ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions, including the current COVID-19 pandemic which has already adversely affected operating results; the effect of the dramatic changes taking place in IT and healthcare; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; continuation of the GEHC agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.
Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vaso” or “management” refer to Vaso Corporation and its subsidiaries
General Overview
COVID-19 pandemic
The COVID-19 pandemic has had a significant impact on the world economy and it is possible that some negative impact to the Company’s financial condition and results of operations may continue. At this time, we cannot reasonably estimate what the total impact may be. The pandemic has resulted in workforce and travel restrictions and created business disruptions in supply chain, production and demand across many business sectors. The pandemic continues to cause materials shortage and delivery delay in the diagnostic imaging business and our equipment segment. In addition, we have experienced the negative impact in the recurring revenue business in our IT segment as some of our customers have been adversely affected by the shutdown, and new business in this segment appears to be slower as well. The pandemic also may have a negative impact on our cash receipts as some customers request forbearance or a delay in their payments to us.
The pandemic may continue to impact our operations in 2022, depending on the duration of the pandemic and the timing and success of the reopening of the economy.
We have taken significant steps in our efforts to protect our workforce and our clients. Most of our employees have been working at least partially remotely and we have reopened our work sites consistent with the guidelines promulgated by the CDC and respective state governments.
Our Business Segments
Vaso Corporation (“Vaso”) was incorporated in Delaware in July 1987. We principally operate in three distinct business segments in the healthcare and information technology industries. We manage and evaluate our operations, and report our financial results, through these three business segments.
| · | IT segment, operating through a wholly-owned subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed network technology services; |
| | |
| · | 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, primarily focuses on the design, manufacture, sale and service of proprietary medical devices and software, operating through a wholly-owned subsidiary VasoMedical, Inc., which in turn operates through Vasomedical Solutions, Inc. for domestic business and Vasomedical Global Corp. for international business, respectively. |
Vaso Corporation and Subsidiaries
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations.
Certain of our accounting policies are deemed “critical”, as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see Note B to the condensed consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 31, 2022.
Results of Operations – For the Three Months Ended March 31, 2022 and 2021
Revenues
Total revenue for the three months ended March 31, 2022 and 2021 was $17,009,000 and $16,519,000, respectively, representing an increase of $490,000, or 3% year-over-year. On a segment basis, revenue in the professional sales service segment increased $1,952,000 while revenue in the IT and equipment segments decreased $1,250,000 and $212,000, respectively.
Revenue in the IT segment for the three months ended March 31, 2022 was $10,003,000 compared to $11,253,000 for the three months ended March 31, 2021, a decrease of $1,250,000, or 11%, of which $1,090,000 resulted from lower NetWolves revenue, due primarily to lower professional services and COVID-related customer attrition, and $160,000 from lower healthcare IT revenue, due primarily to lower software sales. Our monthly recurring revenue in the IT segment accounted for $9,234,000 or 92% of the segment revenue in the first quarter of 2022, and $10,025,000 or 89% of the segment revenue for the same quarter last year (see Note C).
Commission revenues in the professional sales service segment were $6,607,000 in the first quarter of 2022, an increase of $1,952,000, or 42%, as compared to $4,655,000 in the same quarter of 2021. The increase in commission revenues was due primarily to an increase in the volume of underlying equipment delivered by GEHC during the period as well as a higher blended commission rate applicable to such deliveries. The Company only recognizes commission revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement. Consequently, amounts billable, or billed and received, under the agreement with GE Healthcare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet. As of March 31, 2022, $26,945,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $8,975,000 was long-term. At March 31, 2021, $18,472,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $6,090,000 was long-term. The increase in deferred revenue is principally due to an increase in new orders booked in the first quarter 2022.
Revenue in the equipment segment decreased by $212,000, or 35%, to $399,000 for the three-month period ended March 31, 2022 from $611,000 for the same period of the prior year, principally due to lower deliveries in our China operations as a result of COVID lockdowns in China.
Vaso Corporation and Subsidiaries
Gross Profit
Gross profit for the three months ended March 31, 2022 and 2021 was $9,767,000, or 57% of revenue, and $8,559,000, or 52% of revenue, respectively, representing an increase of $1,208,000, or 14% year-over-year. On a segment basis, gross profit in the professional sales service segment increased $1,641,000, or 45%, while gross profit in the IT and equipment segments decreased $272,000, or 6%; and $161,000, or 33%, respectively.
IT segment gross profit for the three months ended March 31, 2022 was $4,134,000, or 41% of the segment revenue, compared to $4,406,000, or 39% of the segment revenue for the three months ended March 31, 2021. The year-over-year decrease of $272,000, or 6%, was primarily a result of lower sales volume at NetWolves partially offset by higher margin product sales mix in the healthcare IT business.
Professional sales service segment gross profit was $5,306,000, or 80% of segment revenue, for the three months ended March 31, 2022 as compared to $3,665,000, or 79% of the segment revenue, for the three months ended March 31, 2021, reflecting an increase of $1,641,000, or 45%. The increase in absolute dollars was primarily due to higher commission revenue as a result of higher blended commission rate and higher volume of GEHC equipment delivered during the first quarter of 2022 than in the same period last year. Cost of commissions in the professional sales service segment of $1,301,000 and $990,000, for the three months ended March 31, 2022 and 2021, respectively, reflected commission expense associated with recognized commission revenues.
Commission expense associated with short-term deferred revenue is recorded as short-term deferred commission expense, or with long-term deferred revenue as part of other assets, on the balance sheet until the related commission revenue is recognized.
Equipment segment gross profit decreased to $327,000, or 82% of segment revenues, for the first quarter of 2022 compared to $488,000, or 80% of segment revenues, for the same quarter of 2021. The $161,000, or 33%, decrease in gross profit was the result of lower revenue in our China operations due to reduced delivery volume for the first quarter of 2022, partially offset by higher gross profit margin product mix during the quarter.
Operating Loss
Operating loss for the three months ended March 31, 2022 and 2021 was $354,000 and $539,000, respectively, representing an improvement of $185,000, or 34%, due primarily to higher gross profit. On a segment basis, the professional sales service segment recorded operating income of $237,000 in the first quarter of 2022 as opposed to an operating loss of $336,000 in the same period of 2021; the IT segment recorded an operating loss of $139,000 in the first quarter of 2022 as opposed to operating income of $69,000 in the same period of 2021; and the equipment segment recorded an operating loss of $79,000 in the first quarter of 2022 as opposed to operating income of $13,000 in the same period of 2021.
Operating loss in the IT segment was $139,000 for the three-month period ended March 31, 2022, a net change of $208,000 from operating income of $69,000 in the same period of 2021, due to lower gross profit partially offset by lower selling, general, and administrative (“SG&A”) and research and development (“R&D”) costs. The professional sales service segment reporting operating income of $237,000 in the three-month period ended March 31, 2022 as compared to an operating loss of $336,000 in the same period of 2021, an improvement of $573,000. The improvement was due to higher gross profit partially offset by higher SG&A costs. The equipment segment reported an operating loss of $79,000 in the first quarter of 2022, compared to operating income of $13,000 in the first quarter 2021, a decrease of $92,000. The decrease was due to lower gross profit partially offset by lower SG&A costs.
Vaso Corporation and Subsidiaries
SG&A costs for the three months ended March 31, 2022 and 2021 were $9,999,000 and $8,954,000, respectively, representing an increase of $1,045,000, or 12% year-over-year. On a segment basis, SG&A costs in the IT segment decreased by $14,000 in the first quarter of 2022 from the same quarter of the prior year due to reduced third-party commissions partially offset by higher personnel costs; SG&A costs in the professional sales service segment increased $1,069,000 due mainly to cost of national sales meeting (which was held online last year), and higher travel and personnel costs; and SG&A costs in the equipment segment decreased $97,000 due mainly to lower personnel costs. Corporate costs not allocated to segments increased $88,000 to $373,000 in the three months ended March 31, 2022 from $285,000 for the same period in 2021 due mainly to higher accounting and insurance costs.
Research and development (“R&D”) expenses were $122,000, or 1% of revenues, for the first quarter of 2022, a decrease of $22,000, or 15%, from $144,000, or 1% of revenues, for the first quarter of 2021. The decrease is primarily attributable to lower product development expenses and a reduction in technical staff in the IT segment.
Adjusted EBITDA
We define Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure, as net income (loss), plus interest expense (income), net; tax expense; depreciation and amortization; and non-cash expenses for share-based compensation. Adjusted EBITDA is a metric that is used by the investment community for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.
Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and should not be considered a substitute for operating income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with U.S. GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
A reconciliation of net loss to Adjusted EBITDA is set forth below:
| | (in thousands) | |
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
| | (unaudited) | | | (unaudited) | |
Net loss | | $ | (344 | ) | | $ | (643 | ) |
Interest expense (income), net | | | 19 | | | | 121 | |
Income tax expense | | | 12 | | | | 18 | |
Depreciation and amortization | | | 453 | | | | 596 | |
Share-based compensation | | | 7 | | | | 9 | |
Adjusted EBITDA | | $ | 147 | | | $ | 101 | |
Adjusted EBITDA increased by $46,000, to $147,000 in the quarter ended March 31, 2022 from $101,000 in the quarter ended March 31, 2021. The increase was attributable to the decrease in net loss, partially offset primarily by the decrease in depreciation and amortization and interest expense.
Interest and Other Income (Expense)
Interest and other income (expense) for the three months ended March 31, 2022 was $22,000 as compared to $(86,000) for the corresponding period of 2021. The increase in interest and other income (expense) was due primarily to lower interest expense due to principal payments against the line of credit and other notes payable.
Vaso Corporation and Subsidiaries
Income Tax Expense
For the three months ended March 31, 2022, we recorded income tax expense of $12,000 as compared to income tax expense of $18,000 for the corresponding period of 2021. The decrease was due mainly from lower state income taxes.
Net Loss
Net loss for the three months ended March 31, 2022 was $344,000 as compared to $643,000 for the three months ended March 31, 2021, representing an improvement of $299,000, or 47%. Loss per share of $0.00 was recorded in both the three-month periods ended March 31, 2022 and 2021. The principal cause of the decrease in net loss is the change from operating loss to operating income in the professional sales service segment, an improvement of $573,000, as well as lower interest expense, partially offset by lower gross profit in the IT and equipment segments.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations from working capital. At March 31, 2022, we had cash and cash equivalents of $4,971,000 and negative working capital of $3,100,000, compared to cash and cash equivalents of $6,025,000 and negative working capital of $3,197,000 at December 31, 2021. $14,451,000 in negative working capital at March 31, 2022 is attributable to the net balance of deferred commission expense and deferred revenue. These are non-cash expense and revenue items and have no impact on future cash flows.
Cash used in operating activities during the three months ended March 31, 2022 was $625,000, which consisted of net loss after adjustments to reconcile net loss to net cash of $251,000 and cash used by operating assets and liabilities of $876,000, compared to cash provided by operating activities of $5,475,000 for the same period in 2021. The $6,100,000 decrease in cash provided by operating activities was due to the late arrival of a commission payment of $7,747,000 that was scheduled for March 2022 and the Company received in April 2022. The changes in the account balances primarily reflect decreases in accrued commissions and accrued expenses and other liabilities of $1,174,000 and $1,026,000, respectively, partially offset by an increase in deferred revenue of $1,989,000 and a decrease in accounts and other receivables of $563,000.
Cash used in investing activities during the three-month period ended March 31, 2022 was $195,000 for the purchase of equipment and software and $158,000 for the purchase of short-term investments.
Cash used in financing activities during the three-month period ended March 31, 2022 was $62,000 resulting from repayments of notes payable and finance lease obligations.
Liquidity
The Company expects to generate sufficient cash flow from operations to satisfy its obligations for the next twelve months.
It is anticipated that the COVID-19 pandemic may continue to adversely impact our operations during and beyond the remaining quarters of 2022, depending on the duration of the pandemic and the timing and success of the reopening of the economy.
Vaso Corporation and Subsidiaries