PART I –
FINANCIAL INFORMATION
ITEM
1 - FINANCIAL STATEMENTS
Vaso
Corporation and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash and cash
equivalents
|
$
2,979
|
$
5,245
|
|
Accounts and other
receivables, net of an allowance for doubtful
|
|
|
|
accounts and
commission adjustments of $3,700 at September 30,
|
|
|
|
2018 and $4,872 at
December 31, 2017
|
10,139
|
13,225
|
|
Receivables due
from related parties
|
20
|
20
|
|
Inventories,
net
|
2,388
|
2,355
|
|
Deferred
commission expense
|
2,617
|
3,649
|
|
Prepaid expenses
and other current assets
|
1,142
|
993
|
|
Total
current assets
|
19,285
|
25,487
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, net of accumulated depreciation of
|
|
|
|
$5,949 at September
30, 2018 and $4,980 at December 31, 2017
|
5,843
|
4,719
|
|
GOODWILL
|
17,315
|
17,471
|
|
INTANGIBLES,
net
|
4,854
|
5,254
|
|
OTHER ASSETS,
net
|
3,051
|
3,847
|
|
|
$
50,348
|
$
56,778
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$
7,179
|
$
5,423
|
|
Accrued
commissions
|
1,430
|
2,467
|
|
Accrued expenses
and other liabilities
|
5,866
|
5,337
|
|
Sales tax
payable
|
941
|
787
|
|
Deferred revenue -
current portion
|
9,969
|
15,540
|
|
Notes payable and
capital lease obligations - current portion (Note N)
|
9,684
|
3,674
|
|
Notes payable -
related parties - current portion
|
82
|
86
|
|
Due to related
party
|
10
|
390
|
|
Total current
liabilities
|
35,161
|
33,704
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Notes payable and
capital lease obligations, net of current portion (Note
N)
|
322
|
4,834
|
|
Notes payable -
related parties, net of current portion
|
246
|
259
|
|
Deferred revenue,
net of current portion
|
6,983
|
7,526
|
|
Deferred tax
liability
|
233
|
220
|
|
Other long-term
liabilities
|
960
|
1,083
|
|
Total long-term
liabilities
|
8,744
|
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 September 30, 2018 and December 31,
2017
|
-
|
-
|
|
Common stock,
$.001 par value; 250,000,000 shares authorized;
|
|
|
|
177,027,734 and
175,741,970 shares issued at September 30, 2018
|
|
|
|
and December 31,
2017, respectively; 166,719,647 and 165,433,883 shares
|
|
|
|
outstanding at
September 30, 2018 and December 31, 2017, respectively
|
177
|
176
|
|
Additional paid-in
capital
|
63,627
|
63,363
|
|
Accumulated
deficit
|
(55,085
)
|
(52,329
)
|
|
Accumulated other
comprehensive loss
|
(276
)
|
(58
)
|
|
Treasury stock, at
cost, 10,308,087 shares at September 30, 2018 and December 31,
2017
|
(2,000
)
|
(2,000
)
|
|
Total
stockholders’ equity
|
6,443
|
9,152
|
|
|
$
50,348
|
$
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
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(Unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Managed IT systems
and services
|
$
11,002
|
$
10,827
|
$
33,118
|
$
31,438
|
|
Professional sales
services
|
6,854
|
6,305
|
18,868
|
18,181
|
|
Equipment sales
and services
|
932
|
909
|
2,755
|
2,649
|
|
Total
revenues
|
18,788
|
18,041
|
54,741
|
52,268
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
|
|
|
Cost of managed IT
systems and services
|
6,563
|
6,311
|
19,291
|
18,526
|
|
Cost of
professional sales services
|
1,465
|
1,386
|
3,903
|
3,946
|
|
Cost of equipment
sales and services
|
309
|
316
|
1,040
|
900
|
|
Total cost of
revenues
|
8,337
|
8,013
|
24,234
|
23,372
|
|
Gross
profit
|
10,451
|
10,028
|
30,507
|
28,896
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Selling, general
and administrative
|
10,462
|
10,412
|
32,459
|
31,349
|
|
Research and
development
|
230
|
235
|
668
|
716
|
|
Total operating
expenses
|
10,692
|
10,647
|
33,127
|
32,065
|
|
Operating
loss
|
(241
)
|
(619
)
|
(2,620
)
|
(3,169
)
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
Interest and
financing costs
|
(178
)
|
(166
)
|
(530
)
|
(506
)
|
|
Interest and other
income, net
|
56
|
63
|
114
|
55
|
|
Gain on sale of
investment in VSK
|
-
|
-
|
212
|
-
|
|
Total other
expense, net
|
(122
)
|
(103
)
|
(204
)
|
(451
)
|
|
|
|
|
|
|
|
Loss before income
taxes
|
(363
)
|
(722
)
|
(2,824
)
|
(3,620
)
|
|
Income tax
expense
|
(14
)
|
(94
)
|
(71
)
|
(314
)
|
|
Net
loss
|
(377
)
|
(816
)
|
(2,895
)
|
(3,934
)
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
Foreign currency
translation (loss) gain
|
(131
)
|
25
|
(218
)
|
116
|
|
Comprehensive
loss
|
$
(508
)
|
$
(791
)
|
$
(3,113
)
|
$
(3,818
)
|
|
|
|
|
|
|
|
Loss per common
share
|
|
|
|
|
|
- basic and
diluted
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.02
)
|
$
(0.02
)
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
|
|
|
- basic and
diluted
|
166,431
|
163,307
|
165,024
|
161,817
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Vaso
Corporation and Subsidiaries
CONDENSED
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
|
1,286
|
1
|
-
|
-
|
265
|
-
|
-
|
266
|
|
Adoption of new
accounting standard (*)
|
-
|
-
|
-
|
-
|
-
|
139
|
-
|
139
|
|
Shares not
issued for employee tax liability
|
-
|
-
|
-
|
-
|
(1
)
|
-
|
-
|
(1
)
|
|
Foreign currency
translation loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(218
)
|
(218
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,895
)
|
-
|
(2,895
)
|
Balance at
September 30, 2018 (unaudited)
|
177,028
|
$
177
|
(10,308
)
|
$
(2,000
)
|
$
63,627
|
$
(55,085
)
|
$
(276
)
|
$
6,443
|
(*) 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
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities
|
|
|
|
Net
loss
|
$
(2,895
)
|
$
(3,934
)
|
|
Adjustments to
reconcile net loss to net
|
|
|
|
cash
(used in) provided by operating activities
|
|
|
|
Depreciation and
amortization
|
1,828
|
1,781
|
|
Deferred income
taxes
|
-
|
287
|
|
Loss from interest
in joint venture
|
9
|
30
|
|
Gain on sale of
investment in VSK
|
(212
)
|
-
|
|
Provision for
doubtful accounts and commission adjustments
|
240
|
145
|
|
Amortization of
debt issue costs
|
24
|
24
|
|
Share-based
compensation
|
266
|
417
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts and other
receivables
|
2,837
|
1,671
|
|
Receivables due
from related parties
|
-
|
(96
)
|
|
Inventories,
net
|
(75
)
|
(235
)
|
|
Deferred
commission expense
|
1,142
|
(982
)
|
|
Prepaid expenses
and other current assets
|
(152
)
|
(211
)
|
|
Other assets,
net
|
244
|
861
|
|
Accounts
payable
|
1,756
|
(153
)
|
|
Accrued
commissions
|
(1,264
)
|
(763
)
|
|
Accrued expenses
and other liabilities
|
791
|
(647
)
|
|
Sales tax
payable
|
155
|
52
|
|
Deferred
revenue
|
(6,114
)
|
2,674
|
|
Deferred tax
liability
|
12
|
180
|
|
Other long-term
liabilities
|
(124
)
|
(235
)
|
|
Net cash (used in)
provided by operating activities
|
(1,532
)
|
866
|
|
|
|
|
|
Cash flows from
investing activities
|
|
|
|
Purchases of
equipment and software
|
(2,168
)
|
(1,981
)
|
|
Proceeds from sale
of investment in VSK
|
311
|
-
|
|
Net cash used in
investing activities
|
(1,857
)
|
(1,981
)
|
|
|
|
|
|
Cash flows from
financing activities
|
|
|
|
Net borrowings on
revolving line of credit
|
1,158
|
78
|
|
Payroll taxes paid
by withholding shares
|
(1
)
|
(3
)
|
|
Net repayment of
notes payable and capital lease obligations
|
(76
)
|
(288
)
|
|
Payments on notes
payable - related parties
|
-
|
(170
)
|
|
Net cash provided
by (used in) financing activities
|
1,081
|
(383
)
|
|
Effect of exchange
rate differences on cash and cash equivalents
|
42
|
(67
)
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(2,266
)
|
(1,565
)
|
|
Cash and cash
equivalents - beginning of period
|
5,245
|
7,087
|
|
Cash and cash
equivalents - end of period
|
$
2,979
|
$
5,522
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
|
|
|
|
Interest
paid
|
$
491
|
$
483
|
|
Income taxes
paid
|
$
74
|
$
35
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
Equipment acquired
through capital lease
|
$
399
|
$
-
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Vaso 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.
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(TM) series
Holter monitors and ambulatory blood pressure
recorders;
·
ARCS
(R)
series analysis,
reporting and communication software for physiological signals such
as ECG and blood pressure;
·
MobiCare(TM)
multi-parameter wireless vital-sign monitoring
system;
·
EECP
(R)
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.
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
Liquidity
and Capital Resources
At September 30,
2018 the Company had cash and cash equivalents of $2,979,000, and
negative working capital, excluding deferred commission expense and
deferred revenue which are non-cash items, of
$8,524,000. Historically the Company has financed its
operations from cash provided from operating activities and
borrowings under its lines of credit. For the nine months ended
September 30, 2018, the Company had a net loss of $2,895,000 and
used cash in operations of $1,532,000. At September 30,
2018, the Company had outstanding borrowings under its lines of
credit of approximately $4.6 million with availability of
approximately $1.4 million. These lines mature on
November 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. 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). Additionally, management has established cost saving
measures that will be implemented, if necessary. 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.
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, the 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”).
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
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
|
$
15
|
$
41
|
|
Total
assets
|
$
1,773
|
$
1,599
|
|
Total
liabilities
|
$
2,013
|
$
1,745
|
|
|
(in thousands)
|
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenue
|
$
432
|
$
318
|
$
1,352
|
$
1,049
|
|
|
|
|
|
|
|
Net
loss
|
$
(13
)
|
$
(90
)
|
$
(81
)
|
$
(626
)
|
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform
with the current period presentation.
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”).
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
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
(R)
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”).
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 September 30, 2018 (unaudited)
|
Nine months ended September 30, 2018 (unaudited)
|
|
|
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Professional
sales services
|
$
6,695
|
$
159
|
$
6,854
|
$
18,548
|
$
320
|
$
18,868
|
|
Total
revenues
|
18,629
|
159
|
18,788
|
54,421
|
320
|
54,741
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
10,292
|
159
|
10,451
|
30,187
|
320
|
30,507
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
10,474
|
(12
)
|
10,462
|
32,557
|
(98
)
|
32,459
|
|
Operating
loss
|
$
(412
)
|
$
171
|
$
(241
)
|
$
(3,038
)
|
$
418
|
$
(2,620
)
|
|
|
|
|
|
As of September 30, 2018 (unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Accounts
and other receivables, net
|
$
9,477
|
$
662
|
$
10,139
|
|
Deferred
commission expense
|
$
2,534
|
$
83
|
$
2,617
|
|
Other
assets, net
|
$
2,897
|
$
154
|
$
3,051
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Deferred
revenue - current portion
|
$
9,724
|
$
245
|
$
9,969
|
|
Deferred
revenue - long term
|
$
6,893
|
$
90
|
$
6,983
|
|
Accumulated
deficit
|
$
(55,642
)
|
$
557
|
$
(55,085
)
|
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:
|
|
(in thousands)
|
|
|
Three Months Ended September 30, 2018 (unaudited)
|
Three Months Ended September 30, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
services
|
$
10,146
|
|
|
$
10,146
|
$
9,739
|
|
|
$
9,739
|
|
Software
sales and support
|
856
|
|
|
856
|
1,088
|
|
|
1,088
|
|
Commissions
|
|
6,854
|
|
6,854
|
|
6,305
|
|
6,305
|
|
Medical
equipment sales
|
|
|
661
|
661
|
|
|
613
|
613
|
|
Medical
equipment service
|
|
|
271
|
271
|
|
|
296
|
296
|
|
|
$
11,002
|
$
6,854
|
$
932
|
$
18,788
|
$
10,827
|
$
6,305
|
$
909
|
$
18,041
|
|
|
Nine Months Ended September 30, 2018 (unaudited)
|
Nine Months Ended September 30, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
services
|
$
30,418
|
|
|
$
30,418
|
$
29,096
|
|
|
$
29,096
|
|
Software
sales and support
|
2,700
|
|
|
2,700
|
2,342
|
|
|
2,342
|
|
Commissions
|
|
18,868
|
|
18,868
|
|
18,181
|
|
18,181
|
|
Medical
equipment sales
|
|
|
1,936
|
1,936
|
|
|
1,802
|
1,802
|
|
Medical
equipment service
|
|
|
819
|
819
|
|
|
847
|
847
|
|
|
$
33,118
|
$
18,868
|
$
2,755
|
$
54,741
|
$
31,438
|
$
18,181
|
$
2,649
|
$
52,268
|
|
|
Three Months Ended September 30, 2018 (unaudited)
|
Three Months Ended September 30, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
recognized over time
|
$
9,561
|
$
-
|
$
163
|
$
9,724
|
$
9,511
|
$
-
|
$
170
|
$
9,681
|
|
Revenue
recognized at a point in time
|
1,441
|
6,854
|
769
|
9,064
|
1,316
|
6,305
|
739
|
8,360
|
|
|
$
11,002
|
$
6,854
|
$
932
|
$
18,788
|
$
10,827
|
$
6,305
|
$
909
|
$
18,041
|
|
|
Nine Months Ended September 30, 2018 (unaudited)
|
Nine Months Ended September 30, 2017 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
recognized over time
|
$
29,315
|
$
-
|
$
505
|
$
29,820
|
$
28,034
|
$
-
|
$
535
|
$
28,569
|
|
Revenue
recognized at a point in time
|
3,803
|
18,868
|
2,250
|
24,921
|
3,404
|
18,181
|
2,114
|
23,699
|
|
|
$
33,118
|
$
18,868
|
$
2,755
|
$
54,741
|
$
31,438
|
$
18,181
|
$
2,649
|
$
52,268
|
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
Transaction Price Allocated to Remaining Performance
Obligations
As of September 30,
2018, the aggregate amount of transaction price allocated to
performance obligations that are unsatisfied (or partially
unsatisfied) for executed contracts approximates $80.5 million, of
which we expect to recognize revenue as follows:
|
|
|
|
|
Fiscal years of revenue recognition
|
|
|
|
|
|
|
|
Unfulfilled
performance obligations
|
$
14,381
|
$
33,877
|
$
16,959
|
$
15,320
|
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 $461,000 and $371,000 at
September 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 $16,011,000 and $22,126,000 at September
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 credited back to GEHC due to customer order
reductions. Such amounts aggregated approximately $2,996,000 and
$1,143,000 at September 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
$942,000 and $941,000 at September 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 nine months ended September 30, 2018, we recognized
approximately $2.7 million and $5.9 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.
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
$12,000 and $98,000 for the three and nine months ended September
30, 2018, respectively, an increase in deferred commission expense
of approximately $83,000, and an increase in long term deferred
commission expense (recorded in other assets) of approximately
$154,000 (inclusive of the beginning balance adjustment of
$139,000).
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
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 September 30,
2018, our condensed consolidated balance sheet includes
approximately $4,456,000 in capitalized sales commissions to be
expensed in future periods, of which $2,617,000 is recorded in
deferred commission expense and $1,839,000, 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 necessary. At September 30, 2018, the
Company recorded approximately $662,000 in additional accounts and
other receivables, net; $335,000 in additional combined short term
and long term deferred revenue; and, for the three and nine months
ended September 30, 2018, $159,000 and $320,000, respectively, in
additional commission revenue resulting from our estimate of
variable consideration. The Company recognized
reductions in revenue associated with revisions to variable
consideration for previously completed performance obligations of
$84,000 and $310,000 for the three and nine month periods ended
September 30, 2018, respectively.
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)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
|
|
IT
|
$
11,002
|
$
10,827
|
$
33,118
|
$
31,438
|
|
Professional
sales service
|
6,854
|
6,305
|
18,868
|
18,181
|
|
Equipment
|
932
|
909
|
2,755
|
2,649
|
|
Total
revenues
|
$
18,788
|
$
18,041
|
$
54,741
|
$
52,268
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
IT
|
$
4,439
|
$
4,516
|
$
13,827
|
$
12,912
|
|
Professional
sales service
|
5,389
|
4,919
|
14,965
|
14,235
|
|
Equipment
|
623
|
593
|
1,715
|
1,749
|
|
Total
gross profit
|
$
10,451
|
$
10,028
|
$
30,507
|
$
28,896
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
|
|
|
IT
|
$
(782
)
|
$
(555
)
|
$
(2,064
)
|
$
(2,186
)
|
|
Professional
sales service
|
1,013
|
488
|
1,123
|
806
|
|
Equipment
|
(181
)
|
(273
)
|
(747
)
|
(805
)
|
|
Corporate
|
(291
)
|
(279
)
|
(932
)
|
(984
)
|
|
Total
operating loss
|
$
(241
)
|
$
(619
)
|
$
(2,620
)
|
$
(3,169
)
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
IT
|
$
1,055
|
$
641
|
$
2,107
|
$
1,830
|
|
Professional
sales service
|
-
|
3
|
-
|
117
|
|
Equipment
|
37
|
-
|
57
|
21
|
|
Corporate
|
1
|
13
|
4
|
13
|
|
Total
cash capital expenditures
|
$
1,093
|
$
657
|
$
2,168
|
$
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
IT
|
$
30,167
|
$
28,320
|
|
Professional
sales service
|
9,907
|
15,658
|
|
Equipment
|
7,138
|
7,830
|
|
Corporate
|
3,136
|
4,970
|
|
Total
assets
|
$
50,348
|
$
56,778
|
GE Healthcare
accounted for 36% and 35% of revenue for the three months ended
September 30, 2018 and 2017, respectively, and 34% and 35% of
revenue for the nine months ended September 30, 2018 and 2017,
respectively. GE Healthcare also accounted for $5.2
million or 51%, and $8.9 million or 67%, of accounts and other
receivables at September 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 nine months
ended September 30, 2018 and 2017, because the effect of their
inclusion would be anti-dilutive.
|
|
|
|
|
For the three and nine months ended
|
|
|
|
|
|
|
|
|
|
Restricted
common stock grants
|
2,559
|
4,613
|
NOTE F –
ACCOUNTS AND OTHER RECEIVABLES, NET
The following table
presents information regarding the Company’s accounts and
other receivables as of September 30, 2018 and December 31,
2017:
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
$
13,075
|
$
18,056
|
|
Unbilled
receivables
|
733
|
-
|
|
Due
from employees
|
31
|
41
|
|
Allowance
for doubtful accounts and
|
|
|
|
commission
adjustments
|
(3,700
)
|
(4,872
)
|
|
Accounts
and other receivables, net
|
$
10,139
|
$
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:
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
610
|
$
530
|
|
Work
in process
|
433
|
449
|
|
Finished
goods
|
1,345
|
1,376
|
|
|
$
2,388
|
$
2,355
|
At September 30,
2018 and December 31, 2017, the Company maintained reserves for
slow moving inventories of $606,000 and $746,000,
respectively.
NOTE H –
GOODWILL AND OTHER INTANGIBLES
Goodwill
aggregating $17,315,000 and $17,471,000 was recorded on the
Company’s condensed consolidated balance sheets at September
30, 2018 and December 31, 2017, respectively, of which $14,375,000
is allocated to the IT segment and $2,940,000 is allocated to the
equipment segment. The components of the change in
goodwill are as follows:
|
|
(in thousands)
Carrying Amount
|
|
|
|
|
Balance
at December 31, 2017
|
$
17,471
|
|
Foreign
currency translation adjustment
|
(156
)
|
|
Balance
at September 30, 2018 (unaudited)
|
$
17,315
|
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
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:
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
|
Costs
|
$
5,831
|
$
5,831
|
|
Accumulated
amortization
|
(2,957
)
|
(2,501
)
|
|
|
2,874
|
3,330
|
|
|
|
|
|
Patents
and Technology
|
|
|
|
Costs
|
2,289
|
2,331
|
|
Accumulated
amortization
|
(1,400
)
|
(1,260
)
|
|
|
889
|
1,071
|
|
|
|
|
|
Software
|
|
|
|
Costs
|
2,214
|
1,819
|
|
Accumulated
amortization
|
(1,123
)
|
(966
)
|
|
|
1,091
|
853
|
|
|
|
|
|
|
$
4,854
|
$
5,254
|
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 $248,000 and $279,000 for the three months
ended September 30, 2018 and 2017, respectively, and $753,000 and
$870,000 for the nine months ended September 30, 2018 and 2017,
respectively.
Amortization of
intangibles for the next five years is:
|
Years ending December 31,
|
(in
thousands)
(unaudited)
|
|
Remainder
of 2018
|
$
247
|
|
2019
|
991
|
|
2020
|
907
|
|
2021
|
832
|
|
2022
|
538
|
|
Total
|
$
3,515
|
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
NOTE I –
OTHER ASSETS, NET
Other assets, net
consist of the following at September 30, 2018 and December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
commission expense - noncurrent
|
$
1,840
|
$
1,867
|
|
Trade
receivables - noncurrent
|
615
|
968
|
|
Other,
net of allowance for loss on loan receivable of
|
|
|
|
$412
at September 30, 2018 and December 31, 2017
|
596
|
1,012
|
|
|
$
3,051
|
$
3,847
|
NOTE J –
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other
liabilities consist of the following at September 30, 2018 and
December 31, 2017:
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
$
623
|
$
1,181
|
|
Accrued
expenses - other
|
1,419
|
2,207
|
|
Other
liabilities
|
3,824
|
1,949
|
|
|
$
5,866
|
$
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:
|
|
(in thousands)
|
|
|
For the three months ended
|
For the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue at beginning of period
|
$
20,193
|
$
20,692
|
$
23,066
|
$
19,404
|
|
Net
additions (reductions):
|
|
|
|
|
|
Deferred
extended service contracts
|
189
|
118
|
503
|
553
|
|
Deferred
in-service and training
|
-
|
5
|
3
|
13
|
|
Deferred
service arrangements
|
-
|
8
|
5
|
28
|
|
Deferred
commission revenues
|
(797
)
|
4,036
|
1,372
|
10,286
|
|
Recognized
as revenue:
|
|
|
|
|
|
Deferred
extended service contracts
|
(156
)
|
(159
)
|
(477
)
|
(501
)
|
|
Deferred
in-service and training
|
(3
)
|
(3
)
|
(5
)
|
(13
)
|
|
Deferred
service arrangements
|
(7
)
|
(11
)
|
(28
)
|
(34
)
|
|
Deferred
commission revenues
|
(2,467
)
|
(2,608
)
|
(7,487
)
|
(7,658
)
|
|
Deferred
revenue at end of period
|
16,952
|
22,078
|
16,952
|
22,078
|
|
Less:
current portion
|
9,969
|
12,651
|
9,969
|
12,651
|
|
Long-term
deferred revenue at end of period
|
$
6,983
|
$
9,427
|
$
6,983
|
$
9,427
|
The
net reduction in deferred commission revenue of $797 thousand in
the third quarter 2018 is due to the impact of the tiered
commission structure. New orders for the quarter exceeded
cancellations of prior period orders recognized in the quarter;
however, the average commission rate on such cancellations was
greater than the average commission rate for new orders in the
quarter resulting in the net decrease in deferred commission
revenues. Periodically, GEHC “scrubs” the open orders
to eliminate orders that are not expected to be
fulfilled.
NOTE L – LINE
OF CREDIT AND CAPITAL LEASE OBLIGATION
NetWolves maintains
a $4.0 million line of credit with a lending
institution. Advances under the line, which expires on
November 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
September 30, 2018, the Company had drawn approximately $3.3
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
November 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 September 30, 2018, the Company had drawn
approximately $1.3 million against the line. The line of
credit agreement includes certain financial
covenants. At September 30, 2018, and in certain prior
quarters, the Company was not in compliance with such
covenants.
In
September 2018, the Company entered into a capital lease, payable
quarterly over a 60-month term, for primarily the acquisition of
network components in its Florida data center. The fair market
value and capital lease liability of the leased equipment was
approximately $399,000, of which approximately $77,000 is recorded
in current liabilities.
NOTE M –
EQUITY
In
March 2018, the Company granted 725,000 shares, valued at
approximately $44,000, 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, valued at
approximately $29,000, of restricted common stock to employees,
vesting over a three-year period.
Vaso Corporation
and Subsidiaries
Notes to Condensed
Consolidated Financial Statements (unaudited)
NOTE N –
RELATED-PARTY TRANSACTIONS
The
Company made interest payments, aggregating approximately $109,000
in each of the three-month periods ended September 30, 2018 and
2017, and approximately $328,000 in each of the nine-month periods
ended September 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 agreed
to extend, if necessary, the maturity date of $3,600,000 of the
Notes an additional year from May 29, 2019 to May 29, 2020,
provided that a minimum of $1,200,000 of the principal is paid on
or before December 31, 2019 and the annual interest rate for the
balance increases to 10% during the extension. The entire
outstanding balance of the MedTech Notes is included as current
liabilities.
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
September 30, 2018 and 2017, and fees of approximately $255,000
were billed by the firm for each of the nine month periods ended
September 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 distributorship 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 income (loss) from operations approximated $29,000 for
the three months ended September 30, 2017, and $(9,000) and
$(30,000) for the nine months ended September 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
in excess of four years from September 30, 2018. 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.
Vaso Corporation
and Subsidiaries
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 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.
Vaso Corporation
and Subsidiaries
Results
of Operations – For the Three Months Ended September 30, 2018
and 2017
Revenues
Total
revenue for the three months ended September 30, 2018 and 2017 was
$18,788,000 and $18,041,000, respectively, representing an increase
of $747,000, or 4% year-over-year. On a segment basis, revenue in
the professional sales service, IT and equipment segments increased
$549,000, $175,000 and $23,000, respectively.
Revenue
in the IT segment for the three months ended September 30, 2018 was
$11,002,000 compared to $10,827,000 for the three months ended
September 30, 2017, an increase of $175,000, or 2%, of which
$407,000 resulted from an increase in the operations of NetWolves,
partially offset by a $232,000 decrease in the healthcare IT VAR
business, due to fewer healthcare IT solutions installations in the
third quarter of 2018. 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
increased to $14.8 million at September 30, 2018 from $10.4 million
at September 30, 2017, due to growth in orders and clients. 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 $6,854,000
in the third quarter of 2018, an increase of 9%, as compared to
$6,305,000 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 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. At September 30,
2017, $21,132,000 in deferred commission revenue was recorded in
the Company’s condensed consolidated balance sheet, of which
$9,013,000 was long-term. The decrease in deferred revenue is
principally due to a decrease in new orders booked, customer
cancellations, and an increase in deliveries by GEHC. We anticipate
that revenue will increase in the fourth quarter of 2018 as
deliveries increase.
Revenue in the equipment segment increased by
$23,000, or 3%, to $932,000 for the three-month period ended
September 30, 2018 from $909,000 for the same period of the prior
year. The increase was principally due to higher sales of
EECP
®
equipment.
Gross Profit
Gross profit for
the three months ended September 30, 2018 and 2017 was $10,451,000,
or 56% of revenue, and $10,028,000, or 56% of revenue,
respectively, representing an increase of $423,000, or 4%
year-over-year. On a segment basis, gross profit in the
professional sales service and equipment segments increased
$470,000, or 10%, and $30,000, or 5%, respectively, while gross
profit in the IT segment decreased $77,000, or 2%.
IT
segment gross profit for the three months ended September 30, 2018
was $4,439,000, or 40% of the segment revenue, compared to
$4,516,000, or 42% of the segment revenue for the three months
ended September 30, 2017. The year-over-year decrease of $77,000,
or 2%, was primarily a result of lower margin product sales mix of
network and managed services.
Professional sales
service segment gross profit was $5,389,000, or 79% of segment
revenue, for the three months ended September 30, 2018 as compared
to $4,919,000, or 78% of the segment revenue, for the three months
ended September 30, 2017, reflecting an increase of
$470,000. The increase in absolute dollars was primarily
due to higher commission revenue as a result of higher volume of
GEHC equipment delivered during the third quarter of 2018 than in
the same period last year. Cost of commissions in the
professional sales service segment of $1,465,000 and $1,386,000,
for the three months ended September 30, 2018 and 2017,
respectively, reflected commission expense associated with
recognized commission revenues.
Vaso Corporation
and Subsidiaries
Commission expense
associated with short-term deferred revenue is recorded as
short-term deferred commission expense, or with long-term deferred
revenue as part of other assets, on the balance sheet until the
related commission revenue is recognized.
Equipment
segment gross profit increased to $623,000, or 67% of segment
revenues, for the third quarter of 2018 compared to $593,000, or
65% of segment revenues, for the same quarter of 2017. The $30,000,
or 5%, increase in gross profit was due to higher sales volume, as
well as a gross profit margin increase due mainly to a higher
proportion of higher margin products in the sales mix in the third
quarter of 2018, compared to the third quarter of
2017.
Operating Loss
Operating
loss for the three months ended September 30, 2018 and 2017 was
$241,000 and $619,000, respectively, representing an improvement of
$378,000, due to the increase in gross profit partially offset by
higher operating costs (below). On a segment basis, operating
income in the professional sales service segment increased $525,000
and operating loss in the equipment segment decreased $92,000,
while operating loss in the IT segment increased $227,000. In
addition, corporate expenses increased $12,000.
Operating
loss in the IT segment increased $227,000 for the three-month
period ended September 30, 2018 as compared to the same period of
2017 due to lower gross profit and higher selling, general, and
administrative (“SG&A”) costs, partially offset by
lower research and development (“R&D”) costs.
Operating income in the professional sales service segment
increased $525,000 in the three-month period ended September 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
decrease in equipment segment operating loss of $92,000 in the
third quarter of 2018 was due to higher gross profit and lower
SG&A costs, partially offset by higher R&D
costs.
SG&A costs for
the three months ended September 30, 2018 and 2017 were $10,462,000
and $10,412,000, respectively, representing an increase of $50,000,
or less than 1% year-over-year. On a segment basis,
SG&A costs in the IT segment increased by $199,000 in the third
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 $54,000 due mainly to
lower personnel-related costs, and SG&A costs in the equipment
segment decreased $108,000 due mainly to lower legal fees and lower
personnel costs. Corporate costs not allocated to segments
increased by $12,000 in the three months ended September 30, 2018
from the same period in 2017, due primarily to higher accounting
fees and financing costs.
Research and
development (“R&D”) expenses were $230,000, or 1%
of revenues, for the third quarter of 2018, a decrease of $5,000,
or 2%, from $235,000, or 1% of revenues, for the third 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:
Vaso Corporation
and Subsidiaries
|
|
(in
thousands)
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(377
)
|
$
(816
)
|
|
Interest
expense (income), net
|
169
|
163
|
|
Income
tax expense
|
14
|
94
|
|
Depreciation
and amortization
|
626
|
611
|
|
Share-based
compensation
|
44
|
100
|
|
|
$
476
|
$
152
|
Adjusted EBITDA
increased by $324,000, to $476,000 in the quarter ended September
30, 2018 from $152,000 in the quarter ended September 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 September 30, 2018 was
$(122,000) as compared to $(103,000) for the corresponding period
of 2017. 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, 2018, we recorded income tax expense of
$14,000 as compared to $94,000 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 September 30, 2018 was $377,000 as
compared to a net loss of $816,000 for the three months ended
September 30, 2017, representing an improvement of $439,000. No net
loss per share was recorded in each of the three-month periods
ended September 30, 2018 and 2017. 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 Nine months Ended September 30, 2018
and 2017
Revenues
Total revenue for
the nine months ended September 30, 2018 and 2017 was $54,741,000
and $52,268,000, respectively, representing an increase of
$2,473,000, or 5% year-over-year. On a segment basis,
revenue in the IT, professional sales service, and equipment
segments increased $1,680,000, $687,000, and $106,000,
respectively.
Revenue
in the IT segment for the nine months ended September 30, 2018 was
$33,118,000 compared to $31,438,000 for the nine months ended
September 30, 2017, an increase of $1,680,000, or 5%, of which
$1,322,000 resulted from growth in the network and managed services
operations, and $358,000 from an increase in the healthcare IT VAR
business. Our monthly recurring revenue in the network and managed
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 $14.8 million at September 30, 2018 from $10.4 million at
September 30, 2017, due to growth in orders and
clients.
Vaso Corporation
and Subsidiaries
Commission
revenues in the professional sales service segment were $18,868,000
in the first nine months of 2018, an increase of 4%, as compared to
$18,181,000 in the first nine months 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. We
expect deliveries and revenue to continue 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.
Revenue in the
equipment segment increased by $106,000, or 4%, to $2,755,000 for
the nine-month period ended September 30, 2018 from $2,649,000 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 nine months ended September 30, 2018 and 2017 was $30,507,000,
or 56% of revenue, and $28,896,000, or 55% of revenue,
respectively, representing an increase of $1,611,000, or 6%
year-over-year. On a segment basis, gross profit in the
IT and professional sales service segments increased $915,000, and
$730,000, respectively, while gross profit in the equipment segment
decreased $34,000.
IT segment gross
profit for the nine months ended September 30, 2018 was
$13,827,000, or 42% of the segment revenue, compared to
$12,912,000, or 41% of the segment revenue for the nine months
ended September 30, 2017, with $386,000 of the increase resulting
primarily from higher sales at NetWolves and $529,000 resulting
from both higher sales and higher gross profit rate in the IT VAR
business.
Professional sales
service segment gross profit was $14,965,000, or 79% of segment
revenue, for the nine months ended September 30, 2018 as compared
to $14,235,000, or 78% of the segment revenue, for the nine months
ended September 30, 2017, reflecting an increase of $730,000, or
5%. The increase in absolute dollars was due to higher
commission revenue as a result of higher volume of GEHC equipment
delivered during the first nine months of 2018 than in the same
period last year, as well as by lower commission expense in the
first nine months of 2018 compared to the same period of
2017.
Cost of commissions
in the professional sales service segment of $3,903,000 and
$3,946,000, for the nine months ended September 30, 2018 and 2017,
respectively, reflected commission expense associated with
recognized commission revenues. The decrease reflects
lower average commission rates. 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 $1,715,000, or 62% of segment revenues,
for the first nine months of 2018 compared to $1,749,000, or 66% of
segment revenues, for the same period of 2017, due to lower margin
product mix in the first nine months of 2018, compared to the same
period of 2017.
Operating Loss
Operating loss for
the nine months ended September 30, 2018 and 2017 was $2,620,000
and $3,169,000, respectively, representing an improvement of
$549,000, primarily due to higher gross profit partially offset by
higher operating costs. On a segment basis, operating
loss decreased $122,000 in the IT segment and decreased $58,000 in
the equipment segment, while operating income in the professional
sales service segment increased $317,000. In addition, corporate
expenses decreased $52,000.
Operating
loss in the IT segment decreased in the nine-month period ended
September 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 increased in the nine-month
period ended September 30, 2018 as compared to the same period of
2017 due to higher gross profit, partially offset by higher
SG&A costs. Operating loss in the equipment segment decreased
in the nine-month period ended September 30, 2018 as compared to
the same period of 2017 due to lower SG&A costs, partially
offset by higher R&D costs and lower gross profit.
Vaso Corporation
and Subsidiaries
SG&A
costs for the nine months ended September 30, 2018 and 2017 were
$32,459,000 and $31,349,000, respectively, representing an increase
of $1,110,000, or 4% year-over-year. On a segment basis, SG&A
costs for the nine months ended September 30, 2018 increased in the
IT segment by $967,000 to $15,680,000, from $14,713,000 for the
corresponding period of the prior year, due primarily to increased
personnel costs at NetWolves, and an increase in the professional
sales service segment of $413,000 to $13,842,000, from $13,429,000
for the corresponding period of the prior year, due to increased
personnel-related and shared marketing costs. SG&A costs in the
equipment segment for the nine months ended September 30, 2018
decreased $219,000 to $2,005,000, from $2,224,000 for the
corresponding period of the prior year, due primarily to lower
headcount and legal costs. Corporate costs not allocated to
segments decreased in the same period by $52,000 from $984,000, due
primarily to lower accounting and director fees.
Research and
development (“R&D”) expenses were $668,000, or 1%
of revenues, for the first nine months of 2018, a decrease of
$48,000, or 7%, from $716,000, or 1% of revenues, for the first
nine months 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)
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(2,895
)
|
$
(3,934
)
|
|
Interest
expense (income), net
|
507
|
494
|
|
Income
tax expense
|
71
|
314
|
|
Depreciation
and amortization
|
1,828
|
1,781
|
|
Share-based
compensation
|
266
|
417
|
|
|
$
(223
)
|
$
(928
)
|
Adjusted EBITDA
improved by $705,000, to $(223,000) in the nine months ended
September 30, 2018 from $(928,000) in the nine months ended
September 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 nine months ended September 30, 2018 was
$(204,000) as compared to $(451,000) 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.
Vaso Corporation
and Subsidiaries
Income Tax Expense
For the nine months
ended September 30, 2018, we recorded income tax expense of $71,000
as compared to income tax expense of $314,000 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 nine months ended September 30, 2018 was $2,895,000
compared to net loss of $3,934,000 for the nine months ended
September 30, 2017, representing a decrease in net loss of
$1,039,000. Our net loss per share was $0.02 in the nine-month
periods ended September 30, 2018 and 2017. The principal causes of
the decrease in net loss is the increase in operating income in the
professional sales service 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 lines of
credit. At September 30, 2018, we had cash and cash
equivalents of $2,979,000 and negative working capital of
$15,876,000 compared to cash and cash equivalents of $5,245,000 and
negative working capital of $8,217,000 at December 31,
2017. $8,524,000 in negative working capital at
September 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 $1,532,000, which consisted of net loss
after adjustments to reconcile net loss to net cash of $740,000 and
cash used by operating assets and liabilities of $792,000, during
the nine months ended September 30, 2018, compared to cash provided
by operating activities of $866,000 for the same period in 2017.
The changes in the account balances primarily reflect a decrease in
accounts and other receivables of $2,837,000, an increase in
accounts payable of $1,756,000, and decreases in deferred revenue
and accrued commissions of $6,114,000, and 1,264,000,
respectively.
Cash used in
investing activities during the nine-month period ended September
30, 2018 was $1,857,000 consisting of $2,168,000 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 nine-month period ended September
30, 2018 was $1,081,000 primarily as a result of $1,158,000 in net
borrowings on revolving lines of credit partially offset by $76,000
in net repayments of notes and capital leases issued for equipment
purchases.
Liquidity
At September 30,
2018 the Company had outstanding borrowings under its lines of
credit of approximately $4.6 million with availability of
approximately $1.4 million. These lines mature on
November 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. The Company has a conditional commitment to extend
$3.6 million of the MedTech Notes for one year through May 29,
2020. Additionally, management has established cost saving measures
that will be implemented, if necessary. 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.
Vaso Corporation
and Subsidiaries
ITEM
4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls
and procedures reporting as promulgated under the Exchange Act is
defined as controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and forms. Disclosure controls and procedures
include without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief
Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
Our
CEO and our CFO have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of September
30, 2018 and have concluded that the Company’s disclosure
controls and procedures were effective as of September 30,
2018.
Changes in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over
financial reporting during the Company’s fiscal quarter ended
September 30, 2018 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Vaso Corporation
and Subsidiaries