This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of our expectations regarding future trends
affecting our business. These forward looking statements and other
forward-looking statements made elsewhere in this document are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Please read the section titled "Risk Factors" in "Item One - Business" to review
certain conditions, among others, which we believe could cause results to differ
materially from those contemplated by the forward-looking statements.
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; the effect of the dramatic changes taking place in IT and healthcare;
continuation of the GEHC agreement; the impact of competitive technology and
products and their pricing; medical insurance reimbursement policies; unexpected
manufacturing or supplier problems; unforeseen difficulties and delays in the
conduct of product development programs; the actions of regulatory authorities
and third-party payers in the United States and overseas; and the risk factors
reported from time to time in the Company's SEC reports. The Company undertakes
no obligation to update forward-looking statements as a result of future events
or developments.
The following discussion should be read in conjunction with the financial
statements and notes thereto included in this Annual Report on Form 10-K.
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General Overview
COVID-19 pandemic
The COVID-19 pandemic has had a significant impact on the United States economy
and it is possible that some 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. We have experienced
the negative impact in the recurring revenue business in our IT segment as some
of our customers have been adversely affected by the shutdown, and new business
in this segment appears to be slower as well. The pandemic also may have a
negative impact on our cash receipts as some customers request forbearance or a
delay in their payments to us.
The pandemic may continue to impact our operations in 2022, depending on the
duration of the pandemic and the timing and success of the reopening of the
economy.
We have taken significant steps in our efforts to protect our workforce and our
clients. Most of our employees have been working at least partially remotely and
we have reopened our work sites consistent with the guidelines promulgated by
the CDC and respective state governments. In addition, the Company in 2020
received a $3.6 million loan under the Paycheck Protection Program of the CARES
Act (the "PPP loan"). 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 (formerly Vasomedical, Inc.) ("Vaso") 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 General Electric
Healthcare (GEHC) into the health provider middle market; and
· Equipment segment, primarily focuses on the design, manufacture, sale and
service of proprietary medical devices and software, operating through a
wholly-owned subsidiary VasoMedical, Inc., which in turn operates through
Vasomedical Solutions, Inc. for domestic business and Vasomedical Global
Corp. for international business, respectively.
VasoTechnology
VasoTechnology, Inc. was formed in May 2015, at the time the Company acquired
all of the assets of NetWolves, LLC and its affiliates, including the membership
interests in NetWolves Network Services LLC (collectively, "NetWolves"). It
currently consists of a managed network and security service division
(NetWolves) and a healthcare IT application VAR (value added reseller) division
(VasoHealthcare IT). Its current offering includes:
· Managed diagnostic imaging applications (channel partner of select vendors
of healthcare IT products).
· Managed network infrastructure (routers, switches and other core
equipment).
· Managed network transport (FCC licensed carrier reselling 175+ facility
partners).
· Managed security services.
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VasoTechnology uses a combination of proprietary technology, methodology and
best-in-class third-party applications to deliver its value proposition.
VasoHealthcare
VasoHealthcare commenced operations in 2010, in conjunction with the Company's
execution of its exclusive sales representation agreement with GEHC, which is
the healthcare business division of the General Electric Company ("GE"), to
further the sale of certain medical capital equipment in certain domestic market
segments. Its current offering consists of:
· GEHC diagnostic imaging capital equipment.
· GEHC service agreements for the above equipment.
· GEHC training services for use of the above equipment.
· GEHC and third-party financial services for the above equipment.
VasoHealthcare has built a team of over 80 highly experienced sales
professionals who utilize highly focused sales management and analytic tools to
manage the complete sales process and to increase market penetration.
VasoMedical
The proprietary medical equipment business under VasoMedical traces back to 1995
when the Company began the proprietary Enhanced External Counterpulsation
(EECP®) technology in the United States and has since diversified to include
other medical hardware and software. Vasomedical Global was formed in 2011 to
combine and coordinate the various international operations including design,
development, manufacturing, and sales of medical devices and software, while
domestic activities are conducted under Vasomedical Solutions. These devices
and software primarily consist of cardiovascular diagnostic and therapeutic
applications, including:
· Biox™ series Holter monitors and ambulatory blood pressure recorders.
· ARCS™ series analysis, reporting and communication software for ECG and
blood pressure signals, including cloud-based software and algorithm
subscription services.
· MobiCare® multi-parameter wireless vital-sign monitoring system.
· EECP® therapy systems for non-invasive, outpatient treatment of ischemic
heart disease.
This segment uses its extensive in-house knowledge for cardiovascular devices
and software coupled with its engineering resources to cost effectively create
and market its proprietary technology. It sells and services its products to
customers in the U.S. and China directly and sells and/or services its products
in the international market mainly through independent distributors.
Strategic Plan and Objectives
Our short- and long-term plans for the growth of the Company and to increase
stockholder value are:
· Continue to effectively control operating costs.
· Continue to expand our product and service offerings as well as market
penetration in the business of our IT segment.
· Maintain and improve business performance in our professional sales
service segment by increasing market penetration of the GE Healthcare
product modalities we represent, and possibly building new teams to
represent other vendors.
· Maintain and grow our equipment business by increasing efficiency and
exploring new revenue models.
· Continue to seek accretive partnership opportunities.
· Explore options in capital markets for our stock.
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Results of Operations - For the Years Ended December 31, 2021 and 2020
Total revenues increased by $5,729,000, or 8.2%, to $75,579,000 in the year
ended December 31, 2021, from $69,850,000 in the year ended December 31,
2020. We reported net income of $6,100,000 and $358,000 for the years ended
December 31, 2021 and 2020, respectively, an improvement of $5,742,000. The
increase in net income was primarily due to higher gross profit and the
forgiveness of the $3,646,000 PPP loan and interest thereon, partially offset by
higher operating costs. Our net income was $0.04 and $0.00 per basic and diluted
common share for the years ended December 31, 2021 and 2020, respectively.
Revenues
Revenue in the IT segment was $42,916,000 for the year ended December 31, 2021
as compared to $43,894,000 for the prior year, a decrease of $978,000, or 2.2%,
of which $2,046,000 was attributable to a decline in NetWolves revenues, offset
by a $1,069,000 increase in VHC-IT revenues.
Commission revenues in the professional sales service segment increased by
$6,576,000, or 28.8%, to $29,441,000 in the year ended December 31, 2021, as
compared to $22,865,000 in the year ended December 31, 2020. The increase was
primarily due to higher volume of GEHC equipment delivered in 2021 coupled with
a higher blended commission rate for equipment delivered in 2021. As discussed
in Note B to the financial statements, the Company defers recognition of
commission revenue until the underlying equipment is delivered. As of December
31, 2021, the Company recorded on its consolidated balance sheet deferred
commission revenue of $24,955,000 for this segment (of which $8,465,000 is
long-term), an increase of $7,266,000, or 41.1%, compared to $17,689,000 of
deferred commission revenue at December 31, 2020 (of which $6,178,000 was
long-term). The increase in deferred revenue is due principally to higher total
orders booked during the year, partially offset by the increase in equipment
deliveries over the same period.
Revenue in our equipment segment increased 4.2% to $3,222,000 for the year ended
December 31, 2021 from $3,091,000 for the year ended December 31, 2020, as a
result of a revenue increase in our China operations, partially offset by not
including EECP operations in the consolidated financials starting the second
quarter of 2020. In April 2020, the Company sold 51% of the equity in its EECP
business and does not consolidate these operations after such date. With EECP
related revenues all excluded, equipment segment revenue would be $3,102,000 and
$2,726,000 for 2021 and 2020, respectively, an increase of $376,000, or 13.8%,
mainly a result of higher revenue in our China operations.
Gross Profit
The Company recorded gross profit of $43,133,000, or 57.1% of revenue, for the
year ended December 31, 2021, compared to $38,571,000, or 55.2% of revenue, for
the year ended December 31, 2020. The increase of $4,562,000, or 11.8%, was due
primarily to a $5,298,000 increase in the professional sales service segment due
to higher revenues, partially offset by a $1,008,000 decrease in the IT segment,
as a result of lower revenues and lower gross margin.
IT segment gross profit decreased to $16,674,000, or 39% of segment revenues,
for the year ended December 31, 2021 as compared to $17,682,000, or 40% of
segment revenues, in the prior year, a decrease of $1,008,000, of which $972,000
was attributable to NetWolves and $36,000 was attributable to VHC-IT, resulting
mainly from lower NW revenues and higher VHC-IT costs.
Professional sales service segment gross profit was $23,906,000, or 81.2% of the
segment revenues, for the year ended December 31, 2021, an increase of
$5,298,000, or 28.5%, from segment gross profit of $18,608,000, or 81.4% of the
segment revenue, for the year ended December 31, 2020. The increase in gross
profit was due primarily to the increase in the segment revenue as a result of
higher equipment delivery volume and higher blended commission rate for year.
Cost of commissions increased by $1,278,000, or 30.0%, to $5,535,000 for the
year ended December 31, 2021, as compared to cost of commissions of $4,257,000
in 2020. The increase is due primarily to the increase in the segment revenue
as gross profit margin remained little changed year over year. Cost of
commissions reflects commission expense associated with certain recognized
commission revenues. Commission expense associated with deferred revenue is
recorded as deferred commission expense until the related commission revenue is
earned.
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Equipment segment gross profit increased by $272,000, or 11.9%, to $2,553,000,
or 79.2% of equipment segment revenues, for the year ended December 31, 2021,
compared to $2,281,000, or 73.8% of equipment segment revenues, for the year
ended December 31, 2020, due to higher segment revenue as well as higher gross
profit margin as a result of excluding EECP operations from the consolidated
financials starting the second quarter of 2020. Excluding EECP operations, gross
profit in the equipment segment would be $2,433,000 (78.4% of the segment
revenue) and $2,040,000 (74.8% of segment revenue) for 2021 and 2020,
respectively, representing an increase for 2021 of $393,000 or 19.3%, year over
year. Equipment segment gross profits are dependent on a number of factors
including the mix of products sold, their respective models and average selling
prices, the ongoing costs of training, maintenance and servicing, as well as
certain fixed period costs, including facilities, payroll and insurance.
Operating Income
Operating income was $2,819,000 for the year ended December 31, 2021 compared to
operating income of $772,000 for the year ended December 31, 2020, an increase
of $2,047,000, or 265%. The improvement was primarily attributable to the
increase in operating income in the professional sales service segment to
$5,918,000 for the year ended December 31, 2021 from $2,977,000 for the year
ended December 31, 2020, due to higher gross profit, offset by higher operating
expenses, and by a $187,000 improvement in the equipment segment, which recorded
$32,000 in operating income in the year ended December 31, 2021, as compared to
an operating loss of $155,000 in the prior year, as a result primarily of higher
gross profit. Offsetting these increases was a $815,000 increase in operating
loss in the IT segment to $2,062,000 for the year ended December 31, 2021 from
an operating loss of $1,247,000 in the prior year resulting mainly from lower
gross profit and a one-time write-off in R&D expenses, partially offset by lower
SG&A expenses, and a $266,000 increase in corporate expenses to $1,069,000 for
the year ended December 31, 2021 from $803,000 in the prior year, mainly due to
increases in accounting, audit and legal expenses. .
Selling, general and administrative (SG&A) expenses for the years ended December
31, 2021 and 2020 were $38,593,000, or 51.1% of revenues, and $37,054,000, or
53.0% of revenues, respectively, reflecting an increase of $1,539,000 or 4.2%.
The increase in SG&A expenditures in the year ended December 31, 2021 resulted
primarily from a $2,357,000 increase in the professional sales service segment
attributable mainly to higher sales personnel-related and travel costs; a
$1,103,000 decrease in the IT segment due to lower personnel, marketing and
travel costs; a $19,000 increase in the equipment segment due mainly to the
deconsolidation of the EECP business starting the second quarter of 2020, and by
a $266,000 increase in corporate expenses reflecting higher accounting and
director fees.
Research and development (R&D) expenses of $1,721,000, or 2% of revenues, for
the year ended December 31, 2021 increased by $976,000, or 131%, from $745,000,
or 1% of revenues, for the year ended December 31, 2020. The increase is
primarily attributable to a one-time write-off of software development costs in
our NetWolves operations.
Adjusted EBITDA
We define Adjusted EBITDA (earnings before interest, taxes, depreciation and
amortization), which is a non-GAAP financial measure, as net (loss) income, plus
net interest expense (income), 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)
Year ended December 31,
2021 2020
Net income $ 6,100 $ 358
Interest expense (income), net 301 675
Income tax expense (benefit) 151 (1 )
Depreciation and amortization 3,840 2,462
Share-based compensation 31 88
Adjusted EBITDA $ 10,423 $ 3,582Adjusted EBITDA increased by $6,841,000, to $10,423,000 in the year ended
December 31, 2021 from $3,582,000 in the year ended December 31, 2020. The
increase was primarily attributable to the higher net income, income tax
expense, and depreciation and amortization, partially offset by lower interest
expense, and share-based compensation costs, as compared to the prior year.
Other Income (Expense), Net
Other income (expense), net for the years ended December 31, 2021 and 2020, was
$3,432,000 and $(415,000), respectively, an increase in net other income of
$3,847,000. The increase was due primarily to the gain on forgiveness of PPP
loan and interest of $3,646,000 and lower interest expense on our lines of
credit and other debt instruments, partially offset by the $110,000 gain on sale
of equity in the EECP business in 2020.
Income Tax (Expense) Benefit
During the year ended December 31, 2021, we recorded income tax expense of
$151,000, as compared to income tax benefit of $1,000 in the year ended December
31, 2020. The Company utilized $4,373,000 and $797,000 in net operating loss
carryforwards for the years ended December 31, 2021 and 2020, respectively. The
change to income tax expense in 2021 arose primarily from higher foreign tax
expense due to a write-off of deferred tax liability in 2020. The Company has
net operating loss carryforwards of approximately $38 million at December 31,
2021.
Liquidity and Capital Resources
Cash and Cash Flow - For the year ended December 31, 2021
We have financed our operations and investment activities primarily from working
capital. At December 31, 2021, we had cash and cash equivalents of $6,025,000
and negative working capital of $3,197,000. $12,946,000 in negative working
capital at December 31, 2021 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. At March 25, 2022 the Company's
cash and cash equivalents were approximately $11.2 million.
Cash provided by operating activities was $7,815,000 during the year ended
December 31, 2021, which consisted of net income after non-cash adjustments of
$7,283,000 and changes in operating assets and liabilities of $532,000. The
changes in the account balances primarily reflect increases in deferred revenue,
accrued expenses, and accrued commissions of $7,260,000, $2,372,000, and
$1,497,000, respectively; partially offsetting these changes were increases in
accounts and other receivables and deferred commission expenses of $6,052,000
and $1,195,000, respectively, and a decrease in accounts payable of $3,492,000.
Cash used in investing activities during the year ended December 31, 2021 was
$260,000 consisting of $415,000 in purchases of equipment and software offset by
$155,000 in redemption of short-term investment.
Cash used in financing activities during the year ended December 31, 2021 was
$8,329,000, primarily attributable to repayment of $5,448,000 on our lines of
credit and $2,881,000 in payments of notes and finance leases.
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Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy
its obligations for the next twelve months. It is possible that the COVID-19
pandemic may adversely impact our operations depending on the duration of the
pandemic and the timing and success of the reopening of the economy.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities (SPES), which
would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of December
31, 2021, we are not involved in any unconsolidated SPES or other off-balance
sheet arrangements.
Effects of Inflation
We believe that inflation and changing prices over the past two years have not
had a significant impact on our revenue or on our results of operations.
Critical Accounting Policies and Estimates
Note B of the Notes to Consolidated Financial Statements includes a
summary of our significant accounting policies and methods used in the
preparation of our financial statements. In preparing these financial
statements, we have made our best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to materiality.
The application of these accounting policies involves the exercise of judgment
and use of assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates. Our critical accounting policy and
estimate is as follows:
Allowance for Commission Adjustments
In our professional sale service segment, we bill a portion of commissions on
the orders we booked in advance of delivery of the underlying equipment. Such
amounts are classified in our consolidated balance sheets in accounts receivable
and deferred revenue, net of estimated commission adjustments. Similarly,
commissions payable to our sales force related to such billings are recorded as
deferred commission expense, net of the impact of the estimated commission
adjustments, when the associated deferred revenue is recorded. The commission
adjustments are based on estimates of future order cancellations, which is
calculated based on historical cancellation rates and applicable credit
policies.
Recently Issued Accounting Pronouncements
Note B of the Notes to Consolidated Financial Statements includes a description
of the Company's evaluation of recently issued accounting pronouncements.
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