Vasomedical, Inc. (OTCPK:VASO) Q2 2014 Earnings Conference Call August 13, 2014 10:00 AM ET
Jun Ma – Chief Executive Officer and President
Michael Beecher – Chief Financial Officer
Greetings ladies and gentlemen, and welcome to the Vasomedical 2014 Second Quarter Conference Call. (Operator instructions) After the speakers’ remarks there will be a question and answer session. (Operator instructions)
I would now like to turn the conference over to Mr. Michael Beecher, Chief Financial Officer of Vasomedical. Thank you, sir. You may begin.
Thank you, operator, and good morning and thank you for joining our call. Before beginning the discussion of the second-quarter results, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, hopeful, intend, guidance, confidence, target, project and other similar expressions typically are used to identify forward-looking statements.
These forward-looking statements are not guarantees of future performance and may involve and are subject to risks and uncertainties and other factors that may affect Vasomedical’s business, financial condition and other operating results, which include but are not limited to the risk factors and other qualifications contained in Vasomedical’s annual report on Form 10 K, quarterly reports that will be filed by Form 10-Q, or reports filed in 8-K if any, and other reports filed by Vasomedical with the SEC to which your attention is directed.
Therefore actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Vasomedical expressly disclaims any intent or obligation to update these forward-looking statements.
At this time it is my pleasure to turn the call over to Dr. Jun Ma, President and Chief Executive Officer of Vasomedical. Jun the floor is yours.
Thank you, Michael. Welcome everyone and thank you for joining our 2014 second quarter conference call. Before I turn the call back over to Michael to provide the detailed financial results for the quarter ended June 30, 2014 I want to provide a brief overview of the company’s operations and strategy moving forward.
After our proper remarks, Mike and I will be happy to answer your questions. With that said, let us get started. We are pleased with the performance of our Sales Representation Segment during the second quarter of 2014. [Indiscernible] grew 4.6% to $6.7 million as a result of an increase in the commission rate of equipment we booked in 2013 and delivered by GE Healthcare during the quarter.
While the $7.9 million recognized in total revenues was nearly flat year-over-year these strong commission rates positively impacted our gross profit for the quarter, which grew 2% year-over-year to $5.5 million. The growth in commission revenue benefited [Indiscernible] orders booked in 2013, which we recorded as deferred revenue in previous quarters, and they are recognized once we are notified that the product was delivered in the second quarter of 2014.
As a reminder, deferred revenue represents the first half of our commissions on orders to be delivered in the future and upon delivery of the underlying equipment we will recognize the full commissions as revenue and receive the remaining 50% of commissions. As of June 30, 2014 deferred commission revenue was $17.7 million, a 33% increase year-over-year.
Given those positive growth trends we expect deferred revenue to continue to be a major contributor to future revenue. As demonstrated on a consistent basis, our GEHC agreement proves to be a successful growth engine to propel the business forward. Due in part to this business, we are also closer to reaching profitability with a much lower net loss of $176,000, a significant improvement when compared to a net loss of $537 million for the same period last year.
As we are [Indiscernible] we have also identified another way to expand our relationship with GE Healthcare. In addition to [culminating] our existing sales representation agreement for diagnostic imaging equipments, we recently entered into a Value Added Reseller Agreement with GEHC to become a national value added reseller of GE Healthcare IT's Radiology Picture Archiving and Communication System or PACS software solutions and related services.
As part of the agreement, a new wholly-owned subsidiary, VasoHealthcare IT Corp., has been subsequently formed to conduct the healthcare IT business. This will include implementation, management and support of the product and we will resell for GEHC, providing an additional source of recurring income. As we have experienced [Indiscernible] sales force for GEHC diagnostic imaging products, we are confident that we can incorporate this strategy to recruit and train another successful team to deliver quality results for the company and GEHC.
Once VasoHealthcare IT becomes fully ramped, we anticipate a significant increase in revenue and the profitability over time. We are also expecting to reinvigorate equipment sales and combat some external market pressure that has affected our China operations during the second quarter. While our sales from our China operations decreased by $223,000 we don’t anticipate this decline to continue as we have built a good pipeline for the second half of the year.
As we expand our portfolio and introduce new [products] into the market we will continue to invest in the sales and marketing efforts to address current demand in China and abroad. This includes creating global awareness of our new MobiCare Wireless Patient Monitoring technology. Going forward we expect to further build our product portfolio and appeal to a wider demographic in the medical device community.
Also, we continue to participate in relevant trade fairs and conferences on a global scale, promote and market our BIOX and EECP to the healthcare communities. In addition to our participating in the 71st China International Medical Equipment Fair and Hospitalar in Brazil earlier in the quarter. We are also planning on attending the European Society of Cardiology Congress at the end of August. As the largest cardiology event in the world, we look forward to showcasing our product line, including MobiCare to tens of thousands of participants and cardiologists.
Our consistent participation in these global medical device fairs and conferences has well-positioned Vasomedical in the industry, cultivating relationships with new and existing customers and driving [regeneration].
On the EECP front, we are actively working on strategies to more effectively market this device. Such an agreement we signed with PSK, a leading manufacturers of EECP therapy systems in China in April of this year. As previously announced, the agreement required the parties to establish a joint venture to co-market external counterpulsation systems in the international market. We are still in the developmental phase of this joint venture, and expect to see marketing and sales progress in the near future.
In summary, we are making clear progress towards returning to profitability with the strength of our sales representation and of our operations including a solid foundation for the rest of our business.
There are several near term milestones that we are on track towards achieving that will strengthen our overall results. We have indicated our support for our stock in the public markets through our share repurchase program initiated in April 2013. The program is now completed and as of August 11, 2014 we have repurchased approximately 10.3 million shares at a cost of $2 million.
Today our strategy is to reinvest in the business, focus on growth and profitability, collaborating efforts from our existing partners and expansion of our business through potential accretive acquisitions.
Now I would like to pass the call over to our CFO, Michael Beecher, to discuss financial results for the second quarter of 2014. Michael.
Thank you, Jun. Now I will walk you through the financials for the three months ended June 30, 2014. our total revenues for the three months ended June 30, 2014 were $7.9 million or approximately the same as revenue in the same period in 2013.
Commission revenues in our Sales Representation Segment increased 5% to $6.7 million for the second quarter of 2014 [$6.3 million] for the same quarter in 2013, primarily due to an increase in the commission rate, partially offset by the decreased volume of equipment delivered by GE Healthcare.
Our revenue from equipment sales for the quarter decreased by 29% to $0.8 million compared with $1.1 million for the same period of 2013 as a result of lower EECP revenue and a decrease in sales from our China operations.
Equipment segment revenue, which includes equipment sales, equipment rentals and services decreased 22% to $1.2 million for the second quarter compared to $1.5 million for the second quarter of 2013, primarily due to the decrease in EECP sales volumes mentioned above.
Gross profit for the second quarter of 2014 increased 2% to $5.5 million, compared with $5.4 million for the same period in 2013. This increase is primarily the result of higher commission revenues in our Sales Representation segment, arising from higher commission rates and partially offset by lower equipment shipments in our Equipment segment.
Equipment segment gross profit margin decreased to 55% for the three months ended June 30, 2014 from 63% for the same period in 2013 and to lower sales volume – a lower proportion of our other medical equipment sales versus EECP sales, which have higher margins than EECP equipment. The Sales Representation Segment gross profit margin increased to 72% for the three months ended June 30 as compared with 69% for the same period in 2013.
Selling, general and administrative or SG&A expenses for the second quarter of 2014 was $5.5 million or 70% of revenues, compared with $5.7 million, or 73% of revenues for the same period last year. The decrease in SG&A was mainly the result of a decrease in expenses in the Sales Representation segment for the national sales meeting, which took place in the first quarter in 2014 but in the second quarter in 2013, partially offset by increasing costs associated with the introduction of the MobiCare product in our Equipment segment.
Research and development expenses for the second quarter of 2014 increased to $206,000 from $162,000 for the same period in 2013. The increase in expenses is primarily attributable to an increase in product development costs.
Net loss for the three months ended June 30, 2014 was $0.2 million, a 60% improvement compared with a net loss of $0.5 million for the three months ended June 30, 2013.
Moving to the balance sheet, as of June 30, 2014, we had cash and cash equivalents of approximately $10 million compared with $8 million as of December 31, 2013. This increase in cash is mostly attributable to the significantly higher commission rate our VasoHealthcare subsidiary reached for orders booked in 2013 compared to 2012.
Our deferred revenue as of June 30, 2014 continues to be substantial at $17.7 million, which will be recognized in the future when the underlying equipment is accepted at the customers’ site.
Our shareholders’ equity has decreased to $5.3 million as of June 30, 2014 compared with $6.5 million as of December 31, 2013 primarily as a result of the net loss for the six months ended June 30, 2014.
Now I would like to turn the call back over to Jun. Jun.
Thank you, Michael. In summary, we will continue to identify innovative ways of growing our business across all subsidiaries, and taking advantage of growth opportunities with our partners. While we have just laid the groundwork for future growth, we believe that our new GEHC agreement, our PSK cooperative agreement and expanded BIOX product portfolio will allow us to generate [Indiscernible] revenue in the later half of 2014 and beyond.
This concludes our prepared remarks. We are now ready to open the call for questions. Operator?
(Operator instructions) Our first question comes from [Indiscernible], private investor. Please proceed with your question. Your line is live.
What is your principle or main obstacle in getting reimbursements in approvals for your EECP?
Let me go back [Indiscernible] make some clarifications. EECP currently in the United States is cleared refractory angina. That needs to be in severe angina, our Canadian class III or class IV, and [Indiscernible] of the three months. So that is the FDA clearance. We – the FDA reclassified heart failure as class III, so all the manufacturers need to resubmit PMA to get approval.
We are in the process communicating with the FDA. So by the rules, we can continue marketing in the heart failure market until FDA says no, I guess, okay. In terms of reimbursement, we have had reimbursement for the [Indiscernible], refractory angina since 1999. There is no change in reimbursement and at this moment, while new indications are being discussed with FDA, the reimbursement effort seems to be very – in the queue.
So, our obstacle now is to get FDA approve heart failure as a clear – as approved indication. Then we will go back to CMS insurance companies to ask for the reimbursement. We had already conversation with FDA, but they are always – I am sorry, CMS, but that was before FDA reclassification. So the game changed. So this answer your question sir?
So, do you have any feeling about when this might start – might occur to finally be get the reimbursement and everything else that you want?
I don’t have a clear timetable. As I said, we are still in the stage of communicating with the FDA for the approval. So because this communication is the result of reclassification, FDA allows us to continue to market in the CHF market. But reimbursement will be the agenda after FDA approval.
Okay. So are there any backlog of reimbursement that you might be building up and so you finally get –
No, again – again reimbursement should occur after FDA approval. So we have certain potential investigations to get FDA approval, but before the approval occurs, there is no reimbursement in the agenda.
Right, but first, if you are treating – people are being treated now, because they are backlog – backlogs of reimbursement?
They have reimbursement. The patients are being treated for refractory angina there is reimbursement.
By FDA and almost all private carriers.
Okay. I’m sorry. I misunderstood. All right. Thank you very much.
Okay. You are welcome, sir.
(Operator instructions) Our next question comes from [Indiscernible] a private investor. Please proceed with your questions.
I just wanted to follow up a little bit on the last question, and ask you just one more thing, what kind of data is the FDA seeking vis-à-vis it has applied for approval for the heart failure application, efficacy or safety or both?
First, thank you for the question. As of now what kind of data, well, first of all we believe we have sufficient data, and we put together a pre-submission package, a pre-PMA submission package to FDA for them to take a look, and we have received some FDA feedback on our package, and as for what additional data FDA may want, this is still an ongoing discussion.
Okay. Thank you.
All right. You are welcome.
(Operator instructions) Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Dr. Jun Ma for closing comments.
Thank you, operator. Thank you all for joining our conference call today, and your continuous commitment to Vasomedical. We are excited about the company’s growth trend looking into 2014, and we will be sure to update you on our progress. Thank you again.
Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.
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