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, 2014
[ ] 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)
RegistrantŐs
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 8, 2014 – 155,844,754
Vasomedical,
Inc. and Subsidiaries
INDEX
PART I – FINANCIAL
INFORMATION. 3
ITEM 1 - FINANCIAL STATEMENTS. 3
CONDENSED
CONSOLIDATED BALANCE SHEETS as of March 31, 2014 (unaudited) and December 31,
2013. 3
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) for
the Three Months Ended March 31, 2014 and 2013. 4
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the Three Months Ended
March 31, 2014 and 2013. 5
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6
ITEM 2 - MANAGEMENTŐS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 15
ITEM 4 - CONTROLS AND PROCEDURES. 19
PART
II - OTHER INFORMATION. 20
ITEM 6 – EXHIBITS. 20
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)
The accompanying notes are an integral part of these condensed
consolidated financial statements.
NOTE A - ORGANIZATION AND PLAN
OF OPERATIONS
Vasomedical, Inc. was
incorporated in Delaware in July 1987. Unless the context requires otherwise,
all references to ŇweÓ, ŇourÓ, ŇusÓ, ŇCompanyÓ, ŇregistrantÓ, ŇVasomedicalÓ or
ŇmanagementÓ refer to Vasomedical, Inc. and its subsidiaries. The Company since
2010 has been operating in two distinct business segments, the Sales
Representation segment and the Equipment segment. 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 (ŇGEHCÓ), the healthcare business unit of General
Electric Company (NYSE: GE), to be GEHCŐs 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 (ŇGEHC AgreementÓ) 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 the Equipment segment we design, manufacture, market and support certain
medical devices. Our principal
products in this segment are Enhanced External Counterpulsation (EECP¨)
systems, which are non-invasive heart therapy devices based on our unique
proprietary technology, and currently indicated in the United States for use in
cases of refractory angina and congestive heart failure (ŇCHFÓ). In addition we develop, manufacture and
market certain ambulatory patient monitoring systems including recorders and
analysis software.
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. (ŇLETÓ)
and Biox Instruments Co. Ltd. (ŇBioxÓ), 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
CompanyŐs 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, 2013, 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, 2013, 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 delivered and 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. Under our agreement with GE Healthcare
(ŇGEHCÓ), GEHC pays the Company a commission. In accordance with the agreement GEHC
pays the Company fifty percent of the commission at the time the order is
received and fifty percent of the commission when the order is completed by
delivery and acceptance to their customer.
At the time the order is received therefore, the Company records a
receivable for the fifty percent of the commission and offsets this to deferred
revenue. At the time the order is
completed the Company records a receivable for the remaining fifty percent
commission and records this as recognized revenue including the amount
previously deferred.
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 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 CompanyŐs 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, 2014 and 2013, GE
Healthcare accounted for 88% and 82% of revenue, respectively, and $4.4 million
or 81%, and $12.5 million or 92%, of accounts and other receivables at March
31, 2014 and December 31, 2013, respectively.
NOTE D – SHARE-BASED
COMPENSATION
The Company complies with ASC
Topic 718 ŇCompensation – Stock CompensationÓ (ŇASC 718Ó), 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 months ended March
31, 2014, the Company granted 450,000 restricted shares of common stock valued
at $157,500 to officers and 50,000 restricted shares of common stock valued at
$15,500 to employees. The 450,000
shares granted to officers vest at various times through February 2016 and the
50,000 shares granted to employees vested immediately. In the first quarter of 2014, the
Company also granted 500,000 restricted shares of common stock to
directors. The shares were valued
at $175,000 and vested immediately.
During the three months ended
March 31, 2013, the Company granted 60,000 restricted shares of common stock to
employees. The shares were valued
at $10,800 and vested immediately.
During the three-month periods
ended March 31, 2014 and 2013,
the Company did not grant any stock options.
Share-based compensation expense
recognized for the three month periods ended March 31, 2014 and 2013 was $110,000
and $137,000, respectively. These
expenses are included in selling, general, and administrative expenses in the condensed
consolidated statements of operations in 2014, and in cost of revenues;
selling, general, and administrative expenses; and research and development
expenses in the condensed consolidated statements of operations in 2013. Expense for share-based arrangements with
non-employees was $43,000 and $86,000 for the three months ended March 31, 2014
and 2013, respectively.
Unrecognized expense related to existing share-based compensation and arrangements
is approximately $293,000 at March 31, 2014 and will be recognized through February
2016.
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.
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, 2014 and 2013, 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 ŇFair
Value Measurements and DisclosuresÓ (ŇASC 820Ó). 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 Ňexit priceÓ) in an orderly transaction between market
participants at the measurement date.
The following tables present information about the CompanyŐs
assets measured at fair value as of March 31,
2014 and December 31, 2013:
(in thousands)
The fair values of the CompanyŐs 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
CompanyŐs accounts and other receivables as of March 31, 2014 and December 31,
2013:
(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, 2014 and December
31, 2013, the Company maintained reserves for excess and obsolete inventory of $776,000
and $803,000, respectively.
The changes in the CompanyŐs deferred revenues are as
follows:
(in thousands)
NOTE K – RELATED-PARTY TRANSACTIONS
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 were billed by the firm through each of the three month periods ended March
31, 2014 and 2013, 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 CompanyŐs consulting agreement with Edgary
Consultants, LLC. The consulting agreement
(the ŇAgreementÓ) between the Company and Edgary Consultants, LLC (ŇConsultantÓ)
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. No performance-based shares were issued
and no further compensation is expected to be paid in conjunction with the
agreement.
Receivables due from FGE management aggregating $5,000 were
collected during the three months ended March 31, 2013.
On March 14, 2014, Biox Instruments Co., Ltd. (Biox) entered
into a Manufacturing, Marketing and Licensing Agreement (the ŇGenwell AgreementÓ)
with Genwell Instruments Co., Ltd. (Genwell), a corporation organized under the
PeopleŐs Republic of China, where Biox was granted exclusive rights to
manufacture and sell GenwellŐs MobiCareTM wireless multi-parameter
patient monitoring systems worldwide. The Genwell Agreement commenced on March
31, 2014 for an initial term of six years.
Certain officers of Biox are shareholders of Genwell.
NOTE L –
STOCKHOLDERSŐ EQUITY
Common Stock
On June 17, 2010 the Board of Directors approved the 2010
Stock Plan (the Ň2010 PlanÓ) for officers, directors, employees and consultants
of the Company. The stock issuable
under the 2010 Plan shall be shares of the CompanyŐs 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.
During the three months ended March 31, 2014 the Company
issued, under the 2010 Plan, 585,000 shares of common stock to employees and
officers, and 500,000 shares of common stock to directors. As of March 31, 2014, 91,222 shares were
available for issuance under the 2010 Plan.
On October 30, 2013 the Board of Directors approved the
2013 Stock Plan (the Ň2013 PlanÓ) for officers, directors, employees and
consultants of the Company. The
stock issuable under the 2013 Plan shall be shares of the CompanyŐs authorized
but unissued or reacquired common stock.
The maximum number of shares of common stock which may be issued under
the 2013 Plan is 7,500,000 shares.
The 2013 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 2013 Plan
provides that the Board of Directors, or a committee of the Board of Directors,
will administer the Plan 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, 2014, 7,500,000 shares
were available for issuance under the 2013 Plan.
No options were issued under the 2010 Plan or 2013 Plan during
the three month period ended March 31, 2014.
In April 2013, the CompanyŐs 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 CompanyŐs common stock. As of March 31, 2014, 9,481,401 shares
had been repurchased at a cost of $1,755,000, which cost has been recorded as
treasury stock in the accompanying condensed consolidated balance sheet as of March
31, 2014.
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.
NOTE N - RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
As of March 31, 2014, the Company believes that there are
no recently issued accounting pronouncements that will have an impact on the
CompanyŐs condensed consolidated financial statements.
NOTE O – SUBSEQUENT EVENT
In April 2014, the Company announced that it entered into
an agreement with Chongqing PSK-Health Sci-Tech Development Co., Ltd.
("PSK") of Chongqing, China, the leading manufacturer of ECP therapy
systems in China, to form a joint venture company, VSK Medical Limited
("VSK"), for the global marketing, sale and advancement of ECP
therapy technology.
The agreement provides for Vasomedical and PSK to appoint
the joint venture company as the exclusive distributor to market, distribute
and sell EECP and ECP therapy products globally, except for the United States
and China. In this regard, the
agreement provides for PSK to be the exclusive distributor of Vasomedical's
EECP therapy systems in China and for Vasomedical to be the exclusive
distributor of PSK's ECP therapy systems in the United States, subject to
certain conditions.
We believe that
combining the efforts of the two largest global providers of EECP/ECP therapy
technology will create greater success than either working independently. The initial focus will be on the
efficient use of the combined resources and leveraging areas of market
strength.
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 ŇanticipatesÓ, ŇbelievesÓ, ŇcouldÓ, ŇestimatesÓ,
ŇexpectsÓ, ŇmayÓ, ŇplansÓ, ŇpotentialÓ and ŇintendsÓ 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
CompanyŐs management, as well as assumptions made by and information currently
available to the CompanyŐs 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 CompanyŐs 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 ŇweÓ, ŇourÓ, ŇusÓ, ŇCompanyÓ, ŇregistrantÓ,
ŇVasomedicalÓ or ŇmanagementÓ refer to Vasomedical, Inc. and its
subsidiaries. Since 2010 we have
been operating in two distinct business segments, the Sales Representation
segment and the Equipment segment. 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
(ŇGEHCÓ), the healthcare business unit of General Electric Company (NYSE: GE),
to be GEHCŐs 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 (ŇGEHC AgreementÓ) 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 the Equipment segment we design,
manufacture, market and support certain medical devices. Our principal products in this segment are
Enhanced External Counterpulsation (EECP¨) systems, which are non-invasive
heart therapy devices based on our unique proprietary technology. In addition we develop, manufacture and
market certain ambulatory patient monitoring systems including recorders and
analysis software.
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 CompanyŐs
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 its existing sales representation operations, growth in our China operations
and by expanding its market presence and product portfolio. In addition, the Company plans to pursue
acquisitions or partnership opportunities in the international and domestic
markets and to expand its 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 (ŇU.S. GAAPÓ). 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 ŇcriticalÓ, as they are both most important to the
financial statement presentation and require managementŐs 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 ŇManagementŐs Discussion and Analysis of
Financial Condition and Results of OperationsÓ in our Annual Report on Form 10-K
for the year ended December 31, 2013.
Results of Operations – For the Three Months Ended March
31, 2014 and 2013
Total revenue for the three months ended March 31, 2014 and
2013 was $7,091,000 and $7,293,000, respectively, a decrease of $202,000, or 3%.
Net loss for the three months ended March 31, 2014 and 2013 was $1,044,000 and
$652,000, respectively, an increase of $392,000, or 60%. The higher loss was primarily
attributable to a $437,000 increase in selling, general and administrative (ŇSG&AÓ)
costs. Our total net loss was $(0.01)
and $(0.00) per basic and diluted common share for the three months ended March
31, 2014 and 2013, respectively.
Revenues
Commission revenues in the Sales
Representation segment were $6,241,000 in the first quarter of 2014, as
compared to $6,009,000 in the first quarter of 2013, an increase of 4%. The increase in commission revenue in
the first quarter of 2014 is due primarily to an increase in commission rate,
partially offset by decreased volume of equipment delivered by GEHC. The Company recognizes commission
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, 2014, $15,665,000 in
deferred commission revenue was recorded in the CompanyŐs condensed
consolidated balance sheet, of which $6,112,000 is long-term. At March 31, 2013, $12,662,000 in
deferred commission revenue was recorded in the CompanyŐs condensed
consolidated balance sheet, of which $3,168,000 was long-term.
Revenue in our Equipment segment
decreased by $434,000, or 34%, to $850,000 for the three-month period ended March
31, 2014 from $1,284,000 for the same period of the prior year. Equipment segment revenue from equipment
sales decreased by $394,000, or 45%, to $483,000 for the three-month period
ended March 31, 2014 as compared to $877,000 for the same period in the prior
year, primarily due to a $206,000 decrease in EECP¨ revenues as a
result of lower sales volume, and a $149,000 decrease in international sales by
our China operations.
We anticipate that demand for
EECP¨ systems will remain soft unless there is greater clinical
acceptance for the use of EECP¨ therapy or a favorable change in
current reimbursement policies by CMS or third party payers. We will continue to cost effectively pursue
strategies to increase and expand the reimbursement for EECP¨
therapy. At the same time, expenditures
will be aligned with the forecast for the newly formed VSK model (see Note O).
Equipment segment revenue from
equipment rental and services decreased 10% to $367,000 in the first quarter of
2014 from $407,000 in the first quarter of 2013. Revenue from equipment rental
and services represented 43% and 32% of total Equipment segment revenue in the first
quarters of fiscal 2014 and fiscal 2013, respectively. The decrease in revenue generated from
equipment rentals and services is due primarily to lower service contract and
accessory part revenues.
Gross Profit
The Company had a gross profit
of $5,164,000 in the first quarter of 2014 compared to $5,062,000 in the first quarter
of the prior year, an increase of 2%.
The increase is principally due to higher gross profit margin in both our
Sales Representation segment and our Equipment segment.
Sales Representation segment
gross profit was $4,639,000, or 74%, for the three months ended March 31, 2014
as compared to $4,313,000, or 72%, for the three months ended March 31, 2013. The increase in absolute dollars and
margin percentage was due to higher commission rates on equipment booked in
2013 but delivered during the first quarter of 2014 while the commission
expense was at the same rate in both periods. Cost of commissions of $1,602,000 and $1,696,000,
for the three months ended March 31, 2014 and 2013, respectively, reflects
commission expense associated with recognized commission revenues. Commission expense associated with
deferred revenue is recorded as deferred commission expense until the related
commission revenue is earned.
Equipment segment gross profit decreased
to $525,000, or 62% of Equipment segment revenues, for the first quarter of 2014
compared to $749,000, or 58% of Equipment segment revenues, for the same
quarter of 2013. Gross profit margin
in the Equipment segment improved due to lower production costs at Biox and lower
field service costs, partially offset by lower margin on EECP¨
equipment as a result of lower shipment volume during the quarter.
Operating Loss
Operating loss was $1,090,000 for the three months ended March
31, 2014 as compared to $682,000 for the three months ended March 31, 2013, an increase
of $408,000. The increase in operating
loss was primarily attributable to a $437,000 increase in selling, general, and
administrative costs. Operating
loss in the Equipment segment increased by $439,000, or 68%, to $1,082,000
compared to $643,000 in the same quarter of the prior year due primarily to
$225,000 lower gross profit and $142,000 higher SG&A costs in the current
year quarter. Partially offsetting the higher loss in the Equipment segment was
a $161,000 increase in operating income in the Sales Representation segment,
which increased to $523,000 as compared to $362,000 in the first quarter of the
prior year due mainly to higher gross margin.
SG&A expenses for the first quarter
of 2014 and 2013 were $6,041,000, or 85% of revenues, and $5,604,000, or 77% of
revenues, respectively, reflecting an increase of $437,000 or approximately 8%,
which includes approximately $231,000 of non-cash items. The increase in
SG&A expenditures in the first quarter of 2014 resulted primarily from higher
meeting costs in the Sales Representation segment (which took place in the
second quarter last year), increased EECP¨ equipment sales
personnel, and increased staffing costs associated with the recently introduced
MobiCareTM product in the Equipment segment, as well as higher
corporate expenses, primarily accounting and directorsŐ fees.
Research
and development (ŇR&DÓ) expenses were $213,000, or 3% of revenues (25% of
Equipment segment revenues), for the first quarter of 2014, an increase of $73,000,
or 52%, from $140,000, or 2% of revenues (11% of Equipment segment revenues),
for the first quarter of 2013. The increase is primarily attributable to costs
associated with the preparation of an FDA required pre-market approval of our EECP¨
therapy system for the treatment of congestive heart failure.
Interest and Other Income, Net
Interest and other income,
net for the first quarter of 2014 was $56,000 as compared to $38,000 for the first
quarter of 2013. The increase was due primarily to higher government grants
received by our Chinese subsidiaries.
Income Tax Expense
During
the first quarter of 2014 we recorded income tax expense of $10,000 as compared
to income tax expense of $8,000 for the first quarter of 2013. The increase arose from higher tax
expense at our Chinese subsidiaries.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations
from working capital. At March 31,
2014, we had cash and cash equivalents of $12,009,000, short-term investments
of $111,000 and working capital of $4,978,000 compared to cash and cash
equivalents of $7,961,000, short-term investments of $111,000 and working
capital of $6,716,000 at December 31, 2013.
Cash provided by operating
activities was $4,196,000 during the first three months of 2014, which
consisted of a net loss after adjustments to reconcile net loss to net cash of
$800,000, offset by cash provided by operating assets and liabilities of $4,996,000.
The changes in the account balances primarily reflect a decrease in accounts
and other receivables of $8,194,000, partially offset by decreases in deferred
revenue of $1,014,000 and accrued expenses of $1,449,000. 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 orders booked in the calendar year, and therefore, significantly higher
commission billings and recognized revenue were generated in the fourth quarter
of 2013 resulting in significant cash inflows early in 2014. As we previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2013, higher commission
rates were earned in 2013 than in 2012, resulting in higher cash inflows in 2014.
Cash used in investing activities during the three-month
period ended March 31, 2014 was $136,000
for the purchase of equipment and software.
No cash was received from or used in financing activities
during the three-month period ended March 31, 2014.
Liquidity
The Company expects to achieve
profitability and continued positive cash flow through its existing sales
representation operations, growth in its China operations and by expanding its
market presence and product portfolio.
The Company is in the process of reorganizing its EECP¨ business
model, both domestically and internationally, in view of its recent joint
venture (see Note O). The Company
will continue to pursue acquisitions and partnership opportunities in the
international and domestic markets and to expand its sales representation
business.
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 (ŇCEOÓ) and Chief Financial
Officer (ŇCFOÓ), 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, 2014 and have concluded that the
CompanyŐs disclosure controls and procedures were effective as of March 31,
2014.
Changes in Internal Control Over Financial Reporting
There
was no change in the CompanyŐs internal control over financial reporting during
the CompanyŐs last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the CompanyŐs 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.
99 Cooperation
Agreement Between Vasomedical Global Corp. and Chongqing PSK-Health Sci-Tech
Development Co., Ltd.
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 14, 2014
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:
- I
have reviewed this quarterly report on Form 10-Q of Vasomedical, Inc. and
subsidiaries (the ŇregistrantÓ);
- Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
- Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
- The
registrantŐs other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
- Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
- Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
- Evaluated the effectiveness of the registrantŐs disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
- Disclosed in this report any change in the registrantŐs internal
control over financial reporting that occurred during the registrantŐs
most recent fiscal quarter (the registrantŐs fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrantŐs internal control over
financial reporting; and
- The
registrantŐs other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrantŐs auditors and the audit committee of the registrantŐs
Board of Directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrantŐs ability to record,
process, summarize, and report financial information; and
- Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrantŐs internal
control over financial reporting.
/s/ Jun
Ma
.
Jun Ma
President and Chief Executive Officer
Date: May 14, 2014
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:
- I
have reviewed this quarterly report on Form 10-Q of Vasomedical, Inc. and
subsidiaries (the ŇregistrantÓ);
- Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
- Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
- The
registrantŐs other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
- Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
- Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
- Evaluated the effectiveness of the registrantŐs disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
- Disclosed in this report any change in the registrantŐs internal
control over financial reporting that occurred during the registrantŐs
most recent fiscal quarter (the registrantŐs fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrantŐs internal control over
financial reporting; and
- The
registrantŐs other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrantŐs auditors and the audit committee of the registrantŐs
Board of Directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrantŐs ability to record,
process, summarize, and report financial information; and
- Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrantŐs internal
control over financial reporting.
/s/ Michael
J. Beecher
.
Michael J.
Beecher
Chief Financial Officer
Date: May 14, 2014
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 ŇCompanyÓ) on Form 10-Q for
the period ending March 31, 2014, as filed with the Securities and Exchange
Commission on the date hereof (the ŇReportÓ), 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 14, 2014
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 ŇCompanyÓ) on Form
10-Q for the period ending March 31, 2014, as filed with the Securities and
Exchange Commission on the date hereof (the ŇReportÓ), 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
Chief Financial Officer
Dated: May 14, 2014
