UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
FORM 10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017
[ ] 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 . (IRS
Employer Identification Number)
incorporation or organization)
137 Commercial
St., Suite 200, Plainview, New York 11803
(Address of
principal executive offices)
Registrant¡¯s Telephone Number (516)
997-4600
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 [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (¡ì232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
[X] 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.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company [X]
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 [X]
Number of Shares Outstanding
of Common Stock, $.001 Par Value, at May 9, 2017 ¨C 164,645,113
Vaso
Corporation and Subsidiaries
INDEX
PART
I ¨C FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS as of March 31,
2017 (unaudited) and December 31, 2016.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ITEM 2 -
MANAGEMENT¡¯S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 4 - CONTROLS
AND PROCEDURES
Vaso
Corporation and Subsidiaries
(in thousands, except share and per share data)
The accompanying
notes are an integral part of these unaudited condensed consolidated financial
statements.
Vaso Corporation and
Subsidiaries
(Unaudited)
(in thousands, except per
share data)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
Vaso Corporation and
Subsidiaries
(in thousands)
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Vaso Corporation and
Subsidiaries
(Unaudited)
(in thousands)
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. The Company changed its name from Vasomedical, Inc. to Vaso Corporation in November 2016 at its annual shareholders meeting. The name was changed because the Company in the last several years has substantially diversified its business and the original name, Vasomedical, Inc., no longer portrayed the nature of its overall business. In addition, the Company retained the VasoMedical, Inc. name and now uses it exclusively for its proprietary medical device business, as the name originally represented.
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 health 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.
VasoTechnology
VasoTechnology, 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 VAR (value added reseller) division. Its current offerings include:
¡¤ Managed diagnostic imaging applications (national channel partner of GEHC IT).
¡¤ Managed network infrastructure (routers, switches and other core equipment).
¡¤ Managed network transport (FCC licensed carrier reselling 175+ facility partners).
¡¤ Managed security services.
VasoTechnology uses a combination of proprietary technology, methodology and third-party applications to deliver its value proposition.
VasoHealthcare
VasoHealthcare 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, to further the sale of certain healthcare capital equipment
in the health 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.
¡¤ GEHC and third party financial services.
VasoMedical
VasoMedical is the Company¡¯s business division for its proprietary medical device business, including the various design, development, manufacturing, sales and service of medical devices in the domestic and international markets and includes the Vasomedical Global and Vasomedical Solutions business units. These devices primarily consist of cardiovascular diagnostic and therapeutic systems. Its current offerings consist of:
¡¤ Biox™ series Holter monitors and ambulatory blood pressure recorders.
¡¤ ARCS™ series analysis, reporting and communication software for physiological signals such as ECG and blood pressure.
¡¤ MobiCare™ multi-parameter wireless vital-sign monitoring system.
¡¤ EECP® therapy system 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, as well as a global joint venture
arrangement, to sell its products.
NOTE B - BASIS OF PRESENTATION AND
CRITICAL ACCOUNTING POLICIES
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"). Certain
information and disclosures normally included in the unaudited condensed
consolidated 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 connection
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, 2016, as filed with the SEC on March 30, 2017.
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
During the first
quarter of 2017, the Company adopted Accounting Standards Update (¡°ASU¡±)
2015-11, ¡°Simplifying the Measurement of Inventory¡±. Inventory under ASU
2015-11 is to be measured at the "lower of cost and net realizable
value" which would eliminate the other two options that currently exist
for "market": (1) replacement cost and (2) net realizable value less
an approximately normal profit margin. ASU 2015-11 defines net realizable value
as the "estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation."
The adoption of this standard did not have a material effect on the Company¡¯s condensed consolidated financial statements.
In May 2014, the Financial Accounting
Standards Board (¡°FASB¡±) issued Accounting
Standards Update (¡°ASU¡±)
2014-09 ¡°Revenue from Contracts with Customers¡±, a comprehensive new revenue
recognition standard which will supersede previous existing revenue recognition
guidance. The standard creates a five-step model for revenue recognition that
requires companies to exercise judgment when considering contract terms and
relevant facts and circumstances. The five-step model includes (1) identifying
the contract, (2) identifying the separate performance obligations in the
contract, (3) determining the transaction price, (4) allocating the transaction
price to the separate performance obligations and (5) recognizing revenue when
each performance obligation has been satisfied. The standard also requires
expanded disclosures surrounding revenue recognition. The standard allows for
either full retrospective or modified retrospective adoption. Public business
entities should apply the guidance in ASU 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within
that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting
period. In 2016,
the FASB issued additional ASUs that clarify the implementation guidance on
principal versus agent considerations (ASU 2016-08), on identifying performance
obligations and licensing (ASU 2016-10), on narrow-scope improvements and
practical expedients (ASU 2016-12), and on the revenue recognition criteria and
other technical corrections (ASU 2016-20).
The Company is
currently evaluating the impact of the adoption of these
standards on
its Consolidated Financial Statements.
In February 2016, The
FASB issued ASU 2016-02 (Topic 842), ¡°Leases¡±. ASU 2016-02 requires that a
lessee recognize the assets and liabilities that arise from operating leases. A
lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a
term of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease
liabilities. In transition, lessees and lessors are required to recognize and
measure leases at the beginning of the earliest period presented using a
modified retrospective approach. This new standard would be effective for the
Company beginning January 1, 2019 with early adoption permitted. The Company does not expect the adoption of this standard to have a material effect on its Consolidated Financial Statements.
Variable Interest
Entities
The Company follows the guidance of accounting for variable interest entities, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entities. Biox is a Variable Interest Entity (¡°VIE¡±).
Liabilities recognized as a result of consolidating this VIE do not represent additional claims on the Company¡¯s general assets. The financial information of Biox, which is included in the accompanying condensed consolidated financial statements, is presented as follows:
(in
thousands)
(in thousands)
Reclassifications
Certain reclassifications have
been made to prior period amounts to conform with the current period presentation.
NOTE C ¨C 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 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 health 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.
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 ¨C primarily cash balances ¨C are reported
in the Corporate entity below.
There are no intersegment revenues.
Summary financial information for the segments is set forth below:
(in
thousands)
(in thousands)
In the fourth quarter of 2016, the
Company revised its method for allocating certain corporate expenses to its
reportable segments resulting in lower amounts allocated to the IT segment and higher
amounts allocated to the professional sales service and equipment segments. Consequently, due primarily to the change
in allocation method, as well as to a $15,000 decrease in total corporate costs
allocated, the IT segment received $139,000 lower allocations, and the
professional sales service segment and equipment segment received $121,000 and
$3,000 higher allocations, respectively, for the three months ended March 31,
2017 as compared to the corresponding period of the prior year.
GE Healthcare accounted for 36% and
39% of revenue for the three months ended March 31, 2017 and 2016, respectively. GE Healthcare also accounted for $5.7 million
or 60%, and $7.9 million or 62%, of accounts and other receivables at March 31,
2017 and December 31, 2016, respectively.
Basic loss per common share is
computed as loss 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.
The following table represents
common stock equivalents that were excluded from the computation of diluted earnings
per share for the three months ended March 31, 2017 and 2016, because the
effect of their inclusion would be anti-dilutive.
(in thousands)
NOTE
E ¨C ACCOUNTS AND OTHER RECEIVABLES, NET
The following table presents information regarding the
Company¡¯s accounts and other receivables as of March 31, 2017 and December 31,
2016:
(in thousands)
Trade receivables include
amounts due for shipped products and services rendered. Amounts currently due under the GEHC Agreement
are subject to adjustment in subsequent periods should the underlying sales
order amount, upon which the receivable is based, change.
Allowance for doubtful accounts
and commission adjustments include estimated losses resulting from the
inability of our customers to make required payments, and adjustments arising
from subsequent changes in sales order amounts that may reduce the amount the
Company will ultimately receive under the GEHC Agreement. Due from employees is primarily
commission advances made to sales personnel.
Inventories,
net of reserves, consist of the following:
(in
thousands)
At March 31, 2017 and December
31, 2016, the Company maintained reserves for slow moving inventories of $820,000
and $827,000, respectively.
NOTE G ¨C GOODWILL AND OTHER
INTANGIBLES
Goodwill aggregating $17,302,000 and $17,280,000 was recorded on the
Company¡¯s condensed consolidated balance sheets at March 31, 2017 and December
31, 2016, respectively, of which $14,375,000, allocated to the IT segment, resulted
from the acquisition of NetWolves in May 2015. The remaining $2,927,000 of goodwill is
allocated to the Company¡¯s equipment segment. The components of the change in goodwill
are as follows:
(in
thousands)
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)
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 $286,000 and $280,000 for the three months
ended March 31, 2017 and 2016, respectively.
Amortization of intangibles for
the next five years is:
(in thousands)
NOTE H ¨C OTHER ASSETS, NET
Other assets, net consist of the following at March
31, 2017 and December 31, 2016:
(in thousands)
NOTE I ¨C ACCRUED EXPENSES AND
OTHER LIABILITIES
Accrued expenses and other liabilities consist of the
following at March 31, 2017 and December 31, 2016:
(in thousands)
`NOTE J - DEFERRED REVENUE
The changes in the Company¡¯s deferred revenues are as
follows:
(in thousands)
NOTE K ¨C LINE OF CREDIT
In August 2016, the Company executed a $2.0 million line of
credit agreement with a lending institution. Advances under the line, which expires
on August 23, 2017, bear interest at a rate of LIBOR plus 2.25% and are secured
by substantially all of the assets of the Company. No advances under the line had been
drawn as of March 31, 2017. The
line of credit agreement includes certain financial covenants. At March 31, 2017, the Company was not in
compliance with one of the covenants, and has received a waiver of the
non-compliance from the lending institution for the period through the
expiration date.
NOTE L ¨C EQUITY
In March
2017, the Company granted 975,000 shares of restricted common stock to officers
and key employees under the 2016 Stock Plan. The shares vested in April 2017.
NOTE M ¨C RELATED-PARTY TRANSACTIONS
On May 29, 2015, the Company entered into a Note Purchase Agreement with MedTechnology Investments, LLC (¡°MedTech¡±) pursuant to which it issued MedTech a secured subordinated promissory note (¡°Note¡±) for $3,800,000 for the purchase of NetWolves. MedTech was formed to acquire the Note, and $1,950,000 of the aggregate funds used to acquire the Note was provided by six of our directors. In June 2015, a second Note for $750,000 was issued to MedTech for working capital purposes, of which $250,000 was provided by a director and a director¡¯s relative. In July 2015, an additional $250,000 was borrowed under the Note Purchase Agreement. The Notes bear interest at an annual rate of 9%, mature on May 29, 2019, may be prepaid without penalty, and are subordinated to any current or future Senior Debt as defined in the Subordinated Security Agreement. The Subordinated Security Agreement secures payment and performance of the Company¡¯s obligations under the Notes and as a result, MedTech was granted a subordinated security interest in the Company¡¯s assets.
David Lieberman, the Vice Chairman of the Company¡¯s Board of
Directors, is a practicing attorney in the State of New York and a senior
partner at the law firm of Beckman, Lieberman & Barandes, LLP, which
performs certain legal services for the Company. Fees of approximately $85,000 were
billed by the firm for the three month periods ended March 31, 2017 and 2016,
at which dates no amounts were outstanding.
At March 31, 2017, the Company had
contributed $522,000 to the VSK joint venture, and $267,000, net, was due to VSK.
The Company¡¯s pro-rata share in
VSK¡¯s loss from operations approximated $45,000 and $73,000 for the three months
ended March 31, 2017 and 2016, respectively, and is included in interest and
other income (expense), net in the accompanying unaudited condensed
consolidated statements of operations and comprehensive loss.
NOTE N ¨C 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 June
2012, the Company concluded an amendment of the GEHC Agreement with GEHC,
originally signed on May 19, 2010.
The amendment, effective July 1, 2012, extended the initial term of
three years commencing July 1, 2010 to five years through June 30, 2015. In December 2014, the Company concluded
an additional amendment, effective January 1, 2015, extending the term through
December 31, 2018, subject to earlier termination under certain circumstances
and termination without cause on six months written notice. These circumstances include not
materially achieving certain sales goals, not maintaining a minimum number of
sales representatives, and various legal and GEHC policy requirements. Under the terms of the agreement, the
Company is required to lease dedicated computer equipment from GEHC for
connectivity to their network.
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; the effect of the dramatic changes taking place in the
healthcare environment; the impact of competitive procedures and products and
their pricing; medical insurance reimbursement policies; unexpected
manufacturing or supplier problems; unforeseen difficulties and delays in the
conduct of clinical trials and other product development programs; the actions
of regulatory authorities and third-party payers in the United States and
overseas; continuation of the GEHC agreements 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
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 health 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.
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 ¡°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, 2016 as filed with the SEC on March 30, 2017.
Results of Operations ¨C For the Three Months Ended March
31, 2017 and 2016
Revenues
Total revenue for the three months
ended March 31, 2017 and 2016 was $16,374,000 and $17,542,000, respectively, representing
a decrease of $1,168,000, or 7% year-over-year. On a segment basis, revenue in the IT
segment increased $73,000, while revenue in the professional sales service and
equipment segments decreased $975,000 and $266,000, respectively.
Revenue in the IT segment for
the three months ended March 31, 2017 was $9,800,000 compared to $9,727,000 for
the three months ended March 31, 2016, an increase of $73,000, of which
$355,000 resulted from growth in the operations of NetWolves, partially offset
by a $282,000 decrease in the healthcare IT VAR business, due to fewer
installations in the first quarter of 2017. Our monthly recurring revenue in our
managed network services operations continues to grow month over month as we
add new customers and expand our services to existing customers. The backlog of orders in our IT VAR
operations was $8.3 million at March 31, 2017 compared to a backlog of $3.5
million at March 31, 2016. We
anticipate that as we continue to develop the IT VAR operations and become
fully enabled in all phases of the sales and service delivery process, the
backlog will go to revenue in more timely fashion and profitability will be
significantly improved in this segment.
Commission revenues in the professional
sales services segment were $5,871,000 in the first quarter of 2017, a decrease
of 14%, as compared to $6,846,000 in the first quarter of 2016. The decrease in commission revenues was due
primarily to a decrease in the volume of equipment delivered by GEHC during the
period. The first quarter of each
year is typically lower in deliveries than in later quarters of the year, with
the fourth quarter of each year typically the strongest, therefore we expect
that deliveries and revenue will improve significantly through the remainder of
2017. 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 under the agreement with GE Healthcare prior to customer acceptance of
the equipment are recorded as deferred revenue in the condensed consolidated
balance sheet. As of March 31, 2017,
$18,891,000 in deferred commission revenue was recorded in the Company¡¯s
condensed consolidated balance sheet, of which $9,813,000 was long-term. At March 31, 2016, $16,744,000 in
deferred commission revenue was recorded in the Company¡¯s condensed
consolidated balance sheet, of which $8,206,000 was long-term.
Revenue in the equipment segment
decreased by $266,000, or 27%, to $703,000 for the three-month period ended March
31, 2017 from $969,000 for the same period of the prior year. The decrease was principally due to a decrease
in EECP® revenues as a result of lower sales volume.
Gross Profit
Gross profit for the three months
ended March 31, 2017 and 2016 was $9,070,000, or 55% of revenue, and $10,012,000,
or 57% of revenue, respectively, representing a decrease of $942,000, or 9%
year-over-year. On a segment basis,
gross profit in the IT segment increased $16,000, while gross profit in the
professional sales services segment and equipment segment decreased $826,000
and $132,000, respectively.
IT segment gross profit for the
three months ended March 31, 2017 was $4,022,000, or 41% of the segment
revenue, compared to $4,006,000, or 41% of the segment revenue for the three
months ended March 31, 2016, with the increase primarily resulting from higher
sales at NetWolves.
Professional sales services
segment gross profit was $4,609,000, or 79% of segment revenue, for the three
months ended March 31, 2017 as compared to $5,435,000, or 79% of the segment
revenue, for the three months ended March 31, 2016, reflecting a decrease of $826,000,
or 15%. The decrease in absolute
dollars was due to lower volume of GEHC equipment delivered during the first
quarter of 2017 than in the same period last year, as
well as lower commission expense in the first quarter of 2017 compared to the
same period of 2016.
Cost of commissions of $1,262,000
and $1,411,000, for the three months ended March 31, 2017 and 2016,
respectively, reflected commission expense associated with recognized
commission revenues. The decrease
was due primarily to lower delivery volume. Commission expense associated with
deferred revenue is recorded as deferred commission expense until the related
commission revenue is recognized.
Equipment segment gross profit decreased
to $439,000, or 62% of segment revenues, for the first quarter of 2017 compared
to $571,000, or 59% of segment revenues, for the same quarter of 2016. Gross profit decreased due to lower sales
volume and gross profit margin increased due mainly to a proportionately larger
volume of higher margin products in the sales mix in 2017, compared to the
first quarter 2016.
Operating Income
(Loss)
Operating income (loss) for the
three months ended March 31, 2017 and 2016 was $(1,841,000) and $159,000, respectively,
representing a decrease of $2,000,000, primarily due to higher operating costs and
lower gross profit. On a segment
basis, operating income in the equipment segment increased $295,000, while
operating income in the professional sales service segment and IT segment
decreased $2,074,000 and $176,000, respectively, and an increase of $45,000 in
corporate expenses
Operating loss in the IT segment
increased in the three-month period ended March 31, 2017 as compared to the
same period of 2016 due to higher research and development costs, partially
offset by higher gross profit. The
professional sales service segment had a loss in the three-month period ended March
31, 2017 as compared operating income in the same period of 2016 due to lower
gross profit combined with higher selling, general, and administrative
(¡°SG&A¡±) costs. Operating loss
in the equipment segment decreased in the three-month period ended March 31,
2017 as compared to the same period of 2016 due to lower SG&A costs,
partially offset by lower gross profit.
SG&A costs for the three months
ended March 31, 2017 and 2016 were $10,690,000 and $9,706,000, respectively, representing
an increase of $984,000, or 10% year-over-year. On a segment basis, SG&A costs in
the equipment segment decreased $389,000 due to a provision for loan loss made
in the first quarter of 2016, while SG&A costs in the professional sales
service segment increased $1,247,000 due to the national sales meeting held in
first quarter of 2017, as opposed to the second quarter in 2016, and increased
headcount and other personnel-related costs. SG&A costs in the IT segment increased
by $78,000 to $4,827,000 in the first quarter of 2017 from $4,749,000 in the
same quarter of the prior year due to increased personnel costs in the IT VAR
business. Corporate costs not
allocated to segments increased by $45,000 from $388,000 for the three months
ended March 31, 2016 to $433,000 for the three months ended March 31, 2017, due
primarily to higher accounting and director fees.
Research and development
(¡°R&D¡±) expenses were $221,000, or 1% of revenues, for the first quarter of
2017, an increase of $74,000, or 50%, from $147,000, or 1% of revenues, for the
first quarter of 2016. The increase is primarily attributable to higher 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.
A reconciliation of net income to Adjusted EBITDA is set forth below:
(in thousands)
Adjusted EBITDA decreased by $1,765,000, to $(1,056,000) in the quarter ended March 31, 2017 from $709,000 in the quarter ended March 31, 2016. The decrease was primarily attributable to the lower net income, partially offset by higher fixed asset depreciation in the IT segment and higher share-based compensation.
Interest and Other Income (Expense)
Interest and other income
(expense) for the three months ended March 31, 2017 was $(181,000) as compared
to $(161,000) for the corresponding period of 2016. The increase was due
primarily to higher interest expense and lower other income in 2017, partially
offset by lower pro-rata share of a quarterly loss at VSK.
Income Tax Expense
For
the three months ended March 31, 2017, we recorded income tax expense of $109,000
as compared to income tax expense of $102,000 for the corresponding period of 2016. The increase arose mainly from higher
state taxes.
Net Loss
Net loss for the three months ended
March 31, 2017 and 2016 was $2,131,000 and $104,000, respectively, representing
an increase of $2,027,000. Our net loss
per share was $0.01 in the three month period ended March 31, 2017, and $0.00 per
share in the three month period ended March 31, 2016. The principal cause of the decrease in
net income is the decrease in revenue in the professional sales service segment
combined with the increase in SG&A costs. As discussed earlier, as revenues in the
professional sales service segment increase through the balance of the year and
the IT segment continues to grow we expect that the Company will again be
profitable for the year.
Cash and Cash Flow
We have financed our operations
from working capital. At March 31,
2017, we had cash and cash equivalents of $6,713,000 and negative working
capital of $4,003,000 compared to cash and cash equivalents of $7,087,000 and negative
working capital of $567,000 at December 31, 2016. $7,226,000 in negative working capital
at March 31, 2017 is attributable to the net balance of deferred commission
expense and deferred revenue. These
are non-cash expense and revenue items and have no impact on future cash flows.
Cash provided by operating
activities was $744,000, which consisted of net loss after adjustments to
reconcile net loss to net cash of $1,158,000 and cash provided by operating
assets and liabilities of $1,902,000, during the three months ended March 31,
2017, compared to cash provided by operating activities of $1,883,000 for the
same period in 2016. The changes in the account balances primarily reflect a
decrease in accounts and other receivables of $3,361,000, partially offset by decreases
in accounts payable of $1,039,000 and accrued commissions of $606,000.
Cash used in investing activities during the three-month
period ended March 31, 2017 was $839,000
for the purchase of equipment and software.
Cash used in financing activities during the three-month
period ended March 31, 2017 was $286,000 as a result of $189,000 in net repayments
on our line of credit and $97,000 in payments of notes and capital leases issued
for equipment purchases.
Liquidity
The Company
expects to be profitable for the year ending December 31, 2017 and expects to maintain
sufficient liquidity through its cash on hand, availability of funds under its
lines of credit, and positive cash flows generated primarily through its
operations under the GEHC Agreement.
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,
2017 and have concluded that the Company¡¯s disclosure controls and procedures
were effective as of March 31, 2017.
Changes in
Internal Control Over Financial Reporting
There
was no change in the Company¡¯s internal control over financial reporting during
the Company¡¯s last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company¡¯s internal control over financial
reporting.
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.
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: May 15, 2017
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jun Ma, certify that:
/s/ Jun Ma
.
Jun Ma
President and Chief Executive Officer
Date: May 15, 2017
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO RULE 13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Beecher, certify
that:
/s/ Michael J. Beecher
.
Michael J. Beecher
Chief Financial Officer
Date: May15, 2017
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly
report of Vaso Corporation and subsidiaries (the ¡°Company¡±) on Form 10-Q for
the period ending March 31, 2017, as filed with the Securities and Exchange
Commission on the date hereof (the ¡°Report¡±), I, Jun Ma, as President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ¡ì 1350, as
adopted pursuant to ¡ì 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Jun Ma
.
Jun
Ma
President
and Chief Executive Officer
Dated: May 15, 2017
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the
quarterly report of Vaso Corporation and subsidiaries (the ¡°Company¡±) on Form
10-Q for the period ending March 31, 2017, as filed with the Securities and
Exchange Commission on the date hereof (the ¡°Report¡±), I, Michael J. Beecher,
as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ¡ì
1350, as adopted pursuant to ¡ì 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Michael J. Beecher
.
Michael J. Beecher
Chief Financial Officer
Dated: May 15, 2017