Edgar Filing: HEARUSA INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 26, 2010

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 001-11655

HearUSA, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		22-2748248
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1250 Northpoint Parkway, West Palm Beach, Florida		33407
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (561) 478-8770

Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨

Smaller reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No þ

On August 5, 2010, 45,447,433 shares of the Registrant’s Common Stock were outstanding.

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets
	June 26, 2010 and December 26, 2009	3

	Consolidated Statements of Operations
	Six months ended June 26, 2010 and June 27, 2009	4

	Consolidated Statements of Operations
	Three months ended June 26, 2010 and June 27, 2009	5

	Consolidated Statements of Cash Flows
	Six months ended June 26, 2010 and June 27, 2009	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 6.	Exhibits	34

	Signatures	35

Part I – Financial Information

Item 1. Financial Statements

HearUSA, Inc.

Consolidated Balance Sheets

(unaudited)

	June 26,			December 26,
	2010			2009
	(Dollars in thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	4,026		$	7,037
Short-term marketable securities		1,306			4,106
Accounts and notes receivable, less allowance for doubtful accounts of $677 and $616		5,506			5,554
Inventories		1,409			1,844
Prepaid expenses and other		417			464
Total current assets		12,664			19,005
Property and equipment, net		3,463			4,021
Goodwill		51,928			51,495
Intangible assets, net		12,529			12,816
Deposits and other		698			731
Restricted cash and cash equivalents		3,252			3,245
Total Assets	$	84,534		$	91,313

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	9,458		$	7,070
Accrued expenses		1,907			2,253
Accrued salaries and other compensation		3,224			3,520
Current maturities of long-term debt		5,357			5,983
Income taxes payable		-			1,974
Dividends payable		35			35
Total current liabilities		19,981			20,835
Long-term debt		33,781			36,139
Deferred income taxes		7,775			7,335
Total long-term liabilities		41,556			43,474
Commitments and contingencies

Stockholders’ equity
Preferred stock (aggregate liquidation preference $2,330, $1 par, 7,500,000 shares authorized)
Series H Junior Participating (none outstanding)		-			-
Series J (233 shares outstanding)		-			-
Total preferred stock		-			-

Common stock: $.10 par; 75,000,000 shares authorized 45,451,160 and 45,381,750 shares issued		4,545			4,538
Additional paid-in capital		138,359			137,863
Accumulated deficit		(119,804	)		(114,982	)
Treasury stock, at cost: 523,662 common shares		(2,485	)		(2,485	)
Total HearUSA, Inc. Stockholders’ Equity		20,615			24,934
Noncontrolling interest		2,382			2,070
Total Stockholders’ equity		22,997			27,004
Total Liabilities and Stockholders’ Equity	$	84,534		$	91,313

See accompanying notes to consolidated financial statements

HearUSA, Inc

Consolidated Statements of Operations

Six Months Ended June 26, 2010 and June 27, 2009

(unaudited)

	June 26,			June 27,
	2010			2009
	(Dollars in thousands, except per share amounts)

Net revenues
Hearing aids and other products	$	37,791		$	41,560
Services		3,213			3,829
Total net revenues		41,004			45,389

Operating costs and expenses
Hearing aids and other products		9,869			10,452
Services		836			889
Total cost of products sold and services excluding depreciation and amortization		10,705			11,341

Center operating expenses		23,611			22,690
General and administrative expenses		7,786			7,675
Depreciation and amortization		1,134			1,138
Total operating costs and expenses		43,236			42,844

Income (loss) from operations		(2,232	)		2,545
Non-operating income (expenses)
Gain on foreign exchange		15			375
Interest income		7			-
Interest expense		(1,790	)		(2,589	)
Income (loss) from continuing operations before income tax expense		(4,000	)		331
Income tax expense		(440	)		(420	)
Loss from continuing operations		(4,440	)		(89	)
Discontinued operations attributable to HearUSA, Inc.
Income from discontinued operations, net of income tax benefit of $261 in 2009		-			1,159
Gain on sale of discontinued operations		-			1,632
Income tax expense on sale of discontinued operations		-			(1,546	)
Income from discontinued operations		-			1,245
Net income (loss)		(4,440	)		1,156

Net income attributable to noncontrolling interest		(312	)		(247	)
Net income (loss) attributable to HearUSA, Inc.		(4,752	)		909
Dividends on preferred stock		(70	)		(68	)

Net Income (loss) attributable to HearUSA, Inc. common stockholders	$	(4,822	)	$	841

Loss from continuing operations attributable to HearUSA, Inc. common stockholders per common share – basic and diluted	$	(0.11	)	$	(0.01	)

Net loss attributable to HearUSA, Inc. common stockholders per common share – basic	$	(0.11	)	$	0.02
Net loss attributable to HearUSA, Inc. common stockholders per common share –diluted	$	(0.11	)	$	0.02
Weighted average number of shares of common stock outstanding – basic and diluted		44,894			44,837

Amounts attributable to HearUSA, Inc. common stockholders:

Loss from continuing operations, net of tax	$	(4,752	)	$	(336	)
Discontinued operations, net of tax		-			1,245

Net income (loss) attributable to HearUSA, Inc. common stockholders	$	(4,752	)	$	909

See accompanying notes to consolidated financial statements

HearUSA, Inc

Consolidated Statements of Operations

Three Months Ended June 26, 2010 and June 27, 2009

(unaudited)

	June 26,			June 27,
	2010			2009
	(Dollars in thousands, except per share amounts)

Net revenues
Hearing aids and other products	$	19,796		$	20,653
Services		1,613			2,014
Total net revenues		21,409			22,667

Operating costs and expenses
Hearing aids and other products		5,290			5,072
Services		412			388
Total cost of products sold and services excluding depreciation and amortization		5,702			5,460

Center operating expenses		12,209			10,908
General and administrative expenses		3,769			3,661
Depreciation and amortization		564			588
Total operating costs and expenses		22,244			20,617

Income (loss) from operations		(835	)		2,050
Non-operating income (expenses)
Gain (loss) on foreign exchange		(5	)		375
Interest income		5			-
Interest expense		(841	)		(1,252	)
Income (loss) from continuing operations before income tax expense		(1,676	)		1,173
Income tax expense		(220	)		(210	)
Income (loss) from continuing operations		(1,896	)		963
Discontinued operations attributable to HearUSA, Inc.
Income from discontinued operations, net of income tax benefit of $270 in 2009		-			250
Gain on sale of discontinued operations		-			1,632
Income tax expense on sale of discontinued operations		-			(1,546	)
Income from discontinued operations		-			336
Net income (loss)		(1,896	)		1,299

Net income attributable to noncontrolling interest		(238	)		(131	)
Net income (loss) attributable to HearUSA, Inc.		(2,134	)		1,168
Dividends on preferred stock		(32	)		(35	)

Net Income (loss) attributable to HearUSA, Inc. common stockholders	$	(2,166	)	$	1,133

Loss from continuing operations attributable to HearUSA, Inc. common stockholders per common share – basic	$	(0.05	)	$	0.02
Loss from continuing operations attributable to HearUSA, Inc. common stockholders per common share – diluted	$	(0.05	)	$	0.02

Net loss attributable to HearUSA, Inc. common stockholders per common share – basic	$	(0.05	)	$	0.03
Net loss attributable to HearUSA, Inc. common stockholders per common share – diluted	$	(0.05	)	$	0.02

Weighted average number of shares of common stock outstanding – basic		44,922			44,837
Weighted average number of shares of common stock outstanding – diluted		44,922			45,340

Amounts attributable to HearUSA, Inc. common stockholders:

Income (loss) from continuing operations, net of tax	$	(2,134	)	$	832
Discontinued operations, net of tax		-			336

Net income (loss) attributable to HearUSA, Inc. common stockholders	$	(2,134	)	$	1,168

See accompanying notes to consolidated financial statements

HearUSA, Inc.

Consolidated Statements of Cash Flows

Six Months Ended June 26, 2010 and June 27, 2009

(unaudited)

	June 26,			June 27,
	2010			2009
	(Dollars in thousands)
Cash flows from operating activities
Net income (loss)	$	(4,440	)	$	1,156
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,134			1,272
Stock-based compensation		526			398
Gain on foreign exchange		(15	)		(375	)
Gain on sale of discontinued operations, net of tax expense		-			(86	)
Provision for doubtful accounts		241			259
Deferred income tax expense		440			420
Non-cash interest on notes payable		101			167
Non-cash (gain) loss on warrant liability		(139	)		36
Principal payments on long-term debt made through rebate credits		(1,535	)		(1,660	)
Other		3			14
(Increase) decrease in:
Accounts and notes receivable		(193	)		(16	)
Inventories		375			(15	)
Prepaid expenses and other		100			(28	)
Increase (decrease) in:
Accounts payable and accrued expenses		198			2,610
Accrued salaries and other compensation		(330	)		(255	)
Net cash provided by (used in) operating activities		(3,534	)		3,897

Cash flows from investing activities
Purchase of property and equipment		(151	)		(394	)
Purchase of intangible assets		(47	)		(157	)
Net proceeds from sale of Canada assets		-			22,046
Net proceeds from the sale (purchases) of short-term marketable securities		2,800			(9,402	)
Business acquisitions		(248	)		(1,313	)
Net cash provided by investing activities		2,354			10,780

Cash flows from financing activities
Proceeds from issuance of long-term debt		200			-
Principal payments on long-term debt		(1,991	)		(2,406	)
Principal payments on Siemens debt		-			(8,097	)
Dividends paid on preferred stock		(70	)		(68	)
Net cash used in financing activities		(1,861	)		(10,571	)

Effects of exchange rate changes on cash		30			(92	)
Net (decrease) increase in cash and cash equivalents		(3,011	)		4,014
Cash and cash equivalents at the beginning of period		7,037			3,553
Cash and cash equivalents at the end of period	$	4,026		$	7,567

Supplemental disclosure of cash flows information:
Cash paid for interest	$	179		$	295

Cash paid for income taxes	$	1,923		$	-

Supplemental schedule of non-cash investing and financing activities:
Principal payments on long-term debt made through rebate credits	$	(1,535	)	$	(1,660	)

Issuance of notes payable in exchange for business acquisitions	$	216		$	1,217

Issuance of capital lease in exchange for property and equipment	$	23		$	272

See accompanying notes to consolidated financial statements

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six month period ended June 26, 2010 are not necessarily indicative of the results that may be expected for the year ending December 25, 2010. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 26, 2009.

1.	Description of the Company and Summary of Significant Accounting Policies

The Company

HearUSA Inc. (“HearUSA” or “the Company”), a Delaware corporation, was established in 1986. As of June 26, 2010, the Company has a network of 177 company-owned hearing care centers in eleven states. The Company also sponsors a network of approximately 2,000 credentialed audiology providers that participate in selected hearing benefit programs contracted by the Company with employer groups, health insurers and benefit sponsors. The centers and the network providers provide audiological products and services for the hearing impaired. The Company is also the administrator of the American Association of Retired Persons (“AARP”) Hearing Care program, the only hearing aid program endorsed by AARP, designed to help members of AARP who have hearing loss. Under this program, the Company has agreed to provide to the members of AARP in the fifty states, the District of Columbia, and the five U.S. Territories, discounts on hearing aids and related services through the Company’s company-owned centers and independent network of participating hearing care providers. Hearing aids sold under the program will come with a three year limited warranty and a three year supply of batteries included in the price of the hearing aid.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned and majority controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statement amounts to conform to the current presentation.

The Company’s 50%-owned joint venture, HEARx West, LLC, generated net income during the three and six months ended June 26, 2010, of approximately $462,000 and $625,000, respectively, and $231,000 and $461,000 during the three and six months ended June 27, 2009, respectively. Because the Company is the general manager of HEARx West and its day to day operations, the Company has significant control over the joint venture. Therefore, the accounts of HEARx West, LLC and its wholly owned subsidiary, HEARx West, Inc. are consolidated in these financial statements.

The Company’s HEARx West joint venture partners are the Permanente Federation LLC and Kaiser Foundation Health Plan, Inc. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, “Consolidations” (see Note 5 - Noncontroliing Interest), the Company records 50% of the joint venture’s net income (loss) as income (loss) attributable to noncontrolling interests in the Company’s consolidated statements of operations with a corresponding noncontrolling interest in stockholders’ equity on its consolidated balance sheets. The Company’s accompanying consolidated financial statements reflect this guidance.

The Company sold the assets of Helix Hearing Care of America Corp. and the stock of 3371727 Canada Inc., both indirect wholly owned subsidiaries of the Company, on April 27, 2009 as discussed in Note 2.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Net income (loss) attributable to controlling interest per common share

Basic earnings per share (“EPS”), is computed by dividing net income or loss attributable to HearUSA, Inc. common stockholders by the weighted average of common shares outstanding for the period. Basic EPS from continuing operations is computed by dividing income (loss) from continuing operations attributable to HearUSA, Inc.’s common stockholders, by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase common stock, restricted stock units and options) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded where their effect would be antidilutive.

Common stock equivalents for outstanding options and warrants to purchase common stock, of approximately 1.2 million and 1.3 million, were excluded from the computation of earnings per share – diluted for the three and six months ended June 26, 2010, respectively and 518,726 and 407,892 for the three and six months ended June 27, 2009, respectively, because the loss from continuing operations attributable to HearUSA, Inc. would make them anti-dilutive.

For purposes of computing net income/loss attributable to HearUSA, Inc. per common stockholder – basic and diluted, for both the three and six months ended June 27, 2009, the weighted average number of shares of common stock outstanding includes the effect of the 497,415 exchangeable shares of HEARx Canada, Inc., as if they were outstanding common stock of the Company. These exchangeable shares were exchanged for common stock of the Company in December 2009.

Comprehensive income (loss)

Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company's other comprehensive income (loss) for the three and six months ended June 27, 2009 represents foreign currency translation adjustments.

Components of comprehensive income (loss) are as follows:

	Six Months Ended						Three Months Ended
Dollars in thousands	June 26, 2010			June 27, 2009			June 26, 2010			June 27, 2009
Net income (loss) for the period	$	(4,440	)	$	1,156		$	(1,896	)	$	1,299
Other comprehensive income (loss):
Foreign currency translation adjustments		-			89			-			319
Comprehensive income (loss) for the period	$	(4,440	)	$	1,245		$	(1,896	)	$	1,618
Comprehensive income attributable to noncontrolling interest		(312	)		(247	)		(238	)		(131	)
Comprehensive income (loss) attributable to HearUSA, Inc.	$	(4,752	)	$	998		$	(2,134	)	$	1,487

2. Discontinued Operations

On April 27, 2009, the Company sold the assets of Helix Hearing Care of America Corp. (the “Seller”) and the stock of 3371727 Canada Inc. (“Canada”), both indirect wholly owned subsidiaries of the Company, to an unrelated company, for cash consideration of approximately $23.1 million, which resulted in a gain on sale of approximately $931,000, net of applicable tax, for the year ended December 26, 2009. We incurred approximately $524,000 of legal and financial advisory fees in connection with the sale, which are included in the net gain on sale. The Company repaid approximately $8.1 million of Siemens debt from the proceeds of this transaction during 2009, as required under the agreement with Siemens.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

In connection with the sale, we agreed to provide certain transitional services to the purchaser for eighteen months pursuant to a support agreement. HearUSA agreed to provide training, installation and support services for eighteen months in exchange for monthly payments totaling approximately $1.2 million and transition support services for up to nine months for quarterly payments totaling approximately $331,000. We believe the majority of these services have already been provided. Pursuant to a separate agreement between HearUSA and a third party, HearUSA sold the right to the approximately $1.2 million to be received over eighteen months under the support agreement in exchange for a lump-sum payment of approximately $1.1 million at the closing of the asset sale. The fees earned from these services are accounted for as contract service revenues, as the services are provided. Approximately$224,000 and $510,000 was recorded as contract service revenue in the three and six months ended June 26, 2010, respectively.

As a result of the sale, the operations of the Canadian division have been discontinued and, accordingly, these operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations.

The Canadian division’s results of operations for the three and six months ended June 27, 2009 were as follows:

	For the six months ended			For the three months ended
	June 27, 2009			June 27, 2009

Revenue	$	4,559		$	1,133

Cost and expenses		3,661			1,153

Income (loss) before provision of income taxes		898			(20	)

Income tax expense (benefit)		(261	)		(270	)

Income from discontinued operations		1,159			250

Gain on sale of discontinued operations, net of applicable tax of $1,546		86			86
Income from discontinued operations	$	1,245		$	336

Income from discontinued operations - basic	$	0.03		$	0.01

Income from discontinued operations - diluted	$	0.03		$	0.01

The Company received approximately $529,000 in escrow funds in July 2009 and $299,000 in October of 2009 which resulted in a gain on sale of approximately $905,000.

3. Business Acquisitions

During the first six months of 2010, the Company acquired the assets of one hearing care center in Michigan in one transaction. Consideration paid was cash of approximately $248,000 and notes payable with an estimated fair value of approximately $216,000. In connection with the acquisition, the Company used approximately $200,000 of its acquisition line of credit with Siemens (see Note 4 – Long-term Debt. The Company has recorded its preliminary purchase price allocation using the fair values of the assets acquired based on management’s best estimates. Accordingly, the following estimates may change as further information becomes available. The acquisition resulted in additions to goodwill of approximately $401,000, fixed assets of approximately $7,000 and customer lists and non-compete agreements of approximately $56,000. This acquisition is not considered material to our results of operations, either individually, or in the aggregate, and therefore, no pro forma information is presented.

The operating results of the acquired businesses are included in our consolidated statements of operations from the effective date of the acquisition.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

The allocated value of the customer lists, non-compete agreements and contracts from acquired businesses are recorded as intangible assets on the consolidated balance sheets.

Goodwill of $401,000 recorded for tax purposes is deductible over a 15 year period for tax purposes.

4. Long-term Debt

Long-term debt consists of the following:

	June 26,		December 26,
Dollars in thousands	2010		2009

Notes payable to Siemens
Tranche B	$	4,298	$	4,387
Tranche C		29,624		30,870
Total notes payable to Siemens		33,922		35,257
Notes payable from business acquisitions and other		5,216		6,865
		39,138		42,122
Less current maturities		5,357		5,983
	$	33,781	$	36,139

The approximate aggregate maturities of principal on long-term debt obligations, net of discounts are as follows (dollars in thousands):

For the twelve months ended June:

2011	$	5,537
2012		4,238
2013		2,740
2014		2,502
2015		24,344

Notes payable to Siemens

The Company has entered into credit, supply, investor rights and security agreements with Siemens Hearing Instruments, Inc. (“Siemens”). The term of the current agreements extends to February 2015.

Pursuant to these agreements, Siemens has extended to the Company a $50 million credit facility and the Company has agreed to purchase at least 90% of its hearing aid purchases from Siemens and its affiliates. If the 90% minimum purchase requirement is met, the Company earns rebates which are then used to liquidate principal and interest payments due under the credit agreement.

Credit Agreement

The credit agreement includes a revolving credit facility of $50 million that bears interest at 9.5%, matures in February 2015 and is secured by substantially all of the Company’s assets. Amounts available to be borrowed under the credit facility are to be used solely for acquisitions unless otherwise approved by Siemens. Borrowings under the credit facility are accessed through Tranche B and Tranche C. Borrowing for acquisitions under Tranche B is generally based upon a formula equal to 1/3 of 70% of the acquisition target’s trailing 12 months revenues, and any amount greater than that may be borrowed under Tranche C with Siemens’ approval. Principal borrowed under Tranche B was repaid quarterly at a rate of $65 per Siemens unit purchased by the acquired businesses through September 2009. In October 2009, the parties agreed to reduce the rebate to a rate of $50 per Siemens’ unit purchased by the acquired businesses in exchange for more favorable pricing. Principal borrowed under Tranche C is repaid at $500,000 per quarter. The required quarterly principal and interest payments on Tranches B and C are forgiven by Siemens through rebate credits of similar amounts as long as 90% of hearing aid units purchased by the Company are from Siemens. Amounts not forgiven through rebate credits are payable in cash each quarter. The Company has met the minimum purchase requirements of the arrangement since inception of the arrangement with Siemens.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

The credit agreement requires that the Company reduce the principal balance by making annual payments in an amount equal to 20% of Excess Cash Flow (as defined in the credit agreement), and by paying Siemens 50% of the proceeds of any net asset sales (as defined) and 25% of proceeds from any equity offerings the Company may complete. The Company did not have any Excess Cash Flow (as defined) in the first six months of 2010 or fiscal 2009. In 2009 the Company paid Siemens approximately $8.1 million of the proceeds received from the sale of the Company’s Canadian operations in 2009.

The credit facility also imposes certain financial and other covenants on the Company which are customary for loans of this size and nature, including restrictions on the conduct of the Company’s business, the incurrence of indebtedness, merger or sale of assets, the modification of material agreements, changes in capital structure and making certain payments. If the Company cannot maintain compliance with the covenants, Siemens may terminate future funding under the credit agreement and declare all then outstanding amounts under the agreement immediately due and payable. At June 26, 2010 the Company was in compliance with the Siemens loan covenants.

Supply Agreement

The supply agreement extends to February 2015 and requires the Company to purchase at least 90% of its hearing aid purchases from Siemens and its affiliates. The 90% requirement is computed on a cumulative four consecutive quarters. The Company has met the minimum purchase requirements of the supply agreement since inception of the arrangement with Siemens. Approximately $44.0 million has been rebated since the Company entered into this arrangement in December 2001.

Additional quarterly volume rebates of $156,250, $312,500 or $468,750 can be earned by meeting certain quarterly volume tests. These rebates reduce the principal due on the credit facility. Additional volume rebates of $312,500 were recorded in each of the first two quarters of 2010 and 2009.

All rebates earned are accounted for as a reduction of cost of products sold.

The following table summarizes the rebate structure:

	Calculation of Pro forma Rebates to HearUSA when at least 90% of Units Purchased are from Siemens (1)
	Quarterly Siemens Unit Sales Compared to Prior Years' Comparable Quarters

	90% but < 95%		95% to 100%		> 100% < 125%		125% and >
Acquisition rebate (2)	$50/ unit		$50/ unit		$50/ unit		$50/ unit
	Plus		Plus		Plus		Plus
Notes payable rebate	$	500,000	$	500,000	$	500,000	$	500,000
Additional volume rebate		-		156,250		312,500		468,750
Interest forgiveness rebate (3)		1,187,500		1,187,500		1,187,500		1,187,500
	$	1,687,500	$	1,843,750	$	2,000,000	$	2,156,250

(1) Calculated using trailing twelve month units purchased by the Company

(2) Siemens units purchased from acquired businesses ($65 per unit through September 2009 and $50 per unit thereafter)

(3) Assuming the $50 million of the line of credit is fully utilized

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

The following table shows the rebates received from Siemens pursuant to the supply agreement during each of the following periods:

	Six Months Ended				Three Months Ended
Dollars in thousands	June 26, 2010		June 27, 2009		June 26, 2010		June 27, 2009

Portion applied against quarterly principal payments	$	1,535	$	1,660	$	771	$	825
Portion applied against quarterly interest payments		1,640		2,093		815		1,008
	$	3,175	$	3,753	$	1,586	$	1,833

The supply agreement may be terminated by either party upon a material breach of the agreement by the other party. In addition, HearUSA may terminate the supply agreement in the event Siemens acquires a business which is directly competitive to the business of the Company. Termination of the supply agreement or a material breach of the supply agreement may be deemed to be a breach of the credit agreement and Siemens would have the right to declare all amounts outstanding under the credit facility immediately due and payable. Termination of the supply agreement could have a material adverse effect on the Company’s financial condition and continued operations.

Investor Rights Agreement

Pursuant to the investor rights agreement, the Company granted Siemens:

Resale registration rights covering the 6.4 million shares of common stock acquired by Siemens on December 23, 2008 under the Siemens Purchase Agreement. The Company completed the registration of these shares for resale in the second quarter of 2009.

Certain rights of first refusal in the event the Company chooses to issue equity or if there is a change of control transaction involving a person in the hearing aid industry.

The rights to have a representative of Siemens’ attend meetings of the Board of Directors of the Company as a nonvoting observer.

A willful breach of the Company’s resale registration obligations under the investor rights agreement may be deemed to be a breach of the credit agreement and Siemens would have the right to declare all amounts outstanding under the credit facility immediately due and payable.

Notes payable from business acquisitions and other

Notes payable from business acquisitions and other are primarily notes payable related to acquisitions of hearing care centers and total approximately $4.4 million and $5.9 million at June 26, 2010 and December 26, 2009, respectively. They have a face value of $4.7 million and $6.2 million at June 26, 2010 and December 26, 2009, respectively, and are payable in monthly or quarterly installments of principal and interest varying from $3,000 to $71,000 over periods varying from two to five years, bearing interest at rates varying from 5% to 7%. The notes have been discounted using market rates ranging from 9.5% to 10%. The discounts are being accreted over the term of the notes on an effective interest method. Discount accretion of approximately $101,000 and $167,000 has been included in interest expense in the six months ended June 26, 2010 and June 27, 2009.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Other notes payable relate mostly to capital leases totaling approximately $789,000 and $954,000 at June 26, 2010 and December 26, 2009, respectively, payable in monthly or quarterly installments varying from $400 to $10,000 over periods varying from one to five years and bearing interest at rates varying from 4.6% to 16.7%.

5. Noncontrolling Interest

The Company accounts and reports for noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries under FASB ASC 810-10, “Consolidations.” The guidance requires that: (1) a noncontrolling interest, previously referred to as minority interest, is to be reported as part of equity in the consolidated financial statements; (2) losses are to be allocated to a noncontrolling interest even when such allocation might result in a deficit balance, thereby reducing the losses attributed to the controlling interest; (3) changes in ownership interest are to be treated as equity transactions if control is maintained; (4) changes in ownership interest resulting in a gain or loss are to be recognized in earnings if control is gained or lost; and (5) in a business combination the noncontrolling interest’s share of net assets acquired is to be recorded at fair value, plus its share of goodwill.

A reconciliation of noncontrolling interest of our subsidiary HEARx West, LLC for the six months ended June 26, 2010 is as follows:

	Amount (thousands)
Balance at December 26, 2009	$	2,070
Joint venture earnings		312
Dividends to joint venture partners		-
Balance at June 26, 2010	$	2,382

6. Fair Value

As of June 26, 2010 and December 26, 2009, the fair value of the Company’s long-term debt is estimated at approximately $39.1 million and $43.3 million, respectively, based on discounted cash flows and the application of the fair value interest rates applied to the expected cash flows, which is consistent with its carrying value. The Company has determined that the long-term debt is defined as Level 2 in the fair value hierarchy. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.

The book values of cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments. These are Level 1 in the fair value hierarchy.

The inputs used in measuring fair value into the fair value hierarchy are as follows:

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2

Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable;

Level 3

Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Assets or liabilities that have recurring fair value measurements are shown below as of June 26, 2010 (in thousands):

Description	Total as of June 26, 2010		Level 1		Level 2

Short-term marketable securities	$	1,306	$	1,306	$	-

Warrant liability included in accounts payable	$	83	$	-	$	83

The Company’s short-term marketable securities primarily consist of money market mutual funds invested in U.S. treasury securities generally maturing in three months or less. These securities are classified as available for sale. There was no unrealized gain or loss as of or for the quarter ended June 26, 2010.

There are no assets or liabilities measured at fair value on a non-recurring basis during the first six months of 2010, except for the assets acquired in the business acquisition described in Note 3.

The fair value of financial instruments represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported.

Effective December 28, 2008 we adopted guidance related to determining whether an instrument or embedded feature is indexed to an entity’s own stock. This guidance applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting this accounting guidance, outstanding common stock purchase warrants to purchase 200,000 common shares that were previously treated as equity pursuant to the derivative treatment exemption, were no longer afforded equity treatment. These warrants have an exercise price of $0.60 per share and expire on October 1, 2010. As such, effective December 28, 2008 we reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in December 2003. On December 28, 2008, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $56,000 to beginning accumulated deficit and $52,000 to a warrant liability to recognize the fair value of these warrants on such date. The fair value of these common stock purchase warrants decreased from $222,000 as of December 26, 2009 to $83,000 as of June 26, 2010. We recognized a gain of $139,000 for the change in the fair value of these warrants for the six months ended June 26, 2010.

These common stock purchase warrants were initially issued in connection with our December 2003 issuance of convertible debt, which was subsequently paid. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised or expire.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	June 26,
	2010
Risk free interest rate		0.1	%
Expected life in years		0.3
Expected volatility		54	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to expected term of these warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on ninety days U.S. Treasury note rates.

7. Stock-based Compensation

Under the terms of the Company’s equity compensation plans, employees and non-employee directors may be granted options to purchase the Company’s common stock at a price equal to the closing price of the Company’s common stock on the date the option is granted as well as restricted stock and restricted stock units. We recognize stock-based compensation expense based on the estimated grant date fair value using a Black-Scholes valuation model. Stock-based compensation expense is included in general and administrative expenses and totaled approximately $308,000 and $526,000 (of which approximately $53,000 and $73,000 relates to restricted stock units) in the three and six months ended June 26, 2010, respectively, and $208,000 and $398,000 (of which approximately $19,000 and $32,000 relates to restricted stock units) in the three and six months ended June 27, 2009, respectively.

In the first six months of 2010, the Company granted 443,750 options at exercise prices between $1.74 and $1.35 to certain employees. These options vest ratably over the next four years. The Company also granted 180,000 options at an exercise price of $1.00 to non-employee directors. These options vest ratably over the next three years. In the first six months of 2009, the Company granted 800,000 options at an exercise price of $0.53 to certain employees. These options vest ratably over the next three years.

The expected term of the options represents the estimated period of time from grant until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of our stock for a period of at least equal to the expected term. The risk-free interest rate is based on the implied yield available on United States Treasury zero-coupon issues with an equivalent remaining term. We have not paid dividends in the past and do not plan to pay any dividends in the foreseeable future.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Stock-based payment award activity

The following table provides additional information regarding options outstanding and options that were exercisable as of June 26, 2010 (options and intrinsic value in thousands):

						Weighted
						Average
						Remaining
				Weighted Average		Contractual Term	Aggregate
	Shares			Exercise Price		(in years)	Intrinsic Value
Outstanding at December 26, 2009		6,267		$	1.16			-
Granted		624			1.26			-
Exercised		-			-			-
Forfeited/expired/cancelled		(87	)		2.81			-
Outstanding at June 26, 2010		6,804		$	1.14	5.92	$	1,121
Exercisable at June 26, 2010		4,355		$	1.13	4.33	$	794

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the options that were in-the-money at June 26, 2010. There was approximately $2.0 million of total unrecognized compensation cost related to share-based compensation under our stock award plans as of June 26, 2010. That cost is expected to be recognized over the remaining average life of 6 years as of June 26, 2010. At June 26, 2010, the aggregate intrinsic value of the employee and non-employee director options outstanding and exercisable was approximately $1.1 million, of which $71,000 is non-employee director aggregate intrinsic value.

A summary of the status and changes in our non-vested options related to our equity incentive plans as of and during the six month months ended June 26, 2010 is presented below:

				Weighted Average
				Grant- Date
	Shares (in thousands)			Fair Value
Non-vested at December 26, 2009		2,151		$	1.10
Granted		624			1.26
Vested		(296	)		0.78
Forfeited unvested		(30	)		1.70
Non-vested at June 26, 2010		2,449		$	1.17

Restricted stock units

The Company began granting restricted stock units pursuant to its 2002 Flexible Stock Plan and Amended and Restated 2007 Incentive Compensation Plan in 2008. Restricted stock units are awards that, upon vesting, will result in the delivery to the holder of shares of the Company’s common stock. Some restricted stock units are service-based and vest ratably over a period of time, and some are performance-based and subject to forfeiture if certain performance criteria are not met.

In March 2010, 318,750 performance-based restricted stock units were granted to management. The Company did not record stock-based compensation for these awards in the first six months of 2010 because it was not probable that the performance measurements would be met. No restricted stock units were granted in the first six months of 2009.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Using the most probable award, the Company recorded approximately $73,000 and $32,000 in stock-based compensation expense which is included in total stock-based compensation expense of approximately $526,000 and $398,000 in the first six months of 2010 and 2009, respectively.

A summary of the Company’s restricted stock unit activity and related information for the six months ended June 26, 2010 is as follows:

	Service-based			Performance-based
	Restricted Stock Units			Restricted Stock Units (1)
	(1)
Outstanding Balance at December 26, 2009		91,000			190,000
Awarded		-			-
Vested		(45,500	)		(62,210	)
Forfeited		-			(3,368	)
Outstanding at June 26, 2010		45,500			124,422

(1)	Each stock unit represents the fair market value of one share of common stock.

The fair value of the 107,710 shares vested during 2010 was approximately $119,000. The weighted average grant-date fair value per share for the restricted stock units was $1.36 with a weighted average remaining contractual term of 1.7 years at June 26, 2010.

8. Segments

As the Company’s business has changed, the segments reviewed by the Company’s chief operating decision maker have changed. The E-Commerce business is no longer considered a separate segment of the Company and has been integrated into the Centers segment. The 2009 summary has been reclassified to reflect these changes.

The following operating segments represent identifiable components of the Company for which separate financial information is available. The following table represents key financial information for each of the Company’s business segments, which include the operation and management of centers; and the establishment, maintenance and support of an affiliated network of independent providers. The centers offer people afflicted with hearing loss a complete range of services and products, including diagnostic audiological testing and the latest technology in hearing aids and listening devices to improve their quality of life. The network, unlike the Company-owned centers, is comprised of hearing care practices owned by independent audiologists. The network revenues are mainly derived from administrative fees paid by employer groups, health insurers and benefit sponsors to administer their benefit programs as well as maintain the affiliated provider network. Since the sale of the Company’s Canadian operations in April 2009, all of the Company’s business units are located in the United States.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

The following is the Company’s segment information:

Dollars in thousands
	Centers (1)		Network			Corporate			Total
Hearing aids and other products revenues
Six months ended June 26, 2010	$	37,750	$	41		$	-		$	37,791
Six months ended June 27, 2009	$	41,560	$	-		$	-		$	41,560

Service revenues
Six months ended June 26, 2010	$	2,047	$	656		$	510		$	3,213
Six months ended June 27, 2009	$	2,480	$	1,167		$	182		$	3,829

Income (loss) from operations
Six months ended June 26, 2010	$	6,204	$	(903	)	$	(7,533	)	$	(2,232	)
Six months ended June 27, 2009	$	10,213	$	547		$	(8,215	)	$	2,545

Six months ended June 26, 2010
Depreciation and amortization	$	868	$	9		$	257			1,134
Total assets	$	66,177	$	914		$	17,443		$	84,534
Capital expenditures	$	140		-		$	58		$	198

Six months ended June 27, 2009
Depreciation and amortization	$	416	$	-		$	722		$	1,138
Total assets	$	66,314	$	916		$	26,848		$	94,078
Capital expenditures	$	416		-		$	135		$	551

(1)

Amounts in 2009 were reclassified for purposes of reporting the integration of our e-commerce business into the Centers segment.

Hearing aids and other products revenues consisted of the following:

	Six months ended
	June 26,			June 27,
	2010			2009
Hearing aid revenues		96.7	%		96.9	%
Other products revenues		3.3	%		3.1	%

Services revenues consisted of the following:

	Six months ended
	June 26,			June 27,
	2010			2009
Hearing aid repairs		48.5	%		44.5	%
Testing and other income		51.5	%		55.5	%

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

Income (loss) from operations at the segment level is computed before the following, the sum of which is included in the column “Corporate” as loss from operations:

	Six months ended
	June 26,			June 27,
Dollars in thousands	2010			2009
Contract service revenue on Canadian support agreement	$	(510	)		(182	)
General and administrative expense		7,786			7,675
Corporate depreciation and amortization		257			722
Corporate loss from operations	$	7,533		$	8,215

9. Liquidity

The Company used approximately $3.5 million for operating activities during the six months ended June 26, 2010 primarily as a result of the net loss of $4.4 million and the payment of $1.9 million in Canadian income taxes accrued in the prior year. The Company also used approximately $2.0 million to repay long-term debt during the same period.

Cash, cash equivalents and short term marketable securities totaled approximately $5.3 million as of June 26, 2010. Approximately $2.4 million of the current maturities of long-term debt to Siemens may be repaid through rebate credits.

The Company believes that current cash and cash equivalents and increases in revenues generated by its new marketing initiatives and the continued growth of the AARP program will be sufficient to support the Company’s operating and investing activities through the next twelve months. However, there can be no assurance that the Company can maintain compliance with the Siemens loan covenants, that the Company will generate expected cash flows from operations or that unexpected cash needs will not arise for which the cash, cash equivalents and cash flow from operations will be sufficient. In the event of a shortfall in cash, the Company can reduce its marketing expenditures and other costs and might consider short-term debt, or additional equity or debt offerings. There can be no assurance however; that the Company can reduce its costs sufficiently to offset cash shortfalls and that such financing will be available to the Company on favorable terms or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements” (ASU 2010-06”). ASU 2010-06 amends the guidance on fair value measurement disclosures to add new requirements for disclosures about transfers into and out of the Level 1 and 2 categories in the fair value measurement hierarchy, and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The amended guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new requirements for disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activities in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this amended guidance has not required significant additional disclosures by the Company.

HearUSA, Inc

Notes to Consolidated Financial Statements

(unaudited)

In June 2009, the FASB issued guidance for determining the primary beneficiary of a variable interest entity (“VIE”). In December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides amendments to ASC 810 to reflect the revised guidance. The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The amendments in ASU 2009-17 also require additional disclosures about a reporting entity’s involvement with VIEs. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations or require additional disclosures.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements include those relating to the Company’s belief that current cash and cash equivalents and increases in revenues generated by the Company’s new marketing initiatives and the continued growth of the AARP program, will be sufficient to support the Company’s operating and investing activities through the next twelve months, the expectation that adoption of ASU 2009-17 will not have a material impact on our financial position and results or require additional disclosure, the Company’s belief that revenues will continue to increase as a result of its new marketing strategy and the launch of the AARP program, and our expectations concerning the further rollout of the AARP Program through the end of 2011. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this report. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, including those risks described in this report and in the Company’s annual report on Form 10-K for fiscal 2009 filed with the Securities and Exchange Commission.

General

HearUSA has over 400 provider agreements with health insurance companies and managed care organizations. The terms of most of these agreements are to be renegotiated annually, and these agreements may be terminated by either party, usually on 90 days or less notice at any time. Some of these insurance and managed care organizations decided to limit or eliminate hearing care benefits beginning in 2010 in response to their declining profitability. As a result, the Company’s revenues from insurance and managed care contracts decreased in the first six months of 2010 compared to the first six months of 2009.

The Company implemented a number of plans and strategies which helped to replace most of the decreased insurance and managed care contract revenues, including increased marketing to its existing insurance base and private pay customers. The Company originally planned to incorporate the AARP program in its traditional advertising campaigns without significantly increasing overall advertising expenditures. Because of the success of its new marketing initiatives, the Company decided to fund the launch of its AARP marketing campaign separately. This new strategy led to an increase of $1.9 million in revenues and $920,000 in advertising costs in the second quarter of 2010 compared to the first quarter. The Company spent approximately $1.5 million marketing the AARP program during the six months ended June 26, 2010.

The Company believes that revenues will continue to increase as a result of its new marketing strategy and the launch of the AARP program and will maintain marketing expenditures at current levels as revenues grow.

RESULTS OF OPERATIONS

For the three months ended June 26, 2010 compared to the three months ended June 27, 2009

Revenues

Dollars in thousands

	2010		2009		Change			% Change
Hearing aids and other products	$	19,796	$	20,653	$	(857	)		(4.1	)%
Services		1,613		2,014		(401	)		(19.9	)%
Total net revenues	$	21,409	$	22,667	$	(1,258	)		(5.5	)%

The $1.3 million, or 5.5%, decrease in net revenue in the 2010 second quarter from the second quarter 2009 is principally a result of the loss of revenue related to a number of insurance plans eliminating, changing or limiting their hearing care benefits. The Company implemented a number of plans and strategies during the first quarter of 2010 which helped to replace most of the lost insurance revenues, including increased marketing to its existing insurance base and private pay customers. The Company also increased the marketing of the AARP program and made it available to AARP members in 45 states through all 177 HearUSA centers and a network of independent AARP providers. As a result of these efforts, revenues during the second quarter of 2010 increased by approximately 9.3% over those of the first quarter of 2010.

Cost of Products Sold and Services

Dollars in thousands

	2010			2009			Change			%
Hearing aids and other products	$	5,290		$	5,072		$	218			4.3	%
Services		412			388			24			6.2	%
Total cost of products sold and services	$	5,702		$	5,460		$	242			4.4	%
Percent of total net revenues		26.6	%		24.1	%		2.5	%		10.4	%

The cost of products sold includes the effect of rebate credits pursuant to our agreements with Siemens.

The following table reflects the components of the rebate credits which are included in the above cost of products sold for hearing aids (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein):

Dollars in thousands
	2010			2009			Change			%
Rebates offsetting base required payments on Tranche C	$	500		$	500		$	-			-
Volume rebates used to reduce Tranche C principal		156			156			-			-
Rebates offsetting required payments on Tranche B for purchases made by acquired centers		115			169			(54	)		(32.0	)%
Rebates offsetting interest on Tranches B and C		815			1,008			(193	)		(19.1	)%
Total rebate credits	$	1,586		$	1,833		$	(247	)		(13.5	)%
Percent of total net revenues		7.4	%		8.1	%		(0.7	)%		(8.6	)%

The $54,000 reduction in rebates earned on Tranche B was due to a decrease in the rebates per unit from $65 to $50 and a decline in Siemens units purchased. The rebates per unit were decreased in exchange for better overall pricing. The $193,000 decrease in interest forgiven is due to a decrease in Siemens indebtedness primarily resulting from the repayment of approximately $8.1 million from the proceeds of the sale of the Canadian operations in 2009. Cost of products sold as a percent of total net revenues before the impact of the Siemens rebate credits was 34.4% in the second quarter of 2010 compared to 32.2% in the second quarter of 2009. The increase in cost of sales as a percentage of revenue is primarily the result of the lost insurance business. This business generated higher margins during the second quarter of 2009.

Expenses

Dollars in thousands

	2010			2009			Change			%
Center operating expenses	$	12,209		$	10,908		$	1,301			11.9	%
Percent of total net revenues		57.0	%		48.1	%		8.9	%		18.5	%
General and administrative expenses	$	3,769		$	3,661		$	108			3.0	%
Percent of total net revenues		17.6	%		16.2	%		1.4	%		8.6	%
Depreciation and amortization	$	564		$	588		$	(24	)		(4.1	)%
Percent of total net revenues		2.6	%		2.6	%		-			-

The $1.3 million increase in center operating expenses in the second quarter of 2010 as compared with the second quarter of 2009 is primarily attributable to an $829,000 increase in marketing expense and a $243,000 increase in AARP program costs. The Company spent approximately $957,000 marketing the AARP program during the second quarter of 2010. AARP advertising and program costs totaled $1.3 million in the second quarter of 2010 compared to $142,000 in the second quarter of 2009.

General and administrative expenses increased by approximately $108,000 in the second quarter of 2010 as compared to the second quarter of 2009. This increase is primarily the result of approximately $195,000 in severance charges and additional employee stock-based compensation. This increase was partially offset by a reduction of approximately $107,000 in communication expenses.

Interest Expense

Dollars in thousands

	2010		2009		Change			%
Notes payable from business acquisitions and others (1)	$	26	$	244	$	(218	)		(89.3	)%
Siemens Tranches B and C – interest forgiven (2)		815		1,008		(193	)		(19.1	)%
Total interest expense	$	841	$	1,252	$	(411	)		(32.8	)%

	2010		2009		Change			%
Total cash interest expense (3)	$	86	$	165	$	(79	)		(47.9	)%
Total non-cash interest expense (4)		755		1,087		(332	)		(30.5	)%
Total interest expense	$	841	$	1,252	$	(411	)		(32.8	)%

(1)

Includes $47,000 and $79,000 in the second quarter of 2010 and 2009, respectively, of non-cash interest expense related to recording of notes at their present value by discounting future payments to market rate of interest (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein) as well as a $105,000 reduction of non-cash interest expense in the second quarter of 2010 and a $36,000 increase in non-cash interest expense in 2009 related to recording warrants at their estimated fair value.

(2)

The interest expense on Tranches B and C is forgiven by Siemens as long as the supply agreement minimum purchase requirements are met and the corresponding rebate credit is recorded as a reduction of the cost of products sold (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements and Liquidity and Capital Resources, include herein).

(3)	Represents the sum of the cash interest portion paid on the notes payable for business acquisitions and others.

(4)

Represents the sum of the non-cash interest expense related to recording the notes payable for business acquisitions at their present value by discounting future payments to the market rate of interest, interest on Siemens Tranches B and C offset by rebates, net of the reduction of non-cash interest expense in 2010 related to recording warrants at their estimated fair value.

The decrease in interest expense in the second quarter of 2010 is primarily attributable to decreases in the Siemens loan balances following the repayment of approximately $8.1 million from the proceeds of the sale of the Canadian operations in 2009 and a reduction of non-cash interest which resulting from the change in the fair value of warrants.

Income Taxes

The Company has generated net operating loss carryforwards of approximately $47.4 million for U.S. income tax purposes. The Company has temporary differences between the financial statement and tax reporting arising primarily from differences in the amortization of intangible assets and goodwill and depreciation of fixed assets. The deferred tax assets for U.S. income tax purposes have been offset by a valuation allowance because it was determined that these assets were not likely to be realized. During the second quarter of 2010, the Company recorded a deferred tax expense of approximately $220,000 compared to approximately $210,000 in the second quarter of 2009 related to the estimated deduction of tax deductible goodwill from its U.S. operations. The deferred income tax expense was recorded because it cannot be offset by temporary differences as it relates to infinite-lived assets and the timing of reversing the liability is unknown. Deferred income tax expense will continue to be recorded until the tax deductible goodwill is fully amortized.

Net Income attributable to noncontrolling interest

During the second quarters of 2010 and 2009, the Company’s 50% owned joint venture, HEARx West, LLC generated net income of approximately $462,000 and $231,000, respectively. The Company records 50% of the venture’s net income as net income attributable to noncontrolling interest in the income of a joint venture in the Company’s consolidated statements of operations. The net income attributable to noncontrolling interest for the second quarter of 2010 and 2009 was approximately $238,000 and $131,000, respectively.

Discontinued Operations

On April 27, 2009, the Company sold the assets of Helix Hearing Care of America Corp. and the stock of 3371727 Canada Inc., both indirect wholly owned subsidiaries of the Company, for cash consideration of approximately $23.1 million. This sale resulted in a gain on sale of approximately $931,000, net of applicable tax, for the year ended December 26, 2009.

The Company had income from discontinued operations of $336,000 during the second quarter of 2009.

For the six months ended June 26, 2010 compared to the six months ended June 27, 2009

Revenues

Dollars in thousands

	2010		2009		Change			% Change
Hearing aids and other products	$	37,791	$	41,560	$	(3,769	)		(9.1	)%
Services		3,213		3,829		(616	)		(16.1	)%
Total net revenues	$	41,004	$	45,389	$	(4,385	)		(9.7	)%

The $4.4 million, or 9.7%, decrease in net revenue from the first six months of 2009 is principally a result of the loss of revenue related to a number of insurance plans eliminating, changing or limiting their hearing care benefits. The Company implemented a number of plans and strategies during the first quarter of 2010 which helped to replace most of the lost insurance revenues, including increased marketing to its existing insurance base and private pay customers. The Company also increased the marketing of the AARP program in HearUSA centers and its nationwide network of hearing providers in 45 states. As a result of these efforts, revenues during the second quarter of 2010 increased by approximately 9.3% over those of the first quarter of 2010.

Cost of Products Sold and Services

Dollars in thousands

	2010			2009			Change			%
Hearing aids and other products	$	9,869		$	10,452		$	(583	)		(5.6	)%
Services		836			889			(53	)		(6.0	)%
Total cost of products sold and services	$	10,705		$	11,341		$	(636	)		(5.6	)%
Percent of total net revenues		26.1	%		25.0	%		1.1	%		4.4	%

The cost of products sold includes the effect of rebate credits pursuant to our agreements with Siemens.

Dollars in thousands
	2010			2009			Change			%
Rebates offsetting base required payments on Tranche C	$	1,000		$	1,000		$	-			-
Volume rebates used to reduce Tranche C principal		313			313			-			-
Rebates offsetting required payments on Tranche B for purchases made by acquired centers		222			347			(125	)		(36.0	)%
Rebates offsetting interest on Tranches B and C		1,640			2,093			(453	)		(21.6	)%
Total rebate credits	$	3,175		$	3,753		$	(578	)		(15.4	)%
Percent of total net revenues		7.7	%		8.3	%		(0.6	)%		(7.2	)%

The $125,000 reduction in volume rebates earned was due to a decrease in the rebates per unit from $65 to $50 and a decline in Siemens units purchased. The rebates per unit were decreased in exchange for better overall pricing. The $453,000 decrease in interest forgiven is due to a decrease in Siemens indebtedness primarily resulting from the repayment of approximately $8.1 million from the proceeds of the sale of the Canadian operations in 2009. Cost of products sold as a percent of total net revenues before the impact of the Siemens rebate credits was 34.3% in the first six months of 2010 compared to 33.3% in the first six months of 2009. The increase in cost of sales as a percentage of revenue is primarily the result of the lost insurance business. This business generated higher margins during the first six months of 2009.

Expenses

Dollars in thousands

	2010			2009			Change			%
Center operating expenses	$	23,611		$	22,690		$	921			4.1	%
Percent of total net revenues		57.6	%		50.0	%		7.6	%		15.2	%
General and administrative expenses	$	7,786		$	7,675		$	111			1.4	%
Percent of total net revenues		19.0	%		16.9	%		2.1	%		12.4	%
Depreciation and amortization	$	1,134		$	1,138		$	(4	)		-0.4	%
Percent of total net revenues		2.8	%		2.5	%		0.3	%		12.0	%

The $921,000 increase in center operating expenses in the first six months of 2010 as compared with the first six months of 2009 is primarily attributable to a $522,000 increase in marketing expense and a $461,000 increase in AARP program costs. AARP advertising and program costs totaled $1.9 million in the first six months of 2010 compared to $232,000 in the first six months of 2009.

General and administrative expenses increased by approximately $111,000 in the first six months of 2010 as compared to the first six months of 2009. This increase is primarily the result of approximately $195,000 in severance charges and additional employee stock-based compensation. This increase was partially offset by a reduction of approximately $107,000 in communication expenses.

Interest Expense

Dollars in thousands

	2010		2009		Change			%
Notes payable from business acquisitions and others (1)	$	150	$	496	$	(346	)		(69.8	)%
Siemens Tranches B and C – interest forgiven (2)		1,640		2,093		(453	)		(21.6	)%
Total interest expense	$	1,790	$	2,589	$	(799	)		(30.9	)%

	2010		2009		Change			%
Total cash interest expense (3)	$	189	$	324	$	(135	)		(41.7	)%
Total non-cash interest expense (4)		1,601		2,265		(664	)		(29.3	)%
Total interest expense	$	1,790	$	2,589	$	(799	)		(30.9	)%

(1)

Includes $101,000 and $167,000 in the first six months of 2010 and 2009, respectively, of non-cash interest expense related to recording of notes at their present value by discounting future payments to market rate of interest (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein) as well as a $140,000 reduction of non-cash interest expense in 2010 and a $36,000 increase in non-cash interest expense in 2009 related to recording warrants at their estimated fair value.

(2)

(3)	Represents the sum of the cash interest portion paid on the notes payable for business acquisitions and others.

(4)

The decrease in interest expense in the first six months of 2010 is attributable to decreases in the Siemens loan balances following the repayment of approximately $8.1 million from the proceeds of the sale of the Canadian operations in 2009 and scheduled debt payments which were forgiven.

Income Taxes

The Company has generated net operating loss carryforwards of approximately $47.4 million for U.S. income tax purposes. The Company has temporary differences between the financial statement and tax reporting arising primarily from differences in the amortization of intangible assets and goodwill and depreciation of fixed assets. The deferred tax assets for U.S. income tax purposes have been offset by a valuation allowance because it was determined that these assets were not likely to be realized. During the first six months of 2010, the Company recorded a deferred tax expense of approximately $440,000 compared to approximately $420,000 in the first six months of 2009 related to the estimated deduction of tax deductible goodwill from its U.S. operations. The deferred income tax expense was recorded because it cannot be offset by temporary differences as it relates to infinite-lived assets and the timing of reversing the liability is unknown. Deferred income tax expense will continue to be recorded until the tax deductible goodwill is fully amortized.

Net Income attributable to noncontrolling interest

During the first six months of 2010 and 2009, the Company’s 50% owned joint venture, HEARx West, LLC generated net income of approximately $625,000 and $461,000, respectively. The Company records 50% of the venture’s net income as net income attributable to noncontrolling interest in the income of a joint venture in the Company’s consolidated statements of operations. The net income attributable to noncontrolling interest for the first six months of 2010 and 2009 was approximately $312,000 and $247,000, respectively.

Discontinued Operations

The Company had income from discontinued operations of $1.2 million during the first six months of 2009.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short term marketable securities totaled approximately $5.3 million as of June 26, 2010 compared to $11.1 million as of December 26, 2009. Approximately $2.4 million of the current maturities of long-term debt to Siemens may be repaid through rebate credits.

The Company believes that current cash and cash equivalents and increases in revenues generated by its new marketing initiatives and the continued growth of the AARP program will be sufficient to funds its operating activities through the next twelve months. However, there can be no assurance that the Company can maintain compliance with the Siemens loan covenants, that the Company will generate expected cash flows from operations or that unexpected cash needs will not arise for which the cash, cash equivalents and cash flow from operations will be sufficient. In the event of a shortfall in cash, the Company can reduce its marketing expenditures and other costs and might consider short-term debt, or additional equity or debt offerings. There can be no assurance however; that the Company can reduce its costs sufficiently to offset cash shortfalls and that such financing will be available to the Company on favorable terms or at all. .

Contractual Obligations

Below is a chart setting forth the Company’s contractual cash payment obligations, which have been aggregated to facilitate a basic understanding of the Company’s liquidity as of June 26, 2010.

	Payments due by period (000’s)
			Less						More
			than 1		1 – 3		4 – 5		Than 5
Contractual obligations	Total		year		years		Years		years
	$		$		$		$		$
Long-term debt (1 and 3)		39,361		5,537		6,978		26,846		-
Subtotal of obligations recorded on balance sheet		39,361		5,537		6,978		26,846		-
Interest to be paid on long-term debt (2 and 3)		12,940		3,390		5,652		3,898		-
Operating leases		16,262		6,086		6,534		3,152		490
Employment agreements		3,312		1,639		1,673		-		-
Purchase obligations (4)		2,878		1,189		1,689		-		-
Total contractual cash obligations		74,753		17,841		22,526		33,896		490

(1)	Approximately $33.9 million can be repaid through rebate credits from Siemens, including $2.4 million in less than 1 year and $4.8 million in years 1-3 and $26.7 million in years 4-5.

(2)

Interest on long-term debt includes the interest on Tranches B and C that can be repaid through rebate credits from Siemens, including $3.1 million in less than 1 year and $5.5 million in years 1-3 and $3.9 million in years 4-5. Interest repaid through rebate credits was $1.6 million in the six months of 2010. (See Note 4 – Long-Term Debt, Notes to Consolidated Financial Statements included herein).

(3)	Principal and interest payments on long-term debt are based on cash payments and not the carrying value of the discounted notes. (See Note 4 – Long-Term Debt, Notes to Consolidated Financial Statements included herein)

(4)	Purchase obligations includes the contractual commitment for AARP campaigns to educate and promote hearing loss awareness and prevention and the contractual commitment to AARP for public marketing funds for the AARP Health Care Options General Program, including $900,000 in less than 1 year.

CRITICAL ACCOUNTING POLICIES

Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the consolidated financial statements:

Goodwill

The Company evaluates goodwill and certain intangible assets with indefinite lives not being amortized for impairment annually or more frequently if impairment indicators arise. Indicators at the Company include but are not limited to: sustained operating losses or a trend of poor operating performance, a decrease in the company’s market capitalization below its book value and an expectation that a reporting unit will be sold or otherwise disposed of. If one or more indicators of impairment exist, the Company performs an evaluation to identify potential impairments. If impairment is identified, the Company measures and records the amount of impairment losses. The Company performs this annual analysis on the first day of its fourth quarter.

A two-step impairment test is performed on goodwill. In order to do this, management applied judgment in determining its "reporting units", which represent distinct parts of the Company’s business. As of June 26, 2010, the reporting units determined by management are the centers and the network. The definition of the reporting units affects the Company’s goodwill impairment assessments. In the first step, the Company compares the fair value of each reporting unit to its carrying value. Calculating the fair value of the reporting units requires significant estimates and long-term assumptions. The Company utilized an independent appraisal firm to test goodwill for impairment as of the first day of the Company’s fourth quarter during 2009 and 2008, and each of these tests indicated no impairment. The Company estimates the fair value of its reporting units by applying a weighted average of two methods: quoted market price and discounted cash flow.

If the carrying value of the reporting unit exceeds its fair value, additional steps are required to calculate an impairment charge. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is the fair value of the reporting unit allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Significant changes in key assumptions about the business and its prospects, or changes in market conditions, stock price, interest rates or other externalities, could result in an impairment charge.

Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with the acquired businesses is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about future performance, cash flows and fair value, our future results could be affected if these current estimates of future performance and fair value change. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. As of June 26, 2010, none of our reporting units with goodwill were at risk of failing step one of the goodwill impairment test.

Revenue recognition

HearUSA has company-owned centers in its core markets and a network of affiliated providers who provide products and services to customers that are located outside its core markets. HearUSA enters into provider agreements with benefit providers (third party payors such as insurance companies, managed care companies, employer groups, etc.) under (a) a discount arrangement on products and service; (b) a fee for service arrangement; and (c) a per capita basis or capitation arrangement, which is a fixed per member per month fee received from the benefit providers.

All contracts are for one calendar year and are usually cancelable with ninety days or less notice by either party. Under the discount arrangements, the Company provides the products and services to the eligible members of a benefit provider at a pre-determined discount or customary price and the member pays the Company directly for the products and services. Under the fee for service arrangements, the Company provides the products and services to the eligible members at its customary price less the benefit they are allowed (a specific dollar amount), which the member pays directly to the Company. The Company then bills the benefit provider the agreed upon benefit for the service.

Under the capitation agreements, the Company agrees with the benefit provider to provide their eligible members with a pre-determined discount. Revenue under capitation agreements is derived from the sales of products and services to members of the plan and from a capitation fee paid to the Company by the benefit provider at the beginning of each month. The members that are purchasing products and services pay the customary price less the pre-determined discount. The revenue from the sales of products to these members is recorded at the customary price less applicable discount in the period that the product is delivered. The direct expenses consisting primarily of the cost of goods sold and commissions on sales are recorded in the same period. Other indirect operating expenses are recorded in the period which they are incurred.

The capitation fee revenue is calculated based on the total members in the benefit provider’s plan at the beginning of each month and is non-refundable. Only a small percentage of these members may ever purchase product or services from the Company. The capitation fee revenue is earned as a result of agreeing to provide services to members without regard to the actual amount of service provided. That revenue is recorded monthly in the period that the Company has agreed to see any eligible members.

The Company records each transaction at its customary price for the three types of arrangements, less any applicable discounts from the arrangements in the center business segment. The products sold are recorded under the hearing aids and other products line item and the services are recorded under the service line item on the consolidated statement of operations. Revenue and expense are recorded when the product has been delivered, net of an estimate for return allowances. Revenue and expense from services and repairs are recorded when the services or repairs have been performed. Capitation revenue is recorded as revenue from hearing aids since it relates to the discount given to the members.

Revenues are considered earned by the Company at the time delivery of product or services have been provided to its customers (when the Company is entitled to the benefits of the revenues).

When the arrangements are related to members of benefit providers that are located outside the Company-owned centers’ territories, the revenues generated under these arrangements are included under the network business segment. The Company records a receivable for the amounts due from the benefit providers and a payable for the amounts owed to the affiliated providers. The Company only pays the affiliated provider when the funds are received from the benefit provider. The Company records revenue equal to the minimal fee for processing and administrative fees. The costs associated with these services are operating costs, mostly for the labor of the network support staff and are recorded when incurred.

No contract costs are capitalized by the Company.

Allowance for doubtful accounts

Certain of the accounts receivable of the Company are from health insurance and managed care organizations and government agencies. These organizations could take up to nine months before paying a claim made by the Company and also impose a limit on the time the claim can be billed. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts receivable.

In order to calculate that allowance, the Company first identifies any known uncollectible amounts in its accounts receivable listing and charges them against the allowance for doubtful accounts. Then a specific percent per plan and per aging categories is applied against the remaining receivables to estimate the needed allowance. Any change in the percent assumptions per plan and aging categories results in a change in the allowance for doubtful accounts. For example, an increase of 10% in the percent applied against the remaining receivables would increase the allowance for doubtful accounts by approximately $41,000.

Sales returns

The Company offers all its customers a full 30-day return period or the return period applicable to state guidelines if longer than 30 days. For patients who participate in the family hearing counseling program, the return period is extended to 60 days. Under the AARP program, patients who are members of AARP have a return period of 90 days if the patient is dissatisfied with the product. The Company calculates its allowance for returns using estimates based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by the manufacturer.

Impairment of Long-Lived Assets

Long-lived assets are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the future undiscounted cash flows generated by an asset or asset group is less than its carrying amount, it is considered to be impaired and would be written down to its fair value. Currently we have not experienced any events that would indicate a potential impairment of these assets, but if circumstances change we could be required to record a loss for the impairment of long-lived assets.

Stock-based compensation

Share-based payments are accounted for using fair value in accordance with applicable generally accepted accounting principles. To determine the fair value of our stock option awards, we use the Black-Scholes option pricing model, which requires management to apply judgment and make assumptions to determine the fair value of our awards. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the price of our common stock over the expected term and an estimate of the number of options that will ultimately be forfeited.

The expected term is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a historical volatility of our common stock for a period at least equal to the expected term. Estimated forfeitures are calculated based on historical experience. Changes in these assumptions can materially affect the estimate of the fair value of our share-based payments and the related amount recognized in our consolidated financial statements.

Income taxes

Income taxes are calculated using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized.

Both the calculation of the deferred tax assets and liabilities, as well as the decision to establish a valuation allowance requires management to make estimates and assumptions. Although we do not believe there is a reasonable likelihood that there will be a material change in the estimates and assumptions used, if actual results are not consistent with the estimates and assumptions, the balances of the deferred tax assets, liabilities and valuation allowance could be significantly different.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements” (ASU 2010-06”). ASU 2010-06 amends the guidance on fair value measurement disclosures to add new requirements for disclosures about transfers into and out of the Level 1 and 2 categories in the fair value measurement hierarchy, and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The amended guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new requirements for disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activities in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this guidance did not require significant additional disclosures by the Company.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company does not engage in derivative transactions. Differences in the fair value of investment securities are not material; therefore, the related market risk is not significant. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt. The following table presents the Company’s financial instruments for which fair value and cash flows are subject to changing market interest rates:

	Fixed Rate			Variable Rate			Total
	9.5%			4.6% to 16.7%
	Due February 2015			Other
	$			$			$
	(000’s)			(000’s)			(000’s)
2010		(1,219	)		(1,755	)		(2,974	)
2011		(2,427	)		(2,653	)		(5,080	)
2011		(2,416	)		(704	)		(3,120	)
2013		(2,360	)		(247	)		(2,607	)
2014		(2,340	)		(80	)		(2,420	)
Thereafter		(23,160	)		-			(23,160	)

Total		(33,922	)		(5,439	)		(39,361	)

Estimated fair value		(33,922	)		(5,216	)		(39,138	)

Item 4.

Controls and Procedures

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 26, 2010. The Company’s chief executive officer and chief financial officer concluded that, as of June 26, 2010, the Company’s disclosure controls and procedures were effective.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended June 26, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II Other Information

Item 6. Exhibits

3.1	Restated Certificate of Incorporation of HEARx Ltd., including certain certificates of designations, preferences and rights of certain preferred stock of the Company (incorporated herein by reference to Exhibit 3 to the Company’s Current Report on Form 8-K, filed May 17, 1996 (File No. 001-11655)).
3.2	Amendment to the Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1A to the Company’s Quarterly Report on Form 10-Q for the period ended June 28, 1996 (File No. 001-11655)).
3.3	Amendment to Restated Certificate of Incorporation including one for ten reverse stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q for the period ending July 2, 1999 (File No. 001-11655)).
3.4	Amendment to Restated Certificate of Incorporation including an increase in authorized shares and change of name (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed July 17, 2002 (File No. 001-11655)).
3.5	Certificate of Designations, Preferences and Rights of the Company’s 1999 Series H Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4 to the Company’s Current Report on Form 8-K, filed December 17, 1999 (File No. 001-11655)).
3.6	Certificate of Designations, Preferences and Rights of the Company’s Special Voting Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)).
3.7	Amendment to Certificate of Designations, Preferences and Rights of the Company’s 1999 Series H Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4 to the Company’s Current Report on Form 8-K, filed July 17, 2002 (File No. 001-11655)).
3.8	Certificate of Designations, Preferences and Rights of the Company’s 1998-E Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)).
3.9	Amendment of Restated Certificate of Incorporation (increasing authorized capital) (incorporated herein by reference to Exhibit 3.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2004).
3.10	Amendment to Certificate of Designation of Series H Junior Participating Preferred Stock of HearUSA, Inc. (increasing the number of authorized series H Shares (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed November 17, 2009)).
3.11	Amended and Restated By-Laws of HearUSA, Inc. (effective October 16, 2009) (incorporated herein by reference to the Company’s Report Filed on Form 8-K, filed October 27, 2009).
4.1	Amended and Restated Rights Agreement, November 16, 2009 between the Company and American Stock Transfer and Trust Company LLC, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, filed November 17, 2009).
31.1	CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HearUSA Inc.
	(Registrant)

August 10, 2010

	/s/Stephen J. Hansbrough
	Stephen J. Hansbrough
	Chairman and Chief Executive Officer
	HearUSA, Inc.

	/s/Francisco Puñal
	Francisco Puñal
	Senior Vice President and
	Chief Financial Officer
	HearUSA, Inc.