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.
Overview
Vasomedical, Inc. principally operates in three distinct business
segments in the healthcare equipment and information technology (¡°IT¡±) industries. We manage and evaluate our operations,
and report our financial results, through these three business segments.
¡¤
IT segment, operating through a wholly-owned
subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed
network technology services;
¡¤
Professional sales service segment, operating
through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare,
primarily focuses on the sale of healthcare capital equipment for General
Electric Healthcare (¡°GEHC¡±) into the health provider middle market; and
¡¤
Equipment segment, operating through
wholly-owned subsidiaries Vasomedical Global Corp. and Vasomedical Solutions,
Inc., primarily focuses on the design, manufacture, sale and service of
proprietary medical devices.
VasoTechnology
VasoTechnology, Inc. was
formed in May 2015, at the time the Company acquired all
of the assets of NetWolves, LLC and its affiliates, including the membership
interests in NetWolves Network Services, LLC (collectively, ¡°NetWolves¡±). It currently consists of a managed
network and security service division and a healthcare IT application VAR
(value added reseller) division.
Its current offerings include:
¡¤
Managed diagnostic imaging applications
(national channel partner of GEHC IT).
¡¤
Managed network infrastructure (routers,
switches and other core equipment).
¡¤
Managed network transport (FCC licensed carrier
reselling 175+ facility partners).
¡¤
Managed security services.
VasoTechnology uses a combination of proprietary technology,
methodology and third-party applications to deliver its value proposition.
VasoHealthcare
VasoHealthcare commenced operations in 2010, in conjunction
with the Company¡¯s execution of its exclusive sales representation agreement
GEHC, which is the healthcare business division of the General Electric Company
(¡°GE¡±), to exploit the sale of certain healthcare capital equipment in the
health provider middle market.
Sales of GEHC equipment by the Company have grown significantly since
then.
VasoHealthcare¡¯s
current offerings consist of:
¡¤
GEHC diagnostic imaging capital equipment.
¡¤
GEHC service agreements.
¡¤
GEHC and third party financial services.
VasoHealthcare has built a team of approximately 90 highly
experienced sales professionals who utilize highly focused sales management and
analytic tools to manage the complete sales process and to increase market
penetration.
Vasomedical Global and Vasomedical Solutions
Vasomedical Global was formed in 2011 to combine and
coordinate the various design, development, manufacturing, and sales of medical
devices by the Company. These
devices primarily consist of cardiovascular diagnostic and therapeutic
systems. Its current offerings
consist of:
¡¤
Biox™ series Holter monitors and ambulatory
blood pressure recorders.
¡¤
ARCS™ series analysis, reporting and
communication software for physiological signals such as ECG and blood
pressure.
¡¤
MobiCare™ multi-parameter wireless vital-sign
monitoring system.
¡¤
EECP® therapy system for non-invasive,
outpatient treatment of ischemic heart disease.
This segment uses its extensive cardiovascular device
knowledge coupled with its significant engineering resources to cost-effectively
create and market its proprietary technology. It works with a global
distribution network of channel partners, as well as a global joint venture
arrangement, to sell its products.
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 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, 2015, as filed with the SEC on March 30, 2016.
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 and Recent Accounting
Pronouncements
During the first quarter of 2016,
we adopted Accounting Standards Update (¡°ASU¡±) No. 2015-16, Simplifying the Accounting for
Measurement-period Adjustments, and ASU No. 2016-09, Compensation ¨C Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, neither of which had a material impact on
our reported financial position or results of operations and cash flows. There have been no other significant
changes in our reported financial position or results of operations and cash
flows as a result of the adoption of new accounting pronouncements or to our
significant accounting policies that were disclosed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2015 that have had a
significant impact on our consolidated financial statements or notes thereto.
In April 2016, the FASB issued ASU
No. 2016-10, Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing,
which adds further guidance on identifying performance obligations and improves
the operability and understanding of the licensing implementation
guidance. The standard is effective
for fiscal periods beginning after December 15, 2017, including interim periods
therein. Early application for
public entities is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that
reporting period. The Company is
currently evaluating the impact of the adoption of this standard on its
consolidated financial statements.
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 is 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 ¨C SEGMENT REPORTING AND
CONCENTRATIONS
Vasomedical, Inc. principally operates in three distinct
business segments in the healthcare equipment and information technology
industries. We manage and evaluate
our operations, and report our financial results, through these three business
segments.
¡¤
IT segment, operating through a wholly-owned
subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed
network technology services;
¡¤
Professional sales service segment, operating
through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare,
primarily focuses on the sale of healthcare capital equipment for GEHC into the
health provider middle market; and
¡¤
Equipment segment, operating through
wholly-owned subsidiaries Vasomedical Global Corp. and Vasomedical Solutions,
Inc., primarily focuses on the design, manufacture, sale and service of
proprietary 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 and
adjusted EBITDA (net income (loss), plus interest expense (income), net; tax
expense; depreciation and amortization; and non-cash stock-based compensation). 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 ¨C primarily cash balances ¨C 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 both the three and six months
ended June 30, 2016, GE Healthcare accounted for 38% of revenue, and for the three
and six months ended June 30, 2015, GE Healthcare accounted for 65% and 73% of
revenue, respectively. GE
Healthcare also accounted for $5.0 million or 56%, and $8.1 million or 69%, of
accounts and other receivables at June 30, 2016 and December 31, 2015,
respectively.
NOTE D ¨C EARNINGS 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, 2016 and 2015,
because the effect of their inclusion would be anti-dilutive.
(in thousands)
NOTE
E ¨C ACCOUNTS AND OTHER RECEIVABLES, NET
The following table presents information regarding the
Company¡¯s accounts and other receivables as of June 30, 2016 and December 31, 2015:
(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, 2016 and December
31, 2015, the Company maintained reserves for slow moving inventories of $830,000
and $861,000, respectively.
Patents and technology, and
software, are amortized on a straight-line basis over their estimated useful
lives of ten, and five years, respectively. The cost of significant customer-related
intangibles is amortized in proportion to estimated total related revenue; cost
of other customer-related intangible assets is amortized on a straight-line basis over the
asset's estimated economic life of seven years. Software costs are
amortized on a straight-line basis over its expected useful life of five
years.
The changes in the Company¡¯s deferred revenues are as
follows:
(in thousands)
NOTE K ¨C EQUITY
On
June 15, 2016, the Board of Directors (¡°Board¡±) approved the 2016 Stock Plan (the
¡°2016 Plan¡±) for officers, directors, and senior employees of the Corporation
or any subsidiary of the Corporation.
The stock issuable under the 2016 Plan shall be shares of the Company¡¯s
authorized but unissued or reacquired common stock. The maximum number of shares of common
stock that may be issued under the 2016 Plan is 7,500,000 shares.
The 2016 Plan
consists of a Stock Issuance Program, under which eligible persons may, at the
discretion of the Board, be issued shares of common stock directly, as a bonus
for services rendered or to be rendered to the Corporation or any subsidiary of
the Corporation.
No shares were granted under
the 2016 Plan during the six months ended June 30, 2016. See
Note O.
NOTE L ¨C 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 a secured subordinated promissory note (¡°Note¡±) to MedTechnology
Investments, LLC (¡°MedTech¡± - see Note M).
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.
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
following table summarizes the allocation of the assets acquired and
liabilities assumed based on their estimated fair values as follows:
(in thousands)
The goodwill is expected to be deductible for tax purposes.
The
following unaudited supplemental pro forma information presents the financial
results as if the acquisition of NetWolves had occurred January 1, 2014.
(in thousands)
NOTE M ¨C 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 (see
Note L).
The Company obtained an opinion regarding the fairness of the
Purchase Price for NetWolves 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 the Note to MedTech. Of the $4,800,000 borrowed from MedTech,
$2,200,000 was provided by six of our directors or members of their families,
and an additional $100,000 was provided by an additional director prior to his
joining the board of directors in June 2015. The MedTech Note bears interest at
9% per annum.
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 $85,000 and $170,000
were billed by the firm for the three and six months ended June 30, 2016,
respectively, at which date no amounts were outstanding. 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.
In January 2015, operations began
under the VSK joint venture. The
Company accounts for its investment in VSK using the equity method. On May 31, 2016, the Company, through its
FGE subsidiary, borrowed $300,000 through the issuance of a promissory note to
VSK, which is included in notes payable due to related party in the
accompanying unaudited condensed consolidated balance sheets. The note matures on May 31, 2018 and
bears interest at 1.2% per annum. At
June 30, 2016, the Company had contributed $522,000 to VSK, and $80,000 was due
from VSK for equipment and services the Company billed to it. The Company¡¯s pro-rata share in VSK¡¯s
loss from operations approximated $4,000 and $77,000 for the three and six months
ended June 30, 2016, respectively, and is included in interest and other income
(expense), net in the accompanying unaudited condensed consolidated statements
of operations and comprehensive income (loss). 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 accrues no interest in VSK¡¯s income in the years ending December 31,
2015, 2016 and 2017 until certain performance targets are achieved. For the year ended December 31, 2015
such targets had not been achieved.
NOTE N ¨C COMMITMENTS AND CONTINGENCIES
Litigation
The Company is currently, and has been in the past, a
party to various routine legal proceedings, primarily employee related matters,
incident to the ordinary course of business. The Company believes that the
outcome of all such pending legal proceedings in the aggregate is unlikely to
have a material adverse effect on the business or consolidated financial
condition of the Company.
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 O ¨C SUBSEQUENT EVENT
In July 2016,
the Company granted 3.6 million shares of restricted common stock to directors,
officers and key employees under the 2016 Stock Plan. One-third of the shares vested
immediately and the remaining two-thirds vest equally one year and two years
from grant date.
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; continuation of the GEHC agreements 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.
Unless the context
requires otherwise, all references to ¡°we¡±, ¡°our¡±, ¡°us¡±, ¡°Company¡±,
¡°registrant¡±, ¡°Vasomedical¡± or ¡°management¡± refer to Vasomedical, Inc. and its
subsidiaries
General Overview
Vasomedical, Inc. (¡°Vasomedical¡±)
was incorporated in Delaware in July 1987. We principally operate in three
distinct business segments in the healthcare equipment and information
technology industries. We manage
and evaluate our operations, and report our financial results, through these
three business segments.
¡¤
IT segment, operating through a wholly-owned
subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed
network technology services;
¡¤
Professional sales service segment, operating
through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare,
primarily focuses on the sale of healthcare capital equipment for GEHC into the
health provider middle market; and
¡¤
Equipment segment, operating through
wholly-owned subsidiaries Vasomedical Global Corp. and Vasomedical Solutions,
Inc., primarily focuses on the design, manufacture, sale and service of
proprietary medical devices.
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, 2015 as filed with the SEC on March 30, 2016.
Results of Operations ¨C For the Three Months Ended June 30,
2016 and 2015
Total revenue for the three months
ended June 30, 2016 and 2015 was $18,214,000 and $10,843,000, respectively, representing
an increase of $7,371,000, or 68% year-over-year. The revenue increase was primarily due to
$7,313,000 higher revenue in the IT segment, $6,472,000 of which resulted from
the operations of NetWolves, that the Company acquired at the end of May 2015
and thus included only one month of operations in the second quarter 2015. Net income for the three months ended June
30, 2016 was $213,000, compared to $191,000 for the three months ended June 30,
2015, representing a growth of $22,000, or 12%. Our total net income was $0.00 per basic
and diluted common share for the three months ended June 30, 2016 and 2015.
Revenues
Commission revenues in the professional
sales services segment were $6,860,000 in the second quarter of 2016, a decrease
of 3%, as compared to $7,036,000 in the second quarter of 2015. The decrease in commission revenues in
the second quarter of 2016 was due primarily to a decrease in the blended commission
rates for equipment delivered by GEHC during the quarter, partially offset by higher
delivery volume. 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, 2016,
$16,710,000 in deferred commission revenue was recorded in the Company¡¯s
condensed consolidated balance sheet, of which $7,716,000 was long-term. At 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.
Revenue in the IT segment for
the three months ended June 30, 2016 was $10,124,000 compared to $2,811,000 for
the three months ended June 30, 2015, an increase of $7,313,000, of which $6,472,000
resulted from the acquisition of NetWolves in the second quarter 2015, and $841,000
resulted from growth in the healthcare IT VAR business, which is still in its
start-up phase.
Revenue in our equipment segment
increased by $234,000, or 23%, to $1,230,000 for the three-month period ended June
30, 2016 compared to the same period of the prior year. The increase was principally due to an
increase in EECP® revenues and international sales by our China
operations as a result of higher sales volume.
Gross Profit
The Company had a gross profit
of $10,113,000, or 56% of revenue, in the second quarter of 2016 compared to $7,328,000,
or 68% of revenue, in the second quarter of the prior year, an increase of $2,785,000,
or 38%. The increase is principally
due to $2,761,000 higher gross profit in the IT segment, of which $2,672,000
resulted from the acquisition of NetWolves, combined with $258,000 higher gross
profit in the equipment segment, partially offset by $234,000 lower gross
profit in the professional sales services segment.
Professional sales services
segment gross profit was $5,278,000, or 77% of the segment revenue, for the three
months ended June 30, 2016 as compared to $5,512,000, or 78% of the segment
revenue, for the three months ended June 30, 2015. The decrease in absolute dollars and
margin percentage was due to the lower blended commission rates on GEHC
equipment delivered during the second quarter of 2016 than in the same period
last year, as well as higher commission expense in
the second quarter of 2016. Cost of
commissions of $1,582,000 and $1,524,000, for the three months ended June 30, 2016
and 2015, respectively, reflected commission expense associated with recognized
commission revenues. The increase was
due to higher commission expense rates on certain deliveries in the second
quarter 2016 compared to the same period in 2015. Commission expense associated with
deferred revenue is recorded as deferred commission expense until the related
commission revenue is recognized.
IT segment gross profit for the
three months ended June 30, 2016 was $3,959,000, or 39% of the segment revenue,
compared to $1,198,000, or 43% of the segment revenue for the three months
ended June 30, 2015, with the increase primarily resulting from the inclusion
of three months of NetWolves operations as compared to one month in the prior
year. Gross profit margin decreased
mainly due to a higher mix of healthcare IT VAR sales, which have lower
margins, in the second quarter of 2016.
Equipment segment gross profit increased
to $876,000, or 71% of equipment segment revenues, for the second quarter of 2016
compared to $618,000, or 62% of equipment segment revenues, for the same
quarter of 2015. Gross profit margin
in the equipment segment increased due mainly to a higher mix of Biox products
and higher average selling prices on EECP® products.
Operating Income
Operating income was $264,000
for the three months ended June 30, 2016, compared to $206,000 for the three
months ended June 30, 2015, a growth of $58,000, or 28%. The improvement in
operating income is due to the increase in gross profit, partially offset by
higher selling, general and administrative, or SG&A, costs. SG&A costs were 53% of revenue for
the three months ended June 30, 2016, compared to 64% of revenue for the three months
ended June 30, 2015.
Operating income in the professional
sales services segment decreased by $372,000 to $1,422,000, compared to $1,794,000
in the second quarter of the prior year, due mainly to a lower gross margin
combined with higher SG&A costs. In addition, operating loss in the equipment
segment decreased by $663,000, or 98%, to $13,000 compared to $676,000 in the
same quarter of the prior year, due primarily to $258,000 higher gross profit
and $374,000 lower SG&A costs in the current year quarter. Our IT segment had an operating loss of
$853,000 in the second quarter of 2016 as compared to an operating loss of $366,000
in the same quarter of the prior year, primarily due to an increase of $418,000
attributable to the inclusion of NetWolves. The results for the three and six months
ended June 30, 2015 included only one month of operations of NetWolves.
SG&A expenses for the second
quarter of 2016 and 2015 were $9,744,000, or 53% of revenues, and $6,985,000,
or 64% of revenues, respectively, reflecting an increase of $2,759,000 or
approximately 39%. The increase in SG&A expenditures in the second quarter
of 2016 resulted primarily from $3,248,000 higher costs in the IT segment in 2016
mainly due to the inclusion of three months of NetWolves operations during the second
quarter of 2016 as compared to one month of NetWolves operations in the same
quarter of the prior year, and higher sales and marketing expenses in the VAR
business, partially offset by lower costs in the equipment and corporate segments.
Research
and development (¡°R&D¡±) expenses were $105,000, or 1% of revenues (9% of equipment
segment revenues), for the second quarter of 2016, a decrease of $32,000, or 23%,
from $137,000, or 1% of revenues (14% of equipment segment revenues), for the second
quarter of 2015. The decrease is primarily attributable to lower product submission
expenses in the second quarter of 2016.
Adjusted EBITDA
We define Adjusted
EBITDA (earnings (loss) before interest, taxes, depreciation and amortization),
which is a non-GAAP financial measure, as net income (loss), plus interest
expense (income), net; tax expense; depreciation and amortization; and non-cash
expenses for share-based compensation. Adjusted EBITDA is a metric that
is used by the investment community for comparative and valuation
purposes. We disclose this metric
in order to support and facilitate the dialogue with research analysts and
investors.
Adjusted EBITDA is
not a measure of financial performance under accounting principles generally
accepted in the United States (¡°GAAP¡±) and should not be considered a
substitute for operating income, which we consider to be the most directly
comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool,
and when assessing our operating performance, you should not consider Adjusted
EBITDA in isolation, or as a substitute for net income or other consolidated
income statement data prepared in accordance with GAAP. Other companies may
calculate Adjusted EBITDA differently than we do, limiting its usefulness as a
comparative measure.
A reconciliation of net income to Adjusted EBITDA is set
forth below:
(in thousands)
Adjusted EBITDA increased by $135,000, or 18%, to $886,000 in
the quarter ended June 30, 2016 from $751,000 in the quarter ended June 30,
2015. The increase was primarily
attributable to the higher net income, higher fixed asset depreciation in the
IT segment and amortization of intangibles associated with the NetWolves
acquisition in May 2015, and higher interest expense arising from the MedTech
Note used to partially fund the NetWolves acquisition, partially offset by lower
share-based compensation and lower income tax expense.
Interest and Other Income (Expense)
Interest and other income
(expense) for the second quarter of 2016 was $(102,000) as compared to $(9,000)
for the second quarter of 2015. The increase was due primarily to higher
interest expense from debt associated with the NetWolves acquisition.
Income Tax Expense
During
the second quarter of 2016 we recorded income tax benefit of $51,000 as compared
to income tax expense of $6,000 for the second quarter of 2015. The change arose from application of alternative
minimum tax credits.
Results of Operations ¨C For the Six Months Ended June 30,
2016 and 2015
Total revenue for the six months
ended June 30, 2016 and 2015 was $35,756,000 and $18,297,000, respectively, representing
an increase of $17,459,000, or 95% year-over-year. The revenue increase was primarily due to
$17,040,000 higher revenue in the IT segment, including $15,711,000 resulting from
the inclusion of six months of NetWolves operations in the current year as
compared to only one month of operations in the same period of the prior year,
and $1,329,000 was attributable to growth in the VAR business. Net income for the six months ended June
30, 2016 was $109,000 as compared to a loss of $62,000 for the same period of
2015, an improvement of $171,000.
Our total net income (loss) was $0.00 and $(0.00) per basic and diluted
common share for the six months ended June 30, 2016 and 2015, respectively.
Revenues
Commission revenues in the professional
sales services segment were $13,706,000 in the first half of 2016, an increase
of 2% from $13,427,000 in the first half of 2015. The increase in commission revenue in
the first half of 2016 was due to an increase in volume of equipment delivered
by GEHC during the period, partially offset by a decrease in the blended commission
rate earned. 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.
Revenue in the IT segment for
the six months ended June 30, 2016 was $19,851,000 compared to $2,811,000
revenue for the six months ended June 30, 2015, an increase of $17,040,000, of
which $15,711,000 resulted from the acquisition of NetWolves in the second
quarter 2015, and $1,329,000 resulted from growth in the healthcare IT VAR
business.
Revenue in our equipment segment
increased by $140,000, or 7%, to $2,199,000 for the six-month period ended June
30, 2016 from $2,059,000 for the same period of the prior year. The change was primarily attributable to
higher international sales by our China operations, partially offset by
decreases in EECP® revenues as a result of lower sales volume.
Gross Profit
The Company had a gross profit
of $20,125,000, or 56% of revenue, in the first six months of 2016 compared to
$12,896,000, or 70% of revenue, in the first six months of the prior year, an increase
of $7,229,000, or 56%. The increase
is principally due to $6,767,000 higher gross profit in the IT segment, of
which $6,554,000 resulted from the inclusion of six months of NetWolves
operations in 2016 compared to one month of NetWolves operations in the same
period of the prior year, and higher gross profit margin in both our professional
sales services and equipment segments.
Professional sales services
segment gross profit was $10,713,000, or 78% of the segment revenue, for the six
months ended June 30, 2016 as compared to $10,380,000, or 77% of the segment
revenue, for the six months ended June 30, 2015. The increase in absolute dollars and
margin percentage was due to higher equipment deliveries by GEHC, partially
offset by a lower blended commission rate, during the first six months
of 2016 than in the same period last year, coupled
with lower commission expense in the first six months of 2016. Cost of commissions of $2,993,000 and $3,047,000,
for the six months ended June 30, 2016 and 2015, 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.
IT segment gross profit for the
six months ended June 30, 2016 was $7,965,000, or 40% of the segment revenue,
compared to $1,198,000, or 43% of the segment revenue, for the six months ended
June 30, 2015, with the increase primarily resulting from the inclusion of six
months of NetWolves operations as compared to one month last year.
Equipment segment gross profit increased
to $1,447,000, or 66% of Equipment segment revenues, for the first six months
of 2016 compared to $1,318,000, or 64% of Equipment segment revenues, for the
same period of 2015. Gross profit
margin in the equipment segment improved due to higher mix of sales by the Chinese
operations, which have higher margins.
Operating Income (Loss)
Operating income was $423,000
for the six months ended June 30, 2016 as compared to an operating loss of $80,000
for the six months ended June 30, 2015, an improvement of $503,000. During the six months ended June 30, 2016,
there was a $7,229,000 increase in gross profit, of which $6,554,000 was due to
the inclusion of six months of NetWolves operations in the six month period
ended June 30, 2016 compared to one month of NetWolves operations included in
the same period of the prior year.
Partially offsetting the increase in gross profit was a $6,746,000
increase in SG&A costs, primarily due to $7,322,000 higher NetWolves costs,
partially offset by lower equipment and corporate segment SG&A costs.
Operating income in the professional
sales services segment increased by $530,000 to $3,410,000 as compared to $2,880,000
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 $600,000, or 46%,
to $711,000 compared to $1,311,000 in the same period of the prior year, due
primarily to $129,000 higher gross profit and $451,000 lower SG&A costs in
the current year period.
SG&A expenses for the first two
quarters of 2016 and 2015 were $19,450,000, or 54% of revenues, and $12,704,000,
or 69% of revenues, respectively, reflecting an increase of $6,746,000 or
approximately 53%. The increase in SG&A expenditures in the first two quarters
of 2016 resulted primarily from $7,642,000 higher costs attributable to the IT
segment in 2016, partially offset by lower costs in the professional sales
services and equipment segments due to reduced headcounts, and lower corporate
expenses due to costs incurred in 2015 related to the NetWolves acquisition.
Research
and development (¡°R&D¡±) expenses were $252,000, or 1% of revenues (11% of equipment
segment revenues), for the first half of 2016, a decrease of $20,000, or 7%,
from $272,000, or 1% of revenues (13% of Equipment segment revenues), for the first
half of 2015. The decrease is primarily attributable to lower product
submission costs.
Adjusted EBITDA
We define Adjusted
EBITDA (earnings (loss) before interest, taxes, depreciation and amortization),
which is a non-GAAP financial measure, as net income (loss), plus interest
expense (income), net; tax expense; depreciation and amortization; and non-cash
expenses for share-based compensation. Adjusted EBITDA is a metric that
is used by the investment community for comparative and valuation
purposes. We disclose this metric
in order to support and facilitate the dialogue with research analysts and
investors.
Adjusted EBITDA is
not a measure of financial performance under accounting principles generally
accepted in the United States (¡°GAAP¡±) and should not be considered a
substitute for operating income, which we consider to be the most directly
comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool,
and when assessing our operating performance, you should not consider Adjusted
EBITDA in isolation, or as a substitute for net income or other consolidated
income statement data prepared in accordance with GAAP. Other companies may
calculate Adjusted EBITDA differently than we do, limiting its usefulness as a
comparative measure.
A reconciliation of net income (loss) to Adjusted EBITDA is
set forth below:
(in thousands)
Adjusted EBITDA increased by $868,000 to $1,597,000 in the
six months ended June 30, 2016 from $729,000 in the same period of 2015. The increase was primarily attributable
to the higher net income, higher fixed asset depreciation in the IT segment and
amortization of intangibles associated with the NetWolves acquisition in May
2015, and higher interest expense arising from the MedTech Note used to
partially fund the NetWolves acquisition, and higher income tax expense,
partially offset by lower share-based compensation.
Interest and Other Income (Expense)
Interest and other income
(expense) for the first two quarters of 2016 was $(263,000) as compared to $30,000
for the first two quarters of 2015. The increase in expense was due primarily
to higher interest expense associated with the NetWolves acquisition.
Income Tax Expense
During
the first two quarters of 2016 we recorded income tax expense of $51,000 as
compared to income tax expense of $12,000 for the same period of 2015. The increase arose from tax amortization
associated with the NetWolves acquisition.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations
from working capital. At June 30, 2016,
we had cash and cash equivalents of $5,622,000 and negative working capital of
$3,704,000 compared to cash and cash equivalents of $2,160,000, short-term
investments of $38,000 and negative working capital of $3,696,000 at December
31, 2015. $7,452,000 in negative
working capital at June 30, 2016 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 $3,748,000 during the first half of 2016, compared to $6,834,000
for the same period in 2015, which consisted of net income after adjustments to
reconcile net income to net cash of $1,840,000 and cash provided by operating
assets and liabilities of $1,908,000. The changes in the account balances
primarily reflect a decrease in accounts and other receivables of $2,596,000, partially
offset by decreases in deferred revenue of $734,000, accrued commissions of $481,000,
and accrued expenses of $198,000. 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, 2016 was $1,291,000.
We invested $422,000 in the VSK joint venture as part of our capital
contribution, and, $907,000 was used for the purchase of equipment and software. This was partially offset by the
redemption of short-term investments of $38,000.
Cash provided by financing activities during the three-month
period ended June 30, 2016 was $997,000 as a result of $994,000 in net borrowings
on our line of credit and $300,000 received through issuance of a note to VSK,
partially offset by $130,000 in debt issuance costs associated with the MedTech
note, $89,000 in repayments of notes issued for equipment purchases, $72,000 in
payments on related party notes associated with the Genwell acquisition, and
$6,000 in payment of payroll taxes where employee shares were withheld for such
payments.
Liquidity
The Company
expects to be profitable for the year ending December 31, 2016 and to continue to
generate positive cash flow through its existing professional sales services
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 accretive
acquisitions and partnership opportunities in the international and domestic
markets and will look to expand its professional sales services 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, 2016
and have concluded that the Company¡¯s disclosure controls and procedures were
effective as of June 30, 2016.
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
10 2016
Stock Plan
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 15, 2016
