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VASO Corp - Quarter Report: 2014 June (Form 10-Q)

vaso10q-june2014.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q


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

Registrant’s Telephone Number
(516) 997-4600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No x
 
Number of Shares Outstanding of Common Stock, $.001 Par Value, at August 9, 2014 – 155,552,283
 
Page 1

 

Vasomedical, Inc. and Subsidiaries

 
INDEX
 



 
 
Page 2

 
 
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Vasomedical, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
   
June 30, 2014
   
December 31, 2013
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
  $ 9,986     $ 7,961  
Short-term investments
    111       111  
Accounts and other receivables, net of an allowance for doubtful
         
accounts and commission adjustments of $3,685 at June 30,
               
2014 and $3,764 at December 31, 2013
    7,526       13,570  
Receivables due from related parties
    21       21  
Inventories, net
    1,901       1,618  
Deferred commission expense
    2,297       2,312  
Other current assets
    517       338  
 Total current assets
    22,359       25,931  
                 
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
         
$1,366 at June 30, 2014 and $1,281 at December 31, 2013
    351       365  
GOODWILL
    3,279       3,303  
OTHER ASSETS, net
    5,243       3,918  
    $ 31,232     $ 33,517  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 480     $ 597  
Accrued commissions
    2,298       2,161  
Accrued expenses and other liabilities
    4,591       5,571  
Sales tax payable
    184       230  
Deferred revenue - current portion
    9,183       10,541  
Deferred tax liability, net
    112       112  
Notes payable due to related party
    3       3  
Total current liabilities
    16,851       19,215  
                 
LONG-TERM LIABILITIES
               
Deferred revenue
    8,529       7,478  
Other long-term liabilities
    520       359  
Total long-term liabilities
    9,049       7,837  
                 
COMMITMENTS AND CONTINGENCIES (NOTE N)
               
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares
         
 issued and outstanding at June 30, 2014, and December 31, 2013
    -       -  
Common stock, $.001 par value; 250,000,000 shares authorized;
               
165,860,370 and 164,705,382 shares issued at June 30, 2014
               
and December 31, 2013, respectively; 155,679,363 and
               
155,223,981 shares outstanding at June 30, 2014 and
               
December 31, 2013, respectively
    166       165  
Additional paid-in capital
  61,831       61,508  
Accumulated deficit
    (54,781 )     (53,561 )
Accumulated other comprehensive income
    78       108  
Treasury stock, at cost, 10,181,007 and 9,481,101 shares at June 30, 2014 and
December 31, 2013, respectively
    (1,962 )     (1,755 )
Total stockholders’ equity
    5,332       6,465  
    $ 31,232     $ 33,517  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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Vasomedical, Inc. and Subsidiaries

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

     Three months ended June 30,  Six months ended June 30,
   
2014
   
2013
   
2014
   
2013
 
Revenues
                       
Equipment sales
  $ 770     $ 1,090     $ 1,254     $ 1,967  
Equipment rentals and services
    410       415       776       822  
Commissions
    6,684       6,391       12,926       12,400  
Total revenues
    7,864       7,896       14,956       15,189  
                                 
Cost of revenues
                               
Cost of sales, equipment
    350       342       494       635  
Cost of equipment rentals and services
    180       216       360       458  
Cost of commissions
    1,852       1,975       3,454       3,671  
Total cost of revenues
    2,382       2,533       4,308       4,764  
Gross profit
    5,482       5,363       10,648       10,425  
                                 
Operating expenses
                               
Selling, general and administrative
    5,482       5,733       11,523       11,337  
Research and development
    206       162       419       302  
Total operating expenses
    5,688       5,895       11,942       11,639  
Operating loss
    (206 )     (532 )     (1,294 )     (1,214 )
                                 
Other income
                               
Interest and other income, net
    44       44       98       82  
Total other income, net
    44       44       98       82  
                                 
Loss before income taxes
    (162 )     (488 )     (1,196 )     (1,132 )
Income tax expense
    (14 )     (49 )     (24 )     (57 )
Net loss
    (176 )     (537 )     (1,220 )     (1,189 )
                                 
Other comprehensive loss
                               
Foreign currency translation gain (loss)
    10       67       (30 )     34  
Comprehensive loss
  $ (166 )   $ (470 )   $ (1,250 )   $ (1,155 )
                                 
Loss per common share
                               
- basic and diluted
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
Weighted average common shares outstanding
                         
- basic and diluted
    155,320       162,186       155,386       162,152  
                                 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
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Vasomedical, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
      Six months ended  
   
June 30, 2014
   
June 30, 2013
 
Cash flows from operating activities
           
Net  loss
  $ (1,220 )   $ (1,189 )
Adjustments to reconcile net loss to net cash
               
  provided by operating activities
               
Depreciation and amortization
    199       182  
Provision for doubtful accounts and commission adjustments
    4       10  
Share-based compensation and arrangements
    244       271  
Amortization of deferred consulting expense
    -       87  
Changes in operating assets and liabilities:
               
Accounts and other receivables
    6,030       2,666  
Receivables due from related parties
    -       (4 )
Inventories, net
    (297 )     (14 )
Deferred commission expense
    15       (147 )
Other current assets
    (119 )     (36 )
Other assets
    (1,276 )     574  
Accounts payable
    (117 )     122  
Accrued commissions
    137       (371 )
Accrued expenses and other liabilities
    (966 )     359  
Sales tax payable
    (51 )     (9 )
Deferred revenue
    (307 )     (2,331 )
Other long-term liabilities
    162       166  
Net cash provided by operating activities
    2,438       336  
                 
Cash flows from investing activities
               
Purchases of property, equipment and software
    (205 )     (45 )
Purchases of short-term investments
    (40 )     (40 )
Redemption of short-term investments
    40       40  
Net cash used in investing activities
    (205 )     (45 )
                 
Cash flows from financing activities
               
Repurchase of common stock
    (207 )     (182 )
Net cash used in by financing activities
    (207 )     (182 )
                 
Effect of exchange rate differences on cash and cash equivalents
    (1 )     (21 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    2,025       88  
Cash and cash equivalents - beginning of period
    7,961       11,469  
Cash and cash equivalents - end of period
  $ 9,986     $ 11,557  
                 
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
               
Interest paid
  $ -     $ -  
Income taxes paid
  $ 19     $ 30  
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
         
Inventories transferred to property and equipment,
               
attributable to operating leases, net
  $ 5     $ 28  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
Page 5

 
Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 

NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

Vasomedical, Inc. was incorporated in Delaware in July 1987. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vasomedical” or “management” refer to Vasomedical, Inc. and its subsidiaries. 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 (“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 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  proprietary technology, and currently indicated in the United States for use in cases of refractory angina and congestive heart failure (“CHF”).  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. (“LET”) and Biox Instruments Co. Ltd. (“Biox”), respectively – to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio.  Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy and now operates through three wholly-owned subsidiaries.  Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE Healthcare diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. manages and coordinates our EECP® therapy business as well as other medical equipment operations.
 
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 joint venture is in the early implementation phase and had not begun operations as of June 30, 2014.
 
In June 2014, the Company entered into a Value Added Reseller Agreement (“VAR Agreement”) with GEHC to become a national value added reseller of GE Healthcare IT's Radiology PACS (Picture Archiving and Communication System) software solutions and related services, including implementation, management and support.  This multiyear VAR Agreement focuses primarily on existing customer segments currently served by Vaso Diagnostics on behalf of GEHC.  A new wholly owned subsidiary, VasoHealthcare IT Corp., has been subsequently formed to conduct the healthcare IT business.
 
We report the operations of Vasomedical Global Corp. and Vasomedical Solutions, Inc. under our Equipment segment.  Vaso Diagnostics activities are included under our Sales Representation segment (See Note C).  VasoHealthcare IT operations, once commenced, will report under an additional segment.

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.
 
 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
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 accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the agreement with GE Healthcare in advance of the customer acceptance of the equipment are recorded as accounts receivable and deferred revenue in the condensed consolidated balance sheets.  Similarly, commissions payable to our sales force related to such billings are recorded as deferred commission expense when the associated deferred revenue is recorded.  Commission expense is recognized when the corresponding commission revenue is recognized.  Cost of commissions includes commission expense and, beginning in 2013, costs associated with the medical device excise tax imposed by the Affordable Care Act.  
 
Reclassifications

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

NOTE C – SEGMENT REPORTING AND CONCENTRATIONS
 
The Company views its business in three segments – the Equipment segment, the Sales Representation segment, and the IT segment.  The Equipment segment is engaged in designing, manufacturing, marketing and supporting EECP® enhanced external counterpulsation systems both domestically and internationally, as well as the development, production, marketing and supporting of other medical devices.  The Sales Representation segment operates through the VasoHealthcare subsidiary and is currently engaged solely in the fulfillment of the Company’s responsibilities under our agreement with GEHC.  The Company’s new subsidiary, VasoHealthcare IT Corp., formed to conduct its healthcare IT operations will report through the IT segment.  Operations in the IT segment have not commenced as of June 30, 2014.  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:
 
 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
   
(in thousands)
 
      As of or for the three months ended June 30, 2014  
      Equipment Segment  
Sales Representation Segment
 
Corporate
 
Consolidated
 
                         
Revenues from external customers
  $ 1,180     $ 6,684     $ -     $ 7,864  
Operating (loss) income
  $ (875 )   $ 1,021     $ (352 )   $ (206 )
Total assets
  $ 8,052     $ 13,144     $ 10,036     $ 31,232  
Accounts and other receivables, net
  $ 941     $ 6,585     $ -     $ 7,526  
Deferred commission expense
  $ -     $ 4,565     $ -     $ 4,565  
                                 
                                 
        As of or for the three months ended June 30, 2013  
   
Equipment Segment
 
Sales Representation Segment
 
Corporate
 
Consolidated
 
                                 
Revenues from external customers
  $ 1,505     $ 6,391     $ -     $ 7,896  
Operating (loss) income
  $ (481 )   $ 308     $ (359 )   $ (532 )
Total assets
  $ 8,129     $ 10,068     $ 11,034     $ 29,231  
Accounts and other receivables, net
  $ 745     $ 5,694     $ -     $ 6,439  
Deferred commission expense
  $ -     $ 4,036     $ -     $ 4,036  
                                 
                                 
                                 
        As of or for the six months ended June 30, 2014  
   
Equipment Segment
 
Sales Representation Segment
 
Corporate
 
Consolidated
 
                                 
Revenues from external customers
  $ 2,030     $ 12,926     $ -     $ 14,956  
Operating (loss) income
  $ (1,955 )   $ 1,544     $ (883 )   $ (1,294 )
Total assets
  $ 8,052     $ 13,144     $ 10,036     $ 31,232  
Accounts and other receivables, net
  $ 941     $ 6,585     $ -     $ 7,526  
Deferred commission expense
  $ -     $ 4,565     $ -     $ 4,565  
                                 
                                 
        As of or for the six months ended June 30, 2013
   
Equipment Segment
 
Sales Representation Segment
 
Corporate
 
Consolidated
 
                                 
Revenues from external customers
  $ 2,789     $ 12,400     $ -     $ 15,189  
Operating (loss) income
  $ (1,125 )   $ 670     $ (759 )   $ (1,214 )
Total assets
  $ 8,129     $ 10,068     $ 11,034     $ 29,231  
Accounts and other receivables, net
  $ 745     $ 5,694     $ -     $ 6,439  
Deferred commission expense
  $ -     $ 4,036     $ -     $ 4,036  
                                 

 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
For the three months ended June 30, 2014 and 2013, GE Healthcare accounted for 85% and 81% of revenue, respectively.  For the six months ended June 30, 2014 and 2013, GE Healthcare accounted for 86% and 82% of revenue, respectively.  Also, GE Healthcare accounted for $6.4 million, or 85%, and $8.1 million, or 89%, of accounts and other receivables at June 30, 2014 and December 31, 2013, respectively.

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

During the six months ended June 30, 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.  Of the 450,000 shares granted to officers, 100,000 shares vested immediately and the remainder vest at various times through February 2016.  The 50,000 shares granted to employees vested immediately.  In the first half 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 and six month periods ended June 30, 2013, the Company granted 340,000 and 400,000 restricted shares of common stock valued at $63,200 and $74,000, respectively.  100,000 of such shares were granted to an officer and 300,000 shares were granted to employees.  Shares valued at $3,600 and $38,000 vested over six month and two year periods, respectively, with the remainder vesting immediately.

During the six month periods ended June 30, 2014 and 2013, the Company did not grant any stock options.
 
Share-based compensation expense recognized for the three and six month periods ended June 30, 2014 was $47,000 and $156,000, respectively, and $133,000 and $271,000 for the three and six month periods ended June 30, 2013, 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 directors and non-employees was $45,000 and $88,000 for the three and six months ended June 30, 2014, respectively, and $1,000 and $87,000 for the three and six months ended June 30, 2013, respectively.  Unrecognized expense related to share-based compensation and arrangements is approximately $194,000 at June 30, 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 and six months ended June 30, 2014 and 2013, because the effect of their inclusion would be anti-dilutive.                                                 

    (in thousands)  
      For the three months ended     For the six months ended  
   
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
Stock options
    1,754       1,780       1,754       1,780  
Warrants
    -       1,500       -       1,500  
Common stock grants
    775       2,390       775       2,390  
      2,529       5,670       2,529       5,670  
                                 
 
 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE F – FAIR VALUE MEASUREMENTS

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

The following tables present information about the Company’s assets measured at fair value as of June 30, 2014 and December 31, 2013:

    (in thousands)  
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Sigificant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Balance
as of
June 30,
2014
 
Assets
                   
(unaudited)
 
Cash equivalents invested in money market funds
(included in cash and cash equivalents)
  $ 9,406     $ -     $ -     $ 9,406  
Investment in certificates of deposit
(included in short-term investments)
    111                       111  
    $ 9,517     $ -     $ -     $ 9,517  
                                 
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Sigificant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
     
Balance
as of
December 31,
2013
 
Assets
                               
Cash equivalents invested in money market funds
(included in cash and cash equivalents)
  $ 6,883     $ -     $ -     $ 6,883  
Investment in certificates of deposit
(included in short-term investments)
    111                       111  
    $ 6,994     $ -     $ -     $ 6,994  
                                 
 
The fair values of the Company’s cash equivalents invested in money market funds are determined through market, observable and corroborated sources.

NOTE G – ACCOUNTS AND OTHER RECEIVABLES, NET

The following table presents information regarding the Company’s accounts and other receivables as of June 30, 2014 and December 31, 2013:
 
      (in thousands)  
   
June 30, 2014
   
December 31, 2013
 
   
(unaudited)
       
Trade receivables
  $ 11,023     $ 17,173  
Due from employees
    188       161  
Allowance for doubtful accounts and
               
commission adjustments
    (3,685 )     (3,764 )
Accounts and other receivables, net
  $ 7,526     $ 13,570  
                 
 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Trade receivables include amounts due for shipped products and services rendered.  Amounts currently due under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change.

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

NOTE H – INVENTORIES, NET

Inventories, net of reserves, consist of the following:              

      (in thousands)  
   
June 30, 2014
   
December 31, 2013
 
   
(unaudited)
       
Raw materials
  $ 749     $ 790  
Work in process
    490       291  
Finished goods
    662       537  
    $ 1,901     $ 1,618  
                 

At June 30, 2014 and December 31, 2013, the Company maintained reserves for excess and obsolete inventory of $812,000 and $803,000, respectively.

NOTE I – GOODWILL AND OTHER INTANGIBLES

Goodwill aggregating $3,279,000 and $3,303,000 was recorded on the Company’s condensed consolidated balance sheets at June 30, 2014 and December 31, 2013, respectively, pursuant to the acquisition of FGE in September 2011.  All of the goodwill was allocated to the Company’s Equipment segment.  The components of the change in goodwill are as follows:
 
     (in thousands)  
   
Carrying Amount
 
       
Balance at December 31, 2013
  $ 3,303  
Foreign currency translation
    (24 )
Balance at June 30, 2014 (unaudited)
  $ 3,279  
         
 
The Company’s other intangible assets consist of capitalized patent costs, customer lists and software costs, as follows:
 
 
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Notes to Condensed Consolidated Financial Statements (unaudited)
 
    (in thousands)  
   
June 30, 2014
   
December 31, 2013
 
   
(unaudited)
       
Patents
           
Costs
  $ 469     $ 469  
Accumulated amortization
    (460 )     (454 )
      9       15  
                 
Customer lists
               
Costs
    800       800  
Accumulated amortization
    (324 )     (267 )
      476       533  
                 
Software
               
Costs
    818       696  
Accumulated amortization
    (457 )     (424 )
      361       272  
                 
    $ 846     $ 820  
 
Patents, customer lists, and software are included in other assets in the accompanying condensed consolidated balance sheets and are amortized on a straight line basis over their estimated useful lives of ten, seven, and five years, respectively.  Amortization expense amounted to $50,000 and $96,000 for the three and six months ended June 30, 2014, respectively, and $42,000 and $85,000 for the three and six months ended June 30, 2013, respectively.

NOTE J - DEFERRED REVENUE

The changes in the Company’s deferred revenues are as follows:
 
     (in thousands)
     For the three months ended June 30,   For the six months ended June 30,  
   
2014
   
2013
   
2014
   
2013
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Deferred revenue at the beginning of the period
  $ 17,004     $ 13,816     $ 18,019     $ 15,602  
Additions:
                               
Deferred extended service contracts
    309       287       546       438  
Deferred in-service and training
    13       10       15       15  
Deferred service arrangements
    25       20       30       30  
Deferred commission revenues
    3,614       2,270       5,384       3,279  
Recognized as revenue:
                               
Deferred extended service contracts
    (220 )     (250 )     (448 )     (510 )
Deferred in-service and training
    (8 )     (9 )     (15 )     (10 )
Deferred service arrangements
    (23 )     (19 )     (46 )     (37 )
Deferred commission revenues
    (3,002 )     (2,854 )     (5,773 )     (5,536 )
Deferred revenue at end of period
    17,712       13,271       17,712       13,271  
Less: current portion
    9,183       10,291       9,183       10,291  
Long-term deferred revenue at end of period
  $ 8,529     $ 2,980     $ 8,529     $ 2,980  

 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
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 and $120,000 were billed by the firm through the three and six months ended June 30, 2014, respectively, and fees of approximately $61,000 and $121,000 were billed through the three and six months ended June 30, 2013, respectively, at which dates no amounts were outstanding.

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

In consideration for the services to be provided by Consultant under the Agreement, the Company agreed to issue to Consultant or its designees, up to 18,500,000 shares of restricted common stock of the Company, 3,000,000 of which were issued in March 2011 and the balance was to be earned on performance. Mr. Lieberman received 600,000 of these restricted shares.  The Company recorded the fair value of the shares issued to Consultant as a prepaid expense and amortized the cost ratably over the two year agreement.  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 $8,000 and $3,000 were advanced and collected during the three and six months ended June 30, 2013, respectively.

 On March 14, 2014, Biox Instruments Co., Ltd. (Biox) entered into a Manufacturing, Marketing and Licensing Agreement (the “Genwell Agreement”) with Genwell Instruments Co., Ltd. (Genwell), a corporation organized under the People’s Republic of China, where Biox was granted exclusive rights to manufacture and sell Genwell’s MobiCareTM wireless multi-parameter patient monitoring systems worldwide.  The Genwell Agreement commenced on March 31, 2014 for an initial term of six years.  As discussed in Note P, the Company later acquired Genwell on August 6, 2014.
 
NOTE L – STOCKHOLDERS’ EQUITY

Common Stock

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

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

During the six months ended June 30, 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 June 30, 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 “2013 Plan”) for officers, directors, employees and consultants of the Company.  The stock issuable under the 2013 Plan shall be shares of the Company’s authorized but unissued or reacquired common stock.  The maximum number of shares of common stock which may be issued under the 2013 Plan is 7,500,000 shares.

 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
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.

During the six months ended June 30, 2014 the Company issued, under the 2013 Plan, 69,988 shares of common stock to employees.  As of June 30, 2014, 7,430,012 shares were available for issuance under the 2013 Plan.

No options were issued under the 2010 Plan or 2013 Plan during the six-month period ended June 30, 2014.

In April 2013, the Company’s Board of Directors authorized a share repurchase program of up to $1.5 million, which was subsequently increased in July 2013 to $2.0 million, of the Company’s common stock.  As of June 30, 2014, 10,181,007 shares had been repurchased at a cost of $1,962,000, which cost has been recorded as treasury stock in the accompanying condensed consolidated balance sheet as of June 30, 2014.
 
NOTE M – INCOME TAXES
 
The Company’s provision for income taxes consists of state and local, and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year.  For the three and six months ended June 30, 2014 and 2013, the Company recorded an income tax provision of $14,000 and $24,000, and $49,000 and $57,000, respectively, consisting primarily of state and local minimum taxes and foreign taxes related to the Chinese subsidiary.  Our domestic deferred tax assets are not realizable on a more-likely-than-not basis and, therefore, we have recorded a full valuation allowance against our domestic deferred tax assets.
 
NOTE N – 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.

Value Added Reseller agreement

In June 2014, the Company entered into an agreement with GE Healthcare for the purchase of certain GEHC IT professional services in conjunction with the execution of its VAR Agreement, as described in Note A.   No services had been purchased as of June 30, 2014.
 
 
 
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Vasomedical, Inc. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)

 
NOTE O - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Standards issued but not yet effective

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
 
NOTE P – SUBSEQUENT EVENT

On August 6, 2014 the Company acquired all of the outstanding shares of Genwell Instruments Co. Ltd. (“Genwell”) located in Wuxi, China through its wholly owned subsidiary Wuxi Gentone Instruments Co. Ltd. (“Gentone”) for cash and notes of Chinese Yuan RMB13,250,000 (approximately $2,151,000 at the acquisition date).  The notes totaling RMB6,250,000 (approximately $1,015,000) are payable one year from the closing date with interest at the rate of 5% per annum.  Genwell was formed in China in 2010 with the assistance of a government grant to develop the MobiCareTM wireless multi-parameter patient monitoring system and holds the patents and intellectual property rights for this system.  The president of our subsidiary Life Enhancement Technologies Ltd. and the president and vice-president of our subsidiary Biox Instruments Company Ltd. together owned 80.9% of Genwell at the time of acquisition.  The President and CEO of the Company was appointed the nominee Chairman of Genwell at its formation for the sole purpose of applying for the government grant available only to overseas Chinese persons.  He has never received any compensation from Genwell nor held any ownership interest in Genwell.  The Company has received a fairness opinion for this transaction from an independent certified appraisal firm and a legal opinion from Chinese counsel.

 
 
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Vasomedical, Inc. and Subsidiaries
 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; uncertainties about the acceptance of a novel therapeutic modality by the medical community; continuation of the GEHC Agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K.  The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.

General Overview

Vasomedical, Inc. was incorporated in Delaware in July 1987.  Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vasomedical” or “management” refer to Vasomedical, Inc. and its subsidiaries.  Until 2010, we were primarily engaged in designing, manufacturing, marketing and supporting Enhanced External Counterpulsation (EECP®) systems, based on our proprietary technology, to physicians and hospitals throughout the United States and in select international markets.

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

In September 2011, the Company acquired Fast Growth Enterprises Limited (FGE), a British Virgin Islands company, which owns and controls two Chinese operating companies - Life Enhancement Technology Ltd. and Biox Instruments Co. Ltd., respectively - to expand its technical and manufacturing capabilities and to enhance its distribution network, technology, and product portfolio.  Also in September 2011, the Company restructured to further align its business management structure and long-term growth strategy, and now operates through three wholly-owned subsidiaries.  Vaso Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the sales representation of GE diagnostic imaging products; Vasomedical Global Corp. operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. was formed to manage and coordinate our EECP® therapy business as well as other medical equipment operations.
 
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 joint venture is in the early implementation phase and had not begun operations as of June 30, 2014.
 
In June 2014, the Company entered into a Value Added Reseller Agreement (“VAR Agreement”) with GEHC to become a national value added reseller of GE Healthcare IT's Radiology PACS (Picture Archiving and Communication System) software solutions and related services, including implementation, management and support.  This multiyear VAR Agreement focuses primarily on existing customer segments currently served by Vaso Diagnostics on behalf of GEHC.  A new wholly owned subsidiary, VasoHealthcare IT Corp., has been subsequently formed to conduct the healthcare IT business.
 
We now report the operations of Vasomedical Global Corp. and Vasomedical Solutions, Inc. under our Equipment segment.  Vaso Diagnostics activities are included under our Sales Representation segment (see Note C).  VasoHealthcare IT operations, once commenced, will report under an additional segment.
 
 
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The Company expects to achieve profitability through its sales representation operations and its China operations, growth from the new GEHC VAR Agreement as well as by expanding its market presence and product portfolio.  In addition, the Company continues 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 (“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, 2013.

Results of Operations – For the Three Months Ended June 30, 2014 and 2013

Total revenue for the three months ended June 30, 2014 and 2013 was $7,864,000 and $7,896,000, respectively, a decrease of $32,000, or less than 1%. Net loss for the three months ended June 30, 2014 was $176,000 compared to a net loss of $537,000 for the three months ended June 30, 2013, an improvement of $361,000.  The decrease in net loss was primarily attributable to an increase in gross profit from our Sales Representation segment of $416,000 and a $251,000 decrease in selling, general and administrative costs, offset by a decrease in gross profit of $297,000 in our Equipment segment.  Our total net loss was $0.00 per basic and diluted common share for the three months ended June 30, 2014 and 2013. We have implemented changes in our Equipment segment operations to reduce sales, marketing and other operating costs and anticipate that the positive effects of these changes will be reflected in subsequent periods.
 
Revenues
 
Commission revenues in the Sales Representation segment were $6,684,000 in the second quarter of 2014, as compared to $6,391,000 in the second quarter of 2013, an increase of 5%.  The increase in commission revenue in the second quarter of 2014 is due primarily to an increase in the commission rate on equipment delivered, partially offset by a decreased volume of equipment delivered by GEHC.  The Company recognizes revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the GEHC Agreement prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.  As of June 30, 2014, $17,712,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $8,529,000 is long-term.  At June 30, 2013, $13,271,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $2,980,000 was long-term.
 
Revenue in our Equipment segment decreased by $325,000, or 22%, to $1,180,000 for the three-month period ended June 30, 2014 from $1,505,000 for the same period of the prior year.  Equipment segment revenue from equipment sales decreased by $320,000, or 29%, to $770,000 for the three-month period ended June 30, 2014 as compared to $1,090,000 for the same period in the prior year primarily due to $223,000 lower sales by our China operations, and $54,000 lower EECP® revenues as a result of lower sales volume.

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 reimbursement for EECP® therapy.

Equipment segment revenue from equipment rental and services decreased 1% to $410,000 in the second quarter of 2014 from $415,000 in the second quarter of 2013. Revenue from equipment rental and services represented 35% and 28% of total Equipment segment revenue in the second quarters of fiscal 2014 and fiscal 2013, respectively.  The decrease in revenue generated from equipment rentals and services is due primarily to decreased service contract revenues.


 
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Vasomedical, Inc. and Subsidiaries
Gross Profit

The Company had a gross profit of $5,482,000 in the second quarter of 2014 compared to $5,363,000 in the second quarter of the prior year, an increase of 2%.  The increase is principally due to higher commission rates in our Sales Representation segment on equipment orders booked in 2013, which were delivered and accepted in the second quarter of 2014.  Equipment segment gross profit decreased to $650,000, or 55% of Equipment segment revenues, for the second quarter of 2014 compared to $947,000, or 63% of Equipment segment revenues, for the same quarter of 2013.  Equipment segment gross profit decreased due to lower sales volume and a lower proportion of other medical equipment sales versus EECP® equipment sales, which have higher margins than EECP® equipment, in the second quarter of 2014.  Gross profit margin on EECP® equipment decreased due to lower shipment volume during the quarter and higher severance costs.
 
Sales Representation segment gross profit was $4,832,000, or 72%, for the three months ended June 30, 2014, as compared to $4,416,000, or 69%, for the three months ended June 30, 2013.  The increase was due to higher commission rates the Company received on equipment booked in 2013, coupled with commission expense which is at the same rate as in 2013 and offset by lower equipment delivery volume by GEHC in the second quarter of 2014.  Cost of commissions of $1,852,000 and $1,975,000, for the three months ended June 30, 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.
 
Operating Loss

Operating loss was $206,000 for the three months ended June 30, 2014 as compared to an operating loss of $532,000 for the three months ended June 30, 2013, a decrease of $326,000.  The decrease in operating loss was primarily attributable to the increase in gross profit in the Sales Representation segment as described above, where operating income was $1,021,000 for the second quarter of 2014 compared to operating income of $308,000 in the same quarter of the prior year.  Equipment segment operating loss increased by $394,000 to $875,000 in the second quarter of 2014 from $481,000 in the same period of the prior year, partially offsetting the Sales Representation segment increase.  As noted above, we have taken steps to reduce costs in our Equipment segment.
 
Selling, general and administrative (“SG&A”) expenses for the second quarter of 2014 and 2013 were $5,482,000, or 70% of revenues, and $5,733,000, or 73% of revenues, respectively, reflecting a decrease of $251,000 or approximately 4%. The decrease in SG&A expenditures in the second quarter of 2014 resulted primarily from the national sales meeting costs in the Sales Representation segment (as the meeting took place in the first quarter of 2014 but in the second quarter in 2013) partially offset by increased staffing costs associated with the recently introduced MobiCareTM product in the Equipment segment.
 
Research and development (“R&D”) expenses of $206,000, or 3% of revenues (17% of Equipment segment revenues), for the second quarter of 2014 increased by $44,000, or 27%, from $162,000, or 2% of revenues (11% of Equipment segment revenues), for the second quarter of 2013. The increase is primarily attributable to an increase in product development and clinical research expenses.

Interest and Other Income, Net

Interest and other income (expense), net for the second quarters of 2014 and 2013 was $44,000.
 
Income Tax Expense
 
During the second quarter of 2014 we recorded an income tax expense of $14,000 as compared to an income tax expense of $49,000 for the second quarter of 2013.  The decrease arose from reduced tax expense at our Chinese subsidiaries.  Our domestic deferred tax assets are not realizable on a more-likely-than-not basis and, therefore, we have recorded a full valuation allowance against our domestic deferred tax assets.
 

 
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Results of Operations – For the Six Months Ended June 30, 2014 and 2013
 
Total revenue for the six months ended June 30, 2014 and 2013 was $14,956,000 and $15,189,000, respectively, a decrease of $233,000, or 2%. Net loss for the six months ended June 30, 2014 was $1,220,000 compared to a net loss of $1,189,000 for the six months ended June 30, 2013.  The increase in net loss was primarily attributable to an increase of $186,000 in selling, general and administrative costs and a $117,000 increase in research and development costs, partially offset by a $223,000 increase in gross profit.  Our total net loss was $0.01 per basic and diluted common share for the six months ended June 30, 2014 and 2013, respectively.
 
Revenues
 
Commission revenues in the Sales Representation segment were $12,926,000 in the first half of 2014, as compared to $12,400,000 in the first half of 2013, an increase of 4%.  The increase in commission revenue in the first half of 2014 is due primarily to an increase in the commission rate on equipment delivered, partially offset by a decreased volume of equipment delivered by GEHC.  The Company recognizes revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable under the GEHC Agreement prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.
 
Revenue in our Equipment segment decreased by $759,000, or 27%, to $2,030,000 for the six-month period ended June 30, 2014 from $2,789,000 for the same period of the prior year.  Equipment segment revenue from equipment sales decreased by $713,000, or 36%, to $1,254,000 for the six-month period ended June 30, 2014 as compared to $1,967,000 for the same period in the prior year, primarily due to a decrease in sales at our China subsidiaries of $372,000 and a decrease of $314,000 in EECP® revenues as a result of lower sales volume.

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 reimbursement for EECP® therapy.

Equipment segment revenue from equipment rental and services decreased 6% to $776,000 in the first half of 2014 from $822,000 in the first half of 2013. Revenue from equipment rental and services represented 38% and 29% of total Equipment segment revenue in the first six months of fiscal 2014 and fiscal 2013, respectively.  The decrease in revenue generated from equipment rentals and services is due primarily to decreased service contract revenues, partially offset by higher field service revenues.
 
Gross Profit
 
The Company had a gross profit of $10,648,000 in the first half of 2014 compared to $10,425,000 in the first half of the prior year, an increase of 2%.  The increase is principally due to the increase in commission revenue discussed above.  Equipment segment gross profit decreased to $1,176,000, or 58% of Equipment segment revenues, for the first half of 2014 compared to $1,696,000, or 61% of Equipment segment revenues, for the same period of 2013.  Equipment segment gross profit declined due to lower equipment sales in the first half of 2014, partially offset by higher gross profit on equipment rentals and services.  Gross profit margin on EECP® equipment decreased as a result of lower shipment volume and an increase in severance costs.
 
Sales Representation segment gross profit was $9,472,000, or 73%, for the six months ended June 30, 2014 as compared to $8,729,000, or 70%, for the six months ended June 30, 2013.  The increase was due to higher commission rates in this segment, as explained above, partially offset by lower delivery volume in the first half of 2014.  Cost of commissions of $3,454,000 and $3,671,000, for the six months ended June 30, 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.

 
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Operating Loss

Operating loss was $1,294,000 for the six months ended June 30, 2014 as compared to an operating loss of $1,214,000 for the six months ended June 30, 2013, an increase of $80,000.  The increase in operating loss was primarily attributable to an increase in operating loss of $830,000 in the Equipment segment to $1,955,000 in the first half of 2014 from an operating loss of $1,125,000 in the same period of the prior year and a $124,000 increase in Corporate expenses during the same period, partially offset by improved operating performance in the Sales Representation segment, where operating income was $1,544,000 for the first half of 2014 compared to a operating income of $670,000 in the same period of the prior year.  As noted previously, we have taken steps to reduce sales, marketing and other operating costs in our Equipment segment.
 
Selling, general and administrative (“SG&A”) expenses for the first half of 2014 and 2013 were $11,523,000, or 77% of revenues, and $11,337,000, or 75% of revenues, respectively, reflecting an increase of $186,000 or approximately 2%. The increase in SG&A expenditures in the first half of 2014 resulted primarily from increased staffing costs associated with the recently introduced MobiCareTM product in the Equipment segment as well as higher corporate expenses, primarily directors fees.
 
Research and development (“R&D”) expenses of $419,000, or 3% of revenues (21% of Equipment segment revenues), for the first half of 2014 increased by $117,000, or 39%, from $302,000, or 2% of revenues (11% of Equipment segment revenues), for the first half 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, as well as an increase in product development and clinical research expenses.
 
Interest and Other Income, Net

Interest and other income, net for the first half of 2014 was $98,000 as compared to $82,000 for the first half of 2013. The increase was due primarily to higher government grants received by our Chinese subsidiaries.
 
Income Tax Expense

During the first half of 2014 we recorded income tax expense of $24,000 as compared to income tax expense of $57,000 for the first half of 2013.  The decrease resulted from lower tax expense at our Chinese subsidiaries.   Our domestic deferred tax assets are not realizable on a more-likely-than-not basis and, therefore, we have recorded a full valuation allowance against our domestic deferred tax assets.
 
Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations from working capital.  At June 30, 2014, we had cash and cash equivalents of $9,986,000, short-term investments of $111,000 and working capital of $5,508,000 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 $2,438,000 during the first six months of 2014, which consisted of a net loss after adjustments to reconcile net loss to net cash of $773,000, offset by cash provided by operating assets and liabilities of $3,211,000. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $6,030,000, partially offset by increases in other assets of $1,276,000 and decreases in accrued expenses of $966,000.  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 in the first half of 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 the first half of 2014.

Cash used in investing activities during the six-month period ended June 30, 2014 was $205,000 for the purchase of equipment and software.

Cash used in financing activities during the six-month period ended June 30, 2014 was $207,000 for the repurchase of common stock.

 
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Liquidity
 
The Company expects to achieve profitability through its sales representation operations and its China operations, growth from the new GEHC VAR agreement, as well as by expanding its market presence and product portfolio.  In addition, the Company continues to pursue acquisitions or partnership opportunities in the international and domestic markets and to expand its sales representation business.
 
Based on our operations through June 30, 2014 and our current business outlook for the ensuing year, we believe internally generated funds from our business segments will be sufficient for the Company to continue operations through at least July 1, 2015 and to fund the Genwell acquisition.


 
 
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ITEM 4 - CONTROLS AND PROCEDURES

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

Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014 and have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2014.

Changes in Internal Control Over Financial Reporting

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




 
 
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PART II - OTHER INFORMATION

ITEM 5 – OTHER INFORMATION
 
On May 20, 2014, Vasomedical, Inc. (the “Company”) held its 2014 Annual Meeting of Shareholders (the “Annual Meeting”).  At the Annual Meeting, shareholders of record on March 28, 2014 were entitled to vote 156,223,981 shares of the Company’s common stock (the “Common Stock”).  A total of 137,000,928 shares of Common Stock (87.7% of all shares entitled to vote at the Annual Meeting) were represented at the Annual Meeting in person or by proxy.
 
At the Annual Meeting, the shareholders of the Company (i) elected two Class III director nominees to hold office until the 2017 Annual Meeting of Shareholders and until their successors are elected, and (ii) ratified the appointment of Rothstein Kass & Company, P.C. as the Company’s independent registered public accountants for the fiscal year ended December 31, 2014.  Set forth below are the final voting results for each of the proposals submitted to a vote of the shareholders.

Election of Directors
 
The shareholders of the Company elected each of the director nominees proposed by the Company’s Board of Directors.  The voting results were as follows:
 

             
   
FOR
   
WITHHELD
 
Jun Ma
    83,820,231       9,577,596  
David Lieberman
    83,995,771       9,402,056  

Ratification of Appointment of Independent Registered Public Accountants
 
The shareholders of the Company ratified the appointment of Rothstein Kass & Company, P.C. as the Company’s independent registered public accountants for the fiscal year ended December 31, 2014.  The voting results were as follows:

               
FOR
   
AGAINST
   
ABSTAIN
 
  119,483,167       17,350,532       167,229  
 
 
 
 
Change in Independent Registered Public Accountants
 
As disclosed on Forms 8-K filed on July 7, 2014 and July 11, 2014, KPMG LLP (“KPMG”) acquired certain assets of Rothstein Kass, P.A. (d/b/a Rothstein Kass & Company, P.C.) and certain of its affiliates (“Rothstein Kass”), the independent registered public accounting firm for Vasomedical, Inc. (the “Company”) on June 30, 2014.  As a result of this transaction, Rothstein Kass effectively resigned as the independent registered public accounting firm for the Company.  On July 10, 2014, the Company’s audit committee approved the engagement of KPMG as the new independent registered public accounting firm for the Company.

 
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ITEM 6 – EXHIBITS
 

 
Exhibits
 
10
Stock Purchase Agreement among the shareholders of Genwell Instruments Co., Ltd., Wuxi Gentong Instruments Co., Ltd., and Genwell Instruments Co., Ltd.
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.





 
 
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Vasomedical, Inc. and Subsidiaries
 

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


VASOMEDICAL, INC.

By:           /s/ Jun Ma                                           
Jun Ma
 
President and Chief Executive Officer
 
(Principal Executive Officer)

/s/ Michael J. Beecher
Michael J. Beecher
 
Chief Financial Officer and Principal Accounting Officer

Date:  August 13, 2014

 
 
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