VASO Corp - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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☒     No ☐

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

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

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

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

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

Number of Shares Outstanding of Common Stock, $.001 Par Value, at May 10, 2023– 175,127,878

Vaso Corporation and Subsidiaries

INDEX

PART I – FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Vaso Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

for the Three Months Ended March 31, 2023 and 2022

(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

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

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

Vaso Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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

Vaso Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

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

Overview

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

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, NetWolves, and a healthcare IT application VAR (value added reseller) division, VasoHealthcare IT.  Its current offerings include:

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 to further the sale of certain healthcare capital equipment in the healthcare provider middle market.  Sales of GEHC equipment by the Company have grown significantly since then. 

VasoHealthcare’s current offerings consist of:

Vaso Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

VasoMedical

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

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

NOTE B – INTERIM STATEMENT PRESENTATION

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial information. Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 31, 2023.

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.

Recently Adopted Accounting Pronouncements

In September 2022, the FASB issued ASU No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This ASU requires that a buyer in a supplier finance program disclose the key terms of supplier finance programs, the amount of obligations outstanding at the end of the reporting period that the entity has confirmed as valid to the finance provider, where these obligations are recorded in the balance sheet, and a roll forward of the obligations. The new standard is effective for fiscal years beginning after December 15, 2022, on a retrospective basis, including interim periods within those fiscal years. The Company adopted ASU No. 2022-04 effective January 1, 2023.  It did not have a material effect on its condensed consolidated financial statements.

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, the amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of Subtopic 610-20. The new standard is effective for fiscal years beginning after December 15, 2022 and should be applied prospectively. The Company adopted ASU No. 2021-08 effective January 1, 2023.  It did not have a material effect on its condensed consolidated financial statements.

NOTE C – REVENUE RECOGNITION

Disaggregation of Revenue

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

Transaction Price Allocated to Remaining Performance Obligations

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

As of March 31, 2023, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $93 million, of which we expect to recognize revenue as follows:

Contract Liabilities

Contract liabilities arise in our IT VAR, VasoHealthcare, and VasoMedical businesses.  In our IT VAR business, payment arrangements with clients typically include an initial payment due upon contract signing and milestone-based payments based upon product delivery and go-live, as well as post go-live monthly payments for subscription and support fees. Customer payments received, or receivables recorded, in advance of go-live and customer acceptance, where applicable, are deferred as contract liabilities. Such amounts aggregated approximately $381,000 and $481,000 at March 31, 2023 and December 31, 2022, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets. 

In our VasoHealthcare business, we bill amounts for certain milestones in advance of customer acceptance of the underlying equipment. Such amounts aggregated approximately $31,543,000 and $30,794,000 at March 31, 2023 and December 31, 2022, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.  In addition, we record a contract liability for amounts expected to be repaid to GEHC due to customer order reductions.  Such amounts aggregated approximately $2,112,000 and $2,577,000 at March 31, 2023 and December 31, 2022, respectively, and are included in accrued expenses and other liabilities in our condensed consolidated balance sheets.

In our VasoMedical business, we bill amounts for post-delivery services and varying duration service contracts in advance of performance.  Such amounts aggregated approximately $10,000 and $9,000 at March 31, 2023 and December 31, 2022, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.

The following table summarizes the Company’s contract receivable and contract liability balances:

The decrease in contract receivables in the first quarter of 2023 was due primarily to collections exceeding revenues.  During the three months ended March 31, 2023, we recognized approximately $3.1 million of revenues that were included in our contract liability balance at January 1, 2023.

Costs to Obtain or Fulfill a Contract

Topic 606 requires that incremental costs of obtaining a contract are recognized as an asset and amortized to expense in a pattern that matches the timing of the revenue recognition of the related contract.  We have determined the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are certain sales commissions paid to associates.  In addition, the Company elected the practical expedient to recognize the incremental costs of obtaining a contract when incurred for contracts where the amortization period for the asset the Company would otherwise have recognized is one year or less. 

Under Topic 606, sales commissions applicable to service contracts exceeding one year have been capitalized and amortized ratably over the term of the contract.  In our VHC IT business, commissions allocable to multi-year subscription contracts or multi-year post-contract support performance obligations are amortized to expense ratably over the terms of the multi-year periods.  VHC IT commissions allocable to other elements are charged to expense at go-live or customer acceptance.  In our professional sales services segment, commissions paid to our sales force are deferred until the underlying equipment is accepted by the customer.  We recognized approximately $605,000 and $528,000 of amortization related to these sales commission assets in “Cost of professional sales services” in the three months ended March 31, 2023 and 2022, respectively, and approximately $26,000 and $20,000 of amortization in “Selling, general and administrative” expense in the three months ended March 31, 2023 and 2022, respectively, in our condensed consolidated statements of operations and comprehensive income (loss).

At March 31, 2023 and December 31, 2022, our consolidated balance sheets include approximately $7,083,000 and $7,113,000, respectively, in capitalized sales commissions - primarily in our professional sales services segment - to be expensed in future periods, of which $3,012,000 and $3,249,000, respectively, is recorded in deferred commission expense and $4,071,000 and $3,864,000, respectively, representing the long-term portion, is included in other assets.

Significant Judgments when Applying Topic 606

Contract transaction price is allocated to performance obligations using estimated stand-alone selling price. Judgment is required in estimating stand-alone selling price for each distinct performance obligation. We determine stand-alone selling price maximizing observable inputs such as stand-alone sales when they exist or substantive renewal price charged to clients. In instances where stand-alone selling price is not observable, we utilize an estimate of stand-alone selling price based on historical pricing and industry practices.

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

Certain revenue we record in our professional sales service segment contains an estimate for variable consideration.  Due to the tiered structure of our commission rate, which increases as annual targets are achieved, under Topic 606 we record revenue and deferred revenue at the rate we expect to be achieved by year end.  We base our estimate of variable consideration on historical results of previous years’ achievement under the GEHC agreement.  Such estimate is reviewed each quarter and adjusted as necessary.  In addition, the Company records commissions for arranging financing at an estimated rate which is subject to later revision based on certain factors. 

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

NOTE D – SEGMENT REPORTING AND CONCENTRATIONS

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

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

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

GE HealthCare accounted for 43% and 39% of revenue for the three months ended March 31, 2023 and 2022, respectively.  GE HealthCare also accounted for $11.3 million or 85%, and $12.8 million or 83%, of accounts and other receivables at March 31, 2023 and December 31, 2022, respectively.  No other customer accounted for 10% or more of revenue.

NOTE E –EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding, including vested restricted shares, without consideration of potential common stock. Diluted earnings (loss) per common share is based on the weighted average number of common and potential dilutive common shares outstanding. 

Diluted earnings (loss) 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:

The following table represents common stock equivalents that were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2023 and 2022, because the effect of their inclusion would be anti-dilutive.

NOTE F – SHORT-TERM INVESTMENTS AND FINANCIAL INSTRUMENTS

The Company's short-term investments consist of bank deposits with yields based on underlying debt and equity securities and six-month US Treasury bills.  The bank deposits are carried at fair value of approximately $437,000 and $433,000 at March 31, 2023 and December 31, 2022, respectively, and are classified as available-for-sale.  Realized gains or losses on the bank deposits are included in net income.  The US Treasury bills are classified as held-to-maturity and are carried at amortized cost of approximately $8,151,000 and $8,071,000 at March 31, 2023 and December 31, 2022, respectively.  Their fair value at March 31, 2023 and December 31, 2022 is approximately $8,155,000 and $8,064,000, respectively, and the unrecognized holding gain is $4,000 and $0 for the three months ended March 31, 2023 and 2022, respectively.  The Company does not expect a credit loss for its short-term investments.

Cash and cash equivalents represent cash and short-term, highly liquid investments either in certificates of deposit, treasury bills, money market funds, or investment grade commercial paper issued by major corporations and financial institutions that generally have maturities of three months or less from the date of acquisition.

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

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

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

Level 1

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

Level 2

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

Level 3

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

The carrying amount of assets and liabilities including cash and cash equivalents, short-term investments, accounts receivable, prepaids, accounts payable, accrued expenses and other current liabilities approximated their fair value as of March 31, 2023 and December 31, 2022, due to the relative short maturity of these instruments. Property and equipment, intangible assets, capital lease obligations, and goodwill are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents information about the Company’s assets measured at fair value as of March 31, 2023 and December 31, 2022:

NOTE G – ACCOUNTS AND OTHER RECEIVABLES, NET

The following table presents information regarding the Company’s accounts and other receivables as of March 31, 2023 and December 31, 2022:

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

Allowance for credit losses 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. 

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE H – INVENTORIES, NET

Inventories, net of reserves, consist of the following:

The Company maintained reserves for slow moving inventories of $163,000 at both March 31, 2023 and December 31, 2022.

NOTE I – GOODWILL AND OTHER INTANGIBLES

Goodwill of $14,375,000 is allocated to the IT segment.  The remaining $1,249,000 of goodwill is attributable to the FGE reporting unit within the Equipment segment.  The NetWolves and FGE reporting units had negative net asset carrying amounts at March 31, 2023 and December 31, 2022.  The components of the change in goodwill are as follows:

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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 $90,000 and $151,000 for the three months ended March 31, 2023 and 2022, respectively.

Amortization of intangibles for the next five years is:

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE J – OTHER ASSETS, NET

Other assets, net consist of the following at March 31, 2023 and December 31, 2022:

NOTE K – ACCRUED EXPENSES AND OTHER LIABILITIES

                Accrued expenses and other liabilities consist of the following at March 31, 2023 and December 31, 2022:

Vaso Corporation and Subsidiaries 

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE L - DEFERRED REVENUE

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

NOTE M – RELATED-PARTY TRANSACTIONS

The Company uses the equity method to account for its interest in EECP Global as it has the ability to exercise significant influence over the entity and reports its share of EECP Global operations in Other (Expense) Income on its condensed consolidated statements of operations.  For the three months ended March 31, 2023 and 2022, the Company’s share of EECP Global’s (loss) income was approximately ($78,000) and $16,000, respectively, and included in Other (Expense) Income in its condensed consolidated statements of operations. At March 31, 2023, the Company recorded a net receivable from related parties of approximately $598,000 on its condensed consolidated balance sheet for amounts due from EECP Global for fees and cost reimbursements net of amounts due to EECP Global for receivables collected on its behalf.

NOTE N – COMMITMENTS AND CONTINGENCIES

Litigation

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

Sales representation agreement

In October 2021, the Company concluded an amendment of the GEHC Agreement with GEHC, originally signed on May 19, 2010 and previously extended in 2012, 2015 and 2017. The amendment extended the term of the original agreement, which began on July 1, 2010, through December 31, 2026, subject to early termination by GEHC without cause with certain conditions.  Under the agreement, VasoHealthcare is the exclusive representative for the sale of select GEHC diagnostic imaging products to specific market accounts in the 48 contiguous states of the United States and the District of Columbia.  The circumstances under which early termination of the agreement may occur with cause include: not materially achieving certain sales goals, not maintaining a minimum number of sales representatives, and not meeting various legal and GEHC policy requirements.

Vaso Corporation and Subsidiaries

Employment Agreements

On May 10, 2019, the Company modified its Employment Agreement with its President and Chief Executive Officer, Dr. Jun Ma, to provide for a five-year term with extensions, unless earlier terminated by the Company, but in no event can it extend beyond May 31, 2026. The Employment Agreement provides for annual compensation of $500,000. Dr. Ma shall be eligible to receive a bonus for each fiscal year during the employment term. The amount and the occasion for payment of such bonus, if any, shall be at the discretion of the Board of Directors. Dr. Ma shall also be eligible for an award under any long-term incentive compensation plan and grants of options and awards of shares of the Company’s stock, as determined at the Board of Directors’ discretion. The Employment Agreement further provides for reimbursement of certain expenses, and certain severance benefits in the event of termination prior to the expiration date of the Employment Agreement.

On December 31, 2022, the Company executed an Employment Agreement with the President of its VasoHealthcare subsidiary, Ms. Jane Moen, to provide for a twenty-seven month initial term with extensions, unless earlier terminated by the Company, but in no event can it extend beyond December 31, 2026 or the earlier termination of the GEHC Agreement. The Employment Agreement provides for annual base compensation of $350,000. Ms. Moen shall be eligible to receive bonuses for each fiscal year during the employment term. The amount and the occasion for payment of such bonuses, if any, shall be based on employment status as well as achieving certain operating targets. Ms. Moen shall also be eligible for an award under any long-term incentive compensation plan and grants of options and awards of shares of the Company’s stock, as determined at the Board of Directors’ discretion. The Employment Agreement further provides for reimbursement of certain expenses, and certain severance benefits in the event of termination prior to the expiration date of the Employment Agreement.

Vaso Corporation and Subsidiaries

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions, including the current COVID-19 pandemic which has already adversely affected operating results; the effect of the dramatic changes taking place in IT and healthcare; the impact of competitive procedures and products and their pricing; medical insurance reimbursement policies; unexpected manufacturing or supplier problems; unforeseen difficulties and delays in product development programs; the actions of regulatory authorities and third-party payers in the United States and overseas; continuation of the GEHC agreement and the risk factors reported from time to time in the Company’s SEC reports, including its recent report on Form 10-K.  The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.

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

General Overview

COVID-19 pandemic

The COVID-19 pandemic has had a significant impact on economies of the United States and China, and it is possible that some negative impact to the Company’s financial condition and results of operations may continue.  At this time, we cannot reasonably estimate what the total impact may be. The pandemic has resulted in workforce and travel restrictions and created business disruptions in supply chain, production and demand across many business sectors. We have experienced negative impact in the recurring revenue business in our IT segment as some of our customers have been adversely affected by the shutdown, and new business in this segment appears to be slower as well.  In addition, revenues in our China operations have been adversely affected by its government’s lockdown policies, which have only recently been reversed. 

Our Business Segments

Vaso Corporation (“Vaso”) was incorporated in Delaware in July 1987.  We principally operate in three distinct business segments in the healthcare and information technology industries.  We manage and evaluate our operations, and report our financial results, through these three business segments.

Vaso Corporation and Subsidiaries

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations.

Certain of our accounting policies are deemed “critical”, as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our critical accounting policies, see Note B to the condensed consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 31, 2023. 

Results of Operations – For the Three Months Ended March 31, 2023 and 2022

Revenues

Total revenue for the three months ended March 31, 2023 and 2022 was $19,221,000 and $17,009,000, respectively, representing an increase of $2,212,000, or 13% year-over-year.  On a segment basis, revenue in the IT, the professional sales service, and equipment segments increased $271,000, $1,703,000, and $238,000, respectively. 

Revenue in the IT segment for the three months ended March 31, 2023 was $10,274,000 compared to $10,003,000 for the three months ended March 31, 2022, an increase of $271,000, or 3%, of which $10,000 resulted from higher NetWolves revenue, due primarily to increased managed service sales, and $261,000 from higher healthcare IT revenue, due primarily to higher software sales.  Monthly recurring revenue in the IT segment accounted for $9,520,000 or 93% of the segment revenue in the first quarter of 2023, and $9,234,000 or 92% of the segment revenue for the same quarter last year (see Note C). 

Commission revenues in the professional sales service segment were $8,310,000 in the first quarter of 2023, an increase of $1,703,000, or 26%, as compared to $6,607,000 in the same quarter of 2022.  The increase in commission revenues was due primarily to an increase in the volume of underlying equipment delivered by GEHC during the period as well as a higher blended commission rate applicable to such deliveries.  The Company only recognizes commission revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement.  Consequently, amounts billable, or billed and received, under the agreement with GE HealthCare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.  As of March 31, 2023, $31,543,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $17,314,000 was long-term.  At March 31, 2022, $26,945,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $8,975,000 was long-term. The increase in deferred revenue is principally due to higher value of new orders booked than orders delivered during the corresponding period. 

Revenue in the equipment segment increased by $238,000, or 60%, to $637,000 for the three-month period ended March 31, 2023 from $399,000 for the same period of the prior year, principally due to higher deliveries in our China operations as COVID lockdowns in China were no longer in effect.

Gross Profit

Gross profit for the three months ended March 31, 2023 and 2022 was $11,710,000, or 61% of revenue, and $9,767,000, or 57% of revenue, respectively, representing an increase of $1,943,000, or 20% year-over-year.  On a segment basis, gross profit in the IT, professional sales service, and equipment segments increased $306,000, or 7%; $1,485,000, or 28%; and $152,000, or 47%, respectively. 

Vaso Corporation and Subsidiaries

IT segment gross profit for the three months ended March 31, 2023 was $4,440,000, or 43% of the segment revenue, compared to $4,134,000, or 41% of the segment revenue for the three months ended March 31, 2022.  The year-over-year increase of $306,000, or 7%, was primarily a result of both higher sales volume and higher margin product sales mix in the healthcare IT business. 

Professional sales service segment gross profit was $6,791,000, or 82% of segment revenue, for the three months ended March 31, 2023 as compared to $5,306,000, or 80% of the segment revenue, for the three months ended March 31, 2022, reflecting an increase of $1,485,000, or 28%.  The increase in absolute dollars was primarily due to higher commission revenue as a result of higher blended commission rate and higher volume of GEHC equipment delivered during the first quarter of 2023 than in the same period last year.  Cost of commissions in the professional sales service segment of $1,519,000 and $1,301,000, for the three months ended March 31, 2023 and 2022, respectively, reflected commission expense associated with recognized commission revenues. 

Commission expense associated with short-term deferred revenue is recorded as short-term deferred commission expense, or with long-term deferred revenue as part of other assets, on the balance sheet until the related commission revenue is recognized.

Equipment segment gross profit increased to $479,000, or 75% of segment revenues, for the first quarter of 2023 compared to $327,000, or 82% of segment revenues, for the same quarter of 2022.  The $152,000, or 47%, increase in gross profit was the result of higher revenue in our China operations due to increased delivery volume for the first quarter of 2023, partially offset by lower gross profit margin product mix during the quarter.     

Operating Income (Loss)

Operating income (loss) for the three months ended March 31, 2023 and 2022 was $410,000 and ($354,000), respectively, representing an improvement of $764,000, due primarily to higher gross profit.  On a segment basis, the professional sales service segment recorded operating income of $987,000 in the first quarter of 2023, as compared to operating income of $237,000 for the same period of 2022; the IT segment recorded an operating loss of $109,000 in the first quarter of 2023 as compared to an operating loss of $139,000 in the same period of 2022; and the equipment segment recorded an operating loss of $25,000 in the first quarter of 2023 as compared to an operating loss of $79,000 in the same period of 2022. 

Operating loss in the IT segment was $109,000 for the three-month period ended March 31, 2023, an improvement of $30,000 from an operating loss of $139,000 in the same period of 2022, due to higher gross profit partially offset by higher selling, general, and administrative (“SG&A”) and research and development (“R&D”) costs.  The professional sales service segment reported operating income of $987,000 in the three-month period ended March 31, 2023 as compared to operating income of $237,000 in the same period of 2022, an increase of $750,000, due to higher gross profit partially offset by higher SG&A costs.  The equipment segment reported an operating loss of $25,000 in the first quarter of 2023, compared to an operating loss of $79,000 in the first quarter 2022, an improvement of $54,000, due to higher gross profit partially offset by higher SG&A and R&D costs.

SG&A costs for the three months ended March 31, 2023 and 2022 were $11,143,000 and $9,999,000, respectively, representing an increase of $1,144,000, or 11% year-over-year.  On a segment basis, SG&A costs in the IT segment increased by $274,000 in the first quarter of 2023 from the same quarter of the prior year due to higher personnel costs partially offset by reduced third-party commissions; SG&A costs in the professional sales service segment increased $734,000 due mainly to higher personnel and national sales meeting costs; and SG&A costs in the equipment segment increased $66,000 due mainly to higher personnel costs. Corporate costs not allocated to segments increased $70,000 to $443,000 in the three months ended March 31, 2023 from $373,000 for the same period in 2022, due mainly to higher director fees.    

Research and development (“R&D”) expenses were $157,000, or 1% of revenues, for the first quarter of 2023, an increase of $35,000, or 29%, from $122,000, or 1% of revenues, for the first quarter of 2022. The increase is primarily attributable to higher product development expenses in the equipment segment.