VASO CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2019
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to
______________
Commission
File Number: 0-18105
VASO CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
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11-2871434
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|
(State or other
jurisdiction of
incorporation or
organization)
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(IRS Employer
Identification Number)
|
137 Commercial
St., Suite 200, Plainview, New York 11803
(Address
of principal executive offices)
Registrant’s
Telephone Number (516) 997-4600
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes
[X]
No
[
]
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes
[X]
No
[ ]
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
"large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
Large
Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [
X ] Smaller Reporting Company [X]
Emerging
Growth Company [ ]
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ]
No
[X]
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol
|
Name
of each exchange on which registered
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Common
Stock
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VASO
|
OTC:PK
|
Number
of Shares Outstanding of Common Stock, $.001 Par Value, at May 9,
2019 – 167,134,200
Vaso Corporation and Subsidiaries
INDEX
PART I
– FINANCIAL INFORMATION
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
ASSETS
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|
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|
CURRENT
ASSETS
|
|
|
|
Cash and cash
equivalents
|
$
2,087
|
$
2,668
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|
Accounts and other
receivables, net of an allowance for doubtful
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accounts and
commission adjustments of $3,993 at March 31,
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2019 and $3,994 at
December 31, 2018
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7,414
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11,028
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Receivables due
from related parties
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20
|
20
|
|
Inventories,
net
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2,089
|
1,983
|
|
Deferred commission
expense
|
2,624
|
2,585
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Prepaid expenses
and other current assets
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989
|
890
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Total current
assets
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15,223
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19,174
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|
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PROPERTY AND
EQUIPMENT, net of accumulated depreciation of
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$6,813 at March 31,
2019 and $6,370 at December 31, 2018
|
5,658
|
5,809
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OPERATING LEASE
RIGHT OF USE ASSETS
|
1,011
|
-
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GOODWILL
|
17,381
|
17,309
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INTANGIBLES,
net
|
4,634
|
4,740
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OTHER ASSETS,
net
|
2,802
|
3,067
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DEFERRED TAX
ASSETS, net
|
375
|
375
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|
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$
47,084
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$
50,474
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LIABILITIES AND
STOCKHOLDERS' EQUITY
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CURRENT
LIABILITIES
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Accounts
payable
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$
6,229
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$
6,284
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Accrued
commissions
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965
|
2,116
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Accrued expenses
and other liabilities
|
4,881
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5,655
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Finance lease
liabilities - current
|
155
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188
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Operating lease
liabilities - current
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657
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-
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Sales tax
payable
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928
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1,020
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Deferred revenue -
current portion
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11,026
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10,382
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Notes payable -
current portion
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9,550
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9,116
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Notes payable -
related parties - current portion
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985
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582
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Due to related
party
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10
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10
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Total current
liabilities
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35,386
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35,353
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LONG-TERM
LIABILITIES
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Notes payable -
related parties, net of current portion
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-
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245
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Finance lease
liabilities, net of current portion
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372
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400
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Operating lease
liabilities, net of current portion
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354
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-
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Deferred revenue,
net of current portion
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6,906
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7,704
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Deferred tax
liability
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124
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124
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Other long-term
liabilities
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999
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1,037
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Total long-term
liabilities
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8,755
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9,510
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COMMITMENTS AND
CONTINGENCIES (NOTE P)
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STOCKHOLDERS'
EQUITY
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Preferred stock,
$.01 par value; 1,000,000 shares authorized; nil
shares
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issued and
outstanding at March 31, 2019 and December 31, 2018
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-
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-
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Common stock, $.001
par value; 250,000,000 shares authorized;
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177,417,287 shares
issued at March 31, 2019 and December 31, 2018;
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167,109,200 shares
outstanding at March 31, 2019 and December 31, 2018
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178
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178
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Additional paid-in
capital
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63,716
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63,672
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Accumulated
deficit
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(58,773
)
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(55,924
)
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Accumulated other
comprehensive loss
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(178
)
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(315
)
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Treasury stock, at
cost, 10,308,087 shares at March 31, 2019 and December 31,
2018
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(2,000
)
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(2,000
)
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Total
stockholders’ equity
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2,943
|
5,611
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$
47,084
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$
50,474
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
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Three
months ended
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March
31,
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2019
|
2018
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Revenues
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Managed IT systems
and services
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$
11,327
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$
11,413
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Professional sales
services
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3,415
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5,211
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Equipment sales
and services
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782
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913
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Total
revenues
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15,524
|
17,537
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Cost of
revenues
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Cost of managed IT
systems and services
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6,601
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6,499
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Cost of
professional sales services
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730
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1,058
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Cost of equipment
sales and services
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307
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359
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Total cost of
revenues
|
7,638
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7,916
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Gross
profit
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7,886
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9,621
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Operating
expenses
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Selling, general
and administrative
|
10,341
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11,548
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Research and
development
|
200
|
187
|
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Total operating
expenses
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10,541
|
11,735
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Operating
loss
|
(2,655
)
|
(2,114
)
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Other (expense)
income
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|
|
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Interest and
financing costs
|
(225
)
|
(171
)
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Interest and other
income, net
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42
|
24
|
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Gain on sale of
investment in VSK
|
-
|
212
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Total other
(expense) income, net
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(183
)
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65
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Loss before income
taxes
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(2,838
)
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(2,049
)
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Income tax
expense
|
(11
)
|
(20
)
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Net
loss
|
(2,849
)
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(2,069
)
|
|
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Other
comprehensive loss
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Foreign currency
translation gain
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137
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184
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Comprehensive
loss
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$
(2,712
)
|
$
(1,885
)
|
|
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Loss per common
share
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- basic and
diluted
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$
(0.02
)
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$
(0.01
)
|
|
|
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Weighted average
common shares outstanding
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|
|
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- basic and
diluted
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166,859
|
163,895
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The accompanying notes are an integral part of these unaudited
condensed
consolidated
financial statements.
4
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(in thousands)
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Accumulated
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Other
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Total
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Common
Stock
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Treasury
Stock
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Additional
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Accumulated
|
Comprehensive
|
Stockholders’
|
||
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Shares
|
Amount
|
Shares
|
Amount
|
Paid-in-Capital
|
Deficit
|
Loss
|
Equity
|
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Balance
at January 1, 2018
|
175,742
|
$
176
|
(10,308
)
|
$
(2,000
)
|
$
63,363
|
$
(52,329
)
|
$
(58
)
|
$
9,152
|
|
Share-based
compensation
|
167
|
-
|
-
|
-
|
141
|
-
|
-
|
141
|
|
Adoption
of new accounting standard (*)
|
-
|
-
|
-
|
-
|
-
|
139
|
-
|
139
|
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
184
|
184
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,069
)
|
-
|
(2,069
)
|
|
Balance
at March 31, 2018 (unaudited)
|
175,909
|
$
176
|
(10,308
)
|
$
(2,000
)
|
$
63,504
|
$
(54,259
)
|
$
126
|
$
7,547
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2019
|
177,417
|
$
178
|
(10,308
)
|
(2,000
)
|
$
63,672
|
$
(55,924
)
|
$
(315
)
|
$
5,611
|
|
Share-based
compensation
|
-
|
-
|
-
|
-
|
44
|
-
|
-
|
44
|
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
137
|
137
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,849
)
|
-
|
(2,849
)
|
|
Balance
at March 31, 2019 (unaudited)
|
177,417
|
$
178
|
(10,308
)
|
$
(2,000
)
|
$
63,716
|
$
(58,773
)
|
$
(178
)
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$
2,943
|
(*)
Accounting Standards Codification
Topic 606,
Revenue from Contracts with Customers
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
Vaso Corporation and Subsidiaries
C
ONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
(in thousands)
|
|
Three months
ended
|
|
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|
March
31,
|
|
|
|
2019
|
2018
|
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Cash flows from
operating activities
|
|
|
|
Net
loss
|
$
(2,849
)
|
$
(2,069
)
|
|
Adjustments to
reconcile net loss to net
|
|
|
|
cash
used in operating activities
|
|
|
|
Depreciation and
amortization
|
675
|
595
|
|
Loss from interest
in joint venture
|
-
|
9
|
|
Gain on sale of
investment in VSK
|
-
|
(212
)
|
|
Provision for
doubtful accounts and commission adjustments
|
90
|
63
|
|
Amortization of
debt issue costs
|
8
|
8
|
|
Share-based
compensation
|
44
|
141
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts and other
receivables
|
3,530
|
4,040
|
|
Inventories,
net
|
(86
)
|
326
|
|
Deferred commission
expense
|
(39
)
|
210
|
|
Prepaid expenses
and other current assets
|
(96
)
|
163
|
|
Other assets,
net
|
306
|
549
|
|
Accounts
payable
|
(57
)
|
(1,828
)
|
|
Accrued
commissions
|
(1,084
)
|
(541
)
|
|
Accrued expenses
and other liabilities
|
(860
)
|
(122
)
|
|
Sales tax
payable
|
(95
)
|
72
|
|
Deferred
revenue
|
(154
)
|
(1,772
)
|
|
Other long-term
liabilities
|
(38
)
|
(152
)
|
|
Net cash used in
operating activities
|
(705
)
|
(520
)
|
|
|
|
|
|
Cash flows from
investing activities
|
|
|
|
Purchases of
equipment and software
|
(410
)
|
(279
)
|
|
Net cash used in
investing activities
|
(410
)
|
(279
)
|
|
|
|
|
|
Cash flows from
financing activities
|
|
|
|
Net borrowings on
revolving lines of credit
|
425
|
1,437
|
|
Repayment of
capital lease obligations
|
-
|
(46
)
|
|
Repayment of notes
payable and finance lease obligations
|
(64
)
|
-
|
|
Proceeds from notes
payable - related parties
|
650
|
-
|
|
Repayment of notes
payable - related parties
|
(500
)
|
-
|
|
Net cash provided
by financing activities
|
511
|
1,391
|
|
Effect of exchange
rate differences on cash and cash equivalents
|
23
|
3
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(581
)
|
595
|
|
Cash and cash
equivalents - beginning of period
|
2,668
|
5,245
|
|
Cash and cash
equivalents - end of period
|
$
2,087
|
$
5,840
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH INFORMATION
|
|
|
|
Interest
paid
|
$
215
|
$
156
|
|
Income taxes
paid
|
$
-
|
$
-
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
Initial recognition
of operating lease right of use asset and liability
|
$
1,107
|
$
-
|
|
Sale of investment
in VSK
|
$
-
|
$
676
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
N
OTES 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
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
IT).
●
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.
7
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
VasoHealthcare’s
current offerings consist of:
●
GEHC diagnostic
imaging capital equipment.
●
GEHC service
agreements for the above equipment.
●
GEHC training
services for use of the above equipment.
●
GEHC and third
party financial services.
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 for cardiovascular monitoring, diagnostic and therapeutic
systems. Its current offerings consist of:
●
Biox™ series
Holter monitors and ambulatory blood pressure
recorders.
●
ARCS
®
series
analysis, reporting and communication software for physiological
signals such as ECG and blood pressure.
●
MobiCare™
multi-parameter wireless vital-sign monitoring system.
●
EECP
®
therapy system
for non-invasive, outpatient treatment of ischemic heart
disease.
This
segment uses its extensive cardiovascular device knowledge coupled
with its significant engineering resources to cost-effectively
create and market its proprietary technology. It works with a
global distribution network of channel partners to sell its
products. It also provides engineering and OEM services to other
medical device companies.
Going concern Assessment
We
have incurred net losses from operations for the three months ended
March 31, 2019, and the years ended December 31, 2018 and 2017, and
we maintain lines of credit from a lending institution and these
lines of credit will require further extensions after their current
June 28, 2019 maturity date and notes payable which mature within
the next twelve months. These events raise substantial doubt about
our ability to continue as a going concern. Our ability to continue
operating as a going concern is dependent upon achieving
profitability, extending the maturity date of our existing lines of
credit, or through additional debt or equity financing. Achieving
profitability is largely dependent on our ability to reduce
operating costs and to maintain or increase our current revenue.
While we believe we will continue to maintain or increase our gross
revenue and are substantially reducing operating costs, and while
historically we have received extensions of the maturity dates of
our lines of credit, failure to achieve these objectives could cast
doubt on our ability to continue as a going concern.
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") for interim
financial information. 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 conjunction 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, 2018, as filed with the SEC on April 15,
2019.
8
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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.
Significant Accounting Policies and Recent Accounting
Pronouncements
Recently Adopted Accounting Pronouncements
Effective January
1, 2019, the Company adopted Accounting Standards Codification
(“ASC”) Topic 842, "Leases." See Note N for further
details.
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform
with the current period presentation.
NOTE C
– REVENUE RECOGNITION
Disaggregation of Revenue
The
following tables present revenues disaggregated by our business
operations and timing of revenue recognition:
9
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
(in thousands)
|
|||||||
|
|
Three Months
Ended March 31, 2019 (unaudited)
|
Three Months
Ended March 31, 2018 (unaudited)
|
||||||
|
|
|
Professional
sales
|
Equipment
|
|
|
Professional
sales
|
Equipment
|
|
|
|
IT
segment
|
service
segment
|
segment
|
Total
|
IT
segment
|
service
segment
|
segment
|
Total
|
|
Network
services
|
$
10,118
|
|
|
$
10,118
|
$
10,211
|
|
|
$
10,211
|
|
Software sales and
support
|
1,209
|
|
|
1,209
|
1,202
|
|
|
1,202
|
|
Commissions
|
|
3,415
|
|
3,415
|
|
5,211
|
|
5,211
|
|
Medical equipment
sales
|
|
|
494
|
494
|
|
|
631
|
631
|
|
Medical equipment
service
|
|
|
288
|
288
|
|
|
282
|
282
|
|
|
$
11,327
|
$
3,415
|
$
782
|
$
15,524
|
$
11,413
|
$
5,211
|
$
913
|
$
17,537
|
|
|
Three Months Ended March 31, 2019 (unaudited)
|
Three Months Ended March 31, 2018 (unaudited)
|
||||||
|
|
|
Professional sales
|
Equipment
|
|
|
Professional sales
|
Equipment
|
|
|
|
IT segment
|
service segment
|
segment
|
Total
|
IT segment
|
service segment
|
segment
|
Total
|
|
Revenue
recognized over time
|
$
9,955
|
$
-
|
$
148
|
$
10,103
|
$
10,090
|
$
-
|
$
173
|
$
10,263
|
|
Revenue
recognized at a point in time
|
1,372
|
3,415
|
634
|
5,421
|
1,323
|
5,211
|
740
|
7,274
|
|
|
$
11,327
|
$
3,415
|
$
782
|
$
15,524
|
$
11,413
|
$
5,211
|
$
913
|
$
17,537
|
Transaction Price Allocated to Remaining Performance
Obligations
As of
March 31, 2019, the aggregate amount of transaction price allocated
to performance obligations that are unsatisfied (or partially
unsatisfied) for executed contracts approximates $82.8 million, of
which we expect to recognize revenue as follows:
|
|
Fiscal years of revenue recognition
|
|||
|
|
remainder of 2019
|
2020
|
2021
|
Thereafter
|
|
Unfulfilled
performance obligations
|
$
34,995
|
$
29,816
|
$
10,652
|
$
7,345
|
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 $314,000 and $344,000 at
March 31, 2019 and December 31, 2018, 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 $17,015,000 and $17,098,000 at March 31,
2019 and December 31, 2018, respectively, and are classified in our
condensed consolidated balance sheets as either current or
long-term deferred revenue. In addition, we record a contract
liability for amounts expected to be repaid to GEHC due to customer
order reductions. Such amounts aggregated approximately $2,020,000
and $2,315,000 at March 31, 2019 and December 31, 2018,
respectively, and are included in accrued expenses and other
liabilities in our condensed consolidated balance
sheets.
10
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In our
VasoMedical business, we bill amounts for post-delivery services
and varying duration service contracts in advance of performance.
Such amounts aggregated approximately $917,000 and $988,000 at
March 31, 2019 and December 31, 2018, respectively, and are
classified in our condensed consolidated balance sheets as either
current or long-term deferred revenue.
During
the three months ended March 31, 2019, we recognized approximately
$1.4 million of revenues that were included in our contract
liability balance at the beginning of such period.
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
●
Professional sales
service segment
●
Equipment
segment
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:
11
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
(in thousands)
|
|
|
|
Three months
ended March 31,
|
|
|
|
2019
|
2018
|
|
|
(unaudited)
|
(unaudited)
|
|
Revenues from
external customers
|
|
|
|
IT
|
$
11,327
|
$
11,413
|
|
Professional sales
service
|
3,415
|
5,211
|
|
Equipment
|
782
|
913
|
|
Total
revenues
|
$
15,524
|
$
17,537
|
|
|
|
|
|
Gross
Profit
|
|
|
|
IT
|
$
4,726
|
$
4,914
|
|
Professional sales
service
|
2,685
|
4,153
|
|
Equipment
|
475
|
554
|
|
Total gross
profit
|
$
7,886
|
$
9,621
|
|
|
|
|
|
Operating
loss
|
|
|
|
IT
|
$
(343
)
|
$
(435
)
|
|
Professional sales
service
|
(1,643
)
|
(1,054
)
|
|
Equipment
|
(308
)
|
(228
)
|
|
Corporate
|
(361
)
|
(397
)
|
|
Total operating
loss
|
$
(2,655
)
|
$
(2,114
)
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
IT
|
$
559
|
$
447
|
|
Professional sales
service
|
45
|
44
|
|
Equipment
|
71
|
102
|
|
Corporate
|
-
|
2
|
|
Total depreciation
and amortization
|
$
675
|
$
595
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
IT
|
$
391
|
$
258
|
|
Professional sales
service
|
-
|
-
|
|
Equipment
|
19
|
18
|
|
Corporate
|
-
|
3
|
|
Total cash capital
expenditures
|
$
410
|
$
279
|
|
|
(in thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Identifiable
Assets
|
|
|
|
IT
|
$
29,625
|
$
28,785
|
|
Professional sales
service
|
7,672
|
12,193
|
|
Equipment
|
7,094
|
6,992
|
|
Corporate
|
2,693
|
2,504
|
|
Total
assets
|
$
47,084
|
$
50,474
|
12
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
GE
Healthcare accounted for 22% and 30% of revenue for the three
months ended March 31, 2019 and 2018, respectively. GE Healthcare
also accounted for $2.5 million or 33%, and $7.2 million or 66%, of
accounts and other receivables at March 31, 2019 and December 31,
2018, respectively.
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 months ended March 31, 2019 and 2018, because the effect of
their inclusion would be anti-dilutive.
|
|
(in thousands)
|
|
|
|
Three months
ended March 31,
|
|
|
|
2019
|
2018
|
|
|
(unaudited)
|
(unaudited)
|
|
Restricted common
stock grants
|
2,388
|
4,762
|
NOTE F
– ACCOUNTS AND OTHER RECEIVABLES, NET
The
following table presents information regarding the Company’s
accounts and other receivables as of March 31, 2019 and December
31, 2018:
|
|
(in
thousands)
|
|
|
|
March
31,
2019
|
December
31,
2018
|
|
|
(unaudited)
|
|
|
Trade
receivables
|
$
11,036
|
$
15,016
|
|
Unbilled
receivables
|
365
|
-
|
|
Due from
employees
|
6
|
6
|
|
Allowance for
doubtful accounts and
|
|
|
|
commission
adjustments
|
(3,993
)
|
(3,994
)
|
|
Accounts and other
receivables, net
|
$
7,414
|
$
11,028
|
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.
13
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)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Raw
materials
|
$
657
|
$
577
|
|
Work in
process
|
374
|
388
|
|
Finished
goods
|
1,058
|
1,018
|
|
|
$
2,089
|
$
1,983
|
At
March 31, 2019 and December 31, 2018, the Company maintained
reserves for slow moving inventories of $636,000.
NOTE H
– PROPERTY AND EQUIPMENT
|
|
(
in
thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Office, laboratory
and other equipment
|
$
3,108
|
$
3,885
|
|
Equipment furnished
for customer
|
|
|
|
or clinical
uses
|
8,321
|
8,167
|
|
Right of use assets
- finance leases
|
915
|
-
|
|
Furniture and
fixtures
|
127
|
127
|
|
|
12,471
|
12,179
|
|
Less: accumulated
depreciation and amortization
|
(6,813
)
|
(6,370
)
|
|
Property
and equipment, net
|
$
5,658
|
$
5,809
|
Assets
under capital lease comprised approximately $855,000 of the office,
laboratory and other equipment asset class and approximately
$60,000 of the equipment furnished for customer or clinical use
asset class at December 31, 2018. In January 2019, the Company
adopted Accounting Standards Codification (“ASC”) 842,
“Leases” (See Note N) and classifies the assets arising
from such leases as “right of use asset - finance
leases”.
NOTE I
– GOODWILL AND OTHER INTANGIBLES
Goodwill of
$14,375,000 is attributable to the NetWolves reporting unit within
the IT segment. The remaining $3,006,000 of goodwill is
attributable to the FGE reporting unit within the Equipment
segment. The NetWolves and FGE reporting units had negative net
asset carrying amounts at March 31, 2019 and December 31, 2018. The
changes in the carrying amount of goodwill are as
follows:
|
|
(in thousands)
|
|
|
|
Three months
ended
|
Year
ended
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Beginning of
period
|
$
17,309
|
$
17,471
|
|
Foreign currency
translation adjustment
|
72
|
(162
)
|
|
End of
period
|
$
17,381
|
$
17,309
|
14
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)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Customer-related
|
|
|
|
Costs
|
$
5,831
|
$
5,831
|
|
Accumulated
amortization
|
(3,201
)
|
(3,083
)
|
|
|
2,630
|
2,748
|
|
|
|
|
|
Patents and
Technology
|
|
|
|
Costs
|
2,363
|
2,363
|
|
Accumulated
amortization
|
(1,586
)
|
(1,532
)
|
|
|
777
|
831
|
|
|
|
|
|
Software
|
|
|
|
Costs
|
2,472
|
2,346
|
|
Accumulated
amortization
|
(1,245
)
|
(1,185
)
|
|
|
1,227
|
1,161
|
|
|
|
|
|
|
$
4,634
|
$
4,740
|
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 $232,000 and $256,000 for the three months
ended March 31, 2019 and 2018, respectively.
15
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Amortization of
intangibles for the next five years is:
|
|
(in
thousands)
|
|
Years ending
December 31,
|
(unaudited)
|
|
Remainder of
2019
|
807
|
|
2020
|
966
|
|
2021
|
891
|
|
2022
|
594
|
|
2023
|
336
|
|
|
$
3,594
|
NOTE J
– OTHER ASSETS, NET
Other
assets, net consist of the following at March 31, 2019 and December
31, 2018:
|
|
(in thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Deferred commission
expense - noncurrent
|
$
1,768
|
$
1,978
|
|
Trade receivables -
noncurrent
|
670
|
630
|
|
Other, net of
allowance for loss on loan receivable of
|
|
|
|
$412 at
March 31, 2019 and December 31, 2018
|
364
|
459
|
|
|
$
2,802
|
$
3,067
|
NOTE K
– ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses
and other liabilities consist of the following at March 31, 2019
and December 31, 2018:
|
|
(in
thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Accrued
compensation
|
$
602
|
$
648
|
|
Accrued expenses -
other
|
1,651
|
2,092
|
|
Other
liabilities
|
2,629
|
2,915
|
|
|
$
4,881
|
$
5,655
|
16
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE L
- DEFERRED REVENUE
The
changes in the Company’s deferred revenues are as
follows:
|
|
(in
thousands)
|
|
|
|
Three months
ended March 31,
|
|
|
|
2019
|
2018
|
|
|
(unaudited)
|
(unaudited)
|
|
Deferred revenue at
beginning of period
|
$
18,086
|
$
23,066
|
|
Net
additions:
|
|
|
|
Deferred extended
service contracts
|
70
|
192
|
|
Deferred in-service
and training
|
5
|
-
|
|
Deferred service
arrangements
|
10
|
-
|
|
Deferred commission
revenues
|
1,336
|
462
|
|
Recognized as
revenue:
|
|
|
|
Deferred extended
service contracts
|
(143
)
|
(161
)
|
|
Deferred in-service
and training
|
(8
)
|
(3
)
|
|
Deferred service
arrangements
|
(5
)
|
(12
)
|
|
Deferred commission
revenues
|
(1,419
)
|
(2,249
)
|
|
Deferred revenue at
end of period
|
17,932
|
21,295
|
|
Less: current
portion
|
11,026
|
15,607
|
|
Long-term deferred
revenue at end of period
|
$
6,906
|
$
5,688
|
NOTE M
– NOTES PAYABLE
Notes
payable consist of the following:
|
|
(in
thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Line of
credit
|
$
4,596
|
$
4,171
|
|
Unsecured term
loan
|
149
|
145
|
|
Notes
payable
|
10
|
14
|
|
Notes payable -
MedTech (net of $6 and $14 in debt issue costs
|
|
|
|
at March 31, 2019
and December 31, 2018, respectively)
|
4,795
|
4,786
|
|
Notes payable -
related parties
|
985
|
827
|
|
Total
debt
|
10,535
|
9,943
|
|
Less: current
portion (including related parties)
|
(10,535
)
|
(9,698
)
|
|
|
$
-
|
$
245
|
NetWolves maintains
a $4.0 million line of credit with a lending institution. Advances
under the line, which expires on June 28, 2019, bear interest at a
rate of LIBOR plus 3% and are secured by substantially all of the
assets of NetWolves Network Services, LLC and guaranteed by Vaso
Corporation. At March 31, 2019, the Company had drawn approximately
$3.2 million against the line. The draw is included in notes
payable – current portion in the Company’s condensed
consolidated balance sheet.
17
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company maintains an additional $2.0 million line of credit with a
lending institution. Advances under the line, which expires on June
28, 2019, bear interest at a rate of LIBOR plus 3% and are secured
by substantially all of the assets of the Company. At March 31,
2019, the Company had drawn approximately $1.3 million against the
line. The line of credit agreement includes certain financial
covenants. At March 31, 2019, the Company was not in compliance
with such covenants.
In
March 2019, the Company’s Biox subsidiary drew RMB500,000
(approximately $75,000) from a line of credit with a Chinese bank
for working capital purposes. The advance, which bore interest at
9.2%, was fully repaid in April 2019.
In
November and December 2018, the Company issued unsecured notes
aggregating $500,000 to certain directors. The notes bore interest
at 10% per annum and matured on March 25, 2019. Principal and
interest on these notes were paid in full upon
maturity.
In the
three months ended March 31, 2019, the Company issued notes
aggregating $650,000 to a director, an employee and a shareholder.
The notes mature at various periods through March 28, 2020 and bear
interest at 10% per annum payable quarterly. In April 2019, the
Company issued to a director a $100,000 note maturing April 3, 2020
bearing interest at 10% per annum payable quarterly.
NOTE N
– LEASES
ASC
842, “Leases”, 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 either the effective date (the
“effective date method”) or the beginning of the
earliest period presented (the “comparative method”)
using a modified retrospective approach. Under the effective date
method, the Company’s comparative period reporting is
unchanged. In contrast, under the comparative method, the
Company’s date of initial application is the beginning of the
earliest comparative period presented, and the Topic 842 transition
guidance is then applied to all comparative periods presented.
Further, under either transition method, the standard includes
certain practical expedients intended to ease the burden of
adoption. The Company adopted ASC 842 January 1, 2019 using the
effective date method and elected certain practical expedients
allowing the Company not to reassess:
●
whether expired or
existing contracts contain leases under the new definition of a
lease;
●
lease
classification for expired or existing leases; and
●
whether previously
capitalized initial direct costs would qualify for capitalization
under Topic 842.
18
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company also made the accounting policy decision not to recognize
lease assets and liabilities for leases with a term of 12 months or
less.
The
Company enters into finance leases, typically with terms of 3 to 5
years, to acquire equipment for its data center. The Company enters
into operating leases for its facilities in New York, Florida, and
China, as well as for vehicles provided to certain employees in the
sales representation segment. The operating lease terms range from
2 to 7 years. The Company excluded the renewal option on its
applicable facility leases from the calculation of its right-of-use
assets and lease liabilities.
Finance and
operating lease liabilities consist of the following:
|
|
(in
thousands)
|
|
|
|
March 31,
2019
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
Lease liabilities -
current
|
|
|
|
Finance
leases
|
$
155
|
$
188
|
|
Operating
leases
|
657
|
-
|
|
|
$
812
|
$
188
|
|
Lease liabilities -
net of current portion
|
|
|
|
Finance
leases
|
$
372
|
$
400
|
|
Operating
leases
|
354
|
-
|
|
|
$
726
|
$
400
|
A
reconciliation of undiscounted cash flows to finance and operating
lease liabilities recognized in the condensed consolidated balance
sheet at March 31, 2019 is set forth below:
|
|
(in
thousands)
|
||
|
Years ending
December 31,
|
Finance
leases
|
Operating
leases
|
Total
|
|
Remainder of
2019
|
153
|
495
|
648
|
|
2020
|
142
|
426
|
568
|
|
2021
|
142
|
129
|
271
|
|
2022
|
118
|
51
|
169
|
|
2023
|
47
|
-
|
47
|
|
Undiscounted lease
payments
|
602
|
1,101
|
1,703
|
|
Amount representing
interest
|
(75
)
|
(90
)
|
(165
)
|
|
Discounted lease
liabilities (unaudited)
|
527
|
1,011
|
1,538
|
19
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Additional
disclosures of lease data are set forth below:
|
|
Three months
ended March 31, 2019
|
|
|
(unaudited)
|
|
Lease
costs:
|
|
|
Finance lease
costs:
|
|
|
Amortization of
right-of-use assets
|
$
46
|
|
Interest on lease
liabilities
|
13
|
|
|
59
|
|
Operating lease
costs:
|
181
|
|
Short-term lease
costs:
|
16
|
|
Total lease
cost
|
$
256
|
|
|
|
|
Other
information:
|
|
|
Cash paid for
amounts included in the
|
|
|
measurement of
lease liabilities:
|
|
|
Operating cash
flows from finance leases
|
$
11
|
|
Operating cash
flows from operating leases
|
181
|
|
Financing cash
flows from finance leases
|
60
|
|
|
$
252
|
|
|
|
|
Weighted-average
remaining lease term - finance leases (months)
|
46
|
|
Weighted-average
remaining lease term - operating leases (months)
|
24
|
|
|
|
|
Weighted-average
discount rate - finance leases
|
7.9
%
|
|
Weighted-average
discount rate - operating leases
|
9.0
%
|
The
Company used the rate implicit in the lease, where known, or its
incremental borrowing rate as the rate used to discount the future
lease payments.
NOTE O
– RELATED-PARTY TRANSACTIONS
The
Company made interest payments, aggregating approximately $108,000
in each of the three-month periods ended March 31, 2019 and 2018,
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. 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 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 March 31, 2019 and 2018, at
which dates no amounts were outstanding.
20
Vaso
Corporation and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE P
– 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 agreement through December 31,
2022, subject to earlier termination with or without cause under
certain circumstances after timely notice. 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.
Employment Agreements
On
May 10, 2019, the Company modified its Employment Agreement with
its President and Chief Executive Officer, Dr. Jun Ma, to provide
for a continuing five-year term, unless earlier terminated by the
Company, but in no event can extend beyond May 31, 2026. The
Employment Agreement provides for annual compensation of $500,000.
Dr. Ma shall be eligible to receive a bonus for each fiscal year
thereafter during the employment term. The amount and the occasion
for payment of such bonus, if any, shall be at the discretion of
the Board of Directors. Dr. Ma shall also be eligible for an award
under any long-term incentive compensation plan and grants of
options and awards of shares of the Company's stock, as determined
at the Board of Directors' discretion. The Employment Agreement
further provides for reimbursement of certain expenses, and certain
severance benefits in the event of termination prior to the
expiration date of the Employment Agreement.
NOTE Q – SUBSEQUENT EVENT
In
May 2019, the Board of Directors ("Board") approved the 2019 Stock
Plan (the "2019 Plan") for officers, directors, and senior
employees of the Corporation or any subsidiary of the Corporation.
The stock issuable under the 2019 Plan shall be shares of the
Company's authorized but unissued or reacquired common stock. The
maximum number of shares of common stock that may be issued under
the 2019 Plan is 15,000,000 shares.
The
2019 Plan consists of a Stock Issuance Program, under which
eligible persons may, at the discretion of the Board, be issued
shares of common stock directly, as a bonus for services rendered
or to be rendered to the Corporation or any subsidiary of the
Corporation.
21
Vaso
Corporation and Subsidiaries
I
TEM 2 - MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for historical information contained in this report, the
matters discussed are forward-looking statements that involve risks
and uncertainties. When used in this report, words such as
“anticipates”, “believes”,
“could”, “estimates”,
“expects”, “may”, “plans”,
“potential” and “intends” and similar
expressions, as they relate to the Company or its management,
identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company’s
management, as well as assumptions made by and information
currently available to the Company’s management. Among the
factors that could cause actual results to differ materially are
the following: the effect of business and economic conditions; the
effect of the dramatic changes taking place in the healthcare
environment; the impact of competitive procedures and products and
their pricing; medical insurance reimbursement policies; unexpected
manufacturing or supplier problems; unforeseen difficulties and
delays in the conduct of clinical trials and other product
development programs; the actions of regulatory authorities and
third-party payers in the United States and overseas; continuation
of the GEHC agreements and the risk factors reported from time to
time in the Company’s SEC reports, including its recent
report on Form 10-K. The Company undertakes no obligation to update
forward-looking statements as a result of future events or
developments.
Unless the context requires otherwise, all references to
“we”, “our”, “us”,
“Company”, “registrant”, “Vaso”
or “management” refer to Vaso Corporation and its
subsidiaries
General Overview
Vaso
Corporation (“Vaso”) was incorporated in Delaware in
July 1987. We principally operate in three distinct business
segments in the healthcare and information technology industries.
We manage and evaluate our operations, and report our financial
results, through these three business segments.
●
IT segment,
operating through a wholly-owned subsidiary VasoTechnology, Inc.,
primarily focuses on healthcare IT and managed network technology
services;
●
Professional sales
service segment, operating through a wholly-owned subsidiary Vaso
Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the
sale of healthcare capital equipment for GEHC into the healthcare
provider middle market; and
●
Equipment segment,
operating through a wholly-owned subsidiary VasoMedical, Inc.,
primarily focuses on the design, manufacture, sale and service of
proprietary medical devices.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations are based upon the accompanying unaudited condensed
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”). The preparation of
financial statements in conformity with U.S. GAAP requires
management to make judgments, estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses, and
the related disclosures at the date of the financial statements and
during the reporting period. Although these estimates are based on
our knowledge of current events, our actual amounts and results
could differ from those estimates. The estimates made are based on
historical factors, current circumstances, and the experience and
judgment of our management, who continually evaluate the judgments,
estimates and assumptions and may employ outside experts to assist
in the evaluations.
Certain of our
accounting policies are deemed “critical”, as they are
both most important to the financial statement presentation and
require management’s most difficult, subjective or complex
judgments as a result of the need to make estimates about the
effect of matters that are inherently uncertain. For a discussion
of our critical accounting policies, see Note C to the condensed
consolidated financial statements and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the year
ended December 31, 2018 as filed with the SEC on April 15,
2019.
22
Vaso
Corporation and Subsidiaries
Results of Operations – For the Three Months Ended March 31,
2019 and 2018
Revenues
Total
revenue for the three months ended March 31, 2019 and 2018 was
$15,524,000 and $17,537,000, respectively, representing a decrease
of $2,013,000, or 11% year-over-year. On a segment basis, revenue
in the IT, professional sales services, and equipment segments
decreased $86,000, $1,796,000, and $131,000,
respectively.
Revenue
in the IT segment for the three months ended March 31, 2019 was
$11,327,000 compared to $11,413,000 for the three months ended
March 31, 2018, a decrease of $86,000, or 1%, of which $92,000
resulted from lower NetWolves revenues, offset by $6,000 from the
growth in the healthcare IT VAR business. Our monthly recurring
revenue in the managed network services operations continues to
grow month over month as we add new customers and expand our
services to existing customers; at the same time, the backlog of
orders in our healthcare IT operations increased to $12.5 million
at March 31, 2019 from $10.4 million at March 31, 2018, as a result
of growth in orders and clients.
Commission
revenues in the professional sales services segment were $3,415,000
in the first quarter of 2019, a decrease of 34%, as compared to
$5,211,000 in the same quarter of 2018. The decrease in commission
revenues was due primarily to a decrease in the volume of equipment
delivered by GEHC during the period, as well as to a lower blended
commission rate. 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 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 March 31, 2019, $17,015,000 in deferred commission
revenue was recorded in the Company’s condensed consolidated
balance sheet, of which $6,461,000 was long-term. At March 31,
2018, $20,338,000 in deferred commission revenue was recorded in
the Company’s condensed consolidated balance sheet, of which
$5,185,000 was long-term. The decrease in deferred revenue is
principally due to a decrease in orders booked, partially offset by
a decrease in deliveries by GEHC. We anticipate that revenue will
increase in the remaining quarters of 2019 as deliveries
increase.
Revenue
in the equipment segment decreased by $131,000, or 14%, to $782,000
for the three-month period ended March 31, 2019 from $913,000 for
the same period of the prior year. The decrease was principally due
to lower sales of Biox ambulatory monitors and ARCS software during
the quarter.
Gross Profit
Gross
profit for the three months ended March 31, 2019 and 2018 was
$7,886,000, or 51% of revenue, and $9,621,000, or 55% of revenue,
respectively, representing a decrease of $1,735,000, or 18%
period-over-period.
IT
segment gross profit for the three months ended March 31, 2019 was
$4,726,000, or 42% of the segment revenue, compared to $4,914,000,
or 43% of the segment revenue for the three months ended March 31,
2018. The period-over-period decrease of $188,000, or 4%, was
primarily a result of an unfavorable mix of lower margin equipment
sales at NetWolves.
Professional sales services segment gross profit
was $2,685,000, or 79% of segment revenue, for the three months
ended March 31, 2019 as compared to $4,153,000, or 80% of the
segment revenue, for the three months ended March 31, 2018,
reflecting a decrease of $1,468,000, or 35%. The decrease in
absolute dollars was primarily due to lower commission revenue as a
result of
lower volume of GEHC equipment delivered during
the first quarter of 2019 than in the same period last year, as
well as to lower blended commission rates. Cost of
commissions in the professional sales service
segment of $730,000 and $1,058,000, for the three months ended
March 31, 2019 and 2018, respectively, reflected commission expense
associated with recognized commission revenues.
23
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 decreased to $475,000, or 61% of segment revenues, for
the first quarter of 2019 compared to $554,000, or 61% of segment
revenues, for the same quarter of 2018. The $79,000, or 14%,
decrease in gross profit was due to lower sales volume, compared to
the first quarter 2018.
Operating Loss
Operating
loss for the three months ended March 31, 2019 and 2018 was
$2,655,000 and $2,114,000, respectively, representing an increase
of $541,000, due to lower gross profit, partially offset by lower
operating costs (defined below).
Operating
loss in the IT segment decreased $92,000 in the three-month period
ended March 31, 2019 as compared to the same period of 2018 due to
lower selling, general, and administrative (“SG&A”)
costs, partially offset by lower gross profit. Operating loss in
the professional sales service segment increased $589,000 in the
three-month period ended March 31, 2019 as compared to operating
loss in the same period of 2018 due to lower gross profit partially
offset by lower SG&A costs. The increase in equipment segment
operating loss was $80,000 in the first quarter of 2019, due to
lower gross profit. During the first quarter of 2019, corporate
expenses decreased $36,000 when compared to the same quarter of
2018.
SG&A
costs for the three months ended March 31, 2019 and 2018 were
$10,341,000 and $11,548,000, respectively, representing a decrease
of $1,207,000, or 10% year-over-year. On a segment basis, SG&A
costs in the IT segment decreased by $300,000 in the first quarter
of 2019 from the same quarter of the prior year due to reduced
personnel costs. SG&A costs in the professional sales service
segment decreased $880,000 due mainly to cost savings related to
the annual national sales meeting, headcount and other
personnel-related costs. SG&A costs in the equipment segment
increased $7,000 due mainly to increased headcount in our China
operations. Corporate costs not allocated to segments decreased by
$36,000 in the three months ended March 31, 2019 from the same
period in 2018, due primarily to lower director and legal
fees.
Research
and development (“R&D”) expenses were $200,000, or
1% of revenues, for the first quarter of 2019, an increase of
$13,000, or 7%, from $187,000, or 1% of revenues, for the first
quarter of 2018. The increase is primarily attributable to higher
software development expenses in the IT segment.
Interest and Other (Expense) Income
Interest
and other (expense) income for the three months ended March 31,
2019 was $(183,000) as compared to $65,000 for the corresponding
period of 2018. The increase in expense was due primarily to higher
interest expense and the non-recurring $212,000 gain on sale of
investment in the VSK joint venture in the prior year
quarter.
Income Tax Expense
For
the three months ended March 31, 2019, we recorded income tax
expense of $11,000 as compared to $20,000 for the corresponding
period of 2018. The decrease arose mainly from lower foreign
taxes.
Net Loss
Net
loss for the three months ended March 31, 2019 was $2,849,000 as
compared to a net loss of $2,069,000 for the three months ended
March 31, 2018, representing an increase of $780,000. Our net loss
per share was $0.02 and $0.01 in the three-month periods ended
March 31, 2019 and 2018, respectively. The principal cause of the
increase in net loss is the increase in operating loss and the
increase in interest and other expense. The Company historically
reports a loss in the first quarter of the year.
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:
24
Vaso
Corporation and Subsidiaries
|
|
(in
thousands)
|
|
|
|
Three months ended
March 31,
|
|
|
|
2019
|
2018
|
|
|
(unaudited)
|
(unaudited)
|
|
Net
loss
|
$
(2,849
)
|
$
(2,069
)
|
|
Interest expense
(income), net
|
217
|
161
|
|
Income tax
expense
|
11
|
20
|
|
Depreciation and
amortization
|
675
|
595
|
|
Share-based
compensation
|
44
|
141
|
|
Adjusted
EBITDA
|
$
(1,902
)
|
$
(1,152
)
|
Adjusted EBITDA
losses increased by $750,000, to $1,902,000 in the quarter ended
March 31, 2019 from $1,152,000 in the quarter ended March 31, 2018.
The increase was primarily attributable to the higher net loss and
the lower share-based compensation and income tax
expense.
Liquidity and Capital Resources
Cash and Cash Flow
We
have financed our operations primarily from working capital and
drawdown on our line of credit. At March 31, 2019, we had cash and
cash equivalents of $2,087,000 and negative working capital of
$20,163,000 compared to cash and cash equivalents of $2,668,000 and
negative working capital of $16,179,000 at December 31, 2018.
$8,402,000 in negative working capital at March 31, 2019 is
attributable to the net balance of deferred commission expense and
deferred revenue. These are non-cash expense and revenue items and
have no impact on future cash flows.
Cash
used in operating activities was $705,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of
$2,032,000 and cash provided by operating assets and liabilities of
$1,327,000, during the three months ended March 31, 2019, compared
to cash used by operating activities of $520,000 for the same
period in 2018. The changes in the account balances primarily
reflect a decrease in accounts and other receivables of $3,530,000,
and decreases in accrued commission and accrued expenses of
$1,084,000 and $860,000, respectively.
Cash
used in investing activities during the three-month period ended
March 31, 2019 was $410,000 for the purchase of equipment and
software.
Cash
provided by financing activities during the three-month period
ended March 31, 2019 was $511,000 primarily as a result of $425,000
in net borrowings on revolving lines of credit and $150,000 in net
proceeds from notes issued to related parties, partially offset by
$64,000 in payments of notes payable and finance leases issued for
equipment purchases.
Liquidity
We
have incurred net losses from operations for the three months ended
March 31, 2019, and the years ended December 31, 2018 and 2017, and
we maintain lines of credit from a lending institution which will
require further extensions after their current June 28, 2019
maturity date and notes payable which mature within the next twelve
months. These events raise substantial doubt about our ability to
continue as a going concern. Our ability to continue operating as a
going concern is dependent upon achieving profitability, extending
the maturity date of our existing lines of credit, or through
additional debt or equity financing. Achieving profitability is
largely dependent on our ability to reduce operating costs and to
maintain or increase our current revenue. While we believe we will
continue to maintain or increase our gross revenue and are
substantially reducing operating costs, and while historically we
have received extensions of the maturity dates of our lines of
credit, failure to achieve these objectives could cast doubt on our
ability to continue as a going concern.
25
Vaso
Corporation and Subsidiaries
I
TEM 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 March 31,
2019 and have concluded that the Company’s disclosure
controls and procedures were effective as of March 31,
2019.
Changes in Internal Control Over Financial Reporting
The
Company implemented new internal control processes in conjunction
with the adoption of
ASC
842,
"Leases."
There were no
other changes in the Company’s internal control over
financial reporting during the Company’s fiscal quarter ended
March 31, 2019 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
26
Vaso
Corporation and Subsidiaries
P
ART II - OTHER INFORMATION
I
TEM 6 – EXHIBITS
Exhibits
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|
Certifications
of the Chief Executive Officer and the Chief Financial Officer
pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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Certifications
of the Chief Executive Officer and the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
27
Vaso
Corporation and Subsidiaries
In
accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
VASO
CORPORATION
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Jun
Ma
|
|
|
|
|
Jun
Ma
|
|
|
|
|
President and Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
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By:
|
/s/ Michael J.
Beecher
|
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Michael J.
Beecher
|
|
|
|
|
Chief Financial
Officer and
Principal
Accounting Officer
|
|
Date:
May 15, 2019
28
TABLE OF CONTENTS
Part I Financial InformationItem 1 - Financial StatementsItem 2 - Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 4 - Controls and ProceduresPart II - Other InformationItem 6 Exhibits