NOTE C
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies consistently applied
in the preparation of the consolidated financial statements are as
follows:
Principles of Consolidation
The
consolidated financial statements include the accounts of Vaso
Corporation, its wholly-owned subsidiaries, and the accounts of the
companies over which we exercise control. Significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes.
Significant estimates and assumptions relate to estimates of
collectibility of accounts receivable, the realizability of
deferred tax assets, stock-based compensation, values and lives
assigned to acquired intangible assets, fair value of reporting
units in connection with goodwill impairment test, the adequacy of
inventory reserves, variable consideration, and allocation of
contract transaction price to performance obligations. Actual
results could differ from those estimates.
Revenue Recognition
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers (Topic 606). Under the standard, revenue is recognized
when a customer obtains control of promised goods or services in an
amount that reflects the consideration the entity expects to
receive in exchange for those goods or services. ASU 2014-09
replaced most existing revenue recognition guidance in U.S. GAAP.
The new standard introduces a five-step process to be followed in
determining the amount and timing of revenue recognition. It also
provides guidance on accounting for costs incurred to obtain or
fulfill contracts with customers, and establishes disclosure
requirements which are more extensive than those required under
prior U.S. GAAP. Generally, we recognize revenue under Topic 606
for each of our performance obligations either over time
(generally, the transfer of a service) or at a point in time
(generally, the transfer of a good) as follows:
Revenue
relating to recurring managed network and voice services provided
by NetWolves are recognized as provided on a monthly basis
(“over time”). Non-recurring charges related to the
provision of such services are recognized in the period provided
(“point in time”). In the IT VAR business, software
system installations are recognized upon verification of
installation and expiration of an acceptance period (“point
in time”). Monthly post-implementation customer support
provided under such installations as well as software solutions
offered under a monthly Software as a Service (“SaaS”)
fee basis are recognized monthly over the contract term
(“over time”).
Commission revenue
is recognized when the underlying equipment has been delivered by
GEHC and accepted at the customer site in accordance with the terms
of the specific sales agreement (“point in
time”).
In the
United States, we recognized revenue from the sale of our medical
equipment in the period in which we deliver the product to the
customer (“point in time”). Revenue from the sale of
our medical equipment to international markets is recognized upon
shipment of the product to a common carrier, as are supplies,
accessories and spare parts delivered in both domestic and
international markets (“point in time”). The Company
also recognizes revenue from the maintenance of its medical
products either on a time and material as-billed basis
(“point in time”) or through the sale of a service
contract, where revenue is recognized ratably over the contract
term (“over time”).
Disaggregation of Revenue
The
following tables present revenues disaggregated by our business
operations and timing of revenue recognition:
(in
thousands)
|
|
Year
Ended December 31, 2020
|
Year
Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
services
|
$39,908
|
$-
|
$-
|
$39,908
|
$39,962
|
$-
|
$-
|
$39,962
|
|
Software
sales and support
|
3,986
|
-
|
-
|
3,986
|
5,543
|
-
|
-
|
5,543
|
|
Commissions
|
-
|
22,865
|
-
|
22,865
|
-
|
26,208
|
-
|
26,208
|
|
Medical
equipment sales
|
-
|
-
|
2,789
|
2,789
|
-
|
-
|
2,778
|
2,778
|
|
Medical
equipment service
|
-
|
-
|
302
|
302
|
-
|
-
|
1,024
|
1,024
|
|
|
$43,894
|
$22,865
|
$3,091
|
$69,850
|
$45,505
|
$26,208
|
$3,802
|
$75,515
|
|
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
recognized over time
|
$40,660
|
$-
|
$234
|
$40,894
|
$40,628
|
$-
|
$595
|
$41,223
|
|
Revenue
recognized at a point in time
|
3,234
|
22,865
|
2,857
|
28,956
|
4,877
|
26,208
|
3,207
|
34,292
|
|
|
$43,894
|
$22,865
|
$3,091
|
$69,850
|
$45,505
|
$26,208
|
$3,802
|
$75,515
|
Transaction Price Allocated to Remaining Performance
Obligations
As of
December 31, 2020, the aggregate amount of transaction price
allocated to performance obligations that are unsatisfied (or
partially unsatisfied) for executed contracts approximates $71
million, of which we expect to recognize revenue as
follows:
(in thousands)
|
|
Fiscal years of revenue
recognition (unaudited)
|
|
|
|
|
|
|
|
Unfulfilled
performance obligations
|
$38,686
|
$17,825
|
$5,657
|
$8,631
|
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 $553,000 and $568,000 at
December 31, 2020 and 2019, respectively, and are included in
accrued expenses and other liabilities in our consolidated balance
sheets.
In our
VasoHealthcare business, we bill a portion of commissions on the
orders we booked in advance of delivery of the underlying
equipment. Such amounts aggregated approximately $17,689,000 and
$18,565,000 at December 31, 2020 and 2019, respectively, and are
classified in our consolidated balance sheets into current or
long-term deferred revenue. In addition, we record a contract
liability for amounts expected to be credited back to GEHC due to
customer order reductions. Such amounts aggregated approximately
$1,118,000 and $1,270,000 at December 31, 2020 and 2019,
respectively, and are included in accrued expenses and other
liabilities in our consolidated balance sheets.
In our
VasoMedical business, we bill amounts for post-delivery services
and varying duration service contracts in advance of performance.
Such amounts aggregated approximately $15,000 and $778,000 at
December 31, 2020 and 2019, respectively, and are classified in our
consolidated balance sheets as either current or long-term deferred
revenue.
During
the year ended December 31, 2020, we recognized approximately $4.9
million of revenues that were included in our contract liability
balance at the beginning of such period.
Costs to Obtain or Fulfill a Contract
Topic
606 requires that incremental costs of obtaining a contract are
recognized as an asset and amortized to expense in a pattern that
matches the timing of the revenue recognition of the related
contract. We have determined the only significant incremental costs
incurred to obtain contracts with customers within the scope of
Topic 606 are certain sales commissions paid to associates. In
addition, the Company elected the practical expedient to recognize
the incremental costs of obtaining a contract when incurred for
contracts where the amortization period for the asset the Company
would otherwise have recognized is one year or less.
Under
Topic 606, sales commissions applicable to service contracts
exceeding one year have been capitalized and amortized ratably over
the term of the contract. In our IT VAR business, commissions
allocable to multi-year subscription contracts or multi-year
post-contract support performance obligations are amortized to
expense ratably over the terms of the multi-year periods. IT VAR
commissions allocable to other elements are charged to expense at
go-live or customer acceptance. In our professional sales services
segment, commissions paid to our sales force are deferred until the
underlying equipment is accepted by the customer.
At
December 31, 2020, our consolidated balance sheet includes
approximately $4,037,000 in capitalized sales commissions to be
expensed in future periods, of which $2,354,000 is recorded in
deferred commission expense and $1,683,000, representing the
long-term portion, is included in other assets.
Significant Judgments when Applying Topic 606
Contract
transaction price is allocated to performance obligations using
estimated stand-alone selling price. Judgment is required in
estimating stand-alone selling price for each distinct performance
obligation. We determine stand-alone selling price maximizing
observable inputs such as stand-alone sales when they exist or
substantive renewal price charged to clients. In instances where
stand-alone selling price is not observable, we utilize an estimate
of stand-alone selling price based on historical pricing and
industry practices.
Certain
revenue we record in our professional sales service segment
contains an estimate for variable consideration. Due to the tiered
structure of our commission rate, which increases as annual targets
are achieved, under Topic 606 we record revenue and deferred
revenue at the rate we expect to be achieved by year end. We base
our estimate of variable consideration on historical results of
previous years’ achievement under the GEHC agreement. Such
estimate will be reviewed each quarter and adjusted as necessary.
In addition, the Company records commissions for arranging
financing at an estimated rate which is subject to later revision
based on certain factors. The Company recognized increases in
revenue associated with revisions to variable consideration for
previously completed performance obligations of $5,000 for the year
ended December 31, 2020.
Shipping and Handling Costs
All
shipping and handling expenses are charged to cost of sales.
Amounts billed to customers related to shipping and handling costs
are included as a component of sales.
Research and Development
Research and
development costs attributable to development are expensed as
incurred.
Share-Based Compensation
The
Company complies with ASC Topic 718, “Compensation –
Stock Compensation” (“ASC 718”), which requires
all companies to recognize the cost of services received in
exchange for equity instruments to be recognized in the financial
statements based on their grant date fair values. The Company
applies an estimated forfeiture rate to the grant date fair value
to determine the annual compensation cost of share-based payment
arrangements with employees. The forfeiture rate is estimated based
primarily on job title and prior forfeiture experience. The Company
did not grant any awards to non-employees during the years ended
December 31, 2020 and 2019.
During
the year ended December 31, 2020, the Company granted 1,000,000
restricted shares of common stock valued at $20,000 to an employee.
20% of the shares vested at approximate grant date and the
remaining 80% vest over four years from the grant date. The total
fair value of shares vested during the year ended December 31, 2020
was $23,000 for officers and $63,000 for employees. The weighted
average grant date fair value of shares granted during the year
ended December 31, 2020 was $0.02 per share.
During
the year ended December 31, 2019, the Company granted 5,500,000
restricted shares of common stock valued at $115,000 to officers.
The shares vest over four years from the grant date. The total fair
value of shares vested during the year ended December 31, 2019 was
$65,000 for officers and $113,000 for employees. The weighted
average grant date fair value of shares granted during the year
ended December 31, 2019 was $0.02 per share.
The
Company did not grant any stock options during the years ended
December 31, 2020 or 2019, nor were any options exercised during
such periods. No options were outstanding at December 31, 2020 or
2019.
Share-based
compensation expense recognized for the years ended December 31,
2020 and 2019 was $88,000 and $141,000, respectively, and is
recorded in selling, general, and administrative expense in the
consolidated statements of operations and comprehensive loss.
Unrecognized expense related to existing share-based compensation
and arrangements is approximately $76,000 at December 31, 2020 and
will be recognized over a weighted-average period of approximately
16 months.
Cash and Cash Equivalents
Cash
and cash equivalents represent cash and short-term, highly liquid
investments either in certificates of deposit, treasury bills,
money market funds, or investment grade commercial paper issued by
major corporations and financial institutions that generally have
maturities of three months or less from the date of
acquisition.
Short term investments
The
Company's short-term investments consist of bank deposits with
yields based on underlying debt and equity securities.
Accounts Receivable, net
The
Company’s accounts receivable are due from customers to whom
we sell our products and services, distributors engaged in the
distribution of our products and from GEHC. Credit is extended
based on evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts receivable are
generally due 30 to 90 days from shipment and services provided and
are stated at amounts due from customers net of allowances for
doubtful accounts, returns, term discounts and other allowances.
Accounts that are outstanding longer than the contractual payment
terms are considered past due. Estimates are used in determining
the allowance for doubtful accounts based on the Company’s
historical collections experience, current trends, credit policy
and a percentage of its accounts receivable by aging category. In
determining these percentages, the Company reviews historical
write-offs of their receivables. The Company also looks at the
credit quality of their customer base as well as changes in their
credit policies. The Company continuously monitors collections and
payments from our customers, and writes off receivables when all
efforts at collection have been exhausted. While credit losses have
historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that they have in the
past.
The
changes in the Company’s allowance for doubtful accounts and
commission adjustments are as follows:
(in
thousands)
|
|
|
|
|
|
|
|
Beginning
Balance
|
$4,285
|
$3,994
|
|
Provision
for losses on accounts receivable
|
663
|
507
|
|
Direct
write-offs, net of recoveries
|
(542)
|
(528)
|
|
Commission
adjustments
|
(186)
|
312
|
|
Deconsolidate
EECP Global (see Note N)
|
(12)
|
-
|
|
Ending
Balance
|
$4,208
|
$4,285
|
Concentrations of Credit Risk
We
market our equipment and IT software solutions principally to
hospitals, diagnostic imaging centers and physician private
practices. We perform credit evaluations of our customers’
financial condition and, as a result, believe that our receivable
credit risk exposure is limited. For the years ended December 31,
2020 and 2019, no customer in our equipment or IT segment accounted
for 10% or more of revenues or accounts receivable. In our
professional sales service segment, 100% of our revenues and
accounts receivable are with GEHC; however, we believe this risk is
acceptable based on GEHC’s financial position and our long
history of doing business with GEHC.
The
Company maintains cash balances in certain U.S. financial
institutions, which, at times, may exceed the Federal Depository
Insurance Corporation (“FDIC”) coverage of
$250,000. The Company has not experienced any losses on these
accounts and believes it is not subject to any significant credit
risk on these accounts. In addition, the FDIC does not insure the
Company’s foreign bank balances, which aggregated
approximately $582,000 and $352,000 at December 31, 2020 and 2019,
respectively.
Inventories
The
Company values inventories in the equipment segment at the lower of
cost or net realizable value, with cost being determined on a
first-in, first-out basis. The Company regularly reviews inventory
quantities on hand, particularly raw materials and components, and
records a provision for excess and slow moving inventory based
primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product
demand.
In our
IT Segment, we purchase computer hardware and software for specific
customer requirements and value such inventories using the specific
identification method.
Property and Equipment
Property and
equipment, including assets under finance leases, are stated at
cost less accumulated depreciation and amortization. Major
improvements are capitalized and minor replacements, maintenance
and repairs are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation
are removed from the consolidated balance sheets. Depreciation is
expensed over the estimated useful lives of the assets, which range
from two to eight years, on a straight-line basis. Accelerated
methods of depreciation are used for tax purposes. We amortize
leasehold improvements over the useful life of the related
leasehold improvement or the life of the related lease, whichever
is less.
Goodwill and Intangible Assets
Goodwill represents
the excess of cost over the fair value of net assets of businesses
acquired. The Company accounts for goodwill under the guidance of
the ASC Topic 350, “Intangibles: Goodwill and Other”.
Goodwill acquired in a purchase business combination is not
amortized, but instead tested for impairment, at least annually, in
accordance with this guidance. The recoverability of goodwill is
subject to an annual impairment test or whenever an event occurs or
circumstances change that would more likely than not result in an
impairment. The Company tests goodwill for impairment at the
reporting unit level on an annual basis as of December 31 and
between annual tests when an event occurs or circumstances change
that could indicate that the asset might be impaired. In any year,
the Company may elect to perform a qualitative assessment to
determine whether it is more likely than not that the fair value of
a reporting unit is in excess of its carrying value. If the Company
cannot determine qualitatively that the fair value is in excess of
the carrying value, or the Company decides to bypass the
qualitative assessment, the Company proceeds to the quantitative
goodwill impairment test, which compares the fair value of each
reporting unit to its carrying amount, including goodwill. If the
fair value of each reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired. If the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is
recognized for an amount equal to that excess, limited to the total
amount of goodwill allocated to that reporting unit. No impairment
loss was recorded as of December 31, 2020 and 2019.
Intangible assets consist of the value of customer
contracts and relationships, patent and technology costs, and
software. The cost of significant customer-related intangibles is
amortized in proportion to estimated total related revenue; cost of
other intangible assets is generally amortized on a straight-line
basis over the asset's estimated economic life, which range
from five to ten years. The Company
capitalizes internal use software development costs incurred during
the application development stage. Costs related to preliminary
project activities, training, data conversion, and post
implementation activities are expensed as incurred. The Company
capitalized $541,000 and $494,000 in software development costs for
the years ended December 31, 2020 and 2019,
respectively.
Impairment of Long-lived Assets
The
Company reviews the recoverability of all long-lived assets,
including the related useful lives, whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset might not be recoverable. If required, the Company compares
the estimated fair value determined by either the undiscounted
future net cash flows or appraised value to the related
asset’s carrying value to determine whether there has been an
impairment. If an asset is considered impaired, the asset is
written down to fair value, which is based either on discounted
cash flows or appraised values in the period the impairment becomes
known. No assets were determined to be impaired as of December 31, 2020 and 2019.
Deferred Revenue
Amounts
billable under the agreement with GEHC in advance of delivery of
the underlying equipment are recorded initially as deferred
revenue, and commission revenue is subsequently recognized as
customer acceptance of such equipment is reported to us by GEHC.
Similarly, commissions payable to our sales force related to such
billings are recorded as deferred commission expense when the
associated deferred revenue is recorded. Commission expense is
recognized when the corresponding commission revenue is
recognized.
We
record revenue on extended service contracts ratably over the term
of the related service contracts. Under the provisions of ASC 606,
we defer revenue related to EECP® system sales
for the fair value of installation and in-service training to the
period when the services are rendered and for service obligations
ratably over the service period, which is generally one year. (See
Note J)
Income Taxes
Deferred income
taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss
carry-forwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established,
when necessary, to reduce deferred tax assets to the amount
expected to be realized. In estimating future tax consequences, we
generally consider all expected future events other than an
enactment of changes in the tax laws or rates. Deferred tax assets
are continually evaluated for the expected realization. To the
extent our judgment regarding the realization of the deferred tax
assets changes, an adjustment to the allowance is recorded, with an
offsetting increase or decrease, as appropriate, in income tax
expense. Such adjustments are recorded in the period in which our
estimate as to the realization of the assets changed that it is
“more likely than not” that all of the deferred tax
assets will be realized. The “realization” standard is
subjective and is based upon our estimate of a greater than 50%
probability that the deferred tax asset can be
realized.
The
Company also complies with the provisions of ASC Topic 740,
“Income Taxes”, which prescribes a recognition
threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to
be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon
examination by the relevant taxing authority based on the technical
merits. The tax benefit recognized is measured as the largest
amount of benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement with the relevant taxing
authority. Derecognition of a tax benefit previously recognized
results in the Company recording a tax liability that reduces
ending retained earnings. Based on its analysis, the Company has
determined that it has not incurred any liability for unrecognized
tax benefits as of December 31, 2020
and 2019. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits as income tax
expense. No amounts were accrued for the payment of interest and
penalties at December 31, 2020 and
2019. Generally, the Company is no longer subject to income
tax examinations by major domestic taxing authorities for years
before 2017. According to the China tax regulatory framework, there
is no statute of limitations on examination of tax filings by tax
authorities. However, the general practice is going back five
years. Management is currently unaware of any issues under review
that could result in significant payments, accruals or material
deviations from its position.
Foreign Currency Translation Gain (Loss) and Comprehensive Income
(Loss)
In
countries in which the Company operates, and the functional
currency is other than the U.S. dollar, assets and liabilities are
translated using published exchange rates in effect at the
consolidated balance sheet date. Equity accounts are
translated at historical rates except for the changes in
accumulated deficit during the year as the result of the income
statement translation process. Revenues and expenses and cash flows
are translated using a weighted average exchange rate for the
period. Resulting translation adjustments are recorded
as a component of accumulated other comprehensive loss on the
accompanying consolidated balance sheets. For the years
ended December 31, 2020 and
2019, other comprehensive income includes gains of $142,000
and $2,000, respectively, which were entirely from foreign currency
translation.
Net Income (Loss) Per Common Share
Basic
income per common share is based on the weighted average number of
common shares outstanding without consideration of potential common
stock. Diluted earnings per common share is based on the weighted
average number of common and potential dilutive common shares
outstanding.
Diluted earnings per share were computed based on the weighted
average number of shares outstanding plus all potentially dilutive
common shares. A reconciliation of basic to diluted shares
used in the earnings per share calculation is as
follows:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
169,932
|
167,843
|
|
Dilutive
effect of unvested restricted shares
|
914
|
-
|
|
Diluted
weighted average shares outstanding
|
170,846
|
167,843
|
The
following table represents common stock equivalents that were
excluded from the computation of diluted earnings per share for the
years ended December 31, 2020 and 2019, because the effect of their
inclusion would be anti-dilutive.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
common stock grants
|
76
|
1,267
|
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, the Company adopted Accounting Standards
Codification (“ASC”) Topic 842, "Leases." See Note N
for further details.
Recently Issued Accounting Pronouncements
The
Company continually assesses any new accounting pronouncements to
determine their applicability to the Company. Where it is
determined that a new accounting pronouncement affects the
Company’s financial reporting, the Company undertakes a study
to determine the consequence of the change to its financial
statements and assures that there are proper controls in place to
ascertain that the Company’s consolidated financial
statements properly reflect the change. New pronouncements assessed
by the Company recently are discussed below:
Credit Losses on Financial instruments
In June
2016, the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which provides new guidance regarding the measurement
and recognition of credit impairment for certain financial assets.
Such guidance will impact how we determine our allowance for
estimated uncollectible receivables. In November 2019, the FASB
issued ASU 2019-10, which changed the effective date of ASU 2016-13
for smaller reporting companies as defined by the SEC from first
quarter of 2020 to the first quarter of 2023, with early adoption
permitted. We are currently evaluating the effect that ASU 2016-13
will have on our consolidated financial statements and related
disclosures.
NOTE D
– SEGMENT REPORTING
The Company views its business in three segments
– the IT segment, the professional sales service segment, and
the equipment segment. The IT segment includes the operations of
NetWolves and VasoHealthcare IT Corp. The professional sales
service segment operates through the Vaso Diagnostics subsidiary
and is currently engaged solely in the fulfillment of the
Company’s responsibilities under our agreement with GEHC. The
equipment segment is engaged in designing, manufacturing, marketing
and supporting EECP®
enhanced external counterpulsation
systems (see Note O) both domestically and internationally, as well
as the development, production, marketing and supporting of other
medical devices.
The chief operating decision maker is the
Company’s Chief Executive Officer, who, in conjunction with
upper management, evaluates segment performance based on operating
income and Adjusted EBITDA (earnings before interest, taxes,
depreciation and amortization – defined as net (loss) income,
plus net interest expense (income), tax expense, depreciation and
amortization, and non-cash expenses for share-based compensation).
Administrative functions such as
finance and human resources 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:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
IT
|
$43,894
|
$45,505
|
|
Professional
sales service
|
22,865
|
26,208
|
|
Equipment
|
3,091
|
3,802
|
|
Total
revenues
|
$69,850
|
$75,515
|
|
|
|
|
|
Gross
Profit
|
|
|
|
IT
|
$17,682
|
$18,790
|
|
Professional
sales service
|
18,608
|
21,287
|
|
Equipment
|
2,281
|
2,355
|
|
Total
gross profit
|
$38,571
|
$42,432
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
IT
|
$(1,247)
|
$(1,170)
|
|
Professional
sales service
|
2,977
|
3,626
|
|
Equipment
|
(155)
|
(855)
|
|
Corporate
|
(803)
|
(1,010)
|
|
Total
operating income (loss)
|
$772
|
$591
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
IT
|
$2,010
|
$2,213
|
|
Professional
sales service
|
161
|
170
|
|
Equipment
|
291
|
298
|
|
Corporate
|
-
|
-
|
|
Total
depreciation and amortization
|
$2,462
|
$2,681
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
IT
|
$960
|
$1,149
|
|
Professional
sales service
|
26
|
-
|
|
Equipment
|
12
|
54
|
|
Corporate
|
2
|
2
|
|
Total
cash capital expenditures
|
$1,000
|
$1,205
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
IT
|
$28,110
|
$30,079
|
|
Professional
sales service
|
9,171
|
16,257
|
|
Equipment
|
6,668
|
6,370
|
|
Corporate
|
6,427
|
1,658
|
|
Total
assets
|
$50,376
|
$54,364
|
For the
years ended December 31, 2020 and 2019, GEHC accounted for 33% and
35% of revenue, respectively. Also, GEHC accounted for $5.1
million, or 52%, and $10.9 million, or 69%, of accounts and other
receivables at December 31, 2020 and 2019,
respectively.
Our
revenues were derived from the following geographic
areas:
(in thousands)
|
|
|
|
|
|
|
|
Domestic
(United States)
|
$67,184
|
$73,019
|
|
Non-domestic
(foreign)
|
2,666
|
2,496
|
|
|
$69,850
|
$75,515
|
NOTE E
– ACCOUNTS AND OTHER RECEIVABLES
The
following table presents information regarding the Company’s
accounts and other receivables as of December 31, 2020 and
2019:
(in
thousands)
|
|
|
|
|
|
|
|
|
Trade
receivables
|
$13,960
|
$20,110
|
|
Due
from employees
|
24
|
27
|
|
Allowance
for doubtful accounts and
|
|
|
|
commission
adjustments
|
(4,208)
|
(4,285)
|
|
Accounts
and other receivables, net
|
$9,776
|
$15,852
|
Trade
receivables include amounts due for shipped products and services
rendered. Amounts currently due 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 estimated future
changes in sales order amounts that may reduce the amount the
Company will ultimately receive under the GEHC Agreement. Due from
employees primarily reflects commission advances made to sales
personnel.
NOTE F
– INVENTORIES
Inventories, net of
reserves, consisted of the following:
(in
thousands)
|
|
|
|
|
|
|
|
|
Raw
materials
|
$669
|
$650
|
|
Work
in process
|
4
|
181
|
|
Finished
goods
|
711
|
1,110
|
|
|
$1,384
|
$1,941
|
At
December 31, 2020 and 2019, the Company maintained reserves for
slow moving inventories of $167,000 and $390,000,
respectively.
NOTE G
– PROPERTY AND EQUIPMENT
Property and
equipment is summarized as follows:
(in
thousands)
|
|
|
|
|
|
|
|
|
Office,
laboratory and other equipment
|
$2,328
|
$2,476
|
|
Equipment
furnished for customer
|
|
|
|
or
clinical uses
|
9,176
|
8,796
|
|
Right
of use assets - finance leases
|
1,115
|
1,115
|
|
Furniture
and fixtures
|
99
|
127
|
|
|
12,718
|
12,514
|
|
Less:
accumulated depreciation and amortization
|
(8,833)
|
(7,560)
|
|
Property
and equipment, net
|
$3,885
|
$4,954
|
Accumulated
amortization of right of use (“ROU”) assets under
finance leases aggregated approximately $636,000 and $438,000 at
December 31, 2020 and 2019, respectively. Depreciation expense
amounted to approximately $1,556,000 and $1,738,000 for the years
ended December 31, 2020 and 2019, respectively. Amortization of ROU
assets under finance leases is included in depreciation
expense.
NOTE H
– GOODWILL AND OTHER INTANGIBLES
Goodwill of
$14,375,000 is attributable to the NetWolves reporting unit within
the IT segment. The remaining $1,313,000 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 December 31, 2020 and 2019. The changes
in the carrying amount of goodwill are as follows:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
$17,271
|
$17,309
|
|
Foreign
currency translation adjustment
|
82
|
(38)
|
|
Sale
of equity in EECP Global
|
(1,665)
|
-
|
|
End
of period
|
$15,688
|
$17,271
|
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 table:
(in
thousands)
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
|
Costs
|
$5,831
|
$5,831
|
|
Accumulated
amortization
|
(3,947)
|
(3,553)
|
|
|
1,884
|
2,278
|
|
|
|
|
|
Patents
and Technology
|
|
|
|
Costs
|
1,894
|
2,363
|
|
Accumulated
amortization
|
(1,521)
|
(1,752)
|
|
|
373
|
611
|
|
|
|
|
|
Software
|
|
|
|
Costs
|
3,394
|
2,840
|
|
Accumulated
amortization
|
(1,702)
|
(1,428)
|
|
|
1,692
|
1,412
|
|
|
|
|
|
|
$3,949
|
$4,301
|
The
Company owns, through our Chinese subsidiaries, thirty invention
and utility patents that expire at various times through 2032, as
well as fourteen software copyright certificates in China related
to proprietary technologies in physiological data acquisition,
analysis and reporting. The Company also holds one patent for
secure and remote monitoring management through its NetWolves
subsidiary. Costs incurred for submitting the applications to the
United States Patent and Trademark Office and other foreign
authorities for these patents have been capitalized. Patent and
technology costs are being amortized using the straight-line method
over 10-year and 8-year lives, respectively. The Company begins
amortizing patent costs once a filing receipt is received stating
the patent serial number and filing date from the Patent Office or
other foreign authority. Due to the sale of equity in the EECP
business, the Company deconsolidated approximately $469,000 in
gross patent assets and related accumulated amortization.
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 approximately $906,000 and $943,000 for the
years ended December 31, 2020 and 2019, respectively. Amortization
of intangibles for the next five years is:
(in thousands)
|
Years
ending December 31,
|
|
|
2021
|
1,064
|
|
2022
|
768
|
|
2023
|
543
|
|
2024
|
474
|
|
2025
|
408
|
|
|
$3,257
|
NOTE I
– OTHER ASSETS
Other
assets consist of the following:
(in
thousands)
|
|
|
|
|
|
|
|
|
Deferred
commission expense - noncurrent
|
$1,683
|
$1,770
|
|
Trade
receivables - noncurrent
|
448
|
631
|
|
Other,
net of allowance for loss on loan receivable of
|
|
|
|
$412
at December 31, 2020 and 2019
|
59
|
185
|
|
|
$2,190
|
$2,586
|
NOTE J
– DEFERRED REVENUE
The
changes in the Company’s deferred revenues are as
follows:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue at beginning of period
|
$19,343
|
$18,086
|
|
Deconsolidate
EECP Global (see Note O)
|
(769)
|
-
|
|
Net
additions:
|
|
|
|
Deferred
extended service contracts
|
144
|
363
|
|
Deferred
in-service and training
|
3
|
13
|
|
Deferred
service arrangements
|
5
|
25
|
|
Deferred
commission revenues
|
7,752
|
11,366
|
|
Recognized
as revenue:
|
|
|
|
Deferred
extended service contracts
|
(140)
|
(566)
|
|
Deferred
in-service and training
|
-
|
(15)
|
|
Deferred
service arrangements
|
(5)
|
(30)
|
|
Deferred
commission revenues
|
(8,629)
|
(9,899)
|
|
Deferred
revenue at end of period
|
17,704
|
19,343
|
|
Less:
current portion
|
11,516
|
12,345
|
|
Long-term
deferred revenue at end of period
|
$6,188
|
$6,998
|
NOTE K
– ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consist of the
following:
(in
thousands)
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
$1,044
|
$1,509
|
|
Accrued
expenses - other
|
1,854
|
1,818
|
|
Other
liabilities
|
1,969
|
2,017
|
|
|
$4,867
|
$5,344
|
NOTE L
– RELATED-PARTY TRANSACTIONS
The
Company recorded interest charges aggregating approximately
$287,000 and $467,000 for the years ended December 31, 2020 and
2019, respectively, payable to MedTechnology Investments, LLC
(“MedTech”) pursuant to its promissory notes
(“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. The Notes bore interest, payable
quarterly, at an annual rate of 9% through their original maturity
date of May 29, 2019. 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 was paid on or before
December 31, 2019 and the annual interest rate for the balance
increased to 10% during the extension. The $1,200,000 principal
payment was waived pursuant to MedTech’s consent to the bank
line of credit maturity extension to September 30, 2020. The Notes
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. In
April 2020, $1.2 million in principal was repaid and the maturity
date of $3.6 million of the Notes were extended through April 30,
2021 at a new interest rate of 6% per annum. The maturity date was
extended again in March 2021 to June 30, 2022, provided $1.2
million is paid prior to April 1, 2021, and $50,000 is paid
quarterly beginning June 30, 2021 (see Note U). The interest rate
remains at 6% per annum. Approximately $1.4 million of the $3.6
million outstanding balance of the MedTech Notes is included in
current liabilities in the Company’s consolidated balance
sheet as of December 31, 2020. Interest charges aggregating
approximately $55,000 were outstanding at December 31, 2020 and
paid on January 4, 2021.
David
Lieberman, a practicing attorney in the State of New York, serves
as Vice Chairman of the Board of Directors. He is
currently a senior partner at the law firm of Beckman Lieberman and
Associates, LLP, which performs certain legal services for the
Company. Fees of approximately $227,000 and $280,000 were billed by
the firm for the years ended December 31, 2020 and 2019,
respectively, at which dates no amounts were
outstanding.
On August 6, 2014 the Company acquired all of the
outstanding shares of Genwell Instruments Co. Ltd.
(“Genwell”), located in Wuxi, China for cash and notes
of Chinese Yuan RMB13,250,000 (approximately $2,151,000 at the
acquisition date). In August 2019, the Company modified the
notes, which had a remaining principal balance of RMB2,250,000, to
change the interest rate from 9% to 10% per annum, effective August
27, 2019, and to extend the maturity date from August 26, 2019 to
February 26, 2020. Unsecured notes and accrued interest aggregating
approximately $339,000 was payable to officers of Biox at December
31, 2019. The notes and accrued interest were repaid in March
2020.
In the
year ended December 31, 2019, the Company issued notes aggregating
$930,000 to third parties, including directors and employees. The
notes matured from January 2020 to July 2020 and bore interest at
10% per annum payable quarterly. In March 2020, the notes were
extended for six months, substantially all of which matured by
November 2020, at a reduced interest rate of 8%, and permitted
prepayment without penalty. In June and July 2020, the Company
repaid the notes and accrued interest.
NOTE M
– NOTES PAYABLE
Notes
payable consist of the following:
(in thousands)
|
|
|
|
|
|
|
|
|
Line
of credit
|
$4,346
|
$5,721
|
|
Notes
payable
|
3,803
|
300
|
|
Notes
payable - MedTech
|
3,600
|
4,800
|
|
Notes
payable - related parties
|
-
|
1,253
|
|
Total
debt
|
11,749
|
12,074
|
|
Less:
current portion (including related parties)
|
(5,970)
|
(3,933)
|
|
|
$5,779
|
$8,141
|
Line of Credit
NetWolves
maintains a $4.0 million line of credit with a lending institution.
In December 2019, the line’s expiration date was extended
from December 18, 2019 to September 30, 2020, and the interest rate
was increased 25 basis points to LIBOR plus 3.50%. In April 2020,
the lending institution extended the maturity date to April 30,
2021 and established a minimum LIBOR rate of 0.50%. The maturity
date was extended again in March 2021 to June 30, 2022 provided
$825,000 is paid prior to April 1, 2021, and $50,000 is paid
quarterly beginning June 30, 2021 (see Note U). Advances under the
line are secured by substantially all of the assets of NetWolves
Network Services, LLC and guaranteed by Vaso Corporation. During
the year ended December 31, 2020, $100,000 in draw was repaid. At
December 31, 2020, the Company had drawn approximately $3.7 million
against the line, of which amount $975,000 is included in notes
payable – current portion in the Company’s consolidated
balance sheet at December 31, 2020.
The
Company maintained an additional $2.0 million line of credit with a
lending institution. In December 2019, the line’s expiration
date was extended from December 18, 2019 to September 30, 2020, and
the interest rate was increased 25 basis points to LIBOR plus
3.50%. Advances under the line are secured by substantially all of
the assets of the Company. In April 2020, the lending institution
extended the maturity date to April 30, 2021 and established a
minimum LIBOR rate of 0.50%, and $1.2 million in draw was repaid.
At December 31, 2020, the Company had drawn $675,000 against the
line. In March 2021, the $675,000 balance and accrued interest was
paid off in full and the line was closed (see Note U). The line of
credit agreement includes certain financial covenants, and the
Company was in compliance with such covenants at December 31, 2020.
The $675,000 balance is included in notes payable – current
portion in the Company’s consolidated balance sheet at
December 31, 2020.
Notes Payable
In
August 2019, the Company issued to a private party a $300,000 note
bearing interest at 10% and maturing November 15, 2019. In
November, 2019, the note’s maturity date was extended to
January 15, 2020, and repaid upon maturity.
In
April 2020, the Company’s Biox subsidiary issued a note
RMB1,000,000 (approximately $153,000) with a Chinese bank for
working capital purposes. The note was secured by the assets of
Biox and bore interest at 4.35% per annum. It matured on April 15,
2021 and was repaid upon maturity.
In
August 2020, the Company issued a note for approximately $42,000
for the purchase of equipment. The note is secured by the purchased
equipment, bears interest at 1.9% and is payable in 60 equal
monthly installments maturing August 2025.
Paycheck Protection Program debt
In
April 2020, the Company received funding of a $3,610,900 Note (the
“PPP Note”) issued by PNC Bank, National Association
(“PNC”) pursuant to the Coronavirus Aid, Relief, and
Economic Security (CARES) Act’s Paycheck Protection Program
(the “Program”).
The
Company accounts for the PPP Note in accordance with Financial
Accounting Standards Board ASC Topic 470, “Debt”, and
Technical Question and Answer (TQA) 3200.18, “Borrower
Accounting for a Forgivable Loan Received Under the Small Business
Administration Paycheck Protection Program”. Under the TQA,
the Company:
●
Initially records
the cash inflow from the PPP loan as a financial liability and
accrues interest in accordance with the interest method under ASC
Subtopic 835-30.
●
Does not impute
additional interest at a market rate.
●
Continues to record
the proceeds from the loan as a liability until either (i) the loan
is partly or wholly forgiven and the debtor has been legally
released or (ii) the debtor pays off the loan.
●
Reduces the
liability by the amount forgiven and records a gain on
extinguishment once the loan is partly or wholly forgiven and legal
release is received.
Amounts
outstanding on the PPP Note are at the annual interest rate of 1%.
During the first six months of the PPP Note, there is no principal
nor interest required to be paid. Thereafter, to the extent the PPP
Note is not forgiven under the Program, the outstanding balance of
the PPP Note converts to an amortizing term loan payable monthly
over an eighteen-month period, which has been updated according to
the Paycheck Protection Program Flexibility Act of 2020
(“Flexibility Act”). The PPP Note can be prepaid at any
time without penalty.
In June
2020, the Flexibility Act was signed into law, which amended the
CARES Act. The Flexibility Act changed key provisions of the PPP,
including, but not limited to, (i) provisions relating to the
maturity of PPP loans, (ii) the deferral period covering of PPP
loan payments and (iii) the process for measurement of loan
forgiveness. More specifically, the Flexibility Act provides a
minimum maturity of five years for all PPP loans made on or after
the date of the enactment of the Flexibility Act (“June 5,
2020”) and permits lenders and borrowers to extend the
maturity date of earlier PPP loans by mutual agreement. As of the
date of this filing, the Company has not approached the lender to
request an extension of the maturity date from two years to five
years. The Flexibility Act also provides that if a borrower does
not apply for forgiveness of a loan within 10 months after the last
day of the measurement period (“covered period”), the
PPP loan is no longer deferred and the borrower must begin paying
principal and interest. In addition, the Flexibility Act extended
the length of the covered period from eight weeks to 24 weeks from
receipt of proceeds, while allowing borrowers that received PPP
loans before June 5, 2020 to determine, at their sole discretion, a
covered period of either 8 weeks or 24 weeks.
After
reviewing the applicable terms and conditions of the Flexibility
Act, the Company elected to extend the length of the covered period
from the lesser of (i) period whereby qualified expenses equal loan
proceeds or (ii) 24 weeks. The Company has performed initial
calculations for the PPP loan forgiveness according to the terms
and conditions of the SBA’s Loan Forgiveness Application
(Revised June 16, 2020) and, based on such calculations, expects
that the PPP loan will be forgiven in full over a period less than
24 weeks. In October 2020, the Company submitted its application to
PNC for forgiveness of the PPP Note in an amount equal to the sum
of the following costs incurred by the Company during the covered
period beginning on the date of first disbursement of the PPP Note
proceeds:
(a)
payroll costs;
(b) any
payment of interest on a covered mortgage obligation;
(c) any
covered rent payment; and
(d) any
covered utility payment.
The
amount of forgiveness is calculated in accordance with the
requirements of the Program. In this regard, no more than 40% of
the amount forgiven can be attributable to non-payroll
costs.
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.
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
professional sales services 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)
|
|
|
|
|
|
|
|
|
Lease
liabilities - current
|
|
|
|
Finance
leases
|
$190
|
$170
|
|
Operating
leases
|
540
|
549
|
|
|
$730
|
$719
|
|
Lease
liabilities - net of current portion
|
|
|
|
Finance
leases
|
$246
|
$437
|
|
Operating
leases
|
469
|
321
|
|
|
$715
|
$758
|
A
reconciliation of undiscounted cash flows to finance and operating
lease liabilities recognized in the consolidated balance sheet at
December 31, 2020 is set forth below:
(in thousands)
|
Years
ending December 31,
|
|
|
|
|
2021
|
227
|
613
|
840
|
|
2022
|
200
|
374
|
574
|
|
2023
|
62
|
98
|
160
|
|
Undiscounted
lease payments
|
489
|
1,085
|
1,574
|
|
Amount
representing interest
|
(53)
|
(76)
|
(129)
|
|
Discounted
lease liabilities
|
436
|
1,009
|
1,445
|
Additional
disclosures of lease data are set forth below:
(in thousands)
|
|
Year ended December 31, 2020
|
|
|
|
|
Lease costs:
|
|
|
Finance
lease costs:
|
|
|
Amortization
of right-of-use assets
|
$198
|
|
Interest
on lease liabilities
|
56
|
|
|
254
|
|
Operating
lease costs:
|
712
|
|
Short-term
lease costs:
|
82
|
|
Total
lease cost
|
$1,048
|
|
|
|
|
Other information:
|
|
|
Cash
paid for amounts included in the
|
|
|
measurement
of lease liabilities:
|
|
|
Operating
cash flows from finance leases
|
$56
|
|
Operating
cash flows from operating leases
|
712
|
|
Financing
cash flows from finance leases
|
171
|
|
|
$939
|
|
|
|
|
|
|
|
Weighted-average
remaining lease term - finance leases (months)
|
29
|
|
Weighted-average
remaining lease term - operating leases (months)
|
23
|
|
|
|
|
Weighted-average
discount rate - finance leases
|
12.1%
|
|
Weighted-average
discount rate - operating leases
|
8.6%
|
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
– SALE OF EQUITY IN THE EECP BUSINESS
On May
20, 2020, the Company closed on the sale of 51% of the capital
stock of its wholly-owned subsidiary EECP Global Corporation
(“EECP Global”) to Chongqing PSK-Health Sci-Tech
Development Co. Ltd, a China-based company, for $1,150,000. EECP
Global was formed in September 2019 to hold all the assets and
liabilities of its EECP business. Concurrently with the closing of
the transaction, the Company signed a three-year Management Service
Agreement with EECP Global to provide management service for the
business and operation of EECP Global in the United States.
Pursuant to the agreement, EECP Global reimburses the Company all
direct expenses and pays a management fee starting April 1, 2020,
the effective date of the sale.
Due to
the Company’s now minority ownership of EECP Global, it
deconsolidated the EECP Global operations effective April 1, 2020
and recorded a gain on sale of approximately $110,000, of which
approximately $54,000 resulted from the gain related to the
remeasurement of the retained noncontrolling investment in EECP
Global to fair value. The gain on sale includes the effect of the
reclassification of approximately $187,000 in accumulated
translation losses from accumulated other comprehensive
loss.
The
Company uses the equity method to account for its interest in EECP
Global, as it has the ability to exercise significant influence
over the entity, and reports its share of EECP Global operations in
Other Income (Expense) on its condensed consolidated statements of
operations. For the year ended December 31, 2020, the
Company’s share of EECP Global’s income was
approximately $11,000. At December 31, 2020, the Company recorded a
net payable to related parties of approximately $233,000 on its
consolidated balance sheet for amounts due to EECP Global for
receivables collected on its behalf net of amounts due from EECP
Global for fees and cost reimbursements.
NOTE P
– STOCKHOLDERS' EQUITY
Chinese subsidiaries dividends and statutory reserves
The
payment of dividends by entities organized in China is subject to
limitations. In particular, regulations in China currently permit
payment of dividends only out of accumulated profits as determined
in accordance with PRC accounting standards and regulations. Based
on People’s Republic of China (PRC) accounting standards, our
Chinese subsidiaries are also required to set aside at least 10% of
after-tax profit each year to their general reserves until the
accumulative amount of such reserves reaches 50% of the registered
capital. As of December 31, 2020 and 2019, statutory reserves
aggregating approximately $35,000 were recorded in the
Company’s consolidated balance sheets. These reserves are not
distributable as cash dividends. In addition, they are required to
allocate a portion of their after-tax profit to their staff welfare
and bonus fund at the discretion of their respective boards of
directors. Moreover, if any of our PRC subsidiaries incurs debt on
its own behalf in the future, the instruments governing the debt
may restrict its ability to pay dividends or make other
distributions to us. Distribution of dividends from the Chinese
operating companies to foreign shareholders is subject to a 10%
withholding tax.
NOTE Q
- OPTION PLANS
2010 Stock Option and Stock Issuance Plan
On June
17, 2010 the Board of Directors approved the 2010 Stock Plan (the
“2010 Plan”) for officers, directors, employees and
consultants of the Company. The stock issuable under the 2010 Plan
shall be shares of the Company’s authorized but unissued or
reacquired common stock. The maximum number of shares of common
stock which may be issued under the 2010 Plan is 5,000,000
shares.
The
2010 Plan is comprised of two separate equity programs, the Options
Grant Program, under which eligible persons may be granted options
to purchase shares of common stock, and the Stock Issuance Program,
under which eligible persons may be issued shares of common stock
directly, either through the immediate purchase of such shares or
as a bonus for services rendered to the Company.
The
2010 Plan provides that the Board of Directors, or a committee of
the Board of Directors, will administer it with full authority to
determine the identity of the recipients of the options or shares
and the number of options or shares. Options granted under the 2010
Plan may be either incentive stock options or non-qualified stock
options. The option price shall be 100% of the fair market value of
the common stock on the date of the grant (or in the case of
incentive stock options granted to any individual stockholder
possessing more than 10% of the total combined voting power of all
voting stock of the Company, 110% of such fair market value). The
term of any option may be fixed by the Board of Directors, or its
authorized committee, but in no event shall it exceed five years
from the date of grant. Options are exercisable upon payment in
full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the
option.
No
shares or options were granted under the 2010 Plan during the year
ended December 31, 2020. In June 2020, the 2010 Plan terminated
with 15,059 ungranted authorized shares.
2013 Stock Option and Stock Issuance Plan
On
October 30, 2013, the Board of Directors approved the 2013 Stock
Plan (the “2013 Plan”) for officers, directors,
employees and consultants of the Company. The stock issuable under
the 2013 Plan shall be shares of the Company’s authorized but
unissued or reacquired common stock. The maximum number of shares
of common stock which may be issued under the 2013 Plan is
7,500,000 shares.
The
2013 Plan is comprised of two separate equity programs, the Options
Grant Program, under which eligible persons may be granted options
to purchase shares of common stock, and the Stock Issuance Program,
under which eligible persons may be issued shares of common stock
directly, either through the immediate purchase of such shares or
as a bonus for services rendered to the Company. The 2013 Plan
provides that the Board of Directors, or a committee of the Board
of Directors, will administer it with full authority to determine
the identity of the recipients of the options or shares and the
number of options or shares.
During
the year ended December 31, 2020, no shares of common stock were
granted under the 2013 Plan, 251,250 shares were forfeited, and
77,369 shares were withheld for withholding taxes.
No
shares of common stock or options were granted under the 2013 Plan
during the year ended December 31, 2020.
2016 Stock Option and Stock Issuance Plan
On
June 15, 2016, the Board of Directors ("Board") approved the 2016
Stock Plan (the "2016 Plan") for officers, directors, and senior
employees of the Corporation or any subsidiary of the
Corporation. The stock issuable under the 2016 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 2016 Plan is 7,500,000
shares.
The
2016 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.
No
shares of common stock or options were granted under the 2016 Plan
during the year ended December 31, 2020.
2019 Stock Option and Stock Issuance Plan
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.
During
the year ended December 31, 2020, 1,000,000 shares were granted
under the 2019 Plan.
The
following table summarizes non-vested restricted shares under all
plans for the year ended December 31, 2020:
(in
thousands)
|
|
Shares Available for
Future Issuance
|
|
Weighted Average Grant
Date Fair Value
|
|
Balance
at December 31, 2018
|
1,901,817
|
2,387,500
|
$0.12
|
|
Authorized
|
15,000,000
|
-
|
$-
|
|
Granted
|
(5,500,000)
|
5,500,000
|
$0.02
|
|
Vested
|
-
|
(2,077,089)
|
$0.08
|
|
Forfeited
|
290,203
|
(290,203)
|
$0.14
|
|
Balance
at December 31, 2019
|
11,692,020
|
5,520,208
|
$0.03
|
|
Authorized
|
-
|
-
|
$-
|
|
Granted
|
(1,000,000)
|
1,000,000
|
$0.02
|
|
Vested
|
-
|
(1,799,923)
|
$0.05
|
|
Forfeited
|
328,619
|
(328,619)
|
$0.10
|
|
Expired
|
(15,059)
|
-
|
$-
|
|
Balance
at December 31, 2020
|
11,005,580
|
4,391,666
|
$0.02
|
There
were 53,558,455 remaining authorized shares of common stock after
reserves for all stock option plans.
NOTE R
- INCOME TAXES
The
following is a geographical breakdown of income (loss) before the
provision for income taxes:
(in thousands)
|
|
|
|
|
|
|
|
Domestic
|
$(74)
|
$(152)
|
|
Foreign
|
431
|
(119)
|
|
Income
(loss) before provision for income taxes
|
$357
|
$(271)
|
The
provision for income taxes consisted of the following:
(in thousands)
|
|
|
|
|
|
|
|
Current
provision (benefit)
|
|
|
|
Federal
|
$-
|
$-
|
|
State
|
78
|
43
|
|
Foreign
|
(7)
|
16
|
|
Total
current provision (benefit)
|
71
|
59
|
|
|
|
|
|
Deferred
provision (benefit)
|
|
|
|
Federal
|
41
|
41
|
|
State
|
11
|
11
|
|
Foreign
|
(124)
|
-
|
|
Total
deferred provision (benefit)
|
(72)
|
52
|
|
|
|
|
|
Total
income tax (benefit) provision
|
$(1)
|
$111
|
|
|
|
|
|
Effective
income tax rate
|
-0.28%
|
-41.02%
|
Income
tax benefit for the year ended December 31, 2020 was $1,000 due
primarily to a $124,000 reduction in foreign deferred tax
liability, partially offset by $78,000 in state income taxes. The
income tax provision of $111,000 for the year ended December 31,
2019 was due primarily to $43,000 in state income taxes and a
$52,000 reduction in deferred tax assets.
The
following is a reconciliation of the effective income tax rate to
the federal statutory rate:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
21.00
|
21.00
|
|
State
income taxes
|
19.39
|
(16.91)
|
|
Change
in valuation allowance
|
|
|
|
relating
to operations
|
2.13
|
12.81
|
|
Foreign
tax rate differential
|
(61.99)
|
(15.27)
|
|
R&D
credit
|
(1.39)
|
5.64
|
|
Nondeductible
expenses
|
8.06
|
(29.32)
|
|
Other
|
12.52
|
(18.97)
|
|
|
(0.28)
|
(41.02)
|
The
effective tax rate increased mainly due to the change from pre-tax
loss in 2019 to pre-tax profit in 2020, and the impact of foreign
taxes and non-deductible expenses.
As of
December 31, 2020, the recorded deferred tax assets were
$14,917,000, reflecting a decrease of $428,000 during the year
ended December 31, 2020, which was offset by a valuation allowance
of $12,145,000, reflecting a decrease of $182,000.
The
components of our deferred tax assets and liabilities are
summarized as follows:
(in (thousands)
|
|
|
|
|
Deferred
Tax Assets:
|
|
|
|
Net
operating loss carryforwards
|
$12,026
|
$12,517
|
|
Amortization
|
344
|
338
|
|
Stock-based
compensation
|
6
|
6
|
|
Allowance
for doubtful accounts
|
110
|
84
|
|
Reserve
for slow moving inventory
|
47
|
169
|
|
Tax
credits
|
449
|
444
|
|
Expense
accruals
|
543
|
457
|
|
Excess
interest carryforwards
|
-
|
171
|
|
Deferred
revenue
|
1,392
|
1,159
|
|
Total
gross deferred taxes
|
14,917
|
15,345
|
|
Valuation
allowance
|
(12,145)
|
(12,327)
|
|
Net
deferred tax assets
|
2,772
|
3,018
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
Deferred
commissions
|
(370)
|
(302)
|
|
Goodwill
|
(1,445)
|
(1,186)
|
|
Differences
in timing of revenue recognition
|
-
|
(124)
|
|
Depreciation
|
(686)
|
(1,207)
|
|
Total
deferred tax liabilities
|
(2,501)
|
(2,819)
|
|
|
|
|
|
Total
deferred tax assets (liabilities)
|
271
|
199
|
|
|
|
|
|
|
|
|
|
Recorded
as:
|
|
|
|
Non-current
deferred tax assets
|
271
|
323
|
|
Non-current
deferred tax liabilities
|
-
|
(124)
|
|
Total
deferred tax assets (liabilities)
|
$271
|
$199
|
The
activity in the valuation allowance is set forth
below:
(in thousands)
|
|
|
|
|
Valuation
allowance, January 1,
|
$12,327
|
$12,362
|
|
Change
in valuation allowance
|
(182)
|
(35)
|
|
Valuation
allowance, December 31,
|
$12,145
|
$12,327
|
At
December 31, 2020, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $38
million expiring at various dates from 2020 through 2037 and
approximately $7 million with no expiration date.
Under
current tax law, the utilization of tax attributes will be
restricted if an ownership change, as defined, were to occur.
Section 382 of the Internal Revenue Code provides, in general, that
if an “ownership change” occurs with respect to a
corporation with net operating and other loss carryforwards, such
carryforwards will be available to offset taxable income in each
taxable year after the ownership change only up to the
“Section 382 Limitation” for each year (generally, the
product of the fair market value of the corporation’s stock
at the time of the ownership change, with certain adjustments, and
a specified long-term tax-exempt bond rate at such time). The
Company’s ability to use its loss carryforwards will be
limited in the event of an ownership change.
NOTE S
- COMMITMENTS AND CONTINGENCIES
Sales representation agreement
In
December 2017, the Company concluded an amendment of the GEHC
Agreement with GEHC, originally signed on May 19, 2010. The
amendment extends the term of the original agreement, which began
on July 1, 2010 and was previously extended in 2012 and 2015,
through December 31, 2022, subject to early termination by GEHC
without cause with certain conditions, making it the longest
extension thus far with a remaining term of five years from
December 31, 2017. Under the agreement, VasoHealthcare is the
exclusive representative for the sale of select GE Healthcare
diagnostic imaging products to specific market 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 with cause include: not materially achieving
certain sales goals, not maintaining a minimum number of sales
representatives, and not meeting various legal and GEHC policy
requirements. The Company met all the contractual conditions in
2020 except achieving certain sales goals due to the adverse impact
of the COVID-19 pandemic.
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
five-year term with extensions, unless earlier terminated by the
Company, but in no event can it 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
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.
On June
1, 2015, the Company entered into an Employment Agreement with Mr.
Peter Castle to be its Chief Operating Officer. The agreement
provides for a three-year term ending on June 1, 2018 and shall
extend for additional one-year periods annually commencing June 1,
2018, unless earlier terminated by the Company, but in no event can
extend beyond June 1, 2021. The Employment Agreement currently
provides for annual compensation of $350,000. Mr. Castle 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. Mr. Castle 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.
Licensing and Support Service Agreement
In
December 2020, NetWolves extended the licensing and support service
agreement of its billing system for an additional three years, to
expire December 2023. The agreement provides for monthly recurring
charges based on a percentage of billed revenues using these
services, which charges aggregated approximately $301,000 and
$331,000 for the years ended December 31, 2020 and 2019,
respectively.
Letters of Credit
At
December 31, 2020 we are contingently liable under a standby letter
of credit approximating $220,500. The letter of credit is being
maintained as security for payments to a vendor.
Litigation
The
Company is currently, and has been in the past, a party to various
routine legal proceedings, primarily employee related matters,
incident to the ordinary course of business. The Company believes
that the outcome of all such pending legal proceedings in the
aggregate is unlikely to have a material adverse effect on the
business or consolidated financial condition of the
Company.
Foreign operations
During
the years ended December 31, 2020 and 2019, the Company had and
continues to have operations in China. Operating transactions in China are denominated in the
Chinese currency called RMB or CNY, which is not freely convertible
into foreign currencies. Operating internationally involves
additional risks relating to such things as currency exchange
rates, different legal and regulatory environments, political,
economic risks relating to the stability or predictability of
foreign governments, differences in the manner in which different
cultures do business, difficulties in staffing and managing foreign
operations, differences in financial reporting, operating
difficulties, and other factors.
Commercial law is
still developing in China and there are limited legal precedents to
follow in commercial transactions. There are many tax jurisdictions
each of which may have changing tax laws. Applicable taxes include
value added taxes (“VAT”), Enterprise Income Tax, and
social (payroll) taxes. Regulations are often unclear. Tax
declarations (reports) are subject to review and taxing authorities
may impose fines, penalties and interest. These facts create risks
in China.
NOTE T
- 401(k) PLANS
The
Company maintains a defined contribution plan to provide retirement
benefits for its employees - the Vaso Corporation 401(k) Plan
adopted in April 1997. As allowed under Section 401(k) of the
Internal Revenue Code, the plan provides tax-deferred salary
deductions for eligible employees. Employees are eligible to
participate in the next quarter enrollment period after employment
and participants may make voluntary contributions to the plan up to
80% of their compensation, subject to applicable IRS annual
limitations. In the years ended December 31, 2020 and 2019 the
Company made discretionary contributions, to match a percentage of
employee contributions, of approximately $114,000 and $118,000,
respectively.
NOTE U
– SUBSEQUENT EVENT
Extension of debt maturity dates
In
March 2021, the Company made principal payments aggregating $1.5
million on its lines of credit and $1.2 million on its MedTech
Notes, and extended the maturity dates of its remaining line of
credit and its MedTech Notes to June 30, 2022. The extensions
require subsequent principal payments of $50,000 per quarter
beginning June 30, 2021 through March 31, 2022 under both the line
of credit and the MedTech Notes. No change was made to the interest
rates in effect at the time of extensions.
