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, including the current COVID-19
pandemic which has already adversely affected operating results; the effect of
the dramatic changes taking place in IT and healthcare; the impact of
competitive procedures and products and their pricing; medical insurance
reimbursement policies; unexpected manufacturing or supplier problems;
unforeseen difficulties and delays in product development programs; the actions
of regulatory authorities and third-party payers in the United States and
overseas; continuation of the GEHC agreement and the risk factors reported from
time to time in the Company's SEC reports, including its recent report on Form
10-K. The Company undertakes no obligation to update forward-looking statements
as a result of future events or developments.
Unless the context requires otherwise, all references to "we", "our", "us",
"Company", "registrant", "Vaso" or "management" refer to Vaso Corporation and
its subsidiaries
General Overview
COVID-19 pandemic
The COVID-19 pandemic has had and may continue to have a significant impact on
the economy of the United States and the world until all major economies resume
to normal, and as such, its negative impact to the Company's financial condition
and results of operations may continue. At this time, we cannot reasonably
estimate what the total impact may be. The pandemic has resulted in workforce
and travel restrictions and created business disruptions in supply chain,
production and demand across many business sectors. For Vaso Corporation, we
believe that significant uncertainty will continue to remain in all our
businesses for the remainder of 2022 and beyond.
We have taken significant steps in our efforts to protect our workforce and our
clients. Many of our employees have been working remotely and we are
implementing plans to fully reopen our work sites consistent with the guidelines
promulgated by the CDC and respective state governments. In addition, the
Company received a $3.6 million loan under the Paycheck Protection Program of
the CARES Act. This loan was used to principally cover our payroll costs for a
period of time as specified by the rules, thereby allowing us to maintain our
workforce and continue to provide services and solutions to our clients. In June
2021, the loan, as well as accrued interest, was forgiven in its entirety by the
Small Business Administration.
Our Business Segments
Vaso Corporation ("Vaso") was incorporated in Delaware in July 1987. We
principally operate in three distinct business segments in the healthcare 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 healthcare
provider middle market; and
· Equipment segment, operating through a wholly-owned subsidiary
VasoMedical, Inc., primarily focuses on the design, manufacture, sale and
service of proprietary medical devices.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon the accompanying unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States ("U.S. GAAP"). The preparation of
financial statements in conformity with U.S. GAAP requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, expenses, and the related disclosures at the date of the
financial statements and during the reporting period. Although these estimates
are based on our knowledge of current events, our actual amounts and results
could differ from those estimates. The estimates made are based on historical
factors, current circumstances, and the experience and judgment of our
management, who continually evaluate the judgments, estimates and assumptions
and may employ outside experts to assist in the evaluations.
Certain of our accounting policies are deemed "critical", as they are both most
important to the financial statement presentation and require management's most
difficult, subjective or complex judgments as a result of the need to make
estimates about the effect of matters that are inherently uncertain. For a
discussion of our critical accounting policies, see Note B to the condensed
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended December 31, 2021 as filed with the SEC on March 31, 2022.
Results of Operations - For the Three Months Ended September 30, 2022 and 2021
Revenues
Total revenue for the three months ended September 30, 2022 and 2021 was
$20,035,000 and $18,429,000, respectively, representing an increase of
$1,606,000, or 9% year-over-year. On a segment basis, revenue in the
professional sales services and equipment segments increased by $2,193,000 and
$157,000, respectively, while revenue in the IT segment decreased by $744,000.
Revenue in the IT segment for the three months ended September 30, 2022 was
$9,836,000 compared to $10,580,000 for the three months ended September 30,
2021, a decrease of $744,000, or 7%, of which $394,000 resulted from lower
network services revenue by NetWolves and $350,000 from lower revenues in the
healthcare IT business. Our monthly recurring revenue in the IT segment
accounted for $9,220,000 or 94% of the segment revenue in the third quarter of
2022, and $9,561,000 or 90% of the segment revenue for the same quarter last
year (see Note C).
Commission revenues in the professional sales service segment were $9,439,000 in
the third quarter of 2022, an increase of $2,193,000, or 30%, as compared to
$7,246,000 in the same quarter of 2021. The increase in commission revenues was
due primarily to both an increase in the volume of underlying equipment
delivered by GEHC during the period and a higher blended commission rate
applicable to such deliveries. The Company only recognizes commission revenue
when the underlying equipment has been accepted at the customer site in
accordance with the specific terms of the sales agreement. Consequently,
amounts billable, or billed and received, under the agreement with GE Healthcare
prior to customer acceptance of the equipment are recorded as deferred revenue
in the condensed consolidated balance sheet. As of September 30, 2022,
$26,886,000 in deferred commission revenue was recorded in the Company's
condensed consolidated balance sheet, of which $9,366,000 was long-term. As of
September 30, 2021, $20,174,000 in deferred commission revenue was recorded in
the Company's condensed consolidated balance sheet, of which $6,814,000 was
long-term. The increase in deferred revenue is principally due to an increase in
new orders booked.
Revenue in the equipment segment increased by $157,000, or 26%, to $760,000 for
the three-month period ended September 30, 2022 from $603,000 for the same
period of the prior year, principally due to higher deliveries in our China
operations partially offset by losses in foreign currency exchange.
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Gross Profit
Gross profit for the three months ended September 30, 2022 and 2021 was
$12,536,000, or 63% of revenue, and $10,260,000, or 56% of revenue,
respectively, representing an increase of $2,276,000, or 22% year-over-year. On
a segment basis, gross profit in the professional sales service and equipment
segments increased $2,315,000, or 42%, and $105,000, or 23%, respectively, while
gross profit in the IT segment decreased $144,000, or 3%.
IT segment gross profit for the three months ended September 30, 2022 was
$4,095,000, or 42% of the segment revenue, compared to $4,239,000, or 40% of the
segment revenue for the three months ended September 30, 2021. The
year-over-year decrease of $144,000, or 3%, was primarily a result of lower
sales volume in the NetWolves and healthcare IT businesses, partially offset by
a higher margin sales mix in the NetWolves business.
Professional sales service segment gross profit was $7,869,000, or 83% of
segment revenue, for the three months ended September 30, 2022 as compared to
$5,554,000, or 77% of the segment revenue, for the three months ended September
30, 2021, reflecting an increase of $2,315,000, or 42%. The increase was due to
higher commission revenue as a result of a higher blended commission rate and
higher volume of GEHC equipment delivered during the third quarter of 2022 than
in the same period last year, as well as by lower commission expenses. Cost of
commissions in the professional sales service segment of $1,570,000 and
$1,692,000, for the three months ended September 30, 2022 and 2021,
respectively, reflected commission expense associated with recognized commission
revenues.
Commission expense associated with short-term deferred revenue is recorded as
short-term deferred commission expense, or with long-term deferred revenue as
part of other assets, on the balance sheet until the related commission revenue
is recognized.
Equipment segment gross profit increased to $572,000, or 75% of segment
revenues, for the third quarter of 2022 compared to $467,000, or 77% of segment
revenues, for the same quarter of 2021. The $105,000, or 23%, increase in gross
profit was primarily the result of higher sales during the quarter.
Operating Income (Loss)
Operating income for the three months ended September 30, 2022 was $2,428,000
compared to $636,000 for the same quarter in 2021, representing an increase of
$1,792,000, or 282%, as gross profit increased much more than operating costs
(below), year-over-year. On a segment basis, the IT segment recorded an
operating loss of $474,000 in the third quarter of 2022 as compared to an
operating loss of $77,000 in the same period of 2021; the equipment segment
recorded operating income of $24,000 in the third quarter of 2022 as opposed to
an operating loss of $96,000 in the same period of 2021; and the professional
sales service segment recorded operating income of $3,143,000 in the third
quarter of 2022 as compared to operating income of $1,091,000 in the same period
of 2021.
Operating loss in the IT segment increased to $474,000 for the three-month
period ended September 30, 2022 from an operating loss of $77,000 in the same
period of 2021, due to lower gross profit and higher SG&A costs, partially
offset by lower research and development ("R&D") costs. Operating income in the
professional sales service segment increased by $2,052,000 in the three-month
period ended September 30, 2022 as compared to operating income in the same
period of 2021, due to higher gross profit partially offset by higher SG&A
costs. The equipment segment reported operating income of $24,000 in the third
quarter of 2022, compared to an operating loss of $96,000 in the third quarter
2021, an increase of $120,000. The increase was primarily due to higher gross
profit.
SG&A costs for the three months ended September 30, 2022 and 2021 were
$9,978,000 and $9,501,000, respectively, representing an increase of $477,000,
or 5% year-over-year. On a segment basis, SG&A costs in the IT segment
increased by $262,000 in the third quarter of 2022 from the same quarter of the
prior year due to higher personnel and travel costs; SG&A costs in the
professional sales service segment increased $263,000 due mainly to higher
personnel costs associated with provision of expanded services; and SG&A costs
in the equipment segment decreased $32,000 due mainly to lower amortization
costs. Corporate costs not allocated to segments decreased $16,000 due mainly to
lower investor relations fees.
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Research and development expenses were $130,000, or 1% of revenues, for the
third quarter of 2022, an increase of $7,000, or 6%, from $123,000, or 1% of
revenues, for the third quarter of 2021. The increase is primarily attributable
to higher product development expenses in the equipment segment.
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 U.S. GAAP and
should not be considered a substitute for operating income, which we consider to
be the most directly comparable U.S. 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
U.S. 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 September 30,
2022 2021
(unaudited) (unaudited)
Net income $ 2,498 $ 651
Interest expense (income), net (34 ) 62
Income tax expense 12 19
Depreciation and amortization 318 624
Share-based compensation 9 8
Adjusted EBITDA $ 2,803 $ 1,364
Adjusted EBITDA increased by $1,439,000, to $2,803,000 in the quarter ended
September 30, 2022 from $1,364,000 in the quarter ended September 30, 2021. The
increase was primarily attributable to the increase in net income, partially
offset by the decrease in depreciation and amortization.
Interest and Other Income (Expense)
Interest and other income (expense) for the three months ended September 30,
2022 was $82,000 as compared to $34,000 for the corresponding period of 2021.
The change in interest and other income (expense) was due primarily to lower
interest expense resulting from repayments of notes payable and lines of credit.
Income Tax Expense
For the three months ended September 30, 2022, we recorded income tax expense of
$12,000 as compared to $19,000 for the corresponding period of 2021. The $7,000
decrease is due mainly to lower state tax expense.
Net Income
Net income for the three months ended September 30, 2022 was $2,498,000 as
compared to net income of $651,000 for the three months ended September 30,
2021, representing an increase of $1,847,000. Income per share of $0.01 and
$0.00 was recorded in the three-month periods ended September 30, 2022 and 2021,
respectively. The principal cause of the increase in net income is the increase
in gross profit, partially offset by the increase in SG&A costs.
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Results of Operations - For the Nine Months Ended September 30, 2022 and 2021
Revenues
Total revenue for the nine months ended September 30, 2022 and 2021 was
$56,547,000 and $51,079,000, respectively, representing an increase of
$5,468,000, or 11% year-over-year. On a segment basis, revenue in the
professional sales service segment increased $8,028,000, while revenue in the IT
and equipment segments decreased $2,417,000 and $143,000, respectively.
Revenue in the IT segment for the nine months ended September 30, 2022 was
$29,858,000 compared to $32, 275,000 for the nine months ended September 30,
2021, a decrease of $2,417,000, or 8%, of which $1,965,000 resulted from lower
NetWolves revenue and $452,000 resulted from lower healthcare IT revenue. Our
monthly recurring revenue in the IT segment accounted for $27,530,000 or 92% of
the segment revenue in the first nine months of 2022, and $28,831,000 or 89% of
the segment revenue for the same period last year (see Note C).
Commission revenues in the professional sales service segment were $24,900,000
in the first nine months of 2022, an increase of $8,028,000, or 48%, as compared
to $16,872,000 in the first nine months of 2021. The increase in commission
revenues was due primarily to an increase in the volume of underlying equipment
delivered by GEHC during the period, as well as by a higher blended commission
rate applicable to such deliveries. The Company recognizes commission revenue
when the underlying equipment has been accepted at the customer site in
accordance with the specific terms of the sales agreement. Consequently,
amounts billable, or billed and received, under the agreement with GE Healthcare
prior to customer acceptance of the equipment are recorded as deferred revenue
in the condensed consolidated balance sheet. As of September 30, 2022,
$26,886,000 in deferred commission revenue was recorded in the Company's
condensed consolidated balance sheet, of which $9,366,000 was long-term. As of
September 30, 2021, $20,174,000 in deferred commission revenue was recorded in
the Company's condensed consolidated balance sheet, of which $6,814,000 was
long-term. The increase in deferred revenue is principally due to an increase in
new orders booked.
Revenue in the equipment segment decreased by $143,000, or 7%, to $1,789,000 for
the nine-month period ended September 30, 2022 from $1,932,000 for the same
period of the prior year, principally due to lower deliveries in our China
operations and foreign currency exchange losses when converting the revenue from
local currency to US dollars, partially offset by higher cloud-based
software-as-a-service ("SaaS") sales in the U.S.
Gross Profit
Gross profit for the nine months ended September 30, 2022 and 2021 was
$33,641,000, or 59% of revenue, and $27,459,000, or 54% of revenue,
respectively, representing an increase of $6,182,000, or 23% year-over-year. On
a segment basis, gross profit in the professional sales service segment
increased $7,160,000, or 54%, while gross profit in the IT and equipment
segments decreased $833,000, or 7%, and $145,000, or 10%, respectively.
IT segment gross profit for the nine months ended September 30, 2022 was
$11,906,000, or 40% of the segment revenue, compared to $12,739,000, or 39% of
the segment revenue for the nine months ended September 30, 2021. The
year-over-year decrease of $833,000, or 7%, was primarily a result of lower
revenue in both the network service business by NetWolves and healthcare IT
business, partially offset by higher margin product sales mix in the healthcare
IT business.
Professional sales service segment gross profit was $20,355,000, or 82% of
segment revenue, for the nine months ended September 30, 2022 as compared to
$13,195,000, or 78% of the segment revenue, for the nine months ended September
30, 2021, reflecting an increase of $7,160,000, or 54%. The increase was
primarily due to higher commission revenue as a result of a higher volume of
GEHC equipment delivered, as well as by a higher blended commission rate during
the first nine months of 2022 than in the same period last year. Cost of
commissions in the professional sales service segment of $4,545,000 and
$3,677,000, for the nine months ended September 30, 2022 and 2021, respectively,
reflected commission expense associated with recognized commission revenues.
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Commission expense associated with short-term deferred revenue is recorded as
short-term deferred commission expense, or with long-term deferred revenue as
part of other assets, on the balance sheet until the related commission revenue
is recognized.
Equipment segment gross profit decreased to $1,380,000, or 77% of segment
revenues, for the first nine months of 2022 compared to $1,525,000, or 79% of
segment revenues, for the same period in 2021. The $145,000, or 10%, decrease
in gross profit was primarily the result of lower revenue and lower gross profit
margin in our China operations.
Operating Income (Loss)
Operating income (loss) for the nine months ended September 30, 2022 and 2021
was $3,635,000 and ($624,000), respectively, representing an improvement of
$4,259,000 as gross profit increased $6,182,000 and operating costs (below)
increased $1,923,000, year-over-year. On a segment basis, the IT segment
recorded an operating loss of $1,531,000 in the first nine months of 2022 as
compared to an operating loss of $254,000 in the same period of 2021; the
equipment segment recorded an operating loss of $132,000 in the first nine
months of 2022 as compared to an operating loss of $212,000 in the same period
of 2021; and operating income in the professional sales service segment
increased by $5,424,000, from $709,000 in the first nine months of 2021 to
$6,133,000 in the same period of 2022.
Operating loss in the IT segment increased to $1,531,000 for the nine-month
period ended September 30, 2022 as compared to an operating loss of $254,000 in
the same period of 2021, due primarily to lower gross profit and higher SG&A
costs, partially offset by lower R&D costs. Operating income in the
professional sales service segment increased $5,424,000 in the nine-month period
ended September 30, 2022 as compared to operating income in the same period of
2021, due to higher gross profit partially offset by higher SG&A costs. The
equipment segment reported an operating loss of $132,000 in the first nine
months of 2022, compared to an operating loss of $212,000 in the first nine
months of 2021, an improvement of $80,000. The decrease in loss was due to lower
SG&A costs, partially offset by lower gross profit and higher R&D costs.
SG&A costs for the nine months ended September 30, 2022 and 2021 were
$29,584,000 and $27,646,000, respectively, representing an increase of
$1,938,000, or 7% year-over-year. On a segment basis, SG&A costs in the IT
segment increased by $507,000 in the first nine months of 2022 from the same
period of the prior year due mainly to higher personnel, accounting and travel
costs; SG&A costs in the professional sales service segment increased by
$1,735,000 due to higher travel, vehicle and personnel costs; and SG&A costs in
the equipment segment decreased by $272,000 due mainly to lower personnel costs.
Corporate costs not allocated to segments decreased $32,000 due mainly to lower
accounting and investor relations costs, partially offset by higher insurance
costs.
Research and development ("R&D") expenses were $422,000, or 1% of revenues, for
the first nine months of 2022, a decrease of $15,000, or 3%, from $437,000, or
1% of revenues, for the first nine months of 2021. The decrease is primarily
attributable to lower product development expenses in the IT segment.
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 U.S. GAAP and
should not be considered a substitute for operating income, which we consider to
be the most directly comparable U.S. 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
U.S. 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)
Nine months ended September 30,
2022 2021
(unaudited) (unaudited)
Net income $ 3,649 $ 2,788
Interest expense (income), net (10 ) 261
Income tax expense 42 87
Depreciation and amortization 1,576 1,748
Share-based compensation 22 25
Adjusted EBITDA $ 5,279 $ 4,909
Adjusted EBITDA increased by $370,000 to $5,279,000 in the nine months ended
September 30, 2022 from $4,909,000 in the nine months ended September 30,
2021. The increase was primarily attributable to higher net income, partially
offset by lower interest expense and lower depreciation and amortization.
Interest and Other Income (Expense)
Interest and other income (expense) for the nine months ended September 30, 2022
was $56,000 as compared to $3,499,000 for the corresponding period of 2021. The
decrease in interest and other income was due primarily to the $3.6 million PPP
loan forgiveness in the second quarter of 2021 and $229,000 lower interest
expense in the nine months ended September 30, 2022.
Income Tax (Expense) Benefit
For the nine months ended September 30, 2022, we recorded income tax expense of
$42,000 as compared to income tax expense of $87,000 for the corresponding
period of 2021. The decrease was due mainly to lower tax expense in our China
operations.
Net Income
Net income for the nine months ended September 30, 2022 was $3,649,000 as
compared to $2,788,000 for the nine months ended September 30, 2021,
representing an increase of $861,000, or 31%. Income per share of $0.02 was
recorded in both of the nine-month periods ended September 30, 2022 and 2021.
The principal cause of the improvement is the increase in revenue and gross
profit in the sales representation segment, partially offset by higher SG&A
cost.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations from working capital. At September 30, 2022, we
had cash, cash equivalents and short-term investments of $18,721,000 and working
capital of $1,712,000, compared to cash, cash equivalents and short-term
investments of $6,654,000 and negative working capital of $3,197,000 at December
31, 2021. The $1,712,000 in working capital at September 30, 2022 includes the
negative effect of the net balance of deferred commission expense and deferred
revenue of $13,809,000. These are non-cash expense and revenue items and have
no impact on future cash flows. Excluding the negative effect of these non-cash
items, working capital would be $15,521,000 at September 30, 2022.
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Cash provided by operating activities was $12,676,000, which consisted of net
income after adjustments to reconcile net income to net cash of $5,578,000 and
cash provided by operating assets and liabilities of $7,098,000, during the nine
months ended September 30, 2022, compared to cash provided by operating
activities of $5,444,000 for the same period in 2021. The changes in the account
balances primarily reflect a decrease in accounts and other receivables of
$6,502,000 and increases in accrued expenses and deferred revenue of $849,000
and $1,927,000, respectively, partially offset by an increase in inventories of
$697,000.
Cash used in investing activities during the nine-month period ended September
30, 2022 was $5,296,000 attributed to $447,000 used for the purchase of
equipment and software and $5,000,000 used in the purchase of short-term
investments, offset by $151,000 in redemption of short-term investments.
Cash used in financing activities during the nine-month period ended September
30, 2022 was $177,000 resulting from the repayment of notes payable and finance
lease obligations.
Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy
its obligations for the next twelve months.
It is anticipated that the COVID-19 pandemic may continue to adversely impact
our operations during and beyond the remaining quarter of 2022, depending on the
duration of the pandemic and the timing and success of the continued reopening
of the economy around the world.
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VASO CORPORATION 
