UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2011
or
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
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 incorporation or organization) | (I.R.S. Employer | |
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. Yesþx 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). Yesþx 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 filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
Number of shares of Registrant’s Common Stock ($.01 par value per share) issued and outstanding, as of September 13, 2011: 10,053,979.
Page | ||||||||
Part I. | FINANCIAL INFORMATION | |||||||
Item 1. | Condensed Consolidated Balance Sheets at July 31, | 3 | ||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
Item 2. | ||||||||
Item 4. | ||||||||
25 | ||||||||
Part II. | OTHER INFORMATION | |||||||
2
Item 1. | Legal Proceedings | 26 | ||||
Item 6. | Exhibits | 26 | ||||
Signatures | 27 |
Item 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) | (Audited) | |||||||
July 31, 2011 | January 31, 2011 | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 577,885 | $ | 1,403,949 | ||||
Accounts receivable, net of allowance for doubtful accounts of $140,000 and $100,000, respectively | 2,151,458 | 2,620,756 | ||||||
Contract receivables | 535,941 | 680,096 | ||||||
Prepaid hardware and third party software for future delivery | 40,963 | 72,259 | ||||||
Prepaid customer maintenance contracts | 925,667 | 794,299 | ||||||
Other prepaid assets | 217,187 | 200,056 | ||||||
Deferred income taxes | 167,000 | 167,000 | ||||||
Total current assets | 4,616,101 | 5,938,415 | ||||||
Property and equipment: | ||||||||
Computer equipment | 2,815,087 | 2,708,819 | ||||||
Computer software | 2,037,063 | 1,947,135 | ||||||
Office furniture, fixtures and equipment | 747,867 | 747,867 | ||||||
Leasehold improvements | 639,864 | 639,864 | ||||||
6,239,881 | 6,043,685 | |||||||
Accumulated depreciation and amortization | (4,895,412 | ) | (4,517,860 | ) | ||||
1,344,469 | 1,525,825 | |||||||
Other assets: | ||||||||
Contract receivables, less current portion | 274,647 | 241,742 | ||||||
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 | ||||||
$ | 14,938,819 | $ | 16,015,422 | |||||
(Unaudited) July 31, 2012 | January 31, 2012 | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,071,522 | $ | 2,243,054 | ||||
Accounts receivable, net of allowance for doubtful accounts of $100,000 and $100,000, respectively | 2,190,052 | 4,484,605 | ||||||
Contract receivables | 339,025 | 430,370 | ||||||
Prepaid hardware and third party software for future delivery | 22,777 | 38,193 | ||||||
Prepaid client maintenance contracts | 941,751 | 788,917 | ||||||
Prepaid and other assets | 594,735 | 256,104 | ||||||
Deferred income taxes | 167,000 | 167,000 | ||||||
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Total current assets | 8,326,862 | 8,408,243 | ||||||
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Non-current assets: | ||||||||
Property and equipment: | ||||||||
Computer equipment | 3,285,529 | 2,892,885 | ||||||
Computer software | 2,187,854 | 2,131,730 | ||||||
Office furniture, fixtures and equipment | 756,375 | 756,375 | ||||||
Leasehold improvements | 667,000 | 667,000 | ||||||
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6,896,758 | 6,447,990 | |||||||
Accumulated depreciation and amortization | (5,594,952 | ) | (5,232,321 | ) | ||||
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| |||||
Property and equipment, net | 1,301,806 | 1,215,669 | ||||||
Contract receivables, less current portion | 168,546 | 221,596 | ||||||
Capitalized software development costs, net of accumulated amortization of $16,027,630 and $14,805,236, respectively | 9,577,781 | 9,830,175 | ||||||
Intangible assets, net | 392,348 | 417,666 | ||||||
Deferred financing cost, net | 302,097 | 145,857 | ||||||
Goodwill | 4,060,504 | 4,060,504 | ||||||
Other, including deferred income taxes of $711,000 and $711,000, respectively | 946,073 | 841,348 | ||||||
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Total non-current assets | 16,749,155 | 16,732,815 | ||||||
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| |||||
$ | 25,076,017 | $ | 25,141,058 | |||||
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See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders’ Equity
(Unaudited) | (Audited) | |||||||
July 31, 2011 | January 31, 2011 | |||||||
Current liabilities: | ||||||||
Accounts payable | $ | 752,454 | $ | 565,252 | ||||
Accrued compensation | 575,603 | 1,163,843 | ||||||
Accrued other expenses | 285,215 | 480,422 | ||||||
Capital lease obligation | 132,299 | 183,637 | ||||||
Deferred revenues | 5,093,616 | 5,766,795 | ||||||
Total current liabilities | 6,839,187 | 8,159,949 | ||||||
Long-term liabilities: | ||||||||
Line of credit | 1,250,000 | 1,200,000 | ||||||
Lease incentive liability, less current portion | 54,464 | 61,034 | ||||||
Total liabilities | 8,143,651 | 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, 10,053,979 and 9,856,517 shares issued and outstanding, respectively | 100,539 | 98,565 | ||||||
Additional paid in capital | 37,461,711 | 36,975,242 | ||||||
Accumulated deficit | (30,767,082 | ) | (30,479,368 | ) | ||||
Total stockholders’ equity | 6,795,168 | 6,594,439 | ||||||
$ | 14,938,819 | $ | 16,015,422 | |||||
(Unaudited) July 31, 2012 | January 31, 2012 | |||||||
Current liabilities: | ||||||||
Accounts payable | $ | 711,029 | $ | 879,027 | ||||
Accrued compensation | 997,080 | 887,130 | ||||||
Accrued other expenses | 1,039,256 | 479,526 | ||||||
Deferred revenues | 5,368,738 | 6,496,938 | ||||||
Contingent consideration for earn-out | 1,232,720 | — | ||||||
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Total current liabilities | 9,348,823 | 8,742,621 | ||||||
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Non-current liabilities: | ||||||||
Term loan | 4,120,000 | 4,120,000 | ||||||
Convertible note | — | 3,000,000 | ||||||
Lease incentive liability | 41,870 | 47,193 | ||||||
Contingent consideration for earn-out, less current portion | — | 1,232,720 | ||||||
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Total non-current liabilities | 4,161,870 | 8,399,913 | ||||||
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Total liabilities | 13,510,693 | 17,142,534 | ||||||
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Stockholders’ equity: | ||||||||
Convertible redeemable preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued | — | — | ||||||
Common stock, $.01 par value per share, 25,000,000 shares authorized, and 12,144,644 and 10,433,716 shares issued and outstanding, respectively | 121,447 | 104,338 | ||||||
Additional paid in capital | 41,882,312 | 38,360,980 | ||||||
Accumulated deficit | (30,438,435 | ) | (30,466,794 | ) | ||||
Total stockholders’ equity | 11,565,324 | 7,998,524 | ||||||
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$ | 25,076,017 | $ | 25,141,058 | |||||
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See Notes to Condensed Consolidated Financial Statements
4
Three and Six Months Ended July 31,
(Unaudited)
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Systems sales | $ | 163,200 | $ | 960,880 | $ | 294,202 | $ | 1,111,318 | ||||||||
Services, maintenance and support | 3,069,869 | 2,830,935 | 6,153,830 | 5,374,510 | ||||||||||||
Software as a service | 912,864 | 884,662 | 1,837,923 | 1,734,665 | ||||||||||||
Total revenues | 4,145,933 | 4,676,477 | 8,285,955 | 8,220,493 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of systems sales | 627,550 | 780,506 | 1,168,502 | 1,518,395 | ||||||||||||
Cost of services, maintenance and support | 1,155,667 | 1,378,778 | 2,489,538 | 2,760,988 | ||||||||||||
Cost of software as a service | 417,868 | 472,098 | 854,291 | 929,126 | ||||||||||||
Selling, general and administrative | 1,582,532 | 1,505,863 | 3,247,193 | 3,203,440 | ||||||||||||
Product research and development | 342,157 | 567,147 | 759,931 | 1,037,318 | ||||||||||||
Total operating expenses | 4,125,774 | 4,704,392 | 8,519,455 | 9,449,267 | ||||||||||||
Operating income (loss) | 20,159 | (27,915 | ) | (233,500 | ) | (1,228,774 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (21,791 | ) | (34,001 | ) | (41,633 | ) | (56,336 | ) | ||||||||
Miscellaneous income (expenses) | (311 | ) | (9,023 | ) | (5,266 | ) | 42,786 | |||||||||
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 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 | ) | ||||
Number of shares used in basic and diluted per common share computation | 9,817,370 | 9,506,904 | 9,847,348 | 9,460,911 | ||||||||||||
Three Months | Six Months | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues: | ||||||||||||||||
Systems sales | $ | 75,670 | $ | 163,200 | $ | 429,200 | $ | 294,202 | ||||||||
Professional services | 941,419 | 868,179 | 2,063,858 | 1,875,233 | ||||||||||||
Maintenance and support | 2,297,246 | 2,201,690 | 4,648,821 | 4,278,597 | ||||||||||||
Software as a service | 1,734,719 | 912,864 | 3,352,308 | 1,837,923 | ||||||||||||
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Total revenues | 5,049,054 | 4,145,933 | 10,494,187 | 8,285,955 | ||||||||||||
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Operating expenses: | ||||||||||||||||
Cost of systems sales | 532,332 | 627,550 | 1,218,859 | 1,168,502 | ||||||||||||
Cost of professional services | 503,474 | 614,978 | 1,055,956 | 1,164,015 | ||||||||||||
Cost of maintenance and support | 705,713 | 540,689 | 1,430,995 | 1,325,523 | ||||||||||||
Cost of software as a service | 616,781 | 417,868 | 1,299,087 | 854,291 | ||||||||||||
Selling, general and administrative | 2,204,205 | 1,582,532 | 3,873,965 | 3,247,193 | ||||||||||||
Product research and development | 510,842 | 342,157 | 967,205 | 759,931 | ||||||||||||
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Total operating expenses | 5,073,347 | 4,125,774 | 9,846,067 | 8,519,455 | ||||||||||||
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Operating income (loss) | (24,293 | ) | 20,159 | 648,120 | (233,500 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (391,188 | ) | (21,791 | ) | (599,018 | ) | (41,633 | ) | ||||||||
Miscellaneous income (expense) | (23,788 | ) | (311 | ) | 12,257 | (5,266 | ) | |||||||||
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Earnings (loss) before income taxes | (439,269 | ) | (1,943 | ) | 61,359 | (280,399 | ) | |||||||||
Income tax expense | (24,000 | ) | (5,000 | ) | (33,000 | ) | (7,315 | ) | ||||||||
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Net earnings (loss) | $ | (463,269 | ) | $ | (6,943 | ) | $ | 28,359 | $ | (287,714 | ) | |||||
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Basic net earnings (loss) per common share | $ | (0.04 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.03 | ) | |||||
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Number of shares used in basic per common share computation | 11,316,083 | 9,907,880 | 10,817,214 | 9,802,488 | ||||||||||||
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Diluted net earnings (loss) per common share | $ | (0.04 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.03 | ) | |||||
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Number of shares used in diluted per common share computation | 11,316,083 | 9,907,880 | 10,936,752 | 9,802,488 | ||||||||||||
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See Notes to Condensed Consolidated Financial Statements
5
Six Months Ended July 31,
(Unaudited)
2011 | 2010 | |||||||
Operating activities: | ||||||||
Net loss | $ | (287,714 | ) | $ | (1,252,324 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,391,822 | 1,708,706 | ||||||
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 | (673,179 | ) | (328,530 | ) | ||||
Net cash provided by (used in) operating activities | 709,759 | (15,383 | ) | |||||
Investing activities: | ||||||||
Purchases of property and equipment | (236,196 | ) | (302,292 | ) | ||||
Capitalization of software development costs | (1,391,000 | ) | (1,274,000 | ) | ||||
Other | — | 2,974 | ||||||
Net cash used in investing activities | (1,627,196 | ) | (1,573,318 | ) | ||||
Financing activities: | ||||||||
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 | 91,373 | 1,144,102 | ||||||
Decrease in cash and cash equivalents | (826,064 | ) | (444,599 | ) | ||||
Cash and cash equivalents at beginning of period | 1,403,949 | 1,025,173 | ||||||
Cash and cash equivalents at end of period | $ | 577,885 | $ | 580,574 | ||||
Supplemental cash flow disclosures: | ||||||||
Interest paid | $ | 29,621 | $ | 30,664 | ||||
Income taxes paid | $ | 16,957 | $ | 16,534 | ||||
2012 | 2011 | |||||||
Operating activities: | ||||||||
Net earnings (loss) | $ | 28,359 | $ | (287,714 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,610,343 | 1,391,822 | ||||||
Loss on disposal of equipment | — | 26,667 | ||||||
Stock-based compensation expense | 399,961 | 395,732 | ||||||
Provision for accounts receivable | — | 40,000 | ||||||
Change in assets and liabilities: | ||||||||
Accounts and contract receivables | 2,438,948 | 540,548 | ||||||
Other assets | (610,237 | ) | (121,302 | ) | ||||
Accounts payable | (167,998 | ) | 187,202 | |||||
Accrued expenses | 597,038 | (790,017 | ) | |||||
Deferred revenues | (1,128,200 | ) | (673,179 | ) | ||||
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Net cash provided by operating activities | 3,168,214 | 709,759 | ||||||
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Investing activities: | ||||||||
Purchases of property and equipment | (448,768 | ) | (236,196 | ) | ||||
Capitalization of software development costs | (970,000 | ) | (1,391,000 | ) | ||||
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Net cash used in investing activities | (1,418,768 | ) | (1,627,196 | ) | ||||
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Financing activities: | ||||||||
Net change in borrowings | — | 50,000 | ||||||
Proceeds from exercise of stock options, stock purchase plan, and subscriptions | 79,022 | 92,711 | ||||||
Payments on capital lease obligation | — | (51,338 | ) | |||||
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Net cash provided by financing activities | 79,022 | 91,373 | ||||||
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Increase (decrease) in cash and cash equivalents | 1,828,468 | (826,064 | ) | |||||
Cash and cash equivalents at beginning of period | 2,243,054 | 1,403,949 | ||||||
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Cash and cash equivalents at end of period | $ | 4,071,522 | $ | 577,885 | ||||
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Supplemental cash flow disclosures: | ||||||||
Interest paid | $ | 299,712 | $ | 29,621 | ||||
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Income taxes paid | $ | 23,276 | $ | 16,957 | ||||
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Supplemental Disclosure of Non-Cash Financing Activity
In June 2012, the $3,000,000 convertible note and accrued interest was converted to 1,529,729 common shares at $2.00 per share.
See Notes to Condensed Consolidated Financial Statements
6
(Unaudited)
NOTE A —– BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Streamline Health Solutions, Inc. (“Streamline Health®we”, “us”, or the Company”“our”), 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 believeswe believe that the disclosures made are adequate to make the information not misleading. In the opinion of our 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 theour most recent Streamline Health Solutions, Inc. Annual Reportannual report on Form 10-K, Commission File Number 0-28132. Operating results for the three and six months ended July 31, 20112012 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2012.
NOTE B —– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’sour significant accounting policies is presented in “Note B —– Significant Accounting Policies” in the fiscal year 20102011 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 on Form 10-K when reviewing interim financial results.
Acquisitions
On December 7, 2011, we completed the acquisition of substantially all of the assets of Interpoint Partners, LLC (“Interpoint”). In October 2009,The net acquired assets and liabilities, and related revenue and expense since December 7, 2011 are included in our condensed consolidated financial statements.
Fair Value of Financial Instruments
The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the Financialreader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount of the Company’s long-term debt approximates fair value since the interest rates being paid on the amounts approximate the market interest rate. Long-term debt is classified as Level 2. The fair value of contingent consideration for earn-out is determined by management with the assistance of an independent third party valuation specialist. The Company used a binomial model to estimate the fair value of the contingent consideration for earn-out. The contingent consideration for earn-out is classified as Level 3.
Revenue Recognition
We derive revenue from the sale of internally developed software either by licensing or by software as a service (SaaS), through our direct sales force or through third-party resellers. Clients with locally-installed software utilize our support and maintenance services for a separate fee, whereas SaaS fees include support and maintenance. We also derive revenue from professional services that support the implementation, configuration, training, and optimization of our applications. Additional revenues are also derived from reselling third-party software and hardware components.
We recognize revenue in accordance with ASC 985-605,Software-Revenue Recognitionand ASC 605-25Revenue Recognition – Multiple-element arrangements. Revenue recognition typically commences when the following criteria have all been met:
Persuasive evidence of an arrangement exists,
Delivery has occurred or services have been rendered,
The arrangement fees are fixed or determinable, and
Collection is considered probable.
If we determine that any of the above criteria has not been met, we will defer recognition of the revenue until all the criteria have been met. Maintenance and support, and SaaS agreements entered into are generally non-cancelable, or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable. Revenues from resellers are recognized gross of royalty payments to resellers.
Revenue Recognition – Multiple-Deliverable Revenue Arrangements
We recognize revenue in accordance with Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)No. 2009-13, —Multiple-DeliverableRevenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements (ASU 2009-13)— a consensus of the FASB Emerging Issues Task Force ” (“ASU 2009-13”). ASU 2009-13 requires a vendoramends the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:
Provide updated guidance on how deliverables of an arrangement are separated, and how consideration is allocated;
Eliminate the residual method and require entities to allocate revenue using the relative selling price method; and;
Require entities to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based onan arrangement using 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 best estimate of the stand-alone selling price of deliverables when more objective evidence of selling price is not available.
7
Terms used in evaluation are as follows:
VSOE — the price at which an element is sold as a separate stand-alone transaction.
TPE — the price of an element, charged by another company that is largely interchangeable in any particular transaction.
ESP — our best estimate of the selling price of an element of the transaction.
We follow accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple solutions, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis. Stand-alone value to a client is defined in the guidance as those that can be sold separately by any vendor or the client could resell the item on a stand-alone basis. Additionally, if the arrangement includes a general right of return relative to the hierarchy.delivered item, delivery or performance of the undelivered item or items must be considered probable and substantially in the control of the vendor.
We have developed a pricing methodology for all elements of the arrangement and proper review of pricing to ensure adherence to our policies. Pricing decisions include cross-functional teams of senior management, which uses market conditions, expected contribution margin, size of the client’s organization, and pricing history for similar solutions when establishing the selling price.
Software as a Service
We use ESP to determine the value of SaaS arrangements because we cannot establish VSOE, and TPE is not a practical alternative due to differences in functionality from our competitors. Similar to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution, and include calculating the equivalent value of maintenance and support on a present value basis over the term of the initial agreement period. Typically revenue recognition commences once the client goes live on the system, and is recognized ratably over the contract term. The amounts representingsoftware portion of SaaS for our HIM (“Health Information Management”) products do not need material modification to achieve their contracted function. The software portion of SaaS for our PFS (“Patient Financial Services”) products require material customization and setup processes to achieve their contracted function.
System Sales
We use the residual method to determine fair value for a proprietary software license sold in a multi-element arrangement because we can establish fair value for all of the undelivered elements. Typically pricing decisions for proprietary software rely on the relative size and complexity of the client purchasing the solution. Third party components are resold at prices based on a cost plus margin analysis. The proprietary software and third party components do not need any significant modification to achieve their intended use. When these revenues meet all criteria for revenue recognition, and are determined to be separate units of accounting, revenue is recognized. Typically this is upon shipment of components or electronic download of software. Proprietary licenses are perpetual in nature, and license fees do not include rights to version upgrades, fixes or service packs.
Maintenance and Support Services
The maintenance and support components are not essential to the functionality of the software and clients renew maintenance contracts separately from software purchases at renewal rates materially similar to the initial rate charged for maintenance on the initial purchase of software. We use VSOE of fair value to determine fair value of maintenance and support services. Rates are set based on market rates for these types of services, and these rates are comparable to rates charged by our competitors, which are based on the undelivered itemsknowledge of the marketplace by senior management. Generally, maintenance and support is calculated as a percentage of the list price of the proprietary license being purchased by a client. Clients have the option of purchasing additional annual maintenance service renewals each year for which rates are deferred until delivered, ornot materially different from the initial rate, but typically include a nominal rate increase based on the consumer price index. Annual maintenance and support agreements entitle clients to technology support, upgrades, bug fixes and service packs.
Professional Services
Professional services components that are not essential to the functionality of the software, from time to time, are sold separately by us. Similar services are sold by other vendors, and clients can elect to perform similar services in-house. When professional services revenues are a separate unit of accounting, revenues are recognized pro rataas the services are performed.
Professional services components that are essential to the functionality of the software, and are not considered a separate unit of accounting, are recognized in revenue ratably over the service contract.
We use VSOE of fair value based on the hourly rate charged when services are sold separately, to determine fair value of professional services. We typically sell professional services on a fixed fee basis. We monitor projects to assure that the expected and historical rate earned remains within a reasonable range to the established selling price.
NOTE C —– EQUITY AWARDS
Common Stock
Authorized common stock of the Company consisted of 25,000,000 shares, par value of $.01 per share, of which 12,144,644 and 10,433,716 shares were issued and outstanding as of July 31, 2012 and January 31, 2012, respectively.
On June 15, 2012 Interpoint elected to convert the balance of principal and interest on the note outstanding, net of working capital adjustments and related accrued interest owed to us, for 1,529,729 shares of common stock at $2.00 per share (see Note F). The excess of the exercise price over the par value of the common stock was recorded as a credit to additional paid in capital of $3,044,203.
Equity Awards
During the six months ended July 31, 2012, we granted 517,000 options with a weighted average exercise price of $2.43 per share. During the same period, 125,667 options expired with an average exercise price of $1.77 per share and 1,666 options were exercised under all plans.
During the six months ended July 31, 2011, the Companywe granted 858,000 options with a weighted average exercise price of $1.94 per share. During the same period 115,916 options expired with an average exercise price of $1.84 per share and 32,598 options were exercised under all plans.
The fair value of each option grant during the six months ended July 31, 2012 and July 31, 2011 was estimated at the date of the grants using a Black-Scholes option pricing model with the following weighted average assumptions:
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 | % |
For the six months ended, July 31, 2012 | For the six months ended, July 31, 2011 | |||||||
Risk-free interest rate | 0.41 | % | 2.27 | % | ||||
Dividend yield | — | — | ||||||
Current weighted-average volatility factor of the expected market price of Common Stock | 0.53 | 0.56 | ||||||
Weighted-average expected life of stock options | 5 years | 5 years | ||||||
Forfeiture rate | 0 | % | 0 | % |
8
During the same periodsix months ended July 31, 2011, we granted 110,412 restricted stock shares with a weighted average fair value of $1.68 per share, and 223,090 restricted stock shares had their restriction period lapse; these shares hadwith a weighted average fair value of $1.92 per share.
During the six months ended July 31, 2011, the Company granted 25,000 restricted stock shares as executive inducement grants with a weighted average fair value of $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.
For the six month periods ended July 31, 2012 and July 31, 2011, we recognized equity awards expense of $400,000 and $396,000, respectively, as a credit to additional paid in capital.
During the six month period ended July 31, 2012, 44,744 shares were purchased at the price of $1.70 per share. Cash received from exercise of options and employee stock purchase plan was $79,000 for the six months ended July 31, 2012. As a result we recorded $78,000 as a credit to additional paid in capital.
NOTE D —– EARNINGS PER SHARE
Diluted net earnings (loss) per share of common sharestock reflects the potential dilution that could occur if stock options, stock purchase plan commitments, and restricted stock were exercised into shares of our common stock, under certain circumstances, that then would share in the earnings of Streamline Health.our earnings. 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 well as anti-dilutive securities is as follows:
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
Three Months Ended, | ||||||||
July 31, 2012 | July 31, 2011 | |||||||
Numerator for Basic and Diluted Earnings per Share: | ||||||||
Net loss | $ | (463,269 | ) | $ | (6,943 | ) | ||
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Denominator for basic earnings per share weighted average shares | 11,316,083 | 9,907,880 | ||||||
Effect of dilutive securities | ||||||||
Stock options | — | — | ||||||
Restricted stock | — | — | ||||||
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Denominator for basic earnings per share, with assumed conversions | 11,316,083 | 9,907,880 | ||||||
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Basic net loss per common share | $ | (0.04 | ) | $ | (0.00 | ) | ||
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Diluted net loss per common share | $ | (0.04 | ) | $ | (0.00 | ) | ||
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Anti-dilutive securities: | ||||||||
Stock options, out-of-the-money | 403,500 | 1,272,467 | ||||||
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Six Months Ended, | ||||||||
July 31, 2012 | July 31, 2011 | |||||||
Numerator for Basic and Diluted Earnings per Share: | ||||||||
Net earnings (loss) | $ | 28,359 | $ | (287,714 | ) | |||
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Denominator for basic earnings per share weighted average shares | 10,817,214 | 9,802,488 | ||||||
Effect of dilutive securities | ||||||||
Stock options | 78,855 | — | ||||||
Restricted stock | 40,683 | — | ||||||
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Denominator for basic earnings per share, with assumed conversions | 10,936,752 | 9,802,488 | ||||||
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Basic net earnings (loss) per common share | $ | 0.00 | $ | (0.03 | ) | |||
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Diluted net earnings (loss) per common share | $ | 0.00 | $ | (0.03 | ) | |||
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Anti-dilutive securities: | ||||||||
Stock options, out-of-the-money | 443,500 | 1,282,467 | ||||||
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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 | ||||||
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 | |||||||||||||
2011 | $ | 1,256,000 | $ | 224,000 | $ | 137,000 | $ | 1,617,000 | ||||||||
2012 | — | 389,000 | — | 389,000 | ||||||||||||
2013 | — | 329,000 | — | 329,000 | ||||||||||||
2014 | — | 335,000 | — | 335,000 | ||||||||||||
2015 | — | 164,000 | — | 164,000 | ||||||||||||
Thereafter | — | — | — | — | ||||||||||||
Total | $ | 1,256,000 | $ | 1,441,000 | $ | 137,000 | $ | 2,834,000 | ||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Totals | ||||||||||||||||||||||
Operating leases | $ | 259 | 477 | 487 | 321 | 161 | 279 | 1,984 | ||||||||||||||||||||
Term loan | — | 4,120 | — | — | — | — | 4,120 | |||||||||||||||||||||
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Total | $ | 259 | 4,597 | 487 | 321 | 161 | 279 | 6,104 | ||||||||||||||||||||
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On April 10, 2012, we entered into an amended lease obligation to lease 8,582 square feet of office space in our current building at 1230 Peachtree NE in Atlanta, GA. The lease commences upon taking possession of the space and ends 72 months thereafter. We took possession of the space during the third quarter of fiscal 2012. Upon relocation, we completely vacated the previously leased premises within the building. The provisions of the lease provide for rent abatement for the first four months of the lease term, and a moving allowance of approximately $17,000. Upon taking possession of the premises, the rent abatement and allowance will be aggregated with the total expected rental expense, and will be amortized on a straight line basis over the term of the lease.
NOTE F —– DEBT
Term Loan and Line of Credit
On April 13,December 7, 2011, in conjunction with the Company’s wholly owned subsidiary, Streamline Health, Inc.,acquisition of the assets of Interpoint, we entered into a second amended and restated revolving notesubordinated credit agreement with Fifth Third Bank Cincinnati, OH. in which the bank provided us with a $4,120,000 term loan maturing on December 7, 2013 and a revolving line of credit maturing on October 1, 2013.
The termsproceeds from the term loan were used to finance the cash portion of the Interpoint acquisition purchase price, as well as pay down the outstanding balance of our existing revolving line of credit with Fifth Third Bank. The term loan remainand revolving line of credit are secured by substantially all of our and our subsidiaries’ assets. Borrowings under the same as set forth in the revolving note entered into on July 31, 2008, as amended on January 6, 2009,term loan bear interest at a rate of 12% and October 21, 2009, except as follows: (i) the maximum principal amount that can be borrowed was increased to $3,000,000 from the prior maximum amount of $2,750,000, subject to the borrowing base limitation; and (ii) the maturity date of the loan has been extended to October 1, 2013 from October 1, 2011. The interest rate on the outstanding principal balanceline of the loan accruescredit bears interest at an annuala floating rate of interest equal to the Adjusted Libor Rate (as defined in the revolving note)based on LIBOR plus 3.25%,an applicable margin, and is payable monthly. The interest rate on the note was 3.5%line of credit at July 31, 2011. In2012 approximated 3.4%. We paid a commitment fee in connection with the term loan of $120,000, which is included in deferred financing costs, and we will also be required to pay a success fee in accordance with the revised maturity date,loan, which is recorded in interest expense. We had no outstanding borrowings under the outstanding balance on the note is classifiedline of credit as a long-term obligation atof July 31, 2011.
2012.
10
Convertible Note
On December 7, 2011, as part of the purchase of the assets of Interpoint, we issued a convertible promissory note (the “Convertible Note”) for $3,000,000. The note accrued interest at a per annum rate of 8% from the Company pursuantdate of the note until the earlier of conversion or payment in full of all outstanding principal and accrued interest. Interest is payable quarterly in arrears on the first day of March, June, September, and December.
On June 15, 2012 Interpoint elected to security agreements entered intoconvert the balance of principal and interest on the note outstanding, net of working capital adjustments and related accrued interest owed to us, for 1,529,729 shares of common stock at $2.00 per share.
Contingent Earn-Out Provision
As part of the asset purchase, Interpoint is entitled to receive additional consideration contingent upon certain financial performance measurements during a one year earn-out period commencing June 30, 2012 and ending on June 30, 2013. The earn-out consideration is calculated as twice the recurring revenue for the earn-out period recognized by the Company.
Interpoint is entitled to additional earn-out consideration of fifty percent of any license sales of the developed software acquired, to specific clients as defined in the asset purchase agreement, for any sales prior to December 31, 2012.
At July 31, 2011. The Company pays a commitment fee on2012 we estimate the unused portion ofpayment obligation in connection with the facility of .06%. The Company had outstanding borrowings of $1,250,000 and $1,200,000 under this revolving loanearn-out will be $1,233,000. Future adjustments to the contingent obligation will be recorded as of July 31, 2011 and January 31, 2011, respectively.
NOTE G — COMMITTMENTS- COMMITMENTS AND CONTINGENCIES
We have entered into employment agreements with itsour officers and certain employees that generally provide annual salary, a minimum bonus, discretionary bonus, and stock incentive provisions.
NOTE H – SUBSEQUENT EVENTS
We evaluated all events or transactions that occurred after July 31, 2012 through the date the we issued these financial statements. On August 16, 2012, we acquired substantially all of the outstanding stock of New York City-based Meta Health Technology, Inc., a New York corporation (“Meta”). We paid a total purchase price of $15,000,000, consisting of cash payment of $13,400,000 and the issuance of 393,086 shares of our common stock at a price of $4.07 per share, which had an agreed upon value of approximately $1,600,000. For the three and six month periods ending July 31, 2012, we recorded $524,000 and $550,000, respectively, of acquisition costs related to the Meta transaction, which was recorded in selling, general and administrative expense.
In conjunction with the Meta acquisition, on August 16, 2012, we amended our current term loan and line of credit agreements with Fifth Third Bank, whereby Fifth Third Bank provided us with a $5,000,000 revolving line of credit, a $5,000,000 senior term loan and a $9,000,000 subordinated term loan, a portion of which was used to refinance the previously outstanding $4,120,000 subordinated term loan. These new term loans and revolving line of credit mature on August 16, 2014. Additionally, as part of the refinancing in August, we mutually agreed to settle the success fee included in the the current term loan for $700,000. The loans are secured by substantially all of our assets. Borrowing under the senior term loan bears interest at a rate of LIBOR plus 5.50%, and borrowing under the subordinated term loan bears interest at 10% from August 16, 2012 and thereafter. Borrowing under the revolving loan bears interest at a rate equal to LIBOR plus 3.00%. The loans are subject to certain customary financial covenants, including, without limitation, covenants that require us to maintain a minimum adjusted EBITDA, to maintain a funded debt to adjusted EBITDA ratio and to maintain a fixed charge coverage ratio. A commitment fee of 0.40% will be incurred on the unused revolving line of credit balance, and is payable quarterly. The proceeds of these loans were used to finance the cash portion of the acquisition purchase price and to cover any additional operation costs as a result of the Meta acquisition.
In a reductionseparate transaction on August 16, 2012, we completed a $12,000,000 equity investment with affiliated funds and accounts of Great Point Partners, LLC, and Noro-Moseley Partners VI, L.P., and another investor. The equity investment consisted of us issuing 2,416,785 shares of a new series A convertible preferred stock at $3.00 per share, warrants exercisable for up to 1,200,000 shares of our common stock at an exercise price of $3.99 per share, and convertible subordinated notes in force implemented by managementthe aggregate principal amount of $5,699,577, which, upon stockholder approval, convert into 1,583,210 shares of preferred stock. The preferred stock is convertible into shares of our common stock on a one-for-one basis at $3.00 per share at any time at the discretion of the holder of such preferred stock. The warrants may be exercised at any time during the quarter ended July 31, 2011,period beginning on February17, 2013 until 5 years from such initial exercise date. Direct costs of obtaining the Company expensed $100,000 infinancing were capitalized and will be amortized over the second quarterlife of fiscal 2011, in accordance with severance agreements.
the related instruments.
11
the healthcare regulatory environment, potential changes in legislation, regulatoryregulation 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 AccountingAccountings Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry generally and the markets in which the Company operates,we operate, and the Company’sour ability to maintain compliance with the terms of itsour credit facilities, and other risk factors that might cause such differences including those discussed herein, including, but not limited to, discussions in the most recent Form 10-K,sections entitled Part I, “Item 1 Business”,Financial Statements” and “Item 1A Risk Factors”, Part II, “Item 72 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 Financial Statements and Supplemental Data.Operations.” In addition, other written or oral statements that constitute forward-looking statements may be made by us or on behalf of the Company.our behalf. 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 undertakesWe undertake 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. fileswe file from time to time with the Securities and Exchange Commission, including future Quarterly Reportsthe annual report on Form 10-K, quarterly reports on Form 10-Q and any Current Reportscurrent reports on Form 8-K.
Our discussion and analysis of itsour financial condition and results of operations are based upon itsour 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 Healthus 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 itswe evaluate our estimates, including those related to product revenues, bad debts, capitalized software development costs, income taxes, support contracts, contingencies, and litigation. Streamline Health bases itsWe base our estimates on historical experience and on various other assumptions that Streamline Health believeswe believe 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.
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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 | ||||||
14
We recognized revenues in the three and six month periods ending July 31, 20112012 of $5,049,000 and $10,494,000, compared to $4,146,000 and $8,286,000 compared to $4,676,000 and $8,220,000; a decrease of $530,000 andfor the comparable prior year periods; an increase of $66,000$903,000 and $2,208,000 or 22% and 27%, respectively. The revenues recognizedRevenues are derived primarily from recurring revenues recognized from SaaS subscriptionssoftware as a service (referred to herein as “SaaS”) and recurring maintenance contracts. The Company earnedWe incurred an operating profitloss of $20,000$24,000 in the second quarter of fiscal 20112012, and incurredearned an operating lossprofit of $234,000$648,000 for the six month period ended July 31, 2011.2012. In the prior year comparable periods the Companywe earned an operating profit of $20,000 and incurred an operating lossesloss of $28,000 and $1,229,000,$234,000, respectively. Operating expenses for the three and six month periods ending July 31, 20112012 were $5,073,000 and $9,846,000, compared to $4,126,000 and $8,519,000 compared to $4,704,000 and $9,449,000 in the comparable prior year periods; a decreasean increase of $578,000$947,000 and $1,327,000, or 12%23% and $930,000 or 10%16%, respectively, over the prior year comparable periods.
Our 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 SaaS, 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.increase or customers expand their solutions. Substantial portions of the operating expenses are fixed; therefore operating profits are expected to vary depending primarily on the factors that drive fluctuations in revenues and the mix of proprietary system salesrevenue versus SaaS subscriptions sold.
Statement of Operations(1)(1)
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Systems sales | 4 | % | 20 | % | 4 | % | 14 | % | ||||||||
Services, maintenance and support | 74 | 61 | 74 | 65 | ||||||||||||
Application-hosting services | 22 | 19 | 22 | 21 | ||||||||||||
Total revenues | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of sales | 53 | % | 56 | % | 55 | % | 63 | % | ||||||||
Selling, general and administrative | 38 | 32 | 39 | 39 | ||||||||||||
Product research and development | 8 | 12 | 9 | 13 | ||||||||||||
Total operating expenses | 99 | % | 100 | % | 103 | % | 115 | % | ||||||||
Operating profit (loss) | 1 | % | (1 | )% | (3 | )% | (15 | )% | ||||||||
Other income (expense), net | (1 | )% | (1 | )% | (1 | )% | — | |||||||||
Income tax net benefit | — | — | — | — | ||||||||||||
Net earnings(loss) | — | (2 | )% | (4 | )% | (15 | )% | |||||||||
Cost of systems sales | 385 | % | 81 | % | 397 | % | 137 | % | ||||||||
Cost of services, maintenance and support | 38 | % | 49 | % | 41 | % | 51 | % | ||||||||
Cost of application-hosting services | 46 | % | 53 | % | 47 | % | 54 | % | ||||||||
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Systems sales | 1.5 | % | 4.0 | % | 4.1 | % | 3.6 | % | ||||||||
Professional services | 18.6 | 20.9 | 19.7 | 22.6 | ||||||||||||
Maintenance and support | 45.5 | 53.1 | 44.3 | 51.6 | ||||||||||||
Software as a service | 34.4 | 22.0 | 31.9 | 22.2 | ||||||||||||
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Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
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Cost of sales | 46.7 | 53.1 | 47.7 | 54.5 | ||||||||||||
Selling, general and administrative | 43.7 | 38.2 | 36.9 | 39.2 | ||||||||||||
Product research and development | 10.1 | 8.3 | 9.2 | 9.2 | ||||||||||||
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Total operating expenses | 100.5 | 99.5 | 93.8 | 102.8 | ||||||||||||
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Operating profit (loss) | (0.5 | ) | 0.5 | 6.2 | (2.8 | ) | ||||||||||
Other income (expense), net | (8.2 | ) | (0.5 | ) | (5.6 | ) | (0.6 | ) | ||||||||
Income tax expense | (0.5 | ) | (0.1 | ) | (0.3 | ) | �� | (0.1 | ) | |||||||
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Net earnings (loss) | (9.2 | )% | (0.2 | %) | 0.3 | % | (3.5 | %) | ||||||||
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Cost of systems sales | 703.5 | % | 384.5 | % | 284.0 | % | 397.2 | % | ||||||||
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Cost of professional services | 53.5 | % | 70.8 | % | 51.2 | % | 62.1 | % | ||||||||
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Cost of maintenance and support | 30.7 | % | 24.6 | % | 30.8 | % | 31.0 | % | ||||||||
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Cost of software as a service | 35.6 | % | 45.8 | % | 38.8 | % | 46.5 | % | ||||||||
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(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 |
15
Revenues consisted of the following (in thousands):
Three Months Ended, | ||||||||||||||||
July 31, 2011 | July 31, 2010 | Change | % Change | |||||||||||||
Proprietary software(1) | $ | 14 | $ | 674 | $ | (660 | ) | (98 | %) | |||||||
Hardware & third party software(1) | 149 | 287 | (138 | ) | (48 | %) | ||||||||||
Professional services(2) | 868 | 929 | (61 | ) | (7 | %) | ||||||||||
Maintenance & support(2) | 2,202 | 1,902 | 300 | 16 | % | |||||||||||
Software as a service | 913 | 884 | 29 | 3 | % | |||||||||||
Total Revenues | $ | 4,146 | $ | 4,676 | $ | (530 | ) | (11 | %) | |||||||
Six Months Ended, | ||||||||||||||||
July 31, 2011 | July 31, 2010 | Change | % Change | |||||||||||||
Proprietary software(1) | $ | 51 | $ | 702 | $ | (651 | ) | (93 | %) | |||||||
Hardware & third party software(1) | 242 | 409 | (167 | ) | (41 | %) | ||||||||||
Professional services(2) | 1,875 | 1,587 | 288 | 18 | % | |||||||||||
Maintenance & support(2) | 4,279 | 3,787 | 492 | 13 | % | |||||||||||
Software as a service | 1,839 | 1,735 | 104 | 6 | % | |||||||||||
Total Revenues | $ | 8,286 | $ | 8,220 | $ | 66 | 1 | % | ||||||||
Three Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Proprietary software(1) | $ | 14 | $ | 14 | $ | 0 | 0 | % | ||||||||
Hardware & third party software(1) | 62 | 149 | (87 | ) | (58 | )% | ||||||||||
Professional services(2) | 941 | 868 | 73 | 8 | % | |||||||||||
Maintenance & support | 2,297 | 2,202 | 95 | 4 | % | |||||||||||
Software as a service(3) | 1,735 | 913 | 822 | 90 | % | |||||||||||
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Total revenues | $ | 5,049 | $ | 4,146 | $ | 903 | 22 | % | ||||||||
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Proprietary software(1) Hardware & third party software(1) Professional services(2) Maintenance & support Software as a service(3) Total revenues Six Months Ended, July 31, 2012 July 31, 2011 Change % Change $ 134 $ 51 $ 83 163 % 295 242 53 22 % 2,064 1,875 189 10 % 4,648 4,279 369 9 % 3,353 1,839 1,514 82 % $ 10,494 $ 8,286 $ 2,208 27 %
(1) | Proprietary software and hardware are the components of the system sales line item | |
(2) |
(3) | Includes $630,000 and $1,120,000 of revenue earned from the acquired Interpoint operations for the three and six month periods ended July 31, 2012, respectively. |
Revenues for the three and six month periods ended July 31, 2011,2012 were $4,146,000$5,049,000 and $8,286,000$10,494,000 respectively; as compared to $4,676,000$4,146,000 and $8,220,000$8,286,000 respectively in the comparable periods of fiscal 2010.2011. The quarterly decreaseand year to date increase was primarily attributable to two large proprietary license sales recognizedrevenues provided by the acquired Interpoint operations (now known as SaaS-PFS) which contributed $660,000 in incremental revenue 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 by2012 and $1,184,000 for the six months ended July 31, 2012. Additional increases in recurring revenues from SaaS and maintenance contracts are primarily due to annual increases, new clients which have added incremental revenue, or expansion of services to current clients.
Backlog
July 31, 2012 | January 31, 2012 | July 31, 2011 | ||||||||||
Streamline Health proprietary software | $ | 120,000 | $ | 181,000 | $ | 80,000 | ||||||
Hardware and third party software | 119,000 | 194,000 | 152,000 | |||||||||
Professional services | 4,678,000 | 5,945,000 | 4,573,000 | |||||||||
Maintenance and support | 9,937,000 | 10,542,000 | 6,009,000 | |||||||||
Software as a service | 17,332,000 | 10,504,000 | 7,275,000 | |||||||||
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Total | $ | 32,186,000 | $ | 27,366,000 | $ | 18,089,000 | ||||||
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At July 31, 2012, we had master agreements and purchase orders from clients and remarketing partners for systems and related services which have not been delivered or installed which, if fully performed, would generate future revenues of approximately $32,186,000 compared with $18,089,000 at July 31, 2011.
Our proprietary software maintenancebacklog consists of signed agreements to purchase software licenses. Typically, this is software that is not yet generally available, or the software is generally available and the client has not taken possession of the software.
Third party hardware and software consists of signed agreements to purchase third party hardware or third party software licenses that have not been delivered to the client. These are products that we resell as components of solutions clients purchase. The decrease in backlog is primarily due to clients which have made fewer purchases for future systems implementations. These items are expected to be delivered in the next twelve months as implementations commence.
Professional services backlog consists of signed contracts for services that have yet to be performed, or revenues that are deferred. Typically backlog is recognized within twelve months of the contract signing for services, unless those services are deemed essential to the functionality of software; whereby they are deferred and recognized over a service subscription revenue.period greater than one year. The increase in backlog from the prior year comparable quarter is due to incremental backlog provided by SaaS-PFS clients acquired in the Interpoint acquisition, and is partially offset by revenue recognized out of backlog.
Maintenance and support backlog consists of maintenance agreements for licenses of our proprietary software and third party hardware and software with clients and remarketing partners for which either an agreement has been signed, a purchase order has been received, or payment has been received. Included in maintenance and support backlog are the signed client agreements through their respective renewal dates. Typical maintenance contracts are for a one year term and are renewed annually. Clients typically prepay maintenance and support which is billed 30-60 days prior to the beginning of the maintenance period. We do not expect any significant client attrition over the next 12 months. Maintenance and support backlog at July 31, 2012 was $9,937,000 as a service subscription revenue on a quarterlycompared to $6,009,000 at July 31, 2011. A significant portion of the increase in maintenance and year-to-date basissupport backlog is due to one SaaS customerclient which signed an extended maintenance contract for five years. Other factors which increased backlog are add-on solutions sold in fiscal 2010 that reached go-live status in2011 and the firstsecond quarter of fiscal 2012. Additionally, contract renewals are typically subject to an annual increase in fees based on market rates and inflationary metrics.
At July 31, 2012, we have entered into SaaS agreements, which are expected to generate revenues of $17,332,000 through their respective renewal dates in fiscal years 2012 through 2018. Typical SaaS terms are one to five years in length. The increase in SaaS backlog from July 31, 2011 and was able to begin ratable revenue recognition,is primarily the impact of assumed backlog from the Interpoint acquisition, as well as the continued recognition of subscription revenues from backlog. Additionally, the increasenew contracts signed late in recurring maintenance and support is due to revenues recognized for maintenance periods commencing on software sold since the close offiscal 2011 through the second quarter 2010. The year-to-date increase in professional services is primarily the result of increased revenue earned from implementations of systems and other professional services sold in prior quarters.
fiscal 2012.
16
Cost of sales consisted of the following (in thousands):
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 | %) | |||||||
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 | %) | |||||||
Three Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Cost of system sales | $ | 532 | $ | 628 | $ | (96 | ) | (15 | %) | |||||||
Cost of professional services | 503 | 615 | (112 | ) | (18 | %) | ||||||||||
Cost of maintenance and support | 706 | 541 | 165 | 30 | % | |||||||||||
Cost of software as a service | 617 | 418 | 199 | 48 | % | |||||||||||
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Total cost of sales | $ | 2,358 | $ | 2,202 | $ | 156 | 7 | % | ||||||||
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Cost of system sales Cost of professional services Cost of maintenance and support Cost of software as a service Total cost of sales Six Months Ended, July 31, 2012 July 31, 2011 Change % Change $ 1,219 $ 1,169 $ 50 4 % 1,056 1,164 (108 ) (9 %) 1,431 1,326 105 8 % 1,299 854 445 52 % $ 5,005 $ 4,513 $ 492 11 %
Cost of systems sales includes amortization of capitalized software expenditures, royalties, and the cost of third-party hardware and software. The quarterly and year-to-date decrease in the cost of systems sales is primarily the result of quarterly and year-to-date decreases in capitalized software amortization of $132,000 and $253,000, respectively; primarily due to products released in prior years becoming fully amortized in fiscal 2011. Cost of systems sales was also reduced on a quarterly and year-to-date basis due to a decrease in third-party hardware and software sales. The year-to-date increase of $50,000 in the cost of systems sales overis primarily attributable to the sunsetting of certain products, and partially offset by older assets becoming fully amortized.
The cost of professional services includes compensation and benefits for personnel, and related expenses. The quarterly and year-to-date decrease in expense is primarily due to a significant reduction in staffing, which took place in the second quarter of fiscal 2011, which increased severance expenses in the prior year comparable periods.
The cost of maintenance and support includes compensation and benefits for client support and professional services personnel and the cost of third party maintenance contracts. The quarterly and year-to-date decreaseincrease in expense is primarily due to reduced salary and benefits expenses during fiscal 2011, primarily through the reduction in forceincreased support costs experienced in the second quarter; and reductionsquarter for certain products 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 use of third-party outside contractors.
The cost of software as a service operations is relatively fixed, but is generally subject to annual increases for the goods and services required. Additionally, amortization of internally developed software purchased in the acquisition of Interpoint of $88,000 and $175,000 was recorded for the three and six months ended July 31, 2012 respectively. The quarterly and year-to-date decreaseincrease, net of amortization expense, is primarily attributable to reductions in salaryincreased personnel and related benefits through reduced staffing;infrastructure costs relative to data center operations to support revenue growth, as well as several annual third party provider license and maintenance agreements that were re-negotiated, resulting in quarterly and year-to-date cost savings.
the incremental leasing costs for PFS SaaS data center operations.
17
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 | % | ||||||||
Three Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Selling, general, and administrative | $ | 2,204 | $ | 1,583 | $ | 621 | 39 | % | ||||||||
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Six Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Selling, general, and administrative | $ | 3,874 | $ | 3,247 | $ | 627 | 19 | % | ||||||||
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Selling, Generalgeneral and Administrativeadministrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company’sour 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 and year-to-date increase over the respective comparable prior periodyear periods is due to increases in equity awards expense, performance bonus accruals, increasedinvestor relations expenses, professional fees, travel and living expenses, trade show expense, and increased investor relations costs.amortization of intangible assets. These quarterly and year-to-date increases were partially offset by reduced salaries and benefits expense, reduced commissions expense, and reduced use of third-party outside consultants, and reduced bad debt expense.
Product Research and Development Expense
Product research and development expenses consisted of the following (in thousands):
Three Months Ended, | ||||||||||||||||
July 31, 2011 | July 31, 2010 | Change | % Change | |||||||||||||
Research and development expense | $ | 342 | $ | 567 | $ | (225 | ) | (40 | %) | |||||||
Capitalized research and development cost | 606 | 578 | 28 | 5 | % | |||||||||||
Total R&D Cost | $ | 948 | $ | 1,145 | $ | (197 | ) | (17 | %) | |||||||
Six Months Ended, | ||||||||||||||||
July 31, 2011 | July 31, 2010 | Change | % Change | |||||||||||||
Research and development expense | $ | 760 | $ | 1,037 | $ | (277 | ) | (27 | %) | |||||||
Capitalized research and development cost | 1,391 | 1,274 | 117 | 9 | % | |||||||||||
Total R&D Cost | $ | 2,151 | $ | 2,311 | $ | (160 | ) | (7 | %) | |||||||
Three Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Product research and development expense | $ | 511 | $ | 342 | $ | 169 | 49 | % | ||||||||
Capitalized software development cost | 463 | 606 | (143 | ) | (24 | %) | ||||||||||
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Total R&D cost | $ | 974 | $ | 948 | $ | 26 | 3 | % | ||||||||
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Six Months Ended, | ||||||||||||||||
July 31, 2012 | July 31, 2011 | Change | % Change | |||||||||||||
Product research and development expense | $ | 967 | $ | 760 | $ | 207 | 27 | % | ||||||||
Capitalized software development cost | 970 | 1,391 | (421 | ) | (30 | %) | ||||||||||
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Total R&D cost | $ | 1,937 | $ | 2,151 | $ | (214 | ) | (10 | %) | |||||||
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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. Quarterly and year-to-date research and development expenses decreased $225,000increased $169,000 and $277,000,$207,000, respectively, from the prior year comparable periods. These decreasesThe quarterly and year-to-date increases in research and development expense is a result of increased development time spent on non-capitalizable products. Quarterly and the offsetting increases inyear-to-date capitalized software development costs aredecreased as compared to the prior year primarily due to an increasea decrease in costs eligible for capitalization, decreased product support costs, and reductions in development staffing that were partially offset by increased use of third-party outside contractors.capitalization. The total research and development expenditures on a quarterly and year-to-date basis have increased
by $26,000 and decreased by $197,000 and $160,000,$214,000, respectively, when considering both capitalized software development costs and non-capitalizable research and development expense; this is primarily due to the aforementionedincreases in post general release software hotfixes and reductions in force, and less cost for product support as compared to the prior comparable periods.
staffing, respectively.
18
Quarterly and year-to-date interest expense infor the second quarter of fiscal 2011period ending July 31, 2012 was $391,000 and $599,000, respectively, compared to $22,000 and $42,000 respectively, compared to $34,000 and $56,000 in the prior year comparable prior periods. Interest expense fromconsists of interest and commitment fees on the working capital facility was $17,000line of credit, interest and success fees on the term loan entered into in conjunction with the second quarterInterpoint acquisition, interest on the convertible note entered into in conjunction with the Interpoint acquisition, and amortization 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.deferred financing costs. Interest expense from the capital lease decreased by $7,000 and $12,000, respectivelyincreased over the prior comparable three and six month periods;periods primarily duebecause of the term loan and convertible note interest of $154,000 and $337,000, respectively. Interest expense for success fees associated with the term loan was approximately $215,000 for the six months ended July 31, 2012. Interest expense also includes the impact of the amortization of deferred financing costs of $20,000 and $40,000 for the three and six month periods ended July 31, 2012, as compared to a lower principal balance.
Provision for Income Taxes
The quarterly and year-to-date tax provision in fiscal 20112012 and 20102011 is comprised of primarily state and local provisions.
Use of Non-GAAP Financial Measures
In order to assess the performanceprovide investors with greater insight, and allow for a more comprehensive understanding of the business include gross margin, cash flow from operations,information used by management and the board of directors in its financial and operational decision-making, we may supplement the Condensed Consolidated Financial Statements presented on a GAAP basis in this quarterly report on Form 10-Q with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, (A non-GAAP measure meaning, “Earnings before Interest, Tax, Depreciation, Amortization, and Stock-based compensation expense”; for explanation and reconciliation of all non-GAAP financial measures, see “Use of Non-GAAP Financial Measures”), non-GAAP Adjusted EBITDA less capitalized software development costs, andMargin.
These 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
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 | % |
EBITDA, Adjusted EBITDA, Adjusted EBITDA Less Capitalized Software Development Costs, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We define: (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, non-recurring transaction expenses, 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)(iv) Adjusted EBITDA per diluted share as adjustedAdjusted 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 Boardboard and may be useful to investors in comparing the Company’sour 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 non-recurring transaction costs that are not expected to be recurring in the normal course of our business. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item.item outside of management’s control. Adjusted EBITDA per diluted share will include incremental shares in the share count that would be considered anti-dilutive in a GAAP net loss position.
20
EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement;
EBITDA does not reflect income tax payments we are required to make; and
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encourage readers to review the GAAP financial measures presentedstatements included elsewhere in this quarterly report.
The following table sets forth a reconciliation of EBITDA and its variants used byAdjusted EBITDA to net income, a comparable GAAP-based measure, as well as earnings (loss) per diluted share to Adjusted EBITDA per diluted share. All of the items included in the reconciliation from net earnings (loss) to EBITDA to Adjusted EBITDA and the related per share calculations are either (i) recurring non-cash items or items that management as describeddoes not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess the Company’s on-goingour comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.
The following table reconciles net earnings (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share for the three and six months ended July 31, 2012 and 2011 (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 | ||||||||||
Three Months Ended, | Six Months Ended, | |||||||||||||||
July 31, 2012 | July 31, 2011 | July 31, 2012 | July 31, 2011 | |||||||||||||
Adjusted EBITDA Reconciliation | ||||||||||||||||
Net earnings (loss) | $ | (463 | ) | $ | (7 | ) | $ | 28 | $ | (288 | ) | |||||
Interest expense | 391 | 22 | 599 | 42 | ||||||||||||
Income tax expense | 24 | 5 | 33 | 7 | ||||||||||||
Depreciation | 183 | 193 | 363 | 391 | ||||||||||||
Amortization of capitalized software development costs | 580 | 507 | 1,223 | 1,001 | ||||||||||||
Amortization of intangible assets | 22 | — | 25 | — | ||||||||||||
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EBITDA | 737 | 720 | 2,271 | 1,153 | ||||||||||||
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Stock-based compensation expense | 221 | 199 | 400 | 396 | ||||||||||||
Transaction expenses | 524 | — | 550 | — | ||||||||||||
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Adjusted EBITDA | $ | 1,482 | $ | 919 | $ | 3,221 | $ | 1,549 | ||||||||
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Earnings (loss) per share - diluted | $ | (0.04 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.03 | ) | |||||
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Adjusted EBITDA per adjusted diluted share | $ | 0.13 | $ | 0.09 | $ | 0.29 | $ | 0.16 | ||||||||
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Diluted weighted average shares | 11,316,083 | 9,907,880 | 10,936,752 | 9,802,488 | ||||||||||||
Includable incremental shares – adjusted EBITDA(1) | 321,857 | 52,867 | — | 59,013 | ||||||||||||
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Adjusted diluted shares | 11,637,940 | 9,960,747 | 10,936,752 | 9,861,501 | ||||||||||||
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(1) | ||
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
Our liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from customers,clients, (ii) amounts invested in research and development, capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter.
Operating cash flow activities
Six months ended July 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Net income | $ | 28 | $ | (288 | ) | |||
Non-cash adjustments to income | 2,010 | 1,855 | ||||||
Cash impact of changes in assets and liabilities | 1,130 | (857 | ) | |||||
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Operating cash flow | $ | 3,168 | $ | 710 | ||||
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Net cash provided by operations for the six month period ended July 31, 2011 was $710,000, an increase of approximately $725,000 from the prior year comparable quarter. The increase was primarily due to a $541,000 decrease in net accounts receivable, the $673,000 decrease in deferred revenues which reflects the revenue recognition of prepaid maintenance contracts during fiscal 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 annual bonus and commission payments; and was offset primarily by fiscal 2011 annual bonuses accrued, and severance agreements accrued during the first six months of fiscal 2011.
Our clients typically have been well-established hospitals or medical facilities or major health information system companies that resell our solutions, which have good credit histories and payments have been received within normal time frames for the six months ended July 31, 2010. This was coupledindustry. However, some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the availability of financing for some of our clients.
Investing cash flow activities
Six months ended July 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Purchases of property and equipment | $ | (449 | ) | $ | (236 | ) | ||
Capitalized software development costs | (970 | ) | (1,391 | ) | ||||
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Investing cash flow | $ | (1,419 | ) | $ | (1,627 | ) | ||
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The reduction of investing cash flows is primarily attributable to the reduction in capitalized software development costs. We estimate that replicating our existing software would cost significantly more than the stated net book value. Many of the programs related to capitalized software development continue to have significant value to our current solutions and those under development, as the concepts, ideas, and software code are readily transferable and are incorporated into new solutions.
Financing cash flow activities
Six months ended July 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Net change in borrowings | $ | — | $ | 50 | ||||
Proceeds from exercise of stock options, stock purchase plan, and subscriptions | 79 | 93 | ||||||
Payments on capital lease obligation | — | (52 | ) | |||||
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Financing cash flow | $ | 79 | $ | 91 | ||||
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The decrease in cash provided by financing activities was primarily the result of the reduction in use of proceeds received for exercise of stock options, and payments on the capital lease obligation.
leases.
22
There were no material changes in the Company’sour internal controls over financial reporting during the three months ended July 31, 20112012 that have affected or are reasonably likely to materially affect the Company’sour internal controls over financial reporting.
23
We are, from time to time, a party to various legal proceedings and claims, which arise, in the ordinary course of business. Streamline Health isWe are not aware of any legal matters that will have a material adverse effect on Streamline Health’sour consolidated results of operations or consolidated financial position.
Item 2. | ||
Item 6. | EXHIBITS |
See Index to the other information set forth in this report, 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, 2011. The risk factors in the Annual Report have not materially changed since January 31, 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.
Exhibits.
24
25
STREAMLINE HEALTH SOLUTIONS, INC. | ||||||
DATE: September 14, 2012 | By: | /s/ Robert E. Watson | ||||
Robert E. Watson Chief Executive Officer | ||||||
DATE: September 14, 2012 | By: | /s/ Stephen H. Murdock | ||||
Stephen H. Murdock Chief Financial Officer |
INDEX TO EXHIBITS
Exhibit No. | Description of Exhibit | |||||
26
31.1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | * | * | |||||
31.2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | * | * | |||||
32.1 | Certification by Chief Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * | * | |||||
32.2 | Certification by Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * | * |
* | ** | |||||
XBRL Taxonomy Extension Schema Document | * | ** | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | ** | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | * | ** | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * | ** | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | * | ** |
** | Included herein |
*** | To be filed by amendment. |
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