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 will continue to have a significant impact on
the United States economy and it is anticipated that its negative impact to the
Company's financial condition and results of operations will 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.
Equipment orders in our professional sales service segment have been negatively
impacted, and we do anticipate continued negative impact in all our business at
least through the fourth quarter, in particular in our professional sales
service segment for the diagnostic imaging equipment. Moreover, we have also
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 impact our operations beyond the fourth 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. Most of our employees have been 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 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, 2019 as filed with the SEC on April 14, 2020.
Results of Operations - For the Three Months Ended September 30, 2020 and 2019
Revenues
Total revenue for the three months ended September 30, 2020 and 2019 was
$17,534,000 and $18,727,000, respectively, representing a decrease of
$1,193,000, or 6% year-over-year. On a segment basis, revenue in the IT,
professional sales service and equipment segments decreased $652,000, $535,000
and $6,000, respectively.
Revenue in the IT segment for the three months ended September 30, 2020 was
$10,833,000 compared to $11,485,000 for the three months ended September 30,
2019, a decrease of $652,000, or 6%, of which $414,000 resulted from a decrease
in the operations of the healthcare IT VAR business and $238,000 resulted from
lower NetWolves revenue. Our monthly recurring revenue in the IT segment
accounted for $10,183,000 or 94% of the segment revenue in the third quarter of
2020, and $10,524,000 or 92% of the segment revenue for the same quarter last
year (see Note C).
Commission revenues in the professional sales service segment were $5,801,000 in
the third quarter of 2020, a decrease of 8%, as compared to $6,336,000 in the
same quarter of 2019. The decrease in commission revenues was due primarily to a
decrease in the volume of underlying equipment delivered by GEHC during the
period. 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, 2020, $16,634,000 in deferred commission
revenue was recorded in the Company's condensed consolidated balance sheet, of
which $7,250,000 was long-term. At September 30, 2019, $17,069,000 in deferred
commission revenue was recorded in the Company's condensed consolidated balance
sheet, of which $6,376,000 was long-term. The decrease in deferred revenue is
principally due to a decrease in new orders booked. We anticipate that revenue
will increase in the fourth quarter of 2020 as deliveries increase.
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Revenue in the equipment segment decreased by $6,000, or 0.7%, to $900,000 for
the three-month period ended September 30, 2020 from $906,000 for the same
period of the prior year. The decrease was principally due to lower sales of
EECP®equipment as a result of the sale of equity in the EECP business.
Gross Profit
Gross profit for the three months ended September 30, 2020 and 2019 was
$9,879,000, or 56% of revenue, and $10,841,000, or 58% of revenue, respectively,
representing a decrease of $962,000, or 9% year-over-year. On a segment basis,
gross profit in the equipment segment increased $113,000, or 20%, while gross
profit in the IT and professional sales service segments decreased $588,000, or
12%, and $487,000, or 9%, respectively.
IT segment gross profit for the three months ended September 30, 2020 was
$4,483,000, or 41% of the segment revenue, compared to $5,071,000, or 44% of the
segment revenue for the three months ended September 30, 2019. The
year-over-year decrease of $588,000, or 12%, was primarily a result of lower
margin product sales mix of network and managed services and lower sales volume
in the IT VAR business.
Professional sales service segment gross profit was $4,709,000, or 81% of
segment revenue, for the three months ended September 30, 2020 as compared to
$5,196,000, or 82% of the segment revenue, for the three months ended September
30, 2019, reflecting a decrease of $487,000, or 9%. The decrease in absolute
dollars was primarily due to lower commission revenue as a result of lower
volume of GEHC equipment delivered during the third quarter of 2020 than in the
same period last year. Cost of commissions in the professional sales service
segment of $1,092,000 and $1,140,000, for the three months ended September 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 increased to $687,000, or 76% of segment
revenues, for the third quarter of 2020 compared to $574,000, or 63% of segment
revenues, for the same quarter of 2019. The $113,000, or 20%, increase in gross
profit was the result of an increase in gross profit margin due to a higher
proportion of high margin products in the sales mix when lower margin EECP
equipment sales were no longer included in the financial statements for the
third quarter of 2020, compared to the third quarter of 2019.
Operating Income
Operating income for the three months ended September 30, 2020 and 2019 was
$1,254,000 and $805,000, respectively, representing an increase of $449,000, or
56%, as operating costs (below) decreased much more than gross profit did,
year-over-year. On a segment basis, operating income in the professional sales
service and equipment segments increased by $133,000 and $424,000, respectively,
while operating income in the IT segment decreased by $110,000.
Operating income in the IT segment decreased to $159,000 for the three-month
period ended September 30, 2020 as compared to operating income of $269,000 in
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 $133,000 in the three-month period
ended September 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. The
equipment segment reported operating income of $142,000 in the third quarter of
2020, compared to an operating loss of $282,000 in the third quarter 2019, an
improvement of $424,000. The improvement was due to a combination of higher
gross profit and lower SG&A and R&D costs.
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SG&A costs for the three months ended September 30, 2020 and 2019 were
$8,451,000 and $9,840,000, respectively, representing a decrease of $1,389,000,
or 14% year-over-year. On a segment basis, SG&A costs in the IT segment
decreased by $492,000 in the third 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 $622,000 due mainly to lower travel costs; and SG&A
costs in the equipment segment decreased $273,000 due mainly to lower personnel
costs. Corporate costs not allocated to segments decreased by $2,000 in the
three months ended September 30, 2020 from the same period in 2019.
Research and development ("R&D") expenses were $174,000, or 1% of revenues, for
the third quarter of 2020, a decrease of $22,000, or 11%, from $196,000, or 1%
of revenues, for the third quarter of 2019. The decrease is primarily
attributable to lower product development expenses and a reduction in technical
staff 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,
2020 2019
(unaudited) (unaudited)
Net income $1,146 $562
Interest expense (income), net 133 268
Income tax (benefit) expense 11 11
Depreciation and amortization 610 679
Share-based compensation 15 25
Adjusted EBITDA $1,915 $1,545Adjusted EBITDA increased by $370,000, to $1,915,000 in the quarter ended
September 30, 2020 from $1,545,000 in the quarter ended September 30, 2019. The
increase was attributable to the increase in net income, partially offset
primarily by the decrease in interest expense.
Interest and Other Income (Expense)
Interest and other income (expense) for the three months ended September 30,
2020 was $(97,000) as compared to $(232,000) for the corresponding period of
2019. The decrease in interest and other income (expense) was due primarily to
lower interest expense due to principal payments against the line of credit and
other notes payable.
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Income Tax Expense
For the three months ended September 30, 2020 and 2019, respectively, we
recorded income tax expense of $11,000 for applicable state taxes.
Net Income
Net income for the three months ended September 30, 2020 was $1,146,000 as
compared to $562,000 for the three months ended September 30, 2019, representing
an improvement of $584,000, or 104%. Earnings per share of $0.01 and $0.00 was
recorded in the three-month periods ended September 30, 2020 and 2019,
respectively. The principal cause of the increase in net income is the increase
in equipment segment and professional sales service segment operating income due
primarily to lower SG&A costs.
Results of Operations - For the Nine months Ended September 30, 2020 and 2019
Revenues
Total revenue for the nine months ended September 30, 2020 and 2019 was
$51,159,000 and $51,794,000, respectively, representing a decrease of $635,000,
or 1% year-over-year. On a segment basis, revenue in the professional sales
service segment increased $806,000, while revenue in the IT and equipment
segments decreased $1,223,000 and $218,000, respectively.
Revenue in the IT segment for the nine months ended September 30, 2020 was
$32,994,000 compared to $34,217,000 for the nine months ended September 30,
2019, a decrease of $1,223,000, or 4%, as a result of a $1,007,000 decrease in
healthcare IT VAR revenues and a $216,000 revenue decrease in our NetWolves
operation.
Commission revenues in the professional sales service segment were $15,688,000
in the first nine months of 2020, an increase of 5%, as compared to $14,882,000
in the first nine months 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. 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.
Revenue in the equipment segment decreased by $218,000, or 8%, to $2,477,000 for
the nine-month period ended September 30, 2020 from $2,695,000 for the same
period of the prior year. The decrease was principally due to a decrease in
EECP®revenues as a result of the sale of equity in the EECP®business, partially
offset by increased sales in our China operations.
Gross Profit
Gross profit for the nine months ended September 30, 2020 and 2019 was
$27,495,000, or 54% of revenue, and $28,139,000, or 54% of revenue,
respectively, representing a decrease of $644,000, or 2% year-over-year. On a
segment basis, gross profit in the professional sales service and equipment
segments increased $524,000 and $76,000, respectively, while gross profit in the
IT segment decreased $1,244,000.
IT segment gross profit for the nine months ended September 30, 2020 was
$13,182,000, or 40% of the segment revenue, compared to $14,426,000, or 42% of
the segment revenue for the nine months ended September 30, 2019, with decreases
of $693,000 and $551,000 from the IT VAR and NetWolves businesses, respectively,
as a result of lower sales and lower margin product mix.
Professional sales service segment gross profit was $12,626,000, or 80% of
segment revenue, for the nine months ended September 30, 2020 as compared to
$12,102,000, or 81% of the segment revenue, for the nine months ended September
30, 2019, reflecting an increase of $524,000, or 4%. The increase in absolute
dollars was due to higher commission revenue primarily as a result of higher
volume of GEHC equipment delivered during the first nine months of 2020 than in
the same period last year, offset by higher commission expense in the first nine
months of 2020 compared to the same period of 2019.
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Cost of commissions in the professional sales service segment of $3,062,000 and
$2,780,000, for the nine months ended September 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 increased to $1,687,000, or 68% of segment
revenues, for the first nine months of 2020 compared to $1,611,000, or 60% of
segment revenues, for the same period of 2019, due to higher margin product mix,
partially offset by lower sales volume, in the first nine months of 2020,
compared to the same period of 2019.
Operating Loss
Operating loss for the nine months ended September 30, 2020 and 2019 was
$530,000 and $2,369,000, respectively, representing an improvement of
$1,839,000, primarily due to lower operating costs partially offset by lower
gross profit. On a segment basis, operating loss increased by $614,000 in the IT
segment and decreased by $808,000 in the equipment segment. Operating income in
the professional sales service segment increased by $1,525,000 to $1,038,000 in
the first nine months of 2020 from an operating loss of $487,000 in the same
period of 2019.
Operating loss in the IT segment increased in the nine-month period ended
September 30, 2020 as compared to the same period of 2019 due to lower gross
profit and higher research and development costs, partially offset by lower SG&A
costs. Operating income in the professional sales service segment increased in
the nine-month period ended September 30, 2020 as compared to the same period of
2019 due to higher gross profit and lower SG&A costs. Operating loss in the
equipment segment decreased in the nine-month period ended September 30, 2020 as
compared to the same period of 2019 due to higher gross profit and lower SG&A
and R&D costs.
SG&A costs for the nine months ended September 30, 2020 and 2019 were
$27,486,000 and $29,884,000, respectively, representing a decrease of
$2,398,000, or 8% year-over-year. On a segment basis, SG&A costs for the nine
months ended September 30, 2020 decreased in the IT segment by $669,000 to
$13,816,000, from $14,485,000 for the corresponding period of the prior year,
due primarily to decreased personnel, travel and marketing costs, and decreased
in the professional sales service segment by $1,002,000 to $11,586,000, from
$12,588,000 for the corresponding period of the prior year, due to lower
personnel and travel costs. SG&A costs in the equipment segment for the nine
months ended September 30, 2020 decreased $607,000 to $1,436,000, from
$2,043,000 for the corresponding period of the prior year, due primarily to
lower personnel and travel costs. Corporate costs not allocated to segments
decreased in the same period by $120,000 to $647,000 from $767,000, due
primarily to lower accounting and legal fees.
Research and development ("R&D") expenses were $539,000, or 1% of revenues, for
the first nine months of 2020, a decrease of $85,000, or 14%, from $624,000, or
1% of revenues, for the first nine months of 2019. The decrease is primarily
attributable to lower product development expenses and staff reductions 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.
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A reconciliation of net income to Adjusted EBITDA is set forth below:
(in thousands)
Nine months ended September 30,
2016 2015
(unaudited) (unaudited)
Net loss $(818) $(3,037)
Interest expense (income), net 546 711
Income tax (benefit) expense (97) 49
Depreciation and amortization 1,861 2,024
Share-based compensation 69 123
Adjusted EBITDA $1,561 $(130)Adjusted EBITDA improved by $1,691,000, to $1,561,000 in the nine months ended
September 30, 2020 from $(130,000) in the nine months ended September 30, 2019.
The improvement was primarily attributable to lower net loss, partially offset
by lower interest costs.
Interest and Other Income (Expense)
Interest and other income (expense) for the nine months ended September 30, 2020
was $(385,000) as compared to $(619,000) for the corresponding period of 2019.
The decrease was due primarily to the $110,000 gain on sale of equity in the
EECP business and lower interest costs due to principal payments against the
line of credit and Medtech notes payable.
Income Tax (Expense) Benefit
For the nine months ended September 30, 2020, we recorded income tax benefit of
$97,000 as compared to income tax expense of $(49,000) for the corresponding
period of 2019. The change arose mainly from the release of deferred foreign tax
liabilities.
Net Loss
Net loss for the nine months ended September 30, 2020 was $818,000 compared to
net loss of $3,037,000 for the nine months ended September 30, 2019,
representing a decrease in net loss of $2,219,000. Our net loss per share was
$0.00 and $0.02 in the nine-month periods ended September 30, 2020 and 2019,
respectively. The principal causes of the decrease in net loss is the increase
in operating income in the professional sales service segment and decrease in
operating loss in the equipment segment, partially offset by the increase in
operating loss in the IT segment.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations from working capital. At September 30, 2020, we
had cash and cash equivalents of $6,865,000 and negative working capital of
$12,952,000, compared to cash and cash equivalents of $2,124,000 and negative
working capital of $7,469,000 at December 31, 2019. $7,392,000 in negative
working capital at September 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.
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Cash provided by operating activities was $4,734,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of $1,320,000 and cash
provided by operating assets and liabilities of $3,414,000, during the nine
months ended September 30, 2020, compared to cash used in operating activities
of $2,050,000 for the same period in 2019. The changes in the account balances
primarily reflect a decrease in accounts and other receivables of $8,615,000,
offset by decreases in accounts payable, accrued commissions, and deferred
revenue of $2,307,000, $1,171,000, and $1,923,000, respectively.
Cash provided by investing activities during the nine-month period ended
September 30, 2020 was $515,000 of which $1,150,000 was provided by the sale of
equity in the EECP business, offset by $635,000 used for the purchase of
equipment and software.
Cash used in financing activities during the nine-month period ended September
30, 2020 was $465,000 primarily as a result of repayments of lines of credit,
notes payable, and finance leases aggregating $4,218,000, partially offset by
$3,754,000 in proceeds from notes payable.
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 will continue to adversely impact
our operations during and beyond the remaining quarter of 2020, depending on the
duration of the pandemic and the timing and success of the reopening of the
economy.
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