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 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", "Vaso" or "management" refer to Vaso Corporation and
its subsidiaries
General Overview
COVID-19 pandemic
The COVID-19 pandemic has had and will continue to have a significant impact on
the United States economy and we anticipate that the pandemic may negatively
impact the Company's financial condition and results of operations, although at
this time we cannot reasonably estimate what that 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.
Equipment orders in our professional sales service segment appear to have been
negatively impacted, and we do anticipate continued negative impact in our
business at least in the third quarter, in particular in our professional sales
service segment for the diagnostic imaging equipment. Moreover, we anticipate a
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 impact our operations beyond the third quarter of 2020,
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. Substantially all of our employees are working remotely and we are
implementing plans to 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, substantially all of which shall qualify for
forgiveness, has been used to principally cover our payroll costs, thereby
allowing us to maintain our workforce and continue to provide services and
solutions to our clients.
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.
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IT segment, operating through a wholly-owned subsidiary VasoTechnology, Inc.,
primarily focuses on healthcare IT and managed network technology services;
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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
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Equipment segment, operating through a wholly-owned subsidiary VasoMedical,
Inc., primarily focuses on the design, manufacture, sale and service of
proprietary medical devices.
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 C 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, 2019 as filed with the SEC on April 14, 2020.
20
Results of Operations - For the Three Months Ended June 30, 2020 and 2019
Revenues
Total revenue for the three months ended June 30, 2020 and 2019 was $16,340,000
and $17,543,000, respectively, representing a decrease of $1,203,000, or 7%
year-over-year. On a segment basis, revenue in the IT, professional sales
services, and equipment segments decreased $583,000, $411,000, and $209,000,
respectively. The decreases in revenue reflect the adverse impact of the
COVID-19 pandemic and the resulting economic slowdown both domestically and
worldwide.
Revenue in the IT segment for the three months ended June 30, 2020 was
$10,822,000 compared to $11,405,000 for the three months ended June 30, 2019, a
decrease of $583,000, or 5%, of which $291,000 resulted from lower healthcare IT
VAR revenues and $292,000 from lower NetWolves revenues. Our monthly recurring
revenue in the IT segment accounted for $9,808,000 or 91% of the segment revenue
in the second quarter of 2020, and $10,047,000 or 88% of the segment revenue for
the same quarter last year (see Note C).
Commission revenues in the professional sales services segment were $4,720,000
in the second quarter of 2020, a decrease of 8%, as compared to $5,131,000 in
the same quarter of 2019. The decrease in commission revenues was due primarily
to a decrease in the volume of equipment delivered by GEHC during the period, as
well as to a lower blended commission rate for the equipment delivered. The
Company recognizes commission revenue only 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 June 30, 2020, $16,465,000 in deferred commission revenue was recorded in the
Company's condensed consolidated balance sheet, of which $7,278,000 was
long-term. At June 30, 2019, $16,638,000 in deferred commission revenue was
recorded in the Company's condensed consolidated balance sheet, of which
$5,424,000 was long-term. The decrease in deferred revenue, by $173,000, or 1%,
is principally due to a decrease in orders booked.
Revenue in the equipment segment decreased by $209,000, or 21%, to $798,000 for
the three-month period ended June 30, 2020 from $1,007,000 for the same period
of the prior year. The decrease was due to lower sales of products and services
during the quarter.
Gross Profit
Gross profit for the three months ended June 30, 2020 and 2019 was $8,420,000,
or 52% of revenue, and $9,411,000, or 54% of revenue, respectively, representing
a decrease of $991,000, or 11% period-over-period.
IT segment gross profit for the three months ended June 30, 2020 was $4,172,000,
or 39% of the segment revenue, compared to $4,628,000, or 41% of the segment
revenue for the three months ended June 30, 2019. The period-over-period
decrease of $456,000, or 10%, was primarily a result of lower revenues.
Professional sales services segment gross profit was $3,770,000, or 80% of
segment revenue, for the three months ended June 30, 2020 as compared to
$4,221,000, or 82% of the segment revenue, for the three months ended June 30,
2019, reflecting a decrease of $451,000, or 11%. The decrease in absolute
dollars was primarily due to lower commission revenue as a result of lower
volume of GEHC equipment delivered during the second quarter of 2020 than in the
same period last year, as well as to lower blended commission rates. Cost of
commissions in the professional sales service segment of $950,000 and $910,000,
for the three months ended June 30, 2020 and 2019, 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 decreased to $478,000, or 60% of segment
revenues, for the second quarter of 2020 compared to $562,000, or 56% of segment
revenues, for the same quarter of 2019. The $84,000, or 15%, decrease in gross
profit was due to lower sales volume, compared to the second quarter 2019.
Operating Loss
Operating loss for the three months ended June 30, 2020 and 2019 was $532,000
and $520,000, respectively, representing an increase of $12,000, due to lower
gross profit, partially offset by lower operating costs (defined below).
Operating loss in the IT segment increased $363,000 in the three-month period
ended June 30, 2020 as compared to the same period of 2019 due to lower gross
profit, partially offset by lower selling, general, and administrative ("SG&A")
costs. Operating income in the professional sales service segment increased
$183,000 in the three-month period ended June 30, 2020 as compared to operating
income in the same period of 2019 due to lower SG&A costs partially offset by
lower gross profit. Operating loss in the equipment segment was $94,000 in the
second quarter of 2020, a decrease of $124,000 from operating loss of $218,000
in the same quarter of 2019, due to lower SG&A and R&D expenses, partially
offset by lower gross profit. During the second quarter of 2020, corporate
expenses decreased $44,000 when compared to the same quarter of 2019.
21
SG&A costs for the three months ended June 30, 2020 and 2019 were $8,769,000 and
$9,703,000, respectively, representing a decrease of $934,000, or 10%
year-over-year. On a segment basis, SG&A costs in the IT segment decreased by
$110,000 in the second quarter of 2020 from the same quarter of the prior year
due to reduced personnel costs. SG&A costs in the professional sales service
segment decreased $633,000 due mainly to lower travel costs. SG&A costs in the
equipment segment decreased $150,000 due mainly to sale of a majority interest
in EECP Global. Corporate costs not allocated to segments decreased by $44,000
in the three months ended June 30, 2020 from the same period in 2019, due
primarily to lower accounting and legal fees.
Research and development ("R&D") expenses were $183,000, or 1% of revenues, for
the second quarter of 2020, a decrease of $45,000, or 20%, from $228,000, or 1%
of revenues, for the second quarter of 2019. The decrease is primarily
attributable to lower software development expenses in the equipment segment.
Interest and Other (Expense) Income
Interest and other (expense) income for the three months ended June 30, 2020 was
$(54,000) as compared to $(203,000) for the corresponding period of 2019. The
decrease in expense was due primarily to the gain on sale of EECP Global (see
Note M) and lower interest expense on notes payable and lines of credit.
Income Tax Expense
For the three months ended June 30, 2020, we recorded income tax expense of
$11,000 as compared to $27,000 for the corresponding period of 2019. The
decrease arose mainly from lower foreign taxes.
Net Loss
Net loss for the three months ended June 30, 2020 was $597,000 as compared to a
net loss of $750,000 for the three months ended June 30, 2019, representing a
decrease of $153,000. Our net loss per share was $0.00 in the three-month
periods ended June 30, 2020 and 2019. The principal cause of the decrease in net
loss is the decrease in interest and other expense partially offset by the
increase in operating loss. The Company historically reports a loss in the
second quarter of the year.
Adjusted EBITDA
We define Adjusted EBITDA, or 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 June 30,
2020 2019
(unaudited) (unaudited)
Net loss $(597) $(750)
Interest expense (income), net 152 227
Income tax (benefit) expense 11 27
Depreciation and amortization 628 670
Share-based compensation 27 54
Adjusted EBITDA $221 $228
22
Adjusted EBITDA decreased by $7,000, to $221,000 in the quarter ended June 30,
2020 from $228,000 in the quarter ended June 30, 2019. The decrease was
primarily attributable to decreases in interest expense (income), depreciation
and amortization and share-based compensation, partially offset by the decrease
in net loss.
Results of Operations - For the Six Months Ended June 30, 2020 and 2019
Revenues
Total revenue for the six months ended June 30, 2020 and 2019 was $33,625,000
and $33,067,000, respectively, representing an increase of $558,000, or 2%
year-over-year. On a segment basis, revenue in the professional sales service
segment increased $1,341,000, while revenues in the IT and equipment segments
decreased $571,000 and $212,000, respectively.
Revenue in the IT segment for the six months ended June 30, 2020 was $22,161,000
compared to $22,732,000 for the six months ended June 30, 2019, a decrease of
$571,000, of which $592,000 resulted from a decrease in the healthcare IT VAR
business, offset by a $21,000 increase in revenues at NetWolves. Our monthly
recurring revenue in the IT segment accounted for $20,359,000 or 92% of the
segment revenue for the first half of 2020, and $20,002,000 or 88% of the
segment revenue for the same period last year (see Note C).
Commission revenues in the professional sales service segment were $9,887,000 in
the first half of 2020, an increase of 16%, as compared to $8,546,000 in the
first half of 2019. 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 an increase in the blended commission rate for the equipment
delivered. We expect deliveries and revenue to improve through the remainder of
2020. 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 June 30, 2020, $16,465,000 in deferred commission revenue was
recorded in the Company's condensed consolidated balance sheet, of which
$7,278,000 was long-term.
Revenue in the equipment segment decreased by $212,000, or 12%, to $1,577,000
for the six-month period ended June 30, 2020 from $1,789,000 for the same period
of the prior year. The decrease was principally due to a decrease in EECP
product and service revenues.
Gross Profit
Gross profit for the six months ended June 30, 2020 and 2019 was $17,616,000, or
52% of revenue, and $17,298,000, or 52% of revenue, respectively, representing
an increase of $318,000, or 2% year-over-year. On a segment basis, gross profit
in the professional sales service segment increased $1,011,000 while gross
profit in the IT and equipment segments decreased $655,000 and $38,000,
respectively.
IT segment gross profit for the six months ended June 30, 2020 was $8,699,000,
or 39% of the segment revenue, compared to $9,354,000, or 41% of the segment
revenue for the six months ended June 30, 2019. Gross profit at NetWolves
decreased $258,000 due mainly to higher costs, and gross profit in the IT VAR
business decreased $397,000 resulting from lower revenue and lower gross profit
rate.
Professional sales service segment gross profit was $7,917,000, or 80% of
segment revenue, for the six months ended June 30, 2020 as compared to
$6,906,000, or 81% of the segment revenue, for the six months ended June 30,
2019, reflecting an increase of $1,011,000, or 15%. The increase in absolute
dollars was due to higher commission revenue as a result of highervolume of GEHC
equipment delivered during the first half of 2020 than in the same period last
year, offset by higher commission expense in the first half of 2020 compared to
the same period of 2019.
Cost of commissions in the professional sales service segment of $1,970,000 and
$1,640,000, for the six months ended June 30, 2020 and 2019, 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.
Equipment segment gross profit decreased to $1,000,000, or 63% of segment
revenues, for the first half of 2020 compared to $1,038,000, or 58% of segment
revenues, for the same period of 2019, due to decreased sales volume offset by
higher margin product mix in the first half of 2020, compared to the first half
of 2019.
23
Operating Loss
Operating loss for the six months ended June 30, 2020 and 2019 was $1,784,000
and $3,174,000, respectively, representing a decrease in loss of $1,390,000,
primarily due to higher gross profit and lower operating costs. On a segment
basis, operating loss decreased $1,393,000 and $383,000 in the professional
sales service and equipment segments, respectively, and increased $504,000 in
the IT segment, in the six months ended June 30, 2020, as compared to the same
period of 2019. In addition, corporate expenses decreased $118,000.
Operating loss in the IT segment increased in the six-month period ended June
30, 2020 as compared to the same period of 2019 due primarily to lower gross
profit, partially offset by lower SG&A costs. Operating loss in the professional
sales service segment decreased in the six-month period ended June 30, 2020
resulting primarily from higher gross profit, as well as from lower SG&A costs.
Operating loss in the equipment segment decreased in the six-month period ended
June 30, 2020 as compared to the same period of 2019 due primarily to lower SG&A
and R&D costs, offset by lower gross profit.
SG&A costs for the six months ended June 30, 2020 and 2019 were $19,035,000 and
$20,044,000, respectively, representing a decrease of $1,009,000, or 5%
year-over-year. On a segment basis, SG&A costs in the professional sales service
segment for the six months ended June 30, 2020 decreased $381,000 to $8,040,000,
from $8,421,000 for the corresponding period of the prior year, due mainly to
reduced travel costs. SG&A costs in the IT segment by decreased $176,000 to
$9,591,000, from $9,767,000 for the corresponding period of the prior year, due
primarily to lower personnel costs in the IT VAR business, partially offset by
higher severance costs at NetWolves. SG&A costs in the equipment segment for the
six months ended June 30, 2020 decreased $334,000 to $965,000, from $1,299,000
for the corresponding period of the prior year, due primarily to lower travel
costs, and corporate costs not allocated to segments decreased in the same
periods by $118,000 from $557,000, due primarily to lower accounting and legal
fees.
Research and development ("R&D") expenses were $365,000, or 1% of revenues, for
the first half of 2020, a decrease of $63,000, or 15%, from $428,000, or 1% of
revenues, for the first half of 2019. The decrease is primarily attributable to
lower software development expenses in the equipment segment.
Interest and Other Income (Expense)
Interest and other income (expense) for the six months ended June 30, 2020 was
$(288,000) as compared to $(387,000) for the corresponding period of 2019. The
decrease in expenses was due primarily to the $110,000 gain on sale of equity in
EECP Global and lower interest expense due to reductions in principal balances
of our credit line and notes payable, partially offset by equity in loss of EECP
Global.
Income Tax Expense
For the six months ended June 30, 2020, we recorded income tax benefit of
$108,000 as compared to income tax expense of $38,000 for the corresponding
period of 2019. The decrease arose mainly from lower foreign tax expense due to
write-off of deferred tax liability.
Net Loss
Net loss for the six months ended June 30, 2020 was $1,964,000 compared to net
loss of $3,599,000 for the six months ended June 30, 2019, representing a
decrease in net loss of $1,635,000. Our net loss per share was $0.01 and $0.02
in the six-month periods ended June 30, 2020 and 2019, respectively. The
principal causes of the decrease in net loss is the decrease in operating loss
in the professional sales service segment.
Adjusted EBITDA
We define Adjusted EBITDA, or 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.
24
A reconciliation of net income to Adjusted EBITDA is set forth below:
(in thousands)
Six months ended June 30,
2020 2019
(unaudited) (unaudited)
Net loss $(1,964) $(3,599)
Interest expense (income), net 412 443
Income tax expense (benefit) (108) 38
Depreciation and amortization 1,251 1,345
Share-based compensation 54 98
Adjusted EBITDA $(355) $(1,675)Adjusted EBITDA loss decreased by $1,320,000, to $(355,000) in the six months
ended June 30, 2020 from $(1,675,000) in the six months ended June 30, 2019. The
decrease was primarily attributable to the lower net loss, offset by lower
interest expense, depreciation and amortization, income tax expense, and
share-based compensation.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations primarily from working capital and the PPP Note.
At June 30, 2020, we had cash and cash equivalents of $6,944,000 and negative
working capital of $14,036,000 compared to cash and cash equivalents of
$2,124,000 and negative working capital of $7,469,000 at December 31, 2019.
$7,139,000 in negative working capital at June 30, 2020 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 provided by operating activities was $4,014,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of $557,000 and cash
provided by operating assets and liabilities of $3,457,000, during the six
months ended June 30, 2020, compared to cash used by operating activities of
$2,362,000 for the same period in 2019. The changes in the account balances
primarily reflect a decrease in accounts and other receivables of $10,971,000,
and decreases in accounts payable, accrued commission, and deferred revenue of
$2,379,000, $1,322,000, and $2,094,000, respectively.
Cash provided by investing activities during the six-month period ended June 30,
2020 was $716,000, resulting from $1,150,000 provided by the sale of EECP
Global, offset by $434,000 used for the purchase of equipment and software.
Cash provided by financing activities during the six-month period ended June 30,
2020 was $128,000 primarily as a result of $3,752,000 in proceeds from notes
payable including the PPP Note, offset by $1,325,000 in repayments on revolving
lines of credit, $2,218,000 in liquidation of notes payable, and $81,000 in
payments of finance leases issued for equipment purchases.
Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy
its obligations for the next twelve months.
The COVID-19 pandemic may continue to adversely impact our operations during and
beyond the remaining quarters of 2020, depending on the duration of the pandemic
and the timing and success of the reopening of the economy.
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