NOTE A - ORGANIZATION AND PLAN
OF OPERATIONS
Vasomedical, Inc. was incorporated in Delaware in July
1987. Unless the context requires otherwise, all references to “we”, “our”,
“us”, “Company”, “registrant”, “Vasomedical” or “management” refer to
Vasomedical, Inc. and its subsidiaries. Until 2010, we were primarily engaged
in designing, manufacturing, marketing and supporting Enhanced External Counterpulsation
(EECP®) systems, based on our proprietary technology, to physicians
and hospitals throughout the United States and in select international markets.
Beginning in July 2010 the Company, through its wholly-owned subsidiary Vaso
Diagnostics, Inc. (Vaso Diagnostics), began its sales representation business
via its agreement (the “GEHC Agreement”) with GE Healthcare (“GEHC”), the
healthcare business unit of General Electric Company (NYSE: GE), to be GEHC’s
exclusive sales representative for the sale of select GEHC diagnostic imaging
products in specific market segments in the 48 contiguous states of the United
States and the District of Columbia. In June 2012, the GEHC
Agreement was amended and extended through June 30, 2015 and again, in December
2014, the GEHC Agreement was further amended and extended through December 31,
2018, subject to earlier termination under certain circumstances and
termination without cause on or after July 1, 2017.
In September 2011, the Company acquired Fast Growth
Enterprises Limited (FGE), a British Virgin Islands company, which owns or
controls two Chinese operating companies - Life Enhancement Technology Ltd. and
Biox Instruments Co. Ltd. (Biox), respectively - to expand its technical and
manufacturing capabilities and to enhance its distribution network, technology,
and product portfolio. Also in September 2011, the Company restructured to
further align its business management structure and long-term growth strategy,
and started to operate through three wholly-owned subsidiaries. Vaso
Diagnostics continues as the operating subsidiary for the sales representation
of GE diagnostic imaging products; Vasomedical Global Corp. operates the
Company’s Chinese companies; and Vasomedical Solutions, Inc. was formed to
manage and coordinate our EECP® therapy business as well as other
medical equipment operations.
In April 2014, the Company entered into an agreement with
Chongqing PSK-Health Sci-Tech Development Co., Ltd. (PSK) of Chongqing, China, the
leading manufacturer of ECP therapy systems in China, to form a joint venture
company, VSK Medical Limited (VSK), for the global marketing, sale and advancement
of ECP therapy technology. The Company owns 49.9% of the joint venture, which
began operations in January 2015.
In June 2014, the Company entered into a Value Added
Reseller Agreement (VAR Agreement) with GEHC to become a national value added
reseller of GE Healthcare IT's Radiology PACS (Picture Archiving and
Communication System) software solutions and related services, including
implementation, management and support. This multiyear VAR Agreement focuses
primarily on existing customer segments currently served by Vaso Diagnostics on
behalf of GEHC. A new wholly owned subsidiary, VasoHealthcare IT Corp., was
formed to conduct the healthcare IT business.
In August 2014, the Company, through its wholly owned
subsidiary Wuxi Gentone Instruments Co. Ltd. (Gentone), acquired all of the
outstanding shares of Genwell Instruments Co. Ltd. (Genwell), located in Wuxi,
China. Genwell was formed in China in 2010 with the assistance of a government
grant to develop the MobiCareTM wireless multi-parameter patient
monitoring system and holds the patents and intellectual property rights for
this system.
In May 2015, the Company entered into an agreement for, and
completed its purchase of, all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network Services
LLC (collectively, “NetWolves”). The purchase of NetWolves was accomplished
pursuant to an Asset Purchase Agreement. As a result, the Company effectively
purchased all rights, titles and ownership of all assets held by NetWolves. NetWolves
designs and delivers efficient and cost-effective multi-network and
multi-technology solutions as a managed network provider, and provides a
complete single-source solution that includes design, network redundancy,
application device management, real-time network monitoring, reporting and
support systems as a comprehensive solution. The Company believes there
are significant operational synergies between NetWolves’ capabilities and
VasoHealthcare IT’s requirements under its VAR Agreement with GEHC, as well as
the opportunity to expand NetWolves’ existing services to the healthcare IT
market.
We report the operations of Vasomedical Global Corp. and
Vasomedical Solutions, Inc. under our Equipment segment. Vaso Diagnostics
activities are included under our Sales Representation segment. VasoHealthcare
IT and NetWolves operations report under the IT segment.
NOTE B - BASIS OF PRESENTATION AND
CRITICAL ACCOUNTING POLICIES
Basis
of Presentation and Use of Estimates
The accompanying
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") and pursuant to the accounting and disclosure rules and
regulations of the Securities and Exchange Commission (the "SEC").
Certain information and disclosures normally included in the unaudited condensed
consolidated financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted pursuant to such rules and regulations. Accordingly,
these condensed consolidated financial statements should be read in connection
with:
1)
The audited consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2014, as filed with the SEC on March
30, 2015.
2)
The audited consolidated financial
statements of NetWolves, LLC and related notes thereto included in the Form 8-K/A
filed with the SEC on August 12, 2015. The operating results of NetWolves from
May 29, 2015 to June 30, 2015 are included in the accompanying condensed
consolidated statements of operations and comprehensive income (loss) for the
three and six month periods ended June 30, 2015.
These unaudited condensed
consolidated financial statements include the accounts of the companies over
which we exercise control. In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of interim
results for the Company. The results of operations for any interim period are
not necessarily indicative of results to be expected for any other interim
period or the full year.
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the condensed consolidated financial statements, the disclosure of contingent assets
and liabilities in the unaudited condensed consolidated financial statements
and the accompanying notes, and the reported amounts of revenues, expenses and
cash flows during the periods presented. Actual amounts and results could
differ from those estimates. The estimates and assumptions the Company makes
are based on historical factors, current circumstances and the experience and
judgment of the Company's management. The Company evaluates its estimates and assumptions
on an ongoing basis.
Significant Accounting Policies
Note B of the Notes to
Consolidated Financial Statements, included in the Annual Report on Form 10-K
for the year ended December 31, 2014, and Note B of the Notes to Consolidated
Financial Statements for the year ended December 31, 2014, included on Form 8-K/A,
include a summary of the significant accounting policies used in the
preparation of the condensed consolidated financial statements.
Revenue Recognition
The Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or service
has been rendered, the price is fixed or determinable and collectability is
reasonably assured.
Revenue and Expense Recognition for the Sales
Representation Segment
The Company recognizes commission revenue in its Sales
Representation segment (see Note C) when persuasive evidence of an arrangement
exists, service has been rendered, the price is fixed or determinable and
collectability is reasonably assured. These conditions are deemed to be met
when the underlying equipment has been accepted at the customer site in
accordance with the specific terms of the sales agreement. Consequently,
amounts billable under the agreement with GE Healthcare in advance of the
customer acceptance of the equipment are recorded as accounts receivable and
deferred revenue in the condensed consolidated balance sheets. Similarly,
commissions payable to our sales force related to such billings are recorded as
deferred commission expense when the associated deferred revenue is recorded.
Commission expense is recognized when the corresponding commission revenue is
recognized.
Variable
Interest Entities
The
Company follows the guidance of accounting for variable interest entities,
which requires certain variable interest entities to be consolidated by the
primary beneficiary of the entities. Biox is a Variable Interest Entity
(VIE).
Liabilities recognized as a result of consolidating this
VIE do not represent additional claims on the Company’s general assets. The
financial information of Biox, which was included in the accompanying condensed
consolidated financial statements, is presented as follows:
(in thousands)
(in thousands)
Reclassifications
Certain reclassifications have
been made to prior period amounts to conform with the current period presentation.
NOTE C – SEGMENT REPORTING AND
CONCENTRATIONS
The Company views its business in three segments – the
Sales Representation segment, the Equipment segment, and the IT segment. The
Sales Representation segment operates through the Vaso Diagnostics subsidiary
and is currently engaged solely in the fulfillment of the Company’s
responsibilities under our agreement with GEHC. The IT segment includes the
operations of NetWolves and VasoHealthcare IT Corp. Operations in the IT
segment began in the third quarter of 2014. The Equipment segment is engaged
in designing, manufacturing, marketing and supporting EECP® enhanced
external counterpulsation systems both domestically and internationally, as
well as the development, production, marketing and supporting of other medical
devices.
The chief operating decision maker is the Company’s Chief
Executive Officer, who, in conjunction with upper management, evaluates segment
performance based on operating income. Administrative functions such as
finance, human resources, and information technology are centralized and
related expenses allocated to each segment. Other costs not directly
attributable to operating segments, such as audit, legal, director fees,
investor relations, and others, as well as certain assets – primarily cash
balances – are reported in the Corporate entity below. There are no intersegment
revenues. Summary financial information for the segments is set forth below:
(in thousands) 
For the three months ended June 30, 2015 and 2014, GE
Healthcare accounted for 65% and 85% of revenue, respectively. For the six
months ended June 30, 2015 and 2014, GE Healthcare accounted for 73% and 86% of
revenue, respectively, and $4.3 million or 68%, and $14.2 million or 93%, of
accounts and other receivables at June 30, 2015 and December 31, 2014,
respectively.
NOTE D – EARNINGS (LOSS) PER
COMMON SHARE
Basic earnings (loss) per
common share is computed as earnings applicable to common stockholders divided
by the weighted-average number of common shares outstanding for the period.
Diluted earnings (loss) per common share reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted to common stock.
Diluted earnings (loss)
per share were computed based on the weighted average number of shares
outstanding plus all potentially dilutive common shares. A reconciliation of
basic to diluted shares used in the earnings per share calculation is as
follows:
(in thousands)
The following table represents
common stock equivalents that were excluded from the computation of diluted
earnings per share for the three and six months ended June 30, 2015 and 2014,
because the effect of their inclusion would be anti-dilutive.
(in
thousands)
NOTE
E – FAIR VALUE MEASUREMENTS
The Company complies with the provisions of ASC 820 “Fair
Value Measurements and Disclosures” (“ASC 820”). Under ASC 820, fair value is
defined as the price that would be received to sell an asset or paid to
transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date.
The following tables present information about the Company’s
assets measured at fair value as of June 30, 2015
and December 31, 2014:
(in thousands)
The fair values of the Company’s cash equivalents invested
in money market funds are determined through market, observable and
corroborated sources.
NOTE
F – ACCOUNTS AND OTHER RECEIVABLES, NET
The following table presents information regarding the
Company’s accounts and other receivables as of June 30, 2015 and December 31, 2014:
(in thousands)
Trade receivables include amounts due for shipped products
and services rendered. Amounts currently due under the GEHC Agreement are
subject to adjustment in subsequent periods should the underlying sales order
amount, upon which the receivable is based, change.
Allowance for doubtful accounts and commission adjustments
include estimated losses resulting from the inability of our customers to make
required payments, and adjustments arising from subsequent changes in sales
order amounts that may reduce the amount the Company will ultimately receive
under the GEHC Agreement. Due from employees is primarily commission advances
made to sales personnel.
Inventories,
net of reserves, consist of the following:
(in thousands)
At June 30, 2015 and December
31, 2014, the Company maintained reserves for excess and obsolete inventory of $791,000
and $815,000, respectively.
The changes in the Company’s deferred revenues are as
follows:
(in thousands)
NOTE L – DEBT
On May 29, 2015,
the Company entered into a Note Purchase Agreement with MedTechnology
Investments, LLC (“MedTech”) pursuant to which it issued MedTech a secured
subordinated promissory note (“Note”) for $3,800,000 for the purchase of
NetWolves . MedTech was formed to acquire the Note, and $1,950,000 of the
aggregate funds used to acquire the Note was provided by six of our directors.
In June 2015, a second Note for $750,000 was issued to MedTech for working
capital purposes, $250,000 of which was provided by a director and a director’s
spouse. Subsequent to June 30, 2015, an additional $250,000 was borrowed under
the Note Purchase Agreement.
The Notes bear
interest at an annual rate of 9%, matures on May 29, 2019, may be prepaid
without penalty, and is subordinated to any current or future Senior Debt as
defined in the Subordinated Security Agreement. The Subordinated Security
Agreement secures payment and performance of the Company’s obligations under
the Note and as a result, MedTech was granted a subordinated security interest
in the Company’s assets.
NOTE M – BUSINESS COMBINATION
On May 29, 2015,
the Company entered into an agreement for, and completed its purchase of, all
of the assets of NetWolves, LLC and its affiliates, including the membership
interests in NetWolves Network Services LLC (collectively, “NetWolves”) for
$18,000,000 (the “Purchase Price”). The purchase of NetWolves was accomplished
pursuant to an Asset Purchase Agreement (the "Purchase Agreement").
As a result, the Company effectively purchased all rights, titles and ownership
of all assets held by NetWolves. The Purchase Price was paid using
$14,200,000 in cash on hand and $3,800,000 raised through the issuance of the
Note to MedTech. The Company believes there are significant operational
synergies between NetWolves’ capabilities and VasoHealthcare IT’s requirements
under its VAR contract with GEHC, as well as the opportunity to expand NetWolves’
existing services to the healthcare IT market.
The operating results of NetWolves from May 29, 2015 to
June 30, 2015 are included in the accompanying condensed consolidated statements
of operations and comprehensive income (loss) for the three and six month
periods ended June 30, 2015. The accompanying condensed consolidated balance
sheet at June 30, 2015 reflects the acquisition of NetWolves effective May 29,
2015.
In accordance with Accounting Standards Codification 805,
Business Combinations, the total purchase consideration is allocated to the net
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values at May 29, 2015 (the acquisition date). The purchase
price was allocated based on the information currently available, and may be
adjusted after obtaining more information regarding, among other things, asset
valuations, liabilities assumed, and revisions of preliminary estimates. The
following table summarizes the preliminary allocation of the assets acquired
and liabilities assumed based on their preliminary estimated fair values as
follows:
(in thousands)
During the three months ended June 30, 2015,
the Company expensed $100,000 of acquisition-related legal costs and incurred
$60,000 in debt issue costs. The legal costs are included in the line item
Selling, General & Administrative costs in the accompanying condensed
consolidated statements of operations and comprehensive income (loss). The
debt issue costs are recorded as a reduction to long term notes payable in the
accompanying condensed consolidated balance sheet at June 30, 2015. The
amounts of revenue and net income of NetWolves included in the Company’s
condensed consolidated statements of operations and comprehensive income (loss)
for both the three and six months ended June 30, 2015 was $2,763,000 and $150,000,
respectively. The goodwill is expected to be deductible for tax purposes.
The following unaudited supplemental pro
forma information presents the financial results as if the acquisitions of
Genwell and NetWolves had occurred January 1, 2013, and January 1, 2014,
respectively.
(in thousands)
NOTE N – RELATED-PARTY TRANSACTIONS
One of the
Company’s directors, Peter Castle, was the Chief Executive Officer and President
of NetWolves, LLC. Another of the Company’s directors, David Lieberman, was a
director of NetWolves Network Services, LLC. Mr. Castle and Mr. Lieberman owned
of record approximately 10.4% and 5.7%, respectively of the membership
interests of NetWolves LLC. Mr. Lieberman may also be deemed to have owned
beneficially up to an additional 13.5% of such membership interests. The
Company’s board of directors negotiated the Purchase Price on an arm’s length
basis, and both Mr. Castle and Mr. Lieberman abstained from the vote approving
the Purchase Agreement.
The Company
obtained an opinion regarding the fairness of the Purchase Price for the NetWolves
entities from a reputable, independent third-party investment banking firm.
$14,200,000 of the Purchase Price was paid for by cash on hand, and the
remaining $3,800,000 was raised from the sale of a Subordinated Secured Note
sold to MedTech. Of the $4,550,000 borrowed from MedTech at June 30, 2015,
$2,200,000 was provided by six of our directors, or members of their families.
David Lieberman,
the Vice Chairman of the Company’s Board of Directors, is a practicing attorney
in the State of New York and a senior partner at the law firm of Beckman,
Lieberman & Barandes, LLP, which performs certain legal services for the
Company. Fees of approximately $60,000 and $120,000
were billed by the firm through the three and six month periods ended June 30,
2015, respectively, at which date $20,000 was outstanding. Fees of
approximately $60,000 and $120,000 were billed by the firm through the three and
six month periods ended June 30, 2014, respectively, at which date no amounts
were outstanding.
In January 2015, operations began under the VSK joint
venture. The Company accounts for its investment in VSK using the equity
method. At June 30, 2015, the Company had contributed $100,000 to VSK, and no
amounts were due from VSK for equipment the Company sold to it. VSK earned
approximately $50,000 and $46,000 for the three and six months ended June 30,
2015, respectively. Under the terms of the agreement, the Company’s accrues no
interest in VSK’s income in the years ending December 31, 2015, 2016 and 2017
unless certain performance targets are achieved. For the six months ended June
30, 2015 such targets had not been achieved.
NOTE O – COMMITMENTS AND CONTINGENCIES
Sales representation agreement
In June 2012, the Company concluded an
amendment of the GEHC Agreement with GEHC, originally signed on May 19, 2010.
The amendment, effective July 1, 2012, extended the initial term of three years
commencing July 1, 2010 to five years through June 30, 2015. In December 2014,
the Company concluded an additional amendment, effective January 1, 2015,
extending the term through December 31, 2018, subject to earlier termination under
certain circumstances and termination without cause on or after July 1, 2017. These
circumstances include not materially achieving certain sales goals, not
maintaining a minimum number of sales representatives, and various legal and
GEHC policy requirements. Under the terms of the agreement, the Company is
required to lease dedicated computer equipment from GEHC for connectivity to
their network.
NOTE P - RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09
“Revenue from contracts with customers”, a comprehensive new revenue
recognition standard which will supersede previous existing revenue recognition
guidance. The standard creates a five-step model for revenue recognition that
requires companies to exercise judgment when considering contract terms and
relevant facts and circumstances. The five-step model includes (1) identifying
the contract, (2) identifying the separate performance obligations in the
contract, (3) determining the transaction price, (4) allocating the transaction
price to the separate performance obligations and (5) recognizing revenue when
each performance obligation has been satisfied. The standard also requires
expanded disclosures surrounding revenue recognition. The standard is effective
for fiscal periods beginning after December 15, 2017 and allows for either full
retrospective or modified retrospective adoption, with early adoption permitted
as of January 1, 2017. The Company is currently evaluating the impact of the
adoption of this standard on its Consolidated Financial Statements.
In April 2015, the FASB issued ASU
2015-03 “Simplifying the Presentation of Debt Issuance Costs”, which changes
the presentation of debt issuance costs in financial statements. An entity
presents such costs in the balance sheet as a direct deduction from the related
debt liability rather than as an asset. Amortization of the costs is reported
as interest expense. The standard is effective for fiscal periods beginning
after December 31, 2015 and allows for early adoption. The Company has early
adopted this statement for the six months ended June 30, 2015, resulting in
$60,000 in debt issue costs initially deducted from the MedTech debt and $1,250
amortized to interest expense.
NOTE Q –
SUBSEQUENT EVENTS
In July 2015, the lending institution extended the
Company’s NetWolves subsidiary’s $2.0 million line of credit and increased the
maximum borrowings to $3.0 million. Advances under the line, which expires on
August 26, 2016, bear interest at a rate of LIBOR plus 2.25% and are secured by
substantially all of the assets of NetWolves Network Services, LLC and the
guaranty of Vasomedical, Inc.
Except for
historical information contained in this report, the matters discussed are
forward-looking statements that involve risks and uncertainties. When used in
this report, words such as “anticipates”, “believes”, “could”, “estimates”,
“expects”, “may”, “plans”, “potential” and “intends” and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company’s management, as well as assumptions made by and information currently
available to the Company’s management. Among the factors that could cause
actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the
healthcare environment; the impact of competitive procedures and products and
their pricing; medical insurance reimbursement policies; unexpected
manufacturing or supplier problems; unforeseen difficulties and delays in the
conduct of clinical trials and other product development programs; the actions
of regulatory authorities and third-party payers in the United States and
overseas; uncertainties about the acceptance of a novel therapeutic modality by
the medical community; continuation of the GEHC Agreement and the risk factors
reported from time to time in the Company’s SEC reports, including its recent
report on Form 10-K. The Company undertakes no obligation to update
forward-looking statements as a result of future events or developments.
General Overview
Vasomedical, Inc. was incorporated in Delaware in July
1987. Unless the context requires otherwise, all references to “we”, “our”,
“us”, “Company”, “registrant”, “Vasomedical” or “management” refer to
Vasomedical, Inc. and its subsidiaries. Until 2010, we were primarily engaged
in designing, manufacturing, marketing and supporting Enhanced External
Counterpulsation (EECP®) systems, based on our proprietary
technology, to physicians and hospitals throughout the United States and in
select international markets. Beginning in July 2010 the Company, through its
wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, began its
sales representation business via its agreement (GEHC Agreement) with GE
Healthcare (GEHC), the healthcare business unit of General Electric Company
(NYSE: GE), to be GEHC’s exclusive sales representative for the sale of select
GEHC diagnostic imaging products in specific market segments in the 48
contiguous states of the United States and the District of
Columbia. In June 2012, the GEHC Agreement was amended and extended
through June 30, 2015 and again, in December 2014, the GEHC Agreement was
further amended and extended through December 31, 2018, subject to earlier
termination under certain circumstances and termination without cause on or
after July 1, 2017.
In September 2011, the Company acquired Fast Growth
Enterprises Limited (FGE), a British Virgin Islands company, which owns or
controls two Chinese operating companies - Life Enhancement Technology Ltd. and
Biox Instruments Co. Ltd., respectively - to expand its technical and
manufacturing capabilities and to enhance its distribution network, technology,
and product portfolio. Also in September 2011, the Company restructured to
further align its business management structure and long-term growth strategy,
and started to operate through three wholly-owned subsidiaries. Vaso
Diagnostics d/b/a VasoHealthcare continues as the operating subsidiary for the
sales representation of GE diagnostic imaging products; Vasomedical Global Corp.
operates the Company’s Chinese companies; and Vasomedical Solutions, Inc. was
formed to manage and coordinate our EECP® therapy business as well
as other medical equipment operations.
In April 2014, the Company entered into an agreement with
Chongqing PSK-Health Sci-Tech Development Co., Ltd. (PSK) of Chongqing, China, the
leading manufacturer of ECP therapy systems in China, to form a joint venture
company, VSK Medical Limited (VSK), for the global marketing, sale and advancement
of ECP therapy technology. The Company owns 49.9% of the shares of VSK. VSK
began operations in January 2015. The Company contributed $100,000 in cash to
VSK during the six months ended June 30, 2015.
In June 2014, the Company entered into a Value Added
Reseller Agreement (VAR Agreement) with GEHC to become a national value added
reseller of GE Healthcare IT's Radiology PACS (Picture Archiving and
Communication System) software solutions and related services, including
implementation, management and support. This multiyear VAR Agreement focuses
primarily on existing customer segments currently served by Vaso Diagnostics on
behalf of GEHC. A new wholly owned subsidiary, VasoHealthcare IT Corp., was
formed to conduct the healthcare IT business.
In August 2014, the Company, through its wholly owned
subsidiary Wuxi Gentone Instruments Co. Ltd. (Gentone), acquired all of the
outstanding shares of Genwell Instruments Co. Ltd. (Genwell), located in Wuxi,
China. Genwell was formed in China in 2010 with the assistance of a government
grant to develop the MobiCareTM wireless multi-parameter patient
monitoring system and holds the patents and intellectual property rights for
this system.
In May 2015, the Company entered into an agreement for, and
completed its purchase of, all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network Services
LLC (collectively, “NetWolves”). The purchase of NetWolves was accomplished
pursuant to an Asset Purchase Agreement. As a result, the Company effectively
purchased all rights, titles and ownership of all assets held by NetWolves. NetWolves
designs and delivers efficient and cost-effective multi-network and
multi-technology solutions as a managed network provider, and provides a
complete single-source solution that includes design, network redundancy,
application device management, real-time network monitoring, reporting and
support systems as a comprehensive solution. The Company believes there
are significant operational synergies between NetWolves’ capabilities and
VasoHealthcare IT’s requirements under its VAR Agreement with GEHC, as well as
the opportunity to expand NetWolves’ existing services to the healthcare IT
market. The operating results of NetWolves from May
29, 2015 to June 30, 2015 are included in the accompanying condensed
consolidated statements of operations and comprehensive income (loss) for the
three and six month periods ended June 30, 2015.
We report the operations of Vasomedical Global Corp. and
Vasomedical Solutions, Inc. under our Equipment segment. Vaso Diagnostics
activities are included under our Sales Representation segment. VasoHealthcare
IT and NetWolves operations report under the IT segment.
The Company continues to pursue
acquisitions or partnership opportunities in the international and domestic
markets and to seek expansion of its sales representation business.
Critical Accounting Policies
and Estimates
Our discussion and analysis of
our financial condition and results of operations are based upon the
accompanying unaudited condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States (“U.S. GAAP”). The preparation of financial statements in
conformity with U.S. GAAP requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses, and the related disclosures at the date of the financial statements
and during the reporting period. Although these estimates are based on our
knowledge of current events, our actual amounts and results could differ from
those estimates. The estimates made are based on historical factors, current
circumstances, and the experience and judgment of our management, who
continually evaluate the judgments, estimates and assumptions and may employ
outside experts to assist in the evaluations.
Certain of our accounting
policies are deemed “critical”, as they are both most important to the
financial statement presentation and require management’s most difficult,
subjective or complex judgments as a result of the need to make estimates about
the effect of matters that are inherently uncertain. For a discussion of our
critical accounting policies, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended December 31, 2014 as filed with the SEC on March 30, 2015.
Results of Operations – For the
Three Months Ended June 30, 2015 and 2014
Total revenue for the three months ended June 30, 2015 and 2014
was $10,843,000 and $7,864,000, respectively, representing an increase of $2,979,000,
or 38% year-over-year. The revenue increase was primarily due to $2,811,000 in
revenue in the IT segment, of which $2,763,000 resulted from the acquisition of
NetWolves. Net income (loss) for the three months ended June 30, 2015 and 2014
was $191,000 and $(176,000), respectively, an improvement of $367,000, or 209%.
Our total net income (loss) was $0.00 and $(0.00) per basic and diluted common
share for the three months ended June 30, 2015 and 2014, respectively.
Revenues
Commission revenues in the Sales
Representation segment were $7,036,000 in the second quarter of 2015, an
increase of 5%, as compared to $6,684,000 in the second quarter of 2014. The
increase in commission revenues in the second quarter of 2015 was due primarily
to higher commission rates on equipment delivered by GEHC during the quarter,
partially offset by a 2% decrease in such deliveries. The Company recognizes
commission revenue when the underlying equipment has been accepted at the
customer site in accordance with the specific terms of the sales agreement.
Consequently, amounts billable under the agreement with GE Healthcare prior to
customer acceptance of the equipment are recorded as deferred revenue in the
condensed consolidated balance sheet. As of June 30, 2015, $18,410,000 in
deferred commission revenue was recorded in the Company’s condensed
consolidated balance sheet, of which $7,508,000 was long-term. At June 30, 2014,
$16,277,000 in deferred commission revenue was recorded in the Company’s
condensed consolidated balance sheet, of which $7,864,000 was long-term.
Revenue in our Equipment segment
decreased by $184,000, or 16%, to $996,000 for the three-month period ended June
30, 2015 compared to the same period of the prior year. Equipment segment
revenue from equipment sales decreased by $116,000, or 15%, to $654,000 for the
three-month period ended June 30, 2015 as compared to the same period in the
prior year, resulting from decreases in EECP® revenues as a result
of lower sales volume, partially offset by increases in international sales by
our China operations.
Equipment segment revenue from
equipment rental and services decreased 17% to $342,000 in the second quarter
of 2015 from $410,000 in the second quarter of 2014. Revenue from equipment
rental and services represented 34% and 35% of total Equipment segment revenue
in the second quarters of fiscal 2015 and fiscal 2014, respectively. The decrease
in revenue generated from equipment rentals and services is due to lower field service,
accessory part, and service contract revenues.
Gross Profit
The Company had a gross profit
of $7,328,000, or 68% of revenue, in the second quarter of 2015 compared to $5,482,000,
or 70% of revenue, in the second quarter of the prior year, an increase of $1,846,000,
or 34%. The increase is principally due to $1,198,000 in gross profit in the
IT segment, of which $1,192,000 resulted from the acquisition of NetWolves, and
higher revenues and gross profit margin in the Sales Representation segment.
Sales Representation segment
gross profit was $5,512,000, or 78% of the segment revenue, for the three
months ended June 30, 2015 as compared to $4,832,000, or 72% of the segment
revenue, for the three months ended June 30, 2014. The increase in absolute
dollars and margin percentage was due to higher commission rates during
the second quarter of 2015 than in the same period last year, as well as lower commission expense in the second quarter
of 2015. Cost of commissions of $1,524,000 and $1,852,000, for the three
months ended June 30, 2015 and 2014, respectively, reflected commission expense
associated with recognized commission revenues. Commission expense associated
with deferred revenue is recorded as deferred commission expense until the
related commission revenue is recognized.
Equipment segment gross profit decreased
to $618,000, or 62% of Equipment segment revenues, for the second quarter of 2015
compared to $650,000, or 55% of Equipment segment revenues, for the same
quarter of 2014. Gross profit margin in the Equipment segment improved due to higher
mix of sales by Chinese operations, which have higher margins, and
manufacturing cost reductions in the U.S.
Operating Income (Loss)
Operating income was $206,000
for the three months ended June 30, 2015, compared to an operating loss of $206,000
for the three months ended June 30, 2014, an improvement of $412,000. During
this period, there was a $1,846,000 increase in gross profit and a $1,503,000 increase
in selling, general, and administrative costs. Operating income in the Sales
Representation segment increased by $773,000 to $1,794,000, compared to $1,021,000
in the second quarter of the prior year, due mainly to a higher gross margin
combined with lower SG&A costs. In addition, operating loss in the
Equipment segment decreased by $199,000, or 23%, to $676,000 compared to $875,000
in the same quarter of the prior year, due primarily to $248,000 lower SG&A
costs in the current year quarter. Our IT segment had an operating loss of
$366,000 in the second quarter of 2015. This loss was reduced by a $150,000 operating
profit from the one month of NetWolves operations included in this quarter. We
anticipate that the operating profit in this segment will improve with the NetWolves
operations and increases in revenue in our GEHC VAR business.
SG&A expenses for the second
quarter of 2015 and 2014 were $6,985,000, or 64% of revenues, and $5,482,000,
or 70% of revenues, respectively, reflecting an increase of $1,503,000 or
approximately 27%. The increase in SG&A expenditures in the second quarter
of 2015 resulted primarily from $1,560,000 in costs attributable to the IT
segment in 2015 mainly due to the inclusion of NetWolves operations during the
quarter, and higher corporate expenses, primarily legal and directors’ fees,
partially offset by lower costs in the Sales Representation and Equipment
segments due to reduced headcounts.
Research and development
(“R&D”) expenses were $137,000, or 1% of revenues (14% of Equipment segment
revenues), for the second quarter of 2015, a decrease of $69,000, or 33%, from
$206,000, or 3% of revenues (17% of Equipment segment revenues), for the second
quarter of 2014. The decrease is primarily attributable to lower clinical
grants in the second quarter of 2015.
Interest and Other Income
(Expense)
Interest and other income
(expense) for the second quarter of 2015 was $(9,000) as compared to $44,000
for the second quarter of 2014. The change from income to expense was due primarily
to higher interest expense associated with the Genwell and NetWolves
acquisitions.
Income
Tax Expense
During the second quarter of 2015
we recorded income tax expense of $6,000 as compared to income tax expense of $14,000
for the second quarter of 2014. The decrease arose from lower tax expense at
our Chinese subsidiaries.
Results of Operations – For the
Six Months Ended June 30, 2015 and 2014
Total revenue for the six months ended June 30, 2015 and 2014
was $18,297,000 and $14,956,000, respectively, representing an increase of $3,341,000,
or 22% year-over-year. The revenue increase was primarily due to $2,811,000 in
revenue in the IT segment, of which $2,763,000 resulted from the acquisition of
NetWolves. Net loss for the six months ended June 30, 2015 and 2014 was $62,000
and $1,220,000, respectively, a decrease of $1,158,000, or 95%. Our total net
loss was $(0.00) and $(0.01) per basic and diluted common share for the six
months ended June 30, 2015 and 2014, respectively.
Revenues
Commission revenues in the Sales
Representation segment were $13,427,000 in the first half of 2015, an increase
of 4% from $12,926,000 in the first half of 2014. The increase in commission
revenue in the first half of 2015 is due to increases in both commission rate
earned and volume of equipment delivered by GEHC during the period. The
Company recognizes commission revenue when the underlying equipment has been
accepted at the customer site in accordance with the specific terms of the
sales agreement. Consequently, amounts billable under the agreement with GE
Healthcare prior to customer acceptance of the equipment are recorded as
deferred revenue in the condensed consolidated balance sheet. As of June 30,
2015, $18,410,000 in deferred commission revenue was recorded in the Company’s
condensed consolidated balance sheet, of which $7,508,000 is long-term. At
June 30, 2014, $16,277,000 in deferred commission revenue was recorded in the
Company’s condensed consolidated balance sheet, of which $7,864,000 was
long-term.
Revenue in our Equipment segment
increased by $29,000, or 1%, to $2,059,000 for the six-month period ended June
30, 2015 from $2,030,000 for the same period of the prior year. Equipment
segment revenue from equipment sales increased by $119,000, or 9%, to $1,373,000
for the six-month period ended June 30, 2015 as compared to $1,254,000 for the
same period in the prior year, resulting from increases in international sales
by our China operations, partially offset by decreases in EECP®
revenues as a result of lower sales volume.
Equipment segment revenue from
equipment rental and services decreased 12% to $686,000 in the first two quarters
of 2015 from $776,000 in the first two quarters of 2014. Revenue from equipment
rental and services represented 33% and 38% of total Equipment segment revenue
in the first two quarters of fiscal 2015 and fiscal 2014, respectively. The decrease
in revenue generated from equipment rentals and services is due primarily to lower
field service and accessory part revenues.
Gross Profit
The Company had a gross profit
of $12,896,000, or 70% of revenue, in the first two quarters of 2015 compared
to $10,648,000, or 71% of revenue, in the first two quarters of the prior year,
an increase of $2,248,000, or 21%. The increase is principally due to $1,198,000
in gross profit in the IT segment, of which $1,192,000 resulted from the
acquisition of NetWolves, and higher gross profit margin in both our Sales
Representation segment and our Equipment segment.
Sales Representation segment
gross profit was $10,380,000, or 77% of the segment revenue, for the six months
ended June 30, 2015 as compared to $9,472,000, or 73% of the segment revenue,
for the six months ended June 30, 2014. The increase in absolute dollars and
margin percentage was due to higher commission rates, and higher
equipment deliveries by GEHC during the first six months of 2015 than in
the same period last year, coupled with lower commission
expense in the first six months of 2015. Cost of commissions of $3,047,000 and
$3,454,000, for the six months ended June 30, 2015 and 2014, respectively, reflected
commission expense associated with recognized commission revenues. Commission
expense associated with deferred revenue is recorded as deferred commission
expense until the related commission revenue is recognized.
Equipment segment gross profit increased
to $1,318,000, or 64% of Equipment segment revenues, for the first two quarters
of 2015 compared to $1,176,000, or 58% of Equipment segment revenues, for the
same period of 2014. Gross profit margin in the Equipment segment improved due
to higher mix of sales by Chinese operations, which have higher margins, and
manufacturing cost reductions in the U.S.
Operating Loss
Operating loss was $80,000 for
the six months ended June 30, 2015 as compared to $1,294,000 for the six months
ended June 30, 2014, a decrease of $1,214,000 or 94%. Included in this loss
was a $721,000 operating loss in our IT segment which began operations in the
third quarter of 2014. During the six months ended June 30, 2015, there was
also a $2,248,000 increase in gross profit partially offset by a $1,181,000 increase
in selling, general, and administrative costs. Operating income in the Sales
Representation segment increased by $1,336,000 to $2,880,000 as compared to $1,544,000
in the first half of the prior year, due mainly to higher gross margin combined
with lower SG&A costs. In addition, operating loss in the Equipment
segment decreased by $644,000, or 33%, to $1,311,000 compared to $1,955,000 in
the same period of the prior year, due primarily to $142,000 higher gross
profit and $356,000 lower SG&A costs in the current year period.
SG&A expenses for the first two
quarters of 2015 and 2014 were $12,704,000, or 69% of revenues, and $11,523,000,
or 77% of revenues, respectively, reflecting an increase of $1,181,000 or
approximately 10%. The increase in SG&A expenditures in the first two quarters
of 2015 resulted primarily from $1,918,000 in costs attributable to the IT
segment in 2015, and higher corporate expenses, primarily legal fees, partially
offset by lower costs in the Sales Representation and Equipment segments due to
reduced headcounts..
Research and development
(“R&D”) expenses were $272,000, or 1% of revenues (13% of Equipment segment
revenues), for the first half of 2015, a decrease of $147,000, or 35%, from $419,000,
or 3% of revenues (21% of Equipment segment revenues), for the first half of 2014.
The decrease is primarily attributable to the elimination of non-recurring
costs in the first half of 2014 associated with the reclassification by FDA of
our EECP® therapy system, as well as lower clinical grants in the
first half of 2015.
Interest and Other Income
(Expense)
Interest and other income
(expense) for the first two quarters of 2015 was $30,000 as compared to $98,000
for the first two quarters of 2014. The decrease was due primarily to higher
interest expense associated with the Genwell and NetWolves acquisitions.
Income
Tax Expense
During the
first two quarters of 2015 we recorded income tax expense of $12,000 as
compared to income tax expense of $24,000 for the same period of 2014. The
decrease arose from lower tax expense at our Chinese subsidiaries.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations
from working capital and the proceeds from notes issued to MedTech. At June 30,
2015, we had cash and cash equivalents of $2,931,000, short-term investments of
$109,000 and negative working capital of $10,221,000 compared to cash and cash
equivalents of $9,128,000, short-term investments of $111,000 and working
capital of $9,215,000 at December 31, 2014. $9,153,000 of the negative working
capital at June 30, 2015 is attributable to the net balance of deferred commission
expense and deferred revenue. These are non-cash expense and revenue items and
have no impact on future cash flows.
Cash provided by operating
activities was $6,834,000 during the first six months of 2015, which consisted
of a net loss after adjustments to reconcile net loss to net cash of $742,000 and
cash provided by operating assets and liabilities of $6,092,000. The changes in
the account balances primarily reflect a decrease in accounts and other
receivables of $10,429,000, partially offset by decreases in deferred revenue
of $2,918,000, accrued commissions of $1,092,000, and accrued expenses of $1,268,000.
Significantly higher commission billings and recognized revenue were generated
in the fourth quarter of 2014 resulting in significant cash inflows early in 2015.
Cash used in investing activities during the six-month
period ended June 30, 2015 was $17,553,000, of which $17,267,000, net of cash
acquired, was used for the acquisition of NetWolves, $100,000 was invested in
the VSK joint venture, and $188,000 was used for the purchase of equipment and
software.
Cash provided by financing activities during the six-month
period ended June 30, 2015 was $4,550,000 through the issuance of notes to MedTech,
partially offset $21,000 in repayments of notes issued for equipment purchases.
Liquidity
The Company expects to be profitable
for the year ended December 31, 2015 and to continue to generate positive cash
flow through its existing sales representation operations, from the operation
of NetWolves, and improved operating efficiency and growth in its China
operations and by expanding its market presence and product portfolio. The
Company has reorganized its EECP® business model, both domestically and
internationally, including the start of operations of the joint venture VSK
Medical, intended to reduce costs and achieve profitability in this business.
The Company will continue to pursue acquisitions and partnership opportunities
in the international and domestic markets and to expand its sales
representation business.
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures reporting as
promulgated under the Exchange Act is defined as controls and procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. Disclosure controls and procedures include without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Our CEO and our CFO have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2015 and have concluded that the Company’s disclosure
controls and procedures were effective as of June 30, 2015.
Changes
in Internal Control Over Financial Reporting
There
was no change in the Company’s internal control over financial reporting during
the Company’s last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Exhibits
31 Certifications of the Chief Executive Officer
and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer
and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
In accordance with the
requirements of the Exchange Act, the Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VASOMEDICAL,
INC.
By: /s/ Jun Ma
Jun Ma
President
and Chief Executive Officer
(Principal
Executive Officer)
/s/ Michael J. Beecher .
Michael
J. Beecher
Chief
Financial Officer and Principal Accounting Officer
Date:
August 14, 2015
