---

 

PART I – FINANCIAL INFORMATION	3
ITEM 1 - FINANCIAL STATEMENTS	3
CONDENSED CONSOLIDATED BALANCE SHEETS as of June 30, 2016 (unaudited) and December 31, 2015	3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (unaudited) for the Three and Six Months Ended June 30, 2016 and 2015	4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the Six Months Ended June 30, 2016 (unaudited) and the Year Ended December 31, 2015	5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the Six Months Ended June 30, 2016 and 2015	6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)	7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 4 - CONTROLS AND PROCEDURES	26
PART II - OTHER INFORMATION	27
ITEM 6 – EXHIBITS	27

---

 

---

 

---

---

 

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

---

---

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.

 

---

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)
		As of June 30, 2016				As of December 31, 2015
		(unaudited)
Cash and cash equivalents		$	43			$	104
Total assets		$	1,281			$	1,168
Total liabilities		$	974			$	1,007

 

		(in  thousands)
		Three months ended June 30,								Six months ended June 30,
		2016				2015				2016				2015
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Total net revenue		$	566			$	454			$	914			$	825
Net income (loss)		$	162			$	(87	)		$	160			$	(223	)

 

 

 

·	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 – 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:

 

  

		As of or for the three months ended June 30, 2016 (unaudited)
		Professional Sales Service Segment				IT Segment				Equipment Segment				Corporate				Consolidated
Revenues from external customers		$	6,860			$	10,124			$	1,229			$	-			$	18,213
Operating income (loss)		$	1,422			$	(853	)		$	(13	)		$	(292	)		$	264
Total assets		$	10,565			$	25,699			$	7,900			$	5,912			$	50,076
Accounts and other receivables, net		$	5,393			$	2,832			$	720			$	-			$	8,945
Deferred commission expense		$	2,011			$	150			$	-			$	-			$	2,161
Other assets, net		$	2,644			$	265			$	79			$	825			$	3,813
			As of or for the three months ended June 30, 2015 (unaudited)
		Professional Sales Service Segment				IT Segment				Equipment Segment				Corporate				Consolidated
Revenues from external customers		$	7,036			$	2,811			$	996			$	-			$	10,843
Operating income (loss)		$	1,794			$	(366	)		$	(676	)		$	(546	)		$	206
Total assets		$	10,421			$	25,205			$	9,385			$	1,309			$	46,320
Accounts and other receivables, net		$	4,421			$	1,399			$	500			$	-			$	6,320
Deferred commission expense		$	2,388			$	19			$	-			$	-			$	2,407
Other assets, net		$	3,098			$	51			$	675			$	113			$	3,937
			As of or for the six months ended June 30, 2016 (unaudited)
		Professional Sales Service Segment				IT Segment				Equipment Segment				Corporate				Consolidated
Revenues from external customers		$	13,706			$	19,851			$	2,199			$	-			$	35,756
Operating income (loss)		$	3,410			$	(1,596	)		$	(711	)		$	(680	)		$	423
Total assets		$	10,565			$	25,699			$	7,900			$	5,912			$	50,076
Accounts and other receivables, net		$	5,393			$	2,832			$	720			$	-			$	8,945
Deferred commission expense		$	2,011			$	150			$	-			$	-			$	2,161
Other assets, net		$	2,644			$	265			$	79			$	825			$	3,813
			As of or for the six months ended June 30, 2015 (unaudited)
		Professional Sales Service Segment				IT Segment				Equipment Segment				Corporate				Consolidated
Revenues from external customers		$	13,427			$	2,811			$	2,059			$	-			$	18,297
Operating income (loss)		$	2,880			$	(721	)		$	(1,311	)		$	(928	)		$	(80	)
Total assets		$	10,421			$	25,205			$	9,385			$	1,309			$	46,320
Accounts and other receivables, net		$	4,421			$	1,399			$	500			$	-			$	6,320
Deferred commission expense		$	2,388			$	19			$	-			$	-			$	2,407
Other assets, net		$	3,098			$	51			$	675			$	113			$	3,937

 

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 – 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)
		Three months ended June 30,								Six months ended June 30,
		2016				2015				2016				2015
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Basic weighted average shares outstanding			158,513				156,258			157,952				156,102
Dilutive effect of options and unvested restricted shares			191				308			421				-
Diluted weighted average shares outstanding			158,704				156,566				158,373				156,102

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)
		For the three months ended								For the six months ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Stock options			-				335			-				935
Restricted common stock grants			2.246				125			500				2,873
			2,246				460				500				3,808

NOTE E – 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)
		June 30, 2016				December 31, 2015
		(unaudited)
Trade receivables		$	12,317			$	15,252
Due from employees			426				231
Allowance for doubtful accounts and
commission adjustments			(3,798	)			(3,863	)
Accounts and other receivables, net		$	8,945			$	11,620

 

Trade receivables include amounts due for shipped products and services rendered.  Amounts currently due under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change.

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

NOTE F – INVENTORIES, NET

 

		(in thousands)
		June 30, 2016				December 31, 2015
		(unaudited)
Raw materials		$	453			$	497
Work in process			384				392
Finished goods			834				1,074
		$	1,671			$	1,963

At June 30, 2016 and December 31, 2015, the Company maintained reserves for slow moving inventories of $830,000 and $861,000, respectively.

NOTE G – GOODWILL AND OTHER INTANGIBLES

Goodwill aggregating $17,412,000 and $17,484,000 was recorded on the Company's condensed consolidated balance sheets at June 30, 2016 and December 31, 2015, respectively, of which $14,375,000, allocated to the IT segment, resulted from the acquisition of NetWolves in May 2015.  The remaining $3,037,000 of goodwill is allocated to the Company's equipment segment.  The components of the change in goodwill are as follows:

		(In thousands)
		Carrying Amount
Balance at December 31, 2015		$	17,484
Foreign currency translation			(72	)
Balance at June 30, 2016 (unaudited)		$	17,412

The Company's other intangible assets consist of capitalized customer-related intangibles, patent and technology costs, and software costs, as set forth in the following:

 

		(in thousands)
		June 30, 2016				December 31, 2015
		(unaudited)
Customer-related
Costs		$	5,831			$	5,831
Accumulated amortization			(1,347	)			(926	)
			4,484				4,905
Patents and Technology
Costs			2,394				2,423
Accumulated amortization			(934	)			(806	)
			1,460				1,617
Software
Costs			1,286				1,182
Accumulated amortization			(742	)			(727	)
			544				455
		$	6,488			$	6,977

 

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.

Amortization expense amounted to $283,000 and $164,000 for the three months ended June 30, 2016, and 2015, respectively, and $563,000 and $335,000 for the six months ended June 30, 2016 and 2015, respectively.

Amortization of intangibles for the next five years is:

 

		(in thousands)
Years		(unaudited)
Remainder of 2016		$	604
2017			1,105
2018			951
2019			829
2020			704

 

NOTE H – OTHER ASSETS, NET

Other assets, net consist of the following at June 30, 2016 and December 31, 2015:

 

		(in thousands)
		June 30, 2016				December 31, 2015
		(unaudited)
Deferred commission expense - noncurrent		$	2,035			$	2,083
Trade receivables - noncurrent			706				1,025
Other, net of allowance for loss on loan receivable of
$412 at June 30, 2016 and $0 at December 31, 2015			1,072				1,207
		$	3,813			$	4,315

 

 

NOTE I – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following at June 30, 2016 and December 31, 2015:

 

		(in thousands)
		June 30, 2016				December 31, 2015
		(unaudited)
Accrued compensation		$	744			$	1,589
Accrued expenses - other			721				1,414
Other liabilities			2,585				1,508
		$	4,050			$	4,511

 

NOTE J - DEFERRED REVENUE

The changes in the Company's deferred revenues are as follows:

 

		(in thousands)
		For the three months ended								For the six months ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Deferred revenue at beginning of period		$	17,903			$	21,453			$	18,516			$	22,532
Additions:
Deferred extended service contracts			115				94				328				305
Deferred in-service and training			5				3				8				5
Deferred service arrangements			10				5				20				15
Deferred commission revenues			2,785				1,481				5,083				3,330
Recognized as revenue:
Deferred extended service contracts			(199	)			(214	)			(398	)			(445	)
Deferred in-service and training			(8	)			(3	)			(13	)			(10	)
Deferred service arrangements			(11	)			(20	)			(20	)			(43	)
Deferred commission revenues			(2,817	)			(3,185	)			(5,741	)			(6,075	)
Deferred revenue at end of period			17,783				19,614				17,783				19,614
Less: current portion			9,613				11,560				9,613				11,560
Long-term deferred revenue at end of period		$	8,170			$	8,054			$	8,170			$	8,054

 

NOTE K – 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 – 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)
		May 29, 2015
Cash and cash equivalents		$	733
Accounts receivable and other current assets			1,535
Other assets			50
Property and equipment			2,359
Accounts payable and other current liabilities			(4,382	)
Long term debt			(1,701	)
Goodwill and other intangibles			14,375
Customer-related intangibles			5,031
Total		$	18,000

The following unaudited supplemental pro forma information presents the financial results as if the acquisition of NetWolves had occurred January 1, 2014.

 

		(in thousands)
		Three months ended				Six months ended
		June 30, 2015				June 30, 2015
		(unaudited)				(unaudited)
Revenue		$	16,088			$	31,449
Net income			580				517
Earnings per share - basic and diluted		$	0.00			$	0.00

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 – 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 – 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.

 

 

 

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

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as "anticipates", "believes", "could", "estimates", "expects", "may", "plans", "potential" and "intends" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the effect of the dramatic changes taking place in the healthcare environment; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of clinical trials and other product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; 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.

 

 

Results of Operations – 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.

 

 

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

 

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)
		Three months ended June 30,
		2016				2015
		(unaudited)				(unaudited)
Net income		$	213			$	191
Interest expense (income), net			154				42
Income tax (benefit) expense			(51	)			6
Depreciation and amortization			536				271
Share-based compensation			34				241
Adjusted EBITDA		$	886			$	751

 

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 – For the Six Months Ended June 30, 2016 and 2015

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.

 

 

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)
		Six months ended June 30,
		2016				2015
		(unaudited)				(unaudited)
Net income (loss)		$	109			$	(62	)
Interest expense (income), net			311				36
Income tax expense			51				12
Depreciation and amortization			1,059				483
Share-based compensation			67				260
Adjusted EBITDA		$	1,597			$	729

 

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 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.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 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.

PART II - OTHER INFORMATION

ITEM 6 – EXHIBITS

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

 

Page 28

---

Exhibit 10

I.  GENERAL PROVISIONS

This 2016 Stock Plan (the "Plan") is intended to promote the interests of VASOMEDICAL, INC., a Delaware corporation ("Corporation"), by providing eligible persons in the employ or service of the Corporation or its affiliates with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service.

Unless otherwise defined herein, all capitalized terms shall have the meaning assigned to them in the attached Appendix.

The Plan shall consist of a Stock Issuance Program under which eligible persons ("Participants") 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 Parent or Subsidiary).

The Plan shall be administered by the Corporation's Board of Directors ("Board"), or in the discretion of the Board, a committee consisting of no less than two Non-Employee Directors or persons meeting such other requirements as may be imposed by Rule 16(b) under the 1934 Act ("Committee").

The Board or Committee shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding stock issuances thereunder as it may deem necessary or advisable.  Decisions of the Board shall be final and binding on all parties who have an interest in the Plan or any stock issuance thereunder.

The persons eligible to participate in the Plan are officers, directors and senior employees of the Corporation or any subsidiary of the Corporation; and

The Board or Committee shall have absolute discretion with respect to stock issuances made under the Stock Issuance Program, described in Article III, including who shall be considered a senior employee, which eligible persons are to receive such stock issuances, the time or times when issuances are to be made, the number of shares to be issued to each Participant, and the vesting schedule (if any) applicable to the issued shares.

 

The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired common stock.  The maximum number of shares of common stock which may be issued under the Plan is 7,500,000 shares.

Any stock issued under the plan which is cancelled prior to vesting shall be added back to the number of shares of common stock reserved for issuance under the Plan.

If there is any change to the common stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding common stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, and (ii) the number and/or class of outstanding securities in effect under the Plan in order to prevent the dilution or enlargement of benefits thereunder.

III.  STOCK ISSUANCE PROGRAM

Shares of common stock may be issued at the discretion of the Board or Committee under the Stock Issuance Program through direct and immediate issuances.  Each such stock issuance shall comply with the terms specified below.

Shares of common stock may be issued under the Stock Issuance Program for past or future services rendered or to be rendered to the Corporation (or any Parent or Subsidiary) as the Board may deem appropriate in each individual instance.

If, at any time, the Corporation shall take any action, whether by stock dividend, stock split, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of common stock theretofore issued and outstanding, the number of shares which are reserved for issuance under the Plan shall, to the extent deemed appropriate by the committee, be increased or decreased in the same proportion, provided, however, that the Corporation shall not be obligated to issue fractional shares.

 

Likewise, in the event of any change in the outstanding shares of common stock by reason of any recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other corporate change, the committee shall make such substitution or adjustments, if any, as it deems to be appropriate, as to the number or  kind of shares of common stock or other securities which are reserved for issuance under the Plan.

In the event of a Change of Control or Corporate Transaction all shares of common stock outstanding on the date of such change of control shall become immediately and fully vested.

The Board or Committee shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects, except for those persons ineligible to participate.  However, no such amendment or modification shall adversely affect the rights and obligations with respect to unvested stock issuances at the time outstanding under the Plan unless the Participant consents to such amendment or modification.  In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations.

The Corporation's obligation to deliver shares of common stock under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

The implementation of the Plan and the issuance of any shares of common stock under the Stock Issuance Program shall be subject to the Corporation's obtaining all approvals and permits required by regulatory authorities having jurisdiction over the Plan, and the shares of common stock issued pursuant to it.

Nothing in the Plan shall confer upon the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause.

The following definitions shall be in effect under the Plan:

Board shall mean the Corporation's Board of Directors.

Change of Control shall mean:

(i)  any person who is not currently such becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding voting securities; or

(ii) three or more directors, whose election or nomination for election is not approved by a majority of the Incumbent Board (as defined in the plan), are elected within any single 12-month period to serve on the board of directors; or

(iii) members of the Incumbent Board cease to constitute a majority of the Board of Directors without the approval of the remaining members of the Incumbent Board; or

(iv) any merger (other than a merger where the Corporation is the survivor and there is no accompanying change in control under subparagraphs (i), (ii) or (iii) of this paragraph (b), consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation.

Code shall mean the Internal Revenue Code of 1986, as amended.

Common Stock shall mean the Corporation's common stock, $.001 par value.

Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

(i)  a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

(ii)  the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation.

Corporation shall mean Vasomedical, Inc., a Delaware corporation.

Disability shall mean the inability of Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances.  Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more.

 

 

 

 

Fair Market Value per share of common stock on any relevant date shall be determined in accordance with the following provisions:

(i) If the common stock is at the time traded on the NASDAQ National or SmallCap Market, then the Fair Market Value shall be the closing selling price per share of common stock on the date in question, as the price is reported by the National Association of Securities Dealers on the NASDAQ National or SmallCap Market.  If there is no closing selling price for the common stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii) If the common stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of common stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the common stock, as such price is officially quoted in the composite tape of transactions on such exchange.  If there is no closing selling price for the common stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii) If the common stock is at the time neither listed on any Stock Exchange nor traded on the NASDAQ National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner.  The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Participant, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

1934 Act shall mean the Securities Exchange Act of 1934, as amended.

Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Participant obtains the Corporation's prior written consent to such transfer, or (ii) a transfer of title to the shares effected pursuant to Participant's will or the laws of intestate succession following Participant's death.

Plan shall mean the Corporation's 2016 Stock Plan.

Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

Purchase Agreement shall mean the stock purchase agreement pursuant to the issuance of the Shares.

Senior Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), in a senior capacity as determined by the Board of Directors or Plan Administrator in its sole discretion.

Shares shall mean the number of shares of common stock subject to the stock issuance.

 

 

Stock Exchange shall mean the Nasdaq National Market System, American Stock Exchange or the New York Stock Exchange.

Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Vesting Commencement Date shall mean the date on which the Shares commence to vest as specified in the Grant Notice or agreement with Participant.

Vesting Schedule shall mean the vesting schedule specified in the Grant Notice or agreement with Participant pursuant to which the Participant is to be vested in the Shares in a series of installments over his or her period of Service.

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jun Ma, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Vasomedical, Inc. and subsidiaries (the "registrant");

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Jun Ma

President and Chief Executive Officer

Date: August 15, 2016

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Beecher, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Vasomedical, Inc. and subsidiaries (the "registrant");