Blueprint.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
 
[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to ______________
 
Commission File Number: 0-18105
 
 
VASO CORPORATION
(Exact name of registrant as specified in its charter)
 
 Delaware
 
 11-2871434
 (State or other jurisdiction of incorporation or organization)
 
 (IRS Employer Identification Number)
 
137 Commercial St., Suite 200, Plainview, New York 11803
(Address of principal executive offices)

Registrant’s Telephone Number (516) 997-4600
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X]No  [   ]
 
Indicate by check mark whether the registrant has submitted electronically 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 [X] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X] Smaller Reporting Company [X]
Emerging Growth Company [ ]
 
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No  [X]
 
Number of Shares Outstanding of Common Stock, $.001 Par Value, at November 10, 2018 – 166,719,647


 
 
 
Vaso Corporation and Subsidiaries
 
INDEX
 
PART I – FINANCIAL INFORMATION
3
ITEM 1 - FINANCIAL STATEMENTS
3
CONDENSED CONSOLIDATED BALANCE SHEETS as of September 30, 2018 (unaudited) and December 31, 2017
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017
4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY for the Nine Months Ended September 30, 2018 (unaudited) and the Year Ended December 31, 2017
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the Nine Months Ended September 30, 2018 and 2017
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
ITEM 4 - CONTROLS AND PROCEDURES
30
PART II - OTHER INFORMATION
31
ITEM 6 – EXHIBITS
31
 
 
 
 
 
 
 
 
 
Page 2
 
PART I – FINANCIAL INFORMATION
 
ITEM 1 - FINANCIAL STATEMENTS
 
Vaso Corporation and Subsidiaries
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $2,979 
 $5,245 
Accounts and other receivables, net of an allowance for doubtful
    
    
accounts and commission adjustments of $3,700 at September 30,
    
    
2018 and $4,872 at December 31, 2017
  10,139 
  13,225 
Receivables due from related parties
  20 
  20 
Inventories, net
  2,388 
  2,355 
Deferred commission expense
  2,617 
  3,649 
Prepaid expenses and other current assets
  1,142 
  993 
 Total current assets
  19,285 
  25,487 
 
    
    
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
    
    
$5,949 at September 30, 2018 and $4,980 at December 31, 2017
  5,843 
  4,719 
GOODWILL
  17,315 
  17,471 
INTANGIBLES, net
  4,854 
  5,254 
OTHER ASSETS, net
  3,051 
  3,847 
 
 $50,348 
 $56,778 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
CURRENT LIABILITIES
    
    
Accounts payable
 $7,179 
 $5,423 
Accrued commissions
  1,430 
  2,467 
Accrued expenses and other liabilities
  5,866 
  5,337 
Sales tax payable
  941 
  787 
Deferred revenue - current portion
  9,969 
  15,540 
Notes payable and capital lease obligations - current portion (Note N)
  9,684 
  3,674 
Notes payable - related parties - current portion
  82 
  86 
Due to related party
  10 
  390 
Total current liabilities
  35,161 
  33,704 
 
    
    
LONG-TERM LIABILITIES
    
    
Notes payable and capital lease obligations, net of current portion (Note N)
  322 
  4,834 
Notes payable - related parties, net of current portion
  246 
  259 
Deferred revenue, net of current portion
  6,983 
  7,526 
Deferred tax liability
  233 
  220 
Other long-term liabilities
  960 
  1,083 
Total long-term liabilities
  8,744 
  13,922 
 
    
    
COMMITMENTS AND CONTINGENCIES (NOTE O)
    
    
 
    
    
STOCKHOLDERS' EQUITY
    
    
Preferred stock, $.01 par value; 1,000,000 shares authorized; nil shares
    
    
 issued and outstanding at September 30, 2018 and December 31, 2017
  - 
  - 
Common stock, $.001 par value; 250,000,000 shares authorized;
    
    
177,027,734 and 175,741,970 shares issued at September 30, 2018
    
    
and December 31, 2017, respectively; 166,719,647 and 165,433,883 shares
    
    
outstanding at September 30, 2018 and December 31, 2017, respectively
  177 
  176 
Additional paid-in capital
  63,627 
  63,363 
Accumulated deficit
  (55,085)
  (52,329)
Accumulated other comprehensive loss
  (276)
  (58)
Treasury stock, at cost, 10,308,087 shares at September 30, 2018 and December 31, 2017
  (2,000)
  (2,000)
Total stockholders’ equity
  6,443 
  9,152 
 
 $50,348 
 $56,778 
 
See Note B, Variable Interest Entities, for additional variable interest entity disclosures
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
Page 3
 
 
Vaso Corporation and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
 
 
 
 Three months ended
 
 
 Nine months ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Managed IT systems and services
 $11,002 
 $10,827 
 $33,118 
 $31,438 
Professional sales services
  6,854 
  6,305 
  18,868 
  18,181 
Equipment sales and services
  932 
  909 
  2,755 
  2,649 
Total revenues
  18,788 
  18,041 
  54,741 
  52,268 
 
    
    
    
    
Cost of revenues
    
    
    
    
Cost of managed IT systems and services
  6,563 
  6,311 
  19,291 
  18,526 
Cost of professional sales services
  1,465 
  1,386 
  3,903 
  3,946 
Cost of equipment sales and services
  309 
  316 
  1,040 
  900 
Total cost of revenues
  8,337 
  8,013 
  24,234 
  23,372 
Gross profit
  10,451 
  10,028 
  30,507 
  28,896 
 
    
    
    
    
Operating expenses
    
    
    
    
Selling, general and administrative
  10,462 
  10,412 
  32,459 
  31,349 
Research and development
  230 
  235 
  668 
  716 
Total operating expenses
  10,692 
  10,647 
  33,127 
  32,065 
Operating loss
  (241)
  (619)
  (2,620)
  (3,169)
 
    
    
    
    
Other income (expense)
    
    
    
    
Interest and financing costs
  (178)
  (166)
  (530)
  (506)
Interest and other income, net
  56 
  63 
  114 
  55 
Gain on sale of investment in VSK
  - 
  - 
  212 
  - 
Total other expense, net
  (122)
  (103)
  (204)
  (451)
 
    
    
    
    
Loss before income taxes
  (363)
  (722)
  (2,824)
  (3,620)
Income tax expense
  (14)
  (94)
  (71)
  (314)
Net loss
  (377)
  (816)
  (2,895)
  (3,934)
 
    
    
    
    
Other comprehensive loss
    
    
    
    
Foreign currency translation (loss) gain
  (131)
  25 
  (218)
  116 
Comprehensive loss
 $(508)
 $(791)
 $(3,113)
 $(3,818)
 
    
    
    
    
Loss per common share
    
    
    
    
- basic and diluted
 $(0.00)
 $(0.00)
 $(0.02)
 $(0.02)
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
- basic and diluted
  166,431 
  163,307 
  165,024 
  161,817 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
Page 4
 
 
Vaso Corporation and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
Total
 
 
 
Common Stock
 
 
Treasury Stock
 
 
Additional
 
 
Accumulated
 
 
Comprehensive
 
 
 Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Paid-in-Capital
 
 
Deficit
 
 
 Loss
 
 
Equity
 
Balance at January 1, 2017
  173,812 
 $174 
  (10,308)
 $(2,000)
 $62,856 
 $(47,790)
 $(329)
 $12,911 
Share-based compensation
  1,930 
  2 
  - 
  - 
  512 
  - 
  - 
  514 
Shares not issued for employee tax liability
  - 
  - 
  - 
  - 
  (5)
  - 
  - 
  (5)
Foreign currency translation gain
  - 
  - 
  - 
  - 
  - 
  - 
  271 
  271 
Net loss
  - 
  - 
  - 
  - 
  - 
  (4,539)
  - 
  (4,539)
Balance at December 31, 2017
  175,742 
 $176 
  (10,308)
 $(2,000)
 $63,363 
 $(52,329)
 $(58)
 $9,152 
Share-based compensation
  1,286 
  1 
  - 
  - 
  265 
  - 
  - 
  266 
Adoption of new accounting standard (*)
  - 
  - 
  - 
  - 
  - 
  139 
  - 
  139 
Shares not issued for employee tax liability
  - 
  - 
  - 
  - 
  (1)
  - 
  - 
  (1)
Foreign currency translation loss
  - 
  - 
  - 
  - 
  - 
  - 
  (218)
  (218)
Net loss
  - 
  - 
  - 
  - 
  - 
  (2,895)
  - 
  (2,895)
Balance at September 30, 2018 (unaudited)
  177,028 
 $177 
  (10,308)
 $(2,000)
 $63,627 
 $(55,085)
 $(276)
 $6,443 
 
(*) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
Page 5
 
 
Vaso Corporation and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
 
 Nine months ended
 
 
 
September 30,
 
 
 
2018
 
 
2017
 
Cash flows from operating activities
 
 
 
 
 
 
Net loss
 $(2,895)
 $(3,934)
Adjustments to reconcile net loss to net
    
    
  cash (used in) provided by operating activities
    
    
Depreciation and amortization
  1,828 
  1,781 
Deferred income taxes
  - 
  287 
Loss from interest in joint venture
  9 
  30 
Gain on sale of investment in VSK
  (212)
  - 
Provision for doubtful accounts and commission adjustments
  240 
  145 
Amortization of debt issue costs
  24 
  24 
Share-based compensation
  266 
  417 
Changes in operating assets and liabilities:
    
    
Accounts and other receivables
  2,837 
  1,671 
Receivables due from related parties
  - 
  (96)
Inventories, net
  (75)
  (235)
Deferred commission expense
  1,142 
  (982)
Prepaid expenses and other current assets
  (152)
  (211)
Other assets, net
  244 
  861 
Accounts payable
  1,756 
  (153)
Accrued commissions
  (1,264)
  (763)
Accrued expenses and other liabilities
  791 
  (647)
Sales tax payable
  155 
  52 
Deferred revenue
  (6,114)
  2,674 
Deferred tax liability
  12 
  180 
Other long-term liabilities
  (124)
  (235)
Net cash (used in) provided by operating activities
  (1,532)
  866 
 
    
    
Cash flows from investing activities
    
    
Purchases of equipment and software
  (2,168)
  (1,981)
Proceeds from sale of investment in VSK
  311 
  - 
Net cash used in investing activities
  (1,857)
  (1,981)
 
    
    
Cash flows from financing activities
    
    
Net borrowings on revolving line of credit
  1,158 
  78 
Payroll taxes paid by withholding shares
  (1)
  (3)
Net repayment of notes payable and capital lease obligations
  (76)
  (288)
Payments on notes payable - related parties
  - 
  (170)
Net cash provided by (used in) financing activities
  1,081 
  (383)
Effect of exchange rate differences on cash and cash equivalents
  42 
  (67)
 
    
    
NET DECREASE IN CASH AND CASH EQUIVALENTS
  (2,266)
  (1,565)
Cash and cash equivalents - beginning of period
  5,245 
  7,087 
Cash and cash equivalents - end of period
 $2,979 
 $5,522 
 
    
    
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
    
    
Interest paid
 $491 
 $483 
Income taxes paid
 $74 
 $35 
 
    
    
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
    
    
Equipment acquired through capital lease
 $399 
 $- 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
Page 6
 
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.
 
·
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 healthcare provider middle market; and
 
·
Equipment segment, operating through a wholly-owned subsidiary VasoMedical, Inc., primarily focuses on the design, manufacture, sale and service of the Company’s 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 Digital);
·
Managed network infrastructure (routers, switches and other core equipment);
·
Managed network transport (FCC licensed carrier reselling 175+ facility partners);
·
Managed security services.
 
VasoTechnology uses a combination of proprietary technology, methodology and third-party applications to deliver its value proposition.
 
VasoHealthcare
 
VasoHealthcare commenced operations in 2010, in conjunction with the Company’s execution of its exclusive sales representation agreement (“GEHC Agreement”) with GEHC, which is the healthcare business division of the General Electric Company, to further the sale of certain healthcare capital equipment in the healthcare 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 for the above equipment;
·
GEHC and third party financial services.
 
 
Page 7
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
VasoHealthcare has built a team of over 80 highly experienced sales professionals who utilize proprietary 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 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 cardiovascular monitoring, diagnostic and therapeutic systems.  Its current offerings consist of:
 
·
Biox(TM) series Holter monitors and ambulatory blood pressure recorders;
·
ARCS(R) series analysis, reporting and communication software for physiological signals such as ECG and blood pressure;
·
MobiCare(TM) multi-parameter wireless vital-sign monitoring system;
·
EECP(R) 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 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"). 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 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, 2017, as filed with the SEC on April 2, 2018.
 
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.
 
 
Page 8
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
Liquidity and Capital Resources
 
At September 30, 2018 the Company had cash and cash equivalents of $2,979,000, and negative working capital, excluding deferred commission expense and deferred revenue which are non-cash items, of $8,524,000.  Historically the Company has financed its operations from cash provided from operating activities and borrowings under its lines of credit. For the nine months ended September 30, 2018, the Company had a net loss of $2,895,000 and used cash in operations of $1,532,000.  At September 30, 2018, the Company had outstanding borrowings under its lines of credit of approximately $4.6 million with availability of approximately $1.4 million.  These lines mature on November 30, 2018.  It is the management’s intention to renew the lines of credit, and it is currently in negotiation with the lending bank for the renewal.  The Company has had a history of renewing these lines of credit upon maturity; therefore, management believes that the lines of credit will be renewed. The Company has a conditional commitment to extend $3.6 million of the MedTech Notes for one year through May 29, 2020 (See Note N). Additionally, management has established cost saving measures that will be implemented, if necessary. The Company expects to maintain sufficient liquidity through its cash on hand, availability of funds under its lines of credit, and internally generated funds to meet its obligations through at least one year from the date of filing of this Form 10-Q.
 
Significant Accounting Policies and Recent Accounting Pronouncements
 
Recently Adopted Accounting Pronouncements
 
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. See Note C for further details.
 
Recently Issued Accounting Pronouncements
 
In February 2016, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, The FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides an additional and optional transition approach by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This new standard would be effective for the Company beginning January 1, 2019 with early adoption permitted.  The Company is still evaluating the impact adoption of this standard will have on its Consolidated Financial Statements.
 
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017.  The standard would only impact the Company in the event of a goodwill impairment.  Accordingly, the Company does not expect the adoption of this standard to have a material effect on its Consolidated Financial Statements.
 
Variable Interest Entities
 
The Company follows the guidance of accounting for variable interest entities, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entities.  Biox Instruments Co., Ltd. (“Biox”) is a Variable Interest Entity (“VIE”).
 
 
Page 9
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
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)
 
 
As of September 30, 2018
 
 
As of December 31, 2017
 
 
 
(unaudited)
 
 
 
 
Cash and cash equivalents
 $15 
 $41 
Total assets
 $1,773 
 $1,599 
Total liabilities
 $2,013 
 $1,745 
 
 
(in thousands)
 
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
Total net revenue
 $432 
 $318 
 $1,352 
 $1,049 
 
    
    
    
    
Net loss
 $(13)
 $(90)
 $(81)
 $(626)
 
Reclassifications
 
Certain reclassifications have been made to prior period amounts to conform with the current period presentation.
 
NOTE C – REVENUE RECOGNITION
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. The new standard introduces a five-step process to be followed in determining the amount and timing of revenue recognition. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers, and establishes disclosure requirements which are more extensive than those required under prior U.S. GAAP.  Generally, we recognize revenue under Topic 606 for each of our performance obligations either over time (generally, the transfer of a service) or at a point in time (generally, the transfer of a good) as follows:
 
VasoTechnology
 
Recurring managed network and voice services provided by NetWolves are recognized as provided on a monthly basis (“over time”).  Non-recurring charges related to the provision of such services are recognized in the period provided (“point in time”).  In the IT VAR business, software system installations are recognized upon verification of installation and expiration of an acceptance period (“point in time”).  Monthly post-implementation customer support provided under such installations as well as software solutions offered under a monthly Software as a Service (“SaaS”) fee basis are recognized monthly over the contract term (“over time”).
 
VasoHealthcare
 
Commission revenue is recognized when the underlying equipment has been delivered by GEHC and accepted at the customer site in accordance with the terms of the specific sales agreement (“point in time”).
 
 
Page 10
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
VasoMedical
 
In the United States, we recognized revenue from the sale of our medical equipment in the period in which we deliver the product to the customer (“point in time”).  Revenue from the sale of our medical equipment to international markets is recognized upon shipment of the product to a common carrier, as are supplies, accessories and spare parts delivered in both domestic and international markets (“point in time”).  The Company also recognizes revenue from the maintenance of EECP(R) systems either on a time and material as-billed basis (“point in time”) or through the sale of a service contract, where revenue is recognized ratably over the contract term (“over time”).
 
Impact of Adoption
 
Effective January 1, 2018, the Company adopted the requirements of Topic 606 using the modified retrospective method, which provided that the cumulative effect from prior periods upon applying the new guidance was recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings, and that prior periods are not retrospectively adjusted.  The Company elected to apply the modified retrospective method only to contracts that were not completed at January 1, 2018.  A summary and discussion of such cumulative effect adjustment and the impact on current period financial statements of adopting Topic 606 is as follows:
 
 
 
 (in thousands)
 
 
 (in thousands)
 
 
 
Three months ended September 30, 2018 (unaudited)
 
 
Nine months ended September 30, 2018 (unaudited)
 
 
 
prior U.S. GAAP
 
 
Topic 606 impact
 
 
as reported
 
 
prior U.S. GAAP
 
 
Topic 606 impact
 
 
as reported
 
STATEMENT OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional sales services
 $6,695 
 $159 
 $6,854 
 $18,548 
 $320 
 $18,868 
Total revenues
  18,629 
  159 
  18,788 
  54,421 
  320 
  54,741 
 
    
    
    
    
    
    
Gross Profit
  10,292 
  159 
  10,451 
  30,187 
  320 
  30,507 
 
    
    
    
    
    
    
Operating expenses
    
    
    
    
    
    
Selling, general and administrative
  10,474 
  (12)
  10,462 
  32,557 
  (98)
  32,459 
Operating loss
 $(412)
 $171 
 $(241)
 $(3,038)
 $418 
 $(2,620)
 
 
 
 (in thousands)
 
 
 
As of September 30, 2018 (unaudited)
 
 
 
prior U.S. GAAP
 
 
Topic 606 impact
 
 
as reported
 
ASSETS
 
 
 
 
 
 
 
 
 
Accounts and other receivables, net
 $9,477 
 $662 
 $10,139 
Deferred commission expense
 $2,534 
 $83 
 $2,617 
Other assets, net
 $2,897 
 $154 
 $3,051 
 
    
    
    
 
    
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
    
Deferred revenue - current portion
 $9,724 
 $245 
 $9,969 
Deferred revenue - long term
 $6,893 
 $90 
 $6,983 
Accumulated deficit
 $(55,642)
 $557 
 $(55,085)
 
 
Page 11
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Disaggregation of Revenue
 
The following tables present revenues disaggregated by our business operations and timing of revenue recognition:
 
 
(in thousands)
 
 
Three Months Ended September 30, 2018 (unaudited)
 
 
Three Months Ended September 30, 2017 (unaudited)
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
Network services
 $10,146 
 
 
 
 
 
 
 $10,146 
 $9,739 
 
 
 
 
 
 
 $9,739 
Software sales and support
  856 
 
 
 
 
 
 
  856 
  1,088 
 
 
 
 
 
 
  1,088 
Commissions
    
  6,854 
 
 
 
  6,854 
    
  6,305 
 
 
 
  6,305 
Medical equipment sales
    
    
  661 
  661 
    
    
  613 
  613 
Medical equipment service
    
    
  271 
  271 
    
    
  296 
  296 
 
 $11,002 
 $6,854 
 $932 
 $18,788 
 $10,827 
 $6,305 
 $909 
 $18,041 
 
 
 
Nine Months Ended September 30, 2018 (unaudited)
 
 
Nine Months Ended September 30, 2017 (unaudited)
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
Network services
 $30,418 
 
 
 
 
 
 
 $30,418 
 $29,096 
 
 
 
 
 
 
 $29,096 
Software sales and support
  2,700 
 
 
 
 
 
 
  2,700 
  2,342 
 
 
 
 
 
 
  2,342 
Commissions
    
  18,868 
 
 
 
  18,868 
    
  18,181 
 
 
 
  18,181 
Medical equipment sales
    
    
  1,936 
  1,936 
    
    
  1,802 
  1,802 
Medical equipment service
    
    
  819 
  819 
    
    
  847 
  847 
 
 $33,118 
 $18,868 
 $2,755 
 $54,741 
 $31,438 
 $18,181 
 $2,649 
 $52,268 
 
 
 
Three Months Ended September 30, 2018 (unaudited)
 
 
Three Months Ended September 30, 2017 (unaudited)
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
Revenue recognized over time
 $9,561 
 $- 
 $163 
 $9,724 
 $9,511 
 $- 
 $170 
 $9,681 
Revenue recognized at a point in time
  1,441 
  6,854 
  769 
  9,064 
  1,316 
  6,305 
  739 
  8,360 
 
 $11,002 
 $6,854 
 $932 
 $18,788 
 $10,827 
 $6,305 
 $909 
 $18,041 
 
 
 
Nine Months Ended September 30, 2018 (unaudited)
 
 
Nine Months Ended September 30, 2017 (unaudited)
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
 
 
Professional sales
 
 
 Equipment
 
 
 
 
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
 
IT segment
 
 
service segment
 
 
segment
 
 
Total
 
Revenue recognized over time
 $29,315 
 $- 
 $505 
 $29,820 
 $28,034 
 $- 
 $535 
 $28,569 
Revenue recognized at a point in time
  3,803 
  18,868 
  2,250 
  24,921 
  3,404 
  18,181 
  2,114 
  23,699 
 
 $33,118 
 $18,868 
 $2,755 
 $54,741 
 $31,438 
 $18,181 
 $2,649 
 $52,268 
 
 
Page 12
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Transaction Price Allocated to Remaining Performance Obligations
 
As of September 30, 2018, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $80.5 million, of which we expect to recognize revenue as follows:
 
 
 
  (in thousands)
 
 
 
Fiscal years of revenue recognition
 
 
 
remainder of 2018
 
 
2019
 
 
2020
 
 
Thereafter
 
Unfulfilled performance obligations
 $14,381 
 $33,877 
 $16,959 
 $15,320 
 
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 $461,000 and $371,000 at September 30, 2018 and December 31, 2017, 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 equipment. Such amounts aggregated approximately $16,011,000 and $22,126,000 at September 30, 2018 and December 31, 2017, respectively, and are classified in our condensed consolidated balance sheets into current or long-term deferred revenue. In addition, we record a contract liability for amounts expected to be credited back to GEHC due to customer order reductions. Such amounts aggregated approximately $2,996,000 and $1,143,000 at September 30, 2018 and December 31, 2017, 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 $942,000 and $941,000 at September 30, 2018 and December 31, 2017, respectively, and are classified in our condensed consolidated balance sheets as either current or long-term deferred revenue.
 
During the three and nine months ended September 30, 2018, we recognized approximately $2.7 million and $5.9 million of revenues that were included in our contract liability balance at the beginning of such periods.
 
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 prior U.S. GAAP, we recognized sales commissions in our equipment segment as incurred. 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 IT VAR business, all commissions paid in advance of go-live were, under prior U.S. GAAP, capitalized as deferred commission expense and charged to expense at go-live or customer acceptance, as applicable. Under Topic 606, IT VAR 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. IT VAR commissions allocable to other elements continue to be charged to expense at go-live or customer acceptance, as was previously done. At the date of adoption of Topic 606, we recorded an asset, and related adjustment to retained earnings, of approximately $139,000 in our condensed consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new guidance. The impact to our financial statements of adopting Topic 606, as it relates to costs to obtain contracts, was a reduction in commission expense of approximately $12,000 and $98,000 for the three and nine months ended September 30, 2018, respectively, an increase in deferred commission expense of approximately $83,000, and an increase in long term deferred commission expense (recorded in other assets) of approximately $154,000 (inclusive of the beginning balance adjustment of $139,000).
 
 
Page 13
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
In our professional sales services segment, under both prior U.S. GAAP and Topic 606, commissions paid to our sales force are deferred until the underlying equipment is accepted by the customer.
 
At September 30, 2018, our condensed consolidated balance sheet includes approximately $4,456,000 in capitalized sales commissions to be expensed in future periods, of which $2,617,000 is recorded in deferred commission expense and $1,839,000, 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.
 
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.  Under prior U.S. GAAP, we recognized revenue at the rate achieved at the applicable reporting date.  We base our estimate of variable consideration on historical results of previous years’ achievement under the GEHC agreement.  Such estimate will be reviewed each quarter and adjusted as necessary.  At September 30, 2018, the Company recorded approximately $662,000 in additional accounts and other receivables, net; $335,000 in additional combined short term and long term deferred revenue; and, for the three and nine months ended September 30, 2018, $159,000 and $320,000, respectively, in additional commission revenue resulting from our estimate of variable consideration.  The Company recognized reductions in revenue associated with revisions to variable consideration for previously completed performance obligations of $84,000 and $310,000 for the three and nine month periods ended September 30, 2018, respectively.
 
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.
 
·
IT segment, operating through a wholly-owned subsidiary VasoTechnology, Inc., primarily focuses on healthcare IT and managed network technology services;
 
·
Professional sales service segment, operating through a wholly-owned subsidiary Vaso Diagnostics, Inc. d/b/a VasoHealthcare, primarily focuses on the sale of healthcare capital equipment for GEHC into the healthcare provider middle market; and
 
·
Equipment segment, 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 – 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:
 
 
Page 14
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
(in thousands)
 
 
 Three months ended
 
 
 Nine months ended
 
 
 
September 30, 
 
 
September 30, 
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
Revenues from external customers
 
 
 
 
 
 
 
 
 
 
 
 
IT
 $11,002 
 $10,827 
 $33,118 
 $31,438 
Professional sales service
  6,854 
  6,305 
  18,868 
  18,181 
Equipment
  932 
  909 
  2,755 
  2,649 
Total revenues
 $18,788 
 $18,041 
 $54,741 
 $52,268 
 
    
    
    
    
Gross Profit
    
    
    
    
IT
 $4,439 
 $4,516 
 $13,827 
 $12,912 
Professional sales service
  5,389 
  4,919 
  14,965 
  14,235 
Equipment
  623 
  593 
  1,715 
  1,749 
Total gross profit
 $10,451 
 $10,028 
 $30,507 
 $28,896 
 
    
    
    
    
Operating (loss) income
    
    
    
    
IT
 $(782)
 $(555)
 $(2,064)
 $(2,186)
Professional sales service
  1,013 
  488 
  1,123 
  806 
Equipment
  (181)
  (273)
  (747)
  (805)
Corporate
  (291)
  (279)
  (932)
  (984)
Total operating loss
 $(241)
 $(619)
 $(2,620)
 $(3,169)
 
    
    
    
    
Capital expenditures
    
    
    
    
IT
 $1,055 
 $641 
 $2,107 
 $1,830 
Professional sales service
  - 
  3 
  - 
  117 
Equipment
  37 
  - 
  57 
  21 
Corporate
  1 
  13 
  4 
  13 
Total cash capital expenditures
 $1,093 
 $657 
 $2,168 
 $1,981 
 
 
 
(in thousands)
 
 
 
September 30, 2018
 
 
December 31, 2017
 
 
 
(unaudited)
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
IT
 $30,167 
 $28,320 
Professional sales service
  9,907 
  15,658 
Equipment
  7,138 
  7,830 
Corporate
  3,136 
  4,970 
Total assets
 $50,348 
 $56,778 
 
GE Healthcare accounted for 36% and 35% of revenue for the three months ended September 30, 2018 and 2017, respectively, and 34% and 35% of revenue for the nine months ended September 30, 2018 and 2017, respectively.  GE Healthcare also accounted for $5.2 million or 51%, and $8.9 million or 67%, of accounts and other receivables at September 30, 2018 and December 31, 2017, respectively.
 
 
Page 15
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
NOTE E – LOSS PER COMMON SHARE
 
Basic loss per common share is computed as loss applicable to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common stock.
 
The following table represents common stock equivalents that were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2018 and 2017, because the effect of their inclusion would be anti-dilutive.
 
 
 
(in thousands)
 
 
 
For the three and nine months ended
 
 
 
September 30, 2018
 
 
September 30, 2017
 
 
 
(unaudited)
 
 
(unaudited)
 
Restricted common stock grants
  2,559 
  4,613 
 
NOTE F – ACCOUNTS AND OTHER RECEIVABLES, NET
 
The following table presents information regarding the Company’s accounts and other receivables as of September 30, 2018 and December 31, 2017:
 
 
(in thousands)
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(unaudited)
 
 
 
 
Trade receivables
 $13,075 
 $18,056 
Unbilled receivables
  733 
  - 
Due from employees
  31 
  41 
Allowance for doubtful accounts and
    
    
commission adjustments
  (3,700)
  (4,872)
Accounts and other receivables, net
 $10,139 
 $13,225 
 
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 represents 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 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.
 
 
Page 16
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
NOTE G – INVENTORIES, NET
 
 Inventories, net of reserves, consist of the following:
 
 
(in thousands)
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(unaudited)
 
 
 
 
Raw materials
 $610 
 $530 
Work in process
  433 
  449 
Finished goods
  1,345 
  1,376 
 
 $2,388 
 $2,355 
 
At September 30, 2018 and December 31, 2017, the Company maintained reserves for slow moving inventories of $606,000 and $746,000, respectively.
 
NOTE H – GOODWILL AND OTHER INTANGIBLES
 
Goodwill aggregating $17,315,000 and $17,471,000 was recorded on the Company’s condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively, of which $14,375,000 is allocated to the IT segment and $2,940,000 is allocated to the equipment segment.  The components of the change in goodwill are as follows:
 
 
 
(in thousands)
Carrying Amount
 
 
 
 
 
Balance at December 31, 2017
 $17,471 
Foreign currency translation adjustment
  (156)
Balance at September 30, 2018 (unaudited)
 $17,315 
 
 
 
 
Page 17
 
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:
 
 
(in thousands)
 
 
September 30, 2018
 
 
December 31, 2017
 
 
 
(unaudited)
 
 
 
 
Customer-related
 
 
 
 
 
 
Costs
 $5,831 
 $5,831 
Accumulated amortization
  (2,957)
  (2,501)
 
  2,874 
  3,330 
 
    
    
Patents and Technology
    
    
Costs
  2,289 
  2,331 
Accumulated amortization
  (1,400)
  (1,260)
 
  889 
  1,071 
 
    
    
Software
    
    
Costs
  2,214 
  1,819 
Accumulated amortization
  (1,123)
  (966)
 
  1,091 
  853 
 
    
    
 
 $4,854 
 $5,254 
 
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 $248,000 and $279,000 for the three months ended September 30, 2018 and 2017, respectively, and $753,000 and $870,000 for the nine months ended September 30, 2018 and 2017, respectively.
 
Amortization of intangibles for the next five years is:
 
Years ending December 31,
 
(in thousands)(unaudited)
 
Remainder of 2018
 $247 
2019
  991
2020
 907
2021
  832
2022
  538
Total
 $3,515
 
 
Page 18
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
NOTE I – OTHER ASSETS, NET
 
Other assets, net consist of the following at September 30, 2018 and December 31, 2017:
 
 
 
(in thousands)
 
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(unaudited)
 
 
 
 
Deferred commission expense - noncurrent
 $1,840 
 $1,867 
Trade receivables - noncurrent
  615 
  968 
Other, net of allowance for loss on loan receivable of
    
    
  $412 at September 30, 2018 and December 31, 2017
  596 
  1,012 
 
 $3,051 
 $3,847 
 
NOTE J – ACCRUED EXPENSES AND OTHER LIABILITIES
 
 Accrued expenses and other liabilities consist of the following at September 30, 2018 and December 31, 2017:
 
 
(in thousands)
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(unaudited)
 
 
 
 
Accrued compensation
 $623 
 $1,181 
Accrued expenses - other
  1,419 
  2,207 
Other liabilities
  3,824 
  1,949 
 
 $5,866 
 $5,337 
 
 
Page 19
 
Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
NOTE K - DEFERRED REVENUE
 
The changes in the Company’s deferred revenues are as follows:
 
 
(in thousands)
 
 
For the three months ended
 
 
For the nine months ended
 
 
 
September 30,
2018
 
 
September 30,
2017
 
 
September 30,
2018
 
 
September 30,
2017
 
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
 
(unaudited)
 
Deferred revenue at beginning of period
 $20,193 
 $20,692 
 $23,066 
 $19,404 
Net additions (reductions):
    
    
    
    
Deferred extended service contracts
  189 
  118 
  503 
  553 
Deferred in-service and training
  - 
  5 
  3 
  13 
Deferred service arrangements
  - 
  8 
  5 
  28 
Deferred commission revenues
  (797)
  4,036 
  1,372 
  10,286 
Recognized as revenue:
    
    
    
    
Deferred extended service contracts
  (156)
  (159)
  (477)
  (501)
Deferred in-service and training
  (3)
  (3)
  (5)
  (13)
Deferred service arrangements
  (7)
  (11)
  (28)
  (34)
Deferred commission revenues
  (2,467)
  (2,608)
  (7,487)
  (7,658)
Deferred revenue at end of period
  16,952 
  22,078 
  16,952 
  22,078 
Less: current portion
  9,969 
  12,651 
  9,969 
  12,651 
Long-term deferred revenue at end of period
 $6,983 
 $9,427 
 $6,983 
 $9,427 
 
The net reduction in deferred commission revenue of $797 thousand in the third quarter 2018 is due to the impact of the tiered commission structure. New orders for the quarter exceeded cancellations of prior period orders recognized in the quarter; however, the average commission rate on such cancellations was greater than the average commission rate for new orders in the quarter resulting in the net decrease in deferred commission revenues. Periodically, GEHC “scrubs” the open orders to eliminate orders that are not expected to be fulfilled.
 
NOTE L – LINE OF CREDIT AND CAPITAL LEASE OBLIGATION
 
NetWolves maintains a $4.0 million line of credit with a lending institution.  Advances under the line, which expires on November 30, 2018, bear interest at a rate of LIBOR plus 2.25% and are secured by substantially all of the assets of NetWolves Network Services, LLC and guaranteed by Vaso Corporation.  At September 30, 2018, the Company had drawn approximately $3.3 million against the line. The draw is included in notes payable and capital lease obligations – current portion in the Company’s condensed consolidated balance sheet.
 
The Company maintains an additional $2.0 million line of credit with a lending institution.  Advances under the line, which expires on November 30, 2018, bear interest at a rate of LIBOR plus 2.25% and are secured by substantially all of the assets of the Company.  At September 30, 2018, the Company had drawn approximately $1.3 million against the line.  The line of credit agreement includes certain financial covenants.  At September 30, 2018, and in certain prior quarters, the Company was not in compliance with such covenants.
 
In September 2018, the Company entered into a capital lease, payable quarterly over a 60-month term, for primarily the acquisition of network components in its Florida data center. The fair market value and capital lease liability of the leased equipment was approximately $399,000, of which approximately $77,000 is recorded in current liabilities.
 
NOTE M – EQUITY
 
In March 2018, the Company granted 725,000 shares, valued at approximately $44,000, of restricted common stock to officers under the 2016 Stock Plan. The shares vested in April 2018. In May and June 2018, the Company granted a total of 575,000 shares, valued at approximately $29,000, of restricted common stock to employees, vesting over a three-year period.
 
 
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Vaso Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
NOTE N – RELATED-PARTY TRANSACTIONS
 
The Company made interest payments, aggregating approximately $109,000 in each of the three-month periods ended September 30, 2018 and 2017, and approximately $328,000 in each of the nine-month periods ended September 30, 2018 and 2017, to MedTechnology Investments, LLC (“MedTech”) pursuant to its $4,800,000 promissory notes (“Notes”). The Notes bear interest, payable quarterly, at an annual rate of 9%, mature on May 29, 2019, may be prepaid without penalty, and are subordinated to any current or future Senior Debt as defined in the Subordinated Security Agreement. The Subordinated Security Agreement secures payment and performance of the Company’s obligations under the Notes and as a result, MedTech was granted a subordinated security interest in the Company’s assets. The MedTech Notes were used in 2015 to partially fund the purchase of NetWolves. $2,300,000 of the $4,800,000 provided by MedTech was provided by directors of the Company, or by their family members. In August 2018, MedTech agreed to extend, if necessary, the maturity date of $3,600,000 of the Notes an additional year from May 29, 2019 to May 29, 2020, provided that a minimum of $1,200,000 of the principal is paid on or before December 31, 2019 and the annual interest rate for the balance increases to 10% during the extension. The entire outstanding balance of the MedTech Notes is included as current liabilities.
 
David Lieberman, the Vice Chairman of the Company’s Board of Directors, is a practicing attorney in the State of New York and a senior partner at the law firm of Beckman, Lieberman & Barandes, LLP, which performs certain legal services for the Company. Fees of approximately $85,000 were billed by the firm for each of the three month periods ended September 30, 2018 and 2017, and fees of approximately $255,000 were billed by the firm for each of the nine month periods ended September 30, 2018 and 2017, at which dates no amounts were outstanding.
 
In March 2018, the Company sold its interest in the VSK joint venture to PSK for a sales price of $676,000 and executed a distributorship agreement, expiring December 31, 2020, with VSK for the sale of the Company’s EECP® products in certain international markets. The sale resulted in a gain of approximately $212,000. Prior to the sale, the Company’s pro-rata share in VSK’s income (loss) from operations approximated $29,000 for the three months ended September 30, 2017, and $(9,000) and $(30,000) for the nine months ended September 30, 2018 and 2017, respectively, and is included in interest and other income, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive (loss) income.
 
NOTE O – 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 December 2017, the Company concluded an amendment of the GEHC Agreement with GEHC, originally signed on May 19, 2010. The amendment extends the term of the original agreement, which began on July 1, 2010 and was previously extended in 2012 and 2015, through December 31, 2022, subject to earlier termination with or without cause under certain circumstances after timely notice, making it the longest extension thus far with a remaining term of in excess of four years from September 30, 2018. Under the agreement, VasoHealthcare is the exclusive representative for the sale of select GE Healthcare diagnostic imaging products to specific market segments/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 include: not materially achieving certain sales goals, not maintaining a minimum number of sales representatives, and not meeting 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 and share certain GEHC sales costs.
 
 
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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; 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 healthcare 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 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, 2017 as filed with the SEC on April 2, 2018.
 
 
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Vaso Corporation and Subsidiaries
 
Results of Operations – For the Three Months Ended September 30, 2018 and 2017
 
Revenues
 
Total revenue for the three months ended September 30, 2018 and 2017 was $18,788,000 and $18,041,000, respectively, representing an increase of $747,000, or 4% year-over-year. On a segment basis, revenue in the professional sales service, IT and equipment segments increased $549,000, $175,000 and $23,000, respectively.
 
Revenue in the IT segment for the three months ended September 30, 2018 was $11,002,000 compared to $10,827,000 for the three months ended September 30, 2017, an increase of $175,000, or 2%, of which $407,000 resulted from an increase in the operations of NetWolves, partially offset by a $232,000 decrease in the healthcare IT VAR business, due to fewer healthcare IT solutions installations in the third quarter of 2018. Our monthly recurring revenue in the managed network services operations continues to grow as we add new customers and expand our services to existing customers. At the same time, the backlog of orders in our healthcare IT operations increased to $14.8 million at September 30, 2018 from $10.4 million at September 30, 2017, due to growth in orders and clients. We define backlog as the total value of the undelivered products and services in current contracts that will be delivered in future periods.
 
Commission revenues in the professional sales service segment were $6,854,000 in the third quarter of 2018, an increase of 9%, as compared to $6,305,000 in the same quarter of 2017. The increase in commission revenues was due primarily to an increase in the volume of underlying equipment delivered by GEHC during the period. 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 September 30, 2018, $16,011,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $6,518,000 was long-term. At September 30, 2017, $21,132,000 in deferred commission revenue was recorded in the Company’s condensed consolidated balance sheet, of which $9,013,000 was long-term. The decrease in deferred revenue is principally due to a decrease in new orders booked, customer cancellations, and an increase in deliveries by GEHC. We anticipate that revenue will increase in the fourth quarter of 2018 as deliveries increase.
 
Revenue in the equipment segment increased by $23,000, or 3%, to $932,000 for the three-month period ended September 30, 2018 from $909,000 for the same period of the prior year. The increase was principally due to higher sales of EECP® equipment.
 
Gross Profit
 
Gross profit for the three months ended September 30, 2018 and 2017 was $10,451,000, or 56% of revenue, and $10,028,000, or 56% of revenue, respectively, representing an increase of $423,000, or 4% year-over-year.  On a segment basis, gross profit in the professional sales service and equipment segments increased $470,000, or 10%, and $30,000, or 5%, respectively, while gross profit in the IT segment decreased $77,000, or 2%.
 
IT segment gross profit for the three months ended September 30, 2018 was $4,439,000, or 40% of the segment revenue, compared to $4,516,000, or 42% of the segment revenue for the three months ended September 30, 2017. The year-over-year decrease of $77,000, or 2%, was primarily a result of lower margin product sales mix of network and managed services.
 
Professional sales service segment gross profit was $5,389,000, or 79% of segment revenue, for the three months ended September 30, 2018 as compared to $4,919,000, or 78% of the segment revenue, for the three months ended September 30, 2017, reflecting an increase of $470,000.  The increase in absolute dollars was primarily due to higher commission revenue as a result of higher volume of GEHC equipment delivered during the third quarter of 2018 than in the same period last year.  Cost of commissions in the professional sales service segment of $1,465,000 and $1,386,000, for the three months ended September 30, 2018 and 2017, respectively, reflected commission expense associated with recognized commission revenues.
 
 
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Vaso Corporation and Subsidiaries
 
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 $623,000, or 67% of segment revenues, for the third quarter of 2018 compared to $593,000, or 65% of segment revenues, for the same quarter of 2017. The $30,000, or 5%, increase in gross profit was due to higher sales volume, as well as a gross profit margin increase due mainly to a higher proportion of higher margin products in the sales mix in the third quarter of 2018, compared to the third quarter of 2017.
 
Operating Loss
 
Operating loss for the three months ended September 30, 2018 and 2017 was $241,000 and $619,000, respectively, representing an improvement of $378,000, due to the increase in gross profit partially offset by higher operating costs (below). On a segment basis, operating income in the professional sales service segment increased $525,000 and operating loss in the equipment segment decreased $92,000, while operating loss in the IT segment increased $227,000. In addition, corporate expenses increased $12,000.
 
Operating loss in the IT segment increased $227,000 for the three-month period ended September 30, 2018 as compared to the same period of 2017 due to lower gross profit and higher selling, general, and administrative (“SG&A”) costs, partially offset by lower research and development (“R&D”) costs. Operating income in the professional sales service segment increased $525,000 in the three-month period ended September 30, 2018 as compared to operating income in the same period of 2017, due to higher gross profit combined with lower SG&A costs. The decrease in equipment segment operating loss of $92,000 in the third quarter of 2018 was due to higher gross profit and lower SG&A costs, partially offset by higher R&D costs.
 
SG&A costs for the three months ended September 30, 2018 and 2017 were $10,462,000 and $10,412,000, respectively, representing an increase of $50,000, or less than 1% year-over-year.  On a segment basis, SG&A costs in the IT segment increased by $199,000 in the third quarter of 2018 from the same quarter of the prior year due to increased personnel costs.  SG&A costs in the professional sales service segment decreased $54,000 due mainly to lower personnel-related costs, and SG&A costs in the equipment segment decreased $108,000 due mainly to lower legal fees and lower personnel costs. Corporate costs not allocated to segments increased by $12,000 in the three months ended September 30, 2018 from the same period in 2017, due primarily to higher accounting fees and financing costs.
 
Research and development (“R&D”) expenses were $230,000, or 1% of revenues, for the third quarter of 2018, a decrease of $5,000, or 2%, from $235,000, or 1% of revenues, for the third quarter of 2017. The decrease is primarily attributable to lower software development expenses in the IT segment.
 
Adjusted EBITDA
 
We define Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure, as net income (loss), plus interest expense (income), net; tax expense; depreciation and amortization; and non-cash expenses for share-based compensation.  Adjusted EBITDA is a metric that is used by the investment community for comparative and valuation purposes.  We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.
 
Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and should not be considered a substitute for operating income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with U.S. GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
A reconciliation of net income to Adjusted EBITDA is set forth below:
 
 
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Vaso Corporation and Subsidiaries
 
 
 
 
(in thousands)
Three months ended September 30,
 
 
 
2018
 
 
2017
 
 
 
(unaudited)
 
 
(unaudited)
 
Net loss
 $(377)
 $(816)
Interest expense (income), net
  169 
  163 
Income tax expense
  14 
  94 
Depreciation and amortization
  626 
  611 
Share-based compensation
  44 
  100 
Adjusted EBITDA
 $476 
 $152 
 
Adjusted EBITDA increased by $324,000, to $476,000 in the quarter ended September 30, 2018 from $152,000 in the quarter ended September 30, 2017.  The increase was primarily attributable to the lower net loss, partially offset by lower income tax expense.
 
Interest and Other Income (Expense)
 
Interest and other income (expense) for the three months ended September 30, 2018 was $(122,000) as compared to $(103,000) for the corresponding period of 2017. The increase in interest and other income (expense) was due primarily to higher interest expense due to increased borrowings under the line of credit.
 
Income Tax Expense
 
For the three months ended September 30, 2018, we recorded income tax expense of $14,000 as compared to $94,000 for the corresponding period of 2017.  The decrease arose mainly from lower deferred taxes resulting from the Tax Cuts and Jobs Act.
 
Net Loss
 
Net loss for the three months ended September 30, 2018 was $377,000 as compared to a net loss of $816,000 for the three months ended September 30, 2017, representing an improvement of $439,000. No net loss per share was recorded in each of the three-month periods ended September 30, 2018 and 2017. The principal cause of the decrease in net loss is the increase in professional sales service segment revenue and gross profit.
 
Results of Operations – For the Nine months Ended September 30, 2018 and 2017
 
Revenues
 
Total revenue for the nine months ended September 30, 2018 and 2017 was $54,741,000 and $52,268,000, respectively, representing an increase of $2,473,000, or 5% year-over-year.  On a segment basis, revenue in the IT, professional sales service, and equipment segments increased $1,680,000, $687,000, and $106,000, respectively.
 
Revenue in the IT segment for the nine months ended September 30, 2018 was $33,118,000 compared to $31,438,000 for the nine months ended September 30, 2017, an increase of $1,680,000, or 5%, of which $1,322,000 resulted from growth in the network and managed services operations, and $358,000 from an increase in the healthcare IT VAR business. Our monthly recurring revenue in the network and managed services operations continues to grow month over month as we add new customers and expand our services to existing customers. At the same time, the backlog of orders in our IT VAR operations increased to $14.8 million at September 30, 2018 from $10.4 million at September 30, 2017, due to growth in orders and clients.
 
 
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Vaso Corporation and Subsidiaries
 
Commission revenues in the professional sales service segment were $18,868,000 in the first nine months of 2018, an increase of 4%, as compared to $18,181,000 in the first nine months of 2017. The increase in commission revenues was due primarily to an increase in the volume of underlying equipment delivered by GEHC during the period. We expect deliveries and revenue to continue to improve through the remainder of 2018. The Company recognizes commission revenue when the underlying equipment has been accepted at the customer site in accordance with the specific terms of the sales agreement. Consequently, amounts billable, or billed and received, under the agreement with GE Healthcare prior to customer acceptance of the equipment are recorded as deferred revenue in the condensed consolidated balance sheet.
 
Revenue in the equipment segment increased by $106,000, or 4%, to $2,755,000 for the nine-month period ended September 30, 2018 from $2,649,000 for the same period of the prior year.  The increase was principally due to an increase in Biox ambulatory monitor and ARCS software revenues as a result of higher sales volume.
 
Gross Profit
 
Gross profit for the nine months ended September 30, 2018 and 2017 was $30,507,000, or 56% of revenue, and $28,896,000, or 55% of revenue, respectively, representing an increase of $1,611,000, or 6% year-over-year.  On a segment basis, gross profit in the IT and professional sales service segments increased $915,000, and $730,000, respectively, while gross profit in the equipment segment decreased $34,000.
 
IT segment gross profit for the nine months ended September 30, 2018 was $13,827,000, or 42% of the segment revenue, compared to $12,912,000, or 41% of the segment revenue for the nine months ended September 30, 2017, with $386,000 of the increase resulting primarily from higher sales at NetWolves and $529,000 resulting from both higher sales and higher gross profit rate in the IT VAR business.
 
Professional sales service segment gross profit was $14,965,000, or 79% of segment revenue, for the nine months ended September 30, 2018 as compared to $14,235,000, or 78% of the segment revenue, for the nine months ended September 30, 2017, reflecting an increase of $730,000, or 5%.  The increase in absolute dollars was due to higher commission revenue as a result of higher volume of GEHC equipment delivered during the first nine months of 2018 than in the same period last year, as well as by lower commission expense in the first nine months of 2018 compared to the same period of 2017.
 
Cost of commissions in the professional sales service segment of $3,903,000 and $3,946,000, for the nine months ended September 30, 2018 and 2017, respectively, reflected commission expense associated with recognized commission revenues.  The decrease reflects lower average commission rates.  Commission expense associated with deferred revenue is recorded as deferred commission expense until the related commission revenue is recognized.
 
Equipment segment gross profit decreased to $1,715,000, or 62% of segment revenues, for the first nine months of 2018 compared to $1,749,000, or 66% of segment revenues, for the same period of 2017, due to lower margin product mix in the first nine months of 2018, compared to the same period of 2017.
 
Operating Loss
 
Operating loss for the nine months ended September 30, 2018 and 2017 was $2,620,000 and $3,169,000, respectively, representing an improvement of $549,000, primarily due to higher gross profit partially offset by higher operating costs.  On a segment basis, operating loss decreased $122,000 in the IT segment and decreased $58,000 in the equipment segment, while operating income in the professional sales service segment increased $317,000. In addition, corporate expenses decreased $52,000.
 
Operating loss in the IT segment decreased in the nine-month period ended September 30, 2018 as compared to the same period of 2017 due to higher gross profit and lower research and development costs, partially offset by higher SG&A costs. Operating income in the professional sales service segment increased in the nine-month period ended September 30, 2018 as compared to the same period of 2017 due to higher gross profit, partially offset by higher SG&A costs. Operating loss in the equipment segment decreased in the nine-month period ended September 30, 2018 as compared to the same period of 2017 due to lower SG&A costs, partially offset by higher R&D costs and lower gross profit.
 
 
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Vaso Corporation and Subsidiaries
 
SG&A costs for the nine months ended September 30, 2018 and 2017 were $32,459,000 and $31,349,000, respectively, representing an increase of $1,110,000, or 4% year-over-year. On a segment basis, SG&A costs for the nine months ended September 30, 2018 increased in the IT segment by $967,000 to $15,680,000, from $14,713,000 for the corresponding period of the prior year, due primarily to increased personnel costs at NetWolves, and an increase in the professional sales service segment of $413,000 to $13,842,000, from $13,429,000 for the corresponding period of the prior year, due to increased personnel-related and shared marketing costs. SG&A costs in the equipment segment for the nine months ended September 30, 2018 decreased $219,000 to $2,005,000, from $2,224,000 for the corresponding period of the prior year, due primarily to lower headcount and legal costs. Corporate costs not allocated to segments decreased in the same period by $52,000 from $984,000, due primarily to lower accounting and director fees.
 
Research and development (“R&D”) expenses were $668,000, or 1% of revenues, for the first nine months of 2018, a decrease of $48,000, or 7%, from $716,000, or 1% of revenues, for the first nine months of 2017. The decrease is primarily attributable to lower software development expenses in the IT segment.
 
Adjusted EBITDA
 
We define Adjusted EBITDA (earnings (loss) before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure, as net income (loss), plus interest expense (income), net; tax expense; depreciation and amortization; and non-cash expenses for share-based compensation.  Adjusted EBITDA is a metric that is used by the investment community for comparative and valuation purposes.  We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.
 
Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and should not be considered a substitute for operating income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with U.S. GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
A reconciliation of net income to Adjusted EBITDA is set forth below:
 
 
  
(in thousands)
Nine months ended September 30,
 
 
 
2018
 
 
2017
 
 
 
(unaudited)
 
 
(unaudited)
 
Net loss
 $(2,895)
 $(3,934)
Interest expense (income), net
  507 
  494 
Income tax expense
  71 
  314 
Depreciation and amortization
  1,828 
  1,781 
Share-based compensation
  266 
  417 
Adjusted EBITDA
 $(223)
 $(928)
 
Adjusted EBITDA improved by $705,000, to $(223,000) in the nine months ended September 30, 2018 from $(928,000) in the nine months ended September 30, 2017.  The improvement was primarily attributable to the lower net loss, partially offset by lower income tax expense and lower share-based compensation.
 
Interest and Other Income (Expense)
 
Interest and other income (expense) for the nine months ended September 30, 2018 was $(204,000) as compared to $(451,000) for the corresponding period of 2017. The decrease was due primarily to the $212,000 gain on sale of VSK, partially offset by higher interest expense due to increased borrowings under our credit line.
 
 
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Vaso Corporation and Subsidiaries
 
Income Tax Expense
 
For the nine months ended September 30, 2018, we recorded income tax expense of $71,000 as compared to income tax expense of $314,000 for the corresponding period of 2017.  The decrease arose mainly from lower deferred income taxes in 2018 arising from the Tax Cuts and Jobs Act.
 
Net Loss
 
Net loss for the nine months ended September 30, 2018 was $2,895,000 compared to net loss of $3,934,000 for the nine months ended September 30, 2017, representing a decrease in net loss of $1,039,000. Our net loss per share was $0.02 in the nine-month periods ended September 30, 2018 and 2017. The principal causes of the decrease in net loss is the increase in operating income in the professional sales service segment, the gain on sale of investment in VSK, and the reduction in income tax expense.
 
Liquidity and Capital Resources
 
Cash and Cash Flow
 
We have financed our operations from working capital and drawdown on our lines of credit.  At September 30, 2018, we had cash and cash equivalents of $2,979,000 and negative working capital of $15,876,000 compared to cash and cash equivalents of $5,245,000 and negative working capital of $8,217,000 at December 31, 2017.  $8,524,000 in negative working capital at September 30, 2018 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 used in operating activities was $1,532,000, which consisted of net loss after adjustments to reconcile net loss to net cash of $740,000 and cash used by operating assets and liabilities of $792,000, during the nine months ended September 30, 2018, compared to cash provided by operating activities of $866,000 for the same period in 2017. The changes in the account balances primarily reflect a decrease in accounts and other receivables of $2,837,000, an increase in accounts payable of $1,756,000, and decreases in deferred revenue and accrued commissions of $6,114,000, and 1,264,000, respectively.
 
Cash used in investing activities during the nine-month period ended September 30, 2018 was $1,857,000 consisting of $2,168,000 for the purchase of equipment and software, partially offset by $311,000 provided by the sale of our investment in VSK.
 
Cash provided by financing activities during the nine-month period ended September 30, 2018 was $1,081,000 primarily as a result of $1,158,000 in net borrowings on revolving lines of credit partially offset by $76,000 in net repayments of notes and capital leases issued for equipment purchases.
 
Liquidity
 
At September 30, 2018 the Company had outstanding borrowings under its lines of credit of approximately $4.6 million with availability of approximately $1.4 million.  These lines mature on November 30, 2018.  It is the management’s intention to renew the lines of credit, and it is currently in negotiation with the lending bank for the renewal.  The Company has had a history of renewing these lines of credit upon maturity; therefore, management believes that the lines of credit will be renewed. The Company has a conditional commitment to extend $3.6 million of the MedTech Notes for one year through May 29, 2020. Additionally, management has established cost saving measures that will be implemented, if necessary. The Company expects to maintain sufficient liquidity through its cash on hand, availability of funds under its lines of credit, and internally generated funds to meet its obligations as they come due.  The Company’s profitability for the year will be largely dependent on deliveries of product by GEHC in our professional sales service segment since the Company does not recognize revenue in this segment until the equipment is delivered.
 
 
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Vaso Corporation and Subsidiaries
 
ITEM 4 - CONTROLS AND PROCEDURES
 
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, 2018 and have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
 
 
 
 
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Vaso Corporation and Subsidiaries
 
PART II - OTHER INFORMATION
 
ITEM 6 – EXHIBITS
 
 
 
Exhibits
 
31
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
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Vaso Corporation and Subsidiaries
 
 
 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)
 
 
 
 
 
 
 
 
 
By:  
/s/ Michael J. Beecher
 
 
 
Michael J. Beecher 
 
 
 
Chief Financial Officer and
Principal Accounting Officer 
 
 
Date:  November 14, 2018
 
 
 
 
 
 
 
 
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