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 March 31, 2013
[ ] 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 . (IRS Employer Identification Number)
incorporation or
organization)
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. Yes [X] No [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer.
Large
Accelerated Filer [ ] Accelerated Filer
[ ] Non-Accelerated Filer [ ] 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). Yes [
] No [X]
Number of Shares
Outstanding of Common Stock, $.001 Par Value,
at May 10, 2013 – 163,263,623
Vasomedical,
Inc. and Subsidiaries
INDEX
PART I – FINANCIAL
INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS as of March 31, 2013 (unaudited) and December 31,
2012
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 4 - CONTROLS AND PROCEDURES
Vasomedical,
Inc. and Subsidiaries
(in thousands, except share data)
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
Vasomedical, Inc. and
Subsidiaries
(Unaudited)
(in
thousands, except per share data)
The accompanying notes are an integral part of these condensed consolidated financial
statements.
Vasomedical, Inc. and Subsidiaries
(Unaudited)
(in
thousands)
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 EECP®
enhanced external counterpulsation 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, through its
subsidiaries, owns and controls two Chinese operating companies - Life
Enhancement Technologies 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 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.
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:
(in thousands)
For the three months ended March
31, 2013 and 2012, GE Healthcare accounted for 82% and 67% of revenue,
respectively. Also, GE Healthcare
accounted for $4.0 million, or 84%, and $8.1 million, or 89%, of accounts and
other receivables at March 31, 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 month period
ended March 31, 2013, the
Company granted 60,000 restricted shares of common stock to employees. The shares vested immediately and were valued
at $10,800. During the three months
ended March 31, 2012, the Company granted 500,000 shares of restricted common
stock, valued at $120,000, to an officer, of which half vested immediately and
the remainder during the quarter ended March 31, 2013.
During the three-month periods
ended March 31, 2013 and 2012,
the Company did not grant any stock options.
Share-based compensation expense
recognized for the three months ended March 31, 2013 and 2012 was $137,000 and
$129,000, 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
arrangements was $86,000 and $152,000 for the three months ended March 31, 2013
and 2012, respectively. Unrecognized
expense related to existing share-based compensation and arrangements is
approximately $253,000 at March 31, 2013 and will be recognized through July 2014.
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.
The following table represents common stock equivalents that were
excluded from the computation of diluted earnings per share for the three months
ended March 31, 2013 and 2012, because the effect of their inclusion would be
anti-dilutive.
(in thousands)
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 March 31, 2013 and December 31, 2012:
(in
thousands)
The fair values of the Company’s cash equivalents invested
in money market funds are determined through market, observable and
corroborated sources.
NOTE
G – ACCOUNTS AND OTHER RECEIVABLES, NET
The following table presents information regarding the
Company’s accounts and other receivables as of March 31, 2013 and December 31,
2012:
(in
thousands)
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.
Inventories, net of reserves, consist of the
following: (in
thousands)
At March 31, 2013 and December
31, 2012, the Company maintained reserves for excess and obsolete inventory of
$576,000.
NOTE I – GOODWILL AND OTHER
INTANGIBLES
Goodwill aggregating $3,234,000 and
$3,212,000 was recorded on the Company’s condensed consolidated balance sheets
at March 31, 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:
(in thousands)
The Company’s other
intangible assets consist of capitalized patent costs, customer lists and software
costs, as follows:
(in thousands)
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
$7,000 for the three months ended March 31, 2013 and 2012, respectively.
NOTE J - DEFERRED REVENUE
The changes in the Company’s deferred revenues are as
follows:
(in
thousands)
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 $60,000 and $67,000
were billed by the firm through the three months ended March 31, 2013 and 2012,
respectively, at which date 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.
During the three months ended March 31, 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 $5,000 and $158,000 were collected during the three
months ended March 31, 2013 and 2012, respectively.
NOTE L –
STOCKHOLDERS’ EQUITY
Common Stock
See Note K for discussion of common stock issued during the
three months ended March 31, 2012 in connection with related party
agreements. In addition, during the
three months ended March 31, 2013 and 2012, the Company issued 322,741 and 62,500
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 March 31, 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 March 31, 2013, 935,000
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 shares, vesting at various times through July 1, 2013, of restricted
common stock were granted to non-officer employees in conjunction with the
extension of the GEHC Agreement, of which 365,500 shares had been forfeited as
of March 31, 2013.
No options were issued under the 2010 Plan during the three
months ended March 31, 2013 and 2012.
Preferred Stock
Pursuant to its conversion terms, all Series E preferred
stock was deemed automatically converted to common stock effective July 1,
2011. As of December 31, 2011, 712,350 shares of common stock were yet to be
issued. 647,600 shares were issued
during the three months ended March 31, 2012, and all remaining shares were
issued the following quarter.
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 March 31, 2013, approximately $0.5 million and 0.5 million shares remain
unvested.
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
In April 2013, the Company’s
Board of Directors authorized a share repurchase program of up to $1.5 million
of the Company’s common stock. As of April
30, 2013, this would represent approximately 5% of the total outstanding shares
of Vasomedical common stock and 248,577 shares have been repurchased through
such date.
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 EECP®
Enhanced External Counterpulsation 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, through its
subsidiaries, 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.
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 March
31, 2013 and 2012
Total revenue for the three months ended March 31, 2013 and
2012 was $7,293,000 and $6,043,000, respectively, an increase of $1,250,000, or
21%. Net loss for the three months ended March 31, 2013 was $652,000 compared
to a net loss of $1,344,000 for the three months ended March 31, 2012. The decrease in net loss was primarily
attributable to a $881,000 increase in gross profit,
partially offset by a $274,000 increase in selling, general and administrative
costs. Our total net loss was $0.00 and
$0.01 per basic and diluted common share for the three months ended March 31,
2013 and 2012, respectively.
Revenues
Revenue in our Equipment segment
decreased by $702,000, or 35%, to $1,284,000 for the three-month period ended March
31, 2013 from $1,986,000 for the same period of the prior year. Equipment segment revenue from equipment
sales decreased by $576,000, or 40%, to $877,000 for the three-month period
ended March 31, 2013 as compared
to $1,453,000 for the same period in the prior year primarily due to a decrease
of $523,000 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 24% to $407,000 in the first quarter of
2013 from $533,000 in the first quarter of 2012. Revenue from equipment rental
and services represented 32% and 27% of total Equipment segment revenue in the first
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
field service revenues.
Commission revenues in the Sales
Representation segment were $6,009,000 in the first quarter of 2013, as
compared to $4,057,000 in the first quarter of 2012, an increase of 48%. The increase in commission revenue in the
first 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 March 31, 2013, $12,662,000
in deferred commission revenue was recorded in the Company’s condensed
consolidated balance sheet, of which $3,168,000 is long-term. At March 31, 2012, $13,581,000 in deferred
commission revenue was recorded in the Company’s condensed consolidated balance
sheet, of which $3,796,000 was long-term.
Gross Profit
The Company had a gross profit
of $5,062,000 in the first quarter of 2013 compared to $4,181,000 in the first quarter
of the prior year, an increase of 21%. The
increase is principally due to the increase in commission revenue discussed above. Equipment segment gross profit decreased to $749,000,
or 58% of Equipment segment revenues, for the first quarter of 2013 compared to
$1,087,000, or 55% of Equipment segment revenues, for the same quarter of 2012.
Equipment segment gross profit declined due
to lower equipment sales in the first 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 $4,313,000, or 72%, for the three months ended March 31, 2013
as compared to $3,094,000, or 76%, for the three months ended March 31, 2012. The increase was due to higher revenue in
this segment, as explained above. Cost
of commissions of $1,696,000 and $963,000, for the three months ended March 31,
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
Operating loss was $682,000 for the three months ended March
31, 2013 as compared to an operating loss of $1,301,000 for the three months
ended March 31, 2012, a decrease of $619,000.
The decrease in operating loss was primarily attributable to improved operating
performance in the Sales Representation segment, where operating income was $362,000
for the first quarter of 2013 compared to an operating loss of $796,000 in the
same quarter of the prior year. Partially
offsetting the improvement in the Sales Representation segment was an increase
in operating loss of $486,000 in the Equipment segment to $643,000 in the first
quarter of 2013 from an operating loss of $157,000 in the same period of the
prior year.
Selling, general and
administrative (“SG&A”) expenses for the first quarter of 2013 and 2012 were
$5,604,000, or 77% of revenues, and $5,330,000, or 88% of revenues,
respectively, reflecting an increase of $274,000 or approximately 5%. The
increase in SG&A expenditures in the first quarter of 2013 resulted
primarily from increased costs in the Sales Representation segment of
approximately $238,000 associated with the extension of the GEHC contract (see
Note M). The cost increase resulting
from the GEHC contract extension is a non-recurring charge that will be
completed in the second quarter 2013.
Research and development (“R&D”) expenses of $140,000, or 2% of
revenues (11% of Equipment segment revenues), for the first quarter of 2013 decreased
by $12,000, or 8%, from $152,000, or 3% of revenues (8% of Equipment segment
revenues), for the first quarter of 2012. The decrease is primarily
attributable to a decrease in clinical research and regulatory expenses.
Interest and Other Income, Net
Interest and other income,
net for the first quarter of 2013 was $40,000 as compared to a net expense of
$28,000 for the first quarter of 2012. The improvement was due to certain
non-recurring non-operating expenses incurred by our Chinese subsidiaries in
the first quarter of 2012 as well as higher 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 first quarter of 2012 was $13,000. The
deferred gain was fully amortized in the third quarter of 2012.
Income Tax Expense
During
the first quarter of 2013 we recorded an income tax expense of $8,000 as
compared to an income tax expense of $25,000 for the first quarter of 2012. The decrease arose from reduced tax expense
at our Chinese subsidiaries.
Cash and Cash Flow
We have financed our operations
from working capital. At March 31, 2013,
we had cash and cash equivalents of $12,899,000, short-term investments of $111,000
and working capital of $6,168,000 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.
Cash provided by operating
activities was $1,497,000 during the first three months of 2013, which
consisted of a net loss after adjustments to reconcile net loss to net cash of
$321,000, offset by cash provided by operating assets and liabilities of $1,818,000.
The changes in the account balances primarily reflect a decrease in accounts
and other receivables of $4,359,000, partially offset by decreases in deferred
revenue of $1,786,000 and accrued commissions of $863,000. 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 quarter 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 quarter of 2013.
Cash used in investing activities during the three-month
period ended March 31, 2013 was $12,000
for the purchase of
equipment and software.
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.
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 March 31, 2013 and have concluded that the
Company’s disclosure controls and procedures were not effective as of March 31,
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.
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.
Exhibits
31 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.
32 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.
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: May 15, 2013
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jun Ma, certify that:
/s/ Jun Ma
.
Jun Ma
President and Chief Executive Officer
Date: May 15, 2013
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Beecher, certify
that:
/s/ Michael J. Beecher
.
Michael J.
Beecher
Chief Financial Officer
Date: May 15, 2013
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly
report of Vasomedical, Inc. and subsidiaries (the “Company”) on Form 10-Q for
the period ending March 31, 2013, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Jun Ma, as President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained
in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/
Jun Ma .
Jun
Ma
President
and Chief Executive Officer
Dated: May 15, 2013
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the
quarterly report of Vasomedical, Inc. and subsidiaries (the “Company”) on Form
10-Q for the period ending March 31, 2013, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Michael J. Beecher,
as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained
in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Michael
J. Beecher .
Michael J. Beecher
Dated: May 15, 2013
Chief Financial Officer