VASO Corp: Form 10-Q for the period ended Mar 31, 2024

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 COVID-19 pandemic; the effect of the dramatic changes taking place in IT and healthcare; continuation of the GEHC agreement; the impact of competitive technology and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in the conduct of product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; and the risk factors reported from time to time in the Company’s SEC reports. 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 economies of the United States and China, 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. We have experienced 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. In addition, revenues in our China operations have been adversely affected by its government’s lockdown policies, which have only recently been reversed.

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.

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, 2023 as filed with the SEC on April 1, 2024.

Results of Operations – For the Three Months Ended March 31, 2024 and 2023

Revenues

Total revenue for the three months ended March 31, 2024 and 2023 was $18,738,000 and $19,036,000, respectively, representing a decrease of $298,000, or 2% year-over-year. On a segment basis, revenue in the professional sales service segment increased $2,000, while revenue in the IT and equipment segments decreased $121,000 and $179,000, respectively.

Revenue in the IT segment for the three months ended March 31, 2024 was $10,153,000 compared to $10,274,000 for the three months ended March 31, 2023, a decrease of $121,000, or 1%, of which $94,000 resulted from lower NetWolves revenue, due primarily to decreased managed service sales, and $27,000 from lower healthcare IT revenue, due primarily to lower software support sales. Monthly recurring revenue in the IT segment accounted for $9,301,000 or 92% of the segment revenue in the first quarter of 2024, and $9,520,000 or 93% of the segment revenue for the same quarter last year (see Note C).

Commission revenues in the professional sales service segment were $8,127,000 in the first quarter of 2024, an increase of $2,000, or less than 1%, as compared to $8,125,000 in the same quarter of 2023. The increase in commission revenues was due primarily to new revenues from the ultrasound product offering beginning in 2nd quarter of 2023, largely offset by lower revenues from the diagnostic imaging products. Diagnostic imaging revenues decreased due to lower volume of underlying equipment delivered by GEHC during the period as well as a lower blended commission rate applicable to such deliveries. The Company only recognizes commission revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement. Consequently, amounts billable, or billed and received, under the agreement with GEHC prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet. As of March 31, 2024, $31,424,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $14,154,000 was long-term. At March 31, 2023, $31,543,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $17,314,000 was long-term. The decrease in deferred revenue is principally due to lower value of new orders booked than orders delivered during the quarter.

Revenue in the equipment segment decreased by $179,000, or 28%, to $458,000 for the three-month period ended March 31, 2024 from $637,000 for the same period of the prior year, principally due to lower deliveries in our China operations resulting from impact of increased government scrutiny of healthcare purchasing practices.

Gross Profit

Gross profit for the three months ended March 31, 2024 and 2023 was $10,918,000, or 58% of revenue, and $11,562,000, or 61% of revenue, respectively, representing a decrease of $644,000, or 6% year-over-year. On a segment basis, gross profit in the IT, professional sales service, and equipment segments decreased $245,000, or 6%; $265,000, or 4%; and $134,000, or 28%, respectively.

IT segment gross profit for the three months ended March 31, 2024 was $4,195,000, or 41% of the segment revenue, compared to $4,440,000, or 43% of the segment revenue for the three months ended March 31, 2023. The year-over-year decrease of $245,000, or 6%, was primarily a result of both lower sales volume and lower margin product sales mix in the healthcare IT business.

Professional sales service segment gross profit was $6,378,000, or 79% of segment revenue, for the three months ended March 31, 2024 as compared to $6,643,000, or 82% of the segment revenue, for the three months ended March 31, 2023, reflecting a decrease of $265,000, or 4%. The decrease in absolute dollars was primarily due to higher cost of commissions combined with essentially flat revenues. Cost of commissions in the professional sales service segment of $1,749,000 and $1,482,000, for the three months ended March 31, 2024 and 2023, respectively, reflected commission expense associated with recognized commission revenues. Cost of commissions increased primarily due to a higher commission cost structure associated with ultrasound product 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 was $345,000, or 75% of segment revenues, for the first quarter of 2024 compared to $479,000, or 75% of segment revenues, for the same quarter of 2023. The $134,000, or 28%, decrease in gross profit was mainly the result of lower revenue in our China operations due to decreased delivery volume for the first quarter of 2024.

Operating (Loss) Income

Operating (loss) income for the three months ended March 31, 2024 and 2023 was ($1,468,000) and $262,000, respectively, representing a decrease of $1,730,000, due primarily to lower gross profit and higher selling, general, and administrative (“SG&A”) expenses. On a segment basis, the professional sales service segment recorded an operating loss of $7,000 in the first quarter of 2024, as compared to operating income of $839,000 for the same period of 2023; the IT segment recorded an operating loss of $420,000 in the first quarter of 2024 as compared to an operating loss of $109,000 in the same period of 2023; and the equipment segment recorded an operating loss of $294,000 in the first quarter of 2024 as compared to an operating loss of $25,000 in the same period of 2023.

Operating loss in the IT segment was $420,000 for the three-month period ended March 31, 2024, an increase in loss of $311,000 from an operating loss of $109,000 in the same period of 2023, due mainly to lower gross profit and higher SG&A costs. The professional sales service segment reported an operating loss of $7,000 in the three-month period ended March 31, 2024 as compared to operating income of $839,000 in the same period of 2023, a decrease in operating income of $846,000, due to lower gross profit and higher SG&A costs. The equipment segment reported an operating loss of $294,000 in the first quarter of 2024, compared to an operating loss of $25,000 in the first quarter 2023, an increase in loss of $269,000, due to lower gross profit and higher SG&A and research and development (“R&D”) costs.

SG&A costs for the three months ended March 31, 2024 and 2023 were $12,195,000 and $11,143,000, respectively, representing an increase of $1,052,000, or 9% year-over-year. On a segment basis, SG&A costs in the IT segment increased by $75,000 in the first quarter of 2024 from the same quarter of the prior year due to higher personnel costs partially offset by reduced third-party commissions; SG&A costs in the professional sales service segment increased $582,000 due mainly to higher personnel cost associated with the new ultrasound program and higher national sales meeting costs; and SG&A costs in the equipment segment increased $92,000 due mainly to higher personnel costs. Corporate costs not allocated to segments increased $303,000 to $746,000 in the three months ended March 31, 2024 from $443,000 for the same period in 2023, due mainly to higher costs for investment banking activities.

Research and development (“R&D”) expenses were $191,000, or 1% of revenues, for the first quarter of 2024, an increase of $34,000, or 22%, from $157,000, or 1% of revenues, for the first quarter of 2023. 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 (loss) income to Adjusted EBITDA is set forth below:

(in thousands)

Adjusted EBITDA decreased by $1,757,000, to ($1,266,000) in the quarter ended March 31, 2024 from $491,000 in the quarter ended March 31, 2023. The decrease was mainly attributable to the change from net income to net loss, as well as to higher interest income and lower depreciation and amortization.

Interest and Other Income (Expense)

Interest and other income (expense) for the three months ended March 31, 2024 was $307,000 as compared to $54,000 for the corresponding period of 2023. The increase in interest and other income (expense) was due primarily to higher interest income on money market balances and short-term investments, and by decreased loss on investment in EECP Global.

Income Tax Expense

For the three months ended March 31, 2024, we recorded income tax expense of $12,000 as compared to income tax expense of $10,000 for the corresponding period of 2023. The increase was due mainly to higher state income taxes.

Net (Loss) Income

Net (loss) income for the three months ended March 31, 2024 was ($1,173,000) as compared to $306,000 for the three months ended March 31, 2023, representing a decrease of $1,479,000. (Loss) income per share was ($0.00) and $0.00 in the three-month periods ended March 31, 2024 and 2023, respectively. The principal cause of the change from net income to net loss is the $846,000 decrease in operating income in the professional sales service segment, increased operating losses in the IT and equipment segments and increased investment banking expenditures, partially offset by the $228,000 increase in interest and other income, net.

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations from working capital. At March 31, 2024, we had cash and cash equivalents of $19,536,000 and working capital of $11,673,000, compared to cash and cash equivalents of $11,342,000 and working capital of $15,059,000 at December 31, 2023.

Cash used by operating activities during the three months ended March 31, 2024 was $1,070,000, which consisted of net loss after adjustments to reconcile net loss to net cash of $923,000 and cash used by operating assets and liabilities of $147,000, compared to cash used by operating activities of $1,941,000 for the same period in 2023. The changes in the account balances primarily reflect decreases in accrued commissions and accrued expenses and other liabilities of $1,933,000 and $2,601,000, respectively, partially offset by a decrease in accounts and other receivables of $4,876,000.

Cash provided by investing activities during the three-month period ended March 31, 2024 was $9,144,000, consisting of $9,616,000 from redemption of short-term investments offset by $472,000 for the purchase of equipment and software.

Cash provided by financing activities during the three-month period ended March 31, 2024 was $121,000, consisting of $140,000 in proceeds from note payable offset by $19,000 in repayment of notes payable and finance lease obligations.

Liquidity

The Company expects to generate sufficient cash flow from operations to satisfy its obligations for at least the next twelve months.

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 March 31, 2024 and have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.

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 March 31, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.