UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10‑K
(Mark One)
☒ | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended January 31, 2016
OR
☐ | |
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: 000-28132000‑28132
STREAMLINE HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 31‑1455414 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1175 Peachtree Street, NE, Suite 600,
Atlanta, GA 30309
(Address of principal executive offices) (Zip Code)
(888) 997‑8732
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
(Title of Class)
The NASDAQ Stock Market, Inc.
(Name of exchange on which listed)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K,10‑K, or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and “emerging growth company” in Rule 12b-212b‑2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
Emerging growth company ☐ | ||||||
If an emerging growth company, indicate by check mark if the registrant 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-212b‑2 of the Exchange Act). Yes
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed using the closing price as reported by The NASDAQ Stock Market, Inc. for the Registrant’s Common Stock on July 31, 2015,2018, was $45,488,878.
The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of April 15, 2016: 19,361,549.
Documents incorporated by reference:
Information required by Part III is incorporated by reference from Streamline’s Proxy Statement for its 20162019 Annual Meeting of Stockholders are incorporated by reference into Part III.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. In this Report, both Part I, Item 1, “Business,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements. In addition, our senior management makes forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue, income, receivables, backlog, client attrition, acquisitions and other growth opportunities, sources of funding operations and acquisitions, the integration of our solutions, the performance of our channel partner relationships, the sufficiency of available liquidity, research and development, and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part I, Item 1A, and the other cautionary statements in other documents we file with the SEC, including the following:
· | competitive products and pricing; |
· | product demand and market acceptance; |
· | entry into new markets; |
· | new product and services development and commercialization; |
· | key strategic alliances with vendors and channel partners that resell our products; |
· | uncertainty in continued relationships with clients due to termination rights; |
· | our ability to control costs; |
· | availability, quality and security of products produced and services provided by third-party vendors; |
· | the healthcare regulatory environment; |
· | potential changes in legislation, regulation and government funding affecting the healthcare industry; |
· | healthcare information systems budgets; |
· | availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems; |
· | the success of our relationships with channel partners; |
· | fluctuations in operating results; |
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· | our future cash needs; |
· | the potential delisting of our common stock from the Nasdaq Capital Market; |
· | the consummation of resources in researching acquisitions, business opportunities or financings and capital market transactions; |
· | the failure to adequately integrate past and future acquisitions into our business; |
· | critical accounting policies and judgments; |
· | changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other standard-setting organizations; |
· | changes in economic, business and market conditions impacting the healthcare industry and the markets in which we operate; and |
· | our ability to maintain compliance with the terms of our credit facilities. |
Most of these factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (generally because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
PART I
ITEM 1. Business
Company Overview
Incorporated in 1989, the Company is a leading provider of transformational data-driven solutions and services in the middle of the revenue cycle for healthcare organizations. providers throughout the United States and Canada. Streamline Health®’s technology helps hospitals improve their financial performance by moving later revenue cycle interventions earlier in the process to optimize their coding accuracy for every patient encounter prior to bill submission. By improving coding accuracy before billing, providers can reduce revenue leakage, mitigate the risk of overbilling, and reduce days in accounts receivable. This enables providers to turn previously unpredictable revenue cycles into more predictable revenue streams.
The Company provides computer software-based solutions through its Looking Glass® platform. Looking Glass® captures, aggregates and translatesauditing services, which capture, aggregate and translate structured and unstructured data to deliver intelligently organized, easily accessible predictive insights to its clients. Hospitals and physician groups use the knowledge generated by the Looking Glass® platformStreamline Health to help them reduce exposure to risk, improve clinical,their financial and operational performance and improve patient care.
The Company’s software solutions are delivered to clients either by purchased fixed-term or perpetual license, where such software is installed locally in the client’s data center, or by access to the Company’s data center systems through a secure connection in a software as a service (SaaS)(“SaaS”) delivery method.
The Company operates exclusively in one segment as a provider of health information technology solutions and associated services that improve healthcare processes and information flows within a healthcare facility. The Company sells its solutions and services in North America to hospitals and health systems, including physician practices, through its direct sales force and its reseller partnerships.
Unless the context requires otherwise, references to “Streamline Health,” the “Company,” “we,” “us” and “our” are intended to mean Streamline Health Solutions, Inc. and its wholly-owned subsidiary. All references to a fiscal year refer to the fiscal year commencing February 1 in that calendar year and ending on January 31 of the following calendar year.
Solutions
The Company offers solutions and services to assist its clients in all areas of the patient care lifecyclerevenue cycle management including Patient Engagement, Patient Care, Health Information Management (HIM), Coding and Clinical Documentation Improvement (CDI), Health Information Management (HIM), Financial Management and Financial Management. Each suite ofeValuatorTM, its flagship solution which delivers 100% automated coding analysis prior to billing. The Company’s solutions isare designed to improve the flow of critical patient information throughout the enterprise. Each of the Company’sThe solutions helpsand services help to transform and structure information between disparate information technology systems into actionable data, giving the end user comprehensive access to clinical and business intelligence to enable better decision-making. All solutionsSolutions can be accessed securely through SaaS, or delivered either by a perpetual license or by a fixed-term license installed locally or accessed securely through SaaS.
HIM, Coding & CDISolutions -- These solutions provide an integrated web-basedcloud-based software suite that enhances the productivity of CDI and Coding staff and enables the seamless sharing of patient data. This suite of solutions includes individual workflows such as content management (ECM), release of information, computer-assisted coding (eCAC), CDI, abstractingAbstracting and physician query.Physician Query. The eCAC solution includes patented Natural Language Processing (NLP) that streamlines concurrent chart review and coding workflows.
eValuator Coding Analysis Platform - This technology is a cloud-based SaaS analytics solution that delivers the capability of fully automated analysis on 100% of billing codes entered by a healthcare provider’s coding team. This is done on a pre-bill basis, enabling providers to identify and address their highest-impact cases prior to bill drop. Rule sets are enabled for inpatient, outpatient and pro-fee cases. With eValuator, providers can add an audit and review function on a pre-bill basis to all cases, allowing the provider to better optimize reimbursements and mitigate risk on its billing practices.
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Financial ManagementSolutions - These solutions enable financial staff across the healthcare enterprise to drill down quickly and deeply into actionable and real-time financial data and key performance indicators to improve revenue realization and staff efficiency. This suite of solutions includes individual workflows such as accounts receivable management, denials management, claims processing, spend management and audit management. These solutions provide dashboards, data mining tools and prescriptive reporting, which help to simplify, facilitate and optimize overall revenue cycle performance of the healthcare enterprise. The financial management suite of solutions is used to improve the quality and accuracy of the data captured via our Patient Engagement solutions during patient admission, registration and scheduling. These solutions are also used to increase the completion and accuracy of patient charts and related coding, improve accounts receivable collections, reduce and manage denials, and improve audit outcomes.
Services
Audit Services — The Company provides technology-enabled coding audit services to help clients review and optimize their internal clinical documentation and coding functions across the applicable segment of the client’s enterprise. The Company provides these services using experienced auditors and its eValuator proprietary software to improve the targeting of records with the highest likelihood of requiring an audit. The audit services are provided for inpatient DRG coding auditing, outpatient APC auditing, HCC auditing and Physician/Pro-Fee services coding auditing.
Custom Integration Services — The Company’s professional services team works with clients to design custom integrations that integrate data to or from virtually any clinical, financial, or administrative system. By taking data and documents from multiple, disparate systems and bringing them into one streamlined system, clients are able to maximize efficiencies and increase operational performance. The Company’s professional services team also creates custom integrations that transfer data from the Company’s solutions into the client’s external or internal systems.
Training Services — Training courses are offered to help clients quickly learn to use our solutions in the most efficient manner possible. Training sessions are available on-site or offoff-site for multiple staff members or as few as one person or multiple staff members.person.
Electronic Image Conversion — The Company’s electronic image conversion service allows organizations to protect their repository of images while taking advantage of its content management technology. Electronic image conversion creates one repository that integrates directly with our clinical content management system. This service is available via the SaaS model or for locally-installed solutions.
Database Monitoring Services — The Company’s advanced database monitoring services for clients with locally-installed clientssolutions help lighten the burden of ongoing system monitoring by the client’s information technology staff and ensure a continual, stable production environment. The Company’s database administrators ensure the client’s system is running optimally with weekly manual checks of the database environment to identify system issues that may require further attention. Monitoring is done through protected connections to data security.
Clients and Strategic Partners
The Company continues to provide transformational data-driven solutions to some of the finest, most well respectedwell-respected healthcare enterprises in the United States and Canada. Clients are geographically dispersed throughout North America, with the heaviest concentration currently in the New York metropolitan area, Philadelphia, Texas, Southern Californiaarea. The Company provides these solutions through a combination of direct sales and the west coast of Florida.
During fiscal year 2015,2018, no individual client accounted for 10% or more of our total revenues. Two clients represented 13%12% and 12%9%, respectively, of total accounts receivable as of January 31, 2016.2019.
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During fiscal year 2014,2017, no individual client accounted for 10% or more of our total revenues. Two clients represented 16%12% and 10%11%, respectively, of total accounts receivable as of January 31, 2015.
For more information regarding our major clients, please see “Risks Relating to Our Business - Our sales have been concentrated in a small number of clients” in Part 1, Item 1A, Risk Factors.
Acquisitions and Divestitures
The Company regularly evaluates opportunities for acquisitions and divestitures for portions of the Company that may not align with current growth strategies. The Company acquired substantially all of the assets of Opportune IT Healthcare Solutions, Inc. (“Opportune IT”), a provider of coding compliance, recovery audit contractor consulting, and ICD-10 readiness and training to hospitals, physicians and medical groups, on September 8, 2016. The Company also divested the Streamline Health® Patient Engagement suite of solutions on December 1, 2016.
Business Segments
We manage our business as one single business segment. For our total assets at January 31, 20162019 and 20152018 and total revenue and net loss for the fiscal years ended January 31, 20162019 and 2015,2018, see our consolidated financial statements included in Part II, Item 8 herein.
Contracts,
The Company enters into master agreements with its clients that specify the scope of the system to be installed andand/or services to be provided by the Company, as well as the agreed-upon aggregate price, applicable term duration and the timetable for the associated licenses and services. Typically
For clients purchasing software to be installed locally or provided on a SaaS model, these are multi-element arrangements that include either a perpetual or term license and right to access the applicable software functionality (whether installed locally at the client site (oror the right to use the Company’s solutions as a part of SaaS services), terms regarding maintenance and an initial maintenance term andsupport services, terms for any third-party components includingsuch as hardware and software, (included with SaaS services), as well asand professional services for implementation, integration, process engineering, optimization and training.training, as well as fees and payment terms for each of the foregoing. If the client purchases solutions via SaaS,on a perpetual license model, the client is billed the license fee up front. Maintenance and support is provided on a term basis for separate fees, with an initial term typically from one to five years in length. The maintenance and support fee is charged annually in advance, commencing either upon contract execution or deployment of the solution in live production. If the client purchases solutions on a term-based model, the client is billed periodically a combined access fee for a specified term, typically from one to seven years in length. The SaaSaccess fee includes the access rights along with all maintenance and support services.
The Company also generally provides software and SaaS clients professional services for implementation, integration, process engineering, optimization and training. These services and the associated fees are separate from the license, maintenance and access fees. Professional services are typicallyprovided on either a fixed-fee or hourly arrangements billable to clients based on agreed-to payment milestones (fixed fee) or monthly.
For coding audit services clients, these review services are provided either through a stand-alone services agreement or services addendum to an existing master agreement with the client. These review services are available as either a one-time service or recurring monthly, quarterly or annual review structure. These services are typically provided on a per reviewed account/chart basis. Monthly minimums are required where material discounts have been offered. Payment typically occurs upon completion of the applicable review project.
The commencement of revenue recognition varies depending on the size and complexity of the system and/or services involved, the implementation or performance schedule requested by the client and usage by clients of SaaS.SaaS for
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software-based components. The Company’s agreements are generally non-cancelable but provide that the client may terminate its agreement upon a material breach by the Company and/or or may delay certain aspects of the installation or associated payments in such events. The Company does allow for termination for convenience in certain situations. The Company also includes trial or evaluation periods for certain clients, especially for new or modified solutions. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period. The Company’s master agreements generally provide that the client may terminate its agreement uponperiod, and a material breach by the Company or may delay certain aspects of the installation. A termination or installation delay of one or more phases of an agreement, or the failure of the Company to procure additional agreements, could have a material adverse effect on the Company’s business, financial condition, and results of operations.operations, as further discussed in Section 1A Risk Factors herein. Historically, the Company has not experienced a material amount of contract cancellations; however, the Company sometimes experiences delays in the course of contract performance and the Company accounts for them accordingly.
Third-Party License fees
The Company incorporates software licensed from various third-party vendors into its proprietary software. In addition,Stand-alone third-party stand-alone software is also required to operate certain of the Company’s proprietary software.software and/or SaaS services. The Company licenses these software products and pays the required license fees when such software is delivered to clients. For information regarding royalty agreements, see Note 3 to our consolidated financial statements included in Part II, Item 8 herein.
Associates
As of
January 31,For more information on contracts, backlog, acquisitions and research and development, see also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Competition
Regarding our Patient Care Solutions, HIM, Coding and CDI Solutions, eValuator Coding Analysis Platform, and Financial Management Solutions, several companies historically have dominated the clinical information system software market and several of these companies have either acquired, developed or are developing their own document management and workflow technologies. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Strategic alliances between vendors offering HIM workflow and document management technologies and vendors of other healthcare systems are increasing. Barriers to entry to this market include technological and application sophistication, the ability to offer a proven product, creating and utilizing a well-established client base and distribution channels, brand recognition, the ability to operate on a variety of operating systems and hardware platforms, the ability to integrate with pre-existing systems and capital for sustained development and marketing activities. The Company believes that these obstacles taken together represent a moderate to high-level barrier to entry. The Company has many competitors including clinical information system vendors that are larger, more established and have substantially more resources than the Company.
Regarding our Audit Services, there are numerous medium and small companies and independent consultants who offer these services. Barriers to entry to this market include creating and utilizing a well-established client base and distribution channels, brand recognition, establishing differentiators for our services and capital for sustained development and marketing activities.
The Company believes that these obstacles taken together represent a moderate to high-level barrier to entry. The Company believes that the principal competitive factors in its market are client recommendations and references, company reputation, system reliability, system features and functionality (including ease of use), technological advancements, client service and support, breadth and quality of the systems, the potential for enhancements and future compatible products, the effectiveness of marketing and sales efforts, price, and the size and perceived financial stability
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of the vendor. In addition, the Company believes that the speed with which companies in its market can anticipate the evolving healthcare industry structure and identify unmet needs are important competitive factors.
Additional Intellectual Property Rights
In addition to the software licenses described in other sections of this Item 1, “Business”, the Company also holds registered trademarks for its Streamline Health® and other key trademarks used in selling our products. These marks are currently active, with registrations being valid for a period of 3 years each. The Company actively renews these marks at the end of each registration period.
Regulation
Our clients derive a substantial portion of their revenue from third-party private and governmental payors, including through Medicare, Medicaid and other government-sponsored programs. Our clients also have express handling and retention obligations under information-based laws such as the Health Insurance Portability and Accountability Act of 1996. There are no material regulatory proposals of which the Company is aware that we believe currently have a high likelihood of passage that we anticipate would have a material impact on the operation or demand of the Company’s products and services. However, the Company acknowledges there is currently great uncertainty in the US healthcare market generally from a regulatory perspective. In addition, there is regulatory uncertainty in the data and technology sectors as it relates to information security regulations. Material changes could have unanticipated impact on demand or usability of the Company’s solutions, require the Company to incur additional development and/or operating costs (on a one-time or recurring basis) or cause clients to terminate their agreements or otherwise be unable to pay amounts owed to the Company, as further discussed in the risk factors in Part 1, Item 1A, “Risk Factors” herein.
Requests for Documents
Copies of documents filed by the Company with the SEC, including annual reports on Form 10-K,10‑K, quarterly reports on Form 10-Q,10‑Q, current reports on Form 8-K,8‑K, proxy statements and all amendments to those reports and statements, if any, can be found at the web site http://investor.streamlinehealth.net as soon as practicable after such material is electronically filed with, or
ITEM 1A. Risk Factors
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our sales have been concentrated in a small number of clients.
Our revenues have been concentrated in a relatively small number of large clients, and we have historically derived a substantial percentage of our total revenues from a few clients. For theboth fiscal years ended
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A significant increase in new software as a service (“SaaS”)SaaS contracts could reduce near-term profitability and require a significant cash outlay, which could adversely affect near term cash flow and financial flexibility.
If new or existing clients purchase significant amounts of our SaaS services, we may have to expend a significant amount of initial setup costs and time before those new clients are able to begin using such services, and we cannot begin to recognize revenues from those SaaS agreements until the commencement of such services. Accordingly, we anticipate that our near-term cash flow, revenue and profitability may be adversely affected by significant incremental setup costs from new SaaS clients that would not be offset by revenue until new SaaS clients go into production. While we anticipate long-term growth in profitability through increases in recurring SaaS subscription fees and significantly improved profit visibility, any inability to adequately finance setup costs for new SaaS solutions could result in the failure to put new SaaS solutions into production, and could have a material adverse effect on our liquidity, financial position and results of operations. In addition, this near-term cash flow demand could adversely impact our financial flexibility and cause us to forego otherwise attractive business opportunities or investments.
Our eValuator platform, coding audit services and associated software and technologies represent a new market for the Company, and we may not see the anticipated market interest or growth due to being a new player in the industry.
The Company is currently investing in the eValuator platform as well as new software-based technologies relating to high automation and machine-based analytics regarding a client’s coding audit process. The return on this investment requires that the product developments continue to be defined and completed in a timely and cost-effective manner, there remains general interest in the marketplace (for both existing and future clients) for this technology, the demand for the product generates sufficient revenue in light of the development costs and that the Company is able to execute a successful product launch for these technologies. If the Company is unable to meet these requirements when launching these technologies, or if there is a delay in the launch process, the Company may not see an increase in revenue to offset the current development costs or otherwise translate to added growth and revenue for the Company.
Clients may exercise termination rights within their contracts, which may cause uncertainty in anticipated and future revenue streams.
The Company generally does not allow for termination of a client’s agreement except at the end of the agreed upon term or for cause. However, certain of the Company’s client contracts provide that the client may terminate the contract without cause prior to the end of the term of the agreement by providing written notice, sometimes with relatively short notice periods. The Company also provides trial or evaluation periods for certain clients, especially for new products and services. Furthermore, there can be no assurance that a client will not cancel all or any portion of an agreement, even without an express early termination right. And, the Company may face additional costs or hardships collecting on amounts owed if a client terminates an agreement without such a right. Whether resulting from termination for cause or the limited termination for convenience rights discussed above, the existence of contractual relationships with these clients is not an assurance that we will continue to provide services for our clients through the entire term of their respective agreements. If clients representing a significant portion of our revenue terminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenue and income from such contracts and this would have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. In addition, client contract terminations could harm our reputation within the industry, especially any termination for cause, which could negatively impact our ability to obtain new clients.
Changes in healthcare regulations impacting coding, payers and other aspects of the healthcare regulatory cycle could have substantial impact on our financial performance, growth and operating costs.
Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. Unanticipated regulatory changes could materially impact the need for and/or value of our solutions. For example, if governmental or other third-party payors materially reduce reimbursement rates or fail to reimburse our clients adequately, our clients may suffer adverse financial consequences. Changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could also directly impact the
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capabilities our solutions and services provide and the pricing arrangements we are required to offer to be competitive in the market. Similarly, the U.S. Congress may adopt legislation that may change, override, conflict with or preempt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information and/or impact the value of the functionality our products and services provide.
These situations would, in turn, reduce the demand for our solutions or services and/or the ability for a client to purchase our solutions or services. This could have a material impact on our financial performance. In addition, the speed with which the Company can respond to and address any such changes when compared with the response of other companies in the same market (especially companies who may accurately anticipate the evolving healthcare industry structure and identify unmet needs) are important competitive factors. If the Company is not able to address the modifications in a timely manner compared with our competition, that may further reduce demand for our solutions and services.
The potential impact on us of new or changes in existing federal, state and local regulations governing healthcare information could be substantial.
Healthcare regulations issued to date have not had a material adverse effect on our business. However, we cannot predict the potential impact of new or revised regulations that have not yet been released or made final, or any other regulations that might be adopted. The U.S. Congress may adopt legislation that may change, override, conflict with or preempt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information. Although the features and architecture of our existing solutions can be modified, it may be difficult to address the changing regulation of healthcare information.
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the group purchasing business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our solutions and services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry, generally, as well as our ability to increase the number of solutions that we sell to our clients. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as
Our clients derive a substantial portion of their revenue from third-party private and governmental payors, including through Medicare, Medicaid and other government-sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. If governmental or other third-party payors materially reduce reimbursement rates or fail to reimburse our clients adequately, our clients may suffer adverse financial consequences, which in turn, may reduce the demand for and ability to purchase our solutions or services.
We face significant competition, including from companies with significantly greater resources.
We currently compete with many other companies for the licensing of similar software solutions and related services. Several companies historically have dominated the clinical information systems software market and several of these companies have either acquired, developed or are developing their own content management, analytics and coding/clinical documentation improvement solutions, as well as the resultant workflow technologies. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Many of these companies are larger than us and have significantly more resources to invest in their businesses.business. In addition, information
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and document management companies serving other industries may enter the market. Suppliers and companies with whom we may establish strategic alliances also may compete with us. Such companies and vendors may either individually, or by forming alliances excluding us, place bids for large agreements in competition with us. A decision on the part of any of these competitors to focus additional resources in any one of our three solutions stacks (content management, analytics and coding/clinical documentation improvement), workflow technologies orand other markets addressed by us could have a material adverse effect on us.
The healthcare industry is evolving rapidly, which may make it more difficult for us to be competitive in the future.
The U.S. healthcare system is under intense pressure to improve in many areas, including modernization, universal access and controlling skyrocketing costs of care. We believe that the principal competitive factors in our market are client recommendations and references, company reputation, system reliability, system features and functionality (including ease of use), technological advancements, client service and support, breadth and quality of the systems, the potential for enhancements and future compatible solutions, the effectiveness of marketing and sales efforts, price and the size and perceived financial stability of the vendor. In addition, we believe that the speed with which companies in our market can anticipate the evolving healthcare industry structure and identify unmet needs areis an important competitive factors.factor. If we are unable to keep pace with changing conditions and new developments, we will not be able to compete successfully in the future against existing or potential competitors.
Rapid technology changes and short product life cycles could harm our business.
The market for our solutions and services is characterized by rapidly changing technologies, regulatory requirements, evolving industry standards and new product introductions and enhancements that may render existing solutions obsolete or less competitive. As a result, our position in the healthcare information technology market could change rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend, in part, upon our ability to enhance our existing solutions and services and to develop and introduce new solutions and services to meet changing requirements. Moreover, competitors may develop competitive products that could adversely affect our operating results. We need to maintain an ongoing research and development program to continue to develop new solutions and apply new technologies to our existing solutions but may not have sufficient funds with which to undertake such required research and development. If we are not able to foresee changes or to react in a timely manner to such developments, we may experience a material, adverse impact on our business, operating results and financial condition.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our solutions and services.
Our intellectual property, which represents an important asset to us, has some protection against infringement through copyright and trademark law. We generally have little patent protection on our software. We rely upon license agreements, employment agreements, confidentiality agreements, nondisclosure agreements and similar agreements to maintain the confidentiality of our proprietary information and trade secrets. Notwithstanding these precautions, others may copy, reverse
Due to the rapid pace of technological change, we believe our future success is likely to depend upon continued innovation, technical expertise, marketing skills and client support and services rather than on legal protection of our intellectual property rights. However, we have in the past aggressively asserted our intellectual property rights when necessary and intend to do so in the future.
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We could be subjected to claims of intellectual property infringement that could be expensive to defend.
While we do not believe that our solutions and services infringe upon the intellectual property rights of third parties, the potential for intellectual property infringement claims continually increases as the number of software patents and copyrighted and trademarked materials continues to rapidly expand. Any claim for intellectual property right infringement, even if not meritorious, could be expensive to defend. If we were held liable for infringing third party intellectual property rights, we could incur substantial damage awards, and potentially be required to cease using the technology, produce non-infringing technology or obtain a license to use such technology. Such potential liabilities or increased costs could be material to us.
Over the last several years, we have completed a number of acquisitions and may undertake additional acquisitions in the future. Any failure to adequately integrate past and future acquisitions into our business could have a material adverse effect on us.
Over the last several years, we have completed several acquisitions of businesses through asset and stock purchases. We expect that we will make additional acquisitions in the future.
Acquisitions involve a number of risks, including, but not limited to:
· | the potential failure to achieve the expected benefits of the acquisition, including the inability to generate sufficient revenue to offset acquisition costs, or the inability to achieve expected synergies or cost savings; |
· | unanticipated expenses related to acquired businesses or technologies and their integration into our existing businesses or technology; |
· | the diversion of financial, managerial and other resources from existing operations; |
· | the risks of entering into new markets in which we have little or no experience or where competitors may have stronger positions; |
· | potential write-offs or amortization of acquired assets or investments; |
· | the potential loss of key employees, clients or partners of an acquired business; |
· | delays in client purchases due to uncertainty related to any acquisition; |
· | potential unknown liabilities associated with an acquisition; and |
· | the tax effects of any such acquisitions. |
If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses, which could have an adverse effect on our business and financial condition.
Finally, if we finance acquisitions by issuing equity or convertible or other debt securities, our existing stockholders may be diluted, or we could face constraints related to the terms of and repayment obligations related to the incurrence of indebtedness. This could adversely affect the market price of our securities.
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We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not ultimately consummated, which could materially adversely affect our financial condition and subsequent attempts to Financial Statements
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
Third party products are essential to our software.
Our software incorporates software licensed from various vendors into our proprietary software. In addition, third-party, stand-alone software is required to operate some of our proprietary software modules. The loss of the ability to use these third-party products, or ability to obtain substitute third-party software at comparable prices, could have a material adverse effect on our ability to license our software.
Our solutions may not be error-free and could result in claims of breach of contract and liabilities.
Our solutions are very complex and may not be error-free, especially when first released. Although we perform extensive testing, failure of any solution to operate in accordance with its specifications and documentation could constitute a breach of the license agreement and require us to correct the deficiency. If such deficiency is not corrected within the agreed-upon contractual limitations on liability and cannot be corrected in a timely manner, it could constitute a material breach of a contract allowing the termination thereof and possibly subjecting us to liability. Also, we sometimes indemnify our clients against third-party infringement claims. If such claims are made, even if they are without merit, they could be expensive to defend. Our license and SaaS agreements generally limit our liability arising from these types of claims, but such limits may not be enforceable in some jurisdictions or under some circumstances. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
We could be liable to third parties from the use of our solutions.
Our solutions provide access to patient information used by physicians and other medical personnel in providing medical care. The medical care provided by physicians and other medical personnel are subject to numerous medical malpractice and other claims. We attempt to limit any potential liability of ours to clients by limiting the warranties on our solutions in our agreements with our clients (i.e., healthcare providers). However, such agreements do not protect us from third-party claims by patients who may seek damages from any or all persons or entities connected to the process of delivering patient care. We maintain insurance, which provides limited protection from such claims, if such claims result in liability to us. Although no such claims have been brought against us to date regarding injuries related to the use of our solutions, such claims may be made in the future. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
Our SaaS and support services could experience interruptions.
We provide SaaS for many clients, including the storage of critical patient, financial and administrative data. In addition, we provide support services to clients through our client support organization. We have redundancies, such as backup generators, redundant telecommunications lines and backup facilities built into our operations to prevent disruptions. However, complete failure of all generators, or impairment of all telecommunications lines or severe casualty damage to the primary building or equipment inside the primary building housing our hosting center or client support facilities could cause a temporary disruption in operations and adversely affect clients who depend on the application
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hosting services. Any interruption in operations at our data center or client support facility could cause us to lose existing clients, impede our ability to obtain new clients, result in revenue loss, cause potential liability to our clients and increase our operating costs.
Our SaaS solutions are provided over an internet connection. Any breach of security or confidentiality of protected health information could expose us to significant expense and harm our reputation.
We provide remote SaaS solutions for clients, including the storage of critical patient, financial and administrative data. We have security measures in place to prevent or detect misappropriation of protected health information. We must maintain facility and systems security measures to preserve the confidentiality of data belonging to clients, as well as their patients, that resides on computer equipment in our data center, which we handle via application hosting services, or that is otherwise in our possession. Notwithstanding efforts undertaken to protect data, it can be vulnerable to infiltration as well as unintentional lapse. If confidential information is compromised, we could face claims for contract breach, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences and serious harm to our reputation.
The loss of key personnel could adversely affect our business.
Our success depends, to a significant degree, on our management, sales force and technical personnel. We must recruit, motivate and retain highly skilled managers, sales, consulting and technical personnel, including solution programmers, database specialists, consultants and system architects who have the requisite expertise in the technical environments in which our solutions operate. Competition for such technical expertise is intense. Our failure to attract and retain qualified personnel could have a material adverse effect on us.
Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our clients’ requirements.
We will need to expand our operations if we successfully achieve greater demand for our products and services. We cannot be certain that our systems, procedures, controls and human resources will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases. Difficulties in managing any future growth, including as a result of integrating any prior or future acquisition with our existing businesses, could cause us to incur unexpected expenses or render us unable to meet our clients’ requirements, and consequently have a significant negative impact on our business, financial condition and operating results.
We may not have access to sufficient or cost-efficient capital to support our growth, execute our business plans and remain competitive in our markets.
As our operations grow and as we implement our business strategies, we expect to use both internal and external sources of capital. In addition to cash flow from normal operations, we may need additional capital in the form of debt or equity to operate and to support our growth, execute our business plans and remain competitive in our markets. We may have no or limited availability to such external capital, in which case our future prospects may be materially impaired. Furthermore, we may not be able to access external sources of capital on reasonable or favorable terms. Our business operations could be subject to both financial and operational covenants that may limit the activities we may undertake, even if we believe they would benefit our company.
We previously entered into a software license and royalty agreement with Montefiore Medical Center pursuant to which we are obligated to pay Montefiore $1,000,000 in cash by July 31, 2020. The payment of this obligation could adversely affect our business.
On October 25, 2013, we entered into a software license and royalty agreement with Montefiore Medical Center (“Montefiore”) pursuant to which Montefiore granted us an exclusive, worldwide 15‑year license of Montefiore’s proprietary clinical analytics platform solution, Clinical Looking Glass® (“CLG”), now known as our Clinical Analytics
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solution. We originally committed that Montefiore would receive at least an additional $3,000,000 of on-going royalty payments related to future sublicensing of CLG by us within the first six and one-half years of the license term. On July 1, 2018, we entered into an amendment to software license and royalty agreement to modify our payment obligations such that under the modified provisions, our obligation to pay on-going royalties was replaced with the obligation to, among other things, pay $1,000,000 in cash by July 31, 2020. To the extent that cash flow from operations is insufficient to pay this obligation, we may pay all or some of this obligation from, among other things, drawings on our credit facility, proceeds from asset sales or the sale of our securities. The payment of this obligation may reduce the amount of proceeds available for acquisitions, negatively impact the value of our common stock and reduce the overall return.
Potential disruptions in the credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows and financial condition.
If internally generated funds are not available from operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Our access to funds under our revolving credit facility or pursuant to arrangements with other financial institutions is dependent on the financial institution'sinstitution’s ability to meet funding commitments. Financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience high volumes of borrowing requests from other borrowers within a short period of time.
We must maintain compliance with the terms of our existing credit facilities.facilities or receive a waiver for any non-compliance. The failure to do somaintain compliance could have a material adverse effect on our ability to finance our ongoing operations and we may not be able to find an alternative lending source if a default occurs.
In November 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, and other lender parties thereto. Pursuant to the Credit Agreement, the lenders agreed to provide a $10,000,000 senior term loan and a $5,000,000 revolving line of credit to our primary operating subsidiary. At closing, the Company repaid indebtedness under its prior credit facility using approximately $7,400,000 of the proceeds provided by the term loan. The prior credit facility with Fifth Third Bank was terminated concurrent with the entry of the Credit Agreement. The Credit Agreement includes customary financial covenants, including the requirements that the Company maintain certain minimum liquidity and achieve certain minimum EBITDA levels.
In order to the termsdraw upon its revolving line of the waiver and amendment to the Credit Agreement, from April 30, 2016 and each quarter thereafter, we must reach agreement with the lenders as to the minimum applicable amount of EBITDA we are required to achieve based on the most recent financial projections we submit to the lenders under the Credit Agreement. If we are unable to reach agreement with the lenders, or if the lenders do not approve our projections, we will be in immediate breach of the minimum EBITDA covenant. Additionally,credit, pursuant to the terms of the waiver and amendment to the Credit Agreement, we arethe Company is required to maintain additional minimum liquidity of at least (i) $5,000,000 through April 15, 2015,January 31, 2018, (ii) $6,500,000$4,000,000 from April 16, 2015February 1, 2018 through and including July 30, 2015,November 19, 2018, (iii) $7,000,000$3,500,000 from July 31, 2015November 20, 2018 through and including January 30, 2016,31, 2019, and (iv) $7,500,000$4,000,000 from January 31, 2016February 1, 2019 through and including the maturity date of the credit facility. The Company was in compliance with the applicable loan covenants at January 31, 2016.
If we do not maintain compliance with all of the continuing covenants and other terms and conditions of the credit facility or secure a waiver for any non-compliance, we could be required to repay outstanding borrowings on an accelerated
Our outstanding preferred stock and warrants have significant redemption and repayment rights that could have a material adverse effect on our liquidity and available financing for our ongoing operations.
In August 2012, we completed a private offering of preferred stock, warrants and convertible notes to a group of investors for gross proceeds of $12 million. In November 2012, the convertible notes converted into shares of preferred stock. TheSubject to the terms of the Subordination and Intercreditor Agreement, the preferred stock is redeemable at the option of the holders thereof anytimeany time after August 31, 2016 if not previously converted into shares of common stock. We may not achieve the thresholds required to trigger automatic conversion of the preferred stock, and alternatively,
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holders may not voluntarily elect to convert the preferred stock into common stock. The election of the holders of our preferred stock to redeem the preferred stock could subject us to decreased liquidity and other negative impacts on our business, results of operations and financial condition. Under the terms of the Subordination and Intercreditor Agreement among the preferred stockholders, the Company and Wells Fargo, our obligation to redeem the preferred stock is subordinated to our obligations under the senior term loan.loan and the preferred stock may not be redeemed without the consent of Wells Fargo. For additional information regarding the terms, rights and preferences of the preferred stock, and warrants, see Note 143 to our consolidated financial statements included in Part II, Item 8 herein and our other SEC filings.
Economic conditions in the United StatesU.S. and globally may have significant effects on our clients and suppliers that could result in material adverse effects on our business, operating results and stock price.
Economic conditions in the United StatesU.S. and globally could deteriorate and the concern thatcause the worldwide economy mayto enter into a prolonged stagnant period that could materially adversely affect our clients'clients’ access to capital or willingness to spend capital on our solutions and services or their levels of cash liquidity with which to pay for solutions that they will order or have already ordered from us. Continued challengingChallenging economic conditions also would likely negatively impact our business, which could result in: (1) reduced demand for our solutions and services; (2) increased price competition for our solutions and services; (3) increased risk of collectability of cash from our clients; (4) increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable; (5) reduced revenues; and (6) higher operating costs as a percentage of revenues.
All of the foregoing potential consequences of the currenta deterioration of economic conditions are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of future results. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect the market price of our common stock and other securities.
The variability of our quarterly operating results can be significant.
Our operating results have fluctuated from quarter-to-quarter in the past, and we may experience continued fluctuations in the future. Future revenues and operating results may vary significantly from quarter-to-quarter as a result of a number of factors, many of which are outside of our control. These factors include: the relatively large size of client agreements; unpredictability in the number and timing of systemsystems sales and sales of application hosting services; length of the sales cycle; delays in installations; changes in client'sclients’ financial conditionconditions or budgets; increased competition; the development and introduction of new products and services; the loss of significant clients or remarketing partners; changes in government regulations, particularly as they relate to the healthcare industry; the size and growth of the overall healthcare information technology markets; any liability and other claims that may be asserted against us; our ability to attract and retain qualified personnel; national and local general economic and market conditions; and other factors discussed in this report and our other filings with the SEC.
The preparation of our financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the capitalization of software development costs. Due to the inherent nature of these estimates, we may be required to significantly increase or decrease such estimates upon determination of the actual results. Any required adjustments could have a material adverse effect on us and on theour results of operations, and could result in the restatement of our prior period financial statements.
Failure to improve and maintain the quality of internal control over financial reporting and disclosure controls and procedures or other lapses in compliance could materially and adversely affect our ability to provide timely and accurate financial information about us or subject us to potential liability.
In connection with the preparation of the consolidated financial statements for each of our fiscal years, our management conducts a review of our internal control over financial reporting. We are also required to maintain effective disclosure controls and procedures. Any failure to maintain adequate controls or to adequately implement
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required new or improved controls could harm operating results, or cause failure to meet reporting obligations in a timely and accurate manner.
Our operations are subject to foreign currency exchange rate risk.
In connection with our expansion into foreign markets, which primarily consists of Canada, we sometimes receive payment in currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect our net sales and gross margins from our non-U.S. dollar-denominateddollar denominated revenue, as expressed in U.S. dollars. There is also a risk that we will have to adjust the pricing of solutions denominated in foreign currencies when there has been significant volatility in foreign currency exchange rates.
Risks Relating to an Investment in Our Securities
The market price of our common stock is likely to be highly volatile as the stock market in general can be highly volatile.
The public trading of our common stock is based on many factors that could cause fluctuation in the price of our common stock. These factors may include, but are not limited to:
· | General economic and market conditions; |
· | Actual or anticipated variations in annual or quarterly operating results; |
· | Lack of or negative research coverage by securities analysts; |
· | Conditions or trends in the healthcare information technology industry; |
· | Changes in the market valuations of other companies in our industry; |
· | Announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; |
· | Announced or anticipated capital commitments; |
· | Ability to maintain listing of our common stock on The Nasdaq Stock Market; |
· | Additions or departures of key personnel; and |
· | Sales and repurchases of our common stock by us, our officers and directors or our significant stockholders, if any. |
Most of these factors are beyond our control. Further, as a result of our relatively small public float, our common stock may be less liquid, and the trading price for our common stock may be more affected by relatively small volumes of trading than is the case for the common stock of companies with a broader public ownership. These factors may cause the market price of our common stock to decline, regardless of our operating performance or financial condition.
If equity research analysts do not publish research reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock may rely in part on the research and reports that equity research analysts publish about our business and us. We do not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease
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publishing reports about our business or us. Furthermore, if no equity research analysts conduct research or publish reports about our business and us, the market price of our common stock could decline.
All of our debt obligations, our existing preferred stock and any preferred stock that we may issue in the future will have priority over our common stock with respect to payment in the event of a bankruptcy, liquidation, dissolution or winding up.
In any bankruptcy, liquidation, dissolution or winding up of the Company, our shares of common stock would rank in right of payment or distribution below all debt claims against us and all of our outstanding shares of preferred stock, if any. As a result, holders of our shares of common stock will not be entitled to receive any payment or other distribution of assets in the event of a bankruptcy or upon a liquidation or dissolution until after all of our obligations to our debt holders and holders of preferred stock have been satisfied. Accordingly, holders of our common stock may lose their entire investment in the event of a bankruptcy, liquidation, dissolution or winding up of our company. Similarly, holders of our preferred stock would rank junior to our debt holders and creditors in the event of a bankruptcy, liquidation, dissolution or winding up of the Company.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are generally not restricted from issuing in public or private offerings additional shares of common stock or preferred stock (except for certain restrictions under the terms of our outstanding preferred stock), and other securities that are convertible into or exchangeable for, or that represent a right to receive, common stock or preferred stock or any substantially similar securities. Such offerings represent the potential for a significant increase in the number of outstanding shares of our common stock. The market price of our common stock could decline as a result of sales of common stock, or preferred stock or similar securities in the market made after an offering or the perception that such sales could occur.
In addition to our currently outstanding preferred stock, the issuance of an additional series of preferred stock could adversely affect holders of shares of our common stock, which may negatively impact your investment.
Our Board of Directors is authorized to issue classes or series of preferred stock without any action on the part of the stockholders. The Board of Directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including rights and preferences over the shares of common stock with respect to dividends or upon our dissolution, winding-up andor liquidation, and other terms. If we issue preferred stock in the future that has a preference over the shares of our common stock with respect to the payment of dividends or upon our dissolution, winding up andor liquidation, or if we issue preferred stock with voting rights that dilute the voting power of the shares of our common stock, the rights of the holders of shares of our common stock or the market price of our common stock could be adversely affected.
As of January 31, 2016,2019, we had 2,949,9952,895,464 shares of preferred stock outstanding. For additional information regarding the terms, rights and preferences of such stock, see Note 1413 to our consolidated financial statements included in Part II, Item 8 herein and our other SEC filings.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend solely on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. The trading price of our common stock could decline and you could lose all or part of your investment.
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Sales of shares of our common stock or securities convertible into our common stock in the public market may cause the market price of our common stock to fall.
The issuance of shares of our common stock or securities convertible into our common stock in an offering from time to time could have the effect of depressing the market price for shares of our common stock. In addition, because our common stock is thinly traded, resales of shares of our common stock by our largest stockholders or insiders could have the effect of depressing market prices for our common stock.
If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected.
Our common stock is listed on the Nasdaq Capital Market. We cannot assure you that we will be able to maintain compliance with Nasdaq’s current listing standards, or that Nasdaq will not implement additional listing standards with which we will be unable to comply. Failure to maintain compliance with Nasdaq listing requirements could result in the delisting of our shares from Nasdaq, which could have a material adverse effect on the trading price, volume and marketability of our common stock. Furthermore, a delisting could adversely affect our ability to issue additional securities and obtain additional financing in the future or result in a loss of confidence by investors or employees.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the market price of our common stock or other securities could decline and you could lose all or part of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The Company’s principal offices are locatedCompany entered into a membership agreement to utilize shared office space at 12301175 Peachtree Street, NE, Suite 600,10th Floor, Atlanta, GA 30309.30361. The Company leases allshared office arrangement expires in November 2020 and provides for membership fees based on the number of its properties. For fiscal 2015, the aggregate rental expense for the Company's leased properties was $1,220,000. The following table provides information regarding each property currently leased by the Company.
The Company believes that its facilities arespace is adequate for its current needs and that suitable alternative space is available to accommodate expansion of the Company’s operations.
ITEM 3. Legal Proceedings
We are, from time to time, a party to various legal proceedings and claims, which arise in the ordinary course of business. Other than the matter described under Note 13 to our consolidated financial statements included in Part II, Item 8 herein, weWe are not aware of any legal matters that could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
The Company’s common stock trades on The NASDAQ Stock Market (“NASDAQ”) under the symbol STRM. The table below sets forth the high and low sales prices for the Company’s common stock for each of the quarters in fiscal years 2015 and 2014, as reported by NASDAQ. The closing price of the Company’s common stock on April 15, 2016 was $1.42 per share as reported by NASDAQ.
| Fiscal Year 2015 | High | Low | |||||
4th Quarter (November 1, 2015 through January 31, 2016) | $ | 2.28 | $ | 1.12 | |||
3rd Quarter (August 1, 2015 through October 31, 2015) | 3.50 | 1.91 | |||||
2nd Quarter (May 1, 2015 through July 31, 2015) | 2.98 | 1.02 | |||||
1st Quarter (February 1, 2015 through April 30, 2015) | 4.25 | 2.08 | |||||
| Fiscal Year 2014 | High | Low | |||||
4th Quarter (November 1, 2014 through January 31, 2015) | $ | 4.38 | $ | 3.25 | |||
3rd Quarter (August 1, 2014 through October 31, 2014) | 5.01 | 3.22 | |||||
2nd Quarter (May 1, 2014 through July 31, 2014) | 5.77 | 4.17 | |||||
1st Quarter (February 1, 2014 through April 30, 2014) | 6.75 | 4.70 | |||||
According to the stock transfer agent’s records, the Company had 217224 stockholders of record as of April 15, 2016.1, 2019. Because brokers and other institutions on behalf of stockholders hold many of such shares, the Company is unable to determine with complete accuracy the current total number of stockholders represented by these record holders. The Company estimates that it has approximately 3,200 stockholders, based on information provided by the Company’s stock transfer agent from its search of individual participants in security position listings.
During the three months ended January 31, 2016,2019, we did not repurchase any shares of the Company’s common stock.
ITEM 6. Selected Financial Data
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
In fiscal 2015,2016, the Company evaluated all of its solutions and determined it could best assist healthcare providers in improving their revenue cycle management by providing solutions and services in the middle portion of the revenue cycle, that is, the revenue cycle operations from initial charge capture to bill drop. Since that time in 2016, the Company continues to make decisions supporting our focus in the middle of the revenue cycle. In late fiscal 2017, the Company introduced a new product for the middle of the revenue cycle, eValuator. This product has significant implications to the timing and accuracy of our customers’ invoicing through rules that are created to review the accuracy of invoicing prior to the physical invoices being released. This is a notable change to existing processes of our customers. The development activities continued through the end of fiscal 2018. There are continued development efforts planned for eValuatorin fiscal 2019, but not to the extent of fiscal 2017 and 2018.
Fiscal year 2017 was the first full year of this new, more narrowly focused internally oneffort to sell solutions and services in the middle of the revenue cycle, improving healthcare providers’ coding accuracy to help them capture all of the financial reimbursement they deserve for the patient care they provide. With this focus, the Company is committed to leading an industry movement to improve hospitals’ financial performance by moving mid-cycle billing interventions upstream, to improve coding accuracy before billing, enabling our clients to reduce revenue leakage, mitigate overbill risk, and reduce denials and days in accounts receivable.
By narrowing our focus to the middle of the revenue cycle we believe we have a more distinct and compelling value proposition that can help us attract more clients. By innovating new technologies, we have been able to expand our target markets beyond just hospitals and into outpatient centers, clinics and physician practices. Our coding solutions like CDI, Physician Query, Abstracting and eValuator are competitive in the market and enabled us to engage 15 new clients in fiscal year 2017 and 18 new clients in fiscal 2018. The new eValuator coding analysis platform continues to drive more attention to Streamline Health. Our current client base continues to show interest in eValuator, but we currently have an even greater number of key areasnew clients than existing clients signing up for the solution.
The Company acquired a product known as Clinical Analytics in its portfolio in October 2013. As a result of its focused attention in the marketplace on the middle of the revenue cycle, the Company moved away from selling the product. The market and buyer for the Clinical Analytics platform is different than that we believe will havefor the mid-revenue cycle products. Without a positive effect on our future performance, and externally on broadening our reachmeaningful customer base outside of Montefiore (see footnotes to the market. Someconsolidated financial
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statements), and with the focus away from pursuit of these initiatives were communicated inclients, the Company’s three primary objectivesCompany determined it should evaluate the remaining intangible assets and software development costs on its balance sheet related to Clinical Analytics for fiscal 2015 which were: grow sales, both insideimpairment. As such, the Company took a charge to income of approximately $3.7 million for impairment of the long-lived intangible assets and outside our existing client base; complete the links between ourremaining software development costs associated with this product. The Company has no other intangible assets or software development that is not associated with its core solutions in the Looking Glass® platform;middle of the revenue cycle.
The Company has continued to instigate and improve our professional services. Some, such as reduce operating costs, generate incremental cash flow, reduce our level of bank debtmaintain tight cost and change audit firms were not communicated as explicitly but were important areas of achievement for our Company nonetheless.
Regardless of the state of the Affordable Care Act, the healthcare industry continues to face sweeping changes and new standards of care that are putting greater pressure on healthcare providers to be more efficient in every aspect of their operations. TheseWe believe these changes represent ongoing opportunities for our Company to work with our currentdirect clients and partner with various resellers to provide information technology solutions to help themproviders meet these new requirements.
Results of Operations
Statements of Operations for the fiscal years ended January 31 (in thousands):
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| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
Systems sales |
| $ | 2,472 |
| $ | 1,343 |
| $ | 1,129 |
| 84 | % |
Professional services |
|
| 1,336 |
|
| 2,744 |
|
| (1,408) |
| (51) | % |
Audit services |
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| 1,118 |
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| 1,216 |
|
| (98) |
| (8) | % |
Maintenance and support |
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| 12,586 |
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| 13,171 |
|
| (585) |
| (4) | % |
Software as a service |
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| 4,853 |
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| 5,864 |
|
| (1,011) |
| (17) | % |
Total revenues |
|
| 22,365 |
|
| 24,338 |
|
| (1,973) |
| (8) | % |
Cost of sales |
|
| 8,137 |
|
| 10,174 |
|
| (2,037) |
| (20) | % |
Selling, general and administrative |
|
| 10,554 |
|
| 11,434 |
|
| (880) |
| (8) | % |
Research and development |
|
| 4,261 |
|
| 5,352 |
|
| (1,091) |
| (20) | % |
Impairment of long-lived assets |
|
| 3,681 |
|
| — |
|
| 3,681 |
| 100 | % |
Loss on exit of operating lease |
|
| 1,034 |
|
| — |
|
| 1,034 |
| 100 | % |
Total operating expenses |
|
| 27,667 |
|
| 26,960 |
|
| 707 |
| 3 | % |
Operating loss |
|
| (5,302) |
|
| (2,622) |
|
| (2,680) |
| 102 | % |
Other expense, net |
|
| (563) |
|
| (561) |
|
| (2) |
| 0 | % |
Income tax benefit |
|
| — |
|
| 84 |
|
| (84) |
| (100) | % |
Net loss |
| $ | (5,865) |
| $ | (3,099) |
| $ | (2,766) |
| 89 | % |
Adjusted EBITDA(1) |
| $ | 2,889 |
| $ | 2,798 |
| $ | 91 |
| 3 | % |
| 2016 | 2015 | $ Change | % Change | |||||||||||
| System sales | $ | 2,946 | $ | 1,215 | $ | 1,731 | 142 | % | ||||||
| Professional services | 2,212 | 2,580 | (368 | ) | (14 | )% | ||||||||
| Maintenance and support | 15,145 | 16,157 | (1,012 | ) | (6 | )% | ||||||||
| Software as a service | 8,011 | 7,673 | 338 | 4 | % | |||||||||
| Total revenues | 28,314 | 27,625 | 689 | 2 | % | |||||||||
| Cost of sales | 11,401 | 13,004 | (1,603 | ) | (12 | )% | ||||||||
| Selling, general and administrative | 13,443 | 16,226 | (2,783 | ) | (17 | )% | ||||||||
| Product research and development | 9,093 | 9,756 | (663 | ) | (7 | )% | ||||||||
| Impairment of intangible assets | — | 1,952 | (1,952 | ) | (100 | )% | ||||||||
| Total operating expenses | 33,937 | 40,938 | (7,001 | ) | (17 | )% | ||||||||
| Operating loss | (5,623 | ) | (13,313 | ) | 7,690 | (58 | )% | |||||||
| Other income (expense), net | 1,340 | 415 | 925 | 223 | % | |||||||||
| Income tax benefit | (8 | ) | 887 | (895 | ) | (101 | )% | |||||||
| Net loss | $ | (4,290 | ) | $ | (12,011 | ) | $ | 7,721 | (64 | )% | ||||
| Adjusted EBITDA(1) | $ | 2,761 | $ | (987 | ) | $ | 3,748 | 380 | % | |||||
(1) | Non-GAAP measure meaning net earnings (loss) before net interest expense, tax expense (benefit), depreciation, amortization, stock-based compensation expense, transactional and other expenses that do not relate to our core operations. See “Use of Non-GAAP Financial Measures” below for additional information and reconciliation. |
21
The following table sets forth, for each fiscal year indicated, certain operating data as percentages of total revenues:
Statements of Operations(1)Operations (1)
|
|
|
|
|
|
|
| Fiscal Year |
| ||
|
| 2018 |
| 2017 |
|
Systems sales |
| 11.1 | % | 5.5 | % |
Professional services |
| 6.0 |
| 11.3 |
|
Audit services |
| 5.0 |
| 5.0 |
|
Maintenance and support |
| 56.2 |
| 54.1 |
|
Software as a service |
| 21.7 |
| 24.1 |
|
Total revenues |
| 100.0 | % | 100.0 | % |
Cost of sales |
| 36.4 |
| 41.8 |
|
Selling, general and administrative |
| 47.2 |
| 47.0 |
|
Research and development |
| 19.1 |
| 22.0 |
|
Impairment of long-lived assets |
| 16.5 |
| — |
|
Loss on exit of operating lease |
| 4.6 |
| — |
|
Total operating expenses |
| 123.8 |
| 110.8 |
|
Operating loss |
| (23.7) |
| (10.8) |
|
Other expense, net |
| (2.5) |
| (2.3) |
|
Income tax benefit |
| — |
| 0.3 |
|
Net loss |
| (26.2) | % | (12.8) | % |
Cost of Sales to Revenues ratio, by revenue stream: |
|
|
|
|
|
Systems sales |
| 38.1 | % | 144.9 | % |
Services, maintenance and support |
| 41.2 | % | 40.3 | % |
Software as a service |
| 20.4 | % | 22.5 | % |
| Fiscal Year | |||||
| 2015 | 2014 | ||||
| System sales | 10.4 | % | 4.4 | % | |
| Professional services | 7.8 | 9.3 | |||
| Maintenance and support | 53.5 | 58.5 | |||
| Software as a service | 28.3 | 27.8 | |||
| Total revenues | 100.0 | % | 100.0 | % | |
| Cost of sales | 40.3 | 47.1 | |||
| Selling, general and administrative | 47.5 | 58.7 | |||
| Product research and development | 32.1 | 35.3 | |||
| Impairment of intangible assets | — | 7.1 | |||
| Total operating expenses | 119.9 | 148.2 | |||
| Operating loss | (19.9 | ) | (48.2 | ) | |
| Other income (expense), net | 4.7 | 1.5 | |||
| Income tax benefit | — | 3.2 | |||
| Net loss | (15.2 | )% | (43.5 | )% | |
| Cost of Sales to Revenues ratio, by revenue stream: | |||||
| Systems sales | 94.3 | % | 291.1 | % | |
| Services, maintenance and support | 35.6 | % | 34.9 | % | |
| Software as a service | 30.5 | % | 38.1 | % | |
(1) | Because a significant percentage of the operating costs are incurred at levels that are not necessarily correlated with revenue levels, a variation in the timing of systems sales and installations and the resulting revenue recognition can cause significant variations in operating results. As a result, period-to-period comparisons may not be meaningful with respect to the past results nor are they necessarily indicative of the future results of the Company in the near or long-term. The data in the table is presented solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated. |
Comparison of fiscal year 20152018 with 20142017
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Systems Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary software - perpetual license |
| $ | 1,398 |
| $ | 277 |
| $ | 1,121 |
| 405 | % |
Term license |
|
| 899 |
|
| 998 |
|
| (99) |
| (10) | % |
Hardware and third-party software |
|
| 175 |
|
| 68 |
|
| 107 |
| 157 | % |
Professional services |
|
| 1,336 |
|
| 2,744 |
|
| (1,408) |
| (51) | % |
Audit services |
|
| 1,118 |
|
| 1,216 |
|
| (98) |
| (8) | % |
Maintenance and support |
|
| 12,586 |
|
| 13,171 |
|
| (585) |
| (4) | % |
Software as a service |
|
| 4,853 |
|
| 5,864 |
|
| (1,011) |
| (17) | % |
Total Revenues |
| $ | 22,365 |
| $ | 24,338 |
| $ | (1,973) |
| (8) | % |
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| System Sales: | ||||||||||||||
| Proprietary software | $ | 2,927 | $ | 1,164 | $ | 1,763 | 151 | % | ||||||
| Hardware and third-party software | 19 | 51 | (32 | ) | (63 | )% | ||||||||
| Professional services | 2,212 | 2,580 | (368 | ) | (14 | )% | ||||||||
| Maintenance and support | 15,145 | 16,157 | (1,012 | ) | (6 | )% | ||||||||
| Software as a service | 8,011 | 7,673 | 338 | 4 | % | |||||||||
| Total Revenues | $ | 28,314 | $ | 27,625 | $ | 689 | 2 | % | ||||||
Proprietary software and term licenses — Proprietary software includes revenue from perpetual and term software license sales. Proprietary software revenues recognized in fiscal 20152018 were $2,927,000,$1,398,000, as compared to $1,164,000$277,000 in fiscal 2014.2017. The increased fiscal 20152018 revenues as compared to 20142017 revenues are primarily
22
attributable to two larger perpetual license sales of our Streamline Health® Abstracting; one in our first quarter and one in our second quarter of fiscal 2018. These perpetual license sales have been gaining traction from a significant distributor partner to the Company. The Company continues to see a positive trend in the volumes with this significant distributor partner. Term license revenue for fiscal 2018 decreased $99,000 from fiscal 2017, to $899,000. This decrease is primarily attributabledue to $1,600,000the adoption of the new revenue recognition standards effective February 1, 2018 and a portion is related to the lower revenues from certain Clinical Analytics contracts that terminated in Coding and CDI perpetual license fees recognized for one sale during fiscal 2015.
Hardware and third-party software — Revenues from hardware and third-party software sales in fiscal 20152018 were $19,000,$175,000, as compared to $51,000$68,000 in fiscal 2014.2017. Fluctuations from year to year are a function of client demand.demand and the customers’ timing of replacing or enhancing their scanning capabilities through our vendors.
Professional services — Revenues from professional services in fiscal 20152018 were $2,212,000,$1,336,000, as compared to $2,580,000$2,744,000 in fiscal 2014.2017. These decreases in professional services revenue are primarily due to the completion of large implementation projects in fiscal 2017. In addition, professional services revenue is adversely impacted by the Company’s SaaS offering that has less implementation services than its legacy on-premise products. The decreaseCompany has utilized its professional staff to ensure the success of its eValuator product. As the Company assigns its professional services staff to eValuator clients in an effort to improve the customer experience and ensure the initial success of the product, fewer resources are available for time and materials engagements. This shifting of resources is, however, intended to improve the long-term prospects of the Company’s new eValuator product.
Audit services — Audit services revenue for fiscal 2018 decreased, slightly, to $1,118,000 from $1,216,000 in fiscal 2017. Audit services revenue was primarily attributable to an increasedadversely impacted by the Company’s focus on professionalutilizing its audit services components thatpersonnel to assist in the success of eValuator solution customers. As the Company assigns its audit services staff to eValuator solution clients, fewer resources are essentialavailable for time and materials engagements. The assignment of audit services personnel to eValuator clients is temporary in nature and is intended to improve the functionalitylong-term prospects of the software,Company’s new eValuator product. Looking ahead to fiscal 2019, the Company will utilize fewer of its audit personnel for which revenues are deferredthe success of eValuator. The Company is experiencing more demand for on-shore, technically proficient auditors in the marketplace. The Company has technically proficient and recognized ratably overon-shore resources to address this need and, accordingly, the term of the customer relationship. In addition, fluctuations over periods result from the nature of recognizing professionalCompany is expecting a stronger demand for its audit services revenues once certain milestones are met.in fiscal 2019.
See discussion on Non-GAAP measures, backlog, below.
Maintenance and support — Revenues from maintenance and support in fiscal 20152018 were $15,145,000,$12,586,000 as compared to $16,157,000$13,171,000 in fiscal 2014.2017. The decrease in maintenance and support revenues in fiscal 20152018 resulted primarily from customer cancellationspricing pressure and deferral ofcertain terminations on the Company’s content management software solution, ECM. The Company believes it has mitigated future pricing pressure and terminations through aggressively pursuing long-term contracts with our significant legacy product customers. These activities have proven useful, as they have resulted in substantially better visibility in the near-term revenue based on collectibility considerations.base for our Company.
Software as a service (SaaS) — Revenues from SaaS in fiscal 20152018 were $8,011,000,$4,853,000, as compared to $7,673,000$5,864,000 in fiscal 2014.2017. The year-to-year increasedecrease in fiscal 2018 revenue was attributable to go-lives that occurred duringcancellations by a few customers of our Financial Management solutions, offset by growth associated with the 2015 fiscal year, which initiated revenue recognition.
23
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Cost of systems sales |
| $ | 942 |
| $ | 1,946 |
| $ | (1,004) |
| (52) | % |
Cost of professional services |
|
| 2,657 |
|
| 2,401 |
|
| 256 |
| 11 | % |
Cost of audit services |
|
| 1,373 |
|
| 1,604 |
|
| (231) |
| (14) | % |
Cost of maintenance and support |
|
| 2,173 |
|
| 2,904 |
|
| (731) |
| (25) | % |
Cost of software as a service |
|
| 992 |
|
| 1,319 |
|
| (327) |
| (25) | % |
Total cost of sales |
| $ | 8,137 |
| $ | 10,174 |
| $ | (2,037) |
| (20) | % |
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| Cost of system sales | $ | 2,778 | $ | 3,536 | $ | (758 | ) | (21 | )% | |||||
| Cost of professional services | 3,144 | 3,459 | (315 | ) | (9 | )% | ||||||||
| Cost of maintenance and support | 3,037 | 3,088 | (51 | ) | (2 | )% | ||||||||
| Cost of software as a service | 2,442 | 2,920 | (478 | ) | (16 | )% | ||||||||
| Total cost of sales | $ | 11,401 | $ | 13,003 | $ | (1,602 | ) | (12 | )% | |||||
CostTotal cost of system sales includes personnel directly affiliated with earning the revenue, amortization and impairment of capitalized software expenditures, depreciation and amortization, royalties and the cost of third-party hardware and software. The Company realized cost savings from its containment efforts in all categories of total cost of sales. The decrease in expense for fiscal 2018 compared with fiscal 2017 was primarily due to the reduction in amortization of capitalized software costs as a result of assets becoming fully amortized, including the internally-developed software acquired from Meta Health Technology, Inc. (“Meta”) in 2012 which reached the end of its assigned economic life in the third quarter of fiscal 2017. We incurred amortization expense on all internally-developed software of $1,160,000 and $2,113,000 in fiscal 2018 and 2017, respectively.
Cost of system sales, as a percentage of systemsystems sales varies from period-to-period depending on hardware and software configurations of the systems sold. The decrease in expensecost of systems sales in fiscal 20152018 from 2017 was primarily due to a reduction in amortization of capitalized software costs due to certain amortization expense. We incurred $2,748,000of software reaching the end of its assigned economic life during fiscal 2018 and $3,352,000 in overall software amortization expense in fiscal 2015 and 2014, respectively.
The cost of professional services includes compensation and benefits for personnel and related expenses. The decrease fromincrease in expense for fiscal 2014 to 2015 was2018 as compared with 2017 is primarily due to the reductiondecrease in independent contractorsprofessional services related to SaaS implementations, for which costs are deferred and personnel expenses,amortized ratably over the estimated life of the SaaS customer relationship, as well as the increase in professionalamortization of these deferred implementation costs upon completion of additional projects. eValuator has a much smaller implementation effort as compared with other software from the Company’s product portfolio. As a result, the Company defers less cost in the current period.
The cost of audit services components that are essentialincludes compensation and benefits for audit services personnel, and related expenses. The decrease in expense for fiscal 2018 compared to 2017 is attributed to the functionalityreduction in personnel. Again, the Company is beginning to receive renewed interest in its audit services as a result of the software, for which direct costs are deferredCompany’s on-shore capabilities and recognized ratably over the associated revenue recognition term.
The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third-party maintenance contracts. The decrease fromin expense for fiscal 2014 to 20152018 as compared with 2017 was primarily due to thea decrease in personnel costs and a reduction in support personnel.
The cost of SaaS solutions is relatively fixed, but subject to some fluctuationinflation for the goods and services it requires. The decrease in expense for fiscal 2018 as compared to 2017 was primarily related to reduced personnel and rent expense due to the closurereduction in depreciation expense as a result of our Cincinnati, OH office.
Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
General and administrative expenses |
| $ | 6,782 |
| $ | 7,121 |
| $ | (339) |
| (5) | % |
Sales and marketing expenses |
|
| 3,772 |
|
| 4,313 |
|
| (541) |
| (13) | % |
Total selling, general, and administrative expense |
| $ | 10,554 |
| $ | 11,434 |
| $ | (880) |
| (8) | % |
24
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| General and administrative expenses | $ | 9,011 | $ | 11,799 | $ | (2,788 | ) | (24 | )% | |||||
| Sales and marketing expenses | 4,432 | 4,283 | 149 | 3 | % | |||||||||
| Total selling, general, and administrative | $ | 13,443 | $ | 16,082 | $ | (2,639 | ) | (16 | )% | |||||
General and administrative expenses consist primarily of compensation and related benefits, and reimbursable travel and livingentertainment expenses related to the Company’sour executive and administrative staff, general corporate expenses, amortization of
Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and livingentertainment expenses related to the Company’sour sales and marketing staff, as well as advertising and marketing expenses, including expenses related to trade shows and similar sales and marketing expenses.shows. The increasedecrease in sales and marketing expense for fiscal 2018 compared with 2017 was primarily due to a reduction in fiscal 2015 over 2014 reflects an increase in total compensation forpersonnel cost, trade shows expense, and sales, staff.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Research and development expense |
| $ | 4,261 |
| $ | 5,352 |
| $ | (1,091) |
| (20) | % |
Plus: Capitalized research and development cost |
|
| 3,003 |
|
| 1,836 |
|
| 1,167 |
| 64 | % |
Total research and development cost |
| $ | 7,264 |
| $ | 7,188 |
| $ | 76 |
| 1 | % |
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| Research and development expense | $ | 9,093 | $ | 9,756 | $ | (663 | ) | (7 | )% | |||||
| Capitalized software development cost | — | 620 | (620 | ) | (100 | )% | ||||||||
| Total research and development cost | $ | 9,093 | $ | 10,376 | $ | (1,283 | ) | (12 | )% | |||||
Research and development expenses consist primarily of compensation and related benefits, the use of independent contractors for specific near-term development projects and an allocated portion of general overhead costs, including occupancy.occupancy costs. The decreaseCompany invested in totalits technology consistently between fiscal 2018 and 2017. However, more of the cost in fiscal 2018 was apportioned to enhancements. This is primarily related to the Company’s investment in its new eValuator product. In each of fiscal 2018 and 2017, the Company was awarded $108,000 and $366,000, respectively, in research and development cost fromtax credits by the State of Georgia. In fiscal 2014 to 20152017, the Company was primarily due to a reduction in development staffing. Our development efforts shifted to solutions involving development costs that are not capitalized due to rapid release cycles. Researchawarded tax credits for prior years. The fiscal 2019 and future research and development expenses in fiscal 2015 and 2014, as a percentage of revenues, were 32% and 35%, respectively.
Impairment of intangible assetsLong-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Impairment of long-lived assets |
| $ | 3,681 |
| $ | — |
| $ | 3,681 |
| 100 | % |
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| Impairment of intangible assets | $ | — | $ | 1,952 | $ | (1,952 | ) | (100 | )% | |||||
The Company acquired a product known as Clinical Analytics in fiscal 2014 that the concerted effort to rebrand the Company’s solutions under a single, harmonized Looking Glass® marketing platform moving forward, eroded,its portfolio in total, the value of the Meta Trade name.October 2013. As a result of its focused attention in the marketplace on the middle of the revenue cycle, the Company moved away from selling the product. The Company follows ASC 360 in identifying triggering events that might cause an impairment to its existing long-lived assets. As such, in the fourth quarter of fiscal 2018, the Company had its only existing customer on Clinical Analytics terminate its contract. Upon review, the Company has determined that the markets for Clinical Analytics and for the middle of the revenue cycle are very different, and accordingly, the Company does not anticipate or forecast future sales for this product. The Company has determined that intangible assets and remaining software development associated with Clinical Analytics were fully impaired and should be removed from its balance sheet. In the fourth quarter of fiscal 2018, we took a charge to income of $3,681,000 for impairment of the long-lived intangible assets ($3,226,000) and the remaining software development costs ($455,000) associated with this product. The Company has
25
no other intangible assets or software development that is not associated with its core solutions in the middle of the revenue cycle.
Loss on Exit of Operating Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Loss on exit of operating lease |
| $ | 1,034 |
| $ | — |
| $ | 1,034 |
| 100 | % |
In an effort to reduce our ongoing operating expenses, we closed our New York office in the second quarter of fiscal 2018 and subleased the office space for the remaining period of the original lease term, which ends on November 2019. As a result of vacating and subleasing the office, we recorded a $1,952,000$472,000 loss on impairmentexit of intangible assetthe operating lease in the second quarter of fiscal 2018, which captures the net cash flows associated with the vacated premises, including receipts of rent from our sublessee totaling $384,000, and the $48,000 loss incurred on the disposal of fixed assets.
In addition, in the third quarter of fiscal 2018, we assigned our then current Atlanta office lease that would have expired in November 2022 and entered into a membership agreement to occupy shared office space in Atlanta. As a result of assigning the office lease, we recorded a $562,000 loss on exit of the operating lease in fiscal 2014.
See Note 12 – Commitments and Contingencies in our notes to our consolidated financial statements included in Part II, Item 8 for further details on our shared office arrangement.
Other Income (Expense)Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| 2018 to 2017 Change |
| |||||||
(in thousands): |
| 2018 |
| 2017 |
| $ |
| % |
| |||
Interest expense |
| $ | (384) |
| $ | (474) |
| $ | 90 |
| (19) | % |
Miscellaneous expense |
|
| (179) |
|
| (87) |
|
| (92) |
| 106 | % |
Total other expense |
| $ | (563) |
| $ | (561) |
| $ | (2) |
| — | % |
| Fiscal Year | 2015 to 2014 Change | |||||||||||||
| (in thousands): | 2015 | 2014 | $ | % | ||||||||||
| Interest expense | $ | (884 | ) | $ | (749 | ) | $ | (135 | ) | 18 | % | |||
| Loss on early extinguishment of debt | — | (430 | ) | 430 | (100 | )% | ||||||||
| Miscellaneous income | 2,224 | 1,592 | 632 | 40 | % | |||||||||
| Total other income | $ | 1,340 | $ | 413 | $ | 927 | 224 | % | ||||||
Interest expense consists of interest and commitment fees on the line of credit and interest on the term loans, and interest on the 2013 note payable, and is inclusive of deferred financing cost and debt discount amortization. Amortization of deferred financing cost was $69,000 and debt discount were $71,000 in both fiscal 20152018 and 2014.2017, respectively. Interest expense was lower in fiscal 2018 as compared with 2017 primarily due to lower debt balances of the Company.
The increase in miscellaneous expense in fiscal 2018 as compared to fiscal 2017 was primarily a result of losses from (i) foreign currency transactions, (ii) loss on fixed assets and (iii) the lease liability from our New York office in fiscal 2018 being higher than fiscal 2017. In fiscal 2017, the Company also recorded income from valuation adjustments to our warrant liability. This had the effect of reducing the expense recognized for fiscal 2017. Our warrants expired in February 2018 and had no further financial impact. There was an impact in each of fiscal 2018 and 2017 to miscellaneous expense related to the valuation of the recorded liability on Montefiore. The valuation impact was higher in fiscal 2015 primarily as a result2017 than 2018. The Company amended the Montefiore liability in the second quarter of higher principal outstanding and interest rate.
Provision for Income Taxes
We recorded tax expense of $8,000 and tax benefit of $887,000zero and $84,000 in fiscal
26
| 2015 | 2014 | ||||||
| Company proprietary software | $ | 21,586,000 | $ | 20,888,000 | |||
| Third-party hardware and software | 200,000 | 244,000 | |||||
| Professional services | 5,803,000 | 7,485,000 | |||||
| Maintenance and support | 23,292,000 | 21,304,000 | |||||
| Software as a service | 16,264,000 | 22,574,000 | |||||
| Total | $ | 67,145,000 | $ | 72,495,000 | |||
Backlog
|
|
|
|
|
|
|
|
| January 31, 2019 |
| October 31, 2018 | ||
Company proprietary software |
| $ | 180,000 |
| $ | 687,000 |
Professional services |
|
| 1,953,000 |
|
| 1,843,000 |
Audit services |
|
| 1,513,000 |
|
| 1,239,000 |
Maintenance and support |
|
| 15,259,000 |
|
| 12,686,000 |
Software as a service |
|
| 9,065,000 |
|
| 9,617,000 |
Total backlog |
| $ | 27,970,000 |
| $ | 26,072,000 |
|
|
|
|
|
|
|
|
| January 31, 2018 |
| October 31, 2017 | ||
Total backlog |
| $ | 32,793,000 |
| $ | 47,668,000 |
At January 31, 2016,2019, the Company had master agreementscontracts and purchase orders from clients and remarketing partners for systems and related services that have not been delivered or installed, which if fully performed, would generate future revenues of $67,145,000$27,970,000 compared with $72,495,000$32,793,000 at January 31, 2015.
The Company’s proprietary software backlog consists of signed agreements to purchase either perpetual software licenses or term licenses. Typically, perpetual licenses included in backlog are either not yet generally available or the software is generally available and the client has not taken possession of the software.possession. Term licenses included in backlog consist of signed agreements where the client has already taken possession, but the payment for the software is bundled with maintenance and support fees over the life of the contract. The Company’s proprietary software backlog and recognized revenue can vary depending on the size and timing of customer activity. The reduction at January 31, 2019 as compared with October 31, 2018 is substantially all related to the timing of orders for the Company’s proprietary software. Any increase or decrease in the backlog for proprietary software is due to renewals exceeding the amount recognized outa moment in time and does not provide an indication of the prior period backlog.
Professional services backlog consists of signed contracts for services that have yet to be performed and these are recognized into revenue within twelve months of the contract signing. The increase in professional services backlog is a result of improved customer demand late in fiscal 2018. This increased customer demand is believed to be related to our competitors moving many of these services off-shore. We believe our customers are receiving a higher-quality of service with US-based staff. This increase in professional services demand is overcoming lower implementation revenue from our software business. Our new eValuator solution requires less effort in terms of implementation as compared with the Company’s other solutions. An implementation for eValuator takes between 30 and 60 days and can be done remotely. Accordingly, the Company is realizing less revenue in professional fees for implementation work as compared with prior years.
Audit services backlog consists of signed contracts for audit services that have yet to be performed. Typically, backlog is recognized within twelve months of the contract signing. The decreaseCompany began offering audit services in professionalSeptember 2016, following the acquisition of Opportune IT. As we became more familiar with the changing nature of some audit services engagements, we adjusted the backlog calculation to only include agreements that have clearly definable service periods. The increase in audit services backlog is a resultprimarily due to higher demand of revenue recognition exceeding bookings.
Maintenance and support backlog consists of maintenance agreements for perpetual licenses of the Company’s proprietaryand/or third party software and third-partyor hardware, and software with clients and remarketing partners for which either an agreement has been signed or a purchase order under a master agreement has been received. The Company includes in backlog theeach case consisting of signed agreements through their respective renewal dates. Typicalto purchase such services but that represent future performance for the contracted maintenance contracts are for a one-year term and are renewed annually.support term. Clients typically prepay maintenance and support that isfees on
27
an annual basis with some monthly pre-payment arrangements existing. Maintenance and support fees are generally billed 30-6030‑60 days prior to the beginning of the maintenance period. The Company does not expect any significant client attrition over the next 12 months. Maintenance and support backlog at January 31, 2016 was $23,292,000, as compared to $21,304,000 at January 31, 2015. Thesubstantial increase in maintenance and support backlog is due to renewals exceedingthe Company’s efforts over the last 12 months to secure Content Management and CDI software customers with longer-term contracts. We pushed all our customers to multi-year contracts so that we could better manage our revenue recognized during the period. The Company expectsfor fiscal 2019 and fiscal 2020. That resulted in our maintenance and support backlog increasing as we had customers coming off auto-renewing (one year) agreements and moving to recognize $12,430,000 out of January 31, 2016 backlog in fiscal 2016.
Software-as-a-service (“SaaS”) backlog includes three of January 31, 2016 SaaS backlog in fiscal 2016. Typical SaaS terms are one to seven years in length. SaaS backlogour products, (i) eValuator, (ii) CDI and terms are as follows:
| (in thousands): | SaaS Backlog at January 31, 2016 | Average Remaining Months in Term | |||
| 7-year term | $ | 1,010 | 32 | ||
| 6-year term | 459 | 30 | |||
| 5-year term | 9,943 | 22 | |||
| 4-year term | 210 | 21 | |||
| 3-year term | 4,269 | 18 | |||
| Less than 3-year term | 373 | 12 | |||
| Total SaaS backlog | $ | 16,264 | |||
Additional commentary regarding the average duration of client contracts and risks relating to achievetermination can be found in any particular period.
Termination rights in the Company’s master agreements are generally non-cancelable but provide thatlimited to termination for cause, except for select exceptions, as further discussed in the client may terminate its agreement upon a material breach by the Company, or may delay certain aspectsContracts, License and Services Fees section of the installation. TherePart I, Item 1, “Business” herein. However, there can be no assurance that a client will not cancel all or any portion of a masteran agreement or delay portions of the agreement. A termination or delay in one or more phases of an agreement, or the failure of the Company to procure additional agreements,as further discussed in Part I, Item 1A, “Risk Factors” herein. Such events could have a material adverse effect on the Company’s ability to recognize amounts and the Company’s financial condition and results of operations.
Use of Non-GAAP Financial Measures
In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used by management and the boardBoard of directorsDirectors in its financial and operational decision-making, the Company has supplemented the Consolidated Financial Statements presented on a GAAP basis in this annual report on Form 10-K10‑K with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share.
These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by the Company, may differ from and may not be comparable to similarly titled measures used by other companies.
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We define: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, transaction expenses and other expenses that do not relate to our core operations; (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing our operating performance consistently
28
over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization), items outside the control of the management team (taxes), and expenses that do not relate to our core operations including: transaction-related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share includes incremental shares in the share count that are considered anti-dilutive in a GAAP net loss position.
The boardBoard of directorsDirectors and management also use these measures (i) as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance. The lender under our credit agreementCredit Agreement requires delivery of compliance reports certifying compliance with financial covenants, certain of which are based on thisa measurement that is similar to the Adjusted EBITDA measurement reviewed by our management and boardBoard of directors.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP or otherwise, and are not alternatives to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share, as disclosed in this annual report on Form 10-K,10‑K have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA and its variations are:
· | EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
· | EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
· | EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement; |
· | EBITDA does not reflect income tax payments that we may be required to make; and |
· | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. |
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers to review the GAAP financial statements included elsewhere in this annual report on Form 10-K,10‑K, and not rely on any single financial measure to evaluate our business. We also strongly urge readers to review the reconciliation of these non-GAAP financial measures to the most comparable GAAP measure in this section, along with the Consolidated Financial Statementsconsolidated financial statements included elsewhere in this annual report on Form 10-K.
The following table sets forth a reconciliation ofreconciles EBITDA and Adjusted EBITDA to net loss, a comparable GAAP-based measure, as well asand Adjusted EBITDA per diluted share to loss per diluted share.share for the fiscal years ended January 31, 2019 and 2018 (amounts in thousands, except per share data). All of the items included in the reconciliation from EBITDA and Adjusted EBITDA to net loss and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess the Company’s comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance. In the case of items that do not
29
relate to our core operations, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| ||||
In thousands, except per share data |
| 2018 |
| 2017 |
| ||
Adjusted EBITDA Reconciliation |
|
|
|
|
|
|
|
Net loss |
| $ | (5,865) |
| $ | (3,099) |
|
Interest expense |
|
| 384 |
|
| 475 |
|
Income tax benefit |
|
| — |
|
| (84) |
|
Depreciation |
|
| 450 |
|
| 774 |
|
Amortization of capitalized software development costs |
|
| 1,160 |
|
| 2,113 |
|
Amortization of intangible assets |
|
| 937 |
|
| 1,161 |
|
Amortization of other costs |
|
| 346 |
|
| 270 |
|
EBITDA |
|
| (2,588) |
|
| 1,610 |
|
Share-based compensation expense |
|
| 629 |
|
| 1,109 |
|
Impairment of long-lived assets |
|
| 3,681 |
|
| — |
|
Loss (gain) on disposal of fixed assets |
|
| 7 |
|
| (16) |
|
Non-cash valuation adjustments to assets and liabilities |
|
| 126 |
|
| 95 |
|
Loss on exit of operating lease |
|
| 1,034 |
|
| — |
|
Adjusted EBITDA |
| $ | 2,889 |
| $ | 2,798 |
|
Adjusted EBITDA margin (1) |
|
| 13 | % |
| 11 | % |
|
|
|
|
|
|
|
|
Adjusted EBITDA per Diluted Share Reconciliation |
|
|
|
|
| ||
Net loss per common share — diluted |
| $ | (0.30) |
| $ | (0.16) |
|
Adjusted EBITDA per adjusted diluted share (2) |
| $ | 0.13 |
| $ | 0.13 |
|
Diluted weighted average shares |
|
| 19,540,980 |
|
| 19,090,899 |
|
Includable incremental shares — adjusted EBITDA (3) |
|
| 3,065,402 |
|
| 3,244,825 |
|
Adjusted diluted shares |
|
| 22,606,382 |
|
| 22,335,724 |
|
| Fiscal Year | |||||||
| Adjusted EBITDA Reconciliation | 2015 | 2014 | |||||
| Net loss | $ | (4,290 | ) | $ | (12,011 | ) | |
| Interest expense | 884 | 749 | |||||
| Tax expense (benefit) | 8 | (887 | ) | ||||
| Depreciation | 1,245 | 1,005 | |||||
| Amortization of capitalized software development costs (1) | 3,073 | 3,678 | |||||
| Amortization of intangible assets | 1,345 | 1,396 | |||||
| Amortization of other costs | 136 | 166 | |||||
| EBITDA | 2,402 | (5,904 | ) | ||||
| Stock-based compensation expense | 2,386 | 1,934 | |||||
| Loss on impairment of intangible assets | — | 1,952 | |||||
| Loss on early extinguishment of debt | — | 430 | |||||
| Loss on disposal of fixed assets | 92 | 181 | |||||
| Non-cash valuation adjustments to assets and liabilities (2) | (1,669 | ) | (2,154 | ) | |||
| Transaction related professional fees, advisory fees, and other internal direct costs | 93 | 182 | |||||
| Associate severances and other costs relating to transactions or corporate restructuring | 206 | 901 | |||||
| Other non-recurring operating expenses (income) (3) | (750 | ) | 1,491 | ||||
| Adjusted EBITDA | $ | 2,761 | $ | (987 | ) | ||
| Adjusted EBITDA Margin (4) | 10 | % | (4 | )% | |||
| Adjusted EBITDA per diluted share | 2015 | 2014 | |||||
| Loss per share — diluted | $ | (0.30 | ) | $ | (0.71 | ) | |
| Adjusted EBITDA per adjusted diluted share (5) | $ | 0.15 | $ | (0.05 | ) | ||
| Diluted weighted average shares | 18,689,854 | 18,261,800 | |||||
| Includable incremental shares — adjusted EBITDA (6) | — | — | |||||
| Adjusted diluted shares | 18,689,854 | 18,261,800 | |||||
(1) |
Adjusted EBITDA as a percentage of GAAP net revenues. |
(2) | Adjusted EBITDA per adjusted diluted share for the |
(3) | The number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP profit is earned in the current period, no additional incremental shares are assumed. |
Application of Critical Accounting Policies
The following is a summary of the Company’s most critical accounting policies. See Note 2 - Significant Accounting Policies to our Consolidated Financial Statementsconsolidated financial statements included in Part II, Item 8 herein for a complete discussion of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue for perpetual and term licenses in accordance with ASC 985-605, Software-Revenue Recognition and ASC 605-25 Revenue Recognition — Multiple-element arrangements. The Company commencesWe adopted the new revenue recognition standard (“ASC 606”) effective February 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. ASC 606 superseded nearly all existing revenue recognition guidance under GAAP. The core principle of ASC 606 is to recognize revenue when the following criteria all have been met:
30
Allowance for Doubtful Accounts
Accounts and contract receivables are comprised of amounts owed the Company for solutions and services provided. Contracts with individual clients and resellers determine when receivables are due and payable. In determining the allowances for doubtful accounts, the unpaid receivables are reviewed monthlyperiodically to determine the payment status based upon the most currently available information as to the status of the receivables.information. During these monthlyperiodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments.
Capitalized Software Development Costs
Software development costs are accounted for in accordance with either ASC 985-20985‑20, Software — Costs of Software to be Sold, Leased or Marketed, or ASC 350-40350‑40, Internal-Use Software. Costs associated with the planning and designing phase of software development are classified as research and development costs and are expensed as incurred. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is over the estimated economic life of the software. Amortization for our legacy software systems is provided on a solution-by-solution basis over the estimated economic life of the software, using the straight-line method. Amortization commences when a solution is available for general release to clients. Acquired internally developedinternally-developed software from acquisitions is amortized using the straight-line method. Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at the date of such determination. The Company reviews, on an on-going basis, the carrying value of its capitalized software development expenditures, net of accumulated amortization.
Goodwill and Intangible Assets
Goodwill and other intangible assets were recognized in conjunction with the acquisitions of Interpoint Partners, LLC (“Interpoint”), Meta Health Technology, Inc. (“Meta”), Clinical Looking Glass,Glass® (“CLG”), Opportune IT and Unibased acquisitions.Systems Architecture, Inc. (“Unibased”). Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally-developed software, client relationships, supplier agreements, non-compete agreements customer contracts, and license agreements. Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one month to 1510 years, using the straight-line and undiscounted expected future cash flows methods. The indefinite-lived intangible asset related to the Meta trade name, which was not amortized, but tested for impairment on at least an annual basis. In fiscal 2014, the Meta trade name was deemed impaired and its corresponding balance was fully written off (see Note 7 - Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8 herein).
We assess the useful lives and possible impairment of existing recognized goodwill on at least an annual basis, and goodwill and intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review include:
· | significant under-performance relative to historical or projected future operating results; |
· | significant changes in the manner of use of the acquired assets or the strategy for the overall business; |
· | identification of other impaired assets within a reporting unit; |
· | disposition of a significant portion of an operating segment; |
· | significant negative industry or economic trends; |
· | significant decline in the Company’s stock price for a sustained period; and |
· | a decline in the market capitalization relative to the net book value. |
Determining whether a triggering event has occurred involves significant judgment by the Company.
31
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax creditcredits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. We establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. See Note 87 - Income Taxes to our consolidated financial statements included in Part II, Item 8 herein for further details.
| Payments Due by Period | |||||||||||||||||||
| (in thousands) | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | Total | ||||||||||||||
| Long-term debt obligations | $ | 674 | $ | 1,797 | $ | 6,064 | $ | — | $ | 8,535 | |||||||||
| Interest expense on long-term debt | 550 | 933 | 308 | — | 1,791 | ||||||||||||||
| Capital lease obligations (1) | 618 | 93 | — | — | 711 | ||||||||||||||
| Operating lease obligations | 971 | 2,046 | 1,471 | 964 | 5,452 | ||||||||||||||
| Total contractual obligations | $ | 2,813 | $ | 4,869 | $ | 7,843 | $ | 964 | $ | 16,489 | |||||||||
Liquidity and Capital Resources
The Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company’s primary cash requirements include regular payment of payroll and other business expenses, principal and interest payments on debt and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center.center infrastructure. Operations are funded with cash generated by operations and borrowings under credit facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for the next twelve months. Cash and cash equivalent balances at
The Company has additional liquidity through the Credit Agreement described in more detail in Note 65 - Debt to our consolidated financial statements included in Part II, Item 8 herein. The Company’s primary operating subsidiary has a $5,000,000 revolving line of credit that has not been drawn upon as of the date of this report.credit. In order to draw upon the revolving line of credit, the Company’s primary operating subsidiary must comply with customary financial covenants, including the requirement that the Company maintain minimum liquidity of at least $7,500,000.(i) $3,500,000 from November 20, 2018 through and including January 31, 2019, and (ii) $4,000,000 from February 1, 2019 through and including the maturity date of the credit facility, which maturity date is May 21, 2020. Pursuant to the Credit Agreement’s definition, the liquidity of the Company’s primary operating subsidiary as of January 31, 20162019 was $14,882,000,$7,376,000, which satisfies the minimum liquidity financial covenant in the Credit Agreement.
The Credit Agreement also requires the Company to achieve certain minimum EBITDA levels, calculated pursuant to the Credit Agreement and measured on a quarter-end basis, of at least the required amounts in the table set forth in Note 65 - Debt to our consolidated financial statements included in Part II, Item 8 herein for the applicable period set forth therein. Our lender uses a measurement that is similar to the Adjusted EBITDA, a non-GAAP financial measure described above. The required minimum EBITDA level for the period ended January 31, 20162019 was $500,000. $20,000.
The Company’s actual EBITDA for this periodCompany was approximately $2,761,000.
The Credit Agreement expressly permits transactions between affiliates that are parties to the Credit Agreement, which includes the Company and its primary operating subsidiary, including loans made between such affiliate loan parties. However, the Credit Agreement prohibits the Company and its subsidiary from declaring or paying any dividend or making any other payment or distribution, directly or indirectly, on account of equity interests issued by the Company if such equity interests: (a) mature or are mandatorily redeemable pursuant to a sinking fund obligation or otherwise (except as a result of a change of control or asset sale so long as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior repayment in full of the loans and all other obligations that are accrued and payable upon the termination of the Credit Agreement), (b) are redeemable at the option of the
32
holder thereof, in whole or in part, (c) provide for the scheduled payments of dividends in cash, or (d) are or become convertible into or exchangeable for indebtedness or any other equity interests that would constitute disqualified equity interests pursuant to clauses (a) through (c) hereof, in each case, prior to the date that is 180 days after the maturity date of the Credit Agreement.
Significant cash obligations
|
|
|
|
|
|
|
|
|
|
| As of January, 31 | ||||
(in thousands) |
|
| 2019 |
| 2018 | ||
Term loan |
|
| $ | 3,948 |
| $ | 4,498 |
Royalty liability |
|
|
| 905 |
|
| 2,469 |
| (in thousands) | Fiscal Year | ||||||
| 2015 | 2014 | ||||||
| Term loans | $ | 8,535 | $ | 10,000 | |||
| Capital lease | 686 | 1,365 | |||||
| Royalty liability | 2,292 | 2,386 | |||||
Please reference Note 312 — AcquisitionsCommitments and Contingencies and Note 65 — Debt to our consolidated financial statements included in Part II, Item 8 for additional information.
Operating cash flow activities
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
(in thousands) |
| 2018 |
| 2017 | ||
Net loss |
| $ | (5,865) |
| $ | (3,099) |
Non-cash adjustments to net loss |
|
| 8,452 |
|
| 5,811 |
Cash impact of changes in assets and liabilities |
|
| (1,190) |
|
| (681) |
Net cash provided by operating activities |
| $ | 1,397 |
| $ | 2,031 |
| (in thousands) | Fiscal Year | ||||||
| 2015 | 2014 | ||||||
| Net loss | $ | (4,290 | ) | $ | (12,011 | ) | |
| Non-cash adjustments to net loss | 6,763 | 8,499 | |||||
| Cash impact of changes in assets and liabilities | 3,408 | 500 | |||||
| Annual operating cash flow | $ | 5,881 | $ | (3,012 | ) | ||
The increasedecrease in net cash provided by operating activities in fiscal 2015 is primarily due to a reductiontwo customers from whom payments were collected just after year-end. These were significant customer collections representing over $1,000,000 in loss, aided by the Company’s effortcash. While in prior years these customers paid their balances prior to decrease expenses, and the collection of accounts receivable, dueJanuary 31, 2018, payments expected to the Company’s effortsbe received in fiscal 2018 were only received subsequent to resolve issues that were delaying payments.
The Company’s clients typically have been well-established hospitals, or medical facilities or major health information system companies that resell the Company’s solutions, which have good credit histories, and payments have been received within normal time frames for the industry. However, some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the liquidity for some of our clients.
Investing cash flow activities
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
(in thousands) |
| 2018 |
| 2017 | ||
Purchases of property and equipment |
| $ | (21) |
| $ | (49) |
Proceeds from sales of property and equipment |
|
| 21 |
|
| 20 |
Capitalized software development costs |
|
| (3,003) |
|
| (1,836) |
Net cash used in investing activities |
| $ | (3,003) |
| $ | (1,865) |
| (in thousands) | Fiscal Year | ||||||
| 2015 | 2014 | ||||||
| Purchases of property and equipment | $ | (518 | ) | $ | (2,125 | ) | |
| Capitalized software development costs | — | (620 | ) | ||||
| Payment for acquisitions, net of cash acquired | — | (6,058 | ) | ||||
| Annual investing cash flow | $ | (518 | ) | $ | (8,803 | ) | |
Cash used for investing activities is primarily a result ofin fiscal 2018 was approximately $1,138,000 higher than fiscal 2017. See research and development cost (above). The reason that the cash expended to acquire the Unibased business, as well as asset purchasesinvestment in capitalized software development costs in fiscal 2018 was higher than 2017 is related to the expansionapportionment of our Atlanta officecosts to capitalized costs. The total cost for research and development was the new Atlanta data centersame in the prior year. In addition, our development efforts shifted to solutions involving development costs that are notfiscal 2018 compared with fiscal 2017, however, more cost was capitalized due to rapid release cycles.the investment in the eValuator product. The Company is expecting to invest less in eValuator going forward as the product has been introduced to the market.
33
The Company estimates that to replicate its existing internally-developed software would cost significantly more than the stated net book value of $6,124,000,$5,698,000, including the acquired internally developedinternally-developed software of Interpoint, Meta, and Unibased,Opportune IT, at January 31, 2016.2019. Many of the programs related to capitalized software development continue to have significant value to our current solutions and those under development, as the concepts, ideas and software code are readily transferable and are incorporated into new solutions.
Financing cash flow activities
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
(in thousands) |
| 2018 |
| 2017 | ||
Principal repayments on term loan |
| $ | (597) |
| $ | (1,112) |
Principal payments on capital lease obligations |
|
| — |
|
| (91) |
Proceeds from exercise of stock options and stock purchase plan |
|
| 44 |
|
| 45 |
Other |
|
| (85) |
|
| (42) |
Net cash used in financing activities |
| $ | (638) |
| $ | (1,200) |
| (in thousands) | Fiscal Year | ||||||
| 2015 | 2014 | ||||||
| Proceeds from term loans | $ | — | $ | 10,000 | |||
| Principal repayments on term loans | (1,465 | ) | (8,298 | ) | |||
| Principal repayments on note payable | — | (900 | ) | ||||
| Payment of deferred financing costs | 2 | (573 | ) | ||||
| Other | (540 | ) | 184 | ||||
| Annual financing cash flow | $ | (2,003 | ) | $ | 413 | ||
The increasedecrease in cash used in financing activities in fiscal 20152018 over the prior year was primarily the result of neta $500,000 prepayment made towards our term loan in fiscal 2017 with proceeds from term loans in fiscal 2014 with the closingsales of our Patient Engagement suite of solutions, as required pursuant to the mandatory prepayment provisions of the Credit Agreement, with Wells Fargo, as well as an increase in principal payments onthe termination of a capital lease obligations in the current year.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
34
ITEM 8. Financial Statements And Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| 36 | |
| 37 | |
| 39 | |
| 40 | |
| 41 | |
| 42 | |
| 64 |
All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Streamline Health Solutions, Inc. and its subsidiary (the Company) as of January 31, 2016,2019 and 2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders’stockholders' equity and cash flows for the yearyears then ended. Our audit also includedended, and the related notes to the consolidated financial statements and schedule (collectively, the financial statement schedulestatements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company listedas of January 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in Schedule II. conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue recognition in the year ended January 31, 2019 due to the adoption of FASB Accounting Standards Codification (Topic 606), Revenue from Contracts with Customers.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements and schedules based on our audit.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits we are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have audited the accompanying consolidated balance sheet of Streamline Health Solutions, Inc. and subsidiaryserved as of January 31, 2015, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the year ended January 31, 2015. In connection with our audit of the consolidated financial statements, we also have audited the 2014 financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
Atlanta, Georgia,
April 22, 2019
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARY
(rounded to the nearest thousand dollars,except share and per share information)
|
|
|
|
|
|
|
|
| January 31, | ||||
|
| 2019 |
| 2018 | ||
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 2,376,000 |
| $ | 4,620,000 |
Accounts receivable, net of allowance for doubtful accounts of $345,000 and $349,000, respectively |
|
| 2,933,000 |
|
| 3,001,000 |
Contract receivables |
|
| 1,263,000 |
|
| 224,000 |
Prepaid assets |
|
| 901,000 |
|
| 1,255,000 |
Other current assets |
|
| 445,000 |
|
| 547,000 |
Total current assets |
|
| 7,918,000 |
|
| 9,647,000 |
Non-current assets: |
|
|
|
|
|
|
Property and equipment, net of accumulated amortization of $1,516,000 and $3,835,000, respectively |
|
| 237,000 |
|
| 1,162,000 |
Contract receivables, less current portion |
|
| 407,000 |
|
| — |
Capitalized software development costs, net of accumulated amortization of $19,689,000 and $18,658,000, respectively |
|
| 5,698,000 |
|
| 4,308,000 |
Intangible assets, net of accumulated amortization of $3,858,000 and $6,969,000, respectively |
|
| 1,669,000 |
|
| 5,835,000 |
Goodwill |
|
| 15,537,000 |
|
| 15,537,000 |
Other |
|
| 274,000 |
|
| 642,000 |
Total non-current assets |
|
| 23,822,000 |
|
| 27,484,000 |
|
| $ | 31,740,000 |
| $ | 37,131,000 |
| January 31 | |||||||
| 2016 | 2015 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 9,882,136 | $ | 6,522,600 | |||
| Accounts receivable, net of allowance for doubtful accounts of $155,407 and $665,962, respectively | 4,199,315 | 6,935,270 | |||||
| Contract receivables | 119,697 | 191,465 | |||||
| Prepaid hardware and third party software for future delivery | 5,858 | 55,173 | |||||
| Prepaid client maintenance contracts | 956,913 | 935,858 | |||||
| Other prepaid assets | 941,532 | 1,437,680 | |||||
| Deferred income taxes | — | 220,004 | |||||
| Other current assets | 97,986 | 207,673 | |||||
| Total current assets | 16,203,437 | 16,505,723 | |||||
| Non-current assets: | |||||||
| Property and equipment: | |||||||
| Computer equipment | 2,647,135 | 2,381,923 | |||||
| Computer software | 801,895 | 964,857 | |||||
| Office furniture, fixtures and equipment | 683,443 | 683,443 | |||||
| Leasehold improvements | 729,348 | 724,015 | |||||
| 4,861,821 | 4,754,238 | ||||||
| Accumulated depreciation and amortization | (2,407,746 | ) | (1,617,423 | ) | |||
| Property and equipment, net | 2,454,075 | 3,136,815 | |||||
| Contract receivables, less current portion | 8,711 | 43,553 | |||||
| Capitalized software development costs, net of accumulated amortization of $14,919,948 and $11,846,468, respectively | 6,123,638 | 9,197,118 | |||||
| Intangible assets, net | 8,155,325 | 9,500,317 | |||||
| Deferred financing costs, net of accumulated amortization of $84,531 and $13,677, respectively | 270,147 | 387,199 | |||||
| Goodwill | 16,184,667 | 16,184,667 | |||||
| Other non-current assets | 746,018 | 823,723 | |||||
| Total non-current assets | 33,942,581 | 39,273,392 | |||||
| $ | 50,146,018 | $ | 55,779,115 | ||||
See accompanying notes to consolidated financial statements.
37
|
|
|
|
|
| ||||||||
| January 31, |
| January 31, | |||||||||||
| 2016 | 2015 |
| 2019 |
| 2018 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| |||||||
| Current liabilities: |
|
|
|
|
|
| |||||||
| Accounts payable | $ | 1,136,779 | $ | 2,298,851 |
| $ | 1,280,000 |
| $ | 421,000 | |||
| Accrued compensation | 935,324 | 865,865 |
|
| 789,000 |
|
| 342,000 | |||||
| Accrued other expenses | 328,551 | 563,838 |
|
| 1,025,000 |
|
| 610,000 | |||||
| Current portion of term loan | 673,807 | 500,000 |
|
| 597,000 |
|
| 597,000 | |||||
| Deferred revenues | 10,447,280 | 9,289,076 |
|
| 8,338,000 |
|
| 9,482,000 | |||||
| Current portion of capital lease obligation | 592,642 | 781,961 | |||||||||||
Other |
|
| 94,000 |
|
| — | |||||||
| Total current liabilities | 14,114,383 | 14,299,591 |
|
| 12,123,000 |
|
| 11,452,000 | |||||
| Non-current liabilities: |
|
|
|
|
|
| |||||||
| Term loan | 7,861,084 | 9,500,000 | |||||||||||
| Warrants liability | 205,113 | 1,834,380 | |||||||||||
Term loan, net of current portion and deferred financing cost of $82,000 and $128,000, respectively |
|
| 3,351,000 |
|
| 3,901,000 | |||||||
| Royalty liability | 2,291,888 | 2,385,826 |
|
| 905,000 |
|
| 2,469,000 | |||||
| Lease incentive liability, less current portion | 369,406 | 342,129 | |||||||||||
| Capital lease obligation | 93,257 | 582,911 | |||||||||||
| Deferred revenues, less current portion | 1,212,709 | 964,933 |
|
| 432,000 |
|
| 333,000 | |||||
| Deferred income tax liabilities | — | 229,579 | |||||||||||
Other |
|
| 41,000 |
|
| 274,000 | |||||||
| Total non-current liabilities | 12,033,457 | 15,839,758 |
|
| 4,729,000 |
|
| 6,977,000 | |||||
| Total liabilities | 26,147,840 | 30,139,349 |
|
| 16,852,000 |
|
| 18,429,000 | |||||
| Series A 0% Convertible Redeemable Preferred Stock, $.01 par value per share, $8,849,985 redemption and liquidation value, 4,000,000 shares authorized, 2,949,995 issued and outstanding, net of unamortized preferred stock discount of $875,935 and $2,212,007, respectively | 7,974,050 | 6,637,978 | |||||||||||
Series A 0% Convertible Redeemable Preferred Stock, $.01 par value per share, $8,686,000 and $8,850,000 redemption value, 4,000,000 shares authorized, 2,895,464 and 2,949,995 shares issued and outstanding, respectively |
|
| 8,686,000 |
|
| 8,850,000 | |||||||
| Stockholders’ equity: |
|
|
|
|
|
| |||||||
| Common stock, $.01 par value per share, 45,000,000 shares authorized; 18,783,540 and 18,553,389 shares issued and outstanding, respectively | 187,836 | 185,534 | |||||||||||
Common stock, $.01 par value per share, 45,000,000 shares authorized; 20,767,708 and 20,005,977 shares issued and outstanding, respectively |
|
| 208,000 |
|
| 200,000 | |||||||
| Additional paid in capital | 79,700,577 | 78,390,424 |
|
| 82,544,000 |
|
| 81,777,000 | |||||
| Accumulated deficit | (63,864,285 | ) | (59,574,170 | ) |
|
| (76,550,000) |
|
| (72,125,000) | |||
| Total stockholders’ equity | 16,024,128 | 19,001,788 |
|
| 6,202,000 |
|
| 9,852,000 | |||||
| $ | 50,146,018 | $ | 55,779,115 |
| $ | 31,740,000 |
| $ | 37,131,000 | ||||
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(rounded to the nearest thousand dollars,except share and per share information)
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Revenues: |
|
|
|
|
|
|
Systems sales |
| $ | 2,472,000 |
| $ | 1,343,000 |
Professional services |
|
| 1,336,000 |
|
| 2,744,000 |
Audit services |
|
| 1,118,000 |
|
| 1,216,000 |
Maintenance and support |
|
| 12,586,000 |
|
| 13,171,000 |
Software as a service |
|
| 4,853,000 |
|
| 5,864,000 |
Total revenues |
|
| 22,365,000 |
|
| 24,338,000 |
Operating expenses: |
|
|
|
|
|
|
Cost of systems sales |
|
| 942,000 |
|
| 1,946,000 |
Cost of professional services |
|
| 2,657,000 |
|
| 2,401,000 |
Cost of audit services |
|
| 1,373,000 |
|
| 1,604,000 |
Cost of maintenance and support |
|
| 2,173,000 |
|
| 2,904,000 |
Cost of software as a service |
|
| 992,000 |
|
| 1,319,000 |
Selling, general and administrative |
|
| 10,554,000 |
|
| 11,434,000 |
Research and development |
|
| 4,261,000 |
|
| 5,352,000 |
Impairment of long-lived assets |
|
| 3,681,000 |
|
| — |
Loss on exit of operating lease |
|
| 1,034,000 |
|
| — |
Total operating expenses |
|
| 27,667,000 |
|
| 26,960,000 |
Operating loss |
|
| (5,302,000) |
|
| (2,622,000) |
Other expense: |
|
|
|
|
|
|
Interest expense |
|
| (384,000) |
|
| (474,000) |
Miscellaneous expense |
|
| (179,000) |
|
| (87,000) |
Loss before income taxes |
|
| (5,865,000) |
|
| (3,183,000) |
Income tax benefit |
|
| — |
|
| 84,000 |
Net loss |
|
| (5,865,000) |
|
| (3,099,000) |
Net loss per common share - basic |
| $ | (0.30) |
| $ | (0.16) |
Weighted average number of common shares - basic |
|
| 19,540,980 |
|
| 19,090,899 |
Net loss per common share - diluted |
| $ | (0.30) |
| $ | (0.16) |
Weighted average number of common shares - diluted |
|
| 19,540,980 |
|
| 19,090,899 |
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Revenues: | |||||||
| Systems sales | $ | 2,946,304 | $ | 1,214,879 | |||
| Professional services | 2,212,002 | 2,580,167 | |||||
| Maintenance and support | 15,145,480 | 16,157,371 | |||||
| Software as a service | 8,010,672 | 7,672,990 | |||||
| Total revenues | 28,314,458 | 27,625,407 | |||||
| Operating expenses: | |||||||
| Cost of systems sales | 2,778,041 | 3,536,495 | |||||
| Cost of professional services | 3,143,881 | 3,458,984 | |||||
| Cost of maintenance and support | 3,036,550 | 3,087,842 | |||||
| Cost of software as a service | 2,442,143 | 2,920,403 | |||||
| Selling, general and administrative | 13,442,799 | 16,225,574 | |||||
| Research and development | 9,093,353 | 9,756,206 | |||||
| Impairment of intangible assets | — | 1,952,000 | |||||
| Total operating expenses | 33,936,767 | 40,937,504 | |||||
| Operating loss | (5,622,309 | ) | (13,312,097 | ) | |||
| Other income (expense): | |||||||
| Interest expense | (884,226 | ) | (748,969 | ) | |||
| Loss on early extinguishment of debt | — | (429,849 | ) | ||||
| Miscellaneous income | 2,224,423 | 1,592,449 | |||||
| Loss before income taxes | (4,282,112 | ) | (12,898,466 | ) | |||
| Income tax (expense) benefit | (8,003 | ) | 887,009 | ||||
| Net loss | (4,290,115 | ) | (12,011,457 | ) | |||
| Less: deemed dividends on Series A Preferred Shares | (1,336,072 | ) | (1,038,310 | ) | |||
| Net loss attributable to common shareholders | $ | (5,626,187 | ) | $ | (13,049,767 | ) | |
| Basic net loss per common share | $ | (0.30 | ) | $ | (0.71 | ) | |
| Number of shares used in basic per common share computation | 18,689,854 | 18,261,800 | |||||
| Diluted net loss per common share | $ | (0.30 | ) | $ | (0.71 | ) | |
| Number of shares used in diluted per common share computation | 18,689,854 | 18,261,800 | |||||
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSCHANGES IN STOCKHOLDERS’ EQUITY
(rounded to the nearest thousand dollars,except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| ||
|
| Common |
| Common |
| paid in |
| Accumulated |
| Total | ||||
|
| stock shares |
| stock |
| capital |
| deficit |
| stockholders’ equity | ||||
Balance at January 31, 2017 |
| 19,695,391 |
| $ | 197,000 |
| $ | 80,668,000 |
| $ | (69,026,000) |
| $ | 11,839,000 |
Stock issued pursuant to Employee Stock Purchase Plan |
| 47,282 |
|
| — |
|
| 45,000 |
|
| — |
|
| 45,000 |
Restricted stock issued |
| 295,337 |
|
| 3,000 |
|
| (3,000) |
|
| — |
|
| — |
Surrender of stock upon vesting of restricted stock to satisfy tax withholding obligations |
| (32,033) |
|
| — |
|
| (42,000) |
|
| — |
|
| (42,000) |
Share-based compensation expense |
| — |
|
| — |
|
| 1,109,000 |
|
| — |
|
| 1,109,000 |
Net loss |
| — |
|
| — |
|
| — |
|
| (3,099,000) |
|
| (3,099,000) |
Balance at January 31, 2018 |
| 20,005,977 |
| $ | 200,000 |
| $ | 81,777,000 |
| $ | (72,125,000) |
| $ | 9,852,000 |
Cumulative effect of ASC 606 implementation |
| — |
|
| — |
|
| — |
|
| 1,440,000 |
|
| 1,440,000 |
Stock issued pursuant to Employee Stock Purchase Plan and exercise of stock options |
| 48,616 |
|
| — |
|
| 44,000 |
|
| — |
|
| 44,000 |
Restricted stock issued |
| 826,666 |
|
| 8,000 |
|
| (8,000) |
|
| — |
|
| — |
Restricted stock forfeited |
| (130,833) |
|
| (1,000) |
|
| 1,000 |
|
| — |
|
| — |
Surrender of stock upon vesting of restricted stock to satisfy tax withholding obligations |
| (37,249) |
|
| — |
|
| (62,000) |
|
| — |
|
| (62,000) |
Conversion of Series A Preferred Stock |
| 54,531 |
|
| 1,000 |
|
| 163,000 |
|
| — |
|
| 164,000 |
Share-based compensation expense |
| — |
|
| — |
|
| 629,000 |
|
| — |
|
| 629,000 |
Net loss |
| — |
|
| — |
|
| — |
|
| (5,865,000) |
|
| (5,865,000) |
Balance at January 31, 2019 |
| 20,767,708 |
| $ | 208,000 |
| $ | 82,544,000 |
| $ | (76,550,000) |
| $ | 6,202,000 |
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Net loss | $ | (4,290,115 | ) | $ | (12,011,457 | ) | |
| Other comprehensive gain (loss), net of tax: | |||||||
| Fair value of interest rate swap liability | — | (3,436 | ) | ||||
| Reclassification adjustment for loss on settlement of interest rate swap liability realized in net loss | — | 114,522 | |||||
| Other comprehensive income | $ | — | $ | 111,086 | |||
| Comprehensive loss | $ | (4,290,115 | ) | $ | (11,900,371 | ) | |
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYCASH FLOWS
(rounded to the nearest thousand dollars,except share information)
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
| $ | (5,865,000) |
| $ | (3,099,000) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation |
|
| 450,000 |
|
| 774,000 |
Amortization of capitalized software development costs |
|
| 1,160,000 |
|
| 2,113,000 |
Amortization of intangible assets |
|
| 937,000 |
|
| 1,161,000 |
Amortization of other deferred costs |
|
| 415,000 |
|
| 341,000 |
Valuation adjustments |
|
| 126,000 |
|
| 95,000 |
Impairment of long-lived assets |
|
| 3,681,000 |
|
| — |
Loss on exit of operating lease |
|
| 1,034,000 |
|
| — |
Loss (gain) on disposal of fixed assets |
|
| 7,000 |
|
| (16,000) |
Share-based compensation expense |
|
| 629,000 |
|
| 1,109,000 |
Provision for accounts receivable |
|
| 13,000 |
|
| 234,000 |
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts and contract receivables |
|
| (640,000) |
|
| 1,498,000 |
Other assets |
|
| 466,000 |
|
| (696,000) |
Accounts payable |
|
| 859,000 |
|
| (695,000) |
Accrued expenses |
|
| 129,000 |
|
| (117,000) |
Deferred revenues |
|
| (2,004,000) |
|
| (671,000) |
Net cash provided by operating activities |
|
| 1,397,000 |
|
| 2,031,000 |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
|
| (21,000) |
|
| (49,000) |
Proceeds from sales of property and equipment |
|
| 21,000 |
|
| 20,000 |
Capitalization of software development costs |
|
| (3,003,000) |
|
| (1,836,000) |
Net cash used in investing activities |
|
| (3,003,000) |
|
| (1,865,000) |
Cash flows from financing activities: |
|
|
|
|
|
|
Principal payments on term loan |
|
| (597,000) |
|
| (1,112,000) |
Principal payments on capital lease obligation |
|
| — |
|
| (91,000) |
Payments related to settlement of employee shared-based awards |
|
| (62,000) |
|
| (42,000) |
Proceeds from exercise of stock options and stock purchase plan |
|
| 44,000 |
|
| 45,000 |
Payment of deferred financing costs |
|
| (23,000) |
|
| — |
Net cash used in financing activities |
|
| (638,000) |
|
| (1,200,000) |
Net decrease in cash and cash equivalents |
|
| (2,244,000) |
|
| (1,034,000) |
Cash and cash equivalents at beginning of period |
|
| 4,620,000 |
|
| 5,654,000 |
Cash and cash equivalents at end of period |
| $ | 2,376,000 |
| $ | 4,620,000 |
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Supplemental cash flow disclosures: |
|
|
|
|
|
|
Interest paid |
| $ | 417,000 |
| $ | 418,000 |
Income taxes paid |
| $ | 11,000 |
| $ | 8,000 |
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
Conversion of 54,531 shares of Series A Preferred Stock to common shares |
| $ | 164,000 |
| $ | — |
Modification of royalty liability associated with the acquisition of Clinical Analytics |
| $ | 1,644,000 |
| $ | — |
| Common stock shares | Common stock | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive loss | Total stockholders’ equity | |||||||||||||||||
| Balance at January 31, 2014 | 18,175,787 | $ | 181,758 | $ | 76,983,088 | $ | (47,562,713 | ) | $ | (111,086 | ) | $ | 29,491,047 | |||||||||
| Stock issued pursuant to Employee Stock Purchase Plan and exercise of stock options | 257,296 | 2,573 | 512,551 | — | — | 515,124 | ||||||||||||||||
| Restricted stock issued | 120,306 | 1,203 | (1,203 | ) | — | — | — | |||||||||||||||
| Interest rate swap | — | — | — | — | 111,086 | 111,086 | ||||||||||||||||
| Share-based compensation expense | — | — | 1,934,298 | — | — | 1,934,298 | ||||||||||||||||
| Deemed dividends on Series A Preferred Stock | — | — | (1,038,310 | ) | — | — | (1,038,310 | ) | ||||||||||||||
| Net loss | — | — | — | (12,011,457 | ) | — | (12,011,457 | ) | ||||||||||||||
| Balance at January 31, 2015 | 18,553,389 | $ | 185,534 | $ | 78,390,424 | $ | (59,574,170 | ) | $ | — | $ | 19,001,788 | ||||||||||
| Stock issued pursuant to Employee Stock Purchase Plan and exercise of stock options | 111,971 | 1,120 | 260,918 | — | — | 262,038 | ||||||||||||||||
| Restricted stock issued | 118,180 | 1,182 | (1,182 | ) | — | — | — | |||||||||||||||
| Share-based compensation expense | — | — | 2,386,489 | — | — | 2,386,489 | ||||||||||||||||
| Deemed dividends on Series A Preferred Stock | — | — | (1,336,072 | ) | — | — | (1,336,072 | ) | ||||||||||||||
| Net loss | — | — | — | (4,290,115 | ) | — | (4,290,115 | ) | ||||||||||||||
| Balance at January 31, 2016 | 18,783,540 | $ | 187,836 | $ | 79,700,577 | $ | (63,864,285 | ) | $ | — | $ | 16,024,128 | ||||||||||
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Operating activities: | |||||||
| Net loss | $ | (4,290,115 | ) | $ | (12,011,457 | ) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of effect of acquisitions: | |||||||
| Depreciation | 1,245,400 | 1,005,283 | |||||
| Amortization of capitalized software development costs | 3,073,479 | 3,677,991 | |||||
| Amortization of intangible assets | 1,344,992 | 1,396,317 | |||||
| Amortization of other deferred costs | 206,881 | 189,107 | |||||
| Amortization of debt discount | — | 47,552 | |||||
| Valuation adjustment for warrants liability | (1,629,267 | ) | (2,283,345 | ) | |||
| Deferred tax expense (benefit) | (9,575 | ) | (720,582 | ) | |||
| Other valuation adjustments | (39,299 | ) | 128,855 | ||||
| Gain from early extinguishment of lease liability | (33,059 | ) | — | ||||
| Loss on impairment of intangible assets | — | 1,952,000 | |||||
| Loss from early extinguishment of debt | — | 315,327 | |||||
| Loss on disposal of fixed assets | 92,448 | 180,793 | |||||
| Loss on exit of operating lease | — | 234,823 | |||||
| Share-based compensation expense | 2,386,490 | 1,934,298 | |||||
| Provision for accounts receivable | 124,235 | 440,771 | |||||
| Changes in assets and liabilities, net of assets acquired: | |||||||
| Accounts and contract receivables | 2,718,330 | 2,157,977 | |||||
| Other assets | 575,774 | (637,348 | ) | ||||
| Accounts payable | (1,117,986 | ) | 600,263 | ||||
| Accrued expenses | (174,133 | ) | (1,422,571 | ) | |||
| Deferred revenues | 1,405,980 | (197,698 | ) | ||||
| Net cash provided by (used in) operating activities | 5,880,575 | (3,011,644 | ) | ||||
| Investing activities: | |||||||
| Purchases of property and equipment | (518,254 | ) | (2,125,240 | ) | |||
| Capitalization of software development costs | — | (619,752 | ) | ||||
| Payment for acquisition, net of cash acquired | — | (6,058,225 | ) | ||||
| Net cash used in investing activities | (518,254 | ) | (8,803,217 | ) | |||
| Financing activities: | |||||||
| Proceeds from term loan | — | 10,000,000 | |||||
| Principal repayments on term loans | (1,465,109 | ) | (8,297,620 | ) | |||
| Principal repayments on note payable | — | (900,000 | ) | ||||
| Principal payments on capital lease obligation | (815,826 | ) | (368,386 | ) | |||
| Recovery (payment) of deferred financing costs | 2,111 | (573,002 | ) | ||||
| Proceeds from exercise of stock options and stock purchase plan | 276,039 | 551,583 | |||||
| Net cash (used in) provided by financing activities | (2,002,785 | ) | 412,575 | ||||
| Increase (decrease) in cash and cash equivalents | 3,359,536 | (11,402,286 | ) | ||||
| Cash and cash equivalents at beginning of year | 6,522,600 | 17,924,886 | |||||
| Cash and cash equivalents at end of year | $ | 9,882,136 | $ | 6,522,600 | |||
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Supplemental cash flow disclosures: | |||||||
| Interest paid | $ | 917,212 | $ | 518,919 | |||
| Income taxes paid (received) | $ | (35,861 | ) | $ | (80,467 | ) | |
| Supplemental disclosure of non-cash financing activities: | |||||||
| Deemed dividends on Series A Preferred Stock | $ | 1,336,072 | $ | 1,038,310 | |||
NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Streamline Health Solutions, Inc. and its subsidiary (“we”, “us”, “our”, “Streamline”, or the “Company”) operates in one segment as a provider of healthcare information technology solutions and associated services. The Company provides these capabilities through the licensing of its Electronic Health InformationHIM, Coding & CDI, eValuator Coding Analysis Platform, Financial Management and Patient Financial Services, Coding and Clinical Documentation ImprovementCare solutions and other Workflowworkflow software applications and the use of such applications by software as a service.service (“SaaS”). The Company also provides audit services to help clients optimize their internal clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions. The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and Canada to capture, store, manage, route, retrieve and process vast amounts of patient clinical, financial and other healthcare provider information.
Fiscal Year
All references to a fiscal year refer to the fiscal year commencing February 1 in that calendar year and ending on
January 31 of the following calendar year.NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Streamline Health Solutions, Inc. and its wholly-owned subsidiary, Streamline Health, Inc. All significant intercompany transactions and balances are eliminated in consolidation.
All amounts in the consolidated financial statements, notes and tables have been rounded to the nearest thousand dollars, except share and per share amounts, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to stock-based compensation, capitalization of software development costs, intangible assets, allowance for doubtful accounts, and income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash demand deposits. Cash deposits are placed in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Cash deposits may exceed FDIC insured levels from time to time. For purposes of the Consolidated Balance Sheetsconsolidated balance sheets and Consolidated Statementsconsolidated statements of Cash Flows,cash flows, the Company considers all highly liquidhighly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Receivables
Accounts and contract receivables are comprised of amounts owed to the Company for licensed software, professional services, including coding audit, maintenance services, and software as a service and are presented net of the allowance for doubtful accounts. The timing of revenue recognition may not coincide with the billing terms of the
42
client contract, resulting in unbilled receivables or deferred revenues; therefore certain contract receivables represent revenues recognized prior to client billings. Individual contract terms with clients or resellers determine when receivables are due. For billings where the criteria for revenue recognition have not been met, deferred revenue is recorded until all revenue recognition criteria have been met.
Allowance for Doubtful Accounts
In determining the allowance for doubtful accounts, aged receivables are analyzed monthlyperiodically by management. Each identified receivable is reviewed based upon the most recent information available including client comments, if any, and the status of any open or unresolved issues with the client preventing the payment thereof. Corrective action, if necessary, is taken by the Company to resolve open issues related to unpaid receivables. During these monthlyperiodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments. The allowance for doubtful accounts was approximately $155,000$345,000 and $666,000$349,000 at
Bad debt expense for fiscal years 20152018 and 20142017 was as follows:
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||
Bad debt expense |
| $ | 13,000 |
| $ | 234,000 |
| 2015 | 2014 | ||||||
| Bad debt expense | $ | 124,000 | $ | 441,000 | |||
Concessions Accrual
In determining the concessionconcessions accrual, the Company evaluates historical concessions granted relative to revenue. The concession accrual included in accrued other expenses on the Company'sCompany’s consolidated balance sheetsheets was $54,000$44,000 and $58,000$48,000 as of
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method, over the estimated useful lives of the related assets. Estimated useful lives are as follows:
Computer equipment and software | 3‑4 years | |
Office equipment | 5 years | |
Office furniture and fixtures | 7 years | |
Leasehold improvements | Term of lease or estimated useful life, whichever is shorter |
Depreciation expense for property and equipment in fiscal
Normal repair and maintenance is expensed as incurred. Replacements are capitalized and the property and equipment accounts are relieved of the items being replaced or disposed of, if no longer of value. The related cost and accumulated depreciation of the disposed assets are eliminated and any gain or loss on disposition is included in the results of operations in the year of disposal.
Leases
On December 13, 2013, the Company entered into an amended lease obligation to lease 24,335 square feet of office space in the same building as the office space in Atlanta, Georgia. The lease commenced upon taking possession of the space and ends 102 months thereafter. The Company took possession of the new space during the second quarter of fiscal 2014. Upon relocation, the Company completely vacated the previously leased premises within the building.was scheduled to end in November 2022. The provisions of the lease provided for rent abatement for the first eight months of the lease term. Upon taking possession of the premises, the rent abatement and the unamortized balance of deferred rent associated with the previously leased premises were aggregated with the total expected rental payments and are being amortized on a straight-line basis over the term of the new lease.
43
In fiscal 2014, the Company relocated its New Yorkentered into a lease obligation to lease 10,350 square feet of office to 105 Madison Avenue,space in New York, New York. The lease commenced upon taking possession of the space and ends 63 months thereafter.expires in November 2019. The provisions of the lease for the new office space of 10,350 square feetagreement provided for rent abatement for the first two months of the lease term. Upon taking possession of the premises, the rent abatement was aggregated with the total expected rental payments and is being amortized on a straight-line basis over the term of the lease.
The Company hashad capital leases to finance office equipment and maintenance services purchases. The balancepurchases that continued into the third quarter of fixed assets acquired under these capital leases is $1,652,000 and $1,515,000 as of
Debt Issuance Costs
Costs related to the issuance of debt are capitalized and amortized to interest expense on a straight-line basis, which is not materially different from the effective interest method, over the term of the related debt.
Impairment of Long-Lived Assets
The Company reviews the carrying value of long-lived assets for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the evaluation are changes in market position and profitability. If facts and circumstances are present which may indicate impairment is probable,that the carrying amount of the assets may not be recoverable, the Company will prepare a projection of the undiscounted cash flows of the specific asset or asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows. If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair value.
Capitalized Software Development Costs
Software development costs associated with the planning and designing phase of software development, including coding and testing activities necessary to establish technological feasibility, are classified as research and development and are expensed as incurred. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. The Company capitalized such costs, including interest, of $0$3,003,000 and $620,000$1,836,000 in fiscal
Amortization for the Company's legacyCompany’s software systems is provided on a solution-by-solution basis over the estimated economic life of the software, typically three to five years, using the straight-line method. Amortization commences when a solution is available for general release to clients. Acquired internally developedinternally-developed software from the Interpoint, Meta, and Unibased acquisitions is amortized using the straight-line method.
Amortization expense on all internally developedinternally-developed software was $3,073,000$1,160,000 and $3,678,000$2,113,000 in fiscal
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Amortization expense on internally-developed software included in: |
|
|
|
|
|
|
Cost of systems sales |
| $ | 768,000 |
| $ | 1,914,000 |
Cost of software as a service |
|
| 379,000 |
|
| 186,000 |
Cost of audit services |
|
| 13,000 |
|
| 13,000 |
Total amortization expense on internally-developed software |
| $ | 1,160,000 |
| $ | 2,113,000 |
44
| Fiscal Year | |||||||
| Amortization expense on internally developed software included in: | 2015 | 2014 | |||||
| Cost of systems sales | $ | 2,747,000 | $ | 3,352,000 | |||
| Cost of software as a service | 326,000 | 326,000 | |||||
| Total amortization expense on internally developed software | $ | 3,073,000 | $ | 3,678,000 | |||
Research and development expense net of capitalized amounts, was $9,093,000$4,261,000 and $9,756,000$5,352,000 in fiscal
Fair Value of Financial Instruments
The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market basedmarket-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount of the Company’s long-term debt approximates fair value since the variable interest rates being paid on the amounts approximate the market interest rate. Long-term debt is classified as Level 2.
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices in |
| Significant Other |
| Significant | ||||
|
| Total Fair |
| Active Markets |
| Observable Inputs |
| Unobservable Inputs | ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
At January 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1) (3) |
| $ | 905,000 |
| $ | — |
| $ | — |
| $ | 905,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1) (2) |
| $ | 2,469,000 |
| $ | — |
| $ | — |
| $ | 2,469,000 |
| Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| At January 31, 2016 | |||||||||||||||
| Warrants liability (1) | $ | 205,000 | $ | — | $ | — | $ | 205,000 | |||||||
| Royalty liability (2) | 2,292,000 | — | — | 2,292,000 | |||||||||||
| At January 31, 2015 | |||||||||||||||
| Warrants liability (3) | $ | 1,834,000 | $ | — | $ | — | $ | 1,834,000 | |||||||
| Royalty liability (2) | 2,386,000 | — | — | 2,386,000 | |||||||||||
(1) |
The initial fair value of royalty liability was determined by management with the assistance of an independent third-party valuation specialist, and by management thereafter. Fair value adjustments are included within miscellaneous expense in the consolidated statements of operations. |
(2) | The fair value of the royalty liability |
(3) | Following the modification of the Royalty Agreement in the |
| fiscal 2018 (discussed in Note 12 – Commitments and Contingencies), the royalty liability was significantly reduced as a result of the commitment to fulfill a portion of our obligation by providing incremental maintenance services. The fair value of |
In fiscal 2018, the Company determined that its strategic focus on serving the middle of the revenue cycle and the resulting decrease in the customer base for our Clinical Analytics solution constituted a triggering event for impairment analysis. We assessed the fair value of long-lived assets associated with our Clinical Analytics solution based on expected future cash flows from this solution, including the royalty liability, and determined that related intangible assets and capitalized software development costs classified as Level 3 were fully impaired, therefore had zero value as of December 31, 2018. For further details on the impairment loss and royalty liability associated with our Clinical Analytics solution, see Note 6 – Goodwill and Intangible Assets and Note 12 – Commitments and Contingencies, respectively.
45
Revenue Recognition
We derive revenue from the sale of internally developedinternally-developed software, either by licensing for local installation or by a software as a service (SaaS),(“SaaS”) delivery model, through theour direct sales force or through third-party resellers. Licensed, locally-installed clients on a perpetual model utilize the Company’sour support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees include support and maintenance. The CompanyWe also derivesderive revenue from professional services that support the implementation, configuration, training and optimization of the applications.applications, as well as audit services provided to help clients review their internal coding audit processes. Additional revenues are also derived from reselling third-party software and hardware components.
The Company recognizesWe recognize revenue in accordance with ASC 985-605, Software-Revenue Recognition and ASC 605-25Accounting Standards Codification (ASC) 606, Revenue Recognition — Multiple-Element Arrangementsfrom Contracts with Customers. The Company commences (“ASC 606”), the new revenue recognition whenstandard established by ASU 2014‑09. The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
We commence revenue recognition (Step 5 below) in accordance with that core principle after applying the following criteria all have been met:steps:
· | Step 1: Identify the contract(s) with a customer |
· | Step 2: Identify the performance obligations in the contract |
· | Step 3: Determine the transaction price |
· | Step 4: Allocate the transaction price to the performance obligations in the contract |
· | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
We follow the accounting revenue guidance under ASC 606 to Financial Statements
If we determine that any of the above criteriawe have not been met,satisfied a performance obligation, we will defer recognition of the revenue until all the criteria have been met.performance obligation is deemed to be satisfied. Maintenance and support and SaaS agreements entered into are generally non-cancelable or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if the Company failswe fail to perform material obligations. However, if non-standard acceptance periods, or non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable.
Significant judgment is required to determine the provisions of Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605),
Contract Combination
The Company may execute more than one unitcontract or agreement with a single customer. The Company evaluates whether the agreements were negotiated as a package with a single objective, whether the amount of accounting. Multiple-element arrangements requireconsideration to be paid in one agreement depends on the delivery price and/or performance of multiple solutions,another agreement, or whether the goods or services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis. Stand-alone value to a client is definedpromised in the guidance as those thatagreements represent a single performance obligation. The conclusions reached can be sold separately by any vendor orimpact the client could resell the item on a stand-alone basis. Additionally, if the arrangement includes a general right
46
allocation of the undelivered item or items must be considered probabletransaction price to each performance obligation and substantially in the controltiming of the vendor.
The Company has utilized the portfolio approach as the practical expedient. We have applied the revenue model to a defined pricing methodology for all elementsportfolio of contracts with similar characteristics where we expected that the arrangementfinancial statements would not differ materially from applying it to the individual contracts within that portfolio.
Systems Sales
The Company’s software license arrangements provide the customer with the right to use functional intellectual property. Implementation, support, and proper review of pricing to ensure adherence to Company policies. Pricing decisions include cross-functional teams of senior management, which uses market conditions, expected contribution margin, size of the client’s organization, and pricing history for similar solutionsother services are typically considered distinct performance obligations when establishing the selling price.
Maintenance and Support Services
Our maintenance and support components are not essential toobligations include multiple discrete performance obligations, with the functionality oftwo largest being unspecified product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe that the software and clients renew maintenance contracts separately from software purchases at renewal rates materially similar to the initial rate charged for maintenance on the initial purchase of software. The Company uses VSOE of fair value to determine fair value ofmultiple discrete performance obligations within our overall maintenance and support services. Generally, maintenance and support is calculatedobligations can be viewed as a percentage ofsingle performance obligation since both the list price ofunspecified upgrades and technical support are activities to fulfill the proprietary license being purchased by a client. Clients have the option of purchasing additional annual maintenance service renewals each year for which ratesperformance obligation and are not materially different from the initial rate, but typically include a nominal rate increase based on the consumer price index. Annual maintenancerendered concurrently. Maintenance and support agreements entitle clients to technology support, version upgrades, bug fixes and service packs.
Software-Based Solution Professional Services
The Company provides various professional services to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution. Thecustomers with software portion of our codinglicenses. These include project management, software implementation and clinical documentation improvement solutions generally does not require materialsoftware modification services. Revenues from arrangements to achieve their contracted function.
Software as a Service
SaaS-based contracts include use of the Company’s platform, implementation, support and other services which represent a single promise to provide continuous access to its software and are not considered a separate unit of accounting, are recognized insolutions. The Company recognizes revenue ratably over time for the life of the client, which approximatescontract.
We defer the duration of the initial contract term. The Company defers the associated direct costs, forwhich include salaries and benefits, expense for professional services related to SaaS contracts. These deferred costs will be amortized over the identical term as the associated SaaS revenues. As of
Audit Services
The Company uses VSOEprovides technology-enabled coding audit services to help clients review and optimize their internal clinical documentation and coding functions across the applicable segment of fair valuethe client’s enterprise. Audit services are a separate performance obligation. We recognize revenue over time as the services are performed.
47
Comparative GAAP Financials
The adoption of the new standard has the following impact to the Company’s condensed consolidated statements of operations for the year ended January 31, 2019:
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|
|
| Year Ended January 31, 2019 | |||||||
|
| As reported under |
| Balances without |
| Adjustments due to | |||
Revenues |
|
|
|
|
|
|
|
|
|
Systems sales |
| $ | 2,472,000 |
| $ | 2,322,000 |
| $ | 150,000 |
Maintenance and support |
|
| 12,586,000 |
|
| 12,590,000 |
|
| (4,000) |
|
|
|
|
|
|
|
|
|
|
|
| As of January 31, 2019 | |||||||
|
| As reported under |
| Balances without |
| Adjustments due to | |||
Assets |
|
|
|
|
|
|
|
|
|
Contract receivables, current |
| $ | 1,263,000 |
| $ | 803,000 |
| $ | 460,000 |
Contract receivables, noncurrent |
|
| 407,000 |
|
| 27,000 |
|
| 380,000 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Deferred revenues, current |
|
| 8,338,000 |
|
| 9,084,000 |
|
| (746,000) |
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|
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|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
| $ | (76,550,000) |
| $ | (78,136,000) |
| $ | 1,586,000 |
The adoption of ASC 606 resulted in a decrease in deferred revenues and an increase in contract receivables driven by upfront recognition of revenue, rather than over the contract period, from certain multi-year term software license agreements that include both software licenses and software support and maintenance. Revenues related to SaaS-based offerings, hardware sales, maintenance and support, and audit services remain substantially unchanged.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type and nature of revenue stream:
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|
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|
|
|
| Year Ended January 31, 2019 | |||||||
|
| Recurring Revenue |
| Non-recurring Revenue |
| Total | |||
Systems sales |
| $ | 899,000 |
| $ | 1,573,000 |
| $ | 2,472,000 |
Professional services |
|
| — |
|
| 1,336,000 |
|
| 1,336,000 |
Audit services |
|
| — |
|
| 1,118,000 |
|
| 1,118,000 |
Maintenance and support |
|
| 12,586,000 |
|
| — |
|
| 12,586,000 |
Software as a service |
|
| 4,853,000 |
|
| — |
|
| 4,853,000 |
Total revenue: |
| $ | 18,338,000 |
| $ | 4,027,000 |
| $ | 22,365,000 |
Contract Receivables and Deferred Revenues
The Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenues include payments received in advance of performance under the contract. Our contract receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent based on the hourly rate chargedtiming of when services are sold separately,we expect to determine fair valuebill the customer. Deferred revenue is classified as current or noncurrent based on the timing of professional services. when we expect to recognize revenue. In
48
the year ended January 31, 2019, we recognized $9,449,000 in revenue from deferred revenues outstanding as of January 31, 2018.
The Company typically sells professional services on an hourly-fee basis. The Company monitors projects to assure that the expected and historical rate earned remains within a reasonable rangecumulative effect of changes related to the establishedadoption of ASC 606 are reflected in the opening balance of accumulated deficit as shown below:
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| As Reported |
| Adjustments |
| As Adjusted | |||
ASSETS |
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|
Contract receivables, current |
| $ | 224,000 |
| $ | 283,000 |
| $ | 507,000 |
Contract receivables, noncurrent |
|
| — |
|
| 468,000 |
|
| 468,000 |
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|
LIABILITIES |
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Deferred revenues, current |
|
| 9,482,000 |
|
| (689,000) |
|
| 8,793,000 |
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|
STOCKHOLDERS' EQUITY |
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Accumulated deficit |
| $ | (72,125,000) |
| $ | 1,440,000 |
| $ | (70,685,000) |
Transaction price allocated to the remaining performance obligations
Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Revenue allocated to remaining performance obligations was $27 million as of January 31, 2019, of which the Company expects to recognize approximately 65% over the next 12 months and the remainder thereafter.
Deferred commissions costs (contract acquisition costs)
Contract acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line basis over a period of benefit, which the Company has determined to be the customer life. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been one year or less.
Deferred commissions costs paid and payable are included on the consolidated balance sheets within prepaid assets and other current assets, respectively, and totaled $185,000 and $114,000, respectively, as of January 31, 2019. As of January 31, 2018, deferred commissions costs paid and payable totaled $136,000 and $116,000, respectively. In fiscal 2018, $145,000 in amortization expense associated with deferred sales commissions was included in selling, price.
Concentrations
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of accounts receivable. The Company’s accounts receivable are concentrated in the healthcare industry. However, the Company’s clients typically are well-established hospitals, medical facilities or major health information systems companies that resell the Company’s solutions that have good credit histories. Payments from clients have been received within normal time frames for the industry. However, some hospitals and medical facilities have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities and extended payment of receivables from these entities is not uncommon.
To date, the Company has relied on a limited number of clients and remarketing partners for a substantial portion of its total revenues. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of clients and its remarketing partners.
49
The Company currently buys all of its hardware and some major software components of its healthcare information systems from third-party vendors. Although there are a limited number of vendors capable of supplying these components, management believes that other suppliers could provide similar components on comparable terms.
Business Combinations
The assets acquired, liabilities assumed and contingent consideration are recorded at their fair value on the acquisition date with subsequent changes recognized in earnings. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date. As a result, during the purchase price measurement period, which may be up to one year from the business combination date, the Company may recordrecognize adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the purchase price measurement period, the Company will record adjustments toprovisional amounts of assets acquired or liabilities assumed subsequent to the purchase price measurement period in operating expenses in the reporting period in which the adjustments wereare determined.
The Company records acquisition and transaction related expenses in the period in which they are incurred. Acquisition and transaction relatedtransaction-related expenses primarily consist of legal, banking, accounting and other advisory fees of third parties related toassociated with potential acquisitions.
Goodwill and Intangible Assets
Goodwill and other intangible assets were recognized in conjunction with the Interpoint, Meta, CLG and Opportune IT acquisitions, as well as the Unibased acquisitions.acquisition (prior to divestiture of such assets). Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally developedinternally-developed software, client relationships, supplier agreements, non-compete agreements customer contracts, and license agreements. Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one to 1510 years, using the straight-line and undiscounted expected future cash flows methods. The indefinite-lived intangible asset related to the Meta trade name was not amortized, but was tested for impairment on at least an annual basis. In fiscal 2014, the Meta trade name was deemed impaired and its corresponding balance was fully written off (see Note 7 - Goodwill and Intangible Assets).
The Company assesses the useful lives and possible impairment of existing recognized goodwill and intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review include:
· | significant underperformance relative to historical or projected future operating results; |
· | significant changes in the manner of use of the acquired assets or the strategy for the overall business; |
· | identification of other impaired assets within a reporting unit; |
· | disposition of a significant portion of an operating segment; |
· | significant negative industry or economic trends; |
· | significant decline in the Company’s stock price for a sustained period; and |
· | a decline in the market capitalization relative to the net book value. |
Determining whether a triggering event has occurred involves significant judgment by the Company.
The Company assesses goodwill annually (as of November 1), or more frequently when events and circumstances, such as the ones mentioned above, occur indicating that the recorded goodwill may be impaired. TheDuring the years ended January 31, 2019 and 2018, the Company did not note any of the above qualitative factors, which would be considered a triggering event for goodwill impairment. In assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit'sunit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions, industry and
50
market considerations, cost factors, overall financial performance, events which are specific to the Company and trends in the market price of the Company'sCompany’s common stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact.
The two-step goodwill impairment test requires the Company to identify its reporting units and to determine estimates of the fair values of those reporting units as of the impairment testing date. Reporting units are determined based on the organizational structure the entity has in place at the date of the impairment test. A reporting unit is an operating segment or component business unit with the following characteristics: (a) it has discrete financial information, (b) segment management regularly reviews its operating results (generally an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts or plans for the segment), and (c) its economic characteristics are dissimilar from other units (this contemplates the nature of the products and services, the nature of the production process, the type or class of customer for the products and services and the methods used to distribute the products and services).
The Company determined that it has one operating segment and one reporting unit.
To conduct a quantitative two-step goodwill impairment test, the fair value of the reporting unit is first compared to its carrying value. If the reporting unit'sunit’s carrying value exceeds its fair value, the Company performs the second step and records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. The Company estimates the fair value of its reporting unit using a blend of market and income approaches. The market approach consists of two separate methods, including reference to the Company'sCompany’s market capitalization, as well as the guideline publicly traded company method. The market capitalization valuation method is based on an analysis of the Company'sCompany’s stock price on and around the testing date, plus a control premium. The guideline publicly traded company method was made by reference to a list of publicly traded software companies providing services to healthcare organizations, as determined by management. The market value of common equity for each comparable company was derived by multiplying the price per share on the testing date by the total common shares outstanding, plus a control premium. Selected valuation multiples are then determined and applied to appropriate financial statistics based on the Company'sCompany’s historical and forecasted results. The Company estimates the fair value of its reporting unit using the income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free” rate of return on an investment, the weighted average cost of capital of a market participant and future revenue, operating margin, working capital and capital expenditure trends. Determining the fair valuesvalue of reporting unitsunit and goodwill includes significant judgment by management, and different judgments could yield different results.
The Company performed its annual assessment of goodwill during the fourth quarter of fiscal 2015,2018, using the two-step approach described above. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. Based on the analysis performed for step one, the fair value of the reporting unit exceeded the carrying amount of the reporting unit, including goodwill, and, therefore, ana goodwill impairment loss was not recognized. As the Company passed step one of the analysis, step two was not required.
In fiscal
Equity Awards
The Company accounts for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as expense over the requisite vestingservice period. The Company incurred total annual compensation expense related to stock-based awards of $2,386,000$629,000 and $1,934,000$1,109,000 in fiscal
The fair value of the stock options granted in fiscal
51
compensation. These assumptions are subjective and are generally derived from external (such as, risk-free rate of interest) and historical data (such as, volatility factor, expected term and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon the number, value and vesting period of future awards.
The Company issues restricted stock awards in the form of Company common stock. The fair value of these awards is based on the market close price per share on the day of grant.grant date. The Company expenses the compensation cost of these awards as the restriction period lapses, which is typically a one-yearone- to four-year service period to the Company.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. See Note 87 - Income Taxes for further details.
The Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. At
January 31,Net Loss Per Common Share
The Company presents basic and diluted earnings per share (“EPS”) data for its common stock. Basic EPS is calculated by dividing the net loss attributable to shareholderscommon stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated based on the profit or loss attributable to shareholderscommon stockholders and the weighted average number of shares of common stock outstanding adjusted for the effects of all potential dilutive common stock issuances related to options, unvested restricted stock, warrants and convertible preferred stock. Potential common stock dilution related to outstanding stock options and unvested restricted stock and warrants is determined using the treasury stock method, while potential common stock dilution related to Series A Convertible Preferred Stock is determined using the “if converted” method.
The Company'sCompany’s unvested restricted stock awards and Series A Convertible Preferred stockStock are considered participating securities under ASC 260, “EarningsEarnings Per Share”Share, which means the security may participate in undistributed earnings with common stock. The Company'sCompany’s unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. The holders of the Series A Convertible Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stock holders,stockholders, earnings are allocated to both common and participating securities based on their respective
52
weighted-average shares outstanding for the period. Diluted EPS for the Company'sCompany’s common stock is computed using the more dilutive of the two-class method or the if-converted method.
In accordance with ASC 260, securities are deemed not to not be participating in losses if there is no obligation to fund such losses. For the years ended January 31, 20162019 and 2015,2018, the unvested restricted stock awards and the Series A Convertible Preferred Stock were deemed not to be participating since there was a net loss from operations for the years endedloss. As of January 31, 20162019 and 2015. As of both January 31, 2016 and 2015,2018, there were 2,895,464 and 2,949,995 shares of preferred stockSeries A Convertible Preferred Stock outstanding, respectively, each share isbeing convertible into one share of the Company'sCompany’s common stock. For the years ended January 31, 20162019 and 2015, the Series A Convertible Preferred Stock would have an anti-dilutive effect if included in Diluted EPS2018, 169,959 and therefore, was not included in the calculation. As of January 31, 2016 and 2015, there were 112,380 and 120,306293,568, respectively, unvested restricted shares of common stock outstanding, respectively. These unvested restricted shares were excluded from the diluted EPS calculation as their effect would have been antidilutive.
The following is the calculation of the basic and diluted net loss per share of common stock:
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| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Net earnings (loss) |
| $ | (5,865,000) |
| $ | (3,099,000) |
Weighted average shares outstanding - Basic |
|
| 19,540,980 |
|
| 19,090,899 |
Stock options, Restricted stock and Series A Convertible Preferred Stock |
|
| — |
|
| — |
Weighted average shares outstanding - Diluted |
|
| 19,540,980 |
|
| 19,090,899 |
Basic net earnings (loss) per share of common stock |
| $ | (0.30) |
| $ | (0.16) |
Diluted net earnings (loss) per share of common stock |
| $ | (0.30) |
| $ | (0.16) |
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Net loss | $ | (4,290,115 | ) | $ | (12,011,457 | ) | |
| Less: deemed dividends on Series A Preferred Stock | (1,336,072 | ) | (1,038,310 | ) | |||
| Net loss attributable to common shareholders | $ | (5,626,187 | ) | $ | (13,049,767 | ) | |
| Weighted average shares outstanding used in basic per common share computations | 18,689,854 | 18,261,800 | |||||
| Stock options and restricted stock | — | — | |||||
| Number of average shares used in diluted per common share computation | 18,689,854 | 18,261,800 | |||||
| Basic net loss per share of common stock | $ | (0.30 | ) | $ | (0.71 | ) | |
| Diluted net loss per share of common stock | $ | (0.30 | ) | $ | (0.71 | ) | |
Diluted net loss per share excludes the effect of 2,411,879 and 2,437,323 outstanding stock options in fiscal
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the course of business. We consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether to accrue for a loss contingency and adjust any previous accrual.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,2014‑09, Revenue from Contracts with Customers, (Topic 606)Topic 606 (“ASC 606”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014‑09 defines a five-step process to achieve this principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015,2016, the FASB delayed the effective date by one year and the guidance will now bebecame effective for us on February 1, 2018. Early adoption is permitted. The new revenue recognition guidance ispermits two methods of adoption: retrospectively to be appliedeach prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application as an adjustment to retained earnings (modified retrospective method). We adopted the standard effective February 1, 2018 using onethe modified retrospective method.
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We are currently evaluatinghave completed our assessment of our systems, available data and processes affected by the impact of the adoptionimplementation of this new revenue recognition guidance. The Company’s formal accounting standard update on our internal processes, operating results, and financial reporting.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of the deferred income taxes. The ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance does not change the existing requirement that only permits offsetting within a tax-paying component of an entity. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, but may be adopted earlier. The Company elected to early adopt ASU 2015-17 prospectively in the fourth quarter of fiscal 2015. As a result, all deferred tax assets and liabilities will be presented as noncurrent on the consolidated balance sheet as of January 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17.
In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The ASU should be applied using a retrospective transition method to each period presented. The standard became effective for us on February 1, 2018. The adoption of this updateASU did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017‑01, Business Combinations (Topic 805): Clarifying the Definition of a Software License and Royalty Agreement (the “Royalty Agreement”)Business, to clarify the definition of a business to assist entities with Montefiore Medical Center (“Montefiore”) pursuant to which it entered into an agreementevaluating whether transactions should be accounted for an exclusive, worldwide 15-year licenseas acquisitions (or disposals) of Montefiore’s proprietary clinical analytics platform solution, Clinical Looking Glass® (“CLG”), now known as our Looking Glass® Clinical Analytics solution. In addition, Montefiore assigned toassets or businesses. The standard became effective for us on February 1, 2018. For the existing license agreement with a customer using CLG. As consideration under the Royalty Agreement, Streamline paid Montefiore a one-time initial base royalty fee of $3,000,000, and we are obligated to pay on-going quarterly royalty amounts related to future sublicensing of CLG by Streamline. Additionally, Streamline has committed that Montefiore will receive at least an additional $3,000,000 of on-going royalty payments within the first six and one-half years of the license term. As of January 31, 2016 and 2015, the present value of this royalty liability was $2,292,000 and $2,386,000, respectively.
| Balance at February 3, 2014 | |||
| Assets purchased: | |||
| Cash | $ | 59,000 | |
| Accounts receivable | 221,000 | ||
| Other assets | 61,000 | ||
| Internally-developed software | 2,017,000 | ||
| Client relationships | 647,000 | ||
| Trade name | 26,000 | ||
| Goodwill (1) | 4,251,000 | ||
| Total assets purchased | 7,282,000 | ||
| Liabilities assumed: | |||
| Accounts payable and accrued liabilities | 362,000 | ||
| Deferred revenue obligation, net | 793,000 | ||
| Deferred income taxes | 9,000 | ||
| Net assets acquired | $ | 6,118,000 | |
| Cash paid | $ | 6,118,000 | |
| Facilities | Equipment | Fiscal Year Totals | |||||||||
| 2016 | $ | 969,000 | $ | 2,000 | $ | 971,000 | |||||
| 2017 | 1,007,000 | — | 1,007,000 | ||||||||
| 2018 | 1,039,000 | — | 1,039,000 | ||||||||
| 2019 | 967,000 | — | 967,000 | ||||||||
| 2020 | 504,000 | — | 504,000 | ||||||||
| Thereafter | 964,000 | — | 964,000 | ||||||||
| Total | $ | 5,450,000 | $ | 2,000 | $ | 5,452,000 | |||||
In January 2014, we paid2017, the subordinated term loanFASB issued ASU 2017‑04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. The standard will be effective for us on February 1, 2020. Early adoption of this update is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017‑09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in full.Topic 718. The outstanding senior term loanupdate became effective for us on February 1, 2018. For the periods included in this report, there was secured by substantially allno impact on our financial position or results of our assets. The senior term loan principal balance was payable in monthly installments of $101,000, which started in January 2014 and would have continued through the maturity date, with the full remaining unpaid principal balance due at maturity. Borrowings under the senior term loan bore interest at a rate of LIBOR plus 5.25%. However,operations as a result of our interest rate swap, the interest rate was fixed at 6.42% until October 27, 2014, whenadoption of this update.
In June 2018, the interest rate swap agreement was terminated. AccruedFASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and unpaid interest on the senior term loan was due monthly through maturity. We paid $116,000services from nonemployees. The update specifies that Topic 718 applies to all share-based payment transactions in closing feeswhich a grantor acquires goods or services to be used or consumed in connection with this senior term loan, which was recorded as a debt discount and amortizedits own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to interest expense over the term of the loan using the effective interest method.
| For the four-quarter period ended | Minimum EBITDA | |||
| April 30, 2015 | $ | (2,500,000 | ) | |
| July 31, 2015 | (1,750,000 | ) | ||
| October 31, 2015 | (750,000 | ) | ||
| January 31, 2016 | 500,000 | |||
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early effective February 1, 2016 and accrued interest on the unpaid principal amount outstanding at a per annum rate equal to 8%. Annual principal payments2018. The adoption of $300,000 were due on November 1, 2014, 2015 and 2016. At closing of the Credit Agreement with Wells Fargo described above, we repaid our indebtedness under this note using approximately $600,000 of the proceeds provided by the term loan.
| January 31, 2016 | January 31, 2015 | |||||||
| Senior term loan | $ | 8,535,000 | $ | 10,000,000 | ||||
| Capital lease | 686,000 | 1,365,000 | ||||||
| Total | 9,221,000 | 11,365,000 | ||||||
| Less: Current portion | 1,266,000 | 1,282,000 | ||||||
| Non-current portion of long-term debt | $ | 7,955,000 | $ | 10,083,000 | ||||
| Senior Term Loan | Capital Lease (1) | Total | ||||||||||
| 2016 | $ | 674,000 | $ | 618,000 | $ | 1,292,000 | ||||||
| 2017 | 898,000 | 93,000 | 991,000 | |||||||||
| 2018 | 898,000 | — | 898,000 | |||||||||
| 2019 | 6,064,000 | — | 6,064,000 | |||||||||
| Total repayments | $ | 8,534,000 | $ | 711,000 | $ | 9,245,000 | ||||||
| Goodwill | |||
| Balance January 31, 2014 | $ | 11,934,000 | |
| Goodwill acquired during fiscal 2014 | 4,251,000 | ||
| Balance January 31, 2015 and January 31, 2016 | $ | 16,185,000 | |
| January 31, 2016 | |||||||||||||
Estimated Useful Life | Gross Assets | Accumulated Amortization | Net Assets | ||||||||||
| Definite-lived assets: | |||||||||||||
| Trade name | 1 year | $ | 26,000 | $ | 26,000 | $ | — | ||||||
| Client relationships | 10-15 years | 5,932,000 | 2,220,000 | 3,712,000 | |||||||||
| Covenants not to compete | 0.5-15 years | 856,000 | 667,000 | 189,000 | |||||||||
| Supplier agreements | 5 years | 1,582,000 | 1,094,000 | 488,000 | |||||||||
| License agreement | 15 years | 4,431,000 | 665,000 | 3,766,000 | |||||||||
| Total | $ | 12,827,000 | $ | 4,672,000 | $ | 8,155,000 | |||||||
| January 31, 2015 | |||||||||||||
Estimated Useful Life | Gross Assets | Accumulated Amortization | Net Assets | ||||||||||
| Definite-lived assets: | |||||||||||||
| Trade name | 1 year | $ | 26,000 | $ | 26,000 | $ | — | ||||||
| Client relationships | 10-15 years | 5,932,000 | 1,548,000 | 4,384,000 | |||||||||
| Covenants not to compete | 0.5-15 years | 856,000 | 606,000 | 250,000 | |||||||||
| Supplier agreements | 5 years | 1,582,000 | 778,000 | 804,000 | |||||||||
| License agreement | 15 years | 4,431,000 | 369,000 | 4,062,000 | |||||||||
| Total | $ | 12,827,000 | $ | 3,327,000 | $ | 9,500,000 | |||||||
| Annual Amortization Expense | |||
| 2016 | $ | 1,298,000 | |
| 2017 | 1,088,000 | ||
| 2018 | 863,000 | ||
| 2019 | 826,000 | ||
| 2020 | 791,000 | ||
| Thereafter | 3,289,000 | ||
| Total | $ | 8,155,000 | |
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Current tax (expense) benefit: | |||||||
| Federal | $ | — | $ | 131,816 | |||
| State | (17,578 | ) | 34,611 | ||||
| (17,578 | ) | 166,427 | |||||
| Deferred tax benefit: | |||||||
| Federal | 8,838 | 663,681 | |||||
| State | 737 | 56,901 | |||||
| 9,575 | 720,582 | ||||||
| Current and deferred tax (expense) benefit | $ | (8,003 | ) | $ | 887,009 | ||
| Fiscal Year | |||||||
| 2015 | 2014 | ||||||
| Federal tax benefit at statutory rate | $ | 1,455,816 | $ | 4,385,479 | |||
| State and local taxes, net of federal benefit (expense) | (267,997 | ) | 325,966 | ||||
| Change in valuation allowance | (1,629,786 | ) | (4,030,864 | ) | |||
| Permanent items: | |||||||
| Incentive stock options | (513,708 | ) | (421,366 | ) | |||
| Transaction costs | — | (5,291 | ) | ||||
| Escrow refund | 255,000 | — | |||||
| Change in fair value of warrants liability | 553,951 | 776,337 | |||||
| Other | (28,914 | ) | (44,719 | ) | |||
| Reserve for uncertain tax position | — | 164,127 | |||||
| Other | 167,635 | (262,660 | ) | ||||
| Income tax (expense) benefit | $ | (8,003 | ) | $ | 887,009 | ||
| January 31, | |||||||
| 2016 | 2015 | ||||||
| Deferred tax assets: | |||||||
| Allowance for doubtful accounts | $ | 58,379 | $ | 245,252 | |||
| Deferred revenue | 244,163 | 372,275 | |||||
| Accruals | 203,291 | 174,658 | |||||
| Net operating loss carryforwards | 15,179,685 | 14,905,174 | |||||
| Stock compensation expense | 592,654 | 438,659 | |||||
| Property and equipment | 78,295 | — | |||||
| AMT credit | 102,144 | 102,144 | |||||
| Other | 17,794 | 8,912 | |||||
| Total deferred tax assets | 16,476,405 | 16,247,074 | |||||
| Valuation allowance | (14,184,030 | ) | (12,554,242 | ) | |||
| Net deferred tax assets | 2,292,375 | 3,692,832 | |||||
| Deferred tax liabilities: | |||||||
| Property and Equipment | — | (21,755 | ) | ||||
| Definite-lived intangible assets | (2,292,375 | ) | (3,671,077 | ) | |||
| Indefinite-lived intangibles | — | (9,575 | ) | ||||
| Total deferred tax liabilities | (2,292,375 | ) | (3,702,407 | ) | |||
| Net deferred tax liabilities | $ | — | $ | (9,575 | ) | ||
| 2015 | 2014 | ||||||
| Beginning of fiscal year | $ | — | $ | 121,000 | |||
| Additions for tax positions of prior years | — | — | |||||
| Reductions for tax positions of prior years | — | — | |||||
| Reductions attributable to lapse of statute of limitations | — | (121,000 | ) | ||||
| End of fiscal year | $ | — | $ | — | |||
NOTE 93 — MAJOR CLIENTS
| Options | Weighted Average Exercise Price | Remaining Life in Years | Aggregate intrinsic value | |||||||||
| Outstanding as of February 1, 2015 | 2,437,323 | $ | 4.52 | |||||||||
| Granted | 1,011,828 | 3.02 | ||||||||||
| Exercised | (75,000 | ) | 2.15 | |||||||||
| Expired | (704,326 | ) | 3.67 | |||||||||
| Forfeited | (257,946 | ) | 4.97 | |||||||||
| Outstanding as of January 31, 2016 | 2,411,879 | $ | 4.16 | (1) | 8.09 | $ | 4,003,719 | |||||
| Exercisable as of January 31, 2016 | 1,000,037 | $ | 4.75 | (2) | 6.82 | $ | 1,660,061 | |||||
| Vested or expected to vest as of January 31, 2016 | 1,990,872 | $ | 4.25 | 7.90 | $ | 3,304,848 | ||||||
| 2015 | 2014 | ||||
| Expected life | 6 years | 6 years | |||
| Risk-free interest rate | 1.51 | % | 1.35 | % | |
| Weighted average volatility factor | 0.59 | 0.60 | |||
| Dividend yield | — | — | |||
| Forfeiture rate | 30 | % | 22 | % | |
| Non-vested Number of Shares | Weighted Average Grant Date Fair Value | |||||
| Non-vested balance at January 31, 2014 | 29,698 | $ | 6.01 | |||
| Granted | 120,306 | 4.31 | ||||
| Vested | (29,698 | ) | 6.65 | |||
| Forfeited/expired | — | — | ||||
| Non-vested balance at January 31, 2015 | 120,306 | $ | 4.31 | |||
| Granted | 118,180 | 2.62 | ||||
| Vested | (120,306 | ) | 4.31 | |||
| Forfeited/expired | (5,800 | ) | 4.31 | |||
| Non-vested balance at January 31, 2016 | 112,380 | $ | 2.62 | |||
| Adjusted Fair Value at August 16, 2012 | Proceeds Allocation at August 16, 2012 | ||||||||
| Instruments: | |||||||||
| Series A Preferred Stock | $ | 9,907,820 | $ | 6,546,146 | (1) | ||||
| Convertible subordinated notes payable | 5,699,577 | 3,765,738 | (2) | ||||||
| Warrants | 2,856,000 | 1,688,116 | (3) | ||||||
| Total investment | $ | 18,463,397 | $ | 12,000,000 | |||||
In connection with thea 2012 private placement investment, the Company issued 2,416,785 shares of Series A Preferred Stock at $3.00 per share. Each share of the Series A Preferred Stock is convertible into one share of the Company's common stock. The price per share of Series A Preferred Stock and the conversion price for the common stock was less than the “market value” of the common stock of $3.82 (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series A Preferred Stock does not pay a dividend, however, the holders are entitled to receive dividends on shares of Preferred Stockpreferred stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends (other than dividends in the form of common stock) actually paid on shares of the common stock. The Series A Preferred Stock has voting rights on a modified as-if-converted-to-common-stock-basis. The Series A Preferred Stock has a non-participating liquidation right equal to the original issue price plus accrued unpaid dividends, which are senior to the Company’s common stock. The Series A Preferred Stock can be converted to common shares at any time by the holders or, at the option of the Company, if the arithmetic average of the daily volume weighted average price of the common stock for the ten day period prior to the
On November 1, 2012, upon shareholder approval, the convertible subordinated notes were converted into 1,583,210 shares of Series A Convertible Preferred Stock. The convertible subordinated notes had an aggregate principal amount of $5,699,577 and converted into an aggregate of 1,583,210 shares of Preferred Stock. The Company recorded a loss upon conversion of $5,913,000, which represented the difference between the aggregate fair value of the Preferred Stock issued of $9,183,000, based on a $5.80 fair value per share, and the total of carrying value of the notes and unamortized deferred financing cost of $3,270,000. The shares of Series A Preferred Stock issued for the conversion of notes payable are recorded at their aggregate redemption value of $4,750,000 with the difference between the fair value and redemption value of $4,433,000 recorded as additional paid in capital. The fair value of the Preferred Stock was determined using a Monte-Carlo simulation based on the following assumptions: annual volatility of 75%, risk-free rate of 0.8%, and dividend yield of 0.0%. The model also utilized the following assumptions to account for the conditions within the agreement: after four years, if the simulated common stock price fell below a price of $3.00 per share, the convertible preferred stock would automatically convert to common stock on a 1:1 basis moving forward at a price of exactly $3.00 per share and a forced conversion if the simulated stock price exceeded $8.00 per share.
| Number of Shares | Series A Preferred Stock | |||||
| Series A Preferred Stock, January 31, 2014 | 2,949,995 | $ | 5,599,668 | |||
| Accretion of Preferred Stock discount | — | 1,038,310 | ||||
| Series A Preferred Stock, January 31, 2015 | 2,949,995 | 6,637,978 | ||||
| Accretion of Preferred Stock discount | — | 1,336,072 | ||||
| Series A Preferred Stock, January 31, 2016 | 2,949,995 | $ | 7,974,050 | |||
Subject to the Subordination and Intercreditor Agreement among the preferred stockholders, the Company and Wells Fargo, each share of Series A Preferred Stock is redeemable at the option of the holder for an amount equal to the initial issuance price of $3.00 (adjusted to reflect stock splits, stock dividends or like events) plus any accrued and unpaid dividends thereon. The Series A Preferred Stock are classified as temporary equity as the securities are redeemable solely at the option of the holder.
In fiscal 2013, 1,050,0002018, 54,531 shares of the Company'sCompany’s Series A Convertible Preferred Stock were converted into Common Stock.common stock. As a result, Series A Convertible Preferred Stock was reduced by $3,150,000,$164,000, with the offsetting increase to Common Stock and Additional Paid-in Capital. As of January 31, 20162019 and 2015,2018, 2,895,464 and 2,949,995 shares of Series A Convertible Preferred Stock remained outstanding.
NOTE 4 — OPERATING LEASES
In conjunctionthe second quarter of fiscal 2018, we closed our New York office and subleased the office space for the remaining period of the original lease term which expires in November 2019. As a result of vacating and subleasing the office, we recorded a $472,000 loss on exit of the operating lease in fiscal 2018, which captures the future net cash flows associated with the private placement investment,vacated premises as of the office closure date, including $384,000 in rent receipts from our sublessee and $48,000 in loss incurred on the disposal of fixed assets. As of January 31, 2019, the total minimum rentals due and to be received under this non-cancelable sublease were $478,000 and $216,000, respectively.
In the third quarter of fiscal 2018, we assigned our then current Atlanta office lease that would have expired in November 2022 and entered into a membership agreement to occupy shared office space in Atlanta. As a result of assigning the office lease, we recorded a $562,000 loss on exit of the operating lease in the third quarter of fiscal 2018, which is mainly comprised of $275,000 in broker commissions and a $499,000 loss on the disposal of leasehold improvements, furniture and equipment, net of a $239,000 gain from the write-off of associated lease incentive liability. See Note 12 – Commitments and Contingencies for further details on our shared office arrangement.
Rent and leasing expense for facilities and equipment was $964,000 and $1,234,000 for fiscal years 2018 and 2017, respectively.
55
NOTE 5 — DEBT
Term Loan and Line of Credit
On November 21, 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, and other lender parties thereto. Pursuant to the Credit Agreement, the lenders agreed to provide a $10,000,000 senior term loan and a $5,000,000 revolving line of credit to our primary operating subsidiary. Amounts outstanding under the Credit Agreement bear interest at either LIBOR or the base rate, as elected by the Company, plus an applicable margin. Subject to the Company’s leverage ratio, pursuant to the terms of the amendment to the Credit Agreement entered into as of April 15, 2015, the applicable LIBOR rate margin varies from 4.25% to 6.25%, and the applicable base rate margin varies from 3.25% to 5.25%. The term loan and line of credit provide support for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. The outstanding senior term loan is secured by substantially all of our assets. Pursuant to the terms of the fourth amendment to the Credit Agreement entered into as of November 20, 2018, the original term loan and line of credit maturity date of November 21, 2019 was extended to May 21, 2020. The senior term loan principal balance is payable in quarterly installments, which started in March 2015 and will continue through the maturity date, with the full remaining unpaid principal balance due at maturity. Financing costs associated with the new credit facility are being amortized over its term on a straight-line basis, which is not materially different from the effective interest method.
The Credit Agreement includes customary financial covenants, including the requirements that the Company maintain minimum liquidity and achieve certain minimum EBITDA levels (as defined in the Credit Agreement). In addition, the Credit Agreement prohibits the Company from paying dividends on the common and preferred stock. Pursuant to the terms of the Credit Agreement, the Company is required to maintain minimum liquidity of at least (i) $5,000,000 through January 31, 2018, (ii) $4,000,000 from February 1, 2018 through November 19, 2018, (iii) $3,500,000 from November 20, 2018 through and including January 31, 2019, and (iv) $4,000,000 from February 1, 2019 through and including the maturity date of the credit facility.
The following table shows our minimum EBITDA covenant thresholds, as modified by the fourth amendment to the Credit Agreement:
Applicable period | Minimum | ||
For the fiscal quarter ended October 31, 2018 | $ | (509,000) | |
For the 2-quarter period ended January 31, 2019 | 20,000 | ||
For the 3-quarter period ending April 30, 2019 | 204,000 | ||
For the 4-quarter period ending July 31, 2019 | 180,000 | ||
For the 4-quarter period ending October 31, 2019 | 508,000 | ||
For the 4-quarter period ending January 31, 2020 | 408,000 | ||
For the 4-quarter period ending April 30, 2020 and each fiscal quarter thereafter | 562,000 | ||
The Company was in compliance with the applicable financial loan covenants at January 31, 2019.
As of January 31, 2019, the Company had no outstanding borrowings under the revolving line of credit, and had accrued $14,000 in interest and unused line fees. Based upon the borrowing base formula set forth in the Credit Agreement, as of January 31, 2019, the Company had access to the full amount of the $5,000,000 revolving line of credit.
56
Outstanding principal balances on debt consisted of the following at:
|
|
|
|
|
|
|
|
| January 31, 2019 |
| January 31, 2018 | ||
Senior term loan |
| $ | 4,030,000 |
| $ | 4,626,000 |
Deferred financing cost |
|
| (82,000) |
|
| (128,000) |
Total |
|
| 3,948,000 |
|
| 4,498,000 |
Less: Current portion |
|
| (597,000) |
|
| (597,000) |
Non-current portion of debt |
| $ | 3,351,000 |
| $ | 3,901,000 |
Future principal payments of debt consisted of the following at January 31, 2019:
|
|
|
|
Fiscal year |
| Senior Term Loan (1) | |
2019 |
| $ | 597,000 |
2020 |
|
| 3,433,000 |
Total repayments |
| $ | 4,030,000 |
(1) | Term loan balance on the consolidated balance sheet is reported net of deferred financing costs of $82,000. |
(2) |
NOTE 6 — GOODWILL AND INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| January 31, 2019 | |||||||||
|
| Estimated |
|
|
| Accumulated |
|
| |||
|
| Useful Life |
| Gross Assets |
| Amortization |
| Net Assets | |||
Finite-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
Client relationships |
| 5-10 years |
| $ | 5,397,000 |
| $ | 3,756,000 |
| $ | 1,641,000 |
Covenants not to compete |
| 3 years |
|
| 130,000 |
|
| 102,000 |
|
| 28,000 |
Total |
|
|
| $ | 5,527,000 |
| $ | 3,858,000 |
| $ | 1,669,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| January 31, 2018 | |||||||||
|
| Estimated |
|
|
| Accumulated |
|
| |||
|
| Useful Life |
| Gross Assets |
| Amortization |
| Net Assets | |||
Finite-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
Client relationships |
| 5-15 years |
|
| 5,805,000 |
|
| 3,308,000 |
|
| 2,497,000 |
Covenants not to compete |
| 0.5-15 years |
|
| 986,000 |
|
| 823,000 |
|
| 163,000 |
Supplier agreements |
| 5 years |
|
| 1,582,000 |
|
| 1,582,000 |
|
| — |
License agreement |
| 15 years |
|
| 4,431,000 |
|
| 1,256,000 |
|
| 3,175,000 |
Total |
|
|
| $ | 12,804,000 |
| $ | 6,969,000 |
| $ | 5,835,000 |
In fiscal 2018, we recognized an impairment charge of $3,681,000 as the carrying value of finite-lived intangible assets and capitalized product development cost relating to our Clinical Analytics solution no longer appeared recoverable. This impairment charge is included in the “Impairment of long-lived assets” line in our consolidated statements of operations for the year ended January 31, 2019. See Note 12 – Commitments and Contingencies for royalty liability associated with our Clinical Analytics solution.
57
Future amortization expense for intangible assets is estimated as follows:
|
|
|
|
|
| Annual Amortization Expense | |
2019 |
| $ | 554,000 |
2020 |
|
| 491,000 |
2021 |
|
| 455,000 |
2022 |
|
| 169,000 |
Total |
| $ | 1,669,000 |
NOTE 7 — INCOME TAXES
Income taxes consist of the following:
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Current tax (expense) benefit: |
|
|
|
|
|
|
Federal |
| $ | 7,000 |
| $ | — |
State |
|
| (7,000) |
|
| (11,000) |
Total current provision |
|
| — |
|
| (11,000) |
Deferred tax benefit: |
|
|
|
|
|
|
Federal |
|
| — |
|
| 95,000 |
State |
|
| — |
|
| — |
Total deferred tax benefit |
|
| — |
|
| 95,000 |
Current and deferred tax benefit |
| $ | — |
| $ | 84,000 |
The income tax benefit differs from the amount computed using the federal statutory income tax rates of 21% and 32.9% for fiscal 2018 and 2017, respectively, as follows:
|
|
|
|
|
|
|
|
| Fiscal Year | ||||
|
| 2018 |
| 2017 | ||
Federal tax benefit at statutory rate |
| $ | (1,232,000) |
| $ | 1,047,000 |
State and local taxes, net of federal benefit (expense) |
|
| (95,000) |
|
| 195,000 |
Change in valuation allowance |
|
| (767,000) |
|
| 4,505,000 |
Permanent items: |
|
|
|
|
|
|
Incentive stock options |
|
| 18,000 |
|
| (112,000) |
Change in fair value of warrants liability |
|
| — |
|
| 15,000 |
Other |
|
| 1,000 |
|
| (24,000) |
Reserve for uncertain tax position |
|
| 32,000 |
|
| (19,000) |
R&D Credit (Federal) |
|
| (158,000) |
|
| 219,000 |
R&D Credit (State) |
|
| 134,000 |
|
| (129,000) |
Tax Cuts and Jobs Act |
|
| — |
|
| (5,827,000) |
Expiring carryforwards |
|
| 1,965,000 |
|
| — |
Other |
|
| 102,000 |
|
| 214,000 |
Income tax benefit |
| $ | — |
| $ | 84,000 |
58
The Company provides deferred income taxes for temporary differences between assets and liabilities recognized for financial reporting and income tax purposes. The income tax effects of these temporary differences and credits are as follows:
|
|
|
|
|
|
|
|
| January 31, | ||||
|
| 2019 |
| 2018 | ||
Deferred tax assets: |
|
|
|
|
|
|
Allowance for doubtful accounts |
| $ | 84,000 |
| $ | 91,000 |
Deferred revenue |
|
| 63,000 |
|
| 155,000 |
Accruals |
|
| 141,000 |
|
| 71,000 |
Net operating loss carryforwards |
|
| 9,532,000 |
|
| 10,617,000 |
Stock compensation expense |
|
| 205,000 |
|
| 236,000 |
Property and equipment |
|
| 30,000 |
|
| 109,000 |
R&D credit |
|
| 1,102,000 |
|
| 1,144,000 |
Other |
|
| 133,000 |
|
| 117,000 |
Total deferred tax assets |
|
| 11,290,000 |
|
| 12,540,000 |
Valuation allowance |
|
| (11,045,000) |
|
| (11,813,000) |
Net deferred tax assets |
|
| 245,000 |
|
| 727,000 |
Deferred tax liabilities: |
|
|
|
|
|
|
Finite-lived intangible assets |
|
| (245,000) |
|
| (727,000) |
Total deferred tax liabilities |
|
| (245,000) |
|
| (727,000) |
Net deferred tax liabilities |
| $ | — |
| $ | — |
At January 31, 2019, the Company had U.S. federal net operating loss carry forwards of $36,800,000, which expire at various dates through fiscal 2037. The Company also had state net operating loss carry forwards of $17,170,000, which expire through fiscal 2038. Federal and state R&D credit carry forwards will expire through fiscal 2038 and 2028, respectively. The Tax Cuts and Jobs Act signed into law on December 22, 2017 eliminated the ability to carryback net operating losses and allows net operating losses to be carried forward indefinitely. At January 31, 2019, the Company had indefinite-lived federal net operating loss carry forwards of $3,900,000.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company established a valuation allowance of $11,045,000 and $11,813,000 at January 31, 2019 and 2018, respectively. The decrease in the valuation allowance of $768,000 was driven primarily by the expiration of federal net operating loss carry forwards.
The Company and its subsidiary are subject to U.S. federal income tax as well as income taxes in multiple state and local jurisdictions. The Company has concluded all U.S. federal tax matters for years through January 31, 2014. All material state and local income tax matters have been concluded for years through January 31, 2013. The Company is no longer subject to IRS examination for periods prior to the tax year ended January 31, 2014; however, carryforward losses that were generated prior to the tax year ended January 31, 2014 may still be adjusted by the IRS if they are used in a future period.
The Company has recorded a reserve, including interest and penalties, for uncertain tax positions of $275,000 and $295,000 as of January 31, 2019 and 2018, respectively. As of January 31, 2019 and 2018, the Company had no accrued interest and penalties associated with unrecognized tax benefits.
59
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as follows:
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||
Beginning of fiscal year |
| $ | 295,000 |
| $ | 290,000 |
Additions for tax positions for the current year |
|
| 32,000 |
|
| 62,000 |
Additions for tax positions of prior years |
|
| — |
|
| 3,000 |
Subtractions for tax positions of prior years |
|
| (52,000) |
|
| (60,000) |
End of fiscal year |
| $ | 275,000 |
| $ | 295,000 |
Impact of the Tax Cuts and Jobs Act
The Tax Act was signed into law on December 22, 2017. Among other things, the Tax Act reduces the U.S. federal corporate tax rate from 34.0 percent to 21.0 percent effective January 1, 2018 and allows for 100 percent expensing of certain fixed assets placed in service after September 27, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued common stock warrants exercisableto address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to finalize the calculations for certain income tax effects of the Tax Cuts and Jobs Act. In accordance with SAB 118, in fiscal 2017 the Company recorded a provisional estimated net tax expense of $5.8 million in connection with the tax effect of the Tax Act. Adjustments to this provisional amount recorded in fiscal 2018 did not have a significant impact on our consolidated financial statements. Our accounting for the effects of the Tax Act enactment is now complete.
NOTE 8 — MAJOR CLIENTS
In fiscal year 2018, no individual client accounted for 10% or more of our total revenues. Two clients represented 12% and 9%, respectively, of total accounts receivable as of January 31, 2019.
In fiscal year 2017, no individual client accounted for 10% or more of our total revenues. Two clients represented 12% and 11%, respectively, of total accounts receivable as of January 31, 2018.
NOTE 9 — EMPLOYEE RETIREMENT PLAN
The Company has established a 401(k) retirement plan that covers all associates. Company contributions to the plan may be made at the discretion of the board of directors. The Company matched 100% up to 1,200,000the first 4% of compensation deferred by each associate in the 401(k) plan through December 31, 2018. Effective January 1, 2019, the Company’s matched amount was decreased to 50% up to the first 4% of compensation deferred by each associate. The total compensation expense for this matching contribution was $483,000 and $524,000 in fiscal 2018 and 2017, respectively.
NOTE 10 — EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan under which associates may purchase up to 1,000,000 shares of common stock. Under the plan, eligible associates may elect to contribute, through payroll deductions, up to 10% of their base pay to a trust during any plan year, i.e., January 1 through December 31 of the Company'ssame year. Semi-annually, typically in January and July of each year, the plan issues, for the benefit of the employees, shares of common stock at an exercisethe lesser of (a) 85% of the fair market value of the common stock on the first day of the vesting period (January 1 or July 1), or (b) 85% of the fair market value of the common stock on the last day of the vesting period (June 30 or December 31 of the same year). At January 31, 2019, 431,556 shares remain that can be purchased under the plan.
The Company recognized compensation expense of $4,000 and $19,000 for fiscal years 2018 and 2017, respectively, under this plan.
60
During fiscal 2018, 13,339 shares were purchased at the price of $3.99$0.69 per share and 10,370 shares were purchased at the price of $1.20 per share; during fiscal 2017, 21,234 shares were purchased at the price of $0.98 per share and 26,048 shares were purchased at the price of $0.91 per share. The warrants cancash received for shares purchased from the plan was $22,000 and $45,000 in fiscal 2018 and 2017, respectively.
The purchase price at June 30, 2019 will be 85% of the lower of (a) the closing price on January 2, 2019 ($0.88) or (b) the closing price on June 30, 2019.
NOTE 11 — STOCK-BASED COMPENSATION
Stock Option Plans
The Company’s Second Amended and Restated 2013 Stock Incentive Plan (the “2013 Plan”) replaced the 2005 Incentive Compensation Plan (the “2005 Plan”). Under these plans, the Company is authorized to issue equity awards (stock options, stock appreciation rights or “SARs”, and restricted stock) to directors and associates of the Company. Outstanding awards under the 2005 Plan continue to be governed by the terms of the 2005 Plan until exercised, in wholeexpired or in part until February 16, 2018. The warrants also include a cashless exercise option which allowsotherwise terminated or canceled, but no further equity awards are allowed to be granted under the holder2005 Plan. Under the 2013 Plan, the Company is authorized to receiveissue a number of shares not to exceed (i) 2,300,000 plus (ii) the number of shares remaining available for issuance under the 2005 Plan as of the date the 2005 Plan was replaced, plus (iii) the number of shares that become available under the 2005 Plan pursuant to forfeiture, termination, lapse, or satisfaction of a 2005 Plan award in cash or property other than shares of common stock based on an agreed upon formula in exchange forstock. The options granted under the warrant rather than paying cash to exercise. The proceeds, net2013 Plan and 2005 Plan have terms of transaction costs, allocatedten years or less, and typically vest and become fully exercisable ratably over three years of continuous service to the warrants of $1,425,000 were classified as equity on August 16, 2012,Company from the date of issuance.grant. At January 31, 2019 and 2018, options to purchase 1,355,657 and 1,873,156 shares of the Company’s common stock, respectively, have been granted and are outstanding under the 2013 Plan. There are no SARs outstanding.
Inducement grants are approved by the Company’s compensation committee pursuant to NASDAQ Marketplace Rule 5635(c)(4). The terms of the grants were nearly identical to the terms and conditions of the Company’s stock incentive plans in effect at the time of each inducement grant. For the year ended January 31, 2019, with regard to inducement grants, no stock options were issued, no options expired, 75,000 options were forfeited and no stock options were exercised. For the year ended January 31, 2018, with regard to inducement grants, no stock options were issued, no options expired, no options were forfeited and no stock options were exercised. As of January 31, 2019 and 2018, there were 225,000 and 300,000 options outstanding, respectively, under inducement grants.
Please see “Restricted Stock” section for information on the restricted shares.
A summary of stock option activity follows:
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|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
| |
|
|
|
| Average |
| Remaining |
| Aggregate | ||
|
| Options |
| Exercise Price |
| Life in Years |
| intrinsic value | ||
Outstanding as of February 1, 2018 |
| 2,173,156 |
| $ | 3.42 |
|
|
|
|
|
Granted |
| 47,000 |
|
| 1.68 |
|
|
|
|
|
Exercised |
| (50,694) |
|
| 1.18 |
|
|
|
|
|
Expired |
| (201,469) |
|
| 2.55 |
|
|
|
|
|
Forfeited |
| (387,336) |
|
| 3.61 |
|
|
|
|
|
Outstanding as of January 31, 2019 |
| 1,580,657 |
| $ | 3.50 | (1) | 6.13 |
| $ | 15,000 |
Exercisable as of January 31, 2019 |
| 1,401,435 |
| $ | 3.73 | (2) | 5.91 |
| $ | 8,000 |
Vested or expected to vest as of January 31, 2019 |
| 1,542,516 |
| $ | 3.54 |
| 6.09 |
| $ | 14,000 |
(1) | The exercise prices range from $1.10 to $8.10, of which 440,000 shares are between $1.10 and $2.00 per share, 362,240 shares are between $2.19 and $4.00 per share, and 778,417 shares are between $4.02 and $8.10 per share. |
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(2) | The exercise prices range from $1.18 to $8.10, of which 280,778 shares are between $1.18 and $2.00 per share, 362,240 shares are between $2.19 and $4.00 per share, and 758,417 shares are between $4.02 and $8.10 per share. |
For fiscal 2018 and 2017, the weighted average grant date fair value of options granted during the year was $1.03 and $0.65, respectively, and the total intrinsic value of options exercised during the year was $13,000 and zero for fiscal 2018 and 2017, respectively.
The fiscal 2018 and 2017 stock-based compensation was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for each fiscal year:
|
|
|
|
|
|
|
| 2018 |
| 2017 |
|
Expected life |
| 6 | years | 6 | years |
Risk-free interest rate |
| 2.89 | % | 2.65 | % |
Weighted average volatility factor |
| 0.65 |
| 0.65 |
|
Dividend yield |
| — |
| — |
|
Forfeiture rate |
| 20 | % | 13 | % |
At January 31, 2012, upon shareholder2019, there was $98,000 of unrecognized compensation cost related to non-vested stock-option awards. That cost is expected to be recognized over a remaining weighted average period of 0.6 years. The expense associated with stock option awards was $244,000 and $563,000, respectively, for fiscal 2018 and 2017. Cash received from the exercise of options was zero in both fiscal 2018 and 2017.
The 2005 Plan and the 2013 Plan contain change in control provisions whereby any outstanding equity awards under the plans subject to vesting, which have not fully vested as of the date of the change in control, shall automatically vest and become immediately exercisable. One of the change in control provisions is deemed to occur if there is a change in beneficial ownership, or authority to vote, directly or indirectly, of securities representing 20% or more of the total of all of the Company’s then-outstanding voting securities, unless through a transaction arranged by or consummated with the prior approval of anti-dilutionthe Board of Directors. Other change in control provisions that resetrelate to mergers and acquisitions or a determination of change in control by the warrants’ exerciseCompany’s Board of Directors.
Restricted Stock
The Company is authorized to grant restricted stock awards to associates and directors under the 2013 Plan. The Company has also issued restricted stock as inducement grants to certain new employees. The restrictions on the shares granted generally lapse over a one- to four-year term of continuous employment from the date of grant. The grant date fair value per share of restricted stock, which is based on the closing price ifof our common stock on the grant date, is expensed on a dilutive issuance occurs,straight-line basis as the warrants were reclassifiedrestriction period lapses. The shares represented by restricted stock awards are considered outstanding at the grant date, as derivative liabilities. the recipients are entitled to voting rights. A summary of restricted stock award activity for fiscal 2018 and 2017 is presented below:
|
|
|
|
|
|
|
|
|
| Weighted | |
|
| Non-vested |
| Average | |
|
| Number of |
| Grant Date | |
|
| Shares |
| Fair Value | |
Non-vested balance at January 31, 2017 |
| 858,225 |
| $ | 1.59 |
Granted |
| 295,337 |
|
| 1.17 |
Vested |
| (331,975) |
|
| 1.47 |
Forfeited |
| — |
|
| — |
Non-vested balance at January 31, 2018 |
| 821,587 |
| $ | 1.59 |
Granted |
| 826,666 |
|
| 1.15 |
Vested |
| (453,537) |
|
| 1.34 |
Forfeited |
| (130,850) |
|
| 1.61 |
Non-vested balance at January 31, 2019 |
| 1,063,866 |
| $ | 1.27 |
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At January 31, 2019, there was $1,110,000 of unrecognized compensation cost related to restricted stock awards. That cost is expected to be recognized over a remaining period of 2.3 years.
The provisions requireexpense associated with restricted stock awards was $383,000 and $546,000, respectively, for fiscal 2018 and 2017.
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Membership agreement to occupy shared office space
In fiscal 2018, the exercise priceCompany entered into a membership agreement to reset to the lower price at which the dilutive issuance is consummated, if the dilutive issuance occurs prior to the second anniversaryoccupy shared office space in Atlanta, Georgia. Our new shared office arrangement commenced upon taking possession of the warrants’ issuance. If a dilutive issuance occurs afterspace and ends in November 2020. Fees due under the second anniversary of the warrants’ issuance, then
Royalty Liability
On October 25, 2013, we entered into a Software License and Royalty Agreement (the “Royalty Agreement”) with Montefiore Medical Center (“Montefiore”) pursuant to which Montefiore granted us an exclusive, worldwide 15‑year license of Montefiore’s proprietary clinical analytics platform solution, Clinical Looking Glass® (“CLG”), now known as our Clinical Analytics solution. In addition, Montefiore assigned to us the existing license agreement with a customer using CLG. As consideration under the Royalty Agreement, we paid Montefiore a one-time initial base royalty fee of $3,000,000. Additionally, we originally committed that Montefiore would receive at least an additional $3,000,000 of on-going royalty payments related to future sublicensing of CLG by us within the first six and one-half years of the license term. On July 1, 2018, we entered into a joint amendment to the number of common stock equivalents outstanding atRoyalty Agreement and the timeexisting Software License and Support Agreement with Montefiore to modify the payment obligations of the dilutive issuance. The changeparties under both agreements. According to the modified provisions, our obligation to pay on-going royalties under the Royalty Agreement was replaced with the obligation to (i) provide maintenance services for 24 months and waive associated maintenance fees, and (ii) pay $1,000,000 in fair valuecash by July 31, 2020. As a result of the warrantscommitment to fulfill a portion of our obligation by providing maintenance services at no cost, the royalty liability was accounted for as an adjustmentsignificantly reduced, with a corresponding increase to stockholders’ equity for the period between the datedeferred revenues. As of the contract’s last classification as equity to the date of reclassification toJanuary 31, 2019, we had $1,172,000 in deferred revenues associated with this modified royalty liability. The fair value of the warrants was $4,139,000 at October 31, 2012. These warrants have been accounted for as derivative liabilities effective October 31, 2012, and as such, are re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period as a charge or credit to other expenses.
| Number of Shares Issuable | Weighted Average Exercise Price | |||||
| Warrants - private placement | 1,200,000 | $ | 3.99 | |||
| Warrants - placement agent | 200,000 | 4.06 | ||||
| Total | 1,400,000 | $ | 4.00 | |||
Litigation
We are, from time to time, a party to various legal proceedings and claims, which arise in the private placement warrants was $205,000 and $1,834,000 at January 31, 2016 and 2015, respectively. No warrants were exercisedordinary course of business. We are not aware of any legal matters that could have a material adverse effect on the Company’s consolidated results of operations, financial position or canceled during fiscal 2015 and 2014.
NOTE 1513 — SUBSEQUENT EVENTS
We have evaluated subsequent events through April 20, 2016 and have determined that there are no subsequent eventsoccurring after January 31, 2016 for which2019, and based on our evaluation we did not identify any events that would have required recognition or disclosure is required.in these consolidated financial statements.
Schedule II
Streamline Health Solutions, Inc.
For the two years ended January 31, 20162019
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| Charged to |
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| Costs and |
| Other |
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Description |
| Period |
| Expenses |
| Accounts |
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| End of Period | |||||
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Year ended January 31, 2019: |
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Allowance for doubtful accounts |
| $ | 349 |
| $ | 13 |
| $ | — |
| $ | (17) |
| $ | 345 |
Year ended January 31, 2018: |
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Allowance for doubtful accounts |
| $ | 198 |
| $ | 234 |
| $ | — |
| $ | (83) |
| $ | 349 |
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| Additions | |||||||||||||||||||
| Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | ||||||||||||||
| (in thousands) | |||||||||||||||||||
| Year ended January 31, 2016: | |||||||||||||||||||
| Allowance for doubtful accounts | $ | 666 | $ | 48 | $ | — | $ | (559 | ) | $ | 155 | ||||||||
| Year ended January 31, 2015: | |||||||||||||||||||
| Allowance for doubtful accounts | $ | 267 | $ | 441 | $ | 1 | $ | (43 | ) | $ | 666 | ||||||||
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
On April 18, 2019, the Audit Committee of the Board of Directors (the “Audit Committee”) of Streamline Health Solutions, Inc. (the “Company”) approved the engagement of Dixon Hughes Goodman LLP (“DHG”) as the Company’s new independent registered public accounting firm, effective as of immediately after the filing of this Annual Report on Form 10-K. As a result, on April 18, 2019, the Audit Committee approved the dismissal of RSM US LLP (“RSM”) as the Company’s independent registered public accounting firm, to be effective as of immediately after the filing of this Annual Report on Form 10-K. The engagement of DHG was the result of a comprehensive, competitive process conducted by the Company’s Audit Committee.
RSM’s audit reports on the Company’s consolidated financial statements for each of the two most recent fiscal years ended January 31, 2019 and 2018 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the two most recent fiscal years ended January 31, 2019 and 2018, and in the subsequent interim period through April 22, 2019, there were no disagreements between the Company and RSM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreement in connection with its reports.
There were no reportable events (as such term is defined in Item 304(a)(1)(v) of Regulation S-K) during the fiscal years ended January 31, 2019 and 2018 and the subsequent interim period through April 22, 2019.
On April 18, 2019, the Company provided RSM with a copy of the disclosures that the Company is making in response to Item 3.04 of Regulation S-K and requested that RSM furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Company in response to Item 3.04 of Regulation S-K, and, if not, stating the respects in which it does not agree. The Company has received the requested letter from RSM, and a copy of RSM’s letter will be filed as Exhibit 16.1 to the Current Report on Form 8-K reporting the change in auditors.
During the Company’s two most recent fiscal years ended January 31, 2019 and 2018 and subsequent interim period through April 22, 2019, neither the Company nor anyone on its behalf consulted with DHG regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report nor oral advice was provided to the Company that DHG concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a “disagreement” (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a “reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A. Controls And Procedures
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e)13a‑15(e) and 15d-15(e)15d‑15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.
65
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)13a‑15(f) and 15d-15(f)15d‑15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, and under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by management and our Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that:
· | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company. |
· | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made in accordance with authorization of our management and our Board of Directors. |
· | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of the effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the chief executive officer and chief financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2016,2019, using criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the Company’s internal control over financial reporting was effective as of January 31, 2016.2019.
This annual report on Form 10-K10‑K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fourth fiscal quarter ended January 31, 20162019 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
ITEM 9B. Other Information
None.
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PART III
ITEM 10. Directors, Executive Officers And Corporate Governance
Information regarding directors, executive officers and corporate governance will be set forth in the proxy statement for our 20162019 annual meeting of stockholders or an amendment to this Annual Report on Form 10‑K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10‑K, and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information regarding executive compensation will be set forth in the proxy statement for our 20162019 annual meeting of stockholders or an amendment to this Annual Report on Form 10‑K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10‑K, and is incorporated herein by reference.
ITEM 12. Securities Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and related stockholder matters will be set forth in the proxy statement for our 20162019 annual meeting of stockholders or an amendment to this Annual Report on Form 10‑K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10‑K, and is incorporated herein by reference.
ITEM 13. Certain Relationships, Related Transactions And Directors Independence
Information regarding certain relationships and related transactions and director independence will be set forth in the proxy statement for our 20162019 annual meeting of stockholders or an amendment to this Annual Report on Form 10‑K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10‑K, and is incorporated herein by reference.
ITEM 14. Principal Accounting Fees And Services
Information regarding principal accountant fees and services will be set forth in the proxy statement for our 20162019 annual meeting of stockholders or an amendment to this Annual Report on Form 10‑K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10‑K, and is incorporated herein by reference.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a)See Index to Consolidated Financial Statements and Schedule Covered by Reports of Registered Public Accounting Firms included in Part II, Item 8 of this annual report on Form 10‑K. See Index to Exhibits contained in this annual report on Form 10‑K. |
(b)Exhibits |
See Index to Exhibits contained in this annual report on Form 10-K.
INDEX TO EXHIBITS
EXHIBITS
3.1 | ||
| Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a/ LanVision Systems, Inc., as amended through August 19, 2014 (Incorporated by reference from Exhibit 3.1 of the Form 10-Q, as filed with the SEC on September 15, 2014). | |
3.2 | |
3.3 | |
4.1 | Specimen Common Stock Certificate of Streamline Health Solutions, Inc. (Incorporated by reference from the Registration Statement on Form |
10.1# | |
10.2# | |
10.2(a)# | |
10.2(b)# | |
10.3# | |
10.3(a)# | |
10.3(b)# | |
10.3(c)# | |
10.4# | |
10.4(a)# | |
10.4(b) | |
10.5# | |
10.6# | |
| Employment Agreement dated February 3, 2014 by and between Streamline Health Solutions, Inc. and Randolph W. Salisbury (Incorporated by reference from Exhibit 10.24 of the Form | |
10.6(a)# | |
68
10.7#* | |
10.8# | |
10.9 | |
10.9(a) | |
10.10 | |
10.10(a) | |
10.10(b) | |
10.10(c) | |
10.10(d) | |
10.10(e) | |
10.11 |
14.1 | |
21.1* | |
23.1* | Consent of Independent Registered Public Accounting Firm - RSM US LLP |
31.1* | |
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* | |
32.2* | |
69
101 | The following financial information from Streamline Health Solutions, Inc. |
*Filed herewith.
#Management Contracts and Compensatory Arrangements.
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 000-28132.000‑28132.
70
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STREAMLINE HEALTH SOLUTIONS, INC. | ||
By: | /S/ DAVID W. SIDES | |
David W. Sides | ||
Chief Executive Officer |
DATE: April 22, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
/S/ DAVID W. SIDES | Chief Executive Officer and Director | April 22, 2019 | ||
David W. Sides | (Principal Executive Officer) | |||
/s/ JONATHAN R. PHILLIPS | Director | April 22, 2019 | ||
Jonathan R. Phillips | ||||
/s/ WYCHE T. "TEE" GREEN, III | Director | April 22, 2019 | ||
Wyche T. "Tee" Green, III | ||||
/s/ JUDITH E. STARKEY | Director | April 22, 2019 | ||
Judith E. Starkey | ||||
/s/ KENAN H. LUCAS | Director | April 22, 2019 | ||
Kenan H. Lucas | ||||
/s/ THOMAS J. GIBSON | Chief Financial Officer | April 22, 2019 | ||
Thomas J. Gibson | (Principal Financial Officer) | |||
/s/ LUCIANA MULLEN | Controller | April 22, 2019 | ||
Luciana Mullen | (Principal Accounting Officer) |
71