ITEM 2 - MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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; the
effect of the dramatic changes taking place in the healthcare
environment; 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
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.
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, 2018 as filed with the
SEC on April 15, 2019.
Results of Operations – For the Three Months Ended September
30, 2019 and 2018
Revenues
Total
revenue for the three months ended September 30, 2019 and 2018 was
$18,727,000 and $18,788,000, respectively, representing a decrease
of $61,000, or less than 1% year-over-year. On a segment basis,
revenue in the IT segment increased $483,000, while professional
sales service and equipment segment revenue decreased $518,000 and
$26,000, respectively.
Revenue
in the IT segment for the three months ended September 30, 2019 was
$11,485,000 compared to $11,002,000 for the three months ended
September 30, 2018, an increase of $483,000, or 4%, of which
$419,000 resulted from an increase in the operations of the
healthcare IT VAR business and $64,000 resulted from higher
NetWolves revenue. Our monthly recurring revenue in the managed
network services operations continues to grow as we add new
customers and expand our services to existing customers. At the
same time, the backlog of orders in our healthcare IT operations
decreased to $13.2 million at September 30, 2019 from $14.8 million
at September 30, 2018, due to revenues exceeding order bookings and
higher order cancellations. We define backlog as the total value of
the undelivered products and services in current contracts that
will be delivered in future periods.
Commission
revenues in the professional sales service segment were $6,336,000
in the third quarter of 2019, a decrease of 8%, as compared to
$6,854,000 in the same quarter of 2018. 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, 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. At September 30,
2018, $16,011,000 in deferred commission revenue was recorded in
the Company’s condensed consolidated balance sheet, of which
$6,518,000 was long-term. The increase in deferred revenue is
principally due to an increase in new orders booked and a decrease
in deliveries by GEHC. We anticipate that revenue will increase in
the fourth quarter of 2019 as deliveries increase.
Revenue in the equipment segment decreased by
$26,000, or 3%, to $906,000 for the three-month period ended
September 30, 2019 from $932,000 for the same period of the prior
year. The decrease was principally due to lower sales of
EECP®
equipment.
Gross Profit
Gross
profit for the three months ended September 30, 2019 and 2018 was
$10,841,000, or 58% of revenue, and $10,451,000, or 56% of revenue,
respectively, representing an increase of $390,000, or 4%
year-over-year. On a segment basis, gross profit in the IT segment
increased $632,000, or 14%, while gross profit in the professional
sales service and equipment segments decreased $193,000, or 4%, and
$49,000, or 8%, respectively.
IT
segment gross profit for the three months ended September 30, 2019
was $5,071,000, or 44% of the segment revenue, compared to
$4,439,000, or 42% of the segment revenue for the three months
ended September 30, 2018. The year-over-year increase of $632,000,
or 14%, was primarily a result of higher margin product sales mix
of network and managed services and higher sales volume in the IT
VAR business.
Professional sales service segment gross profit
was $5,196,000, or 82% of segment revenue, for the three months
ended September 30, 2019 as compared to $5,389,000, or 79% of the
segment revenue, for the three months ended September 30, 2018,
reflecting a decrease of $193,000. 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 2019 than in the same period last year. Cost of commissions in the professional sales service
segment of $1,140,000 and $1,465,000, for the three months ended
September 30, 2019 and 2018, 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 $574,000, or 63% of segment
revenues, for the third quarter of 2019 compared to $623,000, or
67% of segment revenues, for the same quarter of 2018. The $49,000,
or 8%, decrease in gross profit was due to lower sales volume, as
well as a gross profit margin decrease due mainly to a higher
proportion of lower margin products in the sales mix in the third
quarter of 2019, compared to the third quarter of
2018.
Operating Income (loss)
Operating
income (loss) for the three months ended September 30, 2019 and
2018 was $805,000 and $(241,000), respectively, representing an
improvement of $1,046,000, due to the increase in gross profit and
decrease in operating costs (below). On a segment basis, operating
income in the IT and professional sales service segments increased
$1,051,000 and $15,000, respectively and, while operating loss in
the equipment segment increased $101,000. In addition, corporate
expenses decreased $81,000.
Operating
income in the IT segment increased to $269,000 for the three-month
period ended September 30, 2019 as compared to operating loss of
$(782,000) in the same period of 2018 due to higher gross profit
and lower selling, general, and administrative
(“SG&A”) costs, partially offset by higher research
and development (“R&D”) costs. Operating income in
the professional sales service segment increased $15,000 in the
three-month period ended September 30, 2019 as compared to
operating income in the same period of 2018, due to lower SG&A
costs partially offset by lower gross profit. The increase in
equipment segment operating loss of $101,000 in the third quarter
of 2019 was due to lower gross profit and higher SG&A costs,
partially offset by lower R&D costs.
SG&A
costs for the three months ended September 30, 2019 and 2018 were
$9,840,000 and $10,462,000, respectively, representing a decrease
of $622,000, or 6% year-over-year. On a segment basis, SG&A
costs in the IT segment decreased by $422,000 in the third quarter
of 2019 from the same quarter of the prior year due to reduced
personnel costs. SG&A costs in the professional sales service
segment decreased $209,000 due mainly to lower personnel-related
costs, and SG&A costs in the equipment segment increased
$90,000 due mainly to higher legal costs associated with the
successful conclusion of a lawsuit partially offset by lower
personnel costs. Corporate costs not allocated to segments
decreased by $81,000 in the three months ended September 30, 2019
from the same period in 2018, due primarily to lower director and
legal fees and lower investor relations costs.
Research
and development (“R&D”) expenses were $196,000, or
1% of revenues, for the third quarter of 2019, a decrease of
$34,000, or 15%, from $230,000, or 1% of revenues, for the third
quarter of 2018. The decrease is primarily attributable to lower
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:
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$562
|
$(377)
|
|
Interest
expense (income), net
|
268
|
169
|
|
Income
tax expense
|
11
|
14
|
|
Depreciation
and amortization
|
679
|
626
|
|
Share-based
compensation
|
25
|
44
|
|
Adjusted
EBITDA
|
$1,545
|
$476
|
Adjusted EBITDA
increased by $1,069,000, to $1,545,000 in the quarter ended
September 30, 2019 from $476,000 in the quarter ended September 30,
2018. The increase was primarily attributable to the change from
net loss to net income.
Interest and Other Income (Expense)
Interest
and other income (expense) for the three months ended September 30,
2019 was $(232,000) as compared to $(122,000) for the corresponding
period of 2018. The increase in interest and other income (expense)
was due primarily to higher interest expense due to increased
borrowings under the line of credit.
Income Tax Expense
For
the three months ended September 30, 2019, we recorded income tax
expense of $11,000 as compared to $14,000 for the corresponding
period of 2018. The decrease arose mainly from lower state
taxes.
Net Income (loss)
Net
income for the three months ended September 30, 2019 was $562,000
as compared to a net loss of $377,000 for the three months ended
September 30, 2018, representing an improvement of $939,000. No net
income (loss) per share was recorded in each of the three-month
periods ended September 30, 2019 and 2018. The principal cause of
the change from net loss to net income is the increase in IT
segment revenue and gross profit, and the reduction in IT segment
SG&A costs.
Results of Operations – For the Nine months Ended September
30, 2019 and 2018
Revenues
Total
revenue for the nine months ended September 30, 2019 and 2018 was
$51,794,000 and $54,741,000, respectively, representing a decrease
of $2,947,000, or 5% year-over-year. On a segment basis, revenue in
the IT segment increased $1,099,000, while revenue in the
professional sales service and equipment segments decreased
$3,986,000 and $60,000, respectively.
Revenue
in the IT segment for the nine months ended September 30, 2019 was
$34,217,000 compared to $33,118,000 for the nine months ended
September 30, 2018, an increase of $1,099,000, or 3%, a result of
$1,295,000 growth in the healthcare IT VAR business offset by a
$196,000 revenue decrease in our NetWolves operation.
Commission
revenues in the professional sales service segment were $14,882,000
in the first nine months of 2019, a decrease of 21%, as compared to
$18,868,000 in the first nine months of 2018. The decrease in
commission revenues was due primarily to a decrease in the volume
of underlying equipment delivered by GEHC during the period. We
expect deliveries and revenue to improve through the remainder of
2019. 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
$60,000, or 2%, to $2,695,000 for the nine-month period ended
September 30, 2019 from $2,755,000 for the same period of the prior
year. The decrease was principally due to a decrease in
EECP®
revenues as a result of lower sales
volume.
Gross Profit
Gross
profit for the nine months ended September 30, 2019 and 2018 was
$28,139,000, or 54% of revenue, and $30,507,000, or 56% of revenue,
respectively, representing a decrease of $2,368,000, or 8%
year-over-year. On a segment basis, gross profit in the IT segments
increased $599,000, while gross profit in the professional sales
service and equipment segments decreased $2,863,000 and $104,000,
respectively.
IT
segment gross profit for the nine months ended September 30, 2019
was $14,426,000, or 42% of the segment revenue, compared to
$13,827,000, or 42% of the segment revenue for the nine months
ended September 30, 2018, with increases of $497,000 and $102,000
from the IT VAR and NetWolves businesses, respectively, as a result
of higher sales.
Professional sales service segment gross profit
was $12,102,000, or 81% of segment revenue, for the nine months
ended September 30, 2019 as compared to $14,965,000, or 79% of the
segment revenue, for the nine months ended September 30, 2018,
reflecting a decrease of $2,863,000, or 19%. The decrease in
absolute dollars was due to lower commission revenue as a result
of lower volume of GEHC equipment delivered during the first
nine months of 2019 than in the same period last year, offset by lower commission expense in the first
nine months of 2019 compared to the same period of
2018.
Cost
of commissions in the professional sales service segment of
$2,780,000 and $3,903,000, for the nine months ended September 30,
2019 and 2018, 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 $1,611,000, or 60% of segment
revenues, for the first nine months of 2019 compared to $1,715,000,
or 62% of segment revenues, for the same period of 2018, due to
lower sales volume and lower margin product mix in the first nine
months of 2019, compared to the same period of 2018.
Operating Loss
Operating
loss for the nine months ended September 30, 2019 and 2018 was
$2,369,000 and $2,620,000, respectively, representing an
improvement of $251,000, primarily due to lower operating costs
partially offset by lower gross profit. On a segment basis,
operating loss decreased $1,758,000 in the IT segment and increased
$62,000 in the equipment segment. Operating income in the
professional sales service segment decreased $1,610,000 from
$1,123,000 in the nine months ended September 30, 2018 to an
operating loss $487,000 in the same period of 2019. In addition,
corporate expenses decreased $165,000.
Operating
loss in the IT segment decreased in the nine-month period ended
September 30, 2019 as compared to the same period of 2018 due to
higher gross profit and lower SG&A costs, partially offset by
higher research and development costs. Operating income in the
professional sales service segment decreased in the nine-month
period ended September 30, 2019 as compared to the same period of
2018 due to lower gross profit, partially offset by lower SG&A
costs. Operating loss in the equipment segment increased in the
nine-month period ended September 30, 2019 as compared to the same
period of 2018 due to lower gross profit and higher SG&A costs,
partially offset by lower R&D costs.
SG&A
costs for the nine months ended September 30, 2019 and 2018 were
$29,884,000 and $32,459,000, respectively, representing a decrease
of $2,575,000, or 8% year-over-year. On a segment basis, SG&A
costs for the nine months ended September 30, 2019 decreased in the
IT segment by $1,195,000 to $14,485,000, from $15,680,000 for the
corresponding period of the prior year, due primarily to decreased
personnel costs, and decreased in the professional sales service
segment by $1,254,000 to $12,588,000, from $13,842,000 for the
corresponding period of the prior year, due to lower
personnel-related costs. SG&A costs in the equipment segment
for the nine months ended September 30, 2019 increased $39,000 to
$2,043,000, from $2,005,000 for the corresponding period of the
prior year, due primarily to higher legal costs, partially offset
by lower personnel costs. Corporate costs not allocated to segments
decreased in the same period by $165,000 to $767,000 from $932,000,
due primarily to lower director and legal fees and lower investor
relations costs.
Research
and development (“R&D”) expenses were $624,000, or
1% of revenues, for the first nine months of 2019, a decrease of
$44,000, or 7%, from $668,000, or 1% of revenues, for the first
nine months of 2018. The decrease is primarily attributable to
lower 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:
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(3,037)
|
$(2,895)
|
|
Interest
expense (income), net
|
711
|
507
|
|
Income
tax expense
|
49
|
71
|
|
Depreciation
and amortization
|
2,024
|
1,828
|
|
Share-based
compensation
|
123
|
266
|
|
Adjusted
EBITDA
|
$(130)
|
$(223)
|
Adjusted EBITDA
improved by $93,000, to $(130,000) in the nine months ended
September 30, 2019 from $(223,000) in the nine months ended
September 30, 2018. The improvement was primarily attributable to
higher interest and depreciation and amortization charges,
partially offset by the higher net loss and lower share-based
compensation.
Interest and Other Income (Expense)
Interest
and other income (expense) for the nine months ended September 30,
2019 was $(619,000) as compared to $(204,000) for the corresponding
period of 2018. The increase was due primarily to the $212,000 gain
on sale of VSK in the corresponding period of the prior year, and
by higher interest expense due to increased borrowings under our
credit line.
Income Tax Expense
For
the nine months ended September 30, 2019, we recorded income tax
expense of $49,000 as compared to income tax expense of $71,000 for
the corresponding period of 2018. The decrease arose mainly from
lower state and foreign taxes.
Net Loss
Net
loss for the nine months ended September 30, 2019 was $3,037,000
compared to net loss of $2,895,000 for the nine months ended
September 30, 2018, representing an increase in net loss of
$142,000. Our net loss per share was $0.02 in the nine-month
periods ended September 30, 2019 and 2018. The principal causes of
the increase in net loss is the decrease in operating income in the
professional sales service segment and the gain on sale of
investment in VSK, partially offset by the decrease in operating
loss in the IT segment.
Liquidity and Capital Resources
Cash and Cash Flow
We
have financed our operations from working capital and drawdown on
our lines of credit. At September 30, 2019, we had cash and cash
equivalents of $1,343,000 and negative working capital of
$19,489,000, compared to cash and cash equivalents of $2,668,000
and negative working capital of $16,179,000 at December 31, 2018.
$8,672,000 in negative working capital at September 30, 2019 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
used in operating activities was $2,050,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of
$633,000 and cash used by operating assets and liabilities of
$1,417,000, during the nine months ended September 30, 2019,
compared to cash used in operating activities of $1,532,000 for the
same period in 2018. The changes in the account balances primarily
reflect a decrease in accounts and other receivables of $2,774,000,
offset by decreases in accounts payable, accrued commissions, and
accrued expenses of $1,363,000, $1,539,000, and $1,022,000,
respectively.
Cash
used in investing activities during the nine-month period ended
September 30, 2019 was $867,000 for the purchase of equipment and
software.
Cash
provided by financing activities during the nine-month period ended
September 30, 2019 was $1,547,000 primarily as a result of
$1,730,000 in net borrowings on revolving lines of credit and notes
payable, partially offset by $181,000 in net repayments of notes
and finance leases issued for equipment purchases.
Liquidity
We
have incurred net losses from operations for the nine months ended
September 30, 2019, and the years ended December 31, 2018 and 2017.
We maintain lines of credit from a lending institution which will
require further extensions after their current December 18, 2019
maturity date, as will notes payable which mature within the next
twelve months. Our ability to continue operating as a going concern
is dependent upon achieving profitability, extending the maturity
date of our existing lines of credit and notes payable, or through
additional debt or equity financing. Achieving profitability is
largely dependent on our ability to reduce operating costs and to
maintain or increase our current revenue. While we believe we will
continue to maintain or increase our gross revenue and are
substantially reducing operating costs, and while historically we
have received extensions of the maturity dates of our lines of
credit, failure to achieve these objectives could cast doubt on our
ability to continue as a going concern.
