VASO Corp - Quarter Report: 2016 June (Form 10-Q)

 

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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

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

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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.

 

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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.

 

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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

 

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