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, including the current COVID-19 pandemic which has already adversely affected operating results; the effect of the dramatic changes taking place in IT and healthcare; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; continuation of the GEHC agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.
Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vaso” or “management” refer to Vaso Corporation and its subsidiaries
General Overview
COVID-19 Pandemic
The COVID-19 pandemic has had and will continue to have a significant impact on the economy of the United States and the world, and it is anticipated that its negative impact to the Company’s financial condition and results of operations will continue. At this time, we cannot reasonably estimate what the total impact may be. The pandemic has resulted in workforce and travel restrictions and created business disruptions in supply chain, production and demand across many business sectors. For Vaso Corporation, we believe that significant uncertainty will continue to remain in all our businesses for the remainder of 2022 and beyond.
We have taken significant steps in our efforts to protect our workforce and our clients. Many of our employees have been working remotely and we are implementing plans to reopen our work sites consistent with the guidelines promulgated by the CDC and respective state governments. In addition, the Company received a $3.6 million loan under the Paycheck Protection Program of the CARES Act. This loan was used to principally cover our payroll costs for a period of time as specified by the rules, thereby allowing us to maintain our workforce and continue to provide services and solutions to our clients. In June 2021, the loan, as well as accrued interest, was forgiven in its entirety by the Small Business Administration.
Our Business Segments
Vaso Corporation (“Vaso”) was incorporated in Delaware in July 1987. We principally operate in three distinct business segments in the healthcare and information technology industries. We manage and evaluate our operations, and report our financial results, through these three business segments.
| · | IT segment, operating through a wholly-owned subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed network technology services; |
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| · | Professional sales service segment, operating through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the sale of healthcare capital equipment for GEHC into the healthcare provider middle market; and |
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| · | Equipment segment, operating through a wholly-owned subsidiary VasoMedical, Inc., primarily focuses on the design, manufacture, sale and service of proprietary medical devices. |
Vaso Corporation and Subsidiaries
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, 2021 as filed with the SEC on March 31, 2022.
Results of Operations – For the Three Months Ended June 30, 2022 and 2021
Revenues
Total revenue for the three months ended June 30, 2022 and 2021 was $19,502,000 and $16,131,000, respectively, representing an increase of $3,371,000, or 21% year-over-year. On a segment basis, revenue in the professional sales services segment increased $3,883,000 while revenue in the IT and equipment segments decreased $423,000 and $89,000, respectively.
Revenue in the IT segment for the three months ended June 30, 2022 was $10,019,000 compared to $10,442,000 for the three months ended June 30, 2021, a decrease of $423,000, or 4%, of which $481,000 resulted from lower NetWolves revenues, partially offset by $58,000 higher revenues in the healthcare IT business. Our monthly recurring revenue in the IT segment accounted for $9,075,000 or 91% of the segment revenue in the second quarter of 2022, and $9,246,000 or 89% of the segment revenue for the same quarter last year (see Note C).
Commission revenues in the professional sales service segment were $8,854,000 in the second quarter of 2022, an increase of $3,883,000, or 78%, as compared to $4,971,000 in the same quarter of 2021. The increase in commission revenues was due primarily to both an increase in the volume of underlying equipment delivered by GEHC during the period and a higher blended commission rate applicable to such deliveries. 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, 2022, $27,090,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $8,511,000 was long-term. As of June 30, 2021, $19,655,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $7,046,000 was long-term. The increase in deferred revenue is principally due to an increase in new orders booked.
Revenue in the equipment segment decreased by $89,000, or 12%, to $629,000 for the three-month period ended June 30, 2022 from $718,000 for the same period of the prior year, principally due to lower equipment revenues in China as impacted by the COVID-19 lockdown.
Gross Profit
Gross profit for the three months ended June 30, 2022 and 2021 was $11,336,000, or 58% of revenue, and $8,640,000, or 54% of revenue, respectively, representing an increase of $2,696,000, or 31% year-over-year. On a segment basis, gross profit in the professional sales service segment increased $3,204,000, or 81%, while gross profit in the IT and equipment segments decreased $417,000, or 10%; and $91,000, or 16%, respectively.
Vaso Corporation and Subsidiaries
IT segment gross profit for the three months ended June 30, 2022 was $3,677,000, or 37% of the segment revenue, compared to $4,094,000, or 39% of the segment revenue for the three months ended June 30, 2021. The year-over-year decrease of $417,000, or 10%, was primarily a result of lower sales volume in the NetWolves business, partially offset by higher sales volume and higher margin sales mix in the healthcare IT business.
Professional sales service segment gross profit was $7,180,000, or 81% of segment revenue, for the three months ended June 30, 2022 as compared to $3,976,000, or 80% of the segment revenue, for the three months ended June 30, 2021, reflecting an increase of $3,204,000, or 81%. The increase in absolute dollars was primarily due to higher commission revenue as a result of a higher blended commission rate and higher volume of GEHC equipment delivered during the second quarter of 2022 than in the same period last year. Cost of commissions in the professional sales service segment of $1,674,000 and $995,000, for the three months ended June 30, 2022 and 2021, 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 $479,000, or 76% of segment revenues, for the second quarter of 2022 compared to $570,000, or 79% of segment revenues, for the same quarter of 2021. The $91,000, or 16%, decrease in gross profit was the result of lower equipment revenue during the quarter compounded with higher material and labor costs.
Operating Income (Loss)
Operating income (loss) for the three months ended June 30, 2022 and 2021 was $1,562,000 and $(722,000), respectively, representing an increase of $2,284,000, due primarily to the increase in gross profit. On a segment basis, the IT segment recorded an operating loss of $918,000 in the second quarter of 2022 as compared to an operating loss of $246,000 in the same period of 2021; the equipment segment recorded an operating loss of $77,000 in the second quarter of 2022 as compared to an operating loss of $128,000 in the same period of 2021; and the professional sales service segment recorded operating income of $2,754,000 in the second quarter of 2022 as opposed to an operating loss of $47,000 in the same period of 2021.
Operating loss in the IT segment increased to $918,000 for the three-month period ended June 30, 2022 as compared to an operating loss of $246,000 in the same period of 2021, due to lower gross profit and higher selling, general, and administrative (“SG&A”) costs. Operating income in the professional sales service segment increased by $2,801,000 to $2,754,000 in the three-month period ended June 30, 2022 as compared to a $47,000 operating loss in the same period of 2021, due to higher gross profit partially offset by higher SG&A costs. The equipment segment reported an operating loss of $77,000 in the second quarter of 2022, compared to an operating loss of $128,000 in the second quarter 2021, an improvement of $51,000. The decrease in operating loss was due to lower SG&A and R&D costs partially offset by lower gross profit.
SG&A costs for the three months ended June 30, 2022 and 2021 were $9,604,000 and $9,192,000, respectively, representing an increase of $412,000, or 5% year-over-year. On a segment basis, SG&A costs in the IT segment increased by $257,000 in the second quarter of 2022 from the same quarter of the prior year due to higher personnel costs; SG&A costs in the professional sales service segment increased $403,000 due mainly to higher travel and personnel costs; and SG&A costs in the equipment segment decreased $142,000 due mainly to lower marketing and personnel costs. Corporate costs not allocated to segments decreased $106,000 due mainly to lower accounting and director fees.
Research and development (“R&D”) expenses were $170,000, or 1% of revenues, for the second quarters of both 2021 and 2022.
Vaso Corporation and Subsidiaries
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, | |
| | 2022 | | | 2021 | |
| | (unaudited) | | | (unaudited) | |
Net income | | $ | 1,495 | | | $ | 2,780 | |
Interest expense (income), net | | | 5 | | | | 78 | |
Income tax expense | | | 18 | | | | 50 | |
Depreciation and amortization | | | 805 | | | | 528 | |
Share-based compensation | | | 6 | | | | 8 | |
Adjusted EBITDA | | $ | 2,329 | | | $ | 3,444 | |
Adjusted EBITDA decreased by $1,115,000, to $2,329,000 in the quarter ended June 30, 2022 from $3,444,000 in the quarter ended June 30, 2021. The decrease was attributable mainly to the decrease in net income arising from the non-recurring $3,646,000 gain on forgiveness of the PPP loan and interest in the second quarter of 2021, partially offset by the increase in depreciation and amortization.
Interest and Other Income (Expense)
Interest and other income (expense) for the three months ended June 30, 2022 was $(49,000) as compared to $3,552,000 for the corresponding period of 2021. The decrease in interest and other income (expense) was due primarily to the non-recurring $3,646,000 gain on forgiveness of the PPP loan and interest in the three months ended June 30, 2021.
Income Tax Expense
For the three months ended June 30, 2022, we recorded income tax expense of $18,000 as compared to $50,000 for the corresponding period of 2021. The $32,000 decrease arose mainly from lower tax expense in our China operations.
Net Income
Net income for the three months ended June 30, 2022 was $1,495,000 as compared to net income of $2,780,000 for the three months ended June 30, 2021, representing a decrease of $1,285,000. Income per share of $0.01 and $0.02 was recorded in the three-month periods ended June 30, 2022 and 2021, respectively. The principal cause of the decrease in net income is because the Company recorded the PPP loan forgiveness in the three months ended June 30, 2021, partially offset by higher operating income in the current year quarter.
Vaso Corporation and Subsidiaries
Results of Operations – For the Six Months Ended June 30, 2022 and 2021
Revenues
Total revenue for the six months ended June 30, 2022 and 2021 was $36,512,000 and $32,651,000, respectively, representing an increase of $3,861,000, or 12% year-over-year. On a segment basis, revenue in the professional sales service segment increased $5,835,000 while revenue in the IT and equipment segments decreased $1,674,000 and $300,000, respectively.
Revenue in the IT segment for the six months ended June 30, 2022 was $20,022,000 compared to $21,696,000 for the six months ended June 30, 2021, a decrease of $1,674,000, or 8%, of which $1,572,000 resulted from lower NetWolves revenue and $102,000 from lower healthcare IT revenue. Our monthly recurring revenue in the IT segment accounted for $18,309,000 or 91% of the segment revenue in the first half of 2022, and $19,271,000 or 89% of the segment revenue for the same period last year (see Note C).
Commission revenues in the professional sales service segment were $15,461,000 in the first half of 2022, an increase of $5,835,000, or 61%, as compared to $9,626,000 in the first half of 2021. The increase in commission revenues was due primarily to both an increase in the volume of underlying equipment delivered by GEHC during the period and a higher blended commission rate applicable to such deliveries. 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, 2022, $27,090,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $8,511,000 was long-term. As of June 30, 2021, $19,655,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $7,046,000 was long-term. The increase in deferred revenue is principally due to an increase in new orders booked.
Revenue in the equipment segment decreased by $300,000, or 23%, to $1,029,000 for the six-month period ended June 30, 2022 from $1,329,000 for the same period of the prior year, principally due to lower equipment deliveries in our China operations.
Gross Profit
Gross profit for the six months ended June 30, 2022 and 2021 was $21,105,000, or 58% of revenue, and $17,200,000, or 53% of revenue, respectively, representing an increase of $3,905,000, or 23% year-over-year. On a segment basis, gross profit in the professional sales service increased $4,845,000, or 63%, while gross profit in the IT and equipment segments decreased $690,000, or 8%, and $250,000, or 24%, respectively.
IT segment gross profit for the six months ended June 30, 2022 was $7,811,000, or 39% of the segment revenue, compared to $8,501,000, or 39% of the segment revenue for the six months ended June 30, 2021. The year-over-year decrease of $690,000, or 8%, was primarily a result of lower revenues at NetWolves, partially offset by higher margin sales mix in the healthcare IT business.
Professional sales service segment gross profit was $12,486,000, or 81% of segment revenue, for the six months ended June 30, 2022 as compared to $7,641,000, or 79% of the segment revenue, for the six months ended June 30, 2021, reflecting an increase of $4,845,000, or 63%. The increase in absolute dollars was primarily due to higher commission revenue as a result of a higher blended commission rate and higher volume of GEHC equipment delivered during the first half of 2022 than in the same period last year. Cost of commissions in the professional sales service segment of $2,975,000 and $1,985,000, for the six months ended June 30, 2022 and 2021, 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 $808,000, or 79% of segment revenues, for the first half of 2022 compared to $1,058,000, or 80% of segment revenues, for the same half of 2021. The $250,000, or 24%, decrease in gross profit was primarily the result of a decrease in equipment sales and an increase in material and labor costs in our China operations during the first half of 2022.
Vaso Corporation and Subsidiaries
Operating Income (Loss)
Operating income (loss) for the six months ended June 30, 2022 and 2021 was $1,207,000 and $(1,262,000), respectively, representing an improvement of $2,469,000, due primarily to higher gross profit, partially offset by higher SG&A costs. On a segment basis, the IT segment recorded an operating loss of $1,057,000 in the first half of 2022 as compared to an operating loss of $179,000 in the same period of 2021; the professional sales service segment recorded operating income of $2,990,000 in the first half of 2022 as compared to an operating loss of $382,000 in the same period of 2021; and the equipment segment recorded an operating loss of $156,000 in the first half of 2022 as compared to an operating loss of $115,000 in the same period of 2021 .
Operating loss in the IT segment increased to $1,057,000 for the six-month period ended June 30, 2022 as compared to an operating loss of $179,000 in the same period of 2021, due to lower gross profit and higher selling, general, and administrative (“SG&A”) costs. The professional sales service segment reported operating income of $2,990,00 in the first half of 2022, an increase of $3,372,000 from an operating loss of $382,000 in the six-month period ended June 30, 2021, due to higher gross profit partially offset by higher SG&A costs. The equipment segment reported an operating loss of $156,000 in the first half of 2022, compared to an operating loss of $115,000 in the first half 2021, an increase of $41,000 due to lower gross profit, partially offset offset by lower SG&A costs.
SG&A costs for the six months ended June 30, 2022 and 2021 were $19,606,000 and $18,148,000, respectively, representing an increase of $1,458,000, or 8% year-over-year. On a segment basis, SG&A costs in the IT segment increased by $243,000 in the first half of 2022 from the same half of the prior year due to higher personnel costs; SG&A costs in the professional sales service segment increased by $1,472,000 due to higher travel and personnel costs; and SG&A costs in the equipment segment decreased by $240,000 due mainly to lower personnel costs. Corporate costs not allocated to segments decreased $17,000 due mainly to lower accounting and director fees.
Research and development (“R&D”) expenses were $292,000, or 1% of revenues, for the first half of 2022, a decrease of $22,000, or 7%, from $314,000, or 1% of revenues, for the first half of 2021. The decrease is primarily attributable to lower product 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.
Vaso Corporation and Subsidiaries
A reconciliation of net income to Adjusted EBITDA is set forth below:
| | (in thousands) | |
| | Six months ended June 30, | |
| | 2022 | | | 2021 | |
| | (unaudited) | | | (unaudited) | |
Net income | | $ | 1,151 | | | $ | 2,137 | |
Interest expense (income), net | | | 24 | | | | 199 | |
Income tax expense | | | 30 | | | | 68 | |
Depreciation and amortization | | | 1,258 | | | | 1,124 | |
Share-based compensation | | | 13 | | | | 17 | |
Adjusted EBITDA | | $ | 2,476 | | | $ | 3,545 | |
Adjusted EBITDA decreased by $1,069,000 to $2,476,000 in the period ended June 30, 2022 from $3,545,000 in the period ended June 30, 2021. The decrease was primarily attributable to the $3,646,000 non-recurring gain on PPP loan and interest forgiveness in the six months ended June 30, 2021, partially offset by higher depreciation and amortization.
Interest and Other Income (Expense)
Interest and other income (expense) for the six months ended June 30, 2022 was $(26,000) as compared to $3,467,000 for the corresponding period of 2021. The decrease in interest and other income was due primarily to the PPP loan and interest forgiveness in the six months ended June 30, 2021.
Income Tax Expense
We recorded income tax expense of $30,000 and $68,000 for the six-month periods ended June 30, 2022 and 2021, respectively. The decrease arose mainly from lower tax expense in our China operations.
Net Income
Net income for the six months ended June 30, 2022 was $1,151,000 as compared to net income of $2,137,000 for the six months ended June 30, 2021, representing a decrease of $986,000, or 46%. Income per share of $0.01 was recorded in the six-month periods ended June 30, 2022 and 2021, respectively. The principal cause of the decrease in net income is the PPP loan forgiveness in the six months ended June 30, 2021, partially offset by higher operating results in the six months ended June 30, 2022.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations from working capital. At June 30, 2022, we had cash and cash equivalents of $15,436,000 and negative working capital of $1,483,000, compared to cash and cash equivalents of $6,025,000 and negative working capital of $3,197,000 at December 31, 2021. $15,007,000 in negative working capital at June 30, 2022 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.
Vaso Corporation and Subsidiaries
Cash provided by operating activities was $9,731,000, which consisted of net income after adjustments to reconcile net income to net cash of $2,634,000 and cash provided by operating assets and liabilities of $7,097,000, during the six months ended June 30, 2022, compared to cash provided by operating activities of $5,593,000 for the same period in 2021. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $8,376,000 and an increase in deferred revenue of $2,132,000, partially offset by decreases in accrued commissions, accrued expenses, and accounts payable of $1,040,000, $941,000 and $628,000, respectively.
Cash used in investing activities during the six-month period ended June 30, 2022 was $204,000 attributed to $358,000 used for the purchase of equipment and software, offset by the redemption of $154,000 in short-term investments.
Cash used in financing activities during the six-month period ended June 30, 2022 was $125,000 for the repayment of notes payable and finance lease obligations.
Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy its obligations for at least the next twelve months.
It is anticipated that the COVID-19 pandemic may continue to adversely impact our operations during and beyond the remaining quarters of 2022, depending on the duration of the pandemic and the timing and success of the continued reopening of the economy.
Vaso Corporation and Subsidiaries