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VASO > SEC Filings for VASO > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for VASOMEDICAL, INC

Form 10-Q for VASOMEDICAL, INC


14-Nov-2013

Quarterly Report


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

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; uncertainties about the acceptance of a novel therapeutic modality by the medical community; continuation of the GEHC Agreement and the risk factors reported from time to time in the Company's SEC reports, including its recent report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.

General Overview

Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to "we", "our", "us", "Company", "registrant", "Vasomedical" or "management" refer to Vasomedical, Inc. and its subsidiaries. Since 2010 we have been operating in two distinct businesses or segments, the Equipment segment and the Sales Representation segment. In the Equipment segment we design, manufacture, market and support certain medical devices. Our principal products 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 May 2010, the Company, through its wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, expanded into the sales representation business via its agreement with GE Healthcare ("GEHC"), the healthcare business unit of General Electric Company (NYSE: GE), to be GEHC's exclusive sales representative for the sale of select GEHC diagnostic imaging products in specific market segments in the 48 contiguous states of the United States and the District of Columbia. In June 2012, the Company entered into an amendment, effective July 1, 2012, of the sales representative agreement ("GEHC Agreement") extending the initial term of three years commencing July 1, 2010 to five years through June 30, 2015, subject to earlier termination under certain circumstances.

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

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

The Company expects to achieve profitability through reaching a higher commission rate under the GEHC Agreement, growth in our China operations and by expanding our 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 our sales representation business.

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Vasomedical, Inc. and Subsidiaries

Critical Accounting Policies and Estimates

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

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

Results of Operations - For the Three Months Ended September 30, 2013 and 2012

Total revenue for the three months ended September 30, 2013 and 2012 was $7,606,000 and $5,722,000, respectively, an increase of $1,884,000, or 33%. Net loss for the three months ended September 30, 2013 and 2012 was $464,000 and $2,518,000, respectively, a decrease of $2,054,000, or 82%. The improvement was primarily attributable to a $1,124,000 increase in gross profit and a $1,084,000 decrease in selling, general and administrative costs. Our total net loss was $(0.00) and $(0.02) per basic and diluted common share for the three months ended September 30, 2013 and 2012, respectively.

Revenues

Revenue in our Equipment segment increased by $681,000, or 64%, to $1,744,000 for the three-month period ended September 30, 2013 from $1,063,000 for the same period of the prior year. Equipment segment revenue from equipment sales increased by $665,000, or 97%, to $1,353,000 for the three-month period ended September 30, 2013 as compared to $688,000 for the same period in the prior year primarily due to a $570,000 increase in EECP® revenues as a result of higher sales volume, and a $99,000 increase in international sales by our China operations.

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. We continue to pursue strategies to increase and expand the reimbursement for EECP® therapy.

Equipment segment revenue from equipment rental and services increased 4% to $391,000 in the third quarter of 2013 from $375,000 in the third quarter of 2012. Revenue from equipment rental and services represented 22% and 35% of total Equipment segment revenue in the third quarters of fiscal 2013 and fiscal 2012, respectively. The increase in revenue generated from equipment rentals and services is due primarily to increased accessory part revenues.

Commission revenues in the Sales Representation segment were $5,862,000 in the third quarter of 2013, as compared to $4,659,000 in the third quarter of 2012, an increase of 26%. The increase in commission revenue in the third quarter of 2013 is due primarily to an increase in 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 September 30, 2013, $11,357,000 in deferred commission revenue was recorded in the Company's condensed consolidated balance sheet, of which $4,443,000 is long-term. At September 30, 2012, $13,689,000 in deferred commission revenue was recorded in the Company's condensed consolidated balance sheet, of which $5,062,000 was long-term.

Page 17

Vasomedical, Inc. and Subsidiaries Gross Profit

The Company had a gross profit of $5,187,000 in the third quarter of 2013 compared to $4,063,000 in the third quarter of the prior year, an increase of 28%. The increase is due both to higher commission revenues in our Sales representation segment arising from increased equipment deliveries by GEHC and higher equipment shipments in our Equipment segment. Equipment segment gross profit increased to $1,156,000, or 66% of Equipment segment revenues, for the third quarter of 2013 compared to $633,000, or 60% of Equipment segment revenues, for the same quarter of 2012. Gross profit margin on EECP® equipment improved as a result of the more favorable mix of higher margin products sold and higher sales volume of EECP® systems in the third quarter of 2013. Gross profit in the Equipment segment is dependent on a number of factors, particularly the number of systems sold; 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 otherwise 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 $4,031,000, or 69%, for the three months ended September 30, 2013 as compared to $3,430,000, or 74%, for the three months ended September 30, 2012. The decrease in the margin percentage was due to lower commission rates on equipment booked in 2012 but delivered during the third quarter of 2013 while the commission expense is at the same rate, partially offset by higher revenue in this segment. Cost of commissions of $1,831,000 and $1,229,000, for the three months ended September 30, 2013 and 2012, respectively, reflects commission expense associated with recognized commission revenues, and, beginning in 2013, additional costs associated with the medical device excise tax imposed by the Affordable Care Act. Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.

Operating (Loss) Income

Operating loss was $492,000 for the three months ended September 30, 2013 as compared to $2,659,000 for the three months ended September 30, 2012, a decrease of $2,167,000. The decrease in operating loss was primarily attributable to the increase in gross profit in both segments as described above, as well as a $1,084,000 decrease in SG&A costs, mainly arising from a $955,000 decrease in such costs in the Sales Representation segment, where operating income was $199,000 compared to an operating loss of $1,358,000 in the same quarter of the prior year. Equipment segment operating loss decreased by $474,000, or 57%, to $364,000 in the third quarter of 2013 from $838,000 in the same period of the prior year.

Selling, general and administrative ("SG&A") expenses for the third quarter of 2013 and 2012 were $5,507,000, or 72% of revenues, and $6,591,000, or 115% of revenues, respectively, reflecting a decrease of $1,084,000 or approximately 16%. The decrease in SG&A expenditures in the third quarter of 2013 resulted primarily from the completion in the second quarter of 2013 of certain non-recurring costs attributable to the renewal of the GEHC contract.

Research and development ("R&D") expenses of $172,000, or 2% of revenues (10% of Equipment segment revenues), for the third quarter of 2013, increased by $41,000, or 31%, from $131,000, or 2% of revenues (12% of Equipment segment revenues), for the third quarter of 2012. The increase is primarily attributable to an increase in product development expenses.

Interest and Other Income (Expense), Net

Interest and other income (expense), net for the third quarter of 2013 was $(63,000) as compared to $93,000 for the third quarter of 2012. The decrease was due primarily to a $130,000 charge associated with a potential liability to a workers' compensation fund resulting from the 2007 closing of a trade association that previously provided workers' compensation for the Company and others, as well as lower interest earnings on the Company's cash balances.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of the deferred gain on the sale-leaseback of our Westbury, NY facility for the third quarter of 2012 was $4,000, during which period the deferred gain was fully amortized.

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Vasomedical, Inc. and Subsidiaries Income Tax Benefit (Expense)

During the third quarter of 2013 we recorded an income tax benefit $91,000 as compared to an income tax benefit of $44,000 for the second quarter of 2012. The increase arose from higher refunds due on prior period returns.

Results of Operations - For the Nine Months Ended September 30, 2013 and 2012

Total revenue for the nine months ended September 30, 2013 and 2012 was $22,795,000 and $19,462,000, respectively, an increase of $3,333,000, or 17%. Net loss for the nine months ended September 30, 2013 was $1,649,000 compared to a net loss of $3,806,000 for the nine months ended September 30, 2012, a decrease of $2,157,000, or 57%. The decrease in net loss was primarily attributable to a $1,839,000 increase in gross profit, as well as a $413,000 decrease in selling, general and administrative costs. Our total net loss was $(0.01) and $(0.02) per basic and diluted common share for the nine months ended September 30, 2013 and 2012, respectively.

Revenues

Revenue in our Equipment segment decreased by $71,000, or 2%, to $4,533,000 for the nine-month period ended September 30, 2013 from $4,604,000 for the same period of the prior year. Equipment segment revenue from equipment sales increased by $123,000, or 4%, to $3,320,000 for the nine-month period ended September 30, 2013 as compared to $3,197,000 for the same period in the prior year, primarily due to an increase of $311,000 in international sales made by our China operations, partially offset by $236,000 lower 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 by $194,000, or 14%, to $1,213,000 in the first nine months of 2013 from $1,407,000 in the same period of 2012. Revenue from equipment rental and services represented 27% and 31% of total Equipment segment revenue in the first nine months of fiscal 2013 and fiscal 2012, respectively. The decrease in revenue generated from equipment rentals and services is due primarily to decreased time and material charged to on-demand service customers and decreased service contract revenues.

Commission revenues in the Sales Representation segment were $18,262,000 in the first nine months of 2013, as compared to $14,858,000 in the first nine months of 2012, an increase of 23%. The increase in commission revenue in the first nine months of 2013 is due primarily to an increase in volume of equipment delivered by GEHC, partially offset by lower commission rates on orders booked in 2012 and delivered in 2013. 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 September 30, 2013, $11,357,000 in deferred commission revenue was recorded in the Company's condensed consolidated balance sheet, of which $4,443,000 is long-term. At September 30, 2012, $13,689,000 in deferred commission revenue was recorded in the Company's condensed consolidated balance sheet, of which $5,062,000 was long-term.

Gross Profit

The Company had a gross profit of $15,613,000 in the first nine months of 2013 compared to $13,774,000 in the same period of the prior year, an increase of 13%. The increase is principally due to the increase in commission revenue discussed above and an increase in the profit margin in our Equipment segment. Equipment segment gross profit increased to $2,853,000, or 63% of Equipment segment revenues, for the first nine months of 2013 compared to $2,601,000, or 56% of Equipment segment revenues, for the same period of 2012, driven by a more favorable mix of higher margin products sold and lower production costs. 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 otherwise placed during the period; the ongoing costs of servicing EECP® systems; and certain fixed period costs, including facilities, payroll and insurance.

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Vasomedical, Inc. and Subsidiaries

Sales Representation segment gross profit was $12,760,000, or 70%, for the nine months ended September 30, 2013 as compared to $11,173,000, or 75%, for the nine months ended September 30, 2012. The increase was due to higher revenue in this segment, as explained above, partially offset by lower commission rates on equipment booked in 2012 and delivered in the first three quarters of 2013. Cost of commissions of $5,502,000 and $3,685,000, for the nine months ended September 30, 2013 and 2012, respectively, reflects commission expense associated with recognized commission revenues, and, starting in 2013, additional costs associated with the medical device excise tax imposed by the Affordable Care Act. Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is earned.

Operating Loss

Operating loss was $1,704,000 for the nine months ended September 30, 2013 as compared to an operating loss of $3,885,000 for the nine months ended September 30, 2012, an improvement of $2,181,000, or 56%. The decrease in operating loss was primarily attributable to improved operating performance in the Sales Representation segment, where operating income was $870,000 for the first nine months of 2013 compared to an operating loss of $1,473,000 in the same period of the prior year. Partially offsetting the improvement in the Sales Representation segment was an increase of $298,000 in the operating loss of the Equipment segment to $1,489,000 in the first nine months of 2013 from an operating loss of $1,191,000 in the same period of the prior year. The increase in the operating loss in the Equipment segment was principally due to an increase in sales and marketing expenses for this segment.

Selling, general and administrative ("SG&A") expenses for the first nine months of 2013 and 2012 were $16,843,000, or 75% of revenues, and $17,256,000, or 78% of revenues, respectively, reflecting a decrease of $413,000 or approximately 2%. The decrease in SG&A expenditures in the first nine months of 2013 resulted primarily from $754,000 lower costs in the Sales Representation segment, partially offset by $477,000 higher costs in the Equipment segment, mainly associated with the expansion of the Equipment segment sales team.

Research and development ("R&D") expenses of $474,000, or 2% of revenues (10% of Equipment segment revenues), for the first three quarters of 2013, increased by $71,000, or 18%, from $403,000, or 2% of revenues (9% of Equipment segment revenues), for the same period of 2012. The increase is primarily attributable to an increase in product development expenses.

Interest and Other Income, Net

Interest and other income, net for the first nine months of 2013 was $20,000 as compared to $120,000 for the first nine months of 2012. The decrease was due primarily to a $130,000 charge associated with a potential liability to a workers' compensation fund resulting from the 2007 closing of a trade association that previously provided workers' compensation for the Company and others, as well as lower interest earnings on the Company's cash balances.

Amortization of Deferred Gain on Sale-leaseback of Building

The amortization of the deferred gain on the sale-leaseback of our Westbury, NY facility for the first three quarters of 2012 was $31,000. The deferred gain was fully amortized in the third quarter of 2012.

Income Tax Benefit (Expense)

During the first nine months of 2013 we recorded an income tax benefit of $35,000 as compared to income tax expense of $72,000 for the first nine months of 2012. The decrease in expense resulted mainly from a Federal tax refund due on a prior period return.

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Vasomedical, Inc. and Subsidiaries

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations from working capital. At September 30, 2013, we had cash and cash equivalents of $9,147,000, short-term investments of $111,000 and working capital of $4,440,000 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 used in operating activities was $576,000 during the first nine months of 2013, which consisted of a net loss after adjustments to reconcile net loss to net cash of $973,000, offset by cash provided by operating assets and liabilities of $397,000. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $4,304,000, partially offset by decreases in deferred revenue of $2,875,000 and accrued commissions of $746,000. 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 early in 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 2013.

Cash used in investing activities during the nine-month period ended September 30, 2013 was $126,000 for the purchase of equipment and software.

Cash used in financing activities during the nine-month period ended September 30, 2013 was $1,602,000 for the repurchase of common stock.

Liquidity

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

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

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Vasomedical, Inc. and Subsidiaries

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