensive and
require lengthy follow-up, to demonstrate the effectiveness of the device. If we
did obtain PMA approval, any change after approval affecting the safety or
effectiveness of the device will require approval of a PMA supplement.
If we offer new products that require 510(k) clearance or PMA approval, we
will not be able to commercially distribute those products until we receive such
clearance or approval. Regulatory agency approval or clearance for a product may
not be received or may entail limitations on the device's indications for use
that could limit the potential market for any such product. Delays in receipt
of, or failure to obtain or maintain, regulatory clearances and approvals, could
delay or prevent our ability to market or distribute our products. Such delays
could have a material adverse effect on our business.
If we are unable to comply with applicable governmental regulation, we may
not be able to continue our operations.
We also must comply with Current Good Manufacturing Practice (CGMP)
requirements as set forth in the Quality System Regulation (QSR) to receive FDA
approval to market new products and to continue to market current products. The
21
QSR imposes certain procedural and documentation requirements on us with respect
to manufacturing and quality assurance activities, including packaging, storage,
and record keeping. Our products and activities are subject to extensive,
ongoing regulation, including regulation of labeling and promotion activities
and adverse event reporting. Also, our FDA registered facilities are subject to
inspection by the FDA and other governmental authorities. Any failure to comply
with regulatory requirements could delay or prevent our ability to market or
distribute our products. Violation of FDA statutory or regulatory requirements
could result in enforcement actions, such as voluntary or mandatory recalls,
suspension or withdrawal of marketing clearances or approvals, seizures,
injunctions, fines, civil penalties, and criminal prosecutions, all of which
could have a material adverse effect on our business. Most states also have
similar postmarket regulatory and enforcement authority for devices.
We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. We may be slow to adapt, or we may
never adapt to changes in existing requirements or adoption of new requirements
or policies. We may incur significant costs to comply with laws and regulations
in the future or compliance with laws or regulations may create an unsustainable
burden on our business.
We may not receive approvals by foreign regulators that are necessary for
international sales.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. Premarket approval or
clearance in the United States does not ensure regulatory approval by other
jurisdictions. If we, or any international distributor, fail to obtain or
maintain required pre-market approvals or fail to comply with foreign
regulations, foreign regulatory authorities may require us to file revised
governmental notifications, cease commercial sales of our products in the
applicable countries or otherwise cure the problem. Such enforcement action by
regulatory authorities may be costly.
In order to sell our products within the European Union, we must comply
with the European Union's Medical Device Directive. The CE marking on our
products attests to this compliance. Future regulatory changes may limit our
ability to use the CE mark, and any new products we develop may not qualify for
the CE mark. If we lose this authorization or fail to obtain authorization on
future products, we will not be able to sell our products in the European Union.
We depend on Living Data for the supply of our ECP therapy systems.
Under our Supplier Agreement with Living Data Technology Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that we market under the registered trademark EECP(R). With certain exceptions,
including the use of existing inventory, we are required to purchase this
product from Living Data at specified prices. While we do not foresee any
difficulties in timely receiving products at competitive prices, this inability
would adversely affect our business.
We depend on management and other key personnel.
We are dependent on a limited number of key management and technical
personnel. The loss of one or more of our key employees may hurt our business if
we are unable to identify other individuals to provide us with similar services.
We do not maintain "key person" insurance on any of our employees. In addition,
our success depends upon our ability to attract and retain additional highly
qualified sales, management, manufacturing and research and development
personnel. We face competition in our recruiting activities and may not be able
to attract or retain qualified personnel.
We may not have adequate intellectual property protection.
Our patents and proprietary technology may not be able to prevent
competition by others. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions. Future patent applications
may not be issued, the scope of any patent protection may not exclude
competitors, and our patents may not provide competitive advantages to us. Our
patents may be found to be invalid and other companies may claim rights in or
ownership of the patents and other proprietary rights held or licensed by us.
Also, our existing patents may not cover products that we develop in the future.
Moreover, when our patents expire, the inventions will enter the public domain.
There can be no assurance that our patents will not be violated or that any
issued patents will provide protection that has commercial significance.
Litigation may be necessary to protect our patent position. Such litigation may
be costly and time-consuming, and there can be no assurance that we will be
successful in such litigation.
The loss or violation of certain of our patents and trademarks could have a
material adverse effect upon our business.
22
Since patent applications in the United States are maintained in secrecy
until such patent applications are issued, our current product development may
infringe patents that may be issued to others. If our products were found to
infringe patents held by competitors, we may have to modify our products to
avoid infringement, and it is possible that our modified products would not be
commercially successful.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any cash dividends on our common stock in the
foreseeable future.
Risks Related to Our Industry
Technological change is difficult to predict and to manage.
We face the challenges that are typically faced by companies in the medical
device field. Our product line has required, and any future products will
require, substantial development efforts and compliance with governmental
clearance or approval requirements. We may encounter unforeseen technological or
scientific problems that force abandonment or substantial change in the
development of a specific product or process.
We are subject to product liability claims and product recalls that may not
be covered by insurance.
The nature of our business exposes us to risks of product liability claims
and product recalls. Medical devices as complex as ours frequently experience
errors or failures, especially when first introduced or when new versions are
released.
We currently maintain product liability insurance at $7,000,000 per
occurrence and $7,000,000 in the aggregate. Our product liability insurance may
not be adequate. In the future, insurance coverage may not be available on
commercially reasonable terms, or at all. In addition, product liability claims
or product recalls could damage our reputation even if we have adequate
insurance coverage.
We do not know the effects of healthcare reform proposals.
The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been suggested seeking to increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.
We expect that the United States Congress and state legislatures will
continue to review and assess various healthcare reform proposals, and public
debate of these issues will likely continue. There have been, and we expect that
there will continue to be, a number of federal and state proposals to constrain
expenditures for medical products and services, which may affect payments for
products such as ours. We cannot predict which, if any of such reform proposals
will be adopted and when they might be effective, or the effect these proposals
may have on our business. Other countries also are considering health reform.
Significant changes in healthcare systems could have a substantial impact on the
manner in which we conduct our business and could require us to revise our
strategies.
Risks Related to our Securities
The application of the "penny stock" rules could adversely affect the
market price of our common stock and increase your transaction costs to sell
those shares.
As long as the trading price of our common shares is below $5 per share,
the open-market trading of our common shares will be subject to the "penny
stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
23
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell our common shares, and may
result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other
securities.
Our common stock is subject to price volatility.
The market price of our common stock historically has been and may
continue to be highly volatile. Our stock price could be subject to wide
fluctuations in response to various factors beyond our control, including, but
not limited to:
o medical reimbursement;
o quarterly variations in operating results;
o announcements of technological innovations, new products or
pricing by our competitors;
o the rate of adoption by physicians of our technology and products
in targeted markets;
o the timing of patent and regulatory approvals;
o the timing and extent of technological advancements;
o results of clinical studies;
o the sales of our common stock by affiliates or other shareholders
with large holdings; and
o general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market price of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may directly influence the market price of our common stock.
Additional Information
We are subject to the reporting requirements under the Securities Exchange
Act of 1934 and are required to file reports and information with the Securities
and Exchange Commission (SEC), including reports on the following forms: annual
report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form
8-K, and amendments to those reports files or furnished pursuant to Section
13(a) or 15(d) of the Securities Act of 1934.
ITEM 2 - DESCRIPTION OF PROPERTY
We have historically owned our 18,000 square foot headquarters and
manufacturing facility at 180 Linden Avenue, Westbury, New York 11590.
Additionally, we leased approximately 3,500 square feet of additional warehouse
space under an operating lease with a non-affiliated landlord that expired in
September 2006, which we did not renew.
On August 15, 2007, we sold our facility under a five-year leaseback
agreement for $1.4 million. The net proceeds from the sale was approximately
$425,000, after payment in full of the two secured notes on our facility,
brokers fees, closing costs, and the opening of a certificate of deposit in
accordance with the provisions of the new lease. The annual rental expense for
the lease is approximately $138,600. We believe that our current facility is
adequate to meet our current needs and should continue to be adequate for the
immediately foreseeable future.
24
ITEM 3 - LEGAL PROCEEDINGS
There were no material legal proceedings under applicable rules.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year.
25
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the Over-the-Counter Bulletin Board
under the symbol VASO.OB. On May 26, 2006, our common stock ceased trading on
the Nasdaq Capital Market tier of the Nasdaq Stock Market and began trading on
the NASD Pink Sheets. Effective June 20, 2006, our common stock began trading on
the Over-the- Counter Bulletin Board (OTCBB). The number of record holders of
common stock as of August 20, 2008, was approximately 1,043, which does not
include approximately 17,079 beneficial owners of shares held in the name of
brokers or other nominees. The table below sets forth the range of high and low
trade prices of the common stock for the fiscal periods specified.
<TABLE>
<CAPTION>
Fiscal 2008 Fiscal 2007
----------- -----------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $0.19 $0.06 $0.17 $0.08
Second Quarter $0.13 $0.06 $0.15 $0.08
Third Quarter $0.10 $0.05 $0.12 $0.07
Fourth Quarter $0.09 $0.07 $0.09 $0.07
</TABLE>
The last bid price of the Company's common stock on August 20, 2008, was
$0.08 per share.
Dividend Policy
We have never paid any cash dividends on our common stock. While we do not
intend to pay cash dividends in the foreseeable future, payment of cash
dividends, if any, will be dependent upon our earnings and financial position,
investment opportunities and such other factors as the Board of Directors deems
pertinent. Stock dividends, if any, also will be dependent on such factors as
the Board of Directors deems pertinent.
Entry Into A Material Definitive Agreement
On June 21, 2007, we entered into a Securities Purchase Agreement with
Kerns Manufacturing Corp. (Kerns). Concurrently with our entry into the
Securities Purchase Agreement, we also entered into a Distribution Agreement and
a Supplier Agreement with Living Data Technology Corporation, an affiliate of
Kerns (Living Data).
We sold to Kerns, pursuant to the Securities Purchase Agreement, 21,428,572
shares of our common stock at $.07 per share for a total purchase price of
$1,500,000, as well a five-year warrant to purchase 4,285,714 shares of our
common stock at an initial exercise price of $.08 per share (the Warrant). The
agreement further provided for the appointment to our Board of Directors of two
representatives from Kerns. In furtherance thereof, Mr. Jun Ma and Mr. Simon
Srybnik, Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors. Pursuant to the Distribution Agreement, we have become
the exclusive distributor in the United States of the AngioNew ECP systems
manufactured by Living Data. As additional consideration for such agreement, we
agreed to issue an additional 6,990,840 shares of our common stock to Living
Data. Pursuant to the Supplier Agreement, Living Data now is the exclusive
supplier to us of the ECP therapy systems that we market under the registered
trademark EECP(R). The Distribution Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.
Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions, "piggyback registration rights" covering
the shares sold to Kerns as well as the shares issuable upon exercise of the
Warrant and the shares issued to Living Data.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis or Plan of Operations contains
descriptions of our expectations regarding future trends affecting our business.
26
These forward looking statements and other forward-looking statements made
elsewhere in this document are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Please read the section titled
"Risk Factors" in "Item One - Business" to review certain conditions, among
others, which we believe could cause results to differ materially from those
contemplated by the forward-looking statements.
Except for historical information contained in this report, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipates", "believes", "could",
"estimates", "expects", "may", "plans", "potential" and "intends" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and products and their pricing; medical insurance reimbursement policies;
unexpected manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product development programs;
the actions of regulatory authorities and third-party payers in the United
States and overseas; uncertainties about the acceptance of a novel therapeutic
modality by the medical community; and the risk factors reported from time to
time in the Company's SEC reports. The Company undertakes no obligation to
update forward-looking statements as a result of future events or developments.
The following discussion should be read in conjunction with the financial
statements and notes thereto included in this Annual Report on Form 10-KSB.
Overview
Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to "we", "our", "us", "Company",
"registrant", "Vasomedical" or "management" refer to Vasomedical Inc. and its
subsidiaries. Since 1995, we have been primarily engaged in designing,
manufacturing, marketing and supporting EECP(R) enhanced external
counterpulsation systems based on our unique proprietary technology currently
indicated for use in cases of stable or unstable angina (i.e., chest pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and cardiogenic shock. The EECP(R) therapy system is a non-invasive,
outpatient therapy for the treatment of diseases of the cardiovascular system.
The therapy serves to increase circulation in areas of the heart with less than
adequate blood supply and helps to restore systemic vascular function. The
therapy also increases blood flow and oxygen supply to the heart muscle and
other organs and decreases the heart's workload and need for oxygen, while also
improving function of the endothelium, the lining of blood vessels throughout
the body, lessening resistance to blood flow. We provide hospitals, clinics and
physician private practices with EECP(R) 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 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 treatm]]> |