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 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 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.
Results of Operations – For the Three Months Ended June 30,
2019 and 2018
Revenues
Total
revenue for the three months ended June 30, 2019 and 2018 was
$17,543,000 and $18,418,000, respectively, representing a decrease
of $875,000, or 5% year-over-year. On a segment basis, revenue in
the IT, and equipment segments increased $701,000 and $96,000,
respectively, while revenue in the professional sales services
segment decreased $1,672,000.
Revenue
in the IT segment for the three months ended June 30, 2019 was
$11,405,000 compared to $10,704,000 for the three months ended June
30, 2018, an increase of $701,000, or 7%, of which $870,000
resulted from higher healthcare IT VAR revenues, offset by $169,000
from lower NetWolves revenues. 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 $12.7 million at June 30,
2019 from $12.4 million at June 30, 2018, as a result of growth in
orders and clients.
Commission
revenues in the professional sales services segment were $5,131,000
in the second quarter of 2019, a decrease of 25%, as compared to
$6,803,000 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, or billed and received, under the
agreement with GE Healthcare prior to customer acceptance of the
equipment are recorded as deferred revenue in the condensed
consolidated balance sheet. As of June 30, 2019, $16,638,000 in
deferred commission revenue was recorded in the Company’s
condensed consolidated balance sheet, of which $5,424,000 was
long-term. At June 30, 2018, $19,275,000 in deferred commission
revenue was recorded in the Company’s condensed consolidated
balance sheet, of which $6,221,000 was long-term. 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 increased by $96,000, or 11%, to
$1,007,000 for the three-month period ended June 30, 2019 from
$911,000 for the same period of the prior year. The increase was
principally due to higher sales of Biox ambulatory patient monitors
and ARCS software during the quarter.
Gross Profit
Gross
profit for the three months ended June 30, 2019 and 2018 was
$9,411,000, or 54% of revenue, and $10,437,000, or 57% of revenue,
respectively, representing a decrease of $1,026,000, or 10%
period-over-period.
IT
segment gross profit for the three months ended June 30, 2019 was
$4,628,000, or 41% of the segment revenue, compared to $4,475,000,
or 42% of the segment revenue for the three months ended June 30,
2018. The period-over-period increase of $153,000, or 3%, was
primarily a result of higher IT VAR revenues.
Professional sales services segment gross profit
was $4,221,000, or 82% of segment revenue, for the three months
ended June 30, 2019 as compared to $5,423,000, or 80% of the
segment revenue, for the three months ended June 30, 2018,
reflecting a decrease of $1,202,000, or 22%. The decrease in
absolute dollars was primarily due to lower commission revenue as a
result of
lower volume of GEHC equipment delivered during
the second 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 $910,000 and $1,380,000, for the three months ended June
30, 2019 and 2018, 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 increased to $562,000, or 56% of segment
revenues, for the second quarter of 2019 compared to $539,000, or
59% of segment revenues, for the same quarter of 2018. The $23,000,
or 4%, increase in gross profit was due to higher sales volume,
compared to the second quarter 2018.
Operating Loss
Operating
loss for the three months ended June 30, 2019 and 2018 was $520,000
and $263,000, respectively, representing an increase of $257,000,
due to lower gross profit, partially offset by lower operating
costs (defined below).
Operating
loss in the IT segment decreased $613,000 in the three-month period
ended June 30, 2019 as compared to the same period of 2018 due to
lower selling, general, and administrative (“SG&A”)
costs and higher gross profit. Operating income in the professional
sales service segment decreased $1,037,000 in the three-month
period ended June 30, 2019 as compared to operating income in the
same period of 2018 due to lower gross profit partially offset by
lower SG&A costs. The decrease in equipment segment operating
loss was $121,000 in the second quarter of 2019, due to higher
gross profit and lower SG&A expenses. During the second quarter
of 2019, corporate expenses decreased $46,000 when compared to the
same quarter of 2018.
SG&A
costs for the six months ended June 30, 2019 and 2018 were
$20,044,000 and $21,996,000, respectively, representing a decrease
of $1,952,000, or 9% year-over-year. On a segment basis, SG&A
costs in the professional sales service segment for the six months
ended June 30, 2019 decreased $1,045,000 to $8,421,000, from
$9,466,000 for the corresponding period of the prior year, due to
reduced personnel-related and national sales meeting costs, and in
the IT segment by $773,000 to $9,767,000, from $10,540,000 for the
corresponding period of the prior year, due primarily to lower
personnel costs at both NetWolves and the IT VAR business. SG&A
costs in the equipment segment for the six months ended June 30,
2019 decreased $51,000 to $1,299,000, from $1,350,000 for the
corresponding period of the prior year, due primarily to lower
amortization costs, and corporate costs not allocated to segments
decreased in the same periods by $83,000 from $640,000, due
primarily to lower legal and director fees.
Research
and development (“R&D”) expenses were $228,000, or
1% of revenues, for the second quarter of 2019, a decrease of
$24,000, or 10%, from $252,000, or 1% of revenues, for the second
quarter of 2018. The decrease is primarily attributable to lower
software development expenses in the equipment
segment.
Interest and Other (Expense) Income
Interest
and other (expense) income for the three months ended June 30, 2019
was $(203,000) as compared to $(146,000) for the corresponding
period of 2018. The increase in expense was due primarily to higher
interest expense on the lines of credit.
Income Tax Expense
For
the three months ended June 30, 2019, we recorded income tax
expense of $27,000 as compared to $37,000 for the corresponding
period of 2018. The decrease arose mainly from lower foreign
taxes.
Net Loss
Net
loss for the three months ended June 30, 2019 was $750,000 as
compared to a net loss of $446,000 for the three months ended June
30, 2018, representing an increase of $304,000. Our net loss per
share was $0.00 in the three-month periods ended June 30, 2019 and
2018. The principal cause of the increase in net loss is the
decrease in operating income in the sales representation segment
and the increase in interest and other expense. The Company
historically reports a loss in the second 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:
|
|
|
|
|
T
hree
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(750
)
|
$
(446
)
|
|
Interest
expense (income), net
|
227
|
177
|
|
Income
tax expense
|
27
|
37
|
|
Depreciation
and amortization
|
670
|
607
|
|
Share-based
compensation
|
54
|
81
|
|
Adjusted
EBITDA
|
$
228
|
$
456
|
Adjusted EBITDA
decreased by $228,000, to $228,000 in the quarter ended June 30,
2019 from $456,000 in the quarter ended June 30, 2018. The decrease
was primarily attributable to the higher net loss and the lower
share-based compensation and income tax expense.
Results of Operations – For the Six Months Ended June 30,
2019 and 2018
Revenues
Total
revenue for the six months ended June 30, 2019 and 2018 was
$33,067,000 and $35,955,000, respectively, representing a decrease
of $2,888,000, or 8% year-over-year. On a segment basis, revenue in
the IT segment increased $615,000, while revenues in the
professional sales service and equipment segments decreased
$3,468,000 and $35,000, respectively.
Revenue
in the IT segment for the six months ended June 30, 2019 was
$22,732,000 compared to $22,117,000 for the six months ended June
30, 2018, an increase of $615,000, of which $876,000 resulted from
an increase in the healthcare IT VAR business, offset by a $261,000
decrease in revenues at NetWolves. Our monthly recurring revenue in
the managed network services operations continues to grow month
over month as we add new customers and expand our services to
existing customers; at the same time, the backlog of orders in our
IT VAR operations increased to $12.7 million at June 30, 2019 from
$12.4 million at June 30, 2018, due to growth in orders and
clients. We anticipate that as our IT VAR operations become more
developed and the service delivery process accelerated, the backlog
will convert to revenue in a more timely fashion and, coupled with
continued growth in order volume, profitability will improve in
this segment.
Commission
revenues in the professional sales service segment were $8,546,000
in the first half of 2019, a decrease of 29%, as compared to
$12,014,000 in the first half of 2018. The decrease in commission
revenues was due primarily to a decrease in the volume of
underlying equipment delivered by GEHC during the period.
Deliveries of equipment sold by us are typically lower in the first
half of each year than in the second half of the year, with the
strongest in the fourth quarter of each year. Therefore, we expect
deliveries and revenue to improve through the remainder of 2019.
The Company recognizes commission revenue when the underlying
equipment has been accepted at the customer site in accordance with
the specific terms of the sales agreement. Consequently, amounts
billable, or billed and received, under the agreement with GE
Healthcare prior to customer acceptance of the equipment are
recorded as deferred revenue in the condensed consolidated balance
sheet. As of June 30, 2019, $16,638,000 in deferred commission
revenue was recorded in the Company’s condensed consolidated
balance sheet, of which $5,424,000 was long-term.
Revenue
in the equipment segment decreased by $35,000, or 2%, to $1,789,000
for the six-month period ended June 30, 2019 from $1,824,000 for
the same period of the prior year. The decrease was principally due
to a decrease in Biox ambulatory monitor and ARCS software revenues
as a result of lower sales volume, partially offset by higher EECP
service revenues.
Gross Profit
Gross
profit for the six months ended June 30, 2019 and 2018 was
$17,298,000, or 52% of revenue, and $20,058,000, or 56% of revenue,
respectively, representing a decrease of $2,760,000, or 14%
year-over-year. On a segment basis, gross profit in the IT,
professional sales service, and equipment segments decreased
$35,000, $2,670,000, and $55,000, respectively.
IT
segment gross profit for the six months ended June 30, 2019 was
$9,354,000, or 41% of the segment revenue, compared to $9,389,000,
or 42% of the segment revenue for the six months ended June 30,
2018. Gross profit at NetWolves decreased $323,000 due mainly to
lower lower revenues, offset by $288,000 higher gross profit in the
IT VAR business resulting from higher revenue partially offset by
lower gross profit rate.
Professional sales service segment gross profit
was $6,906,000, or 82% of segment revenue, for the six months ended
June 30, 2019 as compared to $9,576,000, or 80% of the segment
revenue, for the six months ended June 30, 2018, reflecting a
decrease of $2,670,000, or 28%. The decrease in absolute dollars
was due to lower commission revenue as a result of lower
volume of GEHC equipment delivered during the first half of 2019
than in the same period last year
,
offset by lower commission expense in the first half of 2019
compared to the same period of 2018.
Cost
of commissions in the professional sales service segment of
$1,640,000 and $2,438,000, for the six months ended June 30, 2019
and 2018, respectively, reflected commission expense associated
with recognized commission revenues. Commission expense associated
with deferred revenue is recorded as deferred commission expense
until the related commission revenue is recognized.
Equipment
segment gross profit decreased to $1,038,000, or 58% of segment
revenues, for the first half of 2019 compared to $1,093,000, or 60%
of segment revenues, for the same period of 2018, due to lower
margin product mix in the first half of 2019, compared to the first
half of 2018.
Operating Loss
Operating
loss for the six months ended June 30, 2019 and 2018 was $3,174,000
and $2,376,000, respectively, representing an increase of $798,000,
primarily due to lower gross profit partially offset by lower
operating costs. On a segment basis, operating loss decreased
$705,000 and $40,000 in the IT and equipment segments,
respectively. Operating loss in the professional sales service
segment was $1,516,000 in the six months ended June 30, 2019, as
compared to operating income of $110,000 in the comparable period
of 2018. In addition, corporate expenses decreased
$83,000.
Operating
loss in the IT segment decreased in the six-month period ended June
30, 2019 as compared to the same period of 2018 due primarily to
lower SG&A costs. Operating loss in the professional sales
service segment in the six-month period ended June 30, 2019
resulted primarily from lower gross profit, partially offset by
lower SG&A costs. Operating loss in the equipment segment
decreased in the six-month period ended June 30, 2019 as compared
to the same period of 2018 due primarily to lower SG&A costs,
partially offset by lower gross profit.
SG&A
costs for the six months ended June 30, 2019 and 2018 were
$20,044,000 and $21,996,000, respectively, representing a decrease
of $1,952,000, or 9% year-over-year. On a segment basis, SG&A
costs in the professional sales service segment for the six months
ended June 30, 2019 decreased $1,045,000 to $8,421,000, from
$9,466,000 for the corresponding period of the prior year, due to
reduced personnel-related and national sales meeting costs, and in
the IT segment by $773,000 to $9,767,000, from $10,540,000 for the
corresponding period of the prior year, due primarily to lower
personnel costs at both NetWolves and the IT VAR business. SG&A
costs in the equipment segment for the six months ended June 30,
2019 decreased $51,000 to $1,299,000, from $1,350,000 for the
corresponding period of the prior year, due primarily to lower
amortization costs, and corporate costs not allocated to segments
decreased in the same periods by $83,000 from $640,000, due
primarily to lower legal and director fees.
Research
and development (“R&D”) expenses were $428,000, or
1% of revenues, for the first half of 2019, a decrease of $10,000,
or 2%, from $438,000, or 1% of revenues, for the first half of
2018. The decrease is primarily attributable to lower software
development expenses in the equipment segment.
Interest and Other Income (Expense)
Interest
and other income (expense) for the six months ended June 30, 2019
was $(387,000) as compared to $(82,000) for the corresponding
period of 2018. The decrease was due primarily to the $212,000 gain
on sale of VSK recognized in the first half of 2018, partially
offset by higher interest expense due to increased borrowings under
our credit line.
Income Tax Expense
For
the six months ended June 30, 2019, we recorded income tax expense
of $38,000 as compared to income tax expense of $57,000 for the
corresponding period of 2018. The decrease arose mainly from lower
foreign taxes.
Net Loss
Net
loss for the six months ended June 30, 2019 was $3,599,000 compared
to net loss of $2,515,000 for the six months ended June 30, 2018,
representing an increase in net loss of $1,084,000. Our net loss
per share was $0.02 in the six-month periods ended June 30, 2019
and 2018. The principal causes of the increase in net loss is the
operating loss in the professional sales service segment and the
prior year gain on sale of investment in VSK.
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:
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(3,599
)
|
$
(2,515
)
|
|
Interest
expense (income), net
|
443
|
338
|
|
Income
tax (benefit) expense
|
38
|
57
|
|
Depreciation
and amortization
|
1,345
|
1,202
|
|
Share-based
compensation
|
98
|
222
|
|
Adjusted
EBITDA
|
$
(1,675
)
|
$
(696
)
|
Adjusted EBITDA
loss increased by $979,000, to $(1,675,000) in the six months ended
June 30, 2019 from $(696,000) in the six months ended June 30,
2018. The increase was primarily attributable to the higher net
loss, partially offset by higher interest expense and higher
depreciation and amortization.
Liquidity and Capital Resources
Cash and Cash Flow
We
have financed our operations primarily from working capital and
draws on our line of credit. At June 30, 2019, we had cash and cash
equivalents of $1,037,000 and negative working capital of
$21,443,000 compared to cash and cash equivalents of $2,668,000 and
negative working capital of $16,179,000 at December 31, 2018.
$9,101,000 in negative working capital at June 30, 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 $2,362,000, which consisted of net
loss after adjustments to reconcile net loss to net cash of
$1,974,000 and cash used by operating assets and liabilities of
$388,000, during the six months ended June 30, 2019, compared to
cash used by operating activities of $2,156,000 for the same period
in 2018. The changes in the account balances primarily reflect a
decrease in accounts and other receivables of $1,720,000, and
decreases in accounts payable and accrued commission of $1,015,000
and $1,179,000, respectively.
Cash
used in investing activities during the six-month period ended June
30, 2019 was $714,000 for the purchase of equipment and
software.
Cash
provided by financing activities during the six-month period ended
June 30, 2019 was $1,387,000 primarily as a result of $1,112,000 in
net borrowings on revolving lines of credit and $410,000 in net
proceeds from notes issued to related parties, partially offset by
$133,000 in payments of notes payable and finance leases issued for
equipment purchases.
Liquidity
We
have incurred net losses from operations for the six months ended
June 30, 2019, and the years ended December 31, 2018 and 2017. We
maintain lines of credit from a lending institution which will
require further extensions after their current December 18, 2019
maturity date, as will notes payable which mature within the next
twelve months. Our ability to continue operating as a going concern
is dependent upon achieving profitability, extending the maturity
date of our existing lines of credit and notes payable, 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.
