Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2022
☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _______________ to ______________
	Commission File Number: 0-18105

 

 

VASO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		11-2871434
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

 

137 Commercial St., Suite 200, Plainview, New York 11803

(Address of principal executive offices)

 

[phone]

Registrant’s Telephone Number

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☒
		Emerging Growth Company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Securities registered pursuant to Section 12 (b) of the Act: None

 

Number of Shares Outstanding of Common Stock, $.001 Par Value, at November 11, 2022 – 175,127,878

 

 

Vaso Corporation and Subsidiaries

 

INDEX

 

PART I – FINANCIAL INFORMATION			3
ITEM 1 -	FINANCIAL STATEMENTS		3
	CONDENSED CONSOLIDATED BALANCE SHEETS as of September 30, 2022 (unaudited) and December 31, 2021		3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		4
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the Nine Months Ended September 30, 2022 and 2021		6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)		7
ITEM 2 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21
ITEM 4 -	CONTROLS AND PROCEDURES		29
PART II - OTHER INFORMATION			30
ITEM 6 –	EXHIBITS		30

 

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Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

Vaso Corporation and Subsidiaries

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

		September 30, 2022				December 31, 2021
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	13,283			$	6,025
Short-term investments			5,438				629
Accounts and other receivables, net of an allowance for doubtful accounts and commission adjustments of $6,281 at September 30, 2022 and $5,804 at December 31, 2021			8,594				15,393
Receivables due from related parties			407				66
Inventories, net			1,714				1,147
Deferred commission expense			3,716				3,549
Prepaid expenses and other current assets			1,183				994
Total current assets			34,335				27,803
Property and equipment, net of accumulated depreciation of  $9,681 at September 30, 2022 and $10,512 at December 31, 2021			1,478				2,172
Operating lease right of use assets			1,696				915
Goodwill			15,581				15,722
Intangibles, net			1,600				2,041
Other assets, net			2,791				2,446
Investment in EECP Global			948				1,043
Deferred tax assets, net			219				219
Total assets		$	58,648			$	52,361
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	3,049			$	2,797
Accrued commissions			1,996				2,705
Accrued expenses and other liabilities			8,400				7,489
Finance lease liabilities - current			156				222
Operating lease liabilities - current			770				562
Sales tax payable			716				719
Deferred revenue - current portion			17,525				16,495
Notes payable - current portion			8				8
Due to related party			3				3
Total current liabilities			32,623				31,000
LONG-TERM LIABILITIES
Notes payable, net of current portion			17				23
Finance lease liabilities, net of current portion			112				218
Operating lease liabilities, net of current portion			927				352
Deferred revenue, net of current portion			9,367				8,470
Other long-term liabilities			1,071				988
Total long-term liabilities			11,494				10,051
COMMITMENTS AND CONTINGENCIES (NOTE N)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized; nil shares issued and outstanding at September 30, 2022 and December 31, 2021			-				-
Common stock, $.001 par value; 250,000,000 shares authorized; 185,435,965 shares issued at September 30, 2022 and December 31, 2021; 175,127,878 shares outstanding at September 30, 2022 and December 31, 2021			185				185
Additional paid-in capital			63,939				63,917
Accumulated deficit			(47,253	)			(50,902	)
Accumulated other comprehensive income			(340	)			110
Treasury stock, at cost, 10,308,087 shares at September 30, 2022 and December 31, 2021			(2,000	)			(2,000	)
Total stockholders equity			14,531				11,310
		$	58,648			$	52,361

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Vaso Corporation and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

 

		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
Revenues		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Managed IT systems and services		$	9,836				10,580			$	29,858			$	32,275
Professional sales services			9,439				7,246				24,900				16,872
Equipment sales and services			760				603				1,789				1,932
Total revenues			20,035				18,429				56,547				51,079
Cost of revenues
Cost of managed IT systems and services			5,741				6,341				17,952				19,536
Cost of professional sales services			1,570				1,692				4,545				3,677
Cost of equipment sales and services			188				136				409				407
Total cost of revenues			7,499				8,169				22,906				23,620
Gross profit			12,536				10,260				33,641				27,459
Operating expenses
Selling, general and administrative			9,978				9,501				29,584				27,646
Research and development			130				123				422				437
Total operating expenses			10,108				9,624				30,006				28,083
Operating income (loss)			2,428				636				3,635				(624	)
Other (expense) income
Interest and financing costs			(14	)			(61	)			(38	)			(267	)
Interest and other income, net			96				95				96				120
Gain on forgiveness of PPP loan			-				-				-				3,646
Loss on disposal of fixed assets			-				-				(2	)			-
Total other income, net			82				34				56				3,499
Income before income taxes			2,510				670				3,691				2,875
Income tax expense			(12	)			(19	)			(42	)			(87	)
Net income			2,498				651				3,649				2,788
Other comprehensive income
Foreign currency translation gain (loss)			(234	)			11				(450	)			41
Comprehensive income		$	2,264				662			$	3,199			$	2,829
Income per common share
- basic and diluted		$	0.01				0.00			$	0.02			$	0.02
Weighted average common shares outstanding
- basic			173,528				172,228				172,909				171,506
- diluted			174,892				174,196				174,513				173,562

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Vaso Corporation and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

																										Accumulated
																		Additional								Other				Total
		Common Stock								Treasury Stock								Paid-in-				Accumulated				Comprehensive				Stockholders
		Shares				Amount				Shares				Amount				Capital				Deficit				Loss				Equity
Balance at January 1, 2021			185,244			$	185				(10,308	)			(2,000	)		$	63,886			$	(57,002	)		$	16			$	5,085
Share-based compensation			-				-				-				-				9				-				-				9
Foreign currency translation loss			-				-				-				-				-				-				(21	)			(21	)
Net loss			-				-				-				-				-				(643	)			-				(643	)
Balance at March 31, 2021 (unaudited)			185,244			$	185				(10,308	)		$	(2,000	)		$	63,895			$	(57,645	)		$	(5	)		$	4,430
Share-based compensation			192				-				-				-				8				-				-				8
Foreign currency translation gain			-				-				-				-				-				-				51				51
Net income			-				-				-				-				-				2,780				-				2,780
Balance at June 30, 2021 (unaudited)			185,436			$	185				(10,308	)		$	(2,000	)		$	63,903			$	(54,865	)		$	46			$	7,269
Share-based compensation			-				-				-				-				8				-				-				8
Foreign currency translation gain			-				-				-				-				-				-				11				11
Net income			-				-				-				-				-				651				-				651
Balance at September 30, 2021 (unaudited)			185,436			$	185				(10,308	)		$	(2,000	)		$	63,911			$	(54,214	)		$	57			$	7,939
Balance at January 1, 2022			185,436			$	185				(10,308	)			(2,000	)		$	63,917			$	(50,902	)		$	110			$	11,310
Share-based compensation			-				-				-				-				7				-				-				7
Foreign currency translation loss			-				-				-				-				-				-				(1	)			(1	)
Net loss			-				-				-				-				-				(344	)			-				(344	)
Balance at March 31, 2022 (unaudited)			185,436			$	185				(10,308	)		$	(2,000	)		$	63,924			$	(51,246	)		$	109			$	10,972
Share-based compensation			-				-				-				-				6				-				-				6
Foreign currency translation loss			-				-				-				-				-				-				(215	)			(215	)
Net income			-				-				-				-				-				1,495				-				1,495
Balance at June 30, 2022 (unaudited)			185,436			$	185				(10,308	)		$	(2,000	)		$	63,930			$	(49,751	)		$	(106	)		$	12,258
Share-based compensation			-				-				-				-				9				-				-				9
Foreign currency translation loss			-				-				-				-				-				-				(234	)			(234	)
Net income			-				-				-				-				-				2,498				-				2,498
Balance at September 30, 2022 (unaudited)			185,436			$	185				(10,308	)		$	(2,000	)		$	63,939			$	(47,253	)		$	(340	)		$	14,531

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Vaso Corporation and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Nine months ended September 30,
		2022				2021
Cash flows from operating activities		(unaudited)				(unaudited)
Net income		$	3,649			$	2,788
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			1,576				1,748
Loss from investment in EECP Global			95				35
Gain on forgiveness of PPP loan			-				(3,646	)
Provision for doubtful accounts and commission adjustments			236				545
Write-down of inventory			-				282
Share-based compensation			22				25
Changes in operating assets and liabilities:
Accounts and other receivables			6,502				2,669
Due from related parties			(343	)			(80	)
Inventories			(697	)			13
Deferred commission expense			(167	)			(589	)
Prepaid expenses and other current assets			(239	)			441
Other assets, net			(539	)			81
Accounts payable			261				(3,569	)
Accrued commissions			(560	)			146
Accrued expenses and other liabilities			849				2,388
Sales tax payable			20				(89	)
Deferred revenue			1,927				2,480
Due to related party			-				(233	)
Other long-term liabilities			84				9
Net cash provided by operating activities			12,676				5,444
Cash flows from investing activities
Purchases of equipment and software			(447	)			(367	)
Purchases of short-term investments			(5,000	)			-
Redemption of short-term investments			151				155
Net cash used in investing activities			(5,296	)			(212	)
Cash flows from financing activities
Repayment on revolving lines of credit			-				(3,025	)
Repayment of notes payable and finance lease obligations			(177	)			(2,823	)
Net cash used in financing activities			(177	)			(5,848	)
Effect of exchange rate differences on cash and cash equivalents			55				(13	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			7,258				(629	)
Cash and cash equivalents - beginning of period			6,025				6,819
Cash and cash equivalents - end of period		$	13,283			$	6,190
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
Interest paid		$	37			$	284
Income taxes paid		$	60			$	101
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Initial recognition of operating lease right of use asset and liability		$	1,332			$	639

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Vaso Corporation and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

 

Vaso Corporation was incorporated in Delaware in July 1987.  Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Vaso” or “management” refer to Vaso Corporation and its subsidiaries.      

 

Overview

 

Vaso Corporation principally operates in three distinct business segments in the healthcare and information technology (“IT”) industries.  We manage and evaluate our operations, and report our financial results, through these three business segments.

 

	·	IT segment, operating through a wholly-owned subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed network technology services;
	·	Professional sales service segment, operating through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the sale of healthcare capital equipment for General Electric Healthcare (“GEHC”) into the healthcare provider middle market; and
	·	Equipment segment, operating through a wholly-owned subsidiary VasoMedical, Inc., primarily focuses on the design, manufacture, sale and service of proprietary medical devices and software.

 

VasoTechnology

 

Vaso Technology, Inc. was formed in May 2015, at the time the Company acquired all of the assets of NetWolves, LLC and its affiliates, including the membership interests in NetWolves Network Services, LLC (collectively, “NetWolves”).  It currently consists of a managed network and security service division and a healthcare IT application division.  Its current offerings include:

 

	·	Managed radiology and imaging applications (channel partner of select vendors of healthcare IT products).
	·	Managed network infrastructure (routers, switches and other core equipment).
	·	Managed network transport (FCC licensed carrier reselling over 175 facility partners).
	·	Managed security services.

 

VasoTechnology uses a combination of proprietary technology, methodology and third-party applications to deliver its value proposition.

 

VasoHealthcare

 

Vaso Healthcare commenced operations in 2010, in conjunction with the Company’s execution of its exclusive sales representation agreement (“GEHC Agreement”) with GEHC, which is the healthcare business division of the General Electric Company (“GE”), to further the sale of certain healthcare capital equipment in the healthcare provider middle market.  Sales of GEHC equipment by the Company have grown significantly since then.  

 

VasoHealthcare’s current offerings consist of:

 

	·	GEHC diagnostic imaging capital equipment.
	·	GEHC service agreements for the above equipment.
	·	GEHC training services for use of the above equipment.
	·	GEHC and third-party financial services.

 

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Vaso Corporation and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

VasoMedical

 

Vaso Medical is the Company’s business division for its proprietary medical device operations, including the design, development, manufacturing, sales and service of various medical devices in the domestic and international markets and includes the Vasomedical Global and Vasomedical Solutions business units.  These devices are primarily for cardiovascular monitoring and diagnostic systems.  Its current offerings consist of:

 

	·	Biox™ series Holter monitors and ambulatory blood pressure recorders.
	·	ARCS® series analysis, reporting and communication software for ECG and blood pressure signals.
	·	MobiCare™ multi-parameter wireless vital-sign monitoring system.
	·	EECP® therapy systems for non-invasive, outpatient treatment of ischemic heart disease.

 

This segment uses its extensive cardiovascular device knowledge coupled with its significant engineering resources to cost-effectively create and market its proprietary technology. It works with a global distribution network of channel partners to sell its products.  It also provides engineering and OEM services to other medical device companies.

 

NOTE B – INTERIM STATEMENT PRESENTATION

 

Basis of Presentation and Use of Estimates

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 31, 2022.

 

These unaudited condensed consolidated financial statements include the accounts of the companies over which we exercise control. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of interim results for the Company. The results of operations for any interim period are not necessarily indicative of results to be expected for any other interim period or the full year.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities in the unaudited condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenues, expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates and assumptions the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company’s management. The Company evaluates its estimates and assumptions on an ongoing basis.

 

Significant Accounting Policies and Recent Accounting Pronouncements

 

Recent Accounting Pronouncements Not Yet Adopted

 

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.

 

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Vaso Corporation and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE C – REVENUE RECOGNITION

 

Disaggregation of Revenue

 

The following tables present revenues disaggregated by our business operations and timing of revenue recognition: 

 

		(in thousands)
		Three Months Ended September 30, 2022 (unaudited)																Three Months Ended September 30, 2021 (unaudited)
						Professional sales																Professional sales
						service				Equipment												service				Equipment
		IT segment				segment				segment				Total				IT segment				segment				segment				Total
Network services		$	8,786			$	-			$	-			$	8,786			$	9,181			$	-			$	-			$	9,181
Software sales and support			1,049				-				-				1,049				1,399				-				-				1,399
Commissions			-				9,439				-				9,439				-				7,246				-				7,246
Medical equipment sales			-				-				727				727				-				-				570				570
Medical equipment service			-				-				32				32				-				-				33				33
		$	9,836			$	9,439			$	760			$	20,035			$	10,580			$	7,246			$	603			$	18,429

 

		Nine Months Ended September 30, 2022 (unaudited)																Nine Months Ended September 30, 2021 (unaudited)
						Professional sales																Professional sales
						service				Equipment												service				Equipment
		IT segment				segment				segment				Total				IT segment				segment				segment				Total
Network services		$	26,705			$	-			$	-			$	26,705			$	28,670			$	-			$	-			$	28,670
Software sales and support			3,153				-				-				3,153				3,605				-				-				3,605
Commissions			-				24,900				-				24,900				-				16,872				-				16,872
Medical equipment sales			-				-				1,696				1,696				-				-				1,835				1,835
Medical equipment service			-				-				93				93				-				-				97				97
		$	29,858			$	24,900			$	1,789			$	56,547			$	32,275			$	16,872			$	1,932			$	51,079

 

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		Three Months Ended September 30, 2022 (unaudited)																Three Months Ended September 30, 2021 (unaudited)
						Professional sales																Professional sales
						service				Equipment												service				Equipment
		IT segment				segment				segment				Total				IT segment				segment				segment				Total
Revenue recognized over time		$	9,220			$	-			$	84			$	9,305			$	9,561			$	-			$	76			$	9,637
Revenue recognized at a point in time			616				9,439				676				10,730				1,019				7,246				527				8,792
		$	9,836			$	9,439			$	760			$	20,035			$	10,580			$	7,246			$	603			$	18,429

 

		Nine Months Ended September 30, 2022 (unaudited)																Nine Months Ended September 30, 2021 (unaudited)
						Professional sales																Professional sales
						service				Equipment												service				Equipment
		IT segment				segment				segment				Total				IT segment				segment				segment				Total
Revenue recognized over time		$	27,530			$	-			$	232			$	27,762			$	28,831			$	-			$	139			$	28,970
Revenue recognized at a point in time			2,328				24,900				1,557				28,785				3,444				16,872				1,793				22,109
		$	29,858			$	24,900			$	1,789			$	56,547			$	32,275			$	16,872			$	1,932			$	51,079

 

Transaction Price Allocated to Remaining Performance Obligations

 

As of September 30, 2022, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $86.0 million, of which we expect to recognize revenue as follows:

 

		(in thousands)
		Fiscal years of revenue recognition (unaudited)
		2022				2023				2024				Thereafter
Unfulfilled performance obligations		$	13,214			$	41,017			$	12,280			$	19,503

 

Contract Liabilities

 

Contract liabilities arise in our healthcare IT, VasoHealthcare, and VasoMedical businesses.  In our healthcare IT 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 $503,000 and $407,000 at September 30, 2022 and December 31, 2021, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets. 

 

In our VasoHealthcare business, we bill amounts for certain milestones in advance of customer acceptance of the underlying equipment. Such amounts aggregated approximately $26,886,000 and $24,956,000 at September 30, 2022 and December 31, 2021, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.  In addition, we record a contract liability for amounts expected to be repaid to GEHC due to customer order reductions.  Such amounts aggregated approximately $3,513,000 and $1,518,000 at September 30, 2022 and December 31, 2021, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets.

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

In our Vaso Medical business, we bill amounts for post-delivery services and varying duration service contracts in advance of performance.  Such amounts aggregated approximately $6,000 and $9,000 at September 30, 2022 and December 31, 2021, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.

 

During the three and nine months ended September 30, 2022, we recognized approximately $3.5 million and $7.7 million of revenues, respectively, that were included in our contract liability balance at July 1, 2022 and January 1, 2022, respectively.

 

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 is 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 also records commission adjustments to contract liabilities in its professional sales service segment based on estimates of future order cancellations.

 

NOTE D – SEGMENT REPORTING AND CONCENTRATIONS

 

Vaso Corporation principally operates in three distinct business segments in the healthcare and information technology industries.  We manage and evaluate our operations, and report our financial results, through these three reportable segments.

 

	·	IT segment, operating through a wholly-owned subsidiary Vaso Technology, 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 Vaso Healthcare, primarily focuses on the sale of healthcare capital equipment for GEHC into the healthcare provider middle market; and
	·	Equipment segment, operating through a wholly-owned subsidiary Vaso Medical, Inc., primarily focuses on the design, manufacture, sale and service of proprietary medical devices.

 

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Vaso Corporation and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

The chief operating decision maker is the Company’s Chief Executive Officer, who, in conjunction with upper management, evaluates segment performance based on operating income and adjusted EBITDA (net income (loss), plus interest expense (income), net; tax expense; depreciation and amortization; and non-cash stock-based compensation).  Administrative functions such as finance, human resources, and information technology are centralized and related expenses allocated to each segment.  Other costs not directly attributable to operating segments, such as audit, legal, director fees, investor relations, and others, as well as certain assets – primarily cash balances – are reported in the Corporate entity below.  There are no intersegment revenues.  Summary financial information for the segments is set forth below:

 

		(in thousands)
		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues from external customers
IT		$	9,836			$	10,580			$	29,858			$	32,275
Professional sales service			9,439				7,246				24,900				16,872
Equipment			760				603				1,789				1,932
Total revenues		$	20,035			$	18,429			$	56,547			$	51,079
Gross Profit
IT		$	4,095			$	4,239			$	11,906			$	12,739
Professional sales service			7,869				5,554				20,355				13,195
Equipment			572				467				1,380				1,525
Total gross profit		$	12,536			$	10,260			$	33,641			$	27,459
Operating income (loss)
IT		$	(474	)		$	(77	)		$	(1,531	)		$	(254	)
Professional sales service			3,143				1,091				6,133				709
Equipment			24				(96	)			(132	)			(212	)
Corporate			(265	)			(282	)			(835	)			(867	)
Total operating income (loss)		$	2,428			$	636			$	3,635			$	(624	)
Depreciation and amortization
IT		$	263			$	512			$	1,367			$	1,413
Professional sales service			10				39				32				115
Equipment			45				73				177				220
Corporate			-				-				-				-
Total depreciation and amortization		$	318			$	624			$	1,576			$	1,748
Capital expenditures
IT		$	86			$	238			$	383			$	324
Professional sales service			-				-				40				3
Equipment			2				1				23				37
Corporate			-				3				1				3
Total cash capital expenditures		$	88			$	242			$	447			$	367

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Identifiable Assets
IT		$	22,771			$	23,144
Professional sales service			14,419				18,718
Equipment			7,258				7,144
Corporate			14,200				3,355
Total assets		$	58,648			$	52,361

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

GE Healthcare accounted for 47% and 39% of revenue for the three months ended September 30, 2022 and 2021, respectively, and 39% and 33% of revenue for the nine months ended September 30, 2022 and 2021, respectively.  GE Healthcare also accounted for $7.1 million or 82%, and $12.3 million or 80%, of accounts and other receivables at September 30, 2022 and December 31, 2021, respectively.  No other customer accounted for 10% or more of revenue.

 

NOTE E –NET INCOME PER COMMON SHARE

 

Basic earnings per common share is computed as earnings applicable to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common stock. 

 

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)
		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Basic weighted average shares outstanding			173,528				172,228				172,909				171,506
Dilutive effect of unvested restricted shares			1,364				1,968				1,604				2,056
Diluted weighted average shares outstanding			174,892				174,196				174,513				173,562

 

The following table represents common stock equivalents that were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2022 and 2021, because the effect of their inclusion would be anti-dilutive.

 

		(in thousands)
		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Restricted common stock grants			-				-				2				-

 

NOTE F – SHORT-TERM INVESTMENTS AND FINANCIAL INSTRUMENTS

 

The Company’s short-term investments consist of bank deposits with yields based on underlying debt and equity securities and six-month US Treasury bills.  The bank deposits are carried at fair value and are classified as available-for-sale.  Realized gains or losses are included in net income.  The US Treasury bills, yielding 3.069%, are carried at amortized cost of approximately $5,016,000, classified as held-to-maturity, and accretion of discount is included in interest income.

 

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.

 

The Company complies with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”).  Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

In determining fair value, the Company uses various valuation approaches.  ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The carrying amounts shown of the Company’s financial instruments including cash and cash equivalents and accounts payable approximate fair value due to the short-term maturities of these instruments.

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

The following table presents information about the Company’s assets measured at fair value as of September 30, 2022 and December 31, 2021:

 

		Quoted Prices				Significant
		in Active				Other				Significant				Balance
		Markets for				Observable				Unobservable				as of
		Identical Assets				Inputs				Inputs				September 30,
		(Level 1)				(Level 2)				(Level 3)				2022
Assets
Cash equivalents invested in money market funds		$	7,826			$	-			$	-			$	7,826
Bank deposits (included in short term investments)			422												422
		$	8,248			$	-			$	-			$	8,248

 

		Quoted Prices				Significant
		in Active				Other				Significant				Balance
		Markets for				Observable				Unobservable				as of
		Identical Assets				Inputs				Inputs				December 31,
		(Level 1)				(Level 2)				(Level 3)				2021
Assets
Cash equivalents invested in money market funds		$	802			$	-			$	-			$	802
Bank deposits (included in short term investments)			629												629
		$	1,431			$	-			$	-			$	1,431

 

NOTE G – ACCOUNTS AND OTHER RECEIVABLES, NET

 

The following table presents information regarding the Company’s accounts and other receivables as of September 30, 2022 and December 31, 2021:

 

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Trade receivables		$	11,762			$	21,197
Unbilled receivables			3,113				-
Allowance for doubtful accounts and
commission adjustments			(6,281	)			(5,804	)
Accounts and other receivables, net		$	8,594			$	15,393

 

Contract receivables under Topic 606 consist of trade receivables and unbilled receivables.  Trade receivables include amounts due for shipped products and services rendered.  Unbilled receivables represent variable consideration recognized in accordance with Topic 606 but not yet billable.  Amounts recorded – billed and unbilled - under the GEHC Agreement are subject to adjustment in subsequent periods should the underlying sales order amount, upon which the receivable is based, change. 

 

Allowance for doubtful accounts and commission adjustments include estimated losses resulting from the inability of our customers to make required payments, and adjustments arising from subsequent changes in sales order amounts that may reduce the amount the Company will ultimately receive under the GEHC Agreement. 

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE H – INVENTORIES, NET

 

Inventories, net of reserves, consist of the following:

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Raw materials		$	798			$	744
Work in process			71				4
Finished goods			845				399
		$	1,714			$	1,147

 

The Company maintained reserves for slow moving inventories of $163,000 and $165,000 at September 30, 2022 and December 31, 2021, respectively.

 

NOTE I – GOODWILL AND OTHER INTANGIBLES

 

Goodwill of $14,375,000 is allocated to the IT segment.  The remaining $1,206,000 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 September 30, 2022 and December 31, 2021.  The components of the change in goodwill are as follows:

 

 

		(in thousands)
		Nine months ended				Year ended
		September 30, 2022				December 31, 2021
		(unaudited)
Beginning of period		$	15,722			$	15,688
Foreign currency translation adjustment			(141	)			34
End of period		$	15,581			$	15,722

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

The Company’s other intangible assets consist of capitalized customer-related intangibles, patent and technology costs, and software costs, as set forth in the following:

 

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Customer-related
Costs		$	5,831			$	5,831
Accumulated amortization			(4,487	)			(4,279	)
			1,344				1,552
Patents and Technology
Costs			1,894				1,894
Accumulated amortization			(1,894	)			(1,754	)
			-				140
Software
Costs			2,351				3,459
Accumulated amortization			(2,095	)			(3,110	)
			256				349
		$	1,600			$	2,041

 

Patents and technology are amortized on a straight-line basis over their estimated useful lives of ten and eight years, respectively.  The cost of significant customer-related intangibles is amortized in proportion to estimated total related revenue; cost of other customer-related intangible assets is amortized on a straight-line basis over the asset’s estimated economic life of seven years. Software costs are amortized on a straight-line basis over its expected useful life of five years.  

 

Amortization expense amounted to $136,000 and $213,000 for the three months ended September 30, 2022 and 2021, respectively and $451,000 and $641,000 for the nine months ended September 30, 2022 and 2021, respectively.

 

Amortization of intangibles for the next five years is:

 

 

		(in thousands)
Years ending December 31,		(unaudited)
Remainder of 2022		$	100
2023			340
2024			271
2025			201
2026			145
		$	1,057

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE J – OTHER ASSETS, NET

 

Other assets, net consist of the following at September 30, 2022 and December 31, 2021:

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Deferred commission expense - noncurrent		$	2,371			$	2,018
Trade receivables - noncurrent			301				368
Other, net of allowance for loss on loan receivable of
$412 at September 30, 2022 and December 31, 2021			119				60
		$	2,791			$	2,446

 

NOTE K – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses and other liabilities consist of the following at September 30, 2022 and December 31, 2021:

 

		(in thousands)
		September 30, 2022				December 31, 2021
		(unaudited)
Accrued compensation		$	1,428			$	2,397
Accrued expenses - other			1,422				1,799
Other liabilities			5,550				3,293
		$	8,400			$	7,489

 

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Vaso Corporation and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE L - DEFERRED REVENUE

 

The changes in the Company’s deferred revenues are as follows:

 

		(in thousands)
		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Deferred revenue at beginning of period		$	27,096			$	19,667			$	24,965			$	17,704
Net additions:
Deferred extended service contracts			-				-				-				(1	)
Deferred commission revenues			3,474				3,356				11,741				9,061
Recognized as revenue:
Deferred extended service contracts			(1	)			(1	)			(4	)			(4	)
Deferred commission revenues			(3,677	)			(2,837	)			(9,810	)			(6,575	)
Deferred revenue at end of period			26,892				20,185				26,892				20,185
Less: current portion			17,525				13,365				17,525				13,365
Long-term deferred revenue at end of period		$	9,367			$	6,820			$	9,367			$	6,820

 

NOTE M – RELATED-PARTY TRANSACTIONS

 

The Company recorded interest charges aggregating approximately $26,000 and $116,000 for the three and nine-month periods ended September 30, 2021, 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, and, through several principal payments made in 2020 and 2021, were repaid in full in December 2021. 

 

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 three months ended September 30, 2022 and 2021, the Company’s share of EECP Global’s loss was approximately $40,000 and $15,000, respectively, and for the nine months ended September 30, 2022 and 2021, the Company’s share of EECP Global’s loss was approximately $95,000 and $35,000, respectively, and included in Other (Expense) Income in its condensed consolidated statements of operations. At September 30, 2022 and December 31, 2021, the Company recorded a net receivable from related parties of approximately $389,000 and $46,000, respectively, on its condensed consolidated balance sheet for amounts due from EECP Global for fees and cost reimbursements net of amounts due to EECP Global for receivables collected on its behalf.

 

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Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE N – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is currently, and has been in the past, a party to various legal proceedings, primarily employee related matters, incident to its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is unlikely to have a material adverse effect on the business or consolidated financial condition of the Company.

 

Sales representation agreement

 

In October 2021, the Company concluded an amendment of the GEHC Agreement with GEHC, originally signed on May 19, 2010 and previously extended in 2012, 2015 and 2017. The amendment further extended the term of the agreement through December 31, 2026. Under the agreement, VasoHealthcare is the exclusive representative for the sale of select GE Healthcare diagnostic imaging products to certain customer segments/accounts in the 48 contiguous states of the United States and the District of Columbia. The agreement may be terminated by GE Healthcare with cause, which includes VasoHealthcare’s not materially achieving certain sales goals, not maintaining a minimum number of sales representatives, or not meeting various legal and GEHC policy requirements. The agreement may also be terminated by GE Healthcare without cause but subject to certain conditions.

 

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.

 

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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 and may continue to have a significant impact on the economy of the United States and the world until all major economies resume to normal, and as such, its 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. For Vaso Corporation, we believe that significant uncertainty will continue to remain in all our businesses for the remainder of 2022 and beyond.

 

We have taken significant steps in our efforts to protect our workforce and our clients. Many of our employees have been working remotely and we are implementing plans to fully reopen our work sites consistent with the guidelines promulgated by the CDC and respective state governments. In addition, the Company received a $3.6 million loan under the Paycheck Protection Program of the CARES Act. This loan was used to principally cover our payroll costs for a period of time as specified by the rules, thereby allowing us to maintain our workforce and continue to provide services and solutions to our clients. In June 2021, the loan, as well as accrued interest, was forgiven in its entirety by the Small Business Administration.

 

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, operating through a wholly-owned subsidiary VasoMedical, Inc., primarily focuses on the design, manufacture, sale and service of proprietary medical devices.

 

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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 September 30, 2022 and 2021

 

Revenues

 

Total revenue for the three months ended September 30, 2022 and 2021 was $20,035,000 and $18,429,000, respectively, representing an increase of $1,606,000, or 9% year-over-year.  On a segment basis, revenue in the professional sales services and equipment segments increased by $2,193,000 and $157,000, respectively, while revenue in the IT segment decreased by $744,000. 

 

Revenue in the IT segment for the three months ended September 30, 2022 was $9,836,000 compared to $10,580,000 for the three months ended September 30, 2021, a decrease of $744,000, or 7%, of which $394,000 resulted from lower network services revenue by NetWolves and $350,000 from lower revenues in the healthcare IT business.  Our monthly recurring revenue in the IT segment accounted for $9,220,000 or 94% of the segment revenue in the third quarter of 2022, and $9,561,000 or 90% of the segment revenue for the same quarter last year (see Note C). 

 

Commission revenues in the professional sales service segment were $9,439,000 in the third quarter of 2022, an increase of $2,193,000, or 30%, as compared to $7,246,000 in the same quarter of 2021.  The increase in commission revenues was due primarily to both an increase in the volume of underlying equipment delivered by GEHC during the period and 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 September 30, 2022, $26,886,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $9,366,000 was long-term.  As of September 30, 2021, $20,174,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $6,814,000 was long-term. The increase in deferred revenue is principally due to an increase in new orders booked. 

 

Revenue in the equipment segment increased by $157,000, or 26%, to $760,000 for the three-month period ended September 30, 2022 from $603,000 for the same period of the prior year, principally due to higher deliveries in our China operations partially offset by losses in foreign currency exchange.

 

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Gross Profit

 

Gross profit for the three months ended September 30, 2022 and 2021 was $12,536,000, or 63% of revenue, and $10,260,000, or 56% of revenue, respectively, representing an increase of $2,276,000, or 22% year-over-year.  On a segment basis, gross profit in the professional sales service and equipment segments increased $2,315,000, or 42%, and $105,000, or 23%, respectively, while gross profit in the IT segment decreased $144,000, or 3%. 

 

IT segment gross profit for the three months ended September 30, 2022 was $4,095,000, or 42% of the segment revenue, compared to $4,239,000, or 40% of the segment revenue for the three months ended September 30, 2021.  The year-over-year decrease of $144,000, or 3%, was primarily a result of lower sales volume in the NetWolves and healthcare IT businesses, partially offset by a higher margin sales mix in the NetWolves business. 

 

Professional sales service segment gross profit was $7,869,000, or 83% of segment revenue, for the three months ended September 30, 2022 as compared to $5,554,000, or 77% of the segment revenue, for the three months ended September 30, 2021, reflecting an increase of $2,315,000, or 42%.  The increase was due to higher commission revenue as a result of a higher blended commission rate and higher volume of GEHC equipment delivered during the third quarter of 2022 than in the same period last year, as well as by lower commission expenses.  Cost of commissions in the professional sales service segment of $1,570,000 and $1,692,000, for the three months ended September 30, 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 increased to $572,000, or 75% of segment revenues, for the third quarter of 2022 compared to $467,000, or 77% of segment revenues, for the same quarter of 2021.  The $105,000, or 23%, increase in gross profit was primarily the result of higher sales during the quarter.     

 

Operating Income (Loss)

 

Operating income for the three months ended September 30, 2022 was $2,428,000 compared to $636,000 for the same quarter in 2021, representing an increase of $1,792,000, or 282%, as gross profit increased much more than operating costs (below), year-over-year.  On a segment basis, the IT segment recorded an operating loss of $474,000 in the third quarter of 2022 as compared to an operating loss of $77,000 in the same period of 2021; the equipment segment recorded operating income of $24,000 in the third quarter of 2022 as opposed to an operating loss of $96,000 in the same period of 2021; and the professional sales service segment recorded operating income of $3,143,000 in the third quarter of 2022 as compared to operating income of $1,091,000 in the same period of 2021. 

 

Operating loss in the IT segment increased to $474,000 for the three-month period ended September 30, 2022 from an operating loss of $77,000 in the same period of 2021, due to lower gross profit and higher SG&A costs, partially offset by lower research and development (“R&D”) costs.  Operating income in the professional sales service segment increased by $2,052,000 in the three-month period ended September 30, 2022 as compared to operating income in the same period of 2021, due to higher gross profit partially offset by higher SG&A costs.  The equipment segment reported operating income of $24,000 in the third quarter of 2022, compared to an operating loss of $96,000 in the third quarter 2021, an increase of $120,000. The increase was primarily due to higher gross profit.

 

SG&A costs for the three months ended September 30, 2022 and 2021 were $9,978,000 and $9,501,000, respectively, representing an increase of $477,000, or 5% year-over-year.  On a segment basis, SG&A costs in the IT segment increased by $262,000 in the third quarter of 2022 from the same quarter of the prior year due to higher personnel and travel costs; SG&A costs in the professional sales service segment increased $263,000 due mainly to higher personnel costs associated with provision of expanded services; and SG&A costs in the equipment segment decreased $32,000 due mainly to lower amortization costs. Corporate costs not allocated to segments decreased $16,000 due mainly to lower investor relations fees.    

 

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Research and development expenses were $130,000, or 1% of revenues, for the third quarter of 2022, an increase of $7,000, or 6%, from $123,000, or 1% of revenues, for the third quarter of 2021. The increase is primarily attributable to higher product development expenses in the equipment segment.

 

Adjusted EBITDA

 

We define Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure, as net income (loss), plus interest expense (income), net; tax expense; depreciation and amortization; and non-cash expenses for share-based compensation.  Adjusted EBITDA is a metric that is used by the investment community for comparative and valuation purposes.  We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

 

Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and should not be considered a substitute for operating income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with U.S. GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

A reconciliation of net income to Adjusted EBITDA is set forth below:

 

		(in thousands)
		Three months ended September 30,
		2022				2021
		(unaudited)				(unaudited)
Net income		$	2,498			$	651
Interest expense (income), net			(34	)			62
Income tax expense			12				19
Depreciation and amortization			318				624
Share-based compensation			9				8
Adjusted EBITDA		$	2,803			$	1,364

 

Adjusted EBITDA increased by $1,439,000, to $2,803,000 in the quarter ended September 30, 2022 from $1,364,000 in the quarter ended September 30, 2021.  The increase was primarily attributable to the increase in net income, partially offset by the decrease in depreciation and amortization.   

 

Interest and Other Income (Expense)

 

Interest and other income (expense) for the three months ended September 30, 2022 was $82,000 as compared to $34,000 for the corresponding period of 2021. The change in interest and other income (expense) was due primarily to lower interest expense resulting from repayments of notes payable and lines of credit.

 

Income Tax Expense

 

For the three months ended September 30, 2022, we recorded income tax expense of $12,000 as compared to $19,000 for the corresponding period of 2021. The $7,000 decrease is due mainly to lower state tax expense.

 

Net Income

 

Net income for the three months ended September 30, 2022 was $2,498,000 as compared to net income of $651,000 for the three months ended September 30, 2021, representing an increase of $1,847,000.  Income per share of $0.01 and $0.00 was recorded in the three-month periods ended September 30, 2022 and 2021, respectively.  The principal cause of the increase in net income is the increase in gross profit, partially offset by the increase in SG&A costs. 

 

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Results of Operations – For the Nine Months Ended September 30, 2022 and 2021

 

Revenues

 

Total revenue for the nine months ended September 30, 2022 and 2021 was $56,547,000 and $51,079,000, respectively, representing an increase of $5,468,000, or 11% year-over-year.  On a segment basis, revenue in the professional sales service segment increased $8,028,000, while revenue in the IT and equipment segments decreased $2,417,000 and $143,000, respectively. 

 

Revenue in the IT segment for the nine months ended September 30, 2022 was $29,858,000 compared to $32, 275,000 for the nine months ended September 30, 2021, a decrease of $2,417,000, or 8%, of which $1,965,000 resulted from lower NetWolves revenue and $452,000 resulted from lower healthcare IT revenue.  Our monthly recurring revenue in the IT segment accounted for $27,530,000 or 92% of the segment revenue in the first nine months of 2022, and $28,831,000 or 89% of the segment revenue for the same period last year (see Note C). 

 

Commission revenues in the professional sales service segment were $24,900,000 in the first nine months of 2022, an increase of $8,028,000, or 48%, as compared to $16,872,000 in the first nine months 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 by a higher blended commission rate applicable to such deliveries.  The Company recognizes commission revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable, or billed and received, under the agreement with GE Healthcare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.  As of September 30, 2022, $26,886,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $9,366,000 was long-term.  As of September 30, 2021, $20,174,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $6,814,000 was long-term. The increase in deferred revenue is principally due to an increase in new orders booked. 

 

Revenue in the equipment segment decreased by $143,000, or 7%, to $1,789,000 for the nine-month period ended September 30, 2022 from $1,932,000 for the same period of the prior year, principally due to lower deliveries in our China operations and foreign currency exchange losses when converting the revenue from local currency to US dollars, partially offset by higher cloud-based software-as-a-service (“SaaS”) sales in the U.S.

 

Gross Profit

 

Gross profit for the nine months ended September 30, 2022 and 2021 was $33,641,000, or 59% of revenue, and $27,459,000, or 54% of revenue, respectively, representing an increase of $6,182,000, or 23% year-over-year.  On a segment basis, gross profit in the professional sales service segment increased $7,160,000, or 54%, while gross profit in the IT and equipment segments decreased $833,000, or 7%, and $145,000, or 10%, respectively. 

 

IT segment gross profit for the nine months ended September 30, 2022 was $11,906,000, or 40% of the segment revenue, compared to $12,739,000, or 39% of the segment revenue for the nine months ended September 30, 2021.  The year-over-year decrease of $833,000, or 7%, was primarily a result of lower revenue in both the network service business by NetWolves and healthcare IT business, partially offset by higher margin product sales mix in the healthcare IT business. 

 

Professional sales service segment gross profit was $20,355,000, or 82% of segment revenue, for the nine months ended September 30, 2022 as compared to $13,195,000, or 78% of the segment revenue, for the nine months ended September 30, 2021, reflecting an increase of $7,160,000, or 54%.  The increase was primarily due to higher commission revenue as a result of a higher volume of GEHC equipment delivered, as well as by a higher blended commission rate during the first nine months of 2022 than in the same period last year.  Cost of commissions in the professional sales service segment of $4,545,000 and $3,677,000, for the nine months ended September 30, 2022 and 2021, respectively, reflected commission expense associated with recognized commission revenues. 

 

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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 $1,380,000, or 77% of segment revenues, for the first nine months of 2022 compared to $1,525,000, or 79% of segment revenues, for the same period in 2021.  The $145,000, or 10%, decrease in gross profit was primarily the result of lower revenue and lower gross profit margin in our China operations.

 

Operating Income (Loss)

 

Operating income (loss) for the nine months ended September 30, 2022 and 2021 was $3,635,000 and ($624,000), respectively, representing an improvement of $4,259,000 as gross profit increased $6,182,000 and operating costs (below) increased $1,923,000, year-over-year.  On a segment basis, the IT segment recorded an operating loss of $1,531,000 in the first nine months of 2022 as compared to an operating loss of $254,000 in the same period of 2021; the equipment segment recorded an operating loss of $132,000 in the first nine months of 2022 as compared to an operating loss of $212,000 in the same period of 2021; and operating income in the professional sales service segment increased by $5,424,000, from $709,000 in the first nine months of 2021 to $6,133,000 in the same period of 2022. 

 

Operating loss in the IT segment increased to $1,531,000 for the nine-month period ended September 30, 2022 as compared to an operating loss of $254,000 in the same period of 2021, due primarily to lower gross profit and higher SG&A costs, partially offset by lower R&D costs.  Operating income in the professional sales service segment increased $5,424,000 in the nine-month period ended September 30, 2022 as compared to operating income in the same period of 2021, due to higher gross profit partially offset by higher SG&A costs.  The equipment segment reported an operating loss of $132,000 in the first nine months of 2022, compared to an operating loss of $212,000 in the first nine months of 2021, an improvement of $80,000. The decrease in loss was due to lower SG&A costs, partially offset by lower gross profit and higher R&D costs.

 

SG&A costs for the nine months ended September 30, 2022 and 2021 were $29,584,000 and $27,646,000, respectively, representing an increase of $1,938,000, or 7% year-over-year.  On a segment basis, SG&A costs in the IT segment increased by $507,000 in the first nine months of 2022 from the same period of the prior year due mainly to higher personnel, accounting and travel costs; SG&A costs in the professional sales service segment increased by $1,735,000 due to higher travel, vehicle and personnel costs; and SG&A costs in the equipment segment decreased by $272,000 due mainly to lower personnel costs. Corporate costs not allocated to segments decreased $32,000 due mainly to lower accounting and investor relations costs, partially offset by higher insurance costs.   

 

Research and development (“R&D”) expenses were $422,000, or 1% of revenues, for the first nine months of 2022, a decrease of $15,000, or 3%, from $437,000, or 1% of revenues, for the first nine months of 2021. The decrease is primarily attributable to lower product development expenses 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.

 

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A reconciliation of net income to Adjusted EBITDA is set forth below:

 

 

		(in thousands)
		Nine months ended September 30,
		2022				2021
		(unaudited)				(unaudited)
Net income		$	3,649			$	2,788
Interest expense (income), net			(10	)			261
Income tax expense			42				87
Depreciation and amortization			1,576				1,748
Share-based compensation			22				25
Adjusted EBITDA		$	5,279			$	4,909

 

Adjusted EBITDA increased by $370,000 to $5,279,000 in the nine months ended September 30, 2022 from $4,909,000 in the nine months ended September 30, 2021.  The increase was primarily attributable to higher net income, partially offset by lower interest expense and lower depreciation and amortization.   

 

Interest and Other Income (Expense)

 

Interest and other income (expense) for the nine months ended September 30, 2022 was $56,000 as compared to $3,499,000 for the corresponding period of 2021. The decrease in interest and other income was due primarily to the $3.6 million PPP loan forgiveness in the second quarter of 2021 and $229,000 lower interest expense in the nine months ended September 30, 2022.   

 

Income Tax (Expense) Benefit

 

For the nine months ended September 30, 2022, we recorded income tax expense of $42,000 as compared to income tax expense of $87,000 for the corresponding period of 2021. The decrease was due mainly to lower tax expense in our China operations.

 

Net Income

 

Net income for the nine months ended September 30, 2022 was $3,649,000 as compared to $2,788,000 for the nine months ended September 30, 2021, representing an increase of $861,000, or 31%.  Income per share of $0.02 was recorded in both of the nine-month periods ended September 30, 2022 and 2021.  The principal cause of the improvement is the increase in revenue and gross profit in the sales representation segment, partially offset by higher SG&A cost. 

 

Liquidity and Capital Resources

 

Cash and Cash Flow

 

We have financed our operations from working capital.  At September 30, 2022, we had cash, cash equivalents and short-term investments of $18,721,000 and working capital of $1,712,000, compared to cash, cash equivalents and short-term investments of $6,654,000 and negative working capital of $3,197,000 at December 31, 2021.  The $1,712,000 in working capital at September 30, 2022 includes the negative effect of the net balance of deferred commission expense and deferred revenue of $13,809,000.  These are non-cash expense and revenue items and have no impact on future cash flows.  Excluding the negative effect of these non-cash items, working capital would be $15,521,000 at September 30, 2022.

 

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Cash provided by operating activities was $12,676,000, which consisted of net income after adjustments to reconcile net income to net cash of $5,578,000 and cash provided by operating assets and liabilities of $7,098,000, during the nine months ended September 30, 2022, compared to cash provided by operating activities of $5,444,000 for the same period in 2021. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $6,502,000 and increases in accrued expenses and deferred revenue of $849,000 and $1,927,000, respectively, partially offset by an increase in inventories of $697,000. 

 

Cash used in investing activities during the nine-month period ended September 30, 2022 was $5,296,000 attributed to $447,000 used for the purchase of equipment and software and $5,000,000 used in the purchase of short-term investments, offset by $151,000 in redemption of short-term investments.

 

Cash used in financing activities during the nine-month period ended September 30, 2022 was $177,000 resulting from the repayment 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 quarter of 2022, depending on the duration of the pandemic and the timing and success of the continued reopening of the economy around the world.

 

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ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures reporting as promulgated under the Exchange Act is defined as controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.  Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022 and have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

 

ITEM 6 – EXHIBITS

 

Exhibits
31		Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	VASO CORPORATION
	By:	/s/ Jun Ma
		Jun Ma
		President and Chief Executive Officer
		(Principal Executive Officer)
		/s/ Michael J. Beecher.
		Michael J. Beecher
		Chief Financial Officer and Principal Accounting Officer
Date: November 14, 2022

 

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