VASO Corp: Form 10-Q for the period ended Jun 30, 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 current COVID-19 pandemic which has already adversely affected operating results; the effect of the dramatic changes taking place in IT and healthcare; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; continuation of the GEHC agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.

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

General Overview

COVID-19 Pandemic

The COVID-19 pandemic has had a significant impact on economies of the United States and the world, and it is possible that some negative impact to the Company’s financial condition and results of operations may continue. The pandemic caused workforce and travel restrictions and created business disruptions in supply chain, production and demand across many business sectors, and 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 were 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 June 30, 2024 and 2023

Revenues

Total revenue for the three months ended June 30, 2024 and 2023 was $20,226,000 and $20,323,000, respectively, representing a decrease of $97,000, or less than 1% year-over-year. On a segment basis, revenue in the IT, professional sales services, and equipment segments increased/(decreased) $156,000, ($30,000), and ($223,000), respectively.

Revenue in the IT segment for the three months ended June 30, 2024 was $10,591,000 compared to $10,435,000 for the three months ended June 30, 2023, an increase of $156,000, or 1%, of which $523,000 resulted from higher network service revenues, offset by $367,000 lower revenues in the healthcare IT business. Our monthly recurring revenue in the IT segment accounted for $8,804,000 or 83% of the segment revenue in the second quarter of 2024, and $9,357,000 or 90% of the segment revenue for the same quarter last year (see Note C to condensed consolidated financial statements).

Commission revenues in the professional sales service segment were $9,110,000 in the second quarter of 2024, a decrease of $30,000, or less than 1%, as compared to $9,140,000 in the same quarter of 2023. The decrease in commission revenues was due primarily to lower deliveries of diagnostic imaging equipment, largely offset by increased deliveries of ultrasound products, by GEHC in the second quarter of 2024, as compared to the second quarter of 2023, and by slightly higher blended commission rates. 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 sheets. As of June 30, 2024, $31,696,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $15,774,000 was long-term. As of June 30, 2023, $33,578,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $16,722,000 was long-term. The decrease in deferred revenue is principally due to a decrease in new orders booked.

Revenue in the equipment segment decreased by $223,000, or 30%, to $525,000 for the three-month period ended June 30, 2024 from $748,000 for the same period of the prior year, due to lower sales of ARCS® cloud software as a service (SaaS) in the US, mainly due to the loss of a large customer for its inability to pay, and lower equipment deliveries in our China operations.

Gross Profit

Gross profit for the three months ended June 30, 2024 and 2023 was $12,151,000, or 60% of revenue, and $12,696,000, or 62% of revenue, respectively, representing a decrease of $545,000, or 4% year-over-year. On a segment basis, gross profit in the IT, professional sales service, and equipment segments decreased $160,000, or 3%; $224,000, or 3%; and $161,000, or 29%, respectively.

IT segment gross profit for the three months ended June 30, 2024 was $4,582,000, or 43% of the segment revenue, compared to $4,742,000, or 45% of the segment revenue for the three months ended June 30, 2023. The year-over-year decrease of $160,000, or 3%, was primarily a result of product mix change reflecting higher network service revenues and lower healthcare IT revenues, and by higher costs in both businesses.

Professional sales service segment gross profit was $7,173,000, or 79% of segment revenue, for the three months ended June 30, 2024 as compared to $7,397,000, or 81% of the segment revenue, for the three months ended June 30, 2023, reflecting a decrease of $224,000, or 3%. The decrease in absolute dollars was primarily due to higher cost of commissions associated with increased ultrasound deliveries and by slightly lower commission revenue. Cost of commissions in the professional sales service segment of $1,937,000 and $1,743,000, for the three months ended June 30, 2024 and 2023, 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 condensed consolidated balance sheets until the related commission revenue is recognized.

Equipment segment gross profit decreased to $396,000, or 75% of segment revenues, for the second quarter of 2024 compared to $557,000, or 74% of segment revenues, for the same quarter of 2023. The $161,000, or 29%, decrease in gross profit was the result of lower equipment revenue during the quarter partially offset by lower ARCS® software costs.

Operating Income

Operating income for the three months ended June 30, 2024 and 2023 was $996,000 and $1,817,000, respectively, representing a decrease of $821,000, or 45%, due primarily to the decrease in gross profit, higher selling, general, and administrative (“SG&A”) costs and transaction costs associated with the Achari Business Combination. On a segment basis, the IT segment recorded an operating loss of $173,000 in the second quarter of 2024 as compared to operating income of $163,000 in the same period of 2023; the professional sales service segment recorded operating income of $1,658,000 in the second quarter of 2024 as opposed to operating income of $2,058,000 in the same period of 2023; and the equipment segment recorded an operating loss of $291,000 in the second quarter of 2024 as compared to an operating loss of $106,000 in the same period of 2023.

Operating loss in the IT segment was $173,000 for the three-month period ended June 30, 2024 as compared to operating income of $163,000 in the same period of 2023, due mainly to higher SG&A costs and lower gross profit. Operating income in the professional sales service segment decreased by $400,000 to $1,658,000 in the three-month period ended June 30, 2024 as compared to operating income of $2,058,000 in the same period of 2023, due primarily to lower gross profit and higher SG&A costs. The equipment segment reported an operating loss of $291,000 in the second quarter of 2024, compared to an operating loss of $106,000 in the second quarter 2023, an increase in operating loss of $185,000, due mainly to lower gross profit.

SG&A costs for the three months ended June 30, 2024 and 2023 were $10,841,000 and $10,662,000, respectively, representing an increase of $179,000, or 2% year-over-year. On a segment basis, SG&A costs in the IT segment increased by $184,000 in the second quarter of 2024 from the same quarter of the prior year due mainly to higher personnel costs; SG&A costs in the professional sales service segment increased $175,000 due mainly to additional sales headcount associated with the ultrasound program; and SG&A costs in the equipment segment increased $28,000 due mainly to higher personnel costs in China. Corporate costs not allocated to segments decreased $100,000 due mainly to lower director fees.

Research and development (“R&D”) expenses decreased by $12,000, or 6%, to $205,000 in the second quarter of 2024 from $217,000 for the second quarter of 2023, primarily due to lower software development costs in our China operations.

Business combination transaction costs reflect accounting, advisory, and other fees associated with the Achari Business Combination.

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)

(unaudited)

(unaudited)

Adjusted EBITDA decreased by $887,000, to $1,201,000 in the quarter ended June 30, 2024 from $2,088,000 in the quarter ended June 30, 2023. The decrease was attributable mainly to the decrease in net income, partially offset by the increase in income tax expense in the second quarter of 2024.

Interest and Other Income (Expense)

Interest and other income (expense) for the three months ended June 30, 2024 was $271,000 as compared to $173,000 for the corresponding period of 2023. The increase in interest and other income (expense) was due primarily to interest income earned on higher money market and short-term investment balances in the second quarter of 2024.

Income Tax Expense

For the three months ended June 30, 2024, we recorded income tax expense of $112,000 as compared to $9,000 for the corresponding period of 2023. The $103,000 increase arose mainly from higher state tax expense.

Net Income

Net income for the three months ended June 30, 2024 was $1,115,000 as compared to net income of $1,981,000 for the three months ended June 30, 2023, representing a decrease of $826,000. Income per share of $0.01 was recorded in both the three-month periods ended June 30, 2024 and 2023. The principal cause of the decrease in net income is lower operating income, partially offset by higher interest income.

Results of Operations – For the Six Months Ended June 30, 2024 and 2023

Revenues

Total revenue for the six months ended June 30, 2024 and 2023 was $38,963,000 and $39,359,000, respectively, representing a decrease of $396,000, or 1% year-over-year. On a segment basis, revenue in the IT, professional sales service, and equipment segments increased/(decreased) $34,000, ($28,000), and ($402,000), respectively.

Revenue in the IT segment for the six months ended June 30, 2024 was $20,743,000 compared to $20,709,000 for the six months ended June 30, 2023, an increase of $34,000, or less than 1%, resulting from $429,000 higher network service revenue and $395,000 lower healthcare IT revenue. Our monthly recurring revenue in the IT segment accounted for $18,105,000 or 87% of the segment revenue in the first half of 2024, and $18,878,000 or 91% of the segment revenue for the same period last year (see Note C to condensed consolidated financial statements).

Commission revenues in the professional sales service segment were $17,237,000 in the first half of 2024, a decrease of $28,000, or less than 1%, as compared to $17,265,000 in the first half of 2023. The decrease in commission revenues was due primarily to lower deliveries of diagnostic imaging equipment, largely offset by increased deliveries of ultrasound products, by GEHC in the second half of 2024, as compared to the second half of 2023, and by slightly higher blended commission rates. 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 sheets. As of June 30, 2024, $31,696,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $15,774,000 was long-term. As of June 30, 2023, $33,578,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $16,722,000 was long-term. The decrease in deferred revenue is principally due to a decrease in new orders booked.

Revenue in the equipment segment decreased by $402,000, or 29%, to $983,000 for the six-month period ended June 30, 2024 from $1,385,000 for the same period of the prior year, principally due to lower equipment deliveries in our China operations and lower ARCS® cloud SaaS revenues due to the loss of a large customer for its inability to pay in our US business.

Gross Profit

Gross profit for the six months ended June 30, 2024 and 2023 was $23,068,000, or 59% of revenue, and $24,258,000, or 62% of revenue, respectively, representing a decrease of $1,190,000, or 5% year-over-year. On a segment basis, gross profit in the IT, professional sales service, and equipment segments decreased $407,000, or 4%; $488,000, or 3%; and $295,000 or 28%, respectively.

IT segment gross profit for the six months ended June 30, 2024 was $8,775,000, or 42% of the segment revenue, compared to $9,182,000, or 44% of the segment revenue for the six months ended June 30, 2023. The year-over-year decrease of $407,000, or 4%, was primarily a result of product mix change reflecting higher network service revenues and lower healthcare IT revenues, and by higher costs in both businesses.

Professional sales service segment gross profit was $13,552,000, or 79% of segment revenue, for the six months ended June 30, 2024 as compared to $14,040,000, or 81% of the segment revenue, for the six months ended June 30, 2023, reflecting a decrease of $488,000, or 3%. The decrease in absolute dollars was primarily due to higher cost of commissions associated with increased ultrasound deliveries and by slightly lower commission revenue. Cost of commissions in the professional sales service segment of $3,685,000 and $3,225,000, for the six months ended June 30, 2024 and 2023, 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 condensed consolidated balance sheets until the related commission revenue is recognized.

Equipment segment gross profit increased to $741,000, or 75% of segment revenues, for the first half of 2024 compared to $1,036,000, or 75% of segment revenues, for the same half of 2023. The $295,000, or 28%, decrease in gross profit was primarily the result of lower equipment deliveries in our China operations and lower ARCS® cloud revenues in our US operations.

Operating (Loss) Income

Operating (loss) income for the six months ended June 30, 2024 and 2023 was ($473,000) and $2,079,000, respectively, representing a decrease of $2,552,000, or 123%, due primarily to the decrease in gross profit, higher SG&A costs and transaction costs associated with the Achari Business Combination. On a segment basis, the IT segment recorded operating loss of $593,000 in the first half of 2024 as compared to operating income of $53,000 in the same period of 2023; the professional sales service segment recorded operating income of $1,651,000 in the first half of 2024 as compared to operating income of $2,897,000 in the same period of 2023; and the equipment segment recorded an operating loss of $585,000 in the first half of 2024 as compared to an operating loss of $131,000 in the same period of 2023.

Operating loss in the IT segment was $593,000 for the six-month period ended June 30, 2024 as compared to operating income of $53,000 in the same period of 2023, due primarily to lower gross profit and higher SG&A costs. The professional sales service segment reported operating income of $1,651,000 in the first half of 2024, a decrease of $1,246,000 from operating income of $2,897,000 in the six-month period ended June 30, 2023, due to higher SG&A costs and lower gross profit. The equipment segment reported an operating loss of $585,000 in the first half of 2024, compared to an operating loss of $131,000 in the first half 2023, an increase in loss of $454,000 due mainly to lower gross profit and higher SG&A and R&D costs.

SG&A costs for the six months ended June 30, 2024 and 2023 were $22,907,000 and $21,804,000, respectively, representing an increase of $1,103,000, or 5% year-over-year. On a segment basis, SG&A costs in the IT segment increased by $259,000 in the first half of 2024 from the same half of the prior year due to higher personnel costs partially offset by lower third-party commission costs; SG&A costs in the professional sales service segment increased by $758,000 due mainly to additional sales headcount associated with the ultrasound program; and SG&A costs in the equipment segment increased by $120,000 due mainly to higher personnel costs. Corporate costs not allocated to segments increased $206,000 due mainly to business combination transaction costs, partially offset by lower director fees.

Research and development (“R&D”) expenses were $396,000, or 1% of revenues, for the first half of 2024, an increase of $21,000, or 6%, from $375,000, or 1% of revenues, for the first half of 2023. The increase is primarily attributable to higher software development expenses in the equipment segment.

Business combination transaction costs reflect accounting, advisory, and other fees associated with the Achari Business Combination.

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)

(unaudited)

(unaudited)

Adjusted EBITDA decreased by $2,644,000 to ($65,000) in the six-month period ended June 30, 2024 from $2,579,000 in the same period ended June 30, 2023. The decrease was primarily attributable to lower net income and higher interest income, partially offset by higher income tax expense in the six months ended June 30, 2024.

Interest and Other Income (Expense)

Interest and other income (expense) for the six months ended June 30, 2024 was $579,000 as compared to $227,000 for the corresponding period of 2023. The increase in interest and other income was due primarily to higher interest income on higher money market and short-term investment balances.

Income Tax Expense

We recorded income tax expense of $124,000 and $19,000 for the six-month periods ended June 30, 2024 and 2023, respectively. The increase arose mainly from higher state tax expense.

Net (Loss) Income

Net loss for the six months ended June 30, 2024 was $18,000 as compared to net income of $2,287,000 for the six months ended June 30, 2023, representing a decrease of $2,305,000, or 101%. Income/(loss) per share of ($0.00) and $0.01 was recorded in the six-month periods ended June 30, 2024 and 2023, respectively. The principal cause of the decrease in net income is lower operating income, partially offset by higher interest income in the six months ended June 30, 2024.

Liquidity and Capital Resources

Cash and Cash Flow

We have financed our operations from working capital. At June 30, 2024, we had cash and cash equivalents of $25,652,000 and working capital of $14,053,000, compared to cash and cash equivalents of $11,342,000 and working capital of $15,059,000 at December 31, 2023.

Cash provided by operating activities was $1,718,000, which consisted of net loss after adjustments to reconcile net loss to net cash of $562,000 and cash provided by operating assets and liabilities of $1,156,000, during the six months ended June 30, 2024, compared to cash provided by operating activities of $6,019,000 for the same period in 2023. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $5,086,000, partially offset by decreases in accrued commissions of $1,379,000 and accrued expenses of $2,358,000.

Cash provided by investing activities during the six-month period ended June 30, 2024 was $12,626,000 attributed to $13,756,000 in redemptions of short-term investments, offset by $787,000 used for the purchase of equipment and software and $343,000 loaned to Achari in connection with the business combination.

Cash used in financing activities during the six-month period ended June 30, 2024 was $39,000 primarily for 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 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 June 30, 2024 and have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 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 June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.