I
TEM 1 - FINANCIAL
STATEMENTS
Vaso Corporation and Subsidiaries
C
ONDENSED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash and cash
equivalents
|
$
3,163
|
$
5,245
|
|
Accounts and other
receivables, net of an allowance for doubtful
|
|
|
|
accounts and
commission adjustments of $4,359 at June 30,
|
|
|
|
2018 and $4,872 at
December 31, 2017
|
10,938
|
13,225
|
|
Receivables due
from related parties
|
19
|
20
|
|
Inventories,
net
|
1,957
|
2,355
|
|
Deferred
commission expense
|
3,324
|
3,649
|
|
Prepaid expenses
and other current assets
|
975
|
993
|
|
Total
current assets
|
20,376
|
25,487
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, net of accumulated depreciation of
|
|
|
|
$5,637 at June 30,
2018 and $4,980 at December 31, 2017
|
4,845
|
4,719
|
|
GOODWILL
|
17,423
|
17,471
|
|
INTANGIBLES,
net
|
4,982
|
5,254
|
|
OTHER ASSETS,
net
|
2,852
|
3,847
|
|
|
$
50,478
|
$
56,778
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$
5,192
|
$
5,423
|
|
Accrued
commissions
|
2,005
|
2,467
|
|
Accrued expenses
and other liabilities
|
4,379
|
5,337
|
|
Sales tax
payable
|
912
|
787
|
|
Deferred revenue -
current portion
|
13,544
|
15,540
|
|
Notes payable and
capital lease obligations - current portion (Note
N)
|
9,347
|
3,674
|
|
Notes payable -
related parties - current portion
|
85
|
86
|
|
Due to related
party
|
11
|
390
|
|
Total current
liabilities
|
35,475
|
33,704
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Notes payable and
capital lease obligations, net of current portion (Note
N)
|
11
|
4,834
|
|
Notes payable -
related parties, net of current portion
|
255
|
259
|
|
Deferred revenue,
net of current portion
|
6,649
|
7,526
|
|
Deferred tax
liability
|
233
|
220
|
|
Other long-term
liabilities
|
945
|
1,083
|
|
Total long-term
liabilities
|
8,093
|
13,922
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (NOTE O)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Preferred stock,
$.01 par value; 1,000,000 shares authorized; nil
shares
|
|
|
|
issued and
outstanding at June 30, 2018 and December 31, 2017
|
-
|
-
|
|
Common stock,
$.001 par value; 250,000,000 shares authorized;
|
|
|
|
176,919,778 and
175,741,970 shares issued at June 30, 2018
|
|
|
|
and December 31,
2017, respectively; 166,611,691 and 165,433,883 shares
|
|
|
|
outstanding at
June 30, 2018 and December 31, 2017, respectively
|
177
|
176
|
|
Additional paid-in
capital
|
63,583
|
63,363
|
|
Accumulated
deficit
|
(54,705
)
|
(52,329
)
|
|
Accumulated other
comprehensive loss
|
(145
)
|
(58
)
|
|
Treasury stock, at
cost, 10,308,087 shares at June 30, 2018 and December 31,
2017
|
(2,000
)
|
(2,000
)
|
|
Total
stockholders’ equity
|
6,910
|
9,152
|
|
|
$
50,478
|
$
56,778
|
See Note B, Variable Interest Entities, for additional variable
interest entity disclosures
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Managed IT systems
and services
|
$
10,704
|
$
10,811
|
$
22,117
|
$
20,611
|
|
Professional sales
services
|
6,803
|
6,005
|
12,014
|
11,876
|
|
Equipment sales
and services
|
911
|
1,037
|
1,824
|
1,740
|
|
Total
revenues
|
18,418
|
17,853
|
35,955
|
34,227
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
|
|
|
Cost of managed IT
systems and services
|
6,229
|
6,437
|
12,728
|
12,215
|
|
Cost of
professional sales services
|
1,380
|
1,298
|
2,438
|
2,560
|
|
Cost of equipment
sales and services
|
372
|
320
|
731
|
584
|
|
Total cost of
revenues
|
7,981
|
8,055
|
15,897
|
15,359
|
|
Gross
profit
|
10,437
|
9,798
|
20,058
|
18,868
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Selling, general
and administrative
|
10,448
|
10,247
|
21,996
|
20,937
|
|
Research and
development
|
252
|
260
|
438
|
481
|
|
Total operating
expenses
|
10,700
|
10,507
|
22,434
|
21,418
|
|
Operating
loss
|
(263
)
|
(709
)
|
(2,376
)
|
(2,550
)
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
Interest and
financing costs
|
(182
)
|
(171
)
|
(353
)
|
(340
)
|
|
Interest and other
income (expense), net
|
36
|
4
|
59
|
(8
)
|
|
Gain on sale of
investment in VSK
|
-
|
-
|
212
|
-
|
|
Total other income
(expense), net
|
(146
)
|
(167
)
|
(82
)
|
(348
)
|
|
|
|
|
|
|
|
Loss before income
taxes
|
(409
)
|
(876
)
|
(2,458
)
|
(2,898
)
|
|
Income tax
expense
|
(37
)
|
(111
)
|
(57
)
|
(220
)
|
|
Net
loss
|
(446
)
|
(987
)
|
(2,515
)
|
(3,118
)
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
Foreign currency
translation (loss) gain
|
(271
)
|
59
|
(87
)
|
91
|
|
Comprehensive
loss
|
$
(717
)
|
$
(928
)
|
$
(2,602
)
|
$
(3,027
)
|
|
|
|
|
|
|
|
Loss per common
share
|
|
|
|
|
|
- basic and
diluted
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.02
)
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
|
|
|
- basic and
diluted
|
164,720
|
161,600
|
164,310
|
161,060
|
The accompanying notes are an integral part of these unaudited
condensed
consolidated
financial statements.
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2017
|
173,812
|
$
174
|
(10,308
)
|
$
(2,000
)
|
$
62,856
|
$
(47,790
)
|
$
(329
)
|
$
12,911
|
|
Share-based
compensation
|
1,930
|
2
|
-
|
-
|
512
|
-
|
-
|
514
|
|
Shares not issued for employee tax
liability
|
-
|
-
|
-
|
-
|
(5
)
|
-
|
-
|
(5
)
|
|
Foreign currency translation
gain
|
-
|
-
|
-
|
-
|
-
|
-
|
271
|
271
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(4,539
)
|
-
|
(4,539
)
|
|
Balance at
December 31, 2017
|
175,742
|
$
176
|
(10,308
)
|
$
(2,000
)
|
$
63,363
|
$
(52,329
)
|
$
(58
)
|
$
9,152
|
|
Share-based
compensation
|
1,178
|
1
|
-
|
-
|
221
|
-
|
-
|
222
|
|
Adoption of new accounting standard
(*)
|
-
|
-
|
-
|
-
|
-
|
139
|
-
|
139
|
|
Shares not issued for employee tax
liability
|
-
|
-
|
-
|
-
|
(1
)
|
-
|
-
|
(1
)
|
|
Foreign currency translation
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(87
)
|
(87
)
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(2,515
)
|
-
|
(2,515
)
|
|
Balance at June
30, 2018 (unaudited)
|
176,920
|
$
177
|
(10,308
)
|
$
(2,000
)
|
$
63,583
|
$
(54,705
)
|
$
(145
)
|
$
6,910
|
(*)
Accounting Standards Codification
Topic 606,
Revenue from Contracts with Customers
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities
|
|
|
|
Net
loss
|
$
(2,515
)
|
$
(3,118
)
|
|
Adjustments to
reconcile net loss to net
|
|
|
|
cash
(used in) provided by operating activities
|
|
|
|
Depreciation and
amortization
|
1,202
|
1,170
|
|
Deferred income
taxes
|
-
|
192
|
|
Loss from interest
in joint venture
|
9
|
59
|
|
Gain on sale of
investment in VSK
|
(212
)
|
-
|
|
Provision for
doubtful accounts and commission adjustments
|
157
|
65
|
|
Amortization of
debt issue costs
|
16
|
16
|
|
Share-based
compensation
|
222
|
317
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts and other
receivables
|
2,125
|
3,865
|
|
Receivables due
from related parties
|
-
|
(116
)
|
|
Inventories,
net
|
383
|
(395
)
|
|
Deferred commission
expense
|
434
|
(629
)
|
|
Prepaid expenses
and other current assets
|
15
|
(36
)
|
|
Other assets,
net
|
514
|
621
|
|
Accounts
payable
|
(230
)
|
(586
)
|
|
Accrued
commissions
|
(671
)
|
(814
)
|
|
Accrued expenses
and other liabilities
|
(733
)
|
(479
)
|
|
Sales tax
payable
|
127
|
(5
)
|
|
Deferred
revenue
|
(2,873
)
|
1,288
|
|
Deferred tax
liability
|
12
|
84
|
|
Other long-term
liabilities
|
(138
)
|
(124
)
|
|
Net cash (used in)
provided by operating activities
|
(2,156
)
|
1,375
|
|
|
|
|
|
Cash flows from
investing activities
|
|
|
|
Purchases of
equipment and software
|
(1,075
)
|
(1,323
)
|
|
Proceeds from sale
of investment in VSK
|
311
|
-
|
|
Net cash used in
investing activities
|
(764
)
|
(1,323
)
|
|
|
|
|
|
Cash flows from
financing activities
|
|
|
|
Net borrowings
(repayments) on revolving line of credit
|
896
|
(426
)
|
|
Payroll taxes paid
by withholding shares
|
(1
)
|
(2
)
|
|
Repayment of notes
payable and capital lease obligations
|
(61
)
|
(202
)
|
|
Net cash provided
by (used in) financing activities
|
834
|
(630
)
|
|
Effect of exchange
rate differences on cash and cash equivalents
|
4
|
8
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(2,082
)
|
(570
)
|
|
Cash and cash
equivalents - beginning of period
|
5,245
|
7,087
|
|
Cash and cash
equivalents - end of period
|
$
3,163
|
$
6,517
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH INFORMATION
|
|
|
|
Interest
paid
|
$
324
|
$
319
|
|
Income taxes
paid
|
$
60
|
$
30
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
Inventories
transferred to property and equipment, net
|
$
-
|
$
1
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
V
aso Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE A
- ORGANIZATION AND PLAN OF OPERATIONS
Vaso
Corporation was incorporated in Delaware in July 1987. Unless the
context requires otherwise, all references to “we”,
“our”, “us”, “Company”,
“registrant”, “Vaso” or
“management” refer to Vaso Corporation and its
subsidiaries. The Company changed its name from Vasomedical, Inc.
to Vaso Corporation in November 2016 at its annual shareholders
meeting. The name was changed because the Company in the several
years prior to the name change had substantially diversified its
business and the original name, Vasomedical, Inc., no longer
portrayed the nature of its overall business. Meanwhile, the
Company retained the name of VasoMedical, Inc. and now uses it
exclusively for its proprietary medical device business, as the
name originally represented.
Overview
Vaso
Corporation principally operates in three distinct business
segments in the healthcare and information technology
(“IT”) 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 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
the Company's proprietary medical devices.
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 and a healthcare IT
application VAR (value added reseller) division. Its current
offerings include:
●
Managed diagnostic
imaging applications (national channel partner of GEHC
Digital);
●
Managed network
infrastructure (routers, switches and other core
equipment);
●
Managed network
transport (FCC licensed carrier reselling 175+ facility
partners);
●
Managed security
services.
VasoTechnology uses
a combination of proprietary technology, methodology and
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 (“GEHC Agreement”) with GEHC, which is the
healthcare business division of the General Electric Company, to
further the sale of certain healthcare capital equipment in the
healthcare provider middle market. Sales of GEHC equipment by the
Company have grown significantly since then.
VasoHealthcare’s
current offerings consist of:
●
GEHC diagnostic
imaging capital equipment;
●
GEHC service
agreements for the above equipment;
●
GEHC and third
party financial services.
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
VasoHealthcare has
built a team of over 80 highly experienced sales professionals who
utilize proprietary sales management and analytic tools to manage
the complete sales process and to increase market
penetration.
VasoMedical
VasoMedical is the
Company’s business division for its proprietary medical
device operations, including the design, development,
manufacturing, sales and service of various medical devices in the
domestic and international markets and includes the Vasomedical
Global and Vasomedical Solutions business units. These devices are
primarily cardiovascular monitoring, diagnostic and therapeutic
systems. Its current offerings consist of:
●
Biox™ series
Holter monitors and ambulatory blood pressure
recorders;
●
ARCS
®
series
analysis, reporting and communication software for physiological
signals such as ECG and blood pressure;
●
MobiCare™
multi-parameter wireless vital-sign monitoring system;
●
EECP
®
therapy system
for non-invasive, outpatient treatment of ischemic heart
disease.
This
segment uses its extensive cardiovascular device knowledge coupled
with its significant engineering resources to cost-effectively
create and market its proprietary technology. It works with a
global distribution network of channel partners to sell its
products. It also provides engineering and OEM services to other
medical device companies.
NOTE B
– INTERIM STATEMENT PRESENTATION
Basis of Presentation and Use of Estimates
The
accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") and pursuant
to the accounting and disclosure rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information
and disclosures normally included in the financial statements
prepared in accordance with U.S. GAAP have been condensed or
omitted pursuant to such rules and regulations. Accordingly, these
condensed consolidated financial statements should be read in
connection with the audited consolidated financial statements and
related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2017, as filed with the
SEC on April 2, 2018.
These
unaudited condensed consolidated financial statements include the
accounts of the companies over which we exercise control. In the
opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation
of interim results for the Company. The results of operations for
any interim period are not necessarily indicative of results to be
expected for any other interim period or the full
year.
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of
the condensed consolidated financial statements, the disclosure of
contingent assets and liabilities in the unaudited condensed
consolidated financial statements and the accompanying notes, and
the reported amounts of revenues, expenses and cash flows during
the periods presented. Actual amounts and results could differ from
those estimates. The estimates and assumptions the Company makes
are based on historical factors, current circumstances and the
experience and judgment of the Company's management. The Company
evaluates its estimates and assumptions on an ongoing
basis.
Liquidity and Capital Resources
At
June 30, 2018 the Company had cash and cash equivalents of
$3,163,000, and negative working capital, excluding deferred
commission expense and deferred revenue which are non-cash items,
of $4,879,000. Historically the Company has financed its operations
from cash provided from operating activities and borrowings under
its lines of credit. For the six months ended June 30, 2018, the
Company had a net loss of $2,515,000 and used cash in operations of
$2,156,000. At June 30, 2018 the Company had outstanding borrowings
under its lines of credit of approximately $4.3 million with
availability of approximately $1.7 million. These lines mature on
September 30, 2018. It is the management’s intention to renew
the lines of credit, and it is currently in negotiation with the
lending bank for the renewal. The Company has had a history of
renewing these lines of credit upon maturity; therefore, management
believes that the lines of credit will be renewed. Additionally,
the Company has a conditional commitment to extend $3.6 million of
the MedTech Notes for one year through May 29, 2020 (See Note N).
The Company expects to maintain sufficient liquidity through its
cash on hand, availability of funds under its lines of credit, and
internally generated funds to meet its obligations through at least
one year from the date of filing of this Form 10-Q.
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Significant Accounting Policies and Recent Accounting
Pronouncements
Recently Adopted Accounting Pronouncements
Effective January
1, 2018, the Company adopted Accounting Standards Codification
(“ASC”) Topic 606,
Revenue from Contracts with Customers
.
See Note C for further details.
Recently Issued Accounting Pronouncements
In
February 2016, The Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-02,
Leases (Topic 842)
. ASU 2016-02
requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the
statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its
right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an
accounting policy election by class of underlying asset not to
recognize lease assets and lease liabilities. In transition,
lessees and lessors are required to recognize and measure leases at
the beginning of the earliest period presented using a modified
retrospective approach. In July 2018, The FASB issued ASU 2018-11,
Leases (Topic 842) - Targeted
Improvements,
which provides an additional and optional
transition approach by allowing entities to initially apply the new
leases standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. This new standard would be
effective for the Company beginning January 1, 2019 with early
adoption permitted. The Company is still evaluating the impact
adoption of this standard will have on its Consolidated Financial
Statements.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
, which
eliminates the requirement to calculate the implied fair value of
goodwill to measure a goodwill impairment charge. Instead, entities
will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value. The standard is
effective for fiscal periods beginning after December 15, 2019.
Early adoption is permitted for interim and annual goodwill
impairment testing dates after January 1, 2017. The standard would
only impact the Company in the event of a goodwill impairment.
Accordingly, t
he Company
does not expect the adoption of this standard to have a material
effect on its Consolidated Financial
Statements.
Variable Interest Entities
The
Company follows the guidance of accounting for variable interest
entities, which requires certain variable interest entities to be
consolidated by the primary beneficiary of the entities. Biox
Instruments Co., Ltd. (“Biox”) is a Variable Interest
Entity (“VIE”).
Liabilities
recognized as a result of consolidating this VIE do not represent
additional claims on the Company’s general assets. The
financial information of Biox, which is included in the
accompanying condensed consolidated financial statements, is
presented as follows:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
39
|
$
41
|
|
Total
assets
|
$
1,713
|
$
1,599
|
|
Total
liabilities
|
$
1,926
|
$
1,745
|
|
|
(in
thousands)
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net
revenue
|
$
513
|
$
420
|
$
919
|
$
731
|
|
|
|
|
|
|
|
Net
loss
|
$
(69
)
|
$
(501
)
|
$
(68
)
|
$
(536
)
|
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform
with the current period presentation.
Vaso
Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE C
– REVENUE RECOGNITION
In May
2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic
606)
. Under the standard, revenue is recognized when a
customer obtains control of promised goods or services in an amount
that reflects the consideration the entity expects to receive in
exchange for those goods or services. ASU 2014-09 replaced most
existing revenue recognition guidance in U.S. GAAP. The new
standard introduces a five-step process to be followed in
determining the amount and timing of revenue recognition. It also
provides guidance on accounting for costs incurred to obtain or
fulfill contracts with customers, and establishes disclosure
requirements which are more extensive than those required under
prior U.S. GAAP. Generally, we recognize revenue under Topic 606
for each of our performance obligations either over time
(generally, the transfer of a service) or at a point in time
(generally, the transfer of a good) as follows:
VasoTechnology
Recurring managed
network and voice services provided by NetWolves are recognized as
provided on a monthly basis (“over time”).
Non-recurring charges related to the provision of such services are
recognized in the period provided (“point in time”). In
the IT VAR business, software system installations are recognized
upon verification of installation and expiration of an acceptance
period (“point in time”). Monthly post-implementation
customer support provided under such installations as well as
software solutions offered under a monthly Software as a Service
(“SaaS”) fee basis are recognized monthly over the
contract term (“over time”).
VasoHealthcare
Commission revenue
is recognized when the underlying equipment has been delivered by
GEHC and accepted at the customer site in accordance with the terms
of the specific sales agreement (“point in
time”).
VasoMedical
In the
United States, we recognized revenue from the sale of our medical
equipment in the period in which we deliver the product to the
customer (“point in time”). Revenue from the sale of
our medical equipment to international markets is recognized upon
shipment of the product to a common carrier, as are supplies,
accessories and spare parts delivered in both domestic and
international markets (“point in time”). The Company
also recognizes revenue from the maintenance of EECP
®
systems either on a time and material as-billed basis (“point
in time”) or through the sale of a service contract, where
revenue is recognized ratably over the contract term (“over
time”).
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Impact of Adoption
Effective January
1, 2018, the Company adopted the requirements of Topic 606 using
the modified retrospective method, which provided that the
cumulative effect from prior periods upon applying the new guidance
was recognized in our consolidated balance sheets as of the date of
adoption, including an adjustment to retained earnings, and that
prior periods are not retrospectively adjusted. The Company elected
to apply the modified retrospective method only to contracts that
were not completed at January 1, 2018. A summary and discussion of
such cumulative effect adjustment and the impact on current period
financial statements of adopting Topic 606 is as
follows:
|
|
|
|
|
|
Three months ended
June 30, 2018 (unaudited)
|
Six months ended
June 30, 2018 (unaudited)
|
|
|
|
|
|
|
|
|
|
STATEMENT OF
OPERATIONS
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Professional sales
services
|
$
6,698
|
$
105
|
$
6,803
|
$
11,853
|
$
161
|
$
12,014
|
|
Total
revenues
|
18,313
|
105
|
18,418
|
35,794
|
161
|
35,955
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
10,332
|
105
|
10,437
|
19,897
|
161
|
20,058
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling, general
and administrative
|
10,477
|
(29
)
|
10,448
|
22,082
|
(86
)
|
21,996
|
|
Operating
loss
|
$
(397
)
|
$
134
|
$
(263
)
|
$
(2,623
)
|
$
247
|
$
(2,376
)
|
|
|
|
|
|
As of June 30,
2018 (unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Accounts and other
receivables, net
|
$
10,532
|
$
406
|
$
10,938
|
|
Deferred commission
expense
|
$
3,251
|
$
73
|
$
3,324
|
|
Other assets,
net
|
$
2,700
|
$
152
|
$
2,852
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
Deferred revenue -
current portion
|
$
13,345
|
$
199
|
$
13,544
|
|
Deferred revenue -
long term
|
$
6,603
|
$
46
|
$
6,649
|
|
Accumulated
deficit
|
$
(55,091
)
|
$
386
|
$
(54,705
)
|
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Disaggregation of Revenue
The
following tables present revenues disaggregated by our business
operations and timing of revenue recognition:
|
|
|
|
|
Three Months
Ended June 30, 2018 (unaudited)
|
Three Months
Ended June 30, 2017 (unaudited)
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Network
services
|
$
10,061
|
-
|
-
|
$
10,061
|
$
9,763
|
-
|
-
|
$
9,763
|
|
Software sales
and support
|
643
|
-
|
-
|
643
|
1,048
|
-
|
-
|
1,048
|
|
Commissions
|
-
|
6,803
|
-
|
6,803
|
-
|
6,005
|
-
|
6,005
|
|
Medical
equipment sales
|
-
|
-
|
645
|
645
|
-
|
-
|
766
|
766
|
|
Medical
equipment service
|
-
|
-
|
266
|
266
|
-
|
-
|
271
|
271
|
|
|
$
10,704
|
$
6,803
|
$
911
|
$
18,418
|
$
10,811
|
$
6,005
|
$
1,037
|
$
17,853
|
|
|
Six Months
Ended June 30, 2018 (unaudited)
|
Six Months
Ended June 30, 2017 (unaudited)
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Network
services
|
$
20,272
|
-
|
-
|
$
20,272
|
$
19,357
|
-
|
-
|
$
19,357
|
|
Software sales
and support
|
1,845
|
-
|
-
|
1,845
|
1,254
|
-
|
-
|
1,254
|
|
Commissions
|
-
|
12,014
|
-
|
12,014
|
-
|
11,876
|
-
|
11,876
|
|
Medical
equipment sales
|
-
|
-
|
1,276
|
1,276
|
-
|
-
|
1,189
|
1,189
|
|
Medical
equipment service
|
-
|
-
|
548
|
548
|
-
|
-
|
551
|
551
|
|
|
$
22,117
|
$
12,014
|
$
1,824
|
$
35,955
|
$
20,611
|
$
11,876
|
$
1,740
|
$
34,227
|
|
|
Three Months
Ended June 30, 2018 (unaudited)
|
Three Months
Ended June 30, 2017 (unaudited)
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Revenue
recognized over time
|
$
9,665
|
$
-
|
$
169
|
$
9,834
|
$
9,353
|
$
-
|
$
175
|
$
9,528
|
|
Revenue
recognized at a point in time
|
1,039
|
6,803
|
742
|
8,584
|
1,458
|
6,005
|
862
|
8,325
|
|
|
$
10,704
|
$
6,803
|
$
911
|
$
18,418
|
$
10,811
|
$
6,005
|
$
1,037
|
$
17,853
|
|
|
Six Months
Ended June 30, 2018 (unaudited)
|
Six Months
Ended June 30, 2017 (unaudited)
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Professional
sales
service
segment
|
|
|
|
Revenue
recognized over time
|
$
19,755
|
$
-
|
$
342
|
$
20,097
|
$
18,522
|
$
-
|
$
364
|
$
18,886
|
|
Revenue
recognized at a point in time
|
2,362
|
12,014
|
1,482
|
15,858
|
2,089
|
11,876
|
1,376
|
15,341
|
|
|
$
22,117
|
$
12,014
|
$
1,824
|
$
35,955
|
$
20,611
|
$
11,876
|
$
1,740
|
$
34,227
|
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Transaction Price Allocated to Remaining Performance
Obligations
As of
June 30, 2018, the aggregate amount of transaction price allocated
to performance obligations that are unsatisfied (or partially
unsatisfied) for executed contracts approximates $85.8 million, of
which we expect to recognize revenue as follows:
|
|
(in thousands)
Fiscal years of
revenue recognition
|
|
|
|
|
|
|
|
Unfulfilled
performance obligations
|
$
30,442
|
$
29,575
|
$
14,014
|
$
11,783
|
Contract Liabilities
Contract
liabilities arise in our IT VAR, VasoHealthcare, and VasoMedical
businesses. In our IT VAR business, payment arrangements with
clients typically include an initial payment due upon contract
signing and milestone-based payments based upon product delivery
and go-live, as well as post go-live monthly payments for
subscription and support fees. Customer payments received, or
receivables recorded, in advance of go-live and customer
acceptance, where applicable, are deferred as contract liabilities.
Such amounts aggregated approximately $511,000 and $371,000 at June
30, 2018 and December 31, 2017, respectively, and are included in
accrued expenses and other liabilities in our condensed
consolidated balance sheets.
In our
VasoHealthcare business, we bill amounts for certain milestones in
advance of customer acceptance of the equipment. Such amounts
aggregated approximately $19,275,000 and $22,126,000 at June 30,
2018 and December 31, 2017, respectively, and are classified in our
condensed consolidated balance sheets into current or long-term
deferred revenue. In addition, we record a contract liability for
amounts expected to be repaid to GEHC due to customer order
reductions. Such amounts aggregated approximately $1,662,000 and
$1,143,000 at June 30, 2018 and December 31, 2017, respectively,
and are included in accrued expenses and other liabilities in our
condensed consolidated balance sheets.
In our
VasoMedical business, we bill amounts for post-delivery services
and varying duration service contracts in advance of performance.
Such amounts aggregated approximately $918,000 and $941,000 at June
30, 2018 and December 31, 2017, respectively, and are classified in
our condensed consolidated balance sheets as either current or
long-term deferred revenue.
During
the three and six months ended June 30, 2018, we recognized
approximately $2.9 million and $4.5 million of revenues that were
included in our contract liability balance at the beginning of such
periods.
Costs to Obtain or Fulfill a Contract
Topic
606 requires that incremental costs of obtaining a contract are
recognized as an asset and amortized to expense in a pattern that
matches the timing of the revenue recognition of the related
contract. We have determined the only significant incremental costs
incurred to obtain contracts with customers within the scope of
Topic 606 are certain sales commissions paid to associates. In
addition, the Company elected the practical expedient to recognize
the incremental costs of obtaining a contract when incurred for
contracts where the amortization period for the asset the Company
would otherwise have recognized is one year or
less.
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Under
prior U.S. GAAP, we recognized sales commissions in our equipment
segment as incurred. Under Topic 606, sales commissions applicable
to service contracts exceeding one year have been capitalized and
amortized ratably over the term of the contract. In our IT VAR
business, all commissions paid in advance of go-live were, under
prior U.S. GAAP, capitalized as deferred commission expense and
charged to expense at go-live or customer acceptance, as
applicable. Under Topic 606, IT VAR commissions allocable to
multi-year subscription contracts or multi-year post-contract
support performance obligations are amortized to expense ratably
over the terms of the multi-year periods. IT VAR commissions
allocable to other elements continue to be charged to expense at
go-live or customer acceptance, as was previously done. At the date
of adoption of Topic 606, we recorded an asset, and related
adjustment to retained earnings, of approximately $139,000 in our
condensed consolidated balance sheets for the amount of unamortized
sales commissions for prior periods, as calculated under the new
guidance. The impact to our financial statements of adopting Topic
606, as it relates to costs to obtain contracts, was a reduction in
commission expense of approximately $29,000 and $86,000 for the
three and six months ended June 30, 2108, respectively, an increase
in deferred commission expense of approximately $73,000, and an
increase in long term deferred commission expense (recorded in
other assets) of approximately $152,000 (inclusive of the beginning
balance adjustment of $139,000).
In our
professional sales services segment, under both prior U.S. GAAP and
Topic 606, commissions paid to our sales force are deferred until
the underlying equipment is accepted by the customer.
At June
30, 2018, our condensed consolidated balance sheet includes
approximately $5,012,000 in capitalized sales commissions to be
expensed in future periods, of which $3,324,000 is recorded in
deferred commission expense and $1,688,000, representing the long
term portion, is included in other assets.
Significant Judgments when Applying Topic 606
Contract
transaction price is allocated to performance obligations using
estimated stand-alone selling price. Judgment is required in
estimating stand-alone selling price for each distinct performance
obligation. We determine stand-alone selling price maximizing
observable inputs such as stand-alone sales when they exist or
substantive renewal price charged to clients. In instances where
stand-alone selling price is not observable, we utilize an estimate
of stand-alone selling price based on historical pricing and
industry practices.
Certain
revenue we record in our professional sales service segment
contains an estimate for variable consideration. Due to the tiered
structure of our commission rate, which increases as annual targets
are achieved, under Topic 606 we record revenue and deferred
revenue at the rate we expect to be achieved by year end. Under
prior U.S. GAAP, we recognized revenue at the rate achieved at the
applicable reporting date. We base our estimate of variable
consideration on historical results of previous years’
achievement under the GEHC agreement. Such estimate will be
reviewed each quarter and adjusted as applicable. At June 30, 2018,
the Company recorded approximately $406,000 in additional accounts
and other receivables, net; $245,000 in additional combined short
term and long term deferred revenue; and, for the three and six
months ended June 30, 2018, $105,000 and $161,000, respectively, in
additional commission revenue resulting from our estimate of
variable consideration. For both the three and six months ended
June 30, 2018, the Company recognized a $226,000 reduction in
revenue associated with revisions to variable consideration for
performance obligations completed in the three months ended March
31, 2018.
NOTE D
– SEGMENT REPORTING AND CONCENTRATIONS
Vaso
Corporation principally operates 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 reportable 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.
The
chief operating decision maker is the Company’s Chief
Executive Officer, who, in conjunction with upper management,
evaluates segment performance based on operating income and
adjusted EBITDA (net income (loss), plus interest expense (income),
net; tax expense; depreciation and amortization; and non-cash
stock-based compensation). Administrative functions such as
finance, human resources, and information technology are
centralized and related expenses allocated to each segment. Other
costs not directly attributable to operating segments, such as
audit, legal, director fees, investor relations, and others, as
well as certain assets – primarily cash balances – are
reported in the Corporate entity below. There are no intersegment
revenues. Summary financial information for the segments is set
forth below:
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers
|
|
|
|
|
|
IT
|
$
10,704
|
$
10,811
|
$
22,117
|
$
20,611
|
|
Professional sales
service
|
6,803
|
6,005
|
12,014
|
11,876
|
|
Equipment
|
911
|
1,037
|
1,824
|
1,740
|
|
Total
revenues
|
$
18,418
|
$
17,853
|
$
35,955
|
$
34,227
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
IT
|
$
4,475
|
$
4,374
|
$
9,389
|
$
8,396
|
|
Professional sales
service
|
5,423
|
4,707
|
9,576
|
9,316
|
|
Equipment
|
539
|
717
|
1,093
|
1,156
|
|
Total gross
profit
|
$
10,437
|
$
9,798
|
$
20,058
|
$
18,868
|
|
|
|
|
|
|
|
Operating (loss)
income
|
|
|
|
|
|
IT
|
$
(845
)
|
$
(712
)
|
$
(1,280
)
|
$
(1,630
)
|
|
Professional sales
service
|
1,164
|
403
|
110
|
318
|
|
Equipment
|
(339
)
|
(127
)
|
(566
)
|
(532
)
|
|
Corporate
|
(243
)
|
(273
)
|
(640
)
|
(706
)
|
|
Total operating
loss
|
$
(263
)
|
$
(709
)
|
$
(2,376
)
|
$
(2,550
)
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
IT
|
$
794
|
$
432
|
$
1,052
|
$
1,188
|
|
Professional sales
service
|
-
|
36
|
-
|
114
|
|
Equipment
|
2
|
16
|
20
|
21
|
|
Corporate
|
-
|
-
|
3
|
-
|
|
Total cash capital
expenditures
|
$
796
|
$
484
|
$
1,075
|
$
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
IT
|
$
28,120
|
$
28,320
|
|
Professional sales
service
|
11,956
|
15,658
|
|
Equipment
|
7,394
|
7,830
|
|
Corporate
|
3,008
|
4,970
|
|
Total
assets
|
$
50,478
|
$
56,778
|
GE
Healthcare accounted for 37% and 34% of revenue for the three
months ended June 30, 2018 and 2017, respectively, and 33% and 35%
of revenue for the six months ended June 30, 2018 and 2017,
respectively. GE Healthcare also accounted for $6.5 million or 60%,
and $8.9 million or 67%, of accounts and other receivables at June
30, 2018 and December 31, 2017, respectively.
Vaso Corporation
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE E
– LOSS PER COMMON SHARE
Basic
loss per common share is computed as loss applicable to common
stockholders divided by the weighted-average number of common
shares outstanding for the period. Diluted loss per common share
reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted
to common stock.
The
following table represents common stock equivalents that were
excluded from the computation of diluted loss per share for the
three and six months ended June 30, 2018 and 2017, because the
effect of their inclusion would be anti-dilutive.
|
|
|
|
|
For the three months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
-
|
600
|
-
|
600
|
Restricted common
stock grants
|
3,874
|
5,792
|
3,874
|
5,792
|
|
|
3,874
|
6,392
|
3,874
|
6,392
|
NOTE F
– ACCOUNTS AND OTHER RECEIVABLES, NET
The
following table presents information regarding the Company’s
accounts and other receivables as of June 30, 2018 and December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
$
14,807
|
$
18,056
|
|
Unbilled
receivables
|
458
|
-
|
|
Due from
employees
|
32
|
41
|
|
Allowance for
doubtful accounts and
|
|
|
|
commission
adjustments
|
(4,359
)
|
(4,872
)
|
|
Accounts and other
receivables, net
|
$
10,938
|
$
13,225
|
Contract
receivables under Topic 606 consist of trade receivables and
unbilled receivables. Trade receivables include amounts due for
shipped products and services rendered. Unbilled receivables
represents variable consideration recognized in accordance with
Topic 606 but not yet billable. Amounts recorded – billed and
unbilled - under the GEHC Agreement are subject to adjustment in
subsequent periods should the underlying sales order amount, upon
which the receivable is based, change.
Allowance for
doubtful accounts and commission adjustments include estimated
losses resulting from the inability of our customers to make
required payments, and adjustments arising from subsequent changes
in sales order amounts that may reduce the amount the Company will
ultimately receive under the GEHC Agreement. Due from employees is
primarily commission advances made to sales personnel.
Vaso Corporation
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE G
– INVENTORIES, NET
Inventories, net
of reserves, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
591
|
$
530
|
|
Work in
process
|
344
|
449
|
|
Finished
goods
|
1,022
|
1,376
|
|
|
$
1,957
|
$
2,355
|
At
June 30, 2018 and December 31, 2017, the Company maintained
reserves for slow moving inventories of $604,000 and $746,000,
respectively.
NOTE H
– GOODWILL AND OTHER INTANGIBLES
Goodwill
aggregating $17,423,000 and $17,471,000 was recorded on the
Company’s condensed consolidated balance sheets at June 30,
2018 and December 31, 2017, respectively, of which $14,375,000 is
allocated to the IT segment and $3,048,000 is allocated to the
equipment segment. The components of the change in goodwill are as
follows:
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2017
|
$
17,471
|
|
Foreign currency
translation adjustment
|
(48
)
|
|
Balance at June 30,
2018 (unaudited)
|
$
17,423
|
The
Company’s other intangible assets consist of capitalized
customer-related intangibles, patent and technology costs, and
software costs, as set forth in the following:
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
|
Costs
|
$
5,831
|
$
5,831
|
|
Accumulated
amortization
|
(2,811
)
|
(2,501
)
|
|
|
3,020
|
3,330
|
|
|
|
|
|
Patents and
Technology
|
|
|
|
Costs
|
2,305
|
2,331
|
|
Accumulated
amortization
|
(1,353
)
|
(1,260
)
|
|
|
952
|
1,071
|
|
|
|
|
|
Software
|
|
|
|
Costs
|
2,077
|
1,819
|
|
Accumulated
amortization
|
(1,067
)
|
(966
)
|
|
|
1,010
|
853
|
|
|
|
|
|
|
$
4,982
|
$
5,254
|
Vaso
Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Patents
and technology are amortized on a straight-line basis over their
estimated useful lives of ten and eight years, respectively. The
cost of significant customer-related intangibles is amortized in
proportion to estimated total related revenue; cost of other
customer-related intangible assets
is amortized on a straight-line
basis over the asset's estimated economic life of seven
years
. Software costs are amortized on a straight-line basis
over its expected useful life of five years.
Amortization
expense amounted to $249,000 and $305,000 for the three months
ended June 30, 2018 and 2017, respectively, and $505,000 and
$591,000 for the six months ended June 30, 2018 and 2017,
respectively.
Amortization of
intangibles for the next five years is:
|
|
|
|
Years ending December
31,
|
|
|
Remainder of
2018
|
$
500
|
|
2019
|
965
|
|
2020
|
882
|
|
2021
|
806
|
|
2022
|
531
|
|
Total
|
$
3,684
|
NOTE I
– OTHER ASSETS, NET
Other
assets, net consist of the following at June 30, 2018 and December
31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred commission
expense - noncurrent
|
$
1,688
|
$
1,867
|
|
Trade receivables -
noncurrent
|
616
|
968
|
|
Other, net of
allowance for loss on loan receivable of
|
|
|
|
$412 at
June 30, 2018 and December 31, 2017
|
548
|
1,012
|
|
|
$
2,852
|
$
3,847
|
NOTE J
– ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses
and other liabilities consist of the following at June 30, 2018 and
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
$
563
|
$
1,181
|
|
Accrued expenses -
other
|
1,279
|
2,207
|
|
Other
liabilities
|
2,537
|
1,949
|
|
|
$
4,379
|
$
5,337
|
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE K
- DEFERRED REVENUE
The
changes in the Company’s deferred revenues are as
follows:
|
|
|
|
|
For the three months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at
beginning of period
|
$
21,295
|
$
19,785
|
$
23,066
|
$
19,404
|
|
Additions:
|
|
|
|
|
|
Deferred extended
service contracts
|
122
|
248
|
314
|
435
|
|
Deferred in-service
and training
|
3
|
8
|
3
|
8
|
|
Deferred service
arrangements
|
5
|
20
|
5
|
20
|
|
Deferred commission
revenues
|
1,710
|
3,367
|
2,169
|
6,251
|
|
Recognized as
revenue:
|
|
|
|
|
|
Deferred extended
service contracts
|
(160
)
|
(164
)
|
(321
)
|
(341
)
|
|
Deferred in-service
and training
|
-
|
(8
)
|
(3
)
|
(10
)
|
|
Deferred service
arrangements
|
(9
)
|
(11
)
|
(21
)
|
(23
)
|
|
Deferred commission
revenues
|
(2,773
)
|
(2,553
)
|
(5,019
)
|
(5,052
)
|
|
Deferred revenue at
end of period
|
20,193
|
20,692
|
20,193
|
20,692
|
|
Less: current
portion
|
13,544
|
11,062
|
13,544
|
11,062
|
|
Long-term deferred
revenue at end of period
|
$
6,649
|
$
9,630
|
$
6,649
|
$
9,630
|
NOTE L
– LINE OF CREDIT
NetWolves maintains
a $4.0 million line of credit with a lending institution. Advances
under the line, which expires on September 30, 2018, bear interest
at a rate of LIBOR plus 2.25% and are secured by substantially all
of the assets of NetWolves Network Services, LLC and guaranteed by
Vaso Corporation. At June 30, 2018, the Company had drawn
approximately $3.5 million against the line. The draw is included
in notes payable and capital lease obligations – current
portion in the Company’s condensed consolidated balance
sheet.
The Company maintains an additional $2.0 million
line of credit with a lending institution. Advances under the line,
which expires on
September 30
,
2018, bear interest at a rate of LIBOR plus 2.25% and are secured
by substantially all of the assets of the Company.
At June
30, 2018, the Company had drawn approximately $0.8 million against
the line.
The line of credit agreement
includes certain financial covenants. At June 30, 2018, and in
certain prior quarters, the Company was not in compliance with such
covenants.
NOTE M
– EQUITY
In
March 2018, the Company granted 725,000 shares of restricted common
stock to officers under the 2016 Stock Plan. The shares vested in
April 2018. In May and June 2018, the Company granted a total of
575,000 shares of restricted common stock to employees, vesting
over a three year period.
NOTE N
– RELATED-PARTY TRANSACTIONS
The
Company made interest payments, aggregating approximately $109,000
in each of the three month periods ended June 30, 2018 and 2017,
and approximately $217,000 in each of the six month periods ended
June 30, 2018 and 2017, to MedTechnology Investments, LLC
(“MedTech”) pursuant to its $4,800,000 promissory notes
(“Notes”). The Notes bear interest, payable quarterly,
at an annual rate of 9%, mature on May 29, 2019, may be prepaid
without penalty, and are subordinated to any current or future
Senior Debt as defined in the Subordinated Security Agreement. The
Subordinated Security Agreement secures payment and performance of
the Company’s obligations under the Notes and as a result,
MedTech was granted a subordinated security interest in the
Company’s assets. The MedTech Notes were used in 2015 to
partially fund the purchase of NetWolves. $2,300,000 of the
$4,800,000 provided by MedTech was provided by directors of the
Company, or by their family members. In August 2018, MedTech
committed to extend the maturity date of $3,600,000 of the Notes an
additional year, if necessary, from May 29, 2019 to May 29, 2020
provided that a minimum of $1.2 million of the principal is paid on
or before May 29, 2019. The interest rate would increase to 10%
effective May 30, 2019. The entire outstanding balance of the
MedTech Notes is included as current
liabilities.
Vaso
Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
David
Lieberman, the Vice Chairman of the Company’s Board of
Directors, is a practicing attorney in the State of New York and a
senior partner at the law firm of Beckman, Lieberman &
Barandes, LLP, which performs certain legal services for the
Company. Fees of approximately $85,000 were billed by the firm for
each of the three month periods ended June 30, 2018 and 2017, and
fees of approximately $170,000 were billed by the firm for each of
the six month periods ended June 30, 2018 and 2017, at which dates
no amounts were outstanding.
In March 2018, the Company sold its interest in
the VSK joint venture to PSK for a sales price of $676,000 and
executed a distributor agreement, expiring December 31, 2020, with
VSK for the sale of the Company’s EECP
®
products in certain international
markets. The sale resulted in a gain of approximately $212,000.
Prior to the sale, the Company’s pro-rata share in
VSK’s loss from operations approximated $14,000 for the three
months ended June 30, 2017, and $9,000 and $59,000 for the six
months ended June 30, 2018 and 2017, respectively, and is included
in interest and other income, net in the accompanying unaudited
condensed consolidated statements of operations and comprehensive
(loss) income.
NOTE O
– COMMITMENTS AND CONTINGENCIES
Litigation
The
Company is currently, and has been in the past, a party to various
legal proceedings, primarily employee related matters, incident to
its business. The Company believes that the outcome of all pending
legal proceedings in the aggregate is unlikely to have a material
adverse effect on the business or consolidated financial condition
of the Company.
Sales representation agreement
In
December 2017, the Company concluded an amendment of the GEHC
Agreement with GEHC, originally signed on May 19, 2010. The
amendment extends the term of the original agreement, which began
on July 1, 2010 and was previously extended in 2012 and 2015,
through December 31, 2022, subject to earlier termination with or
without cause under certain circumstances after timely notice,
making it the longest extension thus far with a remaining term of
five years from December 31, 2017. Under the agreement,
VasoHealthcare is the exclusive representative for the sale of
select GE Healthcare diagnostic imaging products to specific market
segments/accounts in the 48 contiguous states of the United States
and the District of Columbia. The circumstances under which early
termination of the agreement may occur include: not materially
achieving certain sales goals, not maintaining a minimum number of
sales representatives, and not meeting various legal and GEHC
policy requirements. Under the terms of the agreement, the Company
is required to lease dedicated computer equipment from GEHC for
connectivity to their network and share certain GEHC sales
costs.
I
TEM 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 the conduct of clinical trials and other 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, 2017 as filed with the SEC on April 2,
2018.
Results of Operations – For the Three Months Ended June 30,
2018 and 2017
Revenues
Total
revenue for the three months ended June 30, 2018 and 2017 was
$18,418,000 and $17,853,000, respectively, representing an increase
of $565,000, or 3% year-over-year. On a segment basis, revenue in
the professional sales service segment increased $798,000 while
revenue in the IT and equipment segments decreased $107,000 and
$126,000, respectively.
Revenue in the IT
segment for the three months ended June 30, 2018 was $10,704,000
compared to $10,811,000 for the three months ended June 30, 2017, a
decrease of $107,000, or 1%, of which $406,000 resulted from a
decrease in the healthcare IT VAR business, due to fewer healthcare
IT solutions installations in the second quarter of 2018, partially
offset by a $299,000 increase in the operations of NetWolves. Our
monthly recurring revenue in the managed network services
operations continues to grow month over month 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
increased to $12.4 million at June 30, 2018 from $8.8 million at
June 30, 2017, due to growth in orders and clients. We anticipate
that as our healthcare IT operations become more developed and the
service delivery process accelerated, the backlog should convert to
revenue in a more timely fashion and, coupled with continued growth
in order volume, financial results should improve in this
segment.
Commission
revenues in the professional sales service segment were $6,803,000
in the second quarter of 2018, an increase of 13%, as compared to
$6,005,000 in the same quarter of 2017. The increase in commission
revenues was due primarily to an increase 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 June 30, 2018, $19,275,000 in deferred commission
revenue was recorded in the Company’s condensed consolidated
balance sheet, of which $6,221,000 was long-term. At June 30, 2017,
$19,704,000 in deferred commission revenue was recorded in the
Company’s condensed consolidated balance sheet, of which
$9,188,000 was long-term. The decrease in deferred revenue is
principally due to a decrease in orders booked and the increase in
deliveries by GEHC. We anticipate that revenue will increase in the
remaining quarters of 2018 as deliveries increase.
Revenue
in the equipment segment decreased by $126,000, or 12%, to $911,000
for the three-month period ended June 30, 2018 from $1,037,000 for
the same period of the prior year. The decrease was principally due
to lower sales of EECP
®
equipment
partially offset by higher sales of Biox ambulatory monitors and
ARCS software.
Gross Profit
Gross
profit for the three months ended June 30, 2018 and 2017 was
$10,437,000, or 57% of revenue, and $9,798,000, or 55% of revenue,
respectively, representing an increase of $639,000, or 7%
year-over-year. On a segment basis, gross profit in the IT and
professional sales service segments increased $101,000, or 2%, and
$716,000, or 15%, respectively, while gross profit in the equipment
segment decreased $178,000, or 25%.
IT
segment gross profit for the three months ended June 30, 2018 was
$4,475,000, or 42% of the segment revenue, compared to $4,374,000,
or 40% of the segment revenue for the three months ended June 30,
2017. The year-over-year increase of $101,000, or 2%, was primarily
a result of higher sales.
Professional sales
service segment gross profit was $5,423,000, or 80% of segment
revenue, for the three months ended June 30, 2018 as compared to
$4,707,000, or 78% of the segment revenue, for the three months
ended June 30, 2017, reflecting an increase of $716,000. The
increase in absolute dollars was primarily due to higher commission
revenue as a result of higher volume of GEHC equipment delivered
during the second quarter of 2018 than in the same period last
year. Cost of commissions in the professional sales service segment
of $1,380,000 and $1,298,000, for the three months ended June 30,
2018 and 2017, 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 $539,000, or 59% of segment revenues, for
the second quarter of 2018 compared to $717,000, or 69% of segment
revenues, for the same quarter of 2017. The $178,000, or 25%,
decrease in gross profit was due to lower sales volume, as well as
by a gross profit margin decrease due mainly to a higher proportion
of lower margin products in the sales mix in the second quarter of
2018, compared to the second quarter of 2017.
Operating Loss
Operating loss for
the three months ended June 30, 2018 and 2017 was $263,000 and
$709,000, respectively, representing an improvement of $446,000,
due to the increase in gross profit partially offset by higher
operating costs (defined below). On a segment basis, operating
income in the professional sales service segment increased
$761,000, while operating loss in the IT and equipment segments
increased $133,000 and $212,000, respectively. In addition,
corporate expenses decreased $30,000.
Operating loss in
the IT segment increased $133,000 in the three-month period ended
June 30, 2018 as compared to the same period of 2017 due to higher
selling, general, and administrative (“SG&A”)
costs, partially offset by higher gross profit and lower research
and development (“R&D”) costs. Operating income in
the professional sales service segment increased $761,000 in the
three-month period ended June 30, 2018 as compared to operating
income in the same period of 2017 due to higher gross profit
combined with lower SG&A costs. The increase in equipment
segment operating loss of $212,000 in the second quarter of 2018
was due to lower gross profit and higher R&D
costs.
SG&A costs for
the three months ended June 30, 2018 and 2017 were $10,448,000 and
$10,247,000, respectively, representing an increase of $201,000, or
2% year-over-year. On a segment basis, SG&A costs in the IT
segment increased by $308,000 in the second quarter of 2018 from
the same quarter of the prior year due to increased personnel
costs. SG&A costs in the professional sales service segment
decreased $46,000 due mainly to lower personnel-related costs, and
SG&A costs in the equipment segment decreased $32,000 due
mainly to lower legal fees and lower EECP
®
commissions.
Corporate costs not allocated to segments decreased by $30,000 in
the three months ended June 30, 2018 from the same period in 2017,
due primarily to lower director and accounting fees.
Research and
development (“R&D”) expenses were $252,000, or 1%
of revenues, for the second quarter of 2018, a decrease of $8,000,
or 3%, from $260,000, or 1% of revenues, for the second quarter of
2017. The decrease is primarily attributable to lower software
development expenses in the IT segment.
Adjusted EBITDA
We
define Adjusted EBITDA (earnings (loss) before interest, taxes,
depreciation and amortization), which is a non-GAAP financial
measure, as net income (loss), plus interest expense (income), net;
tax expense;depreciation and amortization; and non-cash expenses
for share-based compensation. Adjusted EBITDA is a metric
that is used by the investment community for comparative and
valuation purposes. We disclose this metric in order to support and
facilitate the dialogue with research analysts and
investors.
Adjusted EBITDA is
not a measure of financial performance under U.S. GAAP and should
not be considered a substitute for operating income, which we
consider to be the most directly comparable U.S. GAAP measure.
Adjusted EBITDA has limitations as an analytical tool, and when
assessing our operating performance, you should not consider
Adjusted EBITDA in isolation, or as a substitute for net income or
other consolidated income statement data prepared in accordance
with U.S. GAAP. Other companies may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
A
reconciliation of net income to Adjusted EBITDA is set forth
below:
|
|
(in
thousands)
Three months ended June
30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(446
)
|
$
(987
)
|
|
Interest expense
(income), net
|
177
|
166
|
|
Income tax
expense
|
37
|
111
|
|
Depreciation and
amortization
|
607
|
588
|
|
Share-based
compensation
|
81
|
98
|
|
|
$
456
|
$
(24
)
|
Adjusted EBITDA
increased by $480,000, to $456,000 in the quarter ended June 30,
2018 from $(24,000) in the quarter ended June 30, 2017. The
increase was primarily attributable to the lower net loss,
partially offset by lower income tax expense.
Interest and Other Income (Expense)
Interest and other
income (expense) for the three months ended June 30, 2018 was
$(146,000) as compared to $(167,000) for the corresponding period
of 2017. The decrease in interest and other income (expense) was
due primarily to lower VSK joint venture losses, partially offset
by higher interest expense due to increased borrowings under the
line of credit.
Income Tax Expense
For
the three months ended June 30, 2018, we recorded income tax
expense of $37,000 as compared to $111,000 for the corresponding
period of 2017. The decrease arose mainly from lower deferred taxes
resulting from the Tax Cuts and Jobs Act.
Net Loss
Net
loss for the three months ended June 30, 2018 was $446,000 as
compared to a net loss of $987,000 for the three months ended June
30, 2017, representing a decrease of $541,000. Our net loss per
share was $0.00 and $0.01 in the three-month periods ended June 30,
2018 and 2017, respectively. The principal cause of the decrease in
net loss is the increase in professional sales service segment
revenue and gross profit.
Results of Operations – For the Six months Ended June 30,
2018 and 2017
Revenues
Total
revenue for the six months ended June 30, 2018 and 2017 was
$35,955,000 and $34,227,000, respectively, representing an increase
of $1,728,000, or 5% year-over-year. On a segment basis, revenue in
the IT, professional sales service, and equipment segments
increased $1,506,000, 138,000, and $84,000,
respectively.
Revenue in the IT
segment for the six months ended June 30, 2018 was $22,117,000
compared to $20,611,000 for the six months ended June 30, 2017, an
increase of $1,506,000, of which $915,000 resulted from growth in
the operations of NetWolves, and $591,000 from an increase in the
healthcare IT VAR business. Our monthly recurring revenue in the
managed network services operations continues to grow month over
month as we add new customers and expand our services to existing
customers; at the same time, the backlog of orders in our IT VAR
operations increased to $12.4 million at June 30, 2018 from $8.8
million at June 30, 2017, due to growth in orders and clients. We
anticipate that as our IT VAR operations become more developed and
the service delivery process accelerated, the backlog will convert
to revenue in a more timely fashion and, coupled with continued
growth in order volume, profitability will improve in this
segment.
Commission
revenues in the professional sales service segment were $12,014,000
in the first half of 2018, an increase of 1%, as compared to
$11,876,000 in the first half of 2017. The increase in commission
revenues was due primarily to an increase in the volume of
underlying equipment delivered by GEHC during the period.
Deliveries of equipment sold by us are typically lower in the first
half of each year than in the second half of the year, with the
strongest in the fourth quarter of each year. Therefore, we expect
deliveries and revenue to improve through the remainder of 2018.
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, 2018, $19,275,000 in deferred commission
revenue was recorded in the Company’s condensed consolidated
balance sheet, of which $6,221,000 was long-term.
Revenue in the
equipment segment increased by $84,000, or 5%, to $1,824,000 for
the six-month period ended June 30, 2018 from $1,740,000 for the
same period of the prior year. The increase was principally due to
an increase in Biox ambulatory monitor and ARCS software revenues
as a result of higher sales volume.
Gross Profit
Gross
profit for the six months ended June 30, 2018 and 2017 was
$20,058,000, or 56% of revenue, and $18,868,000, or 55% of revenue,
respectively, representing an increase of $1,190,000, or 6%
year-over-year. On a segment basis, gross profit in the IT and
professional sales service segments increased $993,000, and
$260,000, respectively, while gross profit in the equipment segment
decreased $63,000.
IT
segment gross profit for the six months ended June 30, 2018 was
$9,389,000, or 42% of the segment revenue, compared to $8,396,000,
or 41% of the segment revenue for the six months ended June 30,
2017, with $498,000 of the increase resulting primarily from higher
sales at NetWolves and $495,000 resulting from both higher sales
and higher gross profit rate in the IT VAR business.
Professional sales
service segment gross profit was $9,576,000, or 80% of segment
revenue, for the six months ended June 30, 2018 as compared to
$9,316,000, or 78% of the segment revenue, for the six months ended
June 30, 2017, reflecting an increase of $260,000, or 3%. The
increase in absolute dollars was due to higher commission revenue
as a result of higher volume of GEHC equipment delivered during the
first half of 2018 than in the same period last year, as well as by
lower commission expense in the first half of 2018 compared to the
same period of 2017.
Cost
of commissions in the professional sales service segment of
$2,438,000 and $2,560,000, for the six months ended June 30, 2018
and 2017, 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 $1,093,000, or 60% of segment revenues,
for the first half of 2018 compared to $1,156,000, or 66% of
segment revenues, for the same period of 2017, due to lower margin
product mix in the first half of 2018, compared to the first half
of 2017.
Operating Loss
Operating loss for
the six months ended June 30, 2018 and 2017 was $2,376,000 and
$2,550,000, respectively, representing an improvement of $174,000,
primarily due to higher gross profit partially offset by higher
operating costs. On a segment basis, operating loss decreased
$350,000 in the IT segment, while operating income in the
professional sales service segment decreased $208,000, and
operating loss in the equipment segment increased $34,000. In
addition, corporate expenses decreased $66,000.
Operating loss in
the IT segment decreased in the six-month period ended June 30,
2018 as compared to the same period of 2017 due to higher gross
profit and lower research and development costs, partially offset
by higher SG&A costs. Operating income in the professional
sales service segment decreased in the six-month period ended June
30, 2018 as compared to the same period of 2017 due to higher
SG&A costs partially offset by higher gross profit. Operating
loss in the equipment segment increased in the six-month period
ended June 30, 2018 as compared to the same period of 2017 due to
lower gross profit, partially offset by lower SG&A
costs.
SG&A costs for
the six months ended June 30, 2018 and 2017 were $21,996,000 and
$20,937,000, respectively, representing an increase of $1,059,000,
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, 2018 increased $468,000 to $9,466,000, from $8,998,000 for the
corresponding period of the prior year, due to increased
personnel-related and shared marketing costs, and in the IT segment
by $768,000 to $10,540,000, from $9,772,000 for the corresponding
period of the prior year, due primarily to increased personnel
costs at NetWolves. SG&A costs in the equipment segment for the
six months ended June 30, 2018 decreased $111,000 to $1,350,000,
from $1,461,000 for the corresponding period of the prior year, due
primarily to lower headcount and legal costs, and corporate costs
not allocated to segments decreased in the same periods by $66,000
from $706,000, due primarily to lower accounting and director
fees.
Research and
development (“R&D”) expenses were $438,000, or 1%
of revenues, for the first half of 2018, a decrease of $43,000, or
9%, from $481,000, or 1% of revenues, for the first half of 2017.
The decrease is primarily attributable to lower software
development expenses in the IT segment.
Adjusted EBITDA
We
define Adjusted EBITDA (earnings (loss) before interest, taxes,
depreciation and amortization), which is a non-GAAP financial
measure, as net income (loss), plus interest expense (income), net;
tax expense;depreciation and amortization; and non-cash expenses
for share-based compensation. Adjusted EBITDA is a metric
that is used by the investment community for comparative and
valuation purposes. We disclose this metric in order to support and
facilitate the dialogue with research analysts and
investors.
Adjusted EBITDA is
not a measure of financial performance under U.S. GAAP and should
not be considered a substitute for operating income, which we
consider to be the most directly comparable U.S. GAAP measure.
Adjusted EBITDA has limitations as an analytical tool, and when
assessing our operating performance, you should not consider
Adjusted EBITDA in isolation, or as a substitute for net income or
other consolidated income statement data prepared in accordance
with U.S. GAAP. Other companies may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
A
reconciliation of net income to Adjusted EBITDA is set forth
below:
|
|
(in
thousands)
Six months ended June
30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(2,515
)
|
$
(3,118
)
|
|
Interest expense
(income), net
|
338
|
331
|
|
Income tax
expense
|
57
|
220
|
|
Depreciation and
amortization
|
1,202
|
1,170
|
|
Share-based
compensation
|
222
|
317
|
|
Adjusted
EBITDA
|
$
(696
)
|
$
(1,080
)
|
Adjusted EBITDA
improved by $384,000, to $(696,000) in the six months ended June
30, 2018 from $(1,080,000) in the six months ended June 30, 2017.
The improvement was primarily attributable to the lower net loss,
partially offset by lower income tax expense and lower share-based
compensation.
Interest and Other Income (Expense)
Interest and other
income (expense) for the six months ended June 30, 2018 was
$(82,000) as compared to $(348,000) for the corresponding period of
2017. The decrease was due primarily to the $212,000 gain on sale
of VSK, partially offset by higher interest expense due to
increased borrowings under our credit line.
Income Tax Expense
For
the six months ended June 30, 2018, we recorded income tax expense
of $57,000 as compared to income tax expense of $220,000 for the
corresponding period of 2017. The decrease arose mainly from lower
deferred income taxes in 2018 arising from the Tax Cuts and Jobs
Act.
Net Loss
Net
loss for the six months ended June 30, 2018 was $2,515,000 compared
to net loss of $3,118,000 for the six months ended June 30, 2017,
representing a decrease in net loss of $603,000. Our net loss per
share was $0.02 in the six month periods ended June 30, 2018 and
2017. The principal causes of the decrease in net loss is the
reduction in operating loss in the IT segment, the gain on sale of
investment in VSK, and the reduction in income tax
expense.
Liquidity and Capital Resources
Cash and Cash Flow
We
have financed our operations from working capital and drawdown on
our line of credit. At June 30, 2018, we had cash and cash
equivalents of $3,163,000 and negative working capital of
$15,099,000 compared to cash and cash equivalents of $5,245,000 and
negative working capital of $8,217,000 at December 31, 2017.
$10,220,000 in negative working capital at June 30, 2018 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 $2,156,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of
$1,121,000 and cash used by operating assets and liabilities of
$1,035,000, during the six months ended June 30, 2018, compared to
cash provided by operating activities of $1,375,000 for the same
period in 2017. The changes in the account balances primarily
reflect a decrease in accounts and other receivables of $2,125,000,
and decreases in deferred revenue, accrued commissions, and accrued
expenses and other liabilities of $2,873,000, $671,000, and
733,000, respectively.
Cash
used in investing activities during the six-month period ended June
30, 2018 was $764,000 consisting of $1,075,000 for the purchase of
equipment and software, partially offset by $311,000 provided by
the sale of our investment in VSK.
Cash
provided by financing activities during the six-month period ended
June 30, 2018 was $834,000 primarily as a result of $896,000 in net
borrowings on revolving lines of credit partially offset by $61,000
in payments of notes and capital leases issued for equipment
purchases.
Liquidity
At
June 30, 2018 the Company had outstanding borrowings under its
lines of credit of approximately $4.3 million with availability of
approximately $1.7 million. These lines mature on September 30,
2018. It is the management's intention to renew the lines of
credit, and it is currently in negotiation with the lending bank
for the renewal. The Company has had a history of renewing these
lines of credit upon maturity; therefore, management believes that
the lines of credit will be renewed. Additionally, the Company has
a conditional commitment to extend $3.6 million of the MedTech
Notes for one year through May 29, 2020. The Company expects to
maintain sufficient liquidity through its cash on hand,
availability of funds under its lines of credit, and internally
generated funds to meet its obligations as they come due. The
Company’s profitability for the year will be largely
dependent on deliveries of product by GEHC in our professional
sales service segment since the Company does not recognize revenue
in this segment until the equipment is
delivered.