vaso10q-june2013.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q


x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to ______________

Commission File Number: 0-18105
 

VASOMEDICAL, INC.

 
(Exact name of registrant as specified in its charter)

Delaware
 
11-2871434
 
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
180 Linden Ave., Westbury, New York 11590

(Address of principal executive offices)
 
Registrant’s Telephone Number
(516) 997-4600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  No  x

Number of Shares Outstanding of Common Stock, $.001 Par Value, at August 9, 2013 – 155,661,792
 


Vasomedical, Inc. and Subsidiaries

INDEX
 
3
   
3
   
3
   
4
   
5
   
6
   
16
   
22
   
23
   
23
   
ITEM 6 – EXHIBITS
24

Page 2

PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
June 30, 2013
   
December 31, 2012
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
 
$
11,557
   
$
11,469
 
Short-term investments
   
111
     
110
 
Accounts and other receivables, net of an allowance for doubtful accounts and commission adjustments of $2,718 at June 30, 2013 and $3,179 at December 31, 2012
   
6,439
     
9,145
 
Receivables due from related parties
   
29
     
25
 
Inventories, net
   
2,163
     
2,166
 
Financing receivables, net
   
5
     
16
 
Deferred commission expense
   
2,627
     
2,480
 
Deferred related party consulting expense
   
-
     
85
 
Other current assets
   
266
     
220
 
Total current assets
   
23,197
     
25,716
 
 
               
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,268 at June 30, 2013 and $1,161 at December 31, 2012
   
433
     
473
 
GOODWILL
   
3,270
     
3,212
 
OTHER ASSETS, net
   
2,331
     
2,980
 
 
 
$
29,231
   
$
32,381
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
 
$
464
   
$
342
 
Accrued commissions
   
1,966
     
2,337
 
Accrued expenses and other liabilities
   
4,998
     
4,627
 
Sales tax payable
   
168
     
177
 
Deferred revenue - current portion
   
10,291
     
10,580
 
Deferred tax liability, net
   
112
     
112
 
Notes payable due to related party
   
3
     
3
 
Total current liabilities
   
18,002
     
18,178
 
 
               
LONG-TERM LIABILITIES
               
Deferred revenue
   
2,980
     
5,022
 
Other long-term liabilities
   
337
     
171
 
Total long-term liabilities
   
3,317
     
5,193
 
 
               
COMMITMENTS AND CONTINGENCIES (NOTE M)
               
 
               
STOCKHOLDERS' EQUITY
               
Preferred stock, $.01 par value; 1,000,000 shares authorized; nil shares issued and outstanding at June 30, 2013, and December 31, 2012
   
-
     
-
 
Common stock, $.001 par value; 250,000,000 shares authorized; 163,651,050 and 162,917,996 shares issued at June 30, 2013 and December 31, 2012, respectively; 162,645,052 and 162,917,996 shares outstanding at June 30, 2013 and December 31, 2012, respectively
   
164
     
163
 
Additional paid-in capital
   
61,465
     
61,229
 
Accumulated deficit
   
(53,603
)
   
(52,416
)
Accumulated other comprehensive income
   
68
     
34
 
Treasury stock, at cost, 1,005,998 and nil shares at June 30, 2013 and December 31, 2012, respectively
   
(182
)
   
-
 
Total stockholders’ equity
   
7,912
     
9,010
 
 
 
$
29,231
   
$
32,381
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3

Vasomedical, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)

 
 
Three months ended June 30,
   
Six months ended June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Revenues
                       
Equipment sales
 
$
1,090
   
$
1,056
   
$
1,967
   
$
2,509
 
Equipment rentals and services
   
415
     
499
     
822
     
1,032
 
Commissions
   
6,391
     
6,142
     
12,400
     
10,199
 
Total revenues
   
7,896
     
7,697
     
15,189
     
13,740
 
 
                               
Cost of revenues
                               
Cost of sales, equipment
   
342
     
416
     
635
     
1,022
 
Cost of equipment rentals and services
   
216
     
258
     
458
     
551
 
Cost of commissions
   
1,975
     
1,493
     
3,671
     
2,456
 
Total cost of revenues
   
2,533
     
2,167
     
4,764
     
4,029
 
Gross profit
   
5,363
     
5,530
     
10,425
     
9,711
 
 
                               
Operating expenses
                               
Selling, general and administrative
   
5,733
     
5,335
     
11,337
     
10,665
 
Research and development
   
162
     
120
     
302
     
272
 
Total operating expenses
   
5,895
     
5,455
     
11,639
     
10,937
 
Operating (loss) income
   
(532
)
   
75
     
(1,214
)
   
(1,226
)
 
                               
Other income
                               
Interest and other income, net
   
44
     
58
     
82
     
27
 
Amortization of deferred gain on sale-leaseback of building
   
-
     
13
     
-
     
27
 
Total other income, net
   
44
     
71
     
82
     
54
 
 
                               
(Loss) income before income taxes
   
(488
)
   
146
     
(1,132
)
   
(1,172
)
Income tax expense
   
(49
)
   
(92
)
   
(57
)
   
(116
)
Net (loss) income
   
(537
)
   
54
     
(1,189
)
   
(1,288
)
 
                               
Other comprehensive (loss) income
                               
Foreign currency translation (loss) gain
   
67
     
21
     
34
     
(2
)
Comprehensive (loss) income
 
$
(470
)
 
$
75
   
$
(1,155
)
 
$
(1,290
)
 
                               
(Loss) earnings per common share
                               
- basic
 
$
(0.00
)
 
$
0.00
   
$
(0.01
)
 
$
(0.01
)
- diluted
 
$
(0.00
)
 
$
0.00
   
$
(0.01
)
 
$
(0.01
)
 
                               
Weighted average common shares outstanding
                               
- basic
   
162,186
     
158,072
     
162,152
     
156,225
 
- diluted
   
162,186
     
161,806
     
162,152
     
156,225
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4

Vasomedical, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
Six months ended
 
 
 
June 30, 2013
   
June 30, 2012
 
Cash flows from operating activities
           
Net  loss
 
$
(1,189
)
 
$
(1,288
)
Adjustments to reconcile net loss to net cash provided by operating activities
               
Depreciation and amortization
   
182
     
103
 
Amortization of deferred gain on sale-leaseback of building
   
-
     
(27
)
Provision for doubtful accounts and commission adjustments
   
10
     
(3
)
Share-based compensation
   
271
     
231
 
Amortization of deferred consulting expense
   
87
     
288
 
Changes in operating assets and liabilities:
   
-
         
Accounts and other receivables
   
2,666
     
11,802
 
Receivables due from related parties
   
(4
)
   
186
 
Inventories, net
   
(14
)
   
119
 
Finance receivables, net
   
-
     
9
 
Deferred commission expense
   
(147
)
   
(410
)
Other current assets
   
(36
)
   
(212
)
Other assets
   
574
     
112
 
Accounts payable
   
122
     
183
 
Accrued commissions
   
(371
)
   
(1,716
)
Accrued expenses and other  liabilities
   
359
     
13
 
Sales tax payable
   
(9
)
   
36
 
Deferred revenue
   
(2,331
)
   
(29
)
Other long-term liabilities
   
166
     
127
 
Net cash provided by operating activities
   
336
     
9,524
 
 
               
Cash flows from investing activities
               
Purchases of property, equipment and software
   
(45
)
   
(204
)
Purchases of short-term investments
   
(40
)
   
-
 
Redemption of short-term investments
   
40
     
-
 
Net cash used in investing activities
   
(45
)
   
(204
)
 
               
Cash flows from financing activities
               
Proceeds from exercise of warrant
   
-
     
343
 
Repurchase of common stock
   
(182
)
   
-
 
Repayment of notes payable due to related party
   
-
     
(190
)
Net cash (used in) provided by financing activities
   
(182
)
   
153
 
Effect of exchange rate differences on cash and cash equivalents
   
(21
)
   
16
 
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
88
     
9,489
 
Cash and cash equivalents - beginning of period
   
11,469
     
2,294
 
Cash and cash equivalents - end of period
 
$
11,557
   
$
11,783
 
 
               
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
               
Interest paid
 
$
-
   
$
5
 
Income taxes paid
 
$
30
   
$
242
 
 
               
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
               
Inventories transferred to property and equipment, attributable to operating leases, net
 
$
28
   
$
20
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vasomedical” or “management” refer to Vasomedical, Inc. and its subsidiaries. Until 2010, we were primarily engaged in designing, manufacturing, marketing and supporting Enhanced External Counterpulsation (EECP®) systems based on our unique proprietary technology currently indicated in the United States 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.  In May 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, expanded into the sales representation business via its agreement with GE Healthcare (“GEHC”), the healthcare business unit of General Electric Company (NYSE: GE), to be GEHC’s exclusive sales representative for the sale of select GEHC diagnostic imaging products in specific market segments in the 48 contiguous states of the United States and the District of Columbia.   In June 2012, the Company entered into an amendment, effective July 1, 2012, of the sales representative agreement (“GEHC Agreement”) extending the initial term of three years commencing July 1, 2010 to five years through June 30, 2015, subject to earlier termination under certain circumstances.

In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company which owns and controls two Chinese operating companies - Life Enhancement Technologies Ltd. (”LET”) and Biox Instruments Co. Ltd. (“Biox”), respectively – to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio.  Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy and now operates through three wholly-owned subsidiaries.  Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE Healthcare diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. manages and coordinates our EECP® therapy business as well as other medical equipment operations.

We report the operations of Vasomedical Global Corp. and Vasomedical Solutions, Inc. under our Equipment segment.  VasoHealthcare activities are included under our Sales Representation segment (See Note C).

NOTE B - BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and disclosures normally included in the condensed consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in connection with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC. These condensed consolidated financial statements include the accounts of the companies over which we exercise control. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of interim results for the Company. The results of operations for any interim period are not necessarily indicative of results to be expected for any other interim period or the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities in the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenues, expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates and assumptions the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company's management. The Company evaluates its estimates and assumptions on an ongoing basis.
Page 6

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Significant Accounting Policies

Note B of the Notes to Consolidated Financial Statements, included in the Annual Report on Form 10-K for the year ended December 31, 2012, includes a summary of the significant accounting policies used in the preparation of the condensed consolidated financial statements.

Revenue and Expense Recognition for VasoHealthcare

The Company recognizes commission revenue in its Sales Representation segment (see Note C) when persuasive evidence of an arrangement exists, service has been rendered, the price is fixed or determinable and collectability is reasonably assured.  These conditions are deemed to be met when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the agreement with GE Healthcare in advance of the customer acceptance of the equipment are recorded as accounts receivable and deferred revenue in the condensed consolidated balance sheets.  Similarly, commissions payable to our sales force related to such billings are recorded as deferred commission expense when the associated deferred revenue is recorded.  Commission expense is recognized when the corresponding commission revenue is recognized.  Cost of commissions includes commission expense and, beginning in 2013, costs associated with the medical device excise tax imposed by the Affordable Care Act.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform with the current period presentation.

NOTE C – SEGMENT REPORTING AND CONCENTRATIONS

The Company views its business in two segments – the Equipment segment and the Sales Representation segment.  The Equipment segment is engaged in designing, manufacturing, marketing and supporting EECP® enhanced external counterpulsation systems both domestically and internationally, as well as the development, production, marketing and supporting of other medical devices.  The Sales Representation segment operates through the VasoHealthcare subsidiary and is currently engaged solely in the fulfillment of the Company’s responsibilities under our agreement with GEHC.  The Company evaluates segment performance based on operating income.  Administrative functions such as finance, human resources, and information technology are centralized and related expenses allocated to each segment.  Other costs not directly attributable to operating segments, such as audit, legal, director fees, investor relations, and others, as well as certain assets – primarily cash balances – are reported in the Corporate entity below.  There are no intersegment revenues.  Summary financial information for the segments is set forth below:
Page 7

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)
 
     (in thousands)  
 
 
As of or for the three months ended June 30, 2013
 
 
 
Equipment
Segment
   
Sales
Representation Segment
   
Corporate
   
Consolidated
 
 
                       
Revenues from external customers
 
$
1,505
   
$
6,391
   
$
-
   
$
7,896
 
Operating (loss) income
 
$
(481
)
 
$
308
   
$
(359
)
 
$
(532
)
Total assets
 
$
8,129
   
$
10,068
   
$
11,034
   
$
29,231
 
Accounts and other receivables, net
 
$
745
   
$
5,694
   
$
-
   
$
6,439
 
Deferred commission expense
 
$
-
   
$
4,036
   
$
-
   
$
4,036
 


 
 
As of or for the three months ended June 30, 2012
 
 
 
Equipment
Segment
   
Sales
Representation Segment
   
Corporate
   
Consolidated
 
 
                       
Revenues from external customers
 
$
1,555
   
$
6,142
   
$
-
   
$
7,697
 
Operating (loss) income
 
$
(197
)
 
$
681
   
$
(409
)
 
$
75
 
Total assets
 
$
9,323
   
$
11,558
   
$
11,174
   
$
32,055
 
Accounts and other receivables, net
 
$
1,151
   
$
7,153
   
$
-
   
$
8,304
 
Deferred commission expense
 
$
-
   
$
3,490
   
$
-
   
$
3,490
 
 
 
 
As of or for the six months ended June 30, 2013
 
 
 
Equipment
Segment
   
Sales
Representation Segment
   
Corporate
   
Consolidated
 
 
                       
Revenues from external customers
 
$
2,789
   
$
12,400
   
$
-
   
$
15,189
 
Operating (loss) income
 
$
(1,125
)
 
$
670
   
$
(759
)
 
$
(1,214
)
Total assets
 
$
8,129
   
$
10,068
   
$
11,034
   
$
29,231
 
Accounts and other receivables, net
 
$
745
   
$
5,694
   
$
-
   
$
6,439
 
Deferred commission expense
 
$
-
   
$
4,036
   
$
-
   
$
4,036
 


 
 
As of or for the six months ended June 30, 2012
 
 
 
Equipment
Segment
   
Sales
Representation Segment
   
Corporate
   
Consolidated
 
 
                       
Revenues from external customers
 
$
3,541
   
$
10,199
   
$
-
   
$
13,740
 
Operating loss
 
$
(353
)
 
$
(115
)
 
$
(758
)
 
$
(1,226
)
Total assets
 
$
9,323
   
$
11,558
   
$
11,174
   
$
32,055
 
Accounts and other receivables, net
 
$
1,151
   
$
7,153
   
$
-
   
$
8,304
 
Deferred commission expense
 
$
-
   
$
3,490
   
$
-
   
$
3,490
 

Page 8

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

For the three months ended June 30, 2013 and 2012, GE Healthcare accounted for 81% and 80% of revenue, respectively.  For the six months ended June 30, 2013 and 2012, GE Healthcare accounted for 82% and 74% of revenue, respectively.  Also, GE Healthcare accounted for $5.6 million, or 87%, and $8.1 million, or 89%, of accounts and other receivables at June 30, 2013 and December 31, 2012, respectively.

NOTE D – SHARE-BASED COMPENSATION

The Company complies with ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”), which requires all share-based awards to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their estimated fair values.

During the three and six month periods ended June 30, 2013, the Company granted 340,000 and 400,000 restricted shares of common stock valued at $63,200 and $74,000, respectively.  Shares valued at $3,600 and $38,000 vested over six month and two year periods, respectively, with the remainder vesting immediately.  During the three month period ended June 30, 2012, the Company granted 2,392,500 shares of restricted common stock valued at $598,000 in conjunction with the extension of the GEHC Agreement.  Such shares vest at various times through July 1, 2013.  In addition, during the six month period ended June 30, 2012, the Company granted 500,000 shares valued at $120,000, of which half vested immediately and the remainder vested during the quarter ended June 30, 2013.

During the three and six month periods ended June 30, 2013 and 2012, the Company did not grant any stock options.

Share-based compensation expense recognized for the three and six month periods ended June 30, 2013 was $133,000 and $271,000, respectively, and $102,000 and $231,000 for the three and six month periods ended June 30, 2012, respectively.  These expenses are included in cost of revenues; selling, general, and administrative expenses; and research and development expenses in the condensed consolidated statements of operations.  Expense for share-based consulting fees with non-employees was $1,000 and $87,000 for the three and six months ended June 30, 2013, respectively, and $136,000 and $288,000 for the three and six months ended June 30, 2012, respectively.  Unrecognized expense related to existing share-based compensation and consulting fees is approximately $176,000 at June 30, 2013 and will be recognized through May 2015.

NOTE E – LOSS PER COMMON SHARE

 Basic loss per common share is computed as earnings applicable to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common stock.

Diluted earnings per share were computed based on the weighted average number of shares outstanding plus all potentially dilutive common stock equivalents.  A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:

   
(in thousands)
 
 
 
Three months ended June 30,
   
Six months ended June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Basic weighted average shares outstanding
   
162,186
     
158,072
     
162,152
     
156,225
 
Dilutive effect of share-based compensation
   
-
     
1,334
     
-
     
-
 
Contingently issuable shares
   
-
     
2,400
     
-
     
-
 
Diluted weighted average shares outstanding
   
162,186
     
161,806
     
162,152
     
156,225
 

The following table represents common stock equivalents that were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2013 and 2012, because the effect of their inclusion would be anti-dilutive.
Page 9

   
(in thousands)
 
 
 
For the three months ended
   
For the six months ended
 
 
 
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
Stock options
   
1,780
     
260
     
1,780
     
1,810
 
Warrants
   
1,500
     
1,500
     
1,500
     
1,500
 
Contingently issuable shares
   
-
     
-
     
-
     
2,400
 
Common stock grants
   
2,390
     
375
     
2,390
     
4,918
 
 
   
5,670
     
2,135
     
5,670
     
10,628
 
 
NOTE F – FAIR VALUE MEASUREMENTS

The Company complies with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”).  Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

The following tables present information about the Company’s assets measured at fair value as of June 30, 2013 and December 31, 2012:
 
   
(in thousands)
 
 
 
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
   
Balance as of June 30,
 
 
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
2013
 
Assets
                   
(unaudited)
 
Cash equivalents invested in money market funds (included in cash and cash equivalents)
 
$
10,477
   
$
-
   
$
-
   
$
10,477
 
Investment in certificates of deposit (included in short-term investments)
   
111
                     
111
 
 
 
$
10,588
   
$
-
   
$
-
   
$
10,588
 

 
 
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
   
Balance as of December 31,
 
 
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
2012
 
Assets
                       
Cash equivalents invested in money market funds (included in cash and cash equivalents)
 
$
9,124
   
$
-
   
$
-
   
$
9,124
 
Investment in certificates of deposit (included in short-term investments)
   
110
                     
110
 
 
 
$
9,234
   
$
-
   
$
-
   
$
9,234
 
 
The fair values of the Company’s cash equivalents invested in money market funds are determined through market, observable and corroborated sources.
Page 10

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)
 
NOTE G – ACCOUNTS AND OTHER RECEIVABLES, NET

The following table presents information regarding the Company’s accounts and other receivables as of June 30, 2013 and December 31, 2012:
 
   
(in thousands)
 
 
 
June 30, 2013
   
December 31, 2012
 
 
 
(unaudited)
       
Trade receivables
 
$
9,028
   
$
12,193
 
Due from employees
   
129
     
131
 
Allowance for doubtful accounts and commission adjustments
   
(2,718
)
   
(3,179
)
Accounts and other receivables, net
 
$
6,439
   
$
9,145
 
 
Trade receivables include amounts due for shipped products and services rendered.  Amounts currently due under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change.

Allowance for doubtful accounts and commission adjustments include estimated losses resulting from the inability of our customers to make required payments, and adjustments arising from subsequent changes in sales order amounts that may reduce the amount the Company will ultimately receive under the GEHC Agreement.  Due from employees is primarily commission advances made to sales personnel.

NOTE H – INVENTORIES, NET

Inventories, net of reserves, consist of the following:
 
   
(in thousands)
 
 
 
June 30, 2013
   
December 31, 2012
 
 
 
(unaudited)
       
Raw materials
 
$
833
   
$
909
 
Work in process
   
749
     
483
 
Finished goods
   
581
     
774
 
 
 
$
2,163
   
$
2,166
 
 
At June 30, 2013 and December 31, 2012, the Company maintained reserves for excess and obsolete inventory of $570,000 and $576,000, respectively.

NOTE I – GOODWILL AND OTHER INTANGIBLES

Goodwill aggregating $3,270,000 and $3,212,000 was recorded on the Company’s condensed consolidated balance sheets at June 30, 2013 and December 31, 2012, respectively, pursuant to the acquisition of FGE in September 2011.  All of the goodwill was allocated to the Company’s Equipment segment.  The components of the change in goodwill are as follows:
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Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)
 
   
(in thousands)
 
 
 
Carrying Amount
 
 
     
Balance at December 31, 2012
 
$
3,212
 
Foreign currency translation
   
58
 
Balance at June 30, 2013
 
$
3,270
 
 
The Company’s other intangible assets consist of capitalized patent costs, customer lists and software costs, as follows:
 
   
(in thousands)
 
 
 
June 30, 2013
   
December 31, 2012
 
 
 
(unaudited)
       
Patents
           
Costs
 
$
469
   
$
469
 
Accumulated amortization
   
(447
)
   
(438
)
 
   
22
     
31
 
 
               
Customer lists
               
Costs
   
800
     
800
 
Accumulated amortization
   
(210
)
   
(152
)
 
   
590
     
648
 
 
               
Software
               
Costs
   
549
     
541
 
Accumulated amortization
   
(404
)
   
(386
)
 
   
145
     
155
 
 
               
 
 
$
757
   
$
834
 
 
Patents, customer lists, and software are included in other assets in the accompanying condensed consolidated balance sheets and are amortized on a straight line basis over their estimated useful lives of ten, seven, and five years, respectively.  Amortization expense amounted to $42,000 and $85,000 for the three and six months ended June 30, 2013, respectively, and $10,000 and $18,000 for the three and six months ended June 30, 2012, respectively.
Page 12

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE J - DEFERRED REVENUE

The changes in the Company’s deferred revenues are as follows:
 
   
(in thousands)
 
 
 
For the three months ended June 30,
   
For the six months ended June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Deferred revenue at the beginning of the period
 
$
13,816
   
$
14,781
   
$
15,602
   
$
15,227
 
Additions:
                               
Deferred extended service contracts
   
287
     
373
     
438
     
700
 
Deferred in-service and training
   
10
     
15
     
15
     
20
 
Deferred service arrangements
   
20
     
30
     
30
     
55
 
Deferred commission revenues
   
2,270
     
2,731
     
3,279
     
4,080
 
Recognized as revenue:
                               
Deferred extended service contracts
   
(250
)
   
(282
)
   
(510
)
   
(557
)
Deferred in-service and training
   
(9
)
   
(13
)
   
(10
)
   
(15
)
Deferred service arrangements
   
(19
)
   
(21
)
   
(37
)
   
(43
)
Deferred commission revenues
   
(2,854
)
   
(2,416
)
   
(5,536
)
   
(4,269
)
Deferred revenue at end of period
   
13,271
     
15,198
     
13,271
     
15,198
 
Less: current portion
   
10,291
     
10,005
     
10,291
     
10,005
 
Long-term deferred revenue at end of period
 
$
2,980
   
$
5,193
   
$
2,980
   
$
5,193
 
 
NOTE K – RELATED-PARTY TRANSACTIONS

On June 21, 2007, we entered into a Securities Purchase Agreement with Kerns Manufacturing Corp. (”Kerns”).  Pursuant to this agreement, a five-year warrant to purchase 4,285,714 shares of our common stock at an initial exercise price of $0.08 per share was issued to Kerns.  In March 2012, Kerns exercised its warrant and purchased 4,285,714 shares of common stock.

On February 28, 2011, David Lieberman and Edgar Rios were appointed by the Board of Directors as directors of the Company.  Mr. Lieberman, a practicing attorney in the State of New York, was also appointed to serve as the Vice Chairman of the Board.  He is currently a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which performs certain legal services for the Company.  Fees of approximately $61,000 and $121,000 were billed by the firm through the three and six months ended June 30, 2013, respectively, and fees of approximately $67,000 and $134,000 were billed through the three and six months ended June 30, 2012, respectively, at which dates no amounts were outstanding.

Mr. Rios currently is President of Edgary Consultants, LLC, and was appointed a director in conjunction with the Company’s consulting agreement with Edgary Consultants, LLC.  The consulting agreement (the “Agreement”) between the Company and Edgary Consultants, LLC (“Consultant”) commenced on March 1, 2011 and was for a two year term and expired on February 28, 2013.  The Agreement provided for the engagement of Consultant to assist the Company in seeking broader reimbursement coverage of EECP® therapy.

In consideration for the services to be provided by Consultant under the Agreement, the Company agreed to issue to Consultant or its designees, up to 18,500,000 shares of restricted common stock of the Company, 3,000,000 of which were issued in March 2011 and the balance was to be earned on performance. Mr. Lieberman received 600,000 of these restricted shares.  The Company recorded the fair value of the shares issued to Consultant as a prepaid expense and amortized the cost ratably over the two year agreement.  The unamortized value is reported as deferred related party consulting expense in our accompanying condensed consolidated balance sheets as of December 31, 2012.  No performance-based shares were issued and no further compensation is expected to be paid in conjunction with the agreement.
Page 13

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

During the six months ended June 30, 2012, a director performed consulting services for the Company aggregating approximately $10,000.

Through the Company’s acquisition of FGE in September 2011, it assumed the liability for $288,000 in unsecured notes payable to the President of LET and his spouse, of which $95,000 was repaid in December 2011, and $190,000, bearing interest at 6% per annum, was paid in March 2012.  In addition, receivables due from FGE management aggregating $8,000  and $3,000 were advanced and collected during the three and six months ended June 30, 2013, respectively, receivables due from FGE management aggregating $4,000 and $159,000 were collected during the three and six months ended June 30 2012, respectively.

Biox leases a part of its offices to Genwell Instruments Co., Ltd., a company partially owned by certain officers of the Company’s subsidiaries.  The lease term is for twenty months ending December 31, 2014 at a monthly lease amount of approximately $750.

NOTE L – STOCKHOLDERS’ EQUITY

Common Stock

See Note K for discussion of common stock issued during the six months ended June 30, 2012 in connection with related party agreements.  In addition, during the three and six months ended June 30, 2013 the Company issued 410,313 and 733,054 shares of common stock, respectively, to employees.  During the three and six months ended June 30, 2012 the Company issued 500,000 and 562,500 shares of common stock, respectively, to employees and consultants.

On June 17, 2010 the Board of Directors approved the 2010 Stock Plan (the “2010 Plan”) for officers, directors, employees and consultants of the Company.  The stock issuable under the 2010 Plan shall be shares of the Company’s authorized but unissued or reacquired common stock.  The maximum number of shares of common stock which may be issued under the 2010 Plan is 5,000,000 shares.

The 2010 Plan is comprised of two separate equity programs, the Options Grant Program, under which eligible persons may be granted options to purchase shares of common stock, and the Stock Issuance Program, under which eligible persons may be issued shares of common stock directly, either through the immediate purchase of such shares or as compensation for services rendered to the Company.  The 2010 Plan provides that the Board of Directors, or a committee of the Board of Directors, will administer it with full authority to determine the identity of the recipients of the options or shares and the number of options or shares.

As of June 30, 2013, 3,790,000 restricted shares of common stock were granted under the 2010 Plan to non-officer employees and consultants of the Company.  As of June 30, 2013, 945,000 shares have been forfeited.  In March 2012, 500,000 restricted shares of common stock were granted under the 2010 Plan to an officer, of which 250,000 vested immediately with the remainder vesting over a one year period.  In June 2012, 2,392,500 additional restricted common shares, vesting at various times through July 1, 2013, were granted to non-officer employees in conjunction with the extension of the GEHC Agreement, of which 373,500 shares had been forfeited as of June 30, 2013.

No options were issued under the 2010 Plan during the three and six month periods ended June 30, 2013 and 2012.

In April 2013, the Company’s Board of Directors authorized a share repurchase program of up to $1.5 million, which was subsequently increased in July 2013 to $2.0 million, of the Company’s common stock.  As of June 30, 2013, 1,005,998 shares had been repurchased at a cost of $182,000, which has been recorded as treasury stock in the accompanying condensed consolidated balance sheet as of June 30, 2013. As of August 9, 2013 a total of 7,989,258 shares at a cost of $1,347,197 have been repurchased.  (See Note O – Subsequent Events.)

Preferred Stock

Pursuant to its conversion terms, all Series E preferred stock was deemed automatically converted to common stock effective July 1, 2011, and all converted shares were issued as of June 30, 2012.
Page 14

Vasomedical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE M – COMMITMENTS AND CONTINGENCIES

Sales representation agreement

In June 2012, the Company concluded an amendment of the GEHC Agreement with GE Healthcare, originally signed on May 19, 2010.  The amendment, effective July 1, 2012, extended the initial term of three years commencing July 1, 2010 to five years through June 30, 2015, subject to earlier termination under certain circumstances.  These circumstances include not materially achieving certain sales goals, not maintaining a minimum number of sales representatives, and various legal and GEHC policy requirements.  Under the terms of the agreement, the Company is required to lease dedicated computer equipment from GEHC for connectivity to their network.

In conjunction with the extension of the GEHC Agreement, the Company granted VasoHealthcare employees both stock and cash-based performance incentives for the ensuing year.  The incentives provide for cash payments of up to $2.4 million and 2.4 million shares of restricted common stock grants and vest at various times through July 1, 2013.  A condition of the incentives is that the employees remain continuously employed through the vesting dates.  As of June 30, 2013, approximately $0.5 million and 0.5 million shares remained unvested.  These amounts vested on July 1, 2013.

NOTE N - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adoption of New Standards

Other Comprehensive Income:  Presentation of Comprehensive Income

In February 2013, new guidance was issued that amends the current comprehensive income guidance.  The new guidance requires entities to disclose the effect of each item that was reclassified in its entirety out of accumulated other comprehensive income and into net income on each affected net income line item.  For reclassification items that are not reclassified in their entirety into net income, a cross-reference to other required disclosures is required. The new guidance is to be applied prospectively for annual reporting periods beginning after December 15, 2012 and interim periods within those years.  The adoption of this new guidance did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows.

NOTE O – SUBSEQUENT EVENT

As discussed in Note L, on July 30, 2013 the Company approved an increase to its previously announced stock repurchase program of its common stock, from up to $1.5 million to up to $2 million.  As of the close of business on August 9, 2013, the Company has acquired 7,989,258 shares of its common stock pursuant to this program, including a block transaction of 6,708,134 shares on July 30, 2013, at an aggregate cost to the Company of $1,347,197.
Page 15

Vasomedical, Inc. and Subsidiaries

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; uncertainties about the acceptance of a novel therapeutic modality by the medical community; continuation of the GEHC Agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K.  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.  Until 2010, we were primarily engaged in designing, manufacturing, marketing and supporting Enhanced External Counterpulsation (EECP®) systems, based on our proprietary technology, to physicians and hospitals throughout the United States and in select international markets.

In May 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, expanded into the sales representation business via its agreement with GE Healthcare (“GEHC”), the healthcare business unit of General Electric Company (NYSE: GE), to be GEHC’s exclusive sales representative for the sale of select GEHC diagnostic imaging products in specific market segments in the 48 contiguous states of the United States and the District of Columbia.   In June 2012, the Company entered into an amendment, effective July 1, 2012, of the sales representative agreement (“GEHC Agreement”) extending the initial term of three years commencing July 1, 2010 to five years through June 30, 2015, subject to earlier termination under certain circumstances.

In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company, which owns and controls two Chinese operating companies - Life Enhancement Technology Ltd. and Biox Instruments Co. Ltd., respectively - to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio.  Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy, and now operates through three wholly-owned subsidiaries.  Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® therapy business as well as other medical equipment operations.

We now report the operations of Vasomedical Global Corp. and Vasomedical Solutions, Inc. under our Equipment segment.  VasoHealthcare activities are included under our Sales Representation segment (see Note C).

The Company expects to achieve profitability through reaching a higher commission rate under the GEHC Agreement, growth in our China operations and by expanding our product portfolio.  In addition, the Company plans to pursue other accretive acquisitions in the international and domestic markets and to expand our sales representation business.

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Vasomedical, Inc. and Subsidiaries
 
Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations.

Certain of our accounting policies are deemed “critical”, as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
Results of Operations – For the Three Months Ended June 30, 2013 and 2012

Total revenue for the three months ended June 30, 2013 and 2012 was $7,896,000 and $7,697,000, respectively, an increase of $199,000, or 3%. Net loss for the three months ended June 30, 2013 was $537,000 compared to net income of $54,000 for the three months ended June 30, 2012.  The change from net income to net loss was primarily attributable to a $167,000 decrease in gross profit and a $398,000 increase in selling, general and administrative costs.  Our total net (loss)/earnings was $(0.00) and $0.00 per basic and diluted common share for the three months ended June 30, 2013 and 2012, respectively.

Revenues

Revenue in our Equipment segment decreased by $50,000, or 3%, to $1,505,000 for the three-month period ended June 30, 2013 from $1,555,000 for the same period of the prior year.  Equipment segment revenue from equipment sales increased by $34,000, or 3%, to $1,090,000 for the three-month period ended June 30, 2013 as compared to $1,056,000 for the same period in the prior year primarily due to a $310,000 increase in international sales by our China operations, partially offset by a decrease of $283,000 in EECP® revenues as a result of lower sales volume.

Current demand for EECP® systems domestically will likely remain soft until there is greater clinical acceptance for the use of EECP® therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines, or a favorable change in current reimbursement policies by CMS or third party payers to consider EECP therapy as a first-line treatment option for angina or cover some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others.

Equipment segment revenue from equipment rental and services decreased 17% to $415,000 in the second quarter of 2013 from $499,000 in the second quarter of 2012. Revenue from equipment rental and services represented 28% and 32% of total Equipment segment revenue in the second quarters of fiscal 2013 and fiscal 2012, respectively.  The decrease in revenue generated from equipment rentals and services is due primarily to decreased accessory part and service contract revenues.

Commission revenues in the Sales Representation segment were $6,391,000 in the second quarter of 2013, as compared to $6,142,000 in the second quarter of 2012, an increase of 4%.  The increase in commission revenue in the second quarter of 2013 is due primarily to an increase in volume of equipment delivered by GEHC.  The Company recognizes revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the agreement with GE Healthcare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.  As of June 30, 2013, $12,076,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $2,542,000 is long-term.  At June 30, 2012, $13,896,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $4,748,000 was long-term.
Page 17

Vasomedical, Inc. and Subsidiaries

Gross Profit

The Company had a gross profit of $5,363,000 in the second quarter of 2013 compared to $5,530,000 in the second quarter of the prior year, a decrease of 3%.  The decrease is principally due to lower commission rates on equipment orders in 2012 which were delivered in the second quarter of 2013 in the Sales Representation segment.  Equipment segment gross profit increased to $947,000, or 63% of Equipment segment revenues, for the second quarter of 2013 compared to $881,000, or 57% of Equipment segment revenues, for the same quarter of 2012.  Equipment segment gross profit improved due to a greater proportion of other medical equipment sales versus EECP® equipment sales, which have higher margins than EECP® equipment, in the second quarter of 2013.  Gross profit margin on EECP® equipment improved as a result of lower production costs arising from the acquisition of LET, our primary supplier of certain EECP® systems.  Gross profit in the Equipment segment is dependent on a number of factors, particularly the mix of new and refurbished EECP® systems and the mix of models sold, their respective average selling prices, the mix of EECP® units sold, rented or placed during the period, the ongoing costs of servicing EECP® systems, and certain fixed period costs, including facilities, payroll and insurance.

Sales Representation segment gross profit was $4,416,000, or 69%, for the three months ended June 30, 2013 as compared to $4,649,000, or 76%, for the three months ended June 30, 2012.  The decrease was due to lower commission rates, coupled with commission expense which is at the same rate as in 2012, partially offset by higher revenue in this segment.  Cost of commissions of $1,975,000 and $1,493,000, for the three months ended June 30, 2013 and 2012, respectively, reflects commission expense associated with recognized commission revenues, and, starting in 2013, additional costs associated with the medical device excise tax imposed by the Affordable Care Act.  Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.

Operating (Loss) Income

Operating loss was $532,000 for the three months ended June 30, 2013 as compared to operating income of $75,000 for the three months ended June 30, 2012, a decrease of $607,000.  The decrease in operating income was primarily attributable to the decrease in gross profit in the Sales Representation segment as described above, where operating income was $308,000 for the second quarter of 2013 compared to operating income of $681,000 in the same quarter of the prior year.  Equipment segment operating loss also increased by $284,000 to $481,000 in the second quarter of 2013 from $197,000 in the same period of the prior year.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2013 and 2012 were $5,733,000, or 73% of revenues, and $5,335,000, or 69% of revenues, respectively, reflecting an increase of $398,000 or approximately 7%. The increase in SG&A expenditures in the second quarter of 2013 resulted primarily from increased costs associated with the expansion of the Equipment segment sales team of approximately $200,000, as well as $140,000 higher costs in the Sales Representation segment, which includes $76,000 of non-recurring costs attributable to the renewal of the GEHC contract.

Research and development (“R&D”) expenses of $162,000, or 2% of revenues (11% of Equipment segment revenues), for the second quarter of 2013 increased by $42,000, or 35%, from $120,000, or 2% of revenues (8% of Equipment segment revenues), for the second quarter of 2012. The increase is primarily attributable to an increase in product development expenses.

Interest and Other Income, Net

Interest and other income, net for the second quarter of 2013 was $44,000 as compared to $58,000 for the second quarter of 2012. The decrease was due primarily to lower interest earnings on the Company’s cash balances.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of the deferred gain on the sale-leaseback of our Westbury, NY facility for the second quarter of 2012 was $13,000.  The deferred gain was fully amortized in the third quarter of 2012.

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Vasomedical, Inc. and Subsidiaries
 
Income Tax Expense

During the second quarter of 2013 we recorded an income tax expense of $49,000 as compared to an income tax expense of $92,000 for the second quarter of 2012.  The decrease arose from reduced tax expense at our Chinese subsidiaries.

Results of Operations – For the Six Months Ended June 30, 2013 and 2012

Total revenue for the six months ended June 30, 2013 and 2012 was $15,189,000 and $13,740,000, respectively, an increase of $1,449,000, or 11%. Net loss for the six months ended June 30, 2013 was $1,189,000 compared to a net loss of $1,288,000 for the six months ended June 30, 2012.  The decrease in net loss was primarily attributable to a $714,000 increase in gross profit, partially offset by a $672,000 increase in selling, general and administrative costs.  Our total net loss was $0.01 per basic and diluted common share for the six months ended June 30, 2013 and 2012, respectively.

Revenues

Revenue in our Equipment segment decreased by $752,000, or 21%, to $2,789,000 for the six-month period ended June 30, 2013 from $3,541,000 for the same period of the prior year.  Equipment segment revenue from equipment sales decreased by $542,000, or 22%, to $1,967,000 for the six-month period ended June 30, 2013 as compared to $2,509,000 for the same period in the prior year primarily due to a decrease of $806,000 in EECP® revenues as a result of lower sales volume.

Current demand for EECP® systems domestically will likely remain soft until there is greater clinical acceptance for the use of EECP® therapy in treating patients with angina or angina equivalent symptoms who meet the current reimbursement guidelines, or a favorable change in current reimbursement policies by CMS or third party payers to consider EECP therapy as a first-line treatment option for angina or cover some or all Class II & III heart failure patients. Patients with angina or angina equivalent symptoms eligible for reimbursement under current policies include many with serious comorbidities, such as heart failure, diabetes, peripheral vascular disease and/or others.

Equipment segment revenue from equipment rental and services decreased 20% to $822,000 in the first half of 2013 from $1,032,000 in the first half of 2012. Revenue from equipment rental and services represented 29% of total Equipment segment revenue in the first six months of both fiscal 2013 and fiscal 2012.  The decrease in revenue generated from equipment rentals and services is due primarily to decreased accessory part and service contract revenues.

Commission revenues in the Sales Representation segment were $12,400,000 in the first half of 2013, as compared to $10,199,000 in the first half of 2012, an increase of 22%.  The increase in commission revenue in the first half of 2013 is due primarily to an increase in volume of equipment delivered by GEHC.  The Company recognizes revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the agreement with GE Healthcare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.  As of June 30, 2013, $12,076,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $2,542,000 is long-term.  At June 30, 2012, $13,896,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $4,748,000 was long-term.

Gross Profit

The Company had a gross profit of $10,425,000 in the first half of 2013 compared to $9,711,000 in the first half of the prior year, an increase of 7%.  The increase is principally due to the increase in commission revenue discussed above.  Equipment segment gross profit decreased to $1,696,000, or 61% of Equipment segment revenues, for the first half of 2013 compared to $1,968,000, or 56% of Equipment segment revenues, for the same period of 2012.  Equipment segment gross profit declined due to lower equipment sales in the first half of 2013.  Gross profit margin on EECP® equipment improved as a result of lower production costs arising from the acquisition of LET, our primary supplier of certain EECP® systems.  Gross profit in the Equipment segment is dependent on a number of factors, particularly the mix of new and refurbished EECP® systems and the mix of models sold, their respective average selling prices, the mix of EECP® units sold, rented or placed during the period, the ongoing costs of servicing EECP® systems, and certain fixed period costs, including facilities, payroll and insurance.
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Vasomedical, Inc. and Subsidiaries

Sales Representation segment gross profit was $8,729,000, or 70%, for the six months ended June 30, 2013 as compared to $7,743,000, or 76%, for the six months ended June 30, 2012.  The increase was due to higher revenue in this segment, as explained above, partially offset by lower commission rates in the first half of 2013.  Cost of commissions of $3,671,000 and $2,456,000, for the six months ended June 30, 2013 and 2012, respectively, reflects commission expense associated with recognized commission revenues, and, starting in 2013, additional costs associated with the medical device excise tax imposed by the Affordable Care Act.  Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.

Operating (Loss) Income

Operating loss was $1,214,000 for the six months ended June 30, 2013 as compared to an operating loss of $1,226,000 for the six months ended June 30, 2012, an improvement of $12,000.  The decrease in operating loss was primarily attributable to improved operating performance in the Sales Representation segment, where operating income was $670,000 for the first half of 2013 compared to an operating loss of $115,000 in the same period of the prior year.  Partially offsetting the improvement in the Sales Representation segment was an increase in operating loss of $772,000 in the Equipment segment to $1,125,000 in the first half of 2013 from an operating loss of $353,000 in the same period of the prior year.

Selling, general and administrative (“SG&A”) expenses for the first half of 2013 and 2012 were $11,337,000, or 75% of revenues, and $10,665,000, or 78% of revenues, respectively, reflecting an increase of $672,000 or approximately 6%. The increase in SG&A expenditures in the first half of 2013 resulted primarily from increased costs associated with the expansion of the Equipment segment sales team of approximately $320,000, as well as $201,000 higher costs in the Sales Representation segment.  The increase of $201,000 includes $314,000 of non-recurring costs attributable to the renewal of the GEHC contract, partially offset by reductions in other areas.

Research and development (“R&D”) expenses of $302,000, or 2% of revenues (11% of Equipment segment revenues), for the first half of 2013 increased by $30,000, or 11%, from $272,000, or 2% of revenues (8% of Equipment segment revenues), for the first half of 2012. The increase is primarily attributable to an increase in product development expenses.

Interest and Other Income, Net

Interest and other income, net for the first half of 2013 was $82,000 as compared to $27,000 for the first half of 2012. The improvement was due to certain non-recurring non-operating expenses incurred by our Chinese subsidiaries in the first half of 2012.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of the deferred gain on the sale-leaseback of our Westbury, NY facility for the first half of 2012 was $27,000.  The deferred gain was fully amortized in the third quarter of 2012.

Income Tax Expense

During the first half of 2013 we recorded income tax expense of $57,000 as compared to income tax expense of $116,000 for the first half of 2012.  The decrease resulted from lower tax expense at our Chinese subsidiaries.

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations from working capital.  At June 30, 2013, we had cash and cash equivalents of $11,557,000, short-term investments of $111,000 and working capital of $5,195,000 compared to cash and cash equivalents of $11,469,000, short-term investments of $110,000 and working capital of $7,538,000 at December 31, 2012.
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Vasomedical, Inc. and Subsidiaries

Cash provided by operating activities was $336,000 during the first six months of 2013, which consisted of a net loss after adjustments to reconcile net loss to net cash of $639,000, offset by cash provided by operating assets and liabilities of $975,000. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $2,666,000, partially offset by decreases in deferred revenue of $2,331,000 and accrued commissions of $371,000.  Under the GEHC Agreement the Company earns progressively higher commission rates as calendar year targets are met, and this commission structure has a significant impact on our cash flows. As we achieve these targets, the higher commission rates are retroactively applied to all sales in the calendar year, and therefore, the significantly higher commission billings and recognized revenue generated in the fourth quarter of 2011 resulted in significant cash inflows in the first half of 2012.  As we previously reported in our Annual Report on Form 10-K for the year ended December 31, 2012, lower commission rates were earned in 2012 than in 2011, resulting in lower cash inflows in the first half of 2013.

Cash used in investing activities during the six-month period ended June 30, 2013 was $45,000 for the purchase of equipment and software.

Cash used in financing activities during the six-month period ended June 30, 2013 was $182,000 for the repurchase of common stock.

Liquidity

The Company expects to achieve profitability and continued positive cash flow through reaching a higher commission rate under the GEHC Agreement, growth in our China operations and by expanding our product portfolio.  In addition, the Company plans to pursue other accretive acquisitions in the international and domestic markets and to expand our sales representation business.

While we expect to generate positive operating cash flows for 2013, the progressive nature of the commission rates under the GEHC Agreement can cause related cash inflows to vary widely during the year.
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Vasomedical, Inc. and Subsidiaries

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures reporting as promulgated under the Exchange Act is defined as controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.  Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2013 and have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2013 due to insufficient controls and management review over the recording of certain transactions, and the lack of accounting personnel with appropriate level of knowledge and experience in accounting principles generally accepted in the United States of America and related accounting systems and the closing process at our China subsidiaries.  The Company has engaged additional accounting personnel, and has implemented a review process of its closing procedures, related disclosures, and the approval of certain transactions, and expect that these actions have resolved the issues.  Management expects to test the effectiveness of these modifications in connection with the 2013 audit.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Vasomedical, Inc. and Subsidiaries

PART II - OTHER INFORMATION

ITEM 5 – OTHER INFORMATION

On July 10, 2013, Vasomedical, Inc. (the “Company”) held its 2013 Annual Meeting of Shareholders (the “Annual Meeting”).  At the Annual Meeting, shareholders of record on May 17, 2013 were entitled to vote 163,247,623 shares of the Company’s common stock (the “Common Stock”).  A total of 140,576,777 shares of Common Stock (86.4% of all shares entitled to vote at the Annual Meeting) were represented at the Annual Meeting in person or by proxy.

At the Annual Meeting, the shareholders of the Company (i) elected three Class II director nominees to hold office until the 2016 Annual Meeting of Shareholders and until their successors are elected, (ii) ratified the appointment of Rothstein Kass & Company, P.C. as the Company’s independent registered public accountants for the fiscal year ended December 31, 2013, (iii) approved an advisory, non-binding resolution regarding the compensation of the Company’s named executive officers, and (iv) approved every three years in an advisory, non-binding resolution as the frequency of the advisory vote on the compensation of the Company’s named executive officers.  Set forth below are the final voting results for each of the proposals submitted to a vote of the shareholders.

Election of Directors

The shareholders of the Company elected each of the director nominees proposed by the Company’s Board of Directors.  The voting results were as follows:
 
 
FOR
WITHHELD
Benham Movaseghi
83,377,413
791,479
Peter Castle
83,545,778
623,114
Randy Hill
83,430,542
738,350
 
Ratification of Appointment of Independent Registered Public Accountants

The shareholders of the Company ratified the appointment of Rothstein Kass & Company, P.C. as the Company’s independent registered public accountants for the fiscal year ended December 31, 2013.  The voting results were as follows:
 
FOR
AGAINST
ABSTAIN
138,392,038
1,465,552
719,187
 
Advisory Vote on Executive Compensation

The shareholders of the Company approved, on an advisory basis, the resolution regarding the compensation of the Company’s named executive officers.  The voting results were as follows:
 
FOR
AGAINST
ABSTAIN
83,341,984
632,145
203,763
 
Advisory Vote on the Frequency of Votes on Executive Compensation

The shareholders of the Company approved, on an advisory basis, the holding of advisory votes on executive compensation every three years.  The voting results were as follows:
 
1 YEAR
2 YEAR
3 YEAR
ABSTAIN
14,489,754
157,691
66,887,458
2,633,989

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Vasomedical, Inc. and Subsidiaries

ITEM 6 – EXHIBITS

Exhibits

Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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Vasomedical, Inc. and Subsidiaries

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
VASOMEDICAL, INC.
 
 
 
 
 
 
By:
/s/ Jun Ma
 
 
 
Jun Ma
 
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
/s/ Michael J. Beecher
 
 
 
Michael J. Beecher
 
 
Chief Financial Officer and Principal Accounting Officer

Date:  August 13, 2013
 
 
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