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 United States economy 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.
Equipment orders in our professional sales service segment have been negatively
impacted, and we do anticipate continued negative impact in all our businesses
during the remainder of 2021, in particular in our professional sales service
segment for the diagnostic imaging equipment. Moreover, we have also experienced
the negative impact in the recurring revenue business in our IT segment as some
of our customers have been adversely affected by the shutdown, and new business
in this segment appears to be slower as well. The pandemic also may have a
negative impact on our cash receipts as some customers request forbearance or a
delay in their payments to us.
The pandemic may impact our operations beyond the first quarter of 2021,
depending on the duration of the pandemic and the timing and success of the
reopening of the economy.
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, substantially all of which shall qualify for
forgiveness, has been 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. We have applied
for forgiveness of the PPP loan.
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.
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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.
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, 2020 as filed with the SEC on May 5, 2021.
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Prior Periods' Financial Statement Revision
Certain prior period amounts have been revised to reflect the impact of
corrections of misstatements and to correct the timing of previously recorded
out-of-period adjustments. Refer to Note B in the Notes to Condensed
Consolidated Financial Statements for more information.
Results of Operations - For the Three Months Ended March 31, 2021 and 2020
Revenues
Total revenue for the three months ended March 31, 2021 and 2020 was $16,519,000
and $17,227,000, respectively, representing a decrease of $708,000, or 4%
year-over-year. On a segment basis, revenue in the IT, professional sales
service and equipment segments decreased $30,000, $511,000 and $167,000,
respectively.
Revenue in the IT segment for the three months ended March 31, 2021 was
$11,253,000 compared to $11,283,000 for the three months ended March 31, 2020, a
decrease of $30,000, or less than 1%, of which $257,000 resulted from lower
NetWolves revenue, partially offset by a $227,000 increase in the operations of
the healthcare IT VAR business. Our monthly recurring revenue in the IT segment
accounted for $10,025,000 or 89% of the segment revenue in the first quarter of
2021, and $10,494,000 or 93% of the segment revenue for the same quarter last
year (see Note C).
Commission revenues in the professional sales service segment were $4,655,000 in
the first quarter of 2021, a decrease of 10%, as compared to $5,166,000 in the
same quarter of 2020. The decrease in commission revenues was due primarily to
both a decrease in the volume of underlying equipment delivered by GEHC during
the period and a lower 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 March 31, 2021, $18,472,000 in deferred commission revenue was recorded in
the Company's condensed consolidated balance sheet, of which $6,090,000 was
long-term. At March 31, 2020, $17,890,000 in deferred commission revenue was
recorded in the Company's condensed consolidated balance sheet, of which
$8,625,000 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 $167,000, or 22%, to $611,000 for
the three-month period ended March 31, 2021 from $778,000 for the same period of
the prior year, principally due to the Company deconsolidating EECP operations
beginning in the second quarter of 2020 as a result of the sale of equity in the
EECP business. On a proforma basis with EECP operations also excluded from the
financial statements for the first quarter of 2020, revenue in the equipment
segment would increase by $78,000, or 16%.
Gross Profit
Gross profit for the three months ended March 31, 2021 and 2020 was $8,559,000,
or 52% of revenue, and $9,139,000, or 53% of revenue, respectively, representing
a decrease of $580,000, or 6% year-over-year. On a segment basis, gross profit
in the IT, professional sales service, and equipment segments decreased $66,000,
or 2%; $481,000, or 12%; and $33,000, or 6%, respectively.
IT segment gross profit for the three months ended March 31, 2021 was
$4,406,000, or 39% of the segment revenue, compared to $4,472,000, or 40% of the
segment revenue for the three months ended March 31, 2020. The year-over-year
decrease of $66,000, or 2%, was primarily a result of lower margin product sales
mix in the IT VAR business partially offset by a higher margin sales mix at
NetWolves.
Professional sales service segment gross profit was $3,665,000, or 79% of
segment revenue, for the three months ended March 31, 2021 as compared to
$4,146,000, or 80% of the segment revenue, for the three months ended March 31,
2020, reflecting a decrease of $481,000, or 12%. The decrease in absolute
dollars was primarily due to lower commission revenue as a result of lower
blended commission rate and lower volume of GEHC equipment delivered during the
first quarter of 2021 than in the same period last year. Cost of commissions in
the professional sales service segment of $990,000 and $1,020,000, for the three
months ended March 31, 2021 and 2020, 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 $488,000, or 80% of segment
revenues, for the first quarter of 2021 compared to $521,000, or 67% of segment
revenues, for the same quarter of 2020. The $33,000, or 6%, decrease in gross
profit was the result of lower revenue due to deconsolidation of EECP operations
in the financial statements for the first quarter of 2021, partially offset by
higher gross profit margin of non-EECP products sold during the quarter.
Operating Loss
Operating loss for the three months ended March 31, 2021 and 2020 was $539,000
and $1,360,000, respectively, representing an improvement of $821,000, or 60%,
as operating costs (below) decreased much more than gross profit did,
year-over-year. On a segment basis, IT segment recorded operating income of
$69,000 in the first quarter of 2021 as opposed to an operating loss of $593,000
in the same period of 2020; equipment segment recorded operating income of
$13,000 in the first quarter of 2020 as opposed to an operating loss of $48,000
in the same period of 2021; and operating loss in the professional sales service
segment decreased by $98,000, from $433,000 in the first quarter of 2020 to
$335,000 in the same period of 2021.
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Operating income in the IT segment increased to $69,000 for the three-month
period ended March 31, 2021 as compared to an operating loss of $593,000 in the
same period of 2020, due to lower selling, general, and administrative ("SG&A")
costs partially offset by lower gross profit. Operating loss in the professional
sales service segment decreased $98,000 in the three-month period ended March
31, 2021 as compared to operating loss in the same period of 2020, due to lower
SG&A costs partially offset by lower gross profit. The equipment segment
reported operating income of $13,000 in the first quarter of 2021, compared to
an operating loss of $48,000 in the first quarter 2020, an improvement of
$61,000. The improvement was due to lower SG&A and R&D costs partially offset by
lower gross profit.
SG&A costs for the three months ended March 31, 2021 and 2020 were $8,954,000
and $10,319,000, respectively, representing a decrease of $1,365,000, or 13%
year-over-year. On a segment basis, SG&A costs in the IT segment decreased by
$607,000 in the first quarter of 2021 from the same quarter of the prior year
due to reduced personnel costs; SG&A costs in the professional sales service
segment decreased $579,000 due mainly to lower national sales meeting and travel
costs; and SG&A costs in the equipment segment decreased $74,000 due mainly to
lower personnel costs. Corporate costs not allocated to segments were
approximately unchanged in the three months ended March 31, 2021 from the same
period in 2020.
Research and development ("R&D") expenses were $144,000, or 1% of revenues, for
the first quarter of 2021, a decrease of $36,000, or 20%, from $180,000, or 1%
of revenues, for the first quarter of 2020. The decrease is primarily
attributable to lower product development expenses and a reduction in technical
staff in the equipment segment.
Adjusted EBITDA
We define Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation
and amortization), which is a non-GAAP financial measure, as net income (loss),
plus interest expense (income), net; tax expense; depreciation and amortization;
and non-cash expenses for share-based compensation. Adjusted EBITDA is a metric
that is used by the investment community for comparative and valuation purposes.
We disclose this metric in order to support and facilitate the dialogue with
research analysts and investors.
Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and
should not be considered a substitute for operating income, which we consider to
be the most directly comparable U.S. GAAP measure. Adjusted EBITDA has
limitations as an analytical tool, and when assessing our operating performance,
you should not consider Adjusted EBITDA in isolation, or as a substitute for net
income or other consolidated income statement data prepared in accordance with
U.S. GAAP. Other companies may calculate Adjusted EBITDA differently than we do,
limiting its usefulness as a comparative measure.
A reconciliation of net loss to Adjusted EBITDA is set forth below:
(in thousands)
Three months ended March 31,
2021 2020
(unaudited) (unaudited)
Net loss $(643) $(1,475)
Interest expense (income), net 121 261
Income tax (benefit) expense 18 (119)
Depreciation and amortization 596 623
Share-based compensation 9 27
Adjusted EBITDA $101 $(683)Adjusted EBITDA increased by $784,000, to $101,000 in the quarter ended March
31, 2021 from $(683,000) in the quarter ended March 31, 2020. The increase was
attributable to the decrease in net loss, partially offset primarily by the
decrease in interest expense.
Interest and Other Income (Expense)
Interest and other income (expense) for the three months ended March 31, 2021
was $(86,000) as compared to $(234,000) for the corresponding period of 2020.
The decrease in interest and other income (expense) was due primarily to lower
interest expense due to principal payments against the line of credit and other
notes payable and lower interest rates applicable to such notes payable.
Income Tax (Expense) Benefit
For the three months ended March 31, 2021, we recorded income tax expense of
$18,000 as compared to income tax benefit of $(119,000) for the corresponding
period of 2020. The change from benefit to expense arose mainly from the
reversal in the first quarter of 2020 of deferred tax liability in our China
operations.
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Net Loss
Net loss for the three months ended March 31, 2021 was $643,000 as compared to
$1,475,000 for the three months ended March 31, 2020, representing an
improvement of $832,000, or 56%. Loss per share of $0.00 and $0.01 was recorded
in the three-month periods ended March 31, 2021 and 2020, respectively. The
principal cause of the decrease in net loss is the change from operating loss to
operating income in the IT segment, an improvement of $662,000, as well as
smaller improvements in the professional sales service and equipment segments.
due primarily to lower SG&A costs.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations from working capital. At March 31, 2021, we had
cash and cash equivalents of $9,432,000 and negative working capital of
$10,373,000, compared to cash and cash equivalents of $6,819,000 and negative
working capital of $9,431,000 at December 31, 2020. $9,875,000 in negative
working capital at March 31, 2021 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 provided by operating activities was $5,475,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of $212,000 and cash
provided by operating assets and liabilities of $5,263,000, during the three
months ended March 31, 2021, compared to cash provided by operating activities
of $6,343,000 for the same period in 2020. The changes in the account balances
primarily reflect a decrease in accounts and other receivables of $4,979,000,
partially offset by decreases in accrued commissions and accounts payable of
$1,124,000 and $171,000, respectively.
Cash used in investing activities during the three-month period ended March 31,
2021 was $59,000 for the purchase of equipment and software.
Cash used in financing activities during the three-month period ended March 31,
2021 was $2,801,000 resulting from repayments of lines of credit and notes
payable.
Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy
its obligations for 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 2021, depending on
the duration of the pandemic and the timing and success of the reopening of the
economy.
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Vaso Corporation and Subsidiaries
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VASO CORPORATION 
