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VASO > SEC Filings for VASO > Form 10-K/A on 16-Sep-2013All Recent SEC Filings

Show all filings for VASOMEDICAL, INC

Form 10-K/A for VASOMEDICAL, INC


16-Sep-2013

Annual Report


ITEM 7 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. These forward looking statements and other forward-looking statements made elsewhere in this document are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please read the section titled "Risk Factors" in "Item One - Business" to review certain conditions, among others, which we believe could cause results to differ materially from those contemplated by the forward-looking statements.

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential", "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. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.

The following discussion should be read in conjunction with the financial statements and notes thereto included in this Annual Report on Form 10-K.


Overview

Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its subsidiaries. Since 1995, we have been primarily engaged in designing, manufacturing, marketing and supporting EECP® Enhanced External Counterpulsation systems, based on our unique proprietary technology, to physicians and hospitals throughout the United States and in select international markets.

In 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics d/b/a VasoHealthcare, organized a group of medical device sales professionals and entered into the sales representation business as the exclusive representative for the sale of select General Electric Company (GE) diagnostic imaging equipment to specific market segments in the 48 contiguous states of the United States and the District of Columbia.

In September 2011, the Company acquired two Chinese operating companies, Life Enhancement Technologies Ltd. and Biox Instruments Co. Ltd. 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 will continue as an operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. will operate 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.

In 2011, we changed our fiscal year end to December 31 from May 31. We made this change to better align our financial reporting period, as well as our annual planning and budgeting process, with our business cycle, and the fiscal year of our China operations and of General Electric. This Annual Report on Form 10-K reports our financial results for the year ended December 31, 2012 (our first full fiscal year since the change), the seven-month transition period from June 1, 2011 through December 31, 2011 and the year ended May 31, 2011. For purposes of comparison, we have included the unaudited financial results for the year ended December 31, 2011 and the seven months ended December 31, 2010. See Note S to our Consolidated Financial Statements for additional information.

Results of Operations - For the Years Ended December 31, 2012 and 2011

Net revenues decreased by $1,872,000, or 6%, to $29,240,000 in the year ended December 31, 2012, from $31,112,000 in the year ended December 31, 2011. We reported a net loss applicable to common stockholders of $3,381,000 for the year ended December 31, 2012 as compared to net income of $2,175,000 for the year ended December 31, 2011. Our total net income (loss) was $(0.02) and $0.02 per basic and diluted common share for the years ended December 31, 2012 and 2011, respectively.

Revenues

Revenue in our Equipment segment increased 34% to $6,023,000, including $1,472,000 in revenue from FGE, for the year ended December 31, 2012 from $4,498,000, including $413,000 in FGE revenue, for the year ended December 31, 2011. Equipment segment revenue from equipment sales increased by $1,713,000, or 69%, to $4,191,000 for the year ended December 31, 2012 as compared to $2,478,000 for the year ended December 31, 2011. The increase in equipment sales is due primarily to a $1,059,000 increase in sales by FGE, as well as a 92% increase in international EECP® sales, driven by increased volume and higher average selling price, partially offset by a 4% decrease in domestic sales, mainly a net result of lower deliveries and higher average selling price.

We anticipate that demand for EECP® systems will remain soft domestically unless 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 payors 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. We also anticipate a growth in the FGE revenue due to the growing medical device market in China and as a result of our expanded international marketing effort.


Equipment segment revenue from equipment rental and services decreased 9% to $1,832,000 in the year ended December 31, 2012 from $2,021,000 in the year ended December 31, 2011. Revenue from equipment rental and services represented 30% of total Equipment segment revenue in the year ended December 31, 2012 and 45% in the year ended December 31, 2011. The decrease in revenue generated from equipment rentals and services is due primarily to decreased accessory part sales and rental revenues.

Commission revenues in the Sales Representation segment decreased by 13% to $23,217,000 in the year ended December 31, 2012, as compared to $26,614,000 in the year ended December 31, 2011. The decrease was due primarily to lower commission rates earned in 2012. As discussed in Note B, the Company defers recognition of commission revenue until underlying equipment acceptance is complete. As of December 31, 2012, $13,686,000 in deferred commission revenue was recorded in the Company's consolidated condensed balance sheet, of which $4,370,000 is long-term.

Gross Profit

The Company recorded gross profit of $20,594,000, or 70% of revenue, for the year ended December 31, 2012 compared to $21,917,000, or 70% of revenue, for the year ended December 31, 2011. The decrease of $1,323,000 was due primarily to lower revenue in the Sales Representation segment, partially offset by higher gross profit in the Equipment segment.

Equipment segment gross profit increased to $3,324,000, or 55% of Equipment segment revenues, for the year ended December 31, 2012 compared to $2,124,000, or 47% of Equipment segment revenues, for the year ended December 31, 2011 due to higher sales volume and improved margins resulting from the FGE acquisition. Equipment segment gross profits are 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 ongoing costs of servicing EECP® systems, as well as certain fixed period costs, including facilities, payroll and insurance.

Sales Representation segment gross profit was $17,269,000, or 74% of Sales Representation segment revenues, for the year ended December 31, 2012, a decrease of $2,523,000, or 13%, from segment gross profit of $19,792,000, or 74% of segment revenue, for the year ended December 31, 2011. The decrease was due primarily to lower commission rates earned in 2012. Cost of commissions decreased by $874,000, or 13%, to $5,947,000 for the year ended December 31, 2012, as compared to cost of commissions of $6,821,000 in 2011. Cost of commissions 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.

Operating (Loss) Income

Operating loss was $3,508,000 for the year ended December 31, 2012 compared to operating income of $3,701,000 for the year ended December 31, 2011. The change from operating income to operating loss was primarily attributable to an operating loss of $153,000 in our Sales Representation segment for the year ended December 31, 2012, compared to operating income of $6,689,000 for the year ended December 31, 2011 in that segment. The 2012 segment loss reflects the impact of both the lower commission rates and higher SG&A costs incurred in conjunction with the extension of the GEHC agreement. Equipment segment operating loss in the year ended December 31, 2012 was $1,805,000, as compared to an operating loss of $2,021,000 in the year ended December 31, 2011. The decrease in operating loss was primarily due to higher gross profit, partially offset by higher SG&A costs, reflecting the inclusion of a full year of FGE operations in 2012 as compared to four months of FGE operations included in the 2011 consolidated financial statements.

Selling, general and administrative ("SG&A") expenses for the years ended December 31, 2012 and 2011 were $23,526,000, or 80% of revenues, and $17,690,000, or 57% of revenues, respectively, reflecting an increase of $5,836,000 or approximately 33%. The increase in SG&A expenditures in the year ended December 31, 2012 resulted primarily from increased compensation and benefits expenses in the Sales Representation segment incurred in conjunction with the extension of the GEHC agreement. SG&A also increased in the Equipment segment due to higher administrative compensation costs, higher sales and marketing expenses, mainly related to reimbursement consulting, and the inclusion of FGE costs, as well as higher corporate expenses, mainly accounting, legal and director's fees.


Research and development ("R&D") expenses of $576,000, or 2% of revenues (or 9,6% of Equipment segment revenues), for the year ended December 31, 2012 increased by $51,000, or 10%, from $525,000, or 2% of revenues, for the year ended December 31, 2011. The increase is primarily attributable to an increase in development costs for our EECP® systems.

Interest and Financing Costs

Interest and financing costs for the year ended December 31, 2012 was $2,000 compared to $33,000 in the year ended December 31, 2011. Interest and financing costs in 2011 consisted mainly of interest on a short-term note to finance the Company's insurance premiums and interest charged on a trade payable to a related party.

Interest and Other Income, Net

Interest and other income for the year ended December 31, 2012 and 2011, was $181,000 and $241,000, respectively, a decrease of $60,000. The decrease was due to reductions in government grants obtained by one of the Company's Chinese companies, partially offset by higher interest income earned on the Company's cash balances and financing receivables.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of deferred gain on the sale-leaseback of building for the year ended December 31, 2012 and 2011 was $31,000 and $53,000, respectively. The gain resulted from the Company's sale-leaseback of its Westbury facility.

Income Tax Benefit (Expense), Net

During the year ended December 31, 2012, we recorded income tax expense of $52,000 compared to the year ended December 31, 2011, when the Company recorded an income tax expense of $275,000. The Company utilized $0.8 million and $6.1 million in net reporting loss carryforwards for the years ended December 31, 2012 and 2011, respectively. Income tax expense decreased mainly due to lower taxable income in 2012, resulting in lower Federal Alternative Minimum Tax liability and lower state tax liabilities.

Ultimate realization of any or all of the deferred tax assets is not assured due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carry-forward period. The Company believes it is premature to recognize additional deferred tax assets based on such uncertainties. However, such assessments may change as the representation business of VasoHealthcare matures.

Results of Operations - For the Seven Months Ended December 31, 2011 and 2010

Net revenues increased by $14,748,000, or 169%, to $23,489,000 for the seven months ended December 31, 2011, from $8,741,000 for the seven months ended December 31, 2010. We reported net income applicable to common stockholders of $3,891,000 for the seven months ended December 31, 2011 as compared to a loss of $2,604,000 for the seven months ended December 31, 2010. Our total net income
(loss) was $0.03 and $(0.02) per basic and diluted common share for the seven months ended December 31, 2011 and 2010, respectively.

Revenues

Revenue in our Equipment segment decreased 23% to $2,576,000, including $413,000 in FGE revenue, for the seven months ended December 31, 2011 from $3,328,000 for the seven months ended December 31, 2010. Equipment segment revenue from equipment sales decreased approximately 27% to $1,473,000 for the seven months ended December 31, 2011 as compared to $2,025,000 for the seven months ended December 31, 2010. The decrease in equipment sales is due primarily to a 59% decrease in the number of EECP® units sold internationally, coupled with a minor reduction in average selling price, as well as a 10% reduction in domestic sales driven mainly by lower average selling prices on certain used systems shipped. In addition, excluding FGE sales, revenue from other medical equipment increased 18% for the seven months ended December 31, 2011 as compared to the seven months ended December 31, 2010.


We anticipate that demand for EECP® systems will remain soft domestically unless 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 payors 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 15% to $1,103,000 for the seven months ended December 31, 2011 from $1,304,000 for the seven months ended December 31, 2010. Revenue from equipment rental and services represented 43% of total Equipment segment revenue for the seven months ended December 31, 2011 and 39% for the seven months ended December 31, 2010. The decrease in revenue generated from equipment rentals and services is due primarily to decreased field service and recognized service contract revenues.

Commission revenues in the Sales Representation segment were $20,913,000 for the seven months ended December 31, 2011, compared to $5,413,000 for the seven months ended December 31, 2010. As discussed in Note B, the Company defers recognition of commission revenue until underlying equipment acceptance is complete. As of December 31, 2011, $14,085,000 in deferred commission revenue was recorded in the Company's consolidated condensed balance sheet, of which $5,378,000 is long-term.

Gross Profit

The Company recorded gross profit of $16,756,000, or 71% of revenue, for the seven months ended December 31, 2011 compared to $5,820,000, or 67% of revenue, for the seven months ended December 31, 2010. The increase of $10,936,000 was due primarily to higher revenue in the Sales Representation segment, partially offset by lower gross profit rates resulting from higher commission expense..

Equipment segment gross profit decreased to $1,243,000, or 48% of Equipment segment revenues, for the seven months ended December 31, 2011 compared to $1,532,000, or 46% of Equipment segment revenues, for the seven months ended December 31, 2010 due mainly to lower sales volume. The decrease in absolute dollars was partially offset by an increase in gross profit percentage, which arose primarily from the inclusion of higher margins on FGE sales. Equipment segment gross profits are 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 ongoing costs of servicing EECP® systems, and certain fixed period costs, including facilities, payroll and insurance.

Sales Representation segment gross profit was $15,513,000 for the seven months ended December 31, 2011 compared to $4,220,000 for the seven months ended December 31, 2010. Cost of commissions of $5,400,000 and $1,193,000, for the seven month periods ended December 31, 2011 and 2010, 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.

Operating Income

Operating income was $5,189,000 for the seven months ended December 31, 2011 as compared to an operating loss of $2,445,000 for the seven months ended December 31, 2010. The change from an operating loss to operating income was primarily attributable to operating income of $7,417,000 in our Sales Representation segment for the seven months ended December 31, 2011, as compared to an operating loss of $2,234,000 for the seven months ended December 31, 2010 in that segment. The 2010 segment loss reflects additional start-up costs and the deferral of commission revenue and expense in the seven months ended December 31, 2010. Equipment segment operating loss for the seven months ended December 31, 2011 was $1,603,000, including $578,000 in shared-based expenses, as compared to an operating loss of $59,000, including $226,000 in shared-based expenses, for the seven months ended December 31, 2010. The increase in operating loss was primarily due to lower gross profit and higher SG&A costs.


Selling, general and administrative ("SG&A") expenses for the seven months ended December 31, 2011 and 2010 were $11,243,000, or 48% of revenues, and $8,004,000, or 92% of revenues, respectively, reflecting an increase of $3,239,000 or approximately 40%. The increase in SG&A expenditures for the seven months ended December 31, 2011 resulted primarily from increased wages, benefits, travel, and insurance expenses related to the Sales Representation segment, which was in its start-up phase during the seven months ended December 31, 2010. SG&A also increased in the Equipment segment due to higher sales and marketing expenses mainly related to reimbursement consulting, and the inclusion of FGE costs, as well as higher corporate expenses, mainly accounting, legal and director's fees.

During the seven months ended December 31, 2011, the Company recorded a provision for doubtful accounts and commission adjustments of $866,000 as compared to the seven months ended December 31, 2010 when the Company recorded a provision for doubtful accounts and commission adjustments of $1,150,000. Of the seven months ended December 31, 2011 provision, $55,000 was to accrue for bad debt expense and $811,000 was to reduce gross deferred revenues for estimated adjustments.

Research and development ("R&D") expenses of $324,000, or 1% of revenues, for the seven months ended December 31, 2011 increased by $63,000, or 24%, from $261,000, or 3% of revenues, for the seven months ended December 31, 2010. The increase is primarily attributable to an increase in clinical research expenses.

Interest and Financing Costs

Interest and financing costs for the seven months ended December 31, 2011 was $9,000 compared to $8,000 in the seven months ended December 31, 2010. Interest and financing costs consisted of interest on a short-term note to finance the Company's insurance premiums and interest charged on a trade payable to a related party.

Interest and Other Income, Net

Interest and other income for the seven months ended December 31, 2011 and 2010, were $177,000 and $17,000, respectively. In the seven months ended December 31, 2011 other income primarily consisted of a government grant obtained by one of the Company's Chinese companies. Interest income reflects interest earned on the Company's cash balances and financing receivables.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of deferred gain on sale-leaseback of building for the seven months ended December 31, 2011 and 2010 was $31,000. The gain resulted from the Company's sale-leaseback of its Westbury facility.

Income Tax Benefit (Expense), Net

During the seven months ended December 31, 2011, we recorded income tax expense of $276,000 compared to the seven months ended December 31, 2010, when the Company recorded an income tax expense of $8,000. The Company utilized $6.1 million in net reporting loss carryforwards for the seven month period ended December 31, 2011. Income tax expense increased mainly due to Federal Alternative Minimum Tax liability and certain state tax liabilities in excess of net operating loss carryforwards.

Ultimate realization of any or all of the deferred tax assets is not assured due to significant uncertainties and material assumptions associated with estimates of future taxable income during the carry-forward period. The Company believes it is premature to recognize additional deferred tax assets based on such uncertainties. However, such assessments may change as the representation business of VasoHealthcare matures.

Liquidity and Capital Resources

Cash and Cash Flow - For the year ended December 31, 2012

We have financed our operations primarily from working capital. At December 31, 2012, we had cash and cash equivalents of $11,469,000, short-term investments of $110,000 and working capital of $7,538,000.


Cash provided by operating activities was $9,431,000 during the year ended December 31, 2012, which consisted of the net loss after adjustments of $1,681,000, offset by cash provided by changes in operating assets and liabilities of $11,112,000. The changes in the account balances primarily reflect decreases in accounts and other receivables of $10,854,000, partially offset by an increase in accrued expenses of $2,090,000. These changes in account balances are due mainly to the operations of our Sales Representation segment. At February 28, 2013 the Company's cash balances were approximately $12.9 million.

Investing activities during the year ended December 31, 2012 used cash of $402,000, mainly related to the acquisition of equipment and software.

Financing activities during the year ended December 31, 2012 provided cash of $153,000, primarily arising from the exercise of stock warrants, partially offset by the repayment of notes payable to a related party.

Liquidity

While the Company achieved substantial profitability for the year ended December 31, 2011, it has historically incurred operating losses and incurred a loss for the year ended December 31, 2012. The Company will seek to achieve profitability through growth in our China operations and by expanding our product portfolio. In addition, the Company plans to pursue other accretive acquisitions in the international and domestic markets and to expand our sales representation business. We anticipate a return to profitability in 2013.

While we expect to continue to generate positive operating cash flows in fiscal 2013, the progressive nature of the GEHC Agreement can cause related cash inflows to vary widely during the year.

Based on our operations through December 31, 2012 and current business outlook for 2013, we believe internally generated funds from our Equipment and Sales Representation segments will be sufficient for the Company to continue operations through at least January 1, 2014.

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPES), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2012, we are not involved in any unconsolidated SPES.

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 for more than 35 years specializing in corporation and securities law, 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. Mr. Rios currently is President of Edgary Consultants, LLC, and was appointed in conjunction with the Company's consulting agreement with Edgary Consultants, LLC.

The consulting agreement (the "Agreement") between Vasomedical, Inc. and Edgary Consultants, LLC ("Consultant") commenced on March 1, 2011 and ended 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 provided by Consultant under the Agreement, the Company had agreed to issue to Consultant or its designees, up to 18,500,000 shares of restricted common stock of the Company, 3,000,000 shares of which were . . .

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