NOTE A - ORGANIZATION AND PLAN
OF OPERATIONS
Vaso Corporation was incorporated in
Delaware in July 1987. Unless the
context requires otherwise, all references to ¡°we¡±, ¡°our¡±, ¡°us¡±, ¡°Company¡±,
¡°registrant¡±, ¡°Vaso¡± or ¡°management¡± refer to Vaso Corporation and its
subsidiaries. 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 with
GEHC, which is the healthcare business division of the General Electric Company
(¡°GE¡±), to exploit 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.
VasoHealthcare has built a team of approximately 90 highly
experienced sales professionals who utilize highly focused sales management and
analytic tools to manage the complete sales process and to increase market
penetration.
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, 2015, as filed with the SEC on March 30, 2016.
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 2016,
we adopted Accounting Standards Update (¡°ASU¡±) No. 2015-16, Simplifying the Accounting for
Measurement-period Adjustments, and ASU No. 2016-09, Compensation ¨C Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, neither of which had a material impact on
our reported financial position or results of operations and cash flows. There have been no other significant
changes in our reported financial position or results of operations and cash
flows as a result of the adoption of new accounting pronouncements or to our
significant accounting policies that were disclosed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2015 that have had a
significant impact on our consolidated financial statements or notes thereto.
In April 2016, the FASB issued ASU
No. 2016-10, Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing,
which adds further guidance on identifying performance obligations and improves
the operability and understanding of the licensing implementation
guidance. The standard is effective
for fiscal periods beginning after December 15, 2017, including interim periods
therein. Early application for
public entities is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that
reporting period. The Company is
currently evaluating the impact of the adoption of this standard 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 2016, the Company revised its
method for allocating certain corporate expenses to its reportable segments
resulting in higher amounts allocated to the IT segment and lower amounts
allocated to the professional sales service and equipment segments. Consequently, the IT segment received
$232,000 and $590,000 higher allocations for the three and nine months ended
September 30, 2016 as compared to the corresponding periods of the prior
year. The professional sales
service segment received $48,000 and $442,000 lower allocations and the
equipment segment received $18,000 and $112,000 lower allocations for the three
and nine months ended September 30, 2016 as compared to the corresponding
periods of the prior year.
For both the three and nine months
ended September 30, 2016, GE Healthcare accounted for 38% of revenue, and for the
three and nine months ended September 30, 2015, GE Healthcare accounted for 44%
and 59% of revenue, respectively.
GE Healthcare also accounted for $5.2 million or 56%, and $8.1 million or
69%, of accounts and other receivables at September 30, 2016 and December 31, 2015,
respectively.
NOTE D ¨C EARNINGS PER COMMON
SHARE
Basic earnings per common share is
computed as earnings applicable to common stockholders divided by the
weighted-average number of common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted to common stock.
Diluted earnings per share were computed based on the
weighted average number of shares outstanding plus all potentially dilutive
common shares. A reconciliation of
basic to diluted shares used in the earnings per share calculation is as follows:
(in thousands)
The following table represents
common stock equivalents that were excluded from the computation of diluted
earnings per share for the three and nine months ended September 30, 2016 and 2015,
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 September 30, 2016 and December
31, 2015:
(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 September 30, 2016 and December
31, 2015, the Company maintained reserves for slow moving inventories of $786,000
and $861,000, respectively.
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.
The changes in the Company¡¯s deferred revenues are as
follows:
(in thousands)
NOTE K ¨C DEBT AND LEASE OBLIGATIONS
Debt and lease obligations consist of the following:
(in
thousands)
Line of Credit
In August 2016, NetWolves' lending institution extended its
$3.0 million line of credit and, in September 2016, increased the maximum
borrowings to $4.0 million.
Advances under the line, which expires on August 26, 2017, bear interest
at a rate of LIBOR plus 2.25% (aggregating 2.68% at December 31, 2015 and 2.78%
at September 30, 2016) and are secured by substantially all of the assets of
NetWolves Network Services, LLC and guaranteed by Vaso Corporation. At September 30, 2016, the Company had
drawn approximately $3.2 million against the line.
In August 2016, the Company executed an additional $2.0
million line of credit agreement with the same 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 September 30, 2016.
The line of credit agreement requires the Company to
maintain certain restrictive financial covenants. At September 30, 2016, the Company was
in compliance with such covenants.
Capital Lease
Obligations
In July 2016, the Company entered into two three-year lease
agreements for network equipment installed at its Florida data center. Assets under capital leases and related
accumulated amortization is recorded under property and equipment in the
accompanying condensed consolidated balance sheets. The future minimum lease payments as of
September 30, 2016 are set forth in the following table:
(in thousands)
Total amounts payable by the Company under its various debt
and capital lease obligations outstanding as of September 30, 2016 are:
(in
thousands)
NOTE L ¨C EQUITY
On June 15, 2016, the Board of Directors (¡°Board¡±) approved
the 2016 Stock Plan (the ¡°2016 Plan¡±) for officers, directors, and
senior employees of the Corporation or any subsidiary of the Corporation. The stock issuable under the 2016 Plan
shall be shares of the Company¡¯s authorized but unissued or reacquired common
stock. The maximum number of shares
of common stock that may be issued under the 2016 Plan is 7,500,000 shares.
The 2016 Plan
consists of a Stock Issuance Program, under which eligible persons may, at the
discretion of the Board, be issued shares of common stock directly, as a bonus
for services rendered or to be rendered to the Corporation or any subsidiary of
the Corporation.
In July
2016, the Company granted 3.6 million shares of restricted common stock to
directors, officers and key employees under the 2016 Stock Plan. One-third of the shares vested
immediately and the remaining two-thirds vest equally one year and two years
from grant date.
NOTE M ¨C BUSINESS COMBINATION
On May 29, 2015, the Company entered into an agreement for,
and completed its purchase of, all of the assets of NetWolves, LLC and its
affiliates, including the membership interests in NetWolves Network Services
LLC (collectively, ¡°NetWolves¡±) for
$18,000,000 (the ¡°Purchase Price¡±). The purchase of NetWolves was accomplished
pursuant to an Asset Purchase Agreement (the "Purchase
Agreement"). As a result, the
Company effectively purchased all rights, titles and ownership of all assets
held by NetWolves. The
Purchase Price was paid using $14,200,000 in cash on hand and $3,800,000 raised
through the issuance of a secured subordinated promissory note (¡°Note¡±) to MedTechnology
Investments, LLC (¡°MedTech¡± - see Note N).
The Company believes there are significant operational synergies between
NetWolves¡¯ capabilities and VasoHealthcare IT¡¯s requirements under its VAR
contract with GEHC, as well as the opportunity to expand NetWolves¡¯ existing
services to the healthcare IT market.
In accordance with Accounting
Standards Codification 805, Business Combinations, the total purchase
consideration is allocated to the net tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values at May 29, 2015
(the acquisition date). The
following table summarizes the allocation of the assets acquired and
liabilities assumed based on their estimated fair values as follows:
(in thousands)
The goodwill is expected to be deductible for tax purposes.
The
following unaudited supplemental pro forma information presents the financial
results as if the acquisition of NetWolves had occurred January 1, 2014.
(in thousands,except per
share data)
NOTE N ¨C RELATED-PARTY TRANSACTIONS
One of the Company¡¯s directors, Peter Castle, was the Chief
Executive Officer and President of NetWolves, LLC. Another of the Company¡¯s directors,
David Lieberman, was a director of NetWolves Network Services, LLC. Mr. Castle
and Mr. Lieberman owned of record approximately 10.4% and 5.7%, respectively of
the membership interests of NetWolves LLC.
Mr. Lieberman may also be deemed to have owned beneficially up to an
additional 13.5% of such membership interests. The Company¡¯s board of directors
negotiated the Purchase Price on an arm¡¯s length basis, and both Mr. Castle and
Mr. Lieberman abstained from the vote approving the Purchase Agreement (see
Note M).
The Company obtained an opinion regarding the fairness of the
Purchase Price for NetWolves from a reputable, independent third-party
investment banking firm.
$14,200,000 of the Purchase Price was paid for by cash on hand, and the
remaining $3,800,000 was raised from the sale of the Note to MedTech. Of the $4,800,000 borrowed from MedTech,
$2,200,000 was provided by nine of our directors or members of their families,
and an additional $100,000 was provided by an additional director prior to his
joining the board of directors in June 2015. The MedTech Note bears interest at
9% per annum.
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 and $255,000
were billed by the firm for the three and nine months ended September 30, 2016,
respectively, at which date no amounts were outstanding. Fees of approximately $85,000 and $213,000
were billed by the firm through the three and nine month periods ended September
30, 2015, respectively, at which date no amounts were outstanding.
In July 2016, the Company made partial
principal payments aggregating Chinese yuan RMB1,750,000 (approximately
$288,000), plus accrued interest, on notes payable to the president of Life
Enhancement Technology Ltd. and the president of Biox Instruments Company Ltd. The notes were issued in conjunction with
the acquisition of Genwell Instruments Company Ltd in August 2014. The note balance of RMB4,500,000 (approximately
$675,000) matures August 26, 2019.
In January 2015, operations began
under the VSK joint venture. The
Company accounts for its investment in VSK using the equity method. On May 31, 2016, the Company, through its
FGE subsidiary, borrowed $300,000 through the issuance of a promissory note to
VSK. The note was repaid in full in
September 2016. At September 30,
2016, the Company had contributed $522,000 to VSK, and $220,000, net, was due to
VSK. The Company¡¯s pro-rata share
in VSK¡¯s earnings (loss) from operations approximated $48,000 and $(29,000) for
the three and nine months ended September 30, 2016, respectively, and is
included in interest and other income (expense), net in the accompanying
unaudited condensed consolidated statements of operations and comprehensive
income. VSK earned approximately $97,000
and $143,000 for the three and nine months ended September 30, 2015,
respectively. Under the terms of
the agreement, the Company accrues no interest in VSK¡¯s income in the years
ending December 31, 2015, 2016 and 2017 until certain performance targets are achieved. For the year ended December 31, 2015
such targets had not been achieved.
NOTE O ¨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 September 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 or after July 1, 2017. 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, 2015 as filed with the SEC on March 30, 2016.
Results of Operations ¨C For the Three Months Ended September
30, 2016 and 2015
Revenues
Total revenue for the three months
ended September 30, 2016 and 2015 was $17,544,000 and $17,401,000,
respectively, representing an increase of $143,000, or 1% year-over-year. On a segment basis, revenue in the IT segment
and equipment segment increased $879,000 and $265,000, respectively, while
revenue in the professional sales service segment decreased $1,001,000.
Commission revenues in the professional
sales services segment were $6,583,000 in the third quarter of 2016, a decrease
of 13%, as compared to $7,584,000 in the third quarter of 2015. The decrease in commission revenues was due
primarily to a decrease in the blended commission rates for equipment delivered
by GEHC during the period, as well as lower delivery volume. 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 September 30, 2016, $17,355,000 in
deferred commission revenue was recorded in the Company¡¯s condensed
consolidated balance sheet, of which $10,115,000 was long-term. At September 30, 2015, $18,595,000 in
deferred commission revenue was recorded in the Company¡¯s condensed
consolidated balance sheet, of which $8,068,000 was long-term.
Revenue in the IT segment for
the three months ended September 30, 2016 was $9,679,000 compared to $8,800,000
for the three months ended September 30, 2015, an increase of $879,000, of
which $780,000 resulted from growth in the operations of NetWolves, and $99,000
resulted from growth in the healthcare IT VAR business, which is still in its
start-up phase. 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 $6.3 million at September 30, 2016 compared to a
backlog of $3.7 million at September 30, 2015. We anticipate that as we invest in
expanding the IT VAR operations and the backlog goes to revenue and expand our
managed services offerings we expect significant improvement in profitability
of this segment.
Revenue in the equipment segment
increased by $265,000, or 26%, to $1,282,000 for the three-month period ended September
30, 2016 from $1,017,000 for the same period of the prior year. The increase was principally due to an
increase in EECP® revenues and international sales by our China
operations as a result of higher sales volume and higher average selling
prices.
Gross Profit
Gross profit for the three months
ended September 30, 2016 and 2015 was $10,150,000, or 58% of revenue, and $9,850,000,
or 57% of revenue, respectively, representing an increase of $300,000, or 3%
year-over-year. On a segment basis,
gross profit in the IT segment and equipment segment increased $637,000 and
$288,000, respectively, while gross profit in the professional sales service
segment decreased $625,000.
Professional sales services
segment gross profit was $5,258,000, or 80% of segment revenue, for the three
months ended September 30, 2016 as compared to $5,883,000, or 78% of the
segment revenue, for the three months ended September 30, 2015, reflecting a
decrease of $625,000, or 11%. The decrease
in absolute dollars and increase in margin percentage was due to lower
blended commission rates on GEHC equipment delivered during the third quarter
of 2016 than in the same period last year, as well as
lower commission expense in the third quarter of 2016 compared to the same
period of 2015.
Cost of commissions of $1,325,000
and $1,701,000, for the three months ended September 30, 2016 and 2015,
respectively, reflected commission expense associated with recognized
commission revenues. The decrease
was due to lower commission expense rates on certain deliveries in the third
quarter of 2016 compared to the same period in 2015 as well as lower delivery
volume. Commission expense
associated with deferred revenue is recorded as deferred commission expense
until the related commission revenue is recognized.
IT segment gross profit for the
three months ended September 30, 2016 was $4,129,000, or 43% of the segment
revenue, compared to $3,492,000, or 40% of the segment revenue for the three
months ended September 30, 2015, with the increase primarily resulting from
higher sales as well as improved gross margin percentages at NetWolves.
Equipment segment gross profit increased
to $763,000, or 60% of segment revenues, for the third quarter of 2016 compared
to $475,000, or 47% of segment revenues, for the same quarter of 2015. Gross profit increased due to higher
sales volume and gross profit margin increased due mainly to higher average
selling prices on EECP® products, and certain non-recurring costs
incurred in the 3rd quarter of 2015.
Operating Income
Operating income for the three months
ended September 30, 2016 and 2015 was $502,000 and $1,337,000, respectively, representing
a decrease of $835,000, or 62% year-over-year, primarily due to higher
operating costs partially offset by higher gross profit. On a segment basis, operating income in
the equipment segment increased $593,000, while operating income in the
professional sales service segment and IT segment decreased $980,000 and $599,000,
respectively.
Operating income in the
professional sales service segment decreased in the three-month period ended
September 30, 2016 as compared to the same period of 2015 due to lower gross
profit combined with higher selling, general, and administrative (¡°SG&A¡±)
costs. Operating income in the IT
segment decreased in the three-month period ended September 30, 2016 as
compared to the same period of 2015 due to higher SG&A costs, partially
offset by higher gross profit.
Operating income in the equipment segment increased in the three-month
period ended September 30, 2016 as compared to the same period of 2015 due to
higher gross profit and lower SG&A costs.
SG&A costs for the three months
ended September 30, 2016 and 2015 were $9,531,000 and $8,355,000, respectively,
representing an increase of $1,176,000, or 14% year-over-year. On a segment basis, SG&A costs in
the equipment segment decreased $264,000 due to reduced sales and marketing
costs, while SG&A costs in the professional sales service segment and IT
segment increased $355,000 and $1,233,000, respectively, due to higher
personnel, legal and marketing costs in the professional sales service segment,
and increased headcount, amortization, and corporate allocations in the IT
segment. Corporate costs not
allocated to segments decreased by $141,000 from $480,000 for the three months
ended September 30, 2015 to $339,000 for the three months ended September 30,
2016. The decrease in corporate
costs was due primarily to higher accounting costs incurred pursuant to the NetWolves
acquisition in May 2015, partially offset by higher director fee costs in the
current year quarter.
Research and development
(¡°R&D¡±) expenses were $117,000, or 1% of revenues (9% of equipment segment
revenues), for the third quarter of 2016, a decrease of $41,000, or 26%, from $158,000,
or 1% of revenues (16% of equipment segment revenues), for the third quarter of
2015. The decrease is primarily attributable to lower product development
expenses.
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 accounting principles generally accepted
in the United States (¡°GAAP¡±) and should not be considered a substitute for
operating income, which we consider to be the most directly comparable 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 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 $329,000, or 19%, to $1,421,000
in the quarter ended September 30, 2016 from $1,750,000 in the quarter ended
September 30, 2015. The decrease
was primarily attributable to the lower net income, partially offset by higher
fixed asset depreciation in the IT segment and amortization of intangibles
associated with the NetWolves acquisition in May 2015, higher interest expense
arising from the MedTech Note used to partially fund the NetWolves acquisition,
and higher share-based compensation and income tax expense.
Interest and Other Income (Expense)
Interest and other income
(expense) for the three months ended September 30, 2016 was $(71,000) as
compared to $(69,000) for the corresponding period of 2015. The increase was
due primarily to higher interest expense partially offset by higher pro-rata
share of VSK quarterly earnings.
Income Tax Expense
For
the three months ended September 30, 2016, we recorded income tax expense of $103,000
as compared to income tax expense of $38,000 for the corresponding period of 2015. The increase arose mainly from tax
amortization associated with the NetWolves acquisition.
Net income
Net income for the three months
ended September 30, 2016 and 2015 was $328,000 and $1,230,000, respectively,
representing a decrease of $902,000 or 73%. Our net income per share was $0.00 in
the three month period ended September 30, 2016, and $0.01 per share in the three
month period ended September 30, 2015. 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.
Results of Operations ¨C For the Nine Months Ended
September 30, 2016 and 2015
Revenues
Total revenue for the nine months
ended September 30, 2016 and 2015 was $53,300,000 and $35,698,000,
respectively, representing an increase of $17,602,000, or 49% year-over-year. On a segment basis, revenue in the IT segment
and equipment segment increased $17,919,000 and $404,000, respectively, while
revenue in the professional sales service segment decreased $721,000.
For the nine months ended September
30, 2016 and 2015, commission revenues in the professional sales service
segment were $20,289,000 and $21,010,000, respectively, a decrease of $721,000,
or 3%. The decrease in commission
revenues in nine-month period ended September 30, 2016 was due primarily to
lower blended commission rates on equipment delivered by GEHC, partially offset
by higher volume of equipment delivered during the period. 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.
For the nine months ended September
30, 2016 revenue in the IT segment was $29,530,000 compared to $11,611,000 for
the nine months ended September 30, 2015, an increase of $17,919,000, of which
$16,489,000 resulted from the inclusion of nine months of NetWolves results in
2016 as compared to four months of results in the nine months ended September
30, 2015, as well as $1,430,000 higher revenue in the healthcare IT VAR
business reflecting an increase in installations and recurring revenue.
For the nine month period ended
September 30, 2016, revenue in the equipment segment increased by $404,000, or 13%,
to $3,481,000 from $3,077,000 for the same period of the prior year. The change was primarily attributable to
higher international sales by our China operations, as well as increases in EECP®
revenues as a result of higher sales volume and average selling prices.
Gross Profit
For the nine months ended September
30, 2016 and 2015, gross profit was $30,275,000, or 57% of revenue, and $22,746,000,
or 64% of revenue, respectively, representing an increase of $7,529,000, or 33%
year-over-year. On a segment basis,
gross profit in the IT segment and equipment segment increased $7,404,000 and
$416,000, respectively, while gross profit in the professional sales service
segment decreased $291,000.
For the nine months ended
September 30, 2016 and 2015, gross profit in the professional sales service
segment was $15,971,000, or 79% of segment revenue, as compared to $16,262,000,
or 77% of the segment revenue, reflecting a decrease of $291,000, or 2%. The decrease in absolute dollars and increase
in margin percentage was due to lower blended commission rates on GEHC
equipment delivered during 2016 than in the same period last year, as well as lower commission expense in 2016.
Cost of commissions of $4,318,000
and $4,748,000 for the nine months ended September 30, 2016 and 2015,
respectively, reflected commission expense associated with recognized
commission revenues. The decrease
was due to lower commission expense rates on certain deliveries in 2016
compared to the same period in 2015, partially offset by increased delivery
volume. Commission expense
associated with deferred revenue is recorded as deferred commission expense
until the related commission revenue is recognized.
IT segment gross profit for the
nine months ended September 30, 2016 was $12,094,000, or 41% of the segment
revenue, compared to $4,690,000, or 40% of the segment revenue, for the nine
months ended September 30, 2015, with the increase primarily resulting from the
inclusion of nine months of NetWolves operations as compared to four months
last year.
Equipment segment gross profit increased
to $2,210,000, or 63% of Equipment segment revenues, for the first nine months
of 2016 compared to $1,794,000, or 58% of segment revenues, for the same period
of 2015. Gross profit margin in the
equipment segment improved due to higher mix of sales by the Chinese
operations, which have higher margins.
Operating Income
For the nine months ended September
30, 2016 and 2015, operating income was $925,000 and $1,257,000, respectively, representing
a decrease of $332,000, or 26% year-over-year. On a segment basis, operating income in
the equipment segment increased $1,192,000, while operating income in the
professional sales service segment and IT segment decreased $449,000 and
$1,471,000, respectively.
Operating income in the
professional sales service segment decreased in the nine-month period ended
September 30, 2016 as compared to the same period of 2015 due to lower gross
profit combined with higher SG&A costs. Operating income in the IT segment
decreased in the nine-month period ended September 30, 2016 as compared to the
same period of 2015 due to higher SG&A costs, partially offset by higher
gross profit. Operating income in
the equipment segment increased in the nine months ended September 30, 2016 as
compared to the corresponding period of 2015 due to higher gross profit and
lower SG&A costs.
For the nine months ended September
30, 2016 and 2015, SG&A costs were $28,981,000 and $21,059,000, respectively,
representing an increase of $7,922,000, or 38% year-over-year. On a segment basis, SG&A costs in
the equipment segment decreased $714,000 due to lower sales and marketing
costs, while SG&A costs in the professional sales service segment and IT segment
increased $158,000 and $8,876,000, respectively, due to higher personnel, legal
and marketing costs, partially offset by $442,000 lower corporate allocations,
in the professional sales service segment, and increased headcount,
amortization, corporate allocations and having nine months of the NetWolves
operations included in 2016 versus only four months of NetWolves operations in
2015 in the IT segment. Corporate
costs not allocated to segments decreased from $1,408,000 to $1,011,000, or by
$397,000, for the nine months ended September 30, 2016 and 2015,
respectively. The decrease in
corporate costs was due primarily to higher accounting, legal and financing
costs incurred pursuant to the Netwolves acquisition in May 2015, partially
offset by higher director fee costs in the current year period.
For the nine months ended September
30, 2016 and 2015, R&D costs were $369,000, or 1% of revenues (11% of
equipment segment revenues), a decrease of $61,000, or 14%, from $430,000, or 1%
of revenues (14% of equipment segment revenues), for the corresponding period
of the prior year. The decrease is
primarily attributable to lower product development expenses.
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 accounting principles generally
accepted in the United States (¡°GAAP¡±) and should not be considered a
substitute for operating income, which we consider to be the most directly
comparable 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 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)
For the nine months ended September 30, 2016, Adjusted EBITDA
increased by $539,000, or 22%, to $3,019,000 from $2,480,000 in the
corresponding period of the prior year.
The increase was primarily attributable to higher fixed asset
depreciation in the IT segment and amortization of intangibles associated with
the NetWolves acquisition in May 2015, higher interest expense arising from the
MedTech Note used to partially fund the NetWolves acquisition, and higher
share-based compensation and income tax expense, partially offset by lower net
income.
Interest and Other Income (Expense)
Interest and other income
(expense) for the nine months ended September 30, 2016 was $(334,000) as
compared to $(40,000) for the corresponding period of 2015. The increase was
due primarily to higher interest expense from debt associated with the
NetWolves acquisition in May 2015.
Income Tax Expense
For
the nine months ended September 30, 2016, we recorded income tax expense of
$154,000 as compared to income tax expense of $51,000 for the corresponding
period of 2015. The increase arose mainly
from tax amortization associated with the NetWolves acquisition.
Net income
For the nine months ended September
30, 2016 and 2015, net income was $437,000 and $1,166,000, respectively,
representing a decrease of $729,000 or 63%. Our net income per share was $0.00 in
the nine-month period ended September 30, 2016, and $0.01 per share in the nine-month
period ended September 30, 2015. 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 expenses. For the nine months ended September 30,
2015, the above results reflect the operations of NetWolves for the four months
subsequent to its acquisition on May 29, 2015.
Liquidity and Capital Resources
Cash and Cash Flow
We have financed our operations
from working capital. At September
30, 2016, we had cash and cash equivalents of $5,695,000 and negative working
capital of $1,879,000 compared to cash and cash equivalents of $2,160,000 and negative
working capital of $3,696,000 at December 31, 2015. $6,027,000 in negative working capital
at September 30, 2016 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 $3,756,000, which consisted of net income after adjustments to
reconcile net income to net cash of $3,059,000 and cash provided by operating
assets and liabilities of $697,000, during the nine months ended September 30, 2016,
compared to cash provided by operating activities of $5,879,000 for the same
period in 2015. The changes in the account balances primarily reflect a
decrease in accounts and other receivables of $2,214,000, partially offset by decreases
in accrued commissions of $613,000 and accrued expenses of $488,000. Significantly higher commission billings
and recognized revenue were generated in the fourth quarter of 2014, resulting in
significant cash inflows early in 2015.
Cash used in investing activities during the nine-month
period ended September 30, 2016 was $1,796,000.
We invested $422,000 in the VSK joint venture as part of our capital
contribution, and, $1,412,000 was used for the purchase of equipment and
software. This was partially
offset by the redemption of short-term investments of $38,000.
Cash provided by financing activities during the nine-month
period ended September 30, 2016 was $1,511,000 as a result of $2,124,000 in net
borrowings on our line of credit and $300,000 received through issuance of a
note to VSK, partially offset by $130,000 in debt issuance costs associated
with the MedTech note, $211,000 in repayments of notes issued for equipment
purchases, $566,000 in payments on related party notes associated with the
Genwell acquisition and repayment of the VSK note, and $6,000 in payment of payroll
taxes where employee shares were withheld for such payments.
Liquidity
The Company
expects to be profitable for the year ending December 31, 2016 and expects to continue
to generate positive cash flows from its existing operations.
Evaluation of
Disclosure Controls and Procedures
Disclosure controls and procedures reporting as
promulgated under the Exchange Act is defined as controls and procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. Disclosure controls and procedures
include without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer (¡°CEO¡±) and Chief Financial
Officer (¡°CFO¡±), or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
Our CEO and our CFO have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of September
30, 2016 and have concluded that the Company¡¯s disclosure controls and
procedures were effective as of September 30, 2016.
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
3 Certificate
of Amendment to Certificate of Incorporation.
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: November 14, 2016
