UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberJuly 31, 20102011
or
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-28132
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.) |
10200 Alliance Road, Suite 200
Cincinnati, Ohio 45242-4716
(Address of principal executive offices) (Zip Code)
(513) 794-7100
(Registrant’s telephone number, including area code)
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. Yesþ Noo
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). Yesoþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | |
|
Large accelerated filero | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyþ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Number of shares of Registrant’s Common Stock ($.01 par value per share) issued and outstanding, as of December 9, 2010: 9,796,517.September 13, 2011: 10,053,979.
PART I. FINANCIAL INFORMATION
| | |
Item 1. | | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | (Audited) | | | (Unaudited) | | (Audited) | |
| | October 31, | | January 31, | | | July 31, 2011 | | January 31, 2011 | |
| | 2010 | | 2010 | | |
Current assets: | | |
Cash and cash equivalents | | $ | 665,472 | | $ | 1,025,173 | | | $ | 577,885 | | $ | 1,403,949 | |
Accounts receivable, net of allowance for doubtful accounts of $100,000 | | 2,408,822 | | 1,922,279 | | |
Accounts receivable, net of allowance for doubtful accounts of $140,000 and $100,000, respectively | | | 2,151,458 | | 2,620,756 | |
Contract receivables | | 705,472 | | 1,182,308 | | | 535,941 | | 680,096 | |
Prepaid hardware and third party software for future delivery | | 204,263 | | 149,281 | | | 40,963 | | 72,259 | |
Prepaid other, including prepaid customer maintenance contracts | | 1,121,857 | | 1,363,332 | | |
Prepaid customer maintenance contracts | | | 925,667 | | 794,299 | |
Other prepaid assets | | | 217,187 | | 200,056 | |
Deferred income taxes | | 224,000 | | 224,000 | | | 167,000 | | 167,000 | |
| | | | | | | | | | |
Total current assets | | 5,329,886 | | 5,866,373 | | | 4,616,101 | | 5,938,415 | |
| | | | | | |
| | |
Property and equipment: | | |
Computer equipment | | 3,162,406 | | 2,987,039 | | | 2,815,087 | | 2,708,819 | |
Computer software | | 1,979,869 | | 1,816,397 | | | 2,037,063 | | 1,947,135 | |
Office furniture, fixtures and equipment | | 747,867 | | 747,867 | | | 747,867 | | 747,867 | |
Leasehold improvements | | 639,864 | | 574,257 | | | 639,864 | | 639,864 | |
| | | | | | | | | | |
| | 6,530,006 | | 6,125,560 | | | 6,239,881 | | 6,043,685 | |
Accumulated depreciation and amortization | | | (4,951,522 | ) | | | (4,344,432 | ) | | | (4,895,412 | ) | | | (4,517,860 | ) |
| | | | | | | | | | |
| | 1,578,484 | | 1,781,128 | | | 1,344,469 | | 1,525,825 | |
| | | | | | |
Other assets: | | |
Contract receivables, less current portion | | 243,635 | | 146,093 | | | 274,647 | | 241,742 | |
Capitalized software development costs, net of accumulated amortization of $12,312,492 and $10,411,828, respectively | | 8,090,628 | | 8,049,292 | | |
Other, including deferred income taxes of $1,651,000 | | 1,674,876 | | 1,681,661 | | |
Capitalized software development costs, net of accumulated amortization of $13,833,284 and $12,832,347, respectively | | | 7,965,127 | | 7,575,064 | |
Other, including deferred income taxes of $711,000, respectively | | | 738,475 | | 734,376 | |
| | | | | | |
Total other assets | | | 8,978,249 | | 8,551,182 | |
| | | | | | | | | | |
| | $ | 16,917,509 | | $ | 17,524,547 | | | $ | 14,938,819 | | $ | 16,015,422 | |
| | | | | | | | | | |
| | |
See Notes to Condensed Consolidated Financial Statements.Statements
3
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders’ Equity
| | | | | | | | | |
| | (Unaudited) | | (Audited) | | | | | | | | | |
| | October 31, | | January 31, | | | (Unaudited) | | (Audited) | |
| | 2010 | | 2010 | | | July 31, 2011 | | January 31, 2011 | |
| |
Current liabilities: | | |
Accounts payable | | $ | 382,823 | | $ | 887,928 | | | $ | 752,454 | | $ | 565,252 | |
Accrued compensation | | 650,027 | | 559,235 | | | 575,603 | | 1,163,843 | |
Accrued other expenses | | 485,862 | | 476,504 | | | 285,215 | | 480,422 | |
Line of credit, current | | 2,400,000 | | — | | |
Current portion of capital lease obligation | | 209,060 | | 249,309 | | |
Current portion of deferred revenues | | 4,530,436 | | 4,956,303 | | |
Capital lease obligation | | | 132,299 | | 183,637 | |
Deferred revenues | | | 5,093,616 | | 5,766,795 | |
| | | | | | | | | | |
Total current liabilities | | 8,658,208 | | 7,129,279 | | | 6,839,187 | | 8,159,949 | |
| | | | | | |
Line of credit, non-current | | — | | 900,000 | | |
Deferred revenues, less current portion | | 109,498 | | 602,239 | | |
Capital lease obligation, less current portion | | 24,217 | | 161,666 | | |
Accrued other expenses, non-current | | 7,763 | | — | | |
| | |
Long-term liabilities: | | |
Line of credit | | | 1,250,000 | | 1,200,000 | |
Lease incentive liability, less current portion | | | 54,464 | | 61,034 | |
| | | | | | | | | | |
Total liabilities | | 8,799,686 | | 8,793,184 | | | 8,143,651 | | 9,420,983 | |
| | | | | | |
| | |
Stockholders’ equity: | | |
Convertible redeemable preferred stock, $.01 par value per share 5,000,000 shares authorized, no shares issued | | — | | — | | |
Common stock, $.01 par value per share, 25,000,000 shares authorized, 9,767,284 and 9,436,824 shares issued, respectively | | 97,673 | | 94,368 | | |
Convertible redeemable preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued | | | — | | — | |
Common stock, $.01 par value per share, 25,000,000 shares authorized, 10,053,979 and 9,856,517 shares issued and outstanding, respectively | | | 100,539 | | 98,565 | |
Additional paid in capital | | 36,706,649 | | 36,160,126 | | | 37,461,711 | | 36,975,242 | |
Accumulated other comprehensive income | | — | | 5,620 | | |
Accumulated deficit | | | (28,686,499 | ) | | | (27,528,751 | ) | | | (30,767,082 | ) | | | (30,479,368 | ) |
| | | | | | | | | | |
Total stockholders’ equity | | 8,117,823 | | 8,731,363 | | | 6,795,168 | | 6,594,439 | |
| | | | | | | | | | |
| | $ | 16,917,509 | | $ | 17,524,547 | | | $ | 14,938,819 | | $ | 16,015,422 | |
| | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.Statements
4
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and NineSix Months Ended OctoberJuly 31,
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months | | | Three Months | | Six Months | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | | 2011 | | 2010 | |
Revenues: | | |
Systems sales | | $ | 579,332 | | $ | 169,801 | | $ | 1,690,650 | | $ | 957,384 | | | $ | 163,200 | | $ | 960,880 | | $ | 294,202 | | $ | 1,111,318 | |
Services, maintenance and support | | 2,989,610 | | 3,006,002 | | 8,364,120 | | 8,522,975 | | | 3,069,869 | | 2,830,935 | | 6,153,830 | | 5,374,510 | |
Application-hosting services | | 901,934 | | 930,242 | | 2,636,599 | | 2,445,978 | | |
Software as a service | | | 912,864 | | 884,662 | | 1,837,923 | | 1,734,665 | |
| | | | | | | | | | | | | | | | | | |
Total revenues | | 4,470,876 | | 4,106,045 | | 12,691,369 | | 11,926,337 | | | 4,145,933 | | 4,676,477 | | 8,285,955 | | 8,220,493 | |
| | | | | | | | | | |
| | |
Operating expenses: | | |
Cost of systems sales | | 737,385 | | 658,294 | | 2,255,780 | | 2,091,989 | | | 627,550 | | 780,506 | | 1,168,502 | | 1,518,395 | |
Cost of services, maintenance and support | | 1,347,055 | | 1,317,619 | | 4,108,043 | | 3,697,735 | | | 1,155,667 | | 1,378,778 | | 2,489,538 | | 2,760,988 | |
Cost of application-hosting services | | 480,327 | | 407,953 | | 1,409,453 | | 1,203,606 | | |
Cost of software as a service | | | 417,868 | | 472,098 | | 854,291 | | 929,126 | |
Selling, general and administrative | | 1,361,657 | | 1,540,745 | | 4,565,097 | | 4,010,877 | | | 1,582,532 | | 1,505,863 | | 3,247,193 | | 3,203,440 | |
Product research and development | | 400,133 | | 466,455 | | 1,437,451 | | 1,196,645 | | | 342,157 | | 567,147 | | 759,931 | | 1,037,318 | |
| | | | | | | | | | | | | | | | | | |
Total operating expenses | | 4,326,557 | | 4,391,066 | | 13,775,824 | | 12,200,852 | | | 4,125,774 | | 4,704,392 | | 8,519,455 | | 9,449,267 | |
| | | | | | | | | | | | | | | | | | |
Operating profit (loss) | | 144,319 | | | (285,021 | ) | | | (1,084,455 | ) | | | (274,515 | ) | |
Operating income (loss) | | | 20,159 | | | (27,915 | ) | | | (233,500 | ) | | | (1,228,774 | ) |
Other income (expense): | | |
Interest expense | | | (31,585 | ) | | | (12,137 | ) | | | (87,921 | ) | | | (30,254 | ) | | | (21,791 | ) | | | (34,001 | ) | | | (41,633 | ) | | | (56,336 | ) |
Other income (expense) | | | (13,158 | ) | | 1,387 | | 29,628 | | 20,390 | | |
Miscellaneous income (expenses) | | | | (311 | ) | | | (9,023 | ) | | | (5,266 | ) | | 42,786 | |
| | | | | | | | | | | | | | | | | | |
Earnings (loss) before taxes | | 99,576 | | | (295,771 | ) | | | (1,142,748 | ) | | | (284,379 | ) | |
Income taxes | | | (5,000 | ) | | — | | | (15,000 | ) | | | (13,000 | ) | |
Loss before income taxes | | | | (1,943 | ) | | | (70,939 | ) | | | (280,399 | ) | | | (1,242,324 | ) |
Income tax (expense) | | | | (5,000 | ) | | | (5,000 | ) | | | (7,315 | ) | | | (10,000 | ) |
| | | | | | | | | | | | | | | | | | |
Net earnings (loss) | | $ | 94,576 | | $ | (295,771 | ) | | $ | (1,157,748 | ) | | $ | (297,379 | ) | |
Net loss | | | $ | (6,943 | ) | | $ | (75,939 | ) | | $ | (287,714 | ) | | $ | (1,252,324 | ) |
| | | | | | | | | | | | | | | | | | |
Basic and diluted net earnings (loss) per common share | | | $ | (0.00 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.13 | ) |
| | | | | | | | | | |
Basic net earnings (loss) per common share | | $ | 0.01 | | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.03 | ) | |
Number of shares used in basic and diluted per common share computation | | | 9,817,370 | | 9,506,904 | | 9,847,348 | | 9,460,911 | |
| | | | | | | | | | | | | | | | | | |
| | |
Diluted net earnings (loss) per common share | | $ | 0.01 | | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.03 | ) | |
| | | | | | | | | | |
| | |
Number of shares used in per common share computations: | | |
Basic | | 9,536,051 | | 9,423,211 | | 9,486,233 | | 9,385,969 | | |
| | | | | | | | | | |
Diluted | | 9,544,183 | | 9,423,211 | | 9,486,233 | | 9,385,969 | | |
| | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.Statements
5
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NineSix Months Ended OctoberJuly 31,
(Unaudited)
| | | | | | | | | | | | | | | | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Operating activities: | | |
Net loss | | $ | (1,157,748 | ) | | $ | (297,379 | ) | | $ | (287,714 | ) | | $ | (1,252,324 | ) |
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: | | |
Loss on disposal of fixed assets | | — | | 4,308 | | |
Long-term lease incentive | | — | | | (48,842 | ) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | |
Depreciation and amortization | | 2,550,778 | | 2,039,232 | | | 1,391,822 | | 1,708,706 | |
Share-based compensation | | 414,486 | | 204,259 | | |
| | |
Changes in assets and liabilities: | | |
Accounts and contract receivables | | | (107,249 | ) | | 1,704 | | |
Other current assets | | 180,874 | | 4,950 | | |
Accounts payable and accrued expenses | | | (405,364 | ) | | | (231,355 | ) | |
Loss on disposal of fixed asset | | | 26,667 | | — | |
Stock-based compensation expense | | | 395,732 | | 243,104 | |
Provision for accounts receivable | | | 40,000 | | 50,000 | |
Change in assets and liabilities: | | |
Accounts, contract and installment receivables | | | 540,548 | | | (133,787 | ) |
Other assets | | | | (121,302 | ) | | | (114,459 | ) |
Accounts payable | | | 187,202 | | 200,007 | |
Accrued expenses | | | | (790,017 | ) | | | (388,100 | ) |
Deferred revenues | | | (918,608 | ) | | | (1,859,963 | ) | | | (673,179 | ) | | | (328,530 | ) |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | 557,169 | | | (183,086 | ) | | 709,759 | | | (15,383 | ) |
| | | | | | | | | | |
| | |
Investing activities: | | |
Purchases of property and equipment | | | (447,470 | ) | | | (464,395 | ) | | | (236,196 | ) | | | (302,292 | ) |
Capitalization of software development costs | | | (1,942,000 | ) | | | (2,879,000 | ) | | | (1,391,000 | ) | | | (1,274,000 | ) |
Other | | 6,785 | | 24,805 | | | — | | 2,974 | |
| | | | | | | | | | |
Net cash used in investing activities | | | (2,382,685 | ) | | | (3,318,590 | ) | | | (1,627,196 | ) | | | (1,573,318 | ) |
| | | | | | | | | | |
| | |
Financing activities: | | |
Proceeds from stock purchase plan and exercise of stock options | | 135,341 | | 65,900 | | |
Proceeds from municipal incentive agreement | | 8,172 | | — | | |
Net change in bank line of credit | | 1,500,000 | | 1,100,000 | | |
Payments on capital lease | | | (177,698 | ) | | — | | |
Net change under revolving credit facility | | | 50,000 | | 1,100,000 | |
Proceeds from exercise of stock options and stock purchase plan | | | 92,711 | | 127,391 | |
Payments on capital lease obligation | | | | (51,338 | ) | | | (83,289 | ) |
| | | | | | | | | | |
Net cash provided by financing activities | | 1,465,815 | | 1,165,900 | | | 91,373 | | 1,144,102 | |
| | | | | | |
| | | | | | |
Decrease in cash and cash equivalents | | | (359,701 | ) | | | (2,335,776 | ) | | | (826,064 | ) | | | (444,599 | ) |
Cash and cash equivalents at beginning of period | | 1,025,173 | | 3,128,801 | | | 1,403,949 | | 1,025,173 | |
| | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 665,472 | | $ | 793,025 | | | $ | 577,885 | | $ | 580,574 | |
| | | | | | | | | | |
| | |
Supplemental cash flow disclosures: | | |
Interest paid | | $ | 87,639 | | $ | 24,899 | | | $ | 29,621 | | $ | 30,664 | |
| | | | | | | | | | |
Income taxes paid | | $ | 54,741 | | $ | 10,584 | | | $ | 16,957 | | $ | 16,534 | |
| | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.Statements
6
STREAMLINE HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Streamline Health Solutions, Inc. (“Streamline Health® or the Company”), pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the U. S. Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the most recent Streamline Health Solutions, Inc. Annual Report on Form 10-K, Commission File Number 0-28132. Operating results for the three and ninesix months ended OctoberJuly 31, 2010,2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011.2012.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies is presented beginning on page 45 of itsin “Note B — Significant Accounting Policies” in the fiscal year 2010 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes contained in the Annual Report when reviewing interim financial results.
Useful Lives of Capitalized Software Development CostsRecently Adopted Accounting Pronouncements
ASU 2009-13. In the fourth quarter of fiscalOctober 2009, the Company madeFinancial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2009-13 —Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 requires a vendor to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of stand-alone selling price required to separate deliverables by allowing a vendor to make its fifth generation software, accessANYware 5.0, generally available. In the first quarter of fiscal 2010, subsequent to the release, the Company completed a review by productbest estimate of the estimated useful livesstand-alone selling price of its capitalized software development costs. After reviewing strategic plans, analyzing the historical useful lifedeliverables when more objective evidence of the software products, forecasting product life cycles and demand expectations, the Company assigned a five year estimated useful life for costs capitalized for accessANYware 5.x products, and revised the estimated useful lives of certain other products from three years to five years.selling price is not available.
The product life cycleCompany adopted ASU 2009-13 for accessANYware versions prior to 5.x, have lasted longer than five years. Historical productall new and customer data shows that many customers remainmaterially modified arrangements on the same primary version for five years or more after purchase, or product support and development continue for five years or more. The Company expects the accessANYware 5.x products to also have a five year or longer product life cycle based on this historical data, and the estimated product development lifecycle. In addition, the useful life of the unamortized balance of development costs for prior accessANYware versions should also reflect an approximate five year life from their documented general release dates. The Company intends to actively sell and support these products for a minimum five years while 5.x products are being rolled out. This same policy will be applied to FolderView as it is generally a primary add-on component to prior accessANYware versions, and has had a similar historical life cycle. FolderView will be embedded into version 5.1.prospective basis beginning February 1, 2011. Upon Company review of the revenue projections,primary accounting literature, if the Company is unable to establish selling price using VSOE (vendor specific objective evidence) or third-party evidence, the Company will establish an estimated life cycleselling price. The estimated selling price is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes a best estimate of accessANYware 5.x products,selling price by considering internal factors relevant to pricing practices such as costs and margin objectives, stand-alone sales prices of similar services and percentage of the remaining life cyclefee charged for prior accessANYwarea primary service relative to a particular piece of licensed software. Additional consideration is also given to market conditions such as competitor pricing strategies and FolderView releases, a five yearmarket trends. The Company regularly reviews VSOE for professional services in addition to estimated life is reasonable and proper.selling price.
7
The Company accounted for the change in useful life ashas not experienced a change in units of accounting estimate whichnor was there a change in allocation of fair value to the various units of accounting. Historically, the Company has been able to obtain VSOE or third-party evidence for significant service deliverables. No material changes in assumptions, inputs or methodology used in determining VSOE or third-party evidence have been made. The pattern of revenue recognition is accounted for onexpected to remain consistent with prior periods and the Company does not expect a prospective basis effective February 1, 2010. For the three and nine months ended October 31, 2010 thematerial change resulted in a reduction of amortization expense of approximately $251,000 and $753,000, respectively; an increase in income from continuing operations and net income of $251,000 and $753,000, respectively; and an increase in basic and diluted earnings (loss) per share of $0.03 and $0.08, respectively. Amortization expense for capitalized software development costs is included in cost of system sales in the consolidated statementtiming of operations.revenue recognition from previous generally accepted accounting principles as applied in the prior period.
Revenue Recognition — Multiple-Deliverable Revenue Arrangements
The Company may bundle certain proprietary software technology licenses with post-contract customer support (“PCS”), and implementation services. The Company may also bundle software as a service (“SaaS”) offerings with implementation services. In addition, the Company may also bundle additional consulting services such as Business Process Management (“BPM”) and Revenue Cycle Management (“RCM”) services with proprietary software license agreements and SaaS subscriptions.
Provided that the undelivered elements in arrangements that include multiple elements are fixed and determinable, the Company allocates the total revenue to be earned under the arrangement to the elements based on their relative fair value of vendor specific objective evidence (“VSOE”), third-party evidence or estimated selling price, relative to the hierarchy. The amounts representing the fair value of the undelivered items are deferred until delivered, or recognized pro rata over the service contract.
NOTE C — EQUITY AWARDS
Compensation expense is recognized over the requisite service period for awards of equity instruments to employees based on the grant-date fair value of those awards expected to ultimately vest (with limited exceptions). Forfeitures are estimated on the date of the grant and revised if actual or expected forfeiture activity differs materially from original estimates.
During the ninesix months ended OctoberJuly 31, 2010,2011, the Company granted 139,916858,000 options with a weighted average exercise price of $1.98$1.94 per share. During the same period 80,400115,916 options expired with an average exercise price of $2.03$1.84 per share and 92,00032,598 options were exercised under all plans at an average exercise price of $1.05 per share.plans.
The fair value of each option grant during the quartersix months ended OctoberJuly 31, 20102011 was estimated at the date of the grants using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 2.50%, a dividend yield of zero percent; and a current weighted average volatility factor of the expected market price of Streamline Health’s Common Stock of 0.541 in 2010. The weighted average expected life of stock options is five years and have a forfeiture rate of zero.
| | | | | | | | |
| | For the three | | | For the six | |
| | months ended, | | | months ended, | |
| | April 30, 2011 | | | July 31, 2011 | |
Risk-free interest rate | | | 2.50 | % | | | 2.17 | % |
Dividend yield | | | — | | | | — | |
Current weighted-average volatility factor of the expected market price of Common Stock | | | 0.53 | | | | 0.65 | |
Weighted-average expected life of stock options | | 5 years | | | 5 years | |
Forfeiture rate | | | 0 | % | | | 0 | % |
8
During the first ninesix months of the current fiscal year,ended July 31, 2011, the Company granted 208,541110,412 restricted stock shares with a weighted average fair value of $1.94$1.68 per share. These shares are subject to the 2005 Incentive Compensation Plan as amended, and are granted to certain independent members of the Board of Directors and employees.Directors. The shares have an approximate one-year restriction period. During the same period 25,422223,090 restricted shares had their restriction period lapse; these shares had a weighted average fair value of $2.95$1.92 per share. In addition, 3,347
During the six months ended July 31, 2011, the Company granted 25,000 restricted stock shares were forfeited prior to the lapse of the restriction period; these shares hadas executive inducement grants with a weighted average fair value of $2.00$1.91 per share. The restrictions lapsed immediately upon the grant of the shares, and the Company recognized $48,000 of compensation expense for the six months ended July 31, 2011 relating to these inducement grants. These executive inducement grants were approved by the board pursuant to Nasdaq Marketplace Rule 5635(c)(4). The terms of the grants are nearly as practicable identical to the terms and conditions of the Company’s 2005 Incentive Compensation Plan.
8
NOTE D — EARNINGS PER SHARE
The two-class method is used to calculate basic and diluted earnings (loss) per share (“EPS”) as 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. Under the two-class method, basic earnings (loss) per common share are calculated usingis computed by dividing the net earnings (loss) allocated to common stock holders by the weighted average number of common shares outstanding. In determining the amount of net earnings (loss) to allocate to common holders, earnings are allocated to both common shares and participating securities based on their respective weighted-average shares outstanding duringfor the period.
The fiscal 2010 and 2009 diluted Diluted net earnings (loss) per common share calculation, excludesreflects the effect of somepotential dilution that could occur if stock options, stock purchase plan commitments, and restricted stock were exercised into common stock, equivalents,under certain circumstances, that then would share in the earnings of Streamline Health. The dilutive effect is calculated using the treasury stock method. A reconciliation of basic and diluted weighted average shares for basic and diluted EPS, as the inclusion thereof would be anti-dilutive. The following table details the share amounts,well as of the end of the third quarter:anti-dilutive securities is as follows:
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Nine Months Ended | |
| | October 31, | | | October 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Stock options(1) | | | 593,398 | | | | 642,882 | | | | 605,398 | | | | 642,882 | |
Restricted stock(2) | | | 217,048 | | | | 25,422 | | | | 217,048 | | | | 25,422 | |
| | | | | | | | | | | | |
Total anti-dilutive shares excluded | | | 810,446 | | | | 668,304 | | | | 822,446 | | | | 668,304 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended, | |
| | July 31, 2011 | | | July 31, 2010 | |
Numerator for Basic and Diluted Loss per Share: | | | | | | | | |
Net loss | | | (6,943 | ) | | | (75,939 | ) |
| | | | | | |
Denominator for basic loss per share weighted average shares | | | 9,817,370 | | | | 9,506,904 | |
Effect of dilutive securities(1) | | | | | | | | |
Stock options | | | — | | | | — | |
Restricted stock | | | — | | | | — | |
| | | | | | |
Denominator for basic loss per share, with assumed conversions | | | 9,817,370 | | | | 9,506,904 | |
| | | | | | |
Basic net loss per common share | | | (0.00 | ) | | | (0.01 | ) |
| | | | | | |
Diluted net loss per common share | | | (0.00 | ) | | | (0.01 | ) |
| | | | | | |
Anti-dilutive securities: | | | | | | | | |
Stock options, out-of-the-money | | | 1,272,467 | | | | 847,000 | |
| | | | | | |
9
| | | | | | | | |
| | Six Months Ended, | |
| | July 31, 2011 | | | July 31, 2010 | |
Numerator for Basic and Diluted Loss per Share: | | | | | | | | |
Net loss | | | (287,714 | ) | | | (1,252,324 | ) |
| | | | | | |
Denominator for basic loss per share weighted average shares | | | 9,847,348 | | | | 9,460,911 | |
Effect of dilutive securities(1) | | | | | | | | |
Stock options | | | — | | | | — | |
Restricted stock | | | — | | | | — | |
| | | | | | |
Denominator for basic loss per share, with assumed conversions | | | 9,847,348 | | | | 9,460,911 | |
| | | | | | |
Basic net loss per common share | | | (0.03 | ) | | | (0.13 | ) |
| | | | | | |
Diluted net loss per common share | | | (0.03 | ) | | | (0.13 | ) |
| | | | | | |
Anti-dilutive securities: | | | | | | | | |
Stock options, out-of-the-money | | | 1,282,467 | | | | 847,000 | |
| | | | | | |
| | |
(1) | | Option shares with prices ranging from $1.46 to $6.03Excluded common stock equivalents (stock options and $0.53 to $6.03 were outstanding forrestricted stock), as the three months ended October 31, 2010 and October 31, 2009, respectively. Option shares with prices ranging from $0.53 to $6.03 and $0.53 to $6.03 were outstanding for the nine months ended October 31, 2010 and October 31, 2009, respectively. |
|
(2) | | Performance based restricted stock awards, for which all necessary conditions of such contingently issuable shares have not been satisfied; Share prices ranging from $1.85 to $2.48 and $2.48 to $2.95 were outstanding for the three and months ended October 31, 2010 and October 31, 2009, respectively.inclusion thereof would be antidilutive. |
NOTE E — CONTRACTUAL OBLIGATIONS
The following table details the remaining obligations including accrued interest, by fiscal year, as of the end of the quarter:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Line of Credit | | Operating Leases | | Capital Lease | | Fiscal Year Totals | | | Line of Credit | | Operating Leases | | Capital Lease | | Fiscal Year Totals | |
2010 | | $ | — | | 117,000 | | — | | $ | 117,000 | | |
2011 | | 2,400,000 | | 396,000 | | 250,000 | | 3,046,000 | | | $ | 1,256,000 | | $ | 224,000 | | $ | 137,000 | | $ | 1,617,000 | |
2012 | | — | | 334,000 | | — | | 334,000 | | | — | | 389,000 | | — | | 389,000 | |
2013 | | — | | 320,000 | | — | | 320,000 | | | — | | 329,000 | | — | | 329,000 | |
2014 | | — | | 329,000 | | — | | 329,000 | | | — | | 335,000 | | — | | 335,000 | |
2015 | | | — | | 164,000 | | — | | 164,000 | |
Thereafter | | — | | 164,000 | | — | | 164,000 | | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 2,400,000 | | 1,660,000 | | 250,000 | | $ | 4,310,000 | | | $ | 1,256,000 | | $ | 1,441,000 | | $ | 137,000 | | $ | 2,834,000 | |
| | | | | | | | | | | | | | | | | | |
NOTE F — DEBT
On June 21, 2010,April 13, 2011, the CompanyCompany’s wholly owned subsidiary, Streamline Health, Inc., entered into a Second Amendment to Lease Agreement with Alliance Street, LLC for the Company’s principal executive offices. The term of the lease has been extended for a five year term expiring October 31, 2015.
On June 16, 2010 the Company entered into a minimum five year economic development incentive agreement with the City of Blue Ash, Ohio. This incentive agreement allows the Company to draw up to $130,000 for critical business functions. The terms of the agreement allow for any balance drawn to be forgiven by the City of Blue Ash upon meeting certain employment criteria. The Company has received $8,000 in reimbursements for capital expenditures as of October 31, 2010.
9
NOTE F — DEBT
On October 21, 2009, the Company entered into ansecond amended and restated revolving note with Fifth Third Bank, Cincinnati, OH. The terms of the loan remain the same as set forth in the revolving note entered into on OctoberJuly 31, 2008, as amended on January 6, 2009, and October 21, 2009, except as follows: (i) the maximum principal amount that can be borrowed was increased to $2,750,000$3,000,000 from the prior maximum amount of $2,000,000;$2,750,000, subject to the borrowing base limitation; and (ii) the maturity date of the loan washas been extended to October 1, 20112013 from AugustOctober 1, 2010; and (iii) the2011. The interest rate on the outstanding principal balance will accrueof the loan accrues at an annual floating rate of interest equal to the Adjusted Libor Rate (as defined in the revolving note) plus 3.25%., payable monthly. The interest rate on the note was 3.625%3.5% at OctoberJuly 31, 2010.2011. In accordance with the revised maturity date, the outstanding balance on the note is classified as a long-term obligation at July 31, 2011.
10
In connection with the entering into of the revisedsecond amended and restated revolving note in April 2011, the Company also entered into an amendment to the amended and restated continuing guaranty agreement. The terms of the continuing guarantyguarantee agreement remain the same as set forth in the guaranty agreement entered into on OctoberJuly 31, 2008, as amended on January 6, 2009 and on October 21, 2009, except thatthat: (i) the minimum fixed charge coverage ratio covenant that formerly requiredhas been revised, whereas the Company shall maintain a minimum trailing twelve months fixed charge coverage ratio of 1.25, measured each fiscal quarter; (ii) the funded indebtedness to maintain certain levels of minimum tangible net worthEBITDA covenant has been eliminated.revised, whereas the Company shall report a funded indebtedness to EBITDA ratio no greater than 2.0, measured each fiscal quarter and; (iii) a covenant has been added whereas the Company’s EBITDA shall cover its capitalized software development costs each fiscal quarter. The covenant becomes effective on October 31, 2011 and is calculated based on the trailing nine months. As of January 31, 2012 and thereafter, the calculation will be based on the trailing twelve months.
The note also continues to be secured by a first lien on all of the assets of the Company pursuant to security agreements entered into by the Company.
The Company was in compliance with all of the covenants at OctoberJuly 31, 2010.2011. The Company pays a commitment fee on the unused portion of the facility of 0.06%.06%. The Company had outstanding borrowings of $2,400,000$1,250,000 and $1,200,000 under this revolving loan as of OctoberJuly 31, 2010.2011 and January 31, 2011, respectively.
NOTE G — COMMITTMENTS AND CONTINGENCIES
Streamline Health has entered into employment agreements with its officers and certain employees that generally provide annual salary, a minimum bonus, discretionary bonus, and stock incentive provisions.
As a result of a reduction in force implemented by management during the quarter ended July 31, 2011, the Company expensed $100,000 in the second quarter of fiscal 2011, in accordance with severance agreements.
1011
| | |
Item 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
In addition to historical information contained herein, this Report on Form 10-Q contains forward-looking statements relating to the Company’s plans, strategies, expectations, intentions, etc. and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are no guarantee of future performance and are subject to certain risks and uncertainties that are difficult to predict and actual results could differ materially from those reflected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the timing of contract negotiations and executions and the related timing of the revenue recognition related thereto, the potential cancellation of existing contracts or clients not completing projects included in the backlog, the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with vendors that resell Streamline Health solutions, the ability of Streamline Health to control costs, availability of products obtained from third-party vendors, the healthcare regulatory environment, potential changes in legislation, regulatory and government funding affecting the healthcare industry, healthcare information system budgets, availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results and other risk factors that might cause such differences including those discussed herein, and including, effects of critical accounting policies and judgments, changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry, the markets in which the Company operates, and nationally, and the Company’s ability to maintain compliance with the terms of its credit facilities, but not limited to, discussions in the most recent Form 10-K, Part I, “Item 1.1 Business”, “Item 1A.1A Risk Factors”, Part II, “Item 7.7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8.8 Financial Statements and Supplemental Data.” In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof. The Registrant undertakes no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this and other documents Streamline Health Solutions, Inc. files from time to time with the Securities and Exchange Commission, including future Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Streamline Health’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Streamline Health to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent liabilities. On an ongoing basis, Streamline Health evaluates its estimates, including those related to product revenues, bad debts, capitalized software development costs, income taxes, support contracts, contingencies, and litigation. Streamline Health bases its estimates on historical experience and on various other assumptions that Streamline Health believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and revenue and expense recognition. Actual results may differ from these estimates under different assumptions or conditions.
1112
General
Founded in 1989, Streamline Health Solutions, Inc. (“Streamline Health®”, “Streamline” or the “Company”) is a healthcare informationleading developer of workflow and document management technology company, which is focused on developing and licensing proprietary software solutions that improve document-centric information flowsdrive process efficiencies and complementcost reductions for leading healthcare facilities throughout North America. Since our inception in 1989, Streamline Health’s technology solutions have seamlessly interfaced with our customers’ existing enterprise or departmental electronic medical record systems. The Company’s solutions efficiently integrate paper-based and enhance existing transaction-centric hospital healthcare information systems. In addition,unstructured data with electronic data in the areas of Health Information Management, Patient Financial Services, Human Resources, and Supply Chain Management to provide real-time comprehensive patient profiles and generate substantial operational savings. Streamline Health’s workflow and document management solutions assist hospitals in meeting the requirements of “meaningful use” to become eligible for significant incentive payments as outlined in the HITECH act (a provision of American Recovery and Reinvestment Act of 2009), and they are an integral part of an enterprise-wide Electronic Health provides consulting services specializing in enterprise connectivity, systems integration, and departmental process improvement.Record (EHR). The Company sells its products and services in North America to remarketers, hospitals, clinical and ambulatory services through its direct sales force, and its reseller partnerships. The Company also sells to direct remarketers, hospitals, clinical and ambulatory services.
Document imaging and workflow management technologies like those provided by Streamline Health are essential elements of a complete Electronic Health Record because they allow for the storage of unstructured data. Unstructured data may consist of patient record elements other than discrete data. Examples of unstructured data are hand written physician or nursing notes, physician orders, photographs, audio, video, and outside correspondence.
Streamline Health’s core technology is a secure document management repository called accessANYwareTM that collects, indexes, and intelligently routes unstructured, document-based medical and financial data throughout the enterprise. The accessANYware family of solutions create a permanent document-based repository of historical health information that iswork complementary to, and can be seamlessly integrated with existing disparatetransaction-centric clinical, financial and administrativemanagement information systems, providing convenient electronic access to all forms of patient information from any location, including secure web-based access. These integrated solutions allow providers and administrators to link existing hospital information systems with digitized documents, which can dramatically improve the availability of patient information while decreasing direct costs associated with document retrieval, work-in-process, chart processing, document retention, and archiving.
Healthcare providers have significant need to streamline document-centric information flows to eliminate business process friction points. Streamline Health’s vision for its customers is a fully integrated business process across departments, vendors and existing clinical, billing and administrative applications. These comprehensive, cost-effective information systems deliver rapid access to fully updated and complete patient information. Streamline Health’s strategy is to remain a leader in document management and workflow technologies that supplement the existing clinical information system, provide cost-saving efficiency and enhanced safety through improved access to critical patient data.systems. The Company’s systems and services can also help a provider’s existing system to achieve “meaningful use” under the HITECH provisions of the American Recovery and Reinvestment Act of 2009 (ARRA); which allow for reimbursement by the U.S. federal government for health providers’ capital expenditures on health information technology. These benefits encourage physicians to adopt the Company’s solutions because of convenient access to documents not typically available in data-centric clinical information systems.
The Company operates primarily in one segment as a provider of health information technology solutions that streamline healthcare information flows within the healthcare facility. The financial information required by Item 101(b) of Regulation S-K is contained in Item 6. Selected Financial Information section of the Company’s January 31, 2010 Form 10-K.
12
Executive Overview
In 2009, the Company successfully made its fifth-generation softwareaccessANYware architecture (accessANYware 5.0) generally-available, and has put the new architecture into production successfully in several large healthcare facilities in Canada. Subsequently, we have continued our investment in the accessANYware 5.x solution portfolio research and development. This development effort includes the consolidation of technology platforms onto the Microsoft.NET platform, and also the internationalization of the software to reach international markets.
The Company’s core technology is supplemented by departmental workflow-based solutions and services which specifically included French Canadian language capabilitiesoffer solutions to specific healthcare business processes within Health Information Management (HIM) and the revenue cycle. Additionally, the Company offers a full complement of high quality consulting and implementation services to complement and enhance its software applications.
The Company’s software solutions are delivered either by purchased perpetual license which is installed locally in the customer’s data center; or by subscription and accessed through a secure internet connection (also known as part of“software as a service” or “SaaS”). A SaaS subscription provides Streamline Health’s agreementscomplete suite of document management and workflow products, which also enables improved security, and accessibility to patient records at significant cost savings; with health careminimal up-front capital investment, maintenance, and support costs. In addition, the healthcare provider need not have knowledge of, expertise in, or control over the technology infrastructure in the data center that supports them. SaaS systems in Canada via our international remarketing partner, Telus Health. In 2010 and into 2011 we are continuing development efforts on accessANYware 5.1 which we expect will be availableallow customers to our U.S. based customers in 2011. The enhanced version ofrealize the accessANYware 5.x products allow for expanded functionality, additional interoperability capabilities with existing third party healthcare health information systems, and shorter development periods for a faster time-to-market for new products. We have had positive reception to accessANYware 5.0 at the installed locations in Canada, and the Company plans to continue this momentum with future releases of 5.x products.
Prior versions of accessANYware are still available for sale, and the Company continues to provide full product support for prior versions, as we anticipate several years before all existing accessANYware customers complete a transition to the accessANYware 5.x platform.
Healthcare organizations are seeking to improve business processes to reduce costs, and increase reimbursement rates and revenues, while also improving the quality of care. Business Process Management (BPM) and our newly organized Performance Management Group (PMG) are Streamline Health’s consulting services divisions that take advantage of what the Company believes is a significant growth opportunity; to provide departmental document workflow solutions, revenue cycle management, executive decision analysis consulting, and business process optimization services. In the third quarter of 2010 we entered into a contract with onebenefits of our Texas based hospital systems for BPM services to implement our Referral Order Workflow (ROW). This solution will providewith an automated means of capturing and referring physician orders while routing to the hospital’s scheduling office, and linking the orders to the patient’s medical record within Streamline Health’s enterprise document management repository. Workflow solutions such as ROW are solutions targeted for departmental process improvements. These BPM and PMG implemented solutions provide for a quickaccelerated return on investment, for customers by utilizing Streamline’s workflow management expertise. and less economic risk.
The Company views offerings suchoperates primarily in one segment as ROW, as driversa provider of our future growth, as well ashealth information technology solutions. The financial information required by Item 101(b) of Regulation S-K is contained in Item 6 Selected Financial Information of the success of our customers.
BPM’s focus will remain on departmental workflow and process improvement solutions, and PMG will focus on revenue cycle enhancement consulting and executive level decision analysis. Both use Streamline’s workflow technologies and expertise to improve the customer’s business operations.Company’s January 31, 2011 Form 10-K.
13
Signed Agreements — Backlog
At July 31, 2011 Streamline Health delivers its products as licensed, locally-installedhas master agreements and purchase orders from customers and remarketing partners for systems and related services (excluding support and maintenance, and transaction-based SaaS subscription revenues), which have not been delivered or hostedinstalled which, if fully performed, would generate future revenues of approximately $4,805,000 compared with $4,312,000 at July 31, 2010. The related systems and services are expected to be delivered over the next two to three years. The increase in the Company’s data center. A desirable byproduct of hosted system salesbacklog is the recurringresult of several contracts for professional services, or third-party hardware and software entered into subsequent to the prior year comparable quarter end, net of the revenues recognized from backlog since July 31, 2010. At July 31, 2011, Streamline Health had maintenance agreements purchase orders, from customers and remarketing partners for maintenance, which if fully performed, will generate future revenues of approximately $6,009,000 compared with $5,788,000 at July 31, 2010, through their respective renewal dates in fiscal year 2012 and 2011. This increase is primarily the result of new or renewed maintenance contracts that have entered their service period, and therefore, added to backlog, net of recognized maintenance revenues since July 31, 2010. At July 31, 2011, Streamline Health has entered into SaaS agreements, which are expected to generate revenues in excess of $7,275,000 through their respective renewal dates in fiscal years 2011 through 2014. The software as a service backlog decreased to $7,275,000 from $8,818,000 at July 31, 2010, due to recognized revenues from backlog fulfillmenton contracts signed in prior years, net of these hosted contracts, which are typically five- yearnew SaaS business, conversions from license to SaaS, and contract renewals.
Below is a summary of the backlog at July 31, 2011, January 31, 2011 and July 31, 2010:
| | | | | | | | | | | | |
| | July 31, 2011 | | | January 31, 2011 | | | July 31, 2010 | |
Streamline Health Software Licenses | | $ | 51,000 | | | $ | 121,000 | | | $ | 174,000 | |
Custom Software | | | 29,000 | | | | 42,000 | | | | 62,000 | |
Hardware and Third Party Software | | | 152,000 | | | | 66,000 | | | | 95,000 | |
Professional Services | | | 4,573,000 | | | | 4,629,000 | | | | 3,981,000 | |
Software as a service | | | 7,275,000 | | | | 7,362,000 | | | | 8,818,000 | |
Recurring Maintenance | | | 6,009,000 | | | | 5,384,000 | | | | 5,788,000 | |
| | | | | | | | | |
Total | | $ | 18,089,000 | | | $ | 17,604,000 | | | $ | 18,918,000 | |
| | | | | | | | | |
Streamline Health believes its future revenues will come from its direct sales force, as well as remarketing agreements with third-party health information systems vendors. Streamline Health continues to actively pursue additional remarketing agreements with other companies.
The commencement of revenue recognition varies depending on the size and complexity of the system; the implementation schedule requested by the customer and usage by customers of the Company’s SaaS services. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period. Streamline Health’s master agreements generally provide that the customer may terminate its agreement upon a material breach by Streamline Health, or may delay certain aspects of the installation. There can be no assurance that a customer will not cancel all or any portion of a master agreement or delay installations. A termination or installation delay of one or more contract periods. Additionally, there arephases of an agreement, or the failure of Streamline Health to procure additional agreements, could have a high percentagematerial adverse effect on Streamline Health’s business, financial condition, and results of contract renewals after the initial term. As the Company continues to promote our hosted recurring revenue model, traditional license sales provide a significant impact to our short-term operating results. Licensed, locally installed contracts also provide for significant near-term operating cash flow, as we acquire more hosted customers for which cash is collected over the long term period of the hosted contract. The Company believes a combination of licensed, locally installed system sales along with growth in recurring revenue from hosted system sales is key to our long term success and return on investment for the Company’s stockholders. In the near term, management believes it is more appropriate to measure its success by revenue and revenue backlog, and level of earnings before interest, taxes, depreciation and amortization (EBITDA), rather than net profits. Furthermore, the Company expects that the near-term focus on these metrics will translate into the goal of sustained profitability over the long-term.operations.
14
Operating Results
New bookings for the third quarter, excluding maintenance services, were in excess of $1.2 million. These new bookings include two new enterprise license contracts, and a large add-on enterprise license sale. Bookings reflect the aggregate of signed contracts and/or completed customer purchase orders approved and accepted by the Company as binding commitments to purchase its products and/or services. New bookings do not include maintenance services as these tend to be recurring in nature on an annual or more frequent basis.
The Company recognized revenues in the three and ninesix month periods ending OctoberJuly 31, 20102011 of $4,471,000$4,146,000 and $12,691,000,$8,286,000, compared to $4,106,000$4,676,000 and $11,926,000 in the comparable prior periods.$8,220,000; a decrease of $530,000 and an increase of $66,000 respectively. The increased revenues recognized over the prior three and nine month periods are derived primarily from an increase in proprietary software systems sales, as well as recurring revenues recognized from application-hostingSaaS subscriptions and recurring maintenance revenues.contracts. The Company incurredearned an operating profit of $20,000 in the currentsecond quarter of $144,000fiscal 2011 and incurred an operating loss of $1,084,000$234,000 for the ninesix month period ending Octoberended July 31, 2010. Comparatively,2011. In the prior year comparable periods the Company incurred operating losses of $285,000$28,000 and $275,000 respectively,$1,229,000, respectively. Operating expenses for the three and ninesix month periods ending OctoberJuly 31, 2009. Operating expenses in the three2011 were $4,126,000 and nine month periods ending October 31, 2010 were $4,327,000 and $13,776,000 respectively,$8,519,000, compared to $4,391,000$4,704,000 and $12,201,000$9,449,000 in the comparable prior threeperiods; a decrease of $578,000 or 12% and nine month periods. The decrease in operating expenses$930,000 or 10%, respectively over the prior quarter was due to decreased selling, general and administrative expenses in the third quarter of 2010. The increase in operating expenses over the prior nine month period was due to several factors including an increase in amortization of capitalized software development costs. This increase in amortization expense in fiscal 2010 is primarily due to the general release of accessANYware 5.0 in late fiscal 2009. In addition to amortization expense, the Company increased investments made in professional services staffing, selling and marketing, professional fees, and increased compensation expenses.comparable periods.
14
The Company’s revenues from proprietary systems sales have varied, and may continue to vary, significantly from quarter-to-quarter because of the volume and timing of systems sales and delivery. Professional services revenues also fluctuate from quarter-to-quarter because of the timing of the implementation services, project management, and timing of the recognition of revenues under generally accepted accounting principles. Conversely, revenues from hosted systemsSaaS subscription sales, and maintenance services do not fluctuate significantly from quarter-to-quarter, but have been increasing, on an annual basis, as the number of customers increase. Substantial portions of the operating expenses are fixed; therefore operating profits are expected to vary depending on the factors that drive fluctuations in revenues and the mix of proprietary system sales versus hosted contractsSaaS subscriptions sold.
Quarterly Statement of Operations(1)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, | | | | | | | | | | | | | | | | | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | Three Months Ended July 31, | | Six Months Ended July 31, | |
| | 2011 | | 2010 | | 2011 | | 2010 | |
Systems sales | | | 13 | % | | | 4 | % | | | 13 | % | | | 8 | % | | | 4 | % | | | 20 | % | | | 4 | % | | | 14 | % |
Services, maintenance and support | | 66 | | 73 | | 66 | | 71 | | | 74 | | 61 | | 74 | | 65 | |
Application-hosting services | | 21 | | 23 | | 21 | | 21 | | | 22 | | 19 | | 22 | | 21 | |
| | | | | | | | | | | | | | | | | | |
Total revenues | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | |
Cost of sales | | | 57 | % | | | 58 | % | | | 61 | % | | | 59 | % | | | 53 | % | | | 56 | % | | | 55 | % | | | 63 | % |
Selling, general and administrative | | 31 | | 38 | | 36 | | 34 | | | 38 | | 32 | | 39 | | 39 | |
Product research and development | | 9 | | 11 | | 11 | | 10 | | | 8 | | 12 | | 9 | | 13 | |
| | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 97 | % | | | 107 | % | | | 108 | % | | | 102 | % | | | 99 | % | | | 100 | % | | | 103 | % | | | 115 | % |
| | | | | | | | | | | | | | | | | | |
Operating profit (loss) | | | 3 | % | | | (7 | )% | | | (8 | )% | | | (2 | )% | | | 1 | % | | | (1 | )% | | | (3 | )% | | | (15 | )% |
Other income (expense), net | | | (1 | ) | | | (— | ) | | | (1 | ) | | | (1 | ) | | (1 | )% | | (1 | )% | | (1 | )% | | — | |
Income tax net benefit | | — | | | (— | ) | | | (— | ) | | | (— | ) | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | |
Net earnings(loss) | | | 2 | % | | | (7 | )% | | | (9 | )% | | | (3 | )% | | — | | | (2 | )% | | | (4 | )% | | | (15 | )% |
| | | | | | | | | | | | | | | | | | |
Cost of systems sales | | | 127 | % | | | 388 | % | | | 133 | % | | | 218 | % | | | 385 | % | | | 81 | % | | | 397 | % | | | 137 | % |
| | | | | | | | | | | | | | | | | | |
Cost of services, maintenance and support | | | 45 | % | | | 44 | % | | | 49 | % | | | 43 | % | | | 38 | % | | | 49 | % | | | 41 | % | | | 51 | % |
| | | | | | | | | | | | | | | | | | |
Cost of application-hosting services | | | 53 | % | | | 44 | % | | | 54 | % | | | 49 | % | | | 46 | % | | | 53 | % | | | 47 | % | | | 54 | % |
| | | | | | | | | | | | | | | | | | |
| | |
(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 operations nor are they necessarily indicative of the future operations of Streamline Health 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. |
Backlog
Backlog consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | October 31, | | | July 31, | | | January 31, | | | October 31, | |
| | 2010 | | | 2010 | | | 2010 | | | 2009 | |
Streamline Health software licenses | | $ | 298 | | | | 174 | | | | 201 | | | | 2,036 | |
Custom software | | | 42 | | | | 62 | | | | 105 | | | | 140 | |
Hardware and third party software | | | 176 | | | | 95 | | | | 171 | | | | 268 | |
Professional services | | | 3,293 | | | | 3,981 | | | | 3,977 | | | | 3,156 | |
Application-hosting services | | | 8,068 | | | | 8,818 | | | | 9,414 | | | | 10,897 | |
Recurring maintenance | | | 7,641 | | | | 5,788 | | | | 5,987 | | | | 6,075 | |
| | | | | | | | | | | | |
Total | | $ | 19,518 | | | | 18,918 | | | | 19,855 | | | | 22,572 | |
| | | | | | | | | | | | |
15
At October 31, 2010 Streamline Health has master agreements and purchase orders from customers and remarketing partners for systems and related services (excluding support and maintenance, and transaction-based application-hosting revenues), which have not been delivered or installed and if fully performed, would generate future revenues of approximately $19,518,000 compared with $22,572,000 at October 31, 2009. The related systems and services are expected to be delivered over the next two to three years. The overall decrease in the backlog as compared to October 31, 2009 is primarily the result of the recognition of revenues relating to the release of accessANYware 5.0 in the fourth quarter of fiscal 2009, along with the continued recognition of backlogged revenues relating to professional services, hardware and software for the Canadian customer and others.
At October 31, 2010, Streamline Health had maintenance agreements or purchase orders, from customers and remarketing partners, which if fully performed, will generate future revenues of approximately $7,641,000 compared with $6,075,000 at October 31, 2009, through their respective renewal dates in fiscal year 2010 and 2011. The increase results primarily from the signing of new proprietary software sales contracts during the second half of fiscal 2009, and in the three quarters ended October 31, 2010.
At October 31, 2010, Streamline Health has entered into application-hosting agreements, which are expected to generate revenues in excess of $8,068,000 through their respective renewal dates in fiscal years 2010 through 2015. The application-hosting backlog decreased from $10,897,000 at October 31, 2009, due to the continued recognition of revenues from contracts signed in fiscal 2008 and 2009, and decreased volume of new application-hosting business through the end of the third quarter of 2010.
The commencement of revenue recognition varies depending on the size and complexity of the system, the implementation schedule requested by the customer, and usage by customers of the application-hosting services. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period. Streamline Health’s master agreements generally provide that the customer may terminate its agreement upon a material breach by Streamline Health, or may delay certain aspects of the installation. There can be no assurance that a customer will not cancel all or any portion of a master agreement or delay installations. A termination or installation delay of one or more phases of an agreement, or the failure of Streamline Health to procure additional agreements, could have a material adverse effect on Streamline Health’s business, financial condition, and results of operations.
Streamline Health believes a large percentage of its future revenues will come from its remarketing agreements in place with health information systems vendors. The Company continues to actively pursue remarketing agreements with other companies.
16
Revenues
Revenues consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | | | | | | | | | | | | | | | |
| | October 31, | | Dollars | | Percent | | | Three Months Ended, | | | | | |
| | 2010 | | 2009 | | Change | | Change | | | July 31, 2011 | | July 31, 2010 | | Change | | % Change | |
Proprietary software(1) | | $ | 402 | | $ | 14 | | $ | 388 | | | 2771 | % | | $ | 14 | | $ | 674 | | $ | (660 | ) | | | (98 | %) |
Hardware & third party software(1) | | 177 | | 156 | | 21 | | | 13 | % | | 149 | | 287 | | | (138 | ) | | | (48 | %) |
Professional services(2) | | 980 | | 1,213 | | | (233 | ) | | | (19 | %) | | 868 | | 929 | | | (61 | ) | | | (7 | %) |
Maintenance & support(2) | | 2,010 | | 1,793 | | 217 | | | 12 | % | | 2,202 | | 1,902 | | 300 | | | 16 | % |
Application-hosting services | | 902 | | 930 | | | (28 | ) | | | (3 | %) | |
Software as a service | | | 913 | | 884 | | 29 | | | 3 | % |
| | | | | | | | | | | | | | |
Total Revenues | | $ | 4,471 | | $ | 4,106 | | $ | 365 | | | 9 | % | | $ | 4,146 | | $ | 4,676 | | $ | (530 | ) | | | (11 | %) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | | | | | | | | | | | | | | | | |
| | October 31, | | Dollars | | Percent | | | Six Months Ended, | | | | | |
| | 2010 | | 2009 | | Change | | Change | | | July 31, 2011 | | July 31, 2010 | | Change | | % Change | |
Proprietary software(1) | | $ | 1,104 | | $ | 148 | | $ | 956 | | | 646 | % | | $ | 51 | | $ | 702 | | $ | (651 | ) | | | (93 | %) |
Hardware & third party software(1) | | 586 | | 809 | | | (223 | ) | | | (28 | %) | | 242 | | 409 | | | (167 | ) | | | (41 | %) |
Professional services(2) | | 2,567 | | 2,968 | | | (401 | ) | | | (14 | %) | | 1,875 | | 1,587 | | 288 | | | 18 | % |
Maintenance & support(2) | | 5,797 | | 5,555 | | 242 | | | 4 | % | | 4,279 | | 3,787 | | 492 | | | 13 | % |
Application-hosting services | | 2,637 | | 2,446 | | 191 | | | 8 | % | |
Software as a service | | | 1,839 | | 1,735 | | 104 | | | 6 | % |
| | | | | | | | | | | | | | |
Total Revenues | | $ | 12,691 | | $ | 11,926 | | $ | 765 | | | 6 | % | | $ | 8,286 | | $ | 8,220 | | $ | 66 | | | 1 | % |
| | | | | | | | | | | | | | |
| | |
(1) | | Proprietary software and hardware are the components of the system sales line item |
|
(2) | | Professional services and maintenance & support are the components of the service, maintenance and support line item. BPM and PMG consulting services are included in professional services. |
Revenues for the three and six month periods ended July 31, 2011, were $4,146,000 and $8,286,000 respectively; as compared to $4,676,000 and $8,220,000 respectively in the comparable periods of fiscal 2010. The quarterly decrease was primarily attributable to two large proprietary license sales recognized in the second quarter of fiscal 2010, that had no comparable sales in fiscal 2011; which resulted in a significant decrease in proprietary licensed software sales. The decrease in proprietary software revenues were partially offset by increases in recurring revenues from software maintenance and software as a service subscription revenue. The increase in software as a service subscription revenue on a quarterly and year-to-date basis is due to one SaaS customer contract sold in fiscal 2010 that reached go-live status in the first quarter of fiscal 2011 and was able to begin ratable revenue recognition, as well as the continued recognition of subscription revenues from backlog. Additionally, the increase in recurring maintenance and support is due to revenues wasrecognized for maintenance periods commencing on software sold since the close of the second quarter 2010. The year-to-date increase in professional services is primarily the result of several large proprietary software sales during the secondincreased revenue earned from implementations of systems and third quarters of 2010, and continued recognition of backlog revenues from hosted contracts. Professional service and hardware and third party software sales decreased primarily from customer delays for systems implementation, decreasesother professional services sold in the volume of hardware upgrades by existing clients, or delays in the purchase of hardware and third party software.prior quarters.
1716
Operating ExpensesCost of Sales
Operating expensesCost of sales consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | |
| | October 31, | | | Dollars | | | Percent | |
| | 2010 | | | 2009 | | | Change | | | Change | |
Cost of system sales | | $ | 737 | | | $ | 658 | | | $ | 79 | | | | 12 | % |
Cost of services, maintenance and support | | | 1,347 | | | | 1,318 | | | | 29 | | | | 2 | % |
Cost of application-hosting | | | 480 | | | | 408 | | | | 72 | | | | 18 | % |
| | | | | | | | | | | | |
Total cost of sales | | $ | 2,564 | | | $ | 2,384 | | | $ | 180 | | | | 8 | % |
| | | | | | | | | | | | |
Selling, general, and administrative | | | 1,362 | | | | 1,541 | | | | (179 | ) | | | (12 | )% |
Research and development | | | 400 | | | | 466 | | | | (66 | ) | | | (14 | )% |
| | | | | | | | | | | | |
Total operating expenses | | $ | 4,326 | | | $ | 4,391 | | | $ | (65 | ) | | | (1 | )% |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended, | | | | | | | |
| | July 31, 2011 | | | July 31, 2010 | | | Change | | | % Change | |
Cost of system sales | | $ | 628 | | | $ | 781 | | | $ | (153 | ) | | | (20 | %) |
Cost of services, maintenance and support | | | 1,156 | | | | 1,379 | | | | (223 | ) | | | (16 | %) |
Cost of software as a service | | | 418 | | | | 472 | | | | (54 | ) | | | (11 | %) |
| | | | | | | | | | | | | |
Total cost of sales | | $ | 2,202 | | | $ | 2,632 | | | $ | (430 | ) | | | (16 | %) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | | |
| | October 31, | | | Dollars | | | Percent | |
| | 2010 | | | 2009 | | | Change | | | Change | |
Cost of system sales | | $ | 2,256 | | | $ | 2,092 | | | $ | 164 | | | | 8 | % |
Cost of services, maintenance and support | | | 4,108 | | | | 3,698 | | | | 410 | | | | 11 | % |
Cost of application-hosting | | | 1,409 | | | | 1,203 | | | | 206 | | | | 17 | % |
| | | | | | | | | | | | |
Total cost of sales | | $ | 7,773 | | | $ | 6,993 | | | $ | 780 | | | | 11 | % |
| | | | | | | | | | | | |
Selling, general, and administrative | | | 4,565 | | | | 4,011 | | | | 554 | | | | 14 | % |
Research and development | | | 1,438 | | | | 1,197 | | | | 241 | | | | 20 | % |
| | | | | | | | | | | | |
Total operating expenses | | $ | 13,776 | | | $ | 12,201 | | | $ | 1,575 | | | | 13 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended, | | | | | | | |
| | July 31, 2011 | | | July 31, 2010 | | | Change | | | % Change | |
Cost of system sales | | $ | 1,169 | | | $ | 1,518 | | | $ | (349 | ) | | | (23 | %) |
Cost of services, maintenance and support | | | 2,490 | | | | 2,761 | | | | (271 | ) | | | (10 | %) |
Cost of software as a service | | | 854 | | | | 929 | | | | (75 | ) | | | (8 | %) |
| | | | | | | | | | | | | |
Total cost of sales | | $ | 4,513 | | | $ | 5,208 | | | $ | (695 | ) | | | (13 | %) |
| | | | | | | | | | | | | |
Cost of systems sales includes amortization of capitalized software expenditures, royalties, and the cost of third-party hardware and software. The increasequarterly and year-to-date decrease in the cost of systems sales during the three month period ended October 31, 2010, over the prior comparable quarter, is primarily the result of the increasesquarterly and year-to-date decreases in capitalized software amortization of capitalized software development costs$132,000 and $253,000, respectively; primarily due to the timing of when certain products entered general availability, and increased hardware and third party software sales and the associated direct costs. The increasereleased in the costprior years becoming fully amortized in fiscal 2011. Cost of systems sales during the nine month period ended October 31, 2010,was also reduced on a quarterly and year-to-date basis due to a decrease in third-party hardware and software sales over the prior year comparable quarter, is primarily the result of the increases in amortization of capitalized software development costs due to the general release of accessANYware 5.0. Additionally, this was offset by reduced hardware and third party software sales and the associated direct costs.periods.
Cost of services, maintenance and support includes compensation and benefits for support and professional services personnel and the cost of third party maintenance contracts. The quarterly and year-to-date increasedecrease is primarily due to reduced salary and benefits expenses during fiscal 2011, primarily through the reduction in force in the second quarter; and reductions in the cost of third-party provider maintenance contracts over the prior year comparable quarter. These reductions were partially offset by increased expense due to the increased investment in professional services staff and support for continued growthuse of the BPM services through the second quarter 2010. Investment leveled off during the third quarterthird-party outside contractors.
The cost of fiscal 2010. The incremental costs incurredsoftware as a service operations is relatively fixed, but is generally subject to annual increases for the start-up of the PMG group, consisted of compensationgoods and travel costs which occurred lateservices required. The quarterly and year-to-date decrease is primarily attributable to reductions in thesalary and related benefits through reduced staffing; as well as several annual third quarter.party provider license and maintenance agreements that were re-negotiated, resulting in quarterly and year-to-date cost savings.
1817
The increases in the cost of application-hosting services operations over the three and nine months ended October 31, 2010, over the prior comparable periods, are primarily attributable to increased compensation, depreciation and third party license and maintenance expenses as a result of the growing hosting center operations, as well as typical annual cost increases.
Selling, General and Administrative Expense
Selling, general and administrative expenses consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended, | | | | | | | |
| | July 31, 2011 | | | July 31, 2010 | | | Change | | | % Change | |
Selling, general, and administrative | | $ | 1,583 | | | $ | 1,506 | | | $ | 77 | | | | 5 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended, | | | | | | | |
| | July 31, 2011 | | | July 31, 2010 | | | Change | | | % Change | |
Selling, general, and administrative | | $ | 3,247 | | | $ | 3,203 | | | $ | 44 | | | | 1 | % |
| | | | | | | | | | | | | |
Selling, General and Administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company’s sales, marketing and administrative personnel; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses; and general corporate expenses, including occupancy costs. The quarterly decrease over the comparable prior period is due to the reorganization of the sales and marketing staff, a decrease in bad debt expense, a decrease in commissions expense, offset by the re-instatement of bonuses. The year-to-date increase over the respective comparable prior period is due to investment in customer initiatives; increases in equity awards expense, performance bonus accruals, increased travel and living expenses, and increased investor relations costs. These quarterly and year-to-date increases were offset by reduced commissions expense, reduced use of third-party outside consultants, and other compensation expenses; re-instatement of bonuses; severance costs; and professional fees relating to increased compliance and administration costs.reduced bad debt expense.
Product Research and Development Expense
Product research and development costs are summarized as followsexpenses consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | | | | | | | | | | | | | | | |
| | October 31, | | Dollars | | Percent | | | Three Months Ended, | | | | | |
| | 2010 | | 2009 | | Change | | Change | | | July 31, 2011 | | July 31, 2010 | | Change | | % Change | |
Research and development expense | | $ | 400 | | $ | 466 | | $ | (66 | ) | | | (55 | )% | | $ | 342 | | $ | 567 | | $ | (225 | ) | | | (40 | %) |
Capitalized research and development cost | | 668 | | 859 | | | (191 | ) | | | (22 | )% | | 606 | | 578 | | 28 | | | 5 | % |
| | | | | | | | | | | | | | | | |
Total R&D Cost | | $ | 1,068 | | $ | 1,325 | | $ | (257 | ) | | | (19 | )% | | $ | 948 | | $ | 1,145 | | $ | (197 | ) | | | (17 | %) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | | | | | | | | | | | | | | | | |
| | October 31, | | Dollars | | Percent | | | Six Months Ended, | | | | | |
| | 2010 | | 2009 | | Change | | Change | | | July 31, 2011 | | July 31, 2010 | | Change | | % Change | |
Research and development expense | | $ | 1,438 | | $ | 1,197 | | $ | 241 | | | 20 | % | | $ | 760 | | $ | 1,037 | | $ | (277 | ) | | | (27 | %) |
Capitalized research and development cost | | 1,942 | | 2,879 | | | (937 | ) | | | (33 | )% | | 1,391 | | 1,274 | | 117 | | | 9 | % |
| | | | | | | | | | | | | | | | |
Total R&D Cost | | $ | 3,379 | | $ | 4,076 | | $ | (697 | ) | | | (17 | )% | | $ | 2,151 | | $ | 2,311 | | $ | (160 | ) | | | (7 | %) |
| | | | | | | | | | | | | | | | |
Product 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. ResearchQuarterly and year-to-date research and development expenses decreased for$225,000 and $277,000, respectively, from the three months ended October 31, 2010 due to reduced required resources necessary for current development projects. Researchprior comparable periods. These decreases in research and development expense decreased forand the nine month period ended October 31, 2010,offsetting increases in capitalized software development costs, are primarily due to a decreasean increase in costs eligible for capitalization. However, the decreasecapitalization, decreased product support costs, and reductions in development staffing that were partially offset by increased use of third-party outside contractors. The total research and development expenditures on a quarterly and year-to-date basis have decreased by $197,000 and $160,000, respectively when considering both capitalized software development costs and non-capitalizable research and development expense; this is primarily due to the aforementioned reductions in force, and less cost for the three and nine month periods ended October 31, 2010 overproduct support as compared to the prior comparable periods is the result of the reduced resources necessary for research and development efforts, subsequent to the release of accessANYware 5.0 in the fourth quarter of fiscal 2009.periods.
1918
Operating Profit (loss)(Loss)
The Company incurred an operating profit of $144,000 and$20,000 in the second quarter of fiscal 2011, compared to an operating loss of $1,084,000 for$28,000 in the three and nine month periods ended October 31,second quarter of fiscal 2010. Comparatively,The Company had a changeover in management during the prior threefirst quarter of fiscal 2011 and nine month periods, the Company incurredsubsequent across-the-board analysis of staffing levels, processes, and costs, resulted in significant reductions of operating losses of $285,000 and $275,000, respectively. The operating profit for the quarter was primarily due to increases in proprietary software and maintenance revenuesexpenses. These reductions were offset by increasescoupled with decreases in capitalized software amortization expense; which resulted in quarterly and increased compensation. Similarly, increasesyear-to-date decreases in proprietary software salesoperating expenses of $579,000 or 12%, and recurring application-hosting revenues were offset by increased investment in customer initiatives, increased compensation, and a year-to-date increase in expense relating to amortization of capitalized software development costs, which contributed to the operating loss for the nine month period ending October 31, 2010.$930,000 or 10%, respectively.
Other ExpenseIncome (Expense)
InterestQuarterly and year-to-date interest expense forin the threesecond quarter of fiscal 2011 was $22,000 and nine months ended October 31, 2010 was $32,000 and $88,000$42,000 respectively, compared to $12,000$34,000 and $30,000$56,000 in the comparable prior periods. The increase in interestInterest expense was related tofrom the working capital facility interestwas $17,000 in the second quarter of fiscal 2011 compared with $22,000 in the comparable prior quarter, primarily due to a larger average balance outstanding in the prior comparable quarter. Interest expense from the capital lease decreased by $7,000 and fees, as well as interest for$12,000, respectively over the lease of capital equipment. Year-to-date other income of $30,000 isprior comparable three and six month periods; primarily made up of net unrealized foreign currency exchange gains on outstanding payables and receivables.due to a lower principal balance.
Provision for Income Taxes
The quarterly and year-to-date tax provision in the first quarter of fiscal 20102011 and 20092010 is comprised of primarily state and local provisions.
Net lossLoss
The Company incurred net income of $95,000quarterly and a year-to-date loss of $1,158,000 in the three and nine month periods ended October 31, 2010, compared to net losses of $296,000$7,000 and $297,000$288,000 respectively in fiscal 2011; as compared to quarterly and year-to-date net losses of $76,000 and $1,252,000 respectively in fiscal 2010.
Operational Metrics and Use of Non-GAAP Financial Measures
Streamline Health’s primary metrics used to assess the comparable prior periods ended October 31, 2009. Increases in proprietary software salesperformance of the business include gross margin, cash flow from operations, non-GAAP Adjusted EBITDA (A non-GAAP measure meaning, “Earnings before Interest, Tax, Depreciation, Amortization, and recurring application-hosting revenues were offset by increased investment in customer initiatives,Stock-based compensation expense”; for explanation and increased expense relating to amortizationreconciliation of all non-GAAP financial measures, see “Use of Non-GAAP Financial Measures”), non-GAAP Adjusted EBITDA less capitalized software development costs, and non-GAAP Adjusted EBITDA margin. Management uses these measures 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 employee incentive compensation programs.
19
Additionally, the Company’s lenders use Adjusted EBITDA, to assess operating performance. The Company’s working capital credit agreement requires compliance with financial covenants certain of which contributedare based on an Adjusted EBITDA measurement that is the same as the Adjusted EBITDA measurement reviewed by Company management. The current metrics are outlined in the table below:
| | | | | | | | | | | | | | | | |
| | Six Months Ended, | | | | | | | |
| | July 31, | | | July 31, | | | | | | | |
| | 2011 | | | 2010 | | | Change | | | % Change | |
Gross margin | | $ | 3,774,000 | | | $ | 3,012,000 | | | | 762,000 | | | | 25 | % |
Gross margin % | | | 46 | % | | | 37 | % | | | 9 | % | | | | |
Cash flow provided by (used in) operations | | $ | 710,000 | | | $ | (15,000 | ) | | | 725,000 | | | | 4833 | % |
Adjusted EBITDA | | $ | 1,549,000 | | | $ | 766,000 | | | | 783,000 | | | | 102 | % |
Adjusted EBITDA, less capitalized software development costs | | $ | 158,000 | | | $ | (508,000 | ) | | | 666,000 | | | | 131 | % |
Adjusted EBITDA margin | | | 19 | % | | | 9 | % | | | 10 | % | | | | |
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. A reconciliation of non-GAAP to GAAP measures used is provided below, and 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. The following is a summary of non-GAAP measurements used by the Company:
EBITDA, Adjusted EBITDA, Adjusted EBITDA Less Capitalized Software Development Costs, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
The Company defines: (i) EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, and stock-based compensation expense; (iii) Adjusted EBITDA Less Capitalized Software Development Costs, includes the effect of cash spent on research and development that was capitalized; (iv) Adjusted EBITDA Margin, as Adjusted EBITDA as a percentage of net revenue; and (v) 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 the Company’s operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of the management team (taxes). Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share will include incremental shares in the share count that would be considered anti-dilutive in a GAAP net loss for the current nine month period.position.
20
EBITDA and its variants used by management are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities; therefore the Company suggests that readers of the quarterly reports refer to the Company’s Annual Report on Form 10-K for the year ended January 31, 2011 in the section “Use of Non-GAAP Financial Measures” for complete detail of the limitations of non-GAAP financial measures presented in this quarterly report.
The following table sets forth a reconciliation of EBITDA and its variants used by management, as described to assess the Company’s on-going operating performance (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | |
| | Three Months Ended, | | | Six Months Ended, | |
| | July 31, | | | July 31, | | | July 31, | | | July 31, | |
Adjusted EBITDA Reconciliation | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Net loss | | $ | (7 | ) | | $ | (76 | ) | | $ | (288 | ) | | $ | (1,252 | ) |
Interest expense | | | 22 | | | | 34 | | | | 42 | | | | 56 | |
Income tax expense | | | 5 | | | | 5 | | | | 7 | | | | 10 | |
Depreciation and other amortization | | | 193 | | | | 233 | | | | 391 | | | | 455 | |
Amortization of capitalized software development costs | | | 507 | | | | 639 | | | | 1,001 | | | | 1,254 | |
| | | | | | | | | | | | |
EBITDA | | | 720 | | | | 835 | | | | 1,153 | | | | 523 | |
| | | | | | | | | | | | |
Stock-based compensation expense | | | 199 | | | | 155 | | | | 396 | | | | 243 | |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 919 | | | $ | 990 | | | $ | 1,549 | | | $ | 766 | |
| | | | | | | | | | | | |
Capitalized software development costs | | | 606 | | | | 578 | | | | 1,391 | | | | 1,274 | |
Adjusted EBITDA, less capitalized software development costs | | | 313 | | | | 412 | | | | 158 | | | | (508 | ) |
| | | | | | | | | | | | |
Adjusted EBITDA Margin(1) | | | 22 | % | | | 21 | % | | | 19 | % | | | 9 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA per diluted share | | | | | | | | | | | | | | | | |
Earnings (loss) per share — diluted | | $ | (0.00 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.13 | ) |
Interest expense(2) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Tax expenses(2) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Depreciation and other amortization(2) | | | 0.02 | | | | 0.02 | | | | 0.04 | | | | 0.05 | |
Amortization of capitalized software development costs(2) | | | 0.05 | | | | 0.07 | | | | 0.10 | | | | 0.13 | |
Stock-based compensation expense(2) | | | 0.02 | | | | 0.02 | | | | 0.04 | | | | 0.03 | |
| | | | | | | | | | | | |
Adjusted EBITDA per adjusted diluted share | | $ | 0.09 | | | $ | 0.10 | | | $ | 0.15 | | | $ | 0.08 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted weighted average shares | | | 9,817,370 | | | | 9,506,904 | | | | 9,847,348 | | | | 9,460,911 | |
Includable incremental shares — adjusted EBITDA(3) | | | 12,715 | | | | 19,336 | | | | 17,951 | | | | 19,336 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted diluted shares | | $ | 9,830,085 | | | $ | 9,526,240 | | | | 9,865,299 | | | | 9,480,247 | |
| | | | | | | | | | | | |
| | |
(1) | | Adjusted EBITDA as a percentage of GAAP revenues |
|
(2) | | Per adjusted diluted shares |
|
(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. If negative adjusted EBITDA is incurred, no additional incremental shares are assumed for adjusted diluted shares. |
21
Liquidity and Capital Resources
Traditionally, Streamline Health has funded its operations, working capital needs, and capital expenditures primarily from a combination of cash generated by operations, bank loans, and revolving lines of credit. Streamline Health’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from customers, (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.
Streamline Health has no significant obligations for capital resources, consisting ofother than the $2,400,000$1,250,000 borrowed under its bank line of credit at OctoberJuly 31, 2010, and2011, the non-cancelable operating leases of approximately $1,660,000$1,441,000 payable over the next fivefour years, $250,000and $132,000 for a capital lease, and an economic development incentive from the City of Blue Ash, Ohio up to a maximum amount of $130,000.leases. Capital expenditures for property and equipment in 2010for fiscal 2011 are not expected to exceed $1,000,000.$1,500,000.
Net cash provided by operations for the nine monthssix month period ended July 31, 2011 was $565,000, as compared to cash used for operations$710,000, an increase of $183,000 inapproximately $725,000 from the prior year comparable period. Significant decreasesquarter. The increase was primarily due to a $541,000 decrease in net accounts receivable, the $673,000 decrease in deferred revenues and increases in software amortization and share-based compensation expenses offset the net loss incurred and decreases in accounts payable for a net cash provided by operation. Deferred revenues reflectwhich reflects the revenue recognition of prepaid maintenance contracts during fiscal 2010,2011, net of any additional payments received in 2011; as well as a $790,000 decrease in accrued expenses, primarily payment on executive severance agreements, executive inducement incentives, fiscal 2010 along withannual bonus and commission payments; and was offset primarily by fiscal 2011 annual bonuses accrued, and severance agreements accrued during the timingfirst six months of any payments received.fiscal 2011.
Net cash used in investing activities for the six month period ended July 31, 2011 was $2,383,000,$1,627,000, an improvementincrease of $936,000$54,000 from the prior comparable period.quarter. This decreaseincrease was primarily due to the decreaseincrease in capitalized software development costs, as awhich is the result of accessANYware 5.0certain projects reaching general releasetechnological feasibility for which development cost began being capitalized relating to the development of the Company’s core solutions and the expanded work flow module development. Increases in late 2009 which had significantcapitalized software development costs capitalized in the prior year.were partially offset by reduced purchases of capital assets.
The net cash provided by financing activities for the six month period ended July 31, 2011 was $91,000, a decrease of $1,053,000 which is primarily the net change of cash received fromon the line of credit of $50,000 for the six months ended July 31, 2011 as compared to a net change of $1,100,000 for the six months ended July 31, 2010. This was coupled with decrease in proceeds received from the employee stock purchase plan, and from thefor exercise of stock options. The increase in cash provided by financing activities is due tooptions, and payments on the increased draw against the line of credit as of October 31, 2010.capital lease obligation.
At OctoberJuly 31, 2010,2011, Streamline Health had cash on hand of $665,000,$578,000, and availabilitytotal eligible borrowings on the line of $350,000credit of approximately $1,790,000, or $540,000 in excess availability under the line of credit. The Company’s revolving credit facility matures October 1, 2011. The Company is currently evaluating our financing options available, including renewal or replacement of its current revolving credit facility. Streamline Health believes that its present cash position, combined with cash generation currently anticipated from operations, the availability and expected renewal or replacement of the revolving credit facility, and possible access to new funding sources will be sufficient to meet anticipated cash requirements for the next twelve months. However, continued expansion of the Company will require additional resources. The Company may need to incur debt, obtain an additional infusion of capital, or a combination of both, depending on the extent of the expansion of the Company and future revenues and expenses. However, there can be no assurance Streamline Health will be able to do so. The Company is evaluating financing options available to the Company.
2122
Notwithstanding the current levels of revenues and expenses, for the foreseeable future, Streamline Health will need to continually assess its revenue prospects compared to its then current expenditure levels. If it does not appear likely that revenues will increase, it may be necessary to reduce operating expenses or raise cash through additional borrowings, the sale of assets, or other equity financing. Certain of these actions will require current lender approval. However, there can be no assurance Streamline Health will be successful in any of these efforts. If it is necessary to significantly reduce operating expenses, this could have an adverse effect on future operating performance.
To date, inflation has not had a material impact on Streamline Health’s revenues or expenses.
| | |
Item 3. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the annual reportAnnual Report on Form 10-K for the fiscal year ended January 31, 2010.2011. The Company’s exposures to market risk have not changed materially since January 31, 2010.2011.
| | |
Item 4. | | CONTROLS AND PROCEDURES |
Streamline Health maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in Streamline Health’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Streamline Health’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) and 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.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of Streamline Health’s senior management, including the Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of Streamline Health’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on that evaluation, Streamline Health’s management, including the Chief Executive Officer and Interim Chief Financial Officer, concluded that there is reasonable assurance that Streamline Health’s disclosure controls and procedures were effective as of the end of the period covered by this report and there have beenreport.
There were no material changes in Streamline Health’sthe Company’s internal control or in the other controls over financial reporting during the quarterthree months ended OctoberJuly 31, 20102011 that could materially affect,have affected or isare reasonably likely to materially affect the Company’s internal controls over financial reporting.
2223
Part II. OTHER INFORMATION
| | |
Item 1. | | LEGAL PROCEEDINGS |
Streamline Health is, from time to time, a party to various legal proceedings and claims, which arise, in the ordinary course of business. Streamline Health is not aware of any legal matters that will have a material adverse effect on Streamline Health’s consolidated results of operations or consolidated financial position.
In addition to the other information set forth in this report, and the risk factors set forth below, you should carefully consider the risk factors discussed in Part I, “Item 1A, Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended January 31, 2010.2011. The risk factors in the Annual Report have not materially changed since January 31, 2010,2011, but are not the only risks facing the Company. In addition, risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company, its financial condition and/or operating results.
24
| | |
Item 3. | | DEFAULTS UPON SENIOR SECURITIES |
The Company was not in default of its existing credit facility at OctoberJuly 31, 2010.2011.
| | | | |
|
| 3.1 | (a)3.1(a) | | Certificate of Incorporation of Streamline Health Solutions, Inc. (*) |
| | | | |
| 3.1 | (b)3.1(b) | | Certificate of Incorporation of Streamline Health Solutions, Inc., amendment No. 1 (*) |
| | | | |
| 3.2 | | | Bylaws of Streamline Health Solutions, Inc. as amended and restated on October 22, 2010 (*) |
| | | | |
| 11 | 11.1 | | Computation of earnings (loss) per common shareshare** |
| | | | |
| 31.1 | | | Certification of Chief Executive Officer pursuant to Rule 13a -14(a) and Rule 15d — 14(a) of the Securities Exchange Act, as AmendedAmended** |
| | | | |
| 31.2 | | | Certification of Chief Financial Officer pursuant to Rule 13a -14(a) and Rule 15d — 14(a) of the Securities Exchange Act, as AmendedAmended** |
| | | | |
| 32.1 | | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 20022002** |
| | | | |
| 32.2 | | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 20022002** |
| | |
(*) | | Incorporated herein by reference from, the Registrant’s SEC filings. |
(See (See INDEX TO EXHIBITS)
|
(**) | | Included herein. |
2325
SIGNATURES
Pursuant to the requirements 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. | |
DATE: December 9, 2010September 13, 2011 | By: | /s/ J. Brian PatsyRobert E. Watson | |
| | J. Brian PatsyRobert E. Watson | |
| | Chief Executive Officer
(Principal Executive Officer) | |
| | |
DATE: December 9, 2010September 13, 2011 | By: | /s/ Donald E. Vick, Jr.Stephen H. Murdock | |
| | Donald E. Vick, Jr.Stephen H. Murdock | |
| | Interim Chief Financial Officer
(Principal Financial Officer, and
Principal Accounting Officer) | |
2426
INDEX TO EXHIBITS
| | | | | | |
Exhibit No. | | Description of Exhibit | | |
| | | | | | |
| 3.1 | (a) | | Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a/ LanVision Systems, Inc. Previously(Previously filed with the Commission and incorporated herein by reference from, the Registrant’s (LanVision System, Inc.) Registration Statement on Form S-1, File Number 333-01494, as filed with the Commission on April 15, 1996.) | | * |
| | | | | | |
| 3.1 | (b) | | Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a LanVision Systems, Inc., amendment No. 1 Previously1. (Previously filed with the Commission and incorporated herein by reference from the Registrant’s Form 10-Q, as filed with the Commission on September 8, 2006.) | | * |
| | | | | | |
| 3.2 | | | Bylaws of Streamline Health Solutions, Inc. as amended and restated on July 22, 2010, and previously filed with the Commission and incorporated herein by reference from the Registrant’s Form 10-Q, as filed with the Commission on September 9, 2010. | | * |
| | | | | | |
| 1111.1 | | | Statement Regarding Computation of Earnings (Loss) Per Common Share Earnings | | ** |
| | | | | | |
| 31.1 | | | Certification ofby Chief Executive Officer pursuant to Rule 13a - -14(a) and Rule 15d — 14(a)Section 302 of the Securities ExchangeSarbanes-Oxley Act as Amendedof 2002. | | ** |
| | | | | | |
| 31.2 | | | Certification ofby Chief Financial Officer pursuant to Rule 13a - -14(a) and Rule 15d — 14(a)Section 302 of the Securities ExchangeSarbanes-Oxley Act as Amendedof 2002. | | ** |
| | | | | | |
| 32.1 | | | Certification of theby Chief Executive Officer Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to sectionSection 906 of the Sarbanes-Oxley Act of 20022002. | | ** |
| | | | | | |
| 32.2 | | | Certification of theby Chief Financial Officer Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to sectionSection 906 of the Sarbanes-Oxley Act of 20022002. | | ** |
| | |
* | | Incorporated by reference herein as indicated |
|
** | | Included herein |
2527