SECURITIES AND EXCHANGE COMMISSION 446-0050 Page Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $134,000 and $100,000, respectively Contract receivables Prepaid hardware and third party software for future delivery Prepaid client maintenance contracts Prepaid and other assets Deferred income taxes Total current assets Non-current assets: Property and equipment: Computer equipment Computer software Office furniture, fixtures and equipment Leasehold improvements Accumulated depreciation and amortization Property and equipment, net Contract receivables, less current portion Capitalized software development costs, net of accumulated amortization of $16,733,274 and $14,805,236, respectively Intangible assets, net Deferred financing cost, net Goodwill Other, including deferred income taxes of $0 and $711,000, respectively Total non-current assets Revenues: Systems sales Professional services Maintenance and support Software as a service Total revenues Operating expenses: Cost of systems sales Cost of professional services Cost of maintenance and support Cost of software as a service Selling, general and administrative Product research and development Total operating expenses Operating income (loss) Other income (expense): Interest expense Miscellaneous income (expense) Earnings (loss) before income taxes Income tax benefit (expense) Net earnings Less: deemed dividends on Series A Preferred Shares Net earnings attributable to common shareholders Basic net earnings per common share Number of shares used in basic per common share computation Diluted net earnings per common share Number of shares used in diluted per common share computation Balance at February 1, 2012 Stock issued to Employee Stock Purchase Plan and exercise of stock options Restricted stock issued Conversion of note payable, Interpoint Stock consideration for acquisition Issuance of common stock warrants Issuance costs Reclassification of common stock warrants to liability Beneficial conversion feature of Series A Preferred Stock Share-based compensation expense Deemed dividends on Series A Preferred Stock Net earnings Balance at October 31, 2012 Operating activities: Net earnings Adjustments to reconcile net earnings (loss) to net cash provided by operating activities, net of effect of acquisitions: Depreciation and amortization Loss on disposal of equipment Share-based compensation expense Deferred tax benefit Provision for accounts receivable Amortization of debt discount Fair value adjustment for contingent earnout Net loss from conversion of convertible note Change in assets and liabilities: Accounts and contract receivables Other assets Accounts payable Accrued expenses Deferred revenues Net cash provided by operating activities Investing activities: Purchases of property and equipment Capitalization of software development costs Payment for acquisition Net cash used in investing activities Financing activities: Net change in borrowings Payment of deferred financing costs Proceeds from exercise of stock options and stock purchase plan Proceeds from private placement Payment of success fee Payment on capital lease obligation Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow disclosures: Interest paid Income taxes paid STATMENTS 2014 accompanying notes. Actual results could differ from those estimates. Persuasive evidence of an arrangement exists, The arrangement fees are fixed or determinable, and Collection is considered x October 31, 2012orApril 30, 2013¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 31-1455414 St.Street, NE, Suite 1000,-446-0050¨o¨o¨¨¨x(Do not check if a smaller reporting company)Number($.01$.01 par value, per share) issued and outstanding, as of DecemberJune 14, 2012: 12,639,988. PagePart I.Item 1. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at October 31, 2012April 30, 2013 and January 31, 20122013 3 56 78Item 3. Quantitative and Qualitative Disclosures About Market Risk 17Item 4. Controls and Procedures Part II. OTHER INFORMATION Item 1. Legal Proceedings 4.Exhibits Signatures 24Assets (Unaudited)
October 31, 2012 January 31, 2012 $ 10,528,695 $ 2,243,054 3,389,738 4,484,605 648,736 430,370 22,777 38,193 1,038,035 788,917 555,310 256,104 — 167,000 16,183,291 8,408,243 3,418,500 2,892,885 2,196,236 2,131,730 818,231 756,375 693,890 667,000 7,126,857 6,447,990 (5,778,675 ) (5,232,321 ) 1,348,182 1,215,669 142,021 221,596 13,119,354 9,830,175 8,517,084 417,666 1,211,912 145,857 12,038,226 4,060,504 366,857 841,348 36,743,636 16,732,815 $ 52,926,927 $ 25,141,058 April 30, 2013 January 31, 2013 ASSETS Current assets: Cash and cash equivalents $ 4,001,223 $ 7,500,256 Accounts receivable, net of allowance for doubtful accounts of $134,000 and $134,000, respectively 9,591,294 8,685,017 Contract receivables 558,762 1,481,819 Prepaid hardware and third party software for future delivery 24,448 22,777 Prepaid client maintenance contracts 1,525,261 1,080,330 Other prepaid assets 810,321 997,024 Other current assets 241,105 110,555 Total current assets 16,752,414 19,877,778 Non-current assets: Property and equipment: Computer equipment 3,467,545 3,420,452 Computer software 2,200,854 2,196,236 Office furniture, fixtures and equipment 870,079 843,274 Leasehold improvements 697,570 697,570 7,236,048 7,157,532 Accumulated depreciation and amortization (6,130,170 ) (5,958,727 ) Property and equipment, net 1,105,878 1,198,805 Contract receivables, less current portion 104,526 126,626 Capitalized software development costs, net of accumulated amortization of $18,159,290 and $17,464,601, respectively 12,581,974 12,816,486 Intangible assets, net 7,873,643 8,188,131 Deferred financing costs, net 417,816 541,740 Goodwill 12,152,883 12,133,304 Other 438,951 383,708 Total non-current assets 34,675,671 35,388,800 $ 51,428,085 $ 55,266,578 Notesaccompanying notes. April 30, 2013 January 31, 2013 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 794,684 $ 1,495,913 Accrued compensation 1,355,100 2,088,850 Accrued other expenses 1,384,160 1,325,039 Current portion of long-term debt 1,250,000 1,250,000 Deferred revenues 9,211,458 9,810,442 Contingent consideration for earn-out 1,319,559 1,319,559 Current portion of deferred tax liability 35,619 35,619 Total current liabilities 15,350,580 17,325,422 Non-current liabilities: Term loans 12,125,000 12,437,501 Warrants liability 4,956,000 3,649,349 Lease incentive liability, less current portion 32,015 99,579 Deferred income tax liability, less current portion 529,709 529,709 Total non-current liabilities 17,642,724 16,716,138 Total liabilities 32,993,304 34,041,560 Series A 0% Convertible Redeemable Preferred Stock, $.01 par value per share, $11,999,985 redemption value, 4,000,000 shares authorized, 3,999,995 shares issued and outstanding, net of unamortized preferred stock discount of $4,049,980 and $4,234,269, respectively 7,950,005 7,765,716 Stockholders’ equity: Common stock, $.01 par value per share, 25,000,000 shares authorized; 12,680,615 and 12,643,620 shares issued and outstanding, respectively 126,806 126,436 Convertible redeemable preferred stock, $.01 par value per share, 1,000,000 shares authorized, no shares issued — — Additional paid in capital 48,913,339 49,178,389 Accumulated deficit (38,555,369 ) (35,845,523 ) Total stockholders’ equity 10,484,776 13,459,302 $ 51,428,085 $ 55,266,578 Notesaccompanying notes.Three and Nine Months Ended October 31,(Unaudited) Three Months Nine Months 2012 2011 2012 2011 $ 290,294 $ 232,395 $ 719,495 $ 526,597 1,089,814 833,592 3,153,672 2,708,824 3,148,442 2,279,886 7,797,263 6,558,484 2,005,813 966,218 5,358,120 2,804,141 6,534,363 4,312,091 17,028,550 12,598,046 717,901 583,388 1,936,761 1,751,890 854,997 572,056 1,910,951 1,923,576 918,750 513,868 2,349,745 1,651,884 550,875 480,368 1,849,962 1,334,659 2,926,830 1,494,891 6,800,794 4,742,084 866,659 303,973 1,833,865 1,063,903 6,836,012 3,948,544 16,682,078 12,467,996 (301,649 ) 363,547 346,472 130,050 (895,142 ) (25,896 ) (1,494,161 ) (67,529 ) 43,549 (36,885 ) 55,805 (42,155 ) (1,153,242 ) 300,766 (1,091,884 ) 20,366 3,552,879 (5,000 ) 3,519,879 (12,315 ) $ 2,399,637 $ 295,766 $ 2,427,995 $ 8,051 (139,133 ) (139,133 ) $ 2,260,504 $ 2,288,862 $ 0.18 $ 0.03 $ 0.20 $ 0.00 12,393,352 9,943,567 11,346,428 9,823,937 $ 0.15 $ 0.03 $ 0.18 $ 0.00 15,365,238 9,958,947 12,417,256 9,837,750 (Unaudited) Three Months Ended April 30, 2013 April 30, 2012 Revenues: Systems sales $ 324,646 $ 353,530 Professional services 919,351 1,122,439 Maintenance and support 3,380,600 2,351,575 Software as a service 1,848,741 1,617,589 Total revenues 6,473,338 5,445,133 Operating expenses: Cost of systems sales 638,597 686,528 Cost of services 974,462 552,482 Cost of maintenance and support 984,588 725,281 Cost of software as a service 579,080 682,306 Selling, general and administrative 3,580,867 1,669,760 Research and development 1,097,010 456,363 Total operating expenses 7,854,604 4,772,720 Operating income (loss) (1,381,266 ) 672,413 Other income (expense): Interest expense (566,565 ) (207,830 ) Miscellaneous income (expenses) (742,265 ) 36,045 Earnings (loss) before income taxes (2,690,096 ) 500,628 Income tax expense (19,750 ) (9,000 ) Net earnings (loss) $ (2,709,846 ) $ 491,628 Less: deemed dividends on Series A Preferred Shares $ (341,637 ) $ — Net earnings (loss) attributable to common shareholders $ (3,051,483 ) $ 491,628 Basic net earnings (loss) per common share $ (0.24 ) $ 0.05 Number of shares used in basic per common share computation 12,534,474 10,307,259 Diluted net earnings (loss) per common share $ (0.24 ) $ 0.05 Number of shares used in diluted per common share computation 12,534,474 10,307,259 Notesaccompanying notes. Condensed Consolidated Financial StatementsCONDENSED CONSOLIDATED STATEMENT OF CHANGES INSTOCKHOLDERS’ EQUITY Common
stock shares Common
stock Additional
paid in
capital Accumulated
(deficit) Total
stockholders’
equity 10,433,716 $ 104,338 $ 38,360,980 $ (30,466,794 ) $ 7,998,524 88,742 887 160,920 — 161,807 137,325 1,373 (1,373 ) — — 1,529,729 15,297 3,100,885 — 3,116,182 393,086 3,931 1,497,678 — 1,501,609 — — 2,441,852 — 2,441,852 — — (263,072 ) — (263,072 ) — — (4,138,783 ) — (4,138,783 ) — — 2,685,973 — 2,685,973 — — 645,407 — 645,407 — — (139,133 ) — (139,133 ) — — — 2,427,995 2,427,995 12,582,598 $ 125,826 $ 44,351,334 $ (28,038,799 ) $ 16,438,361 Nine Months Ended October 31,(Unaudited) 2012 2011 $ 2,427,995 $ 8,051 2,847,665 2,008,432 — 26,667 645,407 529,104 (3,564,612 ) — — 40,000 111,584 — 86,839 — 56,682 — (1,351,935 ) 419,517 (482,785 ) (89,066 ) (137,107 ) 161,609 947,630 (574,012 ) 881,677 (1,904,641 ) 2,469,040 625,661 (546,061 ) (245,262 ) (1,571,420 ) (1,970,000 ) (12,161,634 ) — (14,279,115 ) (2,215,262 ) 9,880,000 550,000 (1,246,107 ) — 161,823 92,711 12,000,000 — (700,000 ) — — (156,621 ) 20,095,716 486,090 8,285,641 (1,103,511 ) 2,243,054 1,403,949 $ 10,528,695 $ 300,438 $ 1,181,929 $ 61,532 $ 78,041 $ 19,136 Supplemental Disclosure of Non-Cash Financing ActivityIn June 2012, the $3,000,000 convertible note and accrued interest was converted (Unaudited) Three Months Ended April 30, 2013 April 30, 2012 Operating activities: Net earnings (loss) $ (2,709,846 ) $ 491,628 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation 171,443 179,552 Amortization of capitalized software development costs 694,689 554,983 Amortization of intangible assets 314,488 91,196 Amortization of other deferred costs 82,814 19,688 Valuation adjustment for warrants liability 645,354 — Share-based compensation expense 467,401 178,323 Changes in assets and liabilities, net of assets acquired: Accounts and contract receivables 38,880 1,767,779 Other assets (414,056 ) (486,029 ) Accounts payable (768,793 ) 154,110 Accrued expenses (632,741 ) (202,723 ) Deferred revenues (598,984 ) (1,122,692 ) Net cash (used in) provided by operating activities (2,709,351 ) 1,625,815 Investing activities: Purchases of property and equipment (78,516 ) (227,878 ) Capitalization of software development costs (460,177 ) (507,000 ) Net cash used in investing activities (538,693 ) (734,878 ) Financing activities: Principal repayments on term loans (312,501 ) — Proceeds from exercise of stock options and stock purchase plan 61,512 — Net cash used in financing activities (250,989 ) — (Decrease) increase in cash and cash equivalents (3,499,033 ) 890,937 Cash and cash equivalents at beginning of period 7,500,256 2,243,054 Cash and cash equivalents at end of period $ 4,001,223 $ 3,133,991 STATEMENTS–— BASIS OF PRESENTATION(“we”, “us”, or “our”(the "Company"), pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the U. S. Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although we 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 our most recent annual report on Form 10-K, Commission File Number 0-28132. Operating results for the three and nine months ended October 31, 2012April 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2013.–— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA summary of ourisare presented in “Note B – Significant Accounting Policies” in the fiscal year 20112012 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.AcquisitionsOn December 7, 2011, we completedacquisition of substantially all ofamounts reported in the assets of Interpoint Partners, LLC (“Interpoint”). The net acquired assetsfinancial statements and liabilities, and related revenue and expense since December 7, 2011 are included in our condensed consolidated financial statements.On August 16, 2012, we completed the acquisition of Meta Health Technology, Inc. (“Meta”), please see Note C for further details.We derive(SaaS)("SaaS"), through ourthe direct sales force or through third-party resellers. Clients withLicensed, locally-installed, softwareclients utilize ourthe Company’s support and maintenance services for a separate fee, whereas SaaS fees include support and maintenance. WeThe Company also derivederives revenue from professional services that support the implementation, configuration, training, and optimization of ourthe applications. Additional revenues are also derived from reselling third-party software and hardware components.We recognizeThe Company recognizes revenue in accordance with ASC 985-605,Software-Revenue Recognitionand ASC 605-25Revenue Recognition –— Multiple-element arrangements. RevenueThe Company commences revenue recognition typically commences when the following criteria all have all been met:probable.
We recognize revenue in accordance withOn February 1, 2011, the Company adopted Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable“Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). on a prospective basis. ASU 2009-13 amendsamended 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;method and;
Require entities to allocate revenue to an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor specific objective evidence (“VSOE”) or third party evidence (“TPE”) of selling price.
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 — ourthe Company’s best estimate of the selling price of an element of the transaction.
We follow
We have developed
We useservice
We use
Term Licenses
We use ESP to determine the value of term license 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. Typically revenue recognition commences once the client goes live on the system, and is recognized ratably over the contract term. The software portion of our CAC (“Computer Aided Coding”) products generally do not require material modification to achieve their contracted function.
We use Amortization expense of these costs was approximately
| Three Months Ended, | |||||||
| April 30, 2013 | April 30, 2012 | ||||||
| Net earnings (loss) | $ | (2,709,846 | ) | $ | 491,628 | ||
| Less: deemed dividends on Series A Preferred Stock | (341,637 | ) | — | ||||
| Net earnings (loss) attributable to common shareholders | $ | (3,051,483 | ) | $ | 491,628 | ||
| Weighted average shares outstanding used in basic per common share computations | 12,534,474 | 10,307,259 | |||||
| Stock options and restricted stock | — | — | |||||
| Number of average shares used in diluted per common share computation | 12,534,474 | 10,307,259 | |||||
| Basic net earnings (loss) per share of common stock | $ | (0.24 | ) | $ | 0.05 | ||
| Diluted net earnings (loss) per share of common stock | $ | (0.24 | ) | $ | 0.05 | ||
| Balance at August 16, 2012 | ||||
Assets purchased: | ||||
Cash | $ | 1,126,000 | ||
Accounts receivable | | 2,300,000 | | |
Fixed assets | 133,000 | |||
Other assets | 513,000 | |||
Client relationships | 4,464,000 | |||
Internally developed software | 3,646,000 | |||
Trade name | 1,588,000 | |||
Supplier agreements | 1,582,000 | |||
Covenants not to compete | 720,000 | |||
Goodwill(1) | 7,978,000 | |||
|
| |||
Total assets purchased | $ | 24,050,000 | ||
|
| |||
Liabilities assumed: | ||||
Accounts payable and Accrued liabilities | 1,164,000 | |||
Deferred revenue obligation, net | 3,494,000 | |||
Deferred tax liability | 4,602,000 | |||
|
| |||
Net assets acquired | $ | 14,790,000 | ||
|
| |||
Consideration: | ||||
Company common stock | 1,502,000 | |||
Cash paid | 13,288,000 | |||
|
| |||
Total Consideration | $ | 14,790,000 | ||
|
| |||
| Balance at August 16, 2012 | |||
| Assets purchased: | |||
| Cash | $ | 1,126,000 | |
| Accounts receivable | 2,300,000 | ||
| Fixed assets | 133,000 | ||
| Other assets | 513,000 | ||
| Client relationships | 4,464,000 | ||
| Internally developed software | 3,646,000 | ||
| Trade name | 1,588,000 | ||
| Supplier agreements | 1,582,000 | ||
| Covenants not to compete | 720,000 | ||
| Goodwill(1) | 8,073,000 | ||
| Total assets purchased | $ | 24,145,000 | |
| Liabilities assumed: | |||
| Accounts payable and Accrued liabilities | 1,259,000 | ||
| Deferred revenue obligation, net | 3,494,000 | ||
| Deferred tax liability | 4,602,000 | ||
| Net assets acquired | $ | 14,790,000 | |
| Consideration: | |||
| Company common stock | 1,502,000 | ||
| Cash paid | 13,288,000 | ||
| Total consideration | $ | 14,790,000 | |
| (1) | Goodwill represents the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired, |
The acquired operations of Meta are consolidated with the results of the Company from August 16, 2012. Due to the new deferred tax liabilities recorded as a result of the above purchase price allocation, we were able to reduce our valuation allowance by approximately $3,600,000 representing the significant deferred tax benefit recorded in the three and nine months ended October 31, 2012.
Pro Forma Results
The operating results of Meta for the period August 16, 2012 through October 31, 2012, which include sales of $1,259,000 and net income of approximately $177,000, have been included in our consolidated financial statements.
The following unaudited pro forma information assumes the Meta acquisition occurred as of the beginning of the earliest period presented. The unaudited pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including, historical interest expense, adjustments to interest expense for certain provisions in the asset purchase agreement, adjustments for transaction-related expenses, adjustments for salary and benefits for certain employees, and amortization charges from acquired intangible assets were combined at the beginning of the earliest period presented. The unaudited pro forma supplemental results have been prepared based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the consolidated financial position or results of operations had the acquisition occurred at the beginning of the earliest period presented, nor of future results of operations. For purposes of the pro forma presentation, the financial results of Interpoint for the three and nine months ended September 30, 2011 have been combined with the results of the Company for the three and nine months ended October 31, 2011. The Meta results for the three and nine months ended October 31, 2011 and 2012 are based on the three and nine months ended
September 30, 2011 and 2012. Subsequent to the acquisition, the Meta results will be recorded based on the Company’s fiscal year-end. The unaudited pro forma results are as follows (in thousands):
| Three Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
Revenue | $ | 7,129 | $ | 6,817 | ||||
Net income (loss) | 1,231 | (1,393 | ) | |||||
Net income (loss) attributable to common shareholders | 1,197 | (1,572 | ) | |||||
Income (loss) per share: | ||||||||
Basic | $ | 0.10 | $ | (0.22 | ) | |||
Diluted | $ | 0.08 | $ | (0.22 | ) | |||
| Nine Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
Revenue | 22,733 | 19,196 | ||||||
Net income (loss) | 1,249 | (6,762 | ) | |||||
Net income (loss) attributable to common shareholders | 798 | (7,302 | ) | |||||
Income (loss) per share: | ||||||||
Basic | $ | 0.07 | $ | (0.73 | ) | |||
Diluted | $ | 0.06 | $ | (0.73 | ) | |||
Instruments: Series A Preferred Stock Convertible subordinated notes payable Warrants Total investment — DERIVATIVE LIABILITIES In conjunction with the private placement investment, Risk-free interest rate Dividend yield Current weighted-average volatility factor of the expected market price of Common Stock Weighted-average expected life of stock options Forfeiture rate Numerator for Basic and Diluted Earnings per Share: Net earnings Less: deemed dividends on Series A Preferred Stock Net earnings attributable to common Shareholders Denominator for basic earnings per share weighted average shares Effect of dilutive securities Stock options Restricted shares Series A Preferred Stock Warrants Denominator for basic earnings per share, with assumed conversions Basic net earnings per common share Diluted net earnings per common share Anti-dilutive securities: Stock options, out-of-the-money Warrants, out-of-the-money Numerator for Basic and Diluted Earnings per Share: Net earnings Less: deemed dividends on Series A Preferred Stock Net earnings attributable to common Shareholders Denominator for basic earnings per share weighted average shares Effect of dilutive securities Stock options Restricted stock Series A Preferred Stock Warrants Denominator for basic earnings per share, with assumed conversions Basic net earnings per common share Diluted net earnings per common share Anti-dilutive securities: Stock options, out-of-the-money Warrants, out-of-the-money Operating leases Senior term loan Subordinated term loan Convertible subordinated notes payable (1) Total Senior term loan Subordinated term loan (1) Line of credit $4,120,000 term loan, which was scheduled to mature on December 7, 2013, and a revolving line of credit, which was scheduled to mature on October 1, 2013. percentages: Systems sales Professional services Maintenance and support Software as a service Total revenues Cost of sales Selling, general and administrative Product research and development Total operating expenses Operating profit (loss) Other income (expense), net Income tax benefit Net earnings Cost of systems sales Cost of professional services Cost of maintenance and support Cost of software as a service Proprietary software(1) Term licenses Hardware & third party software(1) Professional services(2) Maintenance & support(3) Software as a service(4) Net revenues Proprietary software(1) Term licenses Hardware & third party software(1) Professional services(2) Maintenance & support(3) Software as a service(4) Net revenues Streamline Health proprietary software (1) Hardware and third party software Professional services Maintenance and support (2) Software as a service Total At services at additional locations for which contracted services have not yet been performed. Cost of system sales Cost of professional services Cost of maintenance and support Cost of software as a service Total cost of sales Cost of system sales Cost of professional services Cost of maintenance and support Cost of software as a service Total cost of sales Selling, general, and administrative Selling, general, and administrative Product research and development expense Capitalized software development cost Total R&D cost Product research and development expense Capitalized software development cost Total R&D cost operations. per diluted share. as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share as disclosed in this quarterly report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of 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 Reconciliation Net earnings Interest expense Income tax expense Depreciation Amortization of capitalized software development costs Amortization of intangible assets EBITDA Stock-based compensation expense Transaction expenses Adjusted EBITDA Adjusted EBITDA per diluted share Earnings per share - diluted Adjusted EBITDA per diluted share Diluted weighted average shares Net income (loss) Non-cash adjustments to income Cash impact of changes in assets and liabilities Operating cash flow cash flow activities Purchases of property and equipment Capitalized software development costs Payment for acquisition Investing cash flow cash flow activities Net change in borrowings Proceeds from exercise of stock options, stock purchase plan, and subscriptions Payment of deferred financing costs Proceeds from private placement Payment of success fees Payments on capital lease obligation Financing cash flow – EQUITY AWARDS AND PRIVATE PLACEMENT INVESTMENTOn August 16, 2012, we completed a $12,000,000 private placement investment (“private placement investment”) with affiliated funds and accounts of Great Point Partners, LLC, and Noro-Moseley Partners VI, L.P., and another investor. The investment consisted of the following instruments: issuance of 2,416,785 shares of a new Series A 0% Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) at $3.00 per share, common stock warrants (“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 payable in the aggregate principal amount of $5,699,577, which upon shareholder approval, convert into 1,583,220 shares of Series A Preferred Stock. The proceeds were allocated among the instruments as follows. Balance at August 16, 2012 $ 6,546,146 3,765,738 1,688,116 $ 12,000,000 We incurred legal, placement and other advisor fees of approximately $1,894,000, including $754,000 in costs for warrants issued to placement agents. The total transaction costs were allocated among the instruments of the private placement investment based on their relative fair values as follows: approximately $611,000 to subordinated convertible notes as deferred financing costs, approximately $1,020,000 to Series A Preferred Stock as discount on Series A Preferred Stock and approximately $263,000 to warrants as a charge to additional paid in capital.Series A Convertible Preferred StockIn connection with the private placement investment, we issued 2,416,785 shares of Series A Preferred Stock at $3.00 per share. Each share of the Series A Preferred Stock is convertible into one share of our common stock. The price per share of Series A Preferred Stock and the conversion price for the common stock was less than the “market value” of the common stock (as defined in the rules of the Nasdaq Stock Market) on the date of execution of the definitive agreements. The Series A Preferred Stock does not pay a dividend, however the holders are entitled to receive dividends on shares of Preferred Stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends (other than dividends in the form of common stock) actually paid on shares of the common stock. The Series A Preferred Stock have voting rights on a modified as-if-converted-to-common-stock-basis. The Series A Preferred Stock has a non-participating liquidation right equal to the original issue price plus accrued unpaid dividends, which are senior to the Company’s common stock. The Series A Preferred Stock can be converted to common shares at any time by the holders, or at the option of the Company if the arithmetic average of the daily volume weighted average price of the common stock for the ten day period prior to the measurement date is greater than $8.00 per share, and the average daily trading volume for the sixty day period immediately prior to the measurement date exceeds 100,000 shares.The allocation of the proceeds and transaction costs based on relative fair values of the instruments resulted in recognition of a discount on the Series A Preferred Stock of approximately $4,410,000, including discount from beneficial conversion feature of approximately $2,686,000, which will be amortized from the date of issuance to the earliest redemption date. For the three and nine months period ended October 31, 2012, we recognized approximately $139,000 of amortization of the discount on Series A Preferred Stock as deemed dividends charged to additional paid in capital. The value of the beneficial conversion feature is calculated as the difference between the effective conversion price of the Series A Preferred Stock and the fair market value of the common stock into which the Series A Preferred Stock are convertible at the commitment date.At any time following August 31, 2016, each share of Series A Preferred Stock is redeemable at the option of the holder for an amount equal to the initial issuance price of $3.00 (adjusted to reflect stock splits, stock dividends or like events) plus any accrued and unpaid dividends thereon. The Series A Preferred Stock are classified as temporary equity as the securities are redeemable solely at the option of the holder.Common Stock Warrantswethe Company issued common stock warrants exercisable for up to 1,200,000 shares of our common stock at an exercise price of $3.99$3.99 per share. The warrants can be exercisedwere initially classified in whole orstockholders' equity as additional paid in part duringcapital at the period beginning on February 17, 2013 until 5 years from such initial exercise date. The warrants also include a cashless exercise option which allows the holder to receive a number of shares of common stock based on an agreed upon formula in exchange for the warrant rather than paying cash to exercise.The proceeds,allocated amount, net of allocated transaction costs, allocated to the warrants of approximately $1,425,000 were classified as equity on August 16, 2012, the date of issuance.$1,425,000. Effective October 31, 2012, upon shareholder approval of antidilutionanti-dilution provisions that reset the warrants’warrants' exercise price if a dilutive issuance occurs, the warrants were reclassified as non-current derivative liabilities. The provisions require the exercise price to reset to the lower price at which the dilutive issuance is consummated, if the dilutive issuance occurs prior to the second anniversary of the warrants’ issuance. If a dilutive issuance occurs after the second anniversary of the warrants’ issuance, then the exercise price will be reset in accordance with a weighted average formula that provides for a partial reset, based on the number of shares raised in the dilutive issuance relative to the number of common stock equivalents outstanding at the time of the dilutive issuance. The change in fair value of the warrants was accounted for as an adjustment to stockholders’ equity for the period between the date of the contract’s last classification as equity to the date of reclassification to liability. The fair value of the warrants was approximately $4,139,000$4,139,000 at October 31, 2012.On October 19, 2012, we also issued 200,000with the difference between the fair value and carrying value recorded to additional paid in capital. Effective as of the reclassification as derivative liabilities, the warrants to our placement agentsare re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period as a portioncredit or charge to miscellaneous income (expense). The fair value of the feeswarrants at April 30, 2013 was approximately $4,956,000, with the increase in fair value since January 31, 2013 of approximately $645,000 recognized as miscellaneous expense in the consolidated statements of operations. The estimated fair value of the warrant liabilities as of April 30, 2013 was computed using Monte-Carlo simulations based on the following assumptions: annual volatility of 70%; risk-free rate of 0.7%, dividend yield of 0.0% and expected life of approximately five years. The model also included assumptions to account for services renderedanti-dilutive provisions within the warrant agreement.theconjunction with its private placement investment. The warrants have an initial exercise dateCompany concluded there was a cumulative $19,000 overstatement of May 1, 2013 and are exercisable for a five year term thereafter at a stated exercise pricethe loss before income taxes on its condensed consolidated statement of $4.06 per share and could be exercised in whole or in part at any time. The warrants also included a cashless exercise option which allowed the holder to receive a number of shares of common stock based on an agreed upon formula in exchangeoperations for the warrants rather than paying cash to exercise.fiscal year-ended January 31, 2013, as previously reported. The warrants have no reset provisions. The warrants had a grant date fair valueaforementioned cumulative $19,000 overstatement has been recorded in the condensed consolidated statement of $754,000, and are classified as equity onoperations for the balance sheet.Convertible Subordinated NotesPlease see Note G - DebtEquity AwardsDuring the ninethree months ended OctoberApril 30, 2013. The January 31, 2012, we granted 762,500 options with2013 condensed consolidated balance sheet, as previously reported, reflects a weighted average exercise price$3.08 per share. During the same period, 258,271 options expired with an average exercise pricedeferred financing costs, a cumulative $150,000 understatement of $1.87 per share and 43,999 options were exercised under all plans.During the nine months ended October 31, 2011, we granted 1,104,000 options with a weighted average exercise price of $1.90 per share. During the same period 127,916 options expired with an average exercise price of $1.88 per share and 32,598 options were exercised under all plans.The fair value of each option grant during the nine months ended October 31, 2012 and October 31, 2011 was estimated at the date of the grants using a Black-Scholes option pricing model with the following weighted average assumptions:At the October 31, 2012 special meeting of shareholders, 500,000 additional shares were approved for the 2005 Incentive Compensation Plan. For the nine
months ended,
October 31, 2012 For the nine
months ended,
October 31, 2011 0.33 % 1.26 % — — 0.58 0.53 5 years 5 years 0 % 0 % During the nine months ended October 31, 2012, we granted 137,325 restricted shares of common stock with a weighted average fair value of $2.01. These shares are subject to the 2005 Incentive Compensation Plan as amended, and are granted to certain independent members of the Board of Directors and employees. The shares have an approximate one-year restriction period.During the nine months ended October 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 with a weighted average fair value of $1.92 had their restriction period lapse. These shares were subject to the 2005 Incentive Compensation Plan as amended, and are granted to certain independent members of the Board of Directors and employees. The shares had an approximate one-year restriction period.During the nine months ended October 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 nine months ended October 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.NOTE E – EARNINGS PER SHAREDiluted net earnings (loss) per share of common stock reflects the potential dilution that could occur from restricted shares and if stock options, stock purchase plan commitments, and warrants were exercised (under the treasury stock method) and thedeemed dividends on Series A Preferred Stock, a converted (on an as-if-converted basis) into shares of our common stock,not quantitatively and qualitatively material to the prior fiscal year, and the respective quarters ended in 2012 and 2013.certain circumstances,non-cancelable operating leases that then would share in our earnings. A reconciliation of basicexpire at various times through fiscal year 2018. Future minimum lease payments under non-cancelable operating leases for the next five fiscal years and diluted weighted average shares for basic and diluted EPS, as well as anti-dilutive securities isthereafter are as follows: Three Months Ended, October 31, 2012 October 31, 2011 $ 2,399,637 $ 295,766 (139,133 ) — 2,260,504 295,766 12,393,352 9,943,567 674,352 15,380 36,962 — 1,996,475 — 264,097 — 15,365,238 9,958,947 $ 0.18 $ 0.03 $ 0.15 $ 0.03 71,500 1,739,551 — — Nine Months Ended, October 31, 2012 October 31, 2011 $ 2,427,995 $ 8,051 (139,133 ) — 2,288,862 8,051 11,346,428 9,823,937 357,554 13,813 42,925 — 670,349 — — — 12,417,256 9,837,750 $ 0.20 $ 0.00 $ 0.18 $ 0.00 486,000 1,432,967 1,400,000 — Facilities Equipment Fiscal Year Totals 2013 (nine months remaining) $ 666,000 $ 135,000 $ 801,000 2014 750,000 162,000 912,000 2015 322,000 40,000 362,000 2016 162,000 2,000 164,000 2017 167,000 1,000 168,000 Thereafter 85,000 — 85,000 Total $ 2,152,000 $ 340,000 $ 2,492,000 – CONTRACTUAL OBLIGATIONSThe following table details the remaining obligations, by fiscal year, as of the end of the quarter (in thousands): 2012 2013 2014 2015 2016 Thereafter Totals $ 310 874 723 322 162 251 2,642 313 1,250 3,437 — — — 5,000 — — 9,000 — — — 9,000 — — — — — — — $ 623 2,124 13,160 322 162 251 16,642 (1)The convertible subordinated notes payable were converted on November 1, 2012. See Note I for further details.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 on August 1, 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 has been aggregated with the total expected rental expense, and amortized on a straight line basis over the term of the lease.As part of the Meta acquisition, we assumed a lease obligation for office space at 330 Seventh Avenue in New York, NY. The balance of the lease term runs through August of 2014.NOTE G –— DEBT Loan Balance at
October 31, 2012 Accrued interest
at October 31,
2012 5,000,000 60,000 9,000,000 211,000 — 2,000 (1)Accrued interest includes accruals for success fees of $160,000.wethe Company amended our currentthe subordinated term loan and line of credit agreements with Fifth Third Bank, whereby Fifth Third Bank provided usthe Company with a $5,000,000$5,000,000 revolving line of credit, a $5,000,000$5,000,000 senior term loan and a $9,000,000$9,000,000 subordinated term loan, a portion of which was used to refinance the previously outstanding $4,120,000$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 2012, wethe Company mutually agreed to settle the success fee included in the previous subordinated term loan for $700,000. We$700,000. The difference between the $233,000 success fee accrued through the date of the amendment and the amount paid was recorded to deferred financing costs and is being amortized over the term of the amended loan. The Company paid a commitment fee in connection with the senior term loan of $75,000,$75,000, which is included in deferred financing costs. Weexpense.expense as accrued over the term of the loan. The success fee is due on the date the entire principal balance of the loan becomes due. The success fee is accrued in accordance with the terms of the loan in an amount necessary to provide the lender a 17% internal rate of return through the date the success fee becomes due.ourthe Company's assets. The senior term loan principal balance is payable in monthly installments of approximately $104,000 which commenced in November 2012, and and will continue through the maturity date, with the full remaining unpaid principal balance due at maturity. The entire unpaid principal balance of the subordinated term loan is due at maturity. Borrowings under the senior term loan bear interest at a rate of LIBOR (0.21%(0.20% at October 31, 2012)April 30, 2013) plus 5.50%, and borrowings under the subordinated term loan bear interest at 10% from August 16, 2012 and thereafter. Accrued and unpaid interest on the senior and subordinated term loans is due monthly through maturity. Borrowings under the revolving loan bear interest at a rate equal to LIBOR plus 3.00%. A commitment fee of 0.40% will be incurred on the unused revolving line of credit balance, and is payable quarterly. There are currently At April 30, 2013, the Company had no draws on outstanding borrowings under the line of credit, with $2,000and had accrued approximately $5,000 in accruedunused balance commitment fees. The proceeds of these loans were used to finance the cash portion of the acquisition purchase price and to cover any additional operating costs as a result of the Meta acquisition.$5,000,000,$5,000,000, (after consideration of certain acquisition and transaction costs) on a trailing four fiscal quarter basis beginning October 31, 2012; (ii) maintain a fixed charge coverage ratio for the fiscal quarter ending January 31, 20122013 and each April 30, July 31, October 31, and January 31 of not less than 1.50:1.50:1 calculated quarterly for the period from October 31, 20112012 to the date of measurement for the quarters ending January 31, 2012,2013, April 30, 20122013 and July 31, 20122013 and on a trailing four quarter basis thereafter; (iii) on a consolidated basis, maintain ratio of funded debt to adjusted EBITDA as of the end of any fiscal quarter less than 3:3:1, calculated quarterly on a trailing four fiscal quarter basis beginning October 31, 2012. We wereThe Company was in compliance with all loan covenants at October 31, 2012.Convertible NotesApril 30, 2013On December 7, 2011, as parta result of obtaining a waiver from its lender.purchasefollowing at: Balance at April 30, 2013 Balance at January 31, 2013 Senior term loan $ 4,375,000 $ 4,688,000 Subordinated term loan 9,000,000 9,000,000 Line of credit — — Total 13,375,000 13,688,000 Less: Current portion 1,250,000 1,250,000 Non-current portion of long-term debt $ 12,125,000 $ 12,438,000 assets of Interpoint, we issued a convertible promissory note (the “Convertible Note”) for $3,000,000. The note accrued interestfollowing at a per annum rate of 8% from the date 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 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. Net loss from conversion was approximately $57,000 for the three and nine months ended October 31, 2012.In conjunction with the private placement, we issued convertible subordinated notes in the aggregate principal amount of $5,699,577, which upon shareholder approval, convert into 1,583,220 shares of Series A Preferred Stock. The allocation of the proceeds to the subordinated convertible notes resulted in a debt discount of approximately $1,934,000, which will be amortized over the period from issue date to maturity date. For the three and nine months ended October 31, 2012, we recorded approximately $112,000 of debt discount amortization. In addition, the notes accrue interest at a per annum rate of 12% from issue date until the earlier of conversion or payment in full of all outstanding principal and accrued interest. Half of the interest accrued is payable monthly, with the remaining in arrears and payable upon conversion of the note. The carrying amount of the convertible subordinated notes payable was approximately $3,877,000, net of approximately $1,822,000 unamortized discount, at October 31, 2012. On November 1, 2012, upon shareholder approval, the convertible subordinated notes were converted into shares of Series A Preferred Stock (see Note I). Payments Due by Period 2013 2014 Senior term loan $ 937,000 $ 3,438,000 Subordinated term loan — 9,000,000 Line of credit — — Total principal repayments $ 937,000 $ 12,438,000 ourthe Company's customers, less $3,500,000.$3,500,000. The earn-out consideration, if any, will be paid no later than July 31, 2013 in cash or through the issuance of a note with terms identical to the terms of the Convertible Note (which was converted on June 15, 2012, please see "Note F - Debt" in the Notes to the Consolidated Financial Statements as part of the annual report on Form 10-K for the year ended January 31, 2013), except with respect to issue date, conversion date and prepayment date. The earn-out note restricts conversion or prepayment at any time prior to the one year anniversary of the issue date.Interpoint is entitled to additional earn-out considerationfifty percent of any license sales ofApril 30, 2013, the developed software acquired, to specific clients as defined in the asset purchase agreement, for any sales prior to December 31, 2012.At October 31, 2012, we estimateCompany estimates the payment obligation in connection with the earn-out will be $1,320,000, an increaseapproximately $87,000, whichJanuary 31, 2013, the Company estimated the payment obligation to be $1,320,000. No change in value of the estimated earn-out was recorded as additionalfor the three months ended April 30, 2013.inconsists of federal, state and local tax provisions. For the third quarterthree months ended April 30, 2013 and 2012, the Company recorded federal tax provisions of fiscal 2012.$11,000 and zero, respectively. For the three months ended April 30, 2013 and 2012 the Company recorded state and local tax provisions of $9,000 and $9,000, respectively.– COMMITMENTS AND CONTINGENCIES— STOCK BASED COMPENSATIONWe have entered into employment agreements with our officersthree months ended April 30, 2013:Three Months Ended April 30, 2013 Options Weighted Average Exercise Price Outstanding — beginning of period 2,685,237 Granted 171,000 6.81 Exercised (36,994 ) 1.66 Forfeit/Expired (65,500 ) 1.96 Outstanding — end of period 2,753,743 $ 3.41 Exercisable — end of period 850,788 $ 2.41 Weighted average grant date fair value of options granted during year $ 3.07 certain employees that generally provide annual salary, a minimum bonus, discretionary bonus, and stock incentive provisions.NOTE I – SUBSEQUENT EVENTS2012We evaluated all events or transactions that occurred after October 31, 2012 through stock-based compensation was estimated at the date we issued these financial statements.On November 1, 2012,of grant using a Black-Scholes option pricing model with the convertible subordinated notes previously issued by us on August 16, 2012 were converted into sharesfollowing weighted average assumptions. Three Months Ended April 30, 2013 April 30, 2012 Expected life 5 years 5 years Risk-free interest rate 0.39 % 0.51 % Weighted average volatility factor 0.54 0.53 Dividend yield — — our Series A 0% Convertible Preferred Stock.three years. The convertible subordinated notes had an aggregate principal amountexpense associated with stock option awards was approximately $402,000 and $128,000, for the three months ended April 30, 2013 and 2012, respectively. Cash received from exercise of $5,699,577options and converted into an aggregate of 1,583,210 shares of Preferred Stock. the employee stock purchase plan was approximately $62,000 and zero, respectively, for the three months ended April 30, 2013 and 2012.issuanceCompany grants restricted stock awards under the 2005 Incentive Compensation Plan to associates and members of the convertible subordinated notesboard of directors. The Company has also issued restricted shares as inducement grants to executives. The restrictions on the shares granted generally lapse over a one year term of continuous employment from the date of grant. The grant date fair value per share of restricted stock, which is the stock price on the grant date, is expensed on a straight-line basis as the restriction period lapses. The shares represented by restricted stock awards are considered outstanding at the grant date, as the recipients are entitled to voting rights. A summary of restricted stock award activity for the period is presented below:Non-vested Number of Shares Weighted Average Grant Date Fair Value Non-vested balance at January 31, 2013 137,325 $ 2.01 Granted — — Vested — — Forfeited/expired — — Non-vested balance at April 30, 2013 137,325 $ 2.01 previously disclosed inapproximately $17,000 of compensation cost that has not yet been recognized related to restricted stock awards. That cost is expected to be recognized over a remaining period of one year or less.Current Report on Form 8-K filed on August 21, 2012. We incurred a loss upon conversion of $5,898,000 on November 1, 2012.three months ended April 30, 2013 and 2012, respectively.Forward-Looking Statements“our”the "Company") and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are no guarantee of future performance and are subject to certain risks and uncertainties that are difficult to predict and actual results could differ materially from those reflected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with vendors that resell our products, our ability to control costs, availability of products produced from third party vendors, the healthcare regulatory environment, potential changes in legislation, regulation 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, effects of critical accounting policies and judgments, changes in accounting policies or procedures as may be required by the Financial Accountings Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry generally and the markets in which we operate and nationally, and our ability to maintain compliance with the terms of our credit facilities, and other risk factors that might cause such differences including those discussed herein, including, but not limited to, discussions in the sections entitled Part I, “Item 11. Financial Statements” and “Item 22. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’smanagement's analysis only as of the date thereof. We 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 we file from time to time with the Securities and Exchange Commission, including the annual report on Form 10-K, quarterly reports on Form 10-Q and any current reports on Form 8-K.Ourfinancial condition and resultscommon stock at an agreed upon price of operations are based upon our consolidated financial statements,$4.07 per share. The fair value of the common stock at the date of issuance was $3.82. As of October 31, 2012, the Company had acquired 100% of Meta’s outstanding shares. The purchase price is subject to certain adjustments related principally to the delivered working capital level, which have been prepared in accordance with accounting principles generally acceptedwill be settled in the United States.third quarter of fiscal 2013, and/or indemnification provisions. Under the acquisition method of accounting, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The preparationoperations of these financial statements requires us 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, we evaluate our estimates, including those related to product revenues, bad debts, capitalized software development costs, income taxes, support contracts, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that we believeMeta are reasonable under the circumstances,consolidated with the results of which form the basis for making judgments about the carrying valuesCompany from August 16, 2012.assets and liabilities, and revenue and expense recognition. Actual results may differ from these estimates under different assumptions or conditions.Operating ResultsWe recognized revenues in the three and nine month periods ending October 31, 2012 of $6,534,000 and $17,029,000, compared to $4,312,000 and $12,598,000Operations for the comparable prior year periods; an increase of $2,222,000 and $4,431,000 or 52% and 35%, respectively. Revenues are derived primarily from recurring revenues recognized from softwarequarters ended (amounts in thousands):Three Months Ended April 30, 2013 April 30, 2012 Change % Change Systems sales $ 324 $ 354 $ (30 ) (8 )% Professional services 919 1,122 (203 ) (18 )% Maintenance and support 3,381 2,352 1,029 44 % Software as a service 1,849 1,618 231 14 % Total revenues 6,473 5,446 1,027 19 % Cost of sales 3,177 2,647 530 20 % Selling, general and administrative 3,581 1,670 1,911 114 % Product research and development 1,097 456 641 141 % Total operating expenses 7,855 4,773 3,082 65 % Operating profit (loss) (1,382 ) 673 (2,055 ) (305 )% Other income (expense), net (1,309 ) (172 ) (1,137 ) 661 % Income tax expense (20 ) (9 ) (11 ) 122 % Net earnings (loss) $ (2,710 ) $ 492 $ (3,202 ) (651 )% Adjusted EBITDA(1) $ 685 $ 1,713 $ (1,028 ) (60 )% (1) Non-GAAP measure meaning earnings before interest, tax, depreciation, amortization, stock-based compensation expense, transactional and one-time costs. See “Use of Non-GAAP Financial Measures” below for additional information and reconciliation. a service (referred to herein as “SaaS”) and maintenance contracts. We incurred a quarterly operating loss of $302,000, and a year-to-date operating profit of $346,000, for the periods ended October 31, 2012. In the prior year comparable periods we earned operating profits of $364,000 and $130,000, respectively. Operating expenses for the three and nine month periods ending October 31, 2012 were $6,836,000 and $16,682,000, compared to $3,949,000 and $12,468,000 in the comparable prior year periods; an increase of $2,887,000 and $4,214,000, or 73% and 34%, 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, 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 or customers expand their solutions. Substantial portions of the operating expenses are fixed; therefore operating profits are expected to vary depending primarily on the mix of proprietary system revenue versus SaaS revenue.Operations(1) Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 4 % 5 % 4 % 4 % 17 19 19 21 48 52 46 52 31 22 31 22 100 100 100 100 47 50 47 53 45 35 40 38 13 7 11 8 105 92 98 99 (5 ) 8 2 1 (13 ) (1 ) (8 ) (1 ) 54 — 21 — 37 % 7 % 14 % (0 )% 247 % 251 % 269 % 332 % 78 % 63 % 61 % 71 % 29 % 22 % 30 % 25 % 27 % 50 % 35 % 48 % Three Months Ended April 30, 2013 April 30, 2012 Systems sales 5.0 % 6.5 % Professional services 14.2 20.6 Maintenance and support 52.2 43.2 Software as a service 28.6 29.7 Total revenues 100.0 % 100.0 % Cost of sales 49.1 48.6 Selling, general and administrative 55.3 30.7 Product research and development 16.9 8.4 Total operating expenses 121.4 87.6 Operating profit (loss) (21.4 ) 12.4 Other income (expense), net (20.2 ) (3.2 ) Income tax net loss (0.3 ) (0.2 ) Net earnings (loss) (41.9 )% 9.0 % Cost of systems sales 197.1 % 193.9 % Cost of services, maintenance and support 22.7 % 15.9 % Cost of software as a service 31.3 % 42.2 % (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 ourthe future operations of the Company in the near or long-term. The data in the table is presented solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated. Three Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 27 $ 24 $ 3 12 % 144 — 144 — % 119 209 (90 ) (43 )% 1,090 833 257 31 % 3,148 2,280 868 38 % 2,006 966 1,040 107 % $ 6,534 $ 4,312 $ 2,222 51 % Nine Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 162 $ 76 $ 86 113 % 144 — 144 — % 414 450 (36 ) (8 )% 3,154 2,709 445 16 % 7,797 6,559 1,238 19 % 5,358 2,804 2,554 91 % $ 17,029 $ 12,598 $ 4,431 35 % Three Months Ended April 30, 2013 April 30, 2012 Change % Change System Sales (1): Proprietary software $ 78 $ 120 $ (42 ) (35 )% Term licenses 226 — 226 — % Hardware & third party software 20 233 (213 ) (91 )% Professional services 919 1,122 (203 ) (18 )% Maintenance & support 3,381 2,352 1,029 44 % Software as a service 1,849 1,618 231 14 % Total Revenues $ 6,473 $ 5,445 $ 1,028 19 % (1) Proprietary software, hardware, and term licenses are the components of the system sales line item. Term licenses are comprised of Meta software only. (2)Includes $74,000 and $138,000 of revenue earned from the acquired Interpoint operations for the three and nine month periods ended October 31, 2012, respectively. Includes $191,000 of revenue earned from the acquired Meta operations for the period from August 17, 2012 to October 31, 2012.(3)Includes maintenance revenue for Meta perpetual licenses and third party software maintenance of $924,000 for the period from August 17, 2012 to October 31, 2012.(4)Includes $821,000 and $1,941,000 of revenue earned from the acquired Interpoint operations for the three and nine month periods ended October 31, 2012, respectively.Revenuesand nine month periodsmonths ended October 31, 2012 were $6,534,000 and $17,029,000 respectively;April 30, 2013 decreased by $42,000, or 35%, over the the prior comparable period. This decrease is attributable to reduced volume of HIM licenses delivered to clients in the current year quarter as compared to $4,312,000 and $12,598,000 respectivelythe prior comparable quarter, which is offset by the delivery of one computer assisted coding ("CAC") license in the comparable periodscurrent quarter. Recurring CAC term license sales of fiscal 2011. The quarterly and year to date increase was primarily attributable to$226,000 are incremental revenues provided by the acquired Meta operations.Three Months Ended (in thousands): April 30, 2013 April 30, 2012 Change % Change Cost of systems sales $ 639 $ 687 $ (48 ) (7 )% Cost of professional services 974 553 421 76 % Cost of maintenance and support 985 725 260 36 % Cost of software as a service 579 682 (103 ) (15 )% Total cost of sales $ 3,177 $ 2,647 $ 530 20 % Three Months Ended (in thousands): April 30, 2013 April 30, 2012 Change % Change General and administrative expenses $ 2,843 $ 1,195 $ 1,648 138 % Sales and marketing expenses 738 475 263 55 % Total selling, general, and administrative $ 3,581 $ 1,670 $ 1,911 114 % Meta operations. Acquired Interpoint operations contributed $895,000 and $2,079,000Meta. We recognized approximately $314,000 in incremental revenueamortization expense for the three months ended April 30, 2013 for acquired intangible assets as compared to $72,000 in the prior comparable period. The Company also incurred increased expense due to investor relations and nine month periods ended October 31, 2012.acquisition search activities, as well as additional costs from executive severances and other costs associated with our corporate office move to Atlanta, Georgia.Three Months Ended (in thousands): April 30, 2013 April 30, 2012 Change % Change Research and development expense $ 1,097 $ 456 $ 641 141 % Plus: Capitalized research and development cost 460 507 (47 ) (9 )% Total R&D cost $ 1,557 $ 963 $ 594 62 % $1,259,000an incremental $386,000 in research and development expenses. Additionally, the hours available for capitalization decreased for the period August 17, 2012HIM product line, and costs not eligible for capitalization increased compared to October 31, 2012. Additionalthe prior comparable period. Research and development expenses for the three months ended April 30, 2013 and 2012, as a percentage of revenues, were 17% and 8%, respectively.in recurring revenues from SaaSthe term loan interest and maintenance contracts are primarily duesuccess fees, and amortization of deferred financing costs related to annual increases, new clientsthe Meta acquisition. The Company also recorded a valuation adjustment to its warrants liability, recorded as miscellaneous expense of $645,000, using assumptions made by management to adjust to the current fair market value of the warrants at April 30, 2013.have added incremental revenue, or expansionis comprised of servicesestimated federal alternative minimum tax, state and local tax provisions. April 30, 2013 April 30, 2012 Company proprietary software $ 3,304,000 $ 94,000 Hardware and third-party software 77,000 140,000 Professional services 8,040,000 5,240,000 Maintenance and support 23,017,000 10,973,000 Software as a service 18,607,000 15,000,000 Total $ 53,045,000 $ 31,447,000 Backlog October 31, 2012 January 31, 2012 October 31, 2011 $ 3,650,000 $ 181,000 $ 67,000 84,000 194,000 190,000 4,348,000 5,945,000 4,946,000 21,535,000 10,504,000 5,374,000 19,117,000 10,542,000 6,237,000 $ 48,734,000 $ 27,366,000 $ 16,814,000 (1)Includes $3,546,000 from Meta operations(2)Includes $9,460,000 from Meta operationsOctober 31, 2012, weApril 30, 2013, the Company 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 $48,734,000$53,045,000 compared with $16,814,000$31,447,000 at October 31, 2011.OurApril 30, 2012. We added $3,546,000 in incremental backlog from Meta term licenses.Third partythird partythird-party hardware or third partythird-party software licenses that have not been delivered to the client. These are products that we resellthe Company resells as components of solutions clients purchase.the solution a client purchases. The decrease in backlog is primarily due to clients which have made fewer purchases for future systems implementations.a reduction in the volume of third-party sales as opposed to the prior comparable period. These items are expected to be delivered in the next twelve months as implementations commence.performed, or revenues that are deferred.performed. 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 period greater than one year.signing. The increase in backlog from the prior year comparable quarter is due to incremental backlog provided by SaaS-PFSseveral clients acquired in the Interpoint acquisition, incremental backlog from Meta backlog, and is partially offset by revenue recognized outthat signed contracts during fiscal 2012 for add-on solutions, upgrades, or expansion of backlog.ourthe Company’s proprietary software and third party hardware and software with clients and remarketing partners for which either an agreement has been signed or a purchase order has been received, or paymentunder a master agreement has been received. IncludedThe Company includes 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 October 31, 2012April 30, 2013 was $21,535,000$23,017,000 as compared to $5,374,000$10,973,000 at October 31, 2011.April 30, 2012. A significant portion of thethis increase in maintenance and support backlog is due to one client which signed an extendedbacklog added by Meta maintenance contract for five years,contracts. Additionally, as well as $9,460,000 in incremental backlog from Meta operations. Other factors which increased backlog are add-on solutions sold in fiscal 2011 and the first three quarterspart of fiscal 2012. Additionally, contract renewals contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics.October 31, 2012, we haveApril 30, 2013, the Company had entered into SaaSsoftware as a service agreements, which are expected to generate revenues of $19,117,000$18,607,000 through their respective renewal dates in fiscal years 20122013 through 2018. Typical SaaS terms are one to fiveseven years in length. The increase incommencement of revenue recognition for SaaS backlog from October 31, 2011 is primarilyvaries depending on the impact of assumed backlog from the Interpoint acquisition, as well as new contracts signed late in fiscal 2011 through the third quarter of fiscal 2012.Cost of SalesCost of sales consistedsize and complexity of the following (in thousands): Three Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 718 $ 583 $ 135 23 % 855 572 283 49 % 918 514 404 79 % 551 480 71 15 % $ 3,042 $ 2,149 $ 893 41 % Nine Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 1,937 $ 1,752 $ 185 10 % 1,911 1,924 (13 ) (1 )% 2,350 1,652 698 42 % 1,850 1,335 515 38 % $ 8,048 $ 6,663 $ 1,385 21 % Costsystem, the implementation schedule requested by the client, and ultimately the official go-live on the system. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period.systems sales includes amortizationthe Company’s master agreements are generally non-cancelable but provide that the client may terminate its agreement upon a material breach by the Company, or may delay certain aspects of capitalized software expenditures, royalties, and the costinstallation. There can be no assurance that a client will not cancel all or any portion of third-party hardware and software. The quarterly increasea master agreement or delay portions of the agreement. A termination or delay in the cost of systems sales is primarily the resultone or more phases of an increase in third-party hardware and software sales. The year-to-date increase of $185,000 inagreement, or the cost of systems sales is primarily attributable to the sunsetting of certain products, the general release and subsequent amortization of products during the third quarter, 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 increase in expense is primarily due to a significant increase in staffing, which took place in the second quarter of fiscal 2012. A portionfailure of the increase is also attributableCompany to the incremental increase of $331,000 and $502,000, respectively, in quarterly and year-to-date expense attributable to the inclusion of Interpoint and Meta implementation services.The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts. The quarterly and year-to-date increase in expense is primarily due to increased support costs experienced in the quarter for certain products in general release.The cost of software asprocure additional agreements, could have a service 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 and Meta of $218,000 and $394,000 was recorded for the three and nine months ended October 31, 2012 respectively. The quarterly and year-to-date increase, net of amortization expense, is primarily attributable to increased personnel and infrastructure costs relative to data center operations to support revenue growth, as well as the incremental costs for SaaS data center operations.Selling, General and Administrative ExpenseSelling, general and administrative expenses consisted of the following (in thousands): Three Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 2,927 $ 1,495 $ 1,432 96 % Nine Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 6,801 $ 4,742 $ 2,059 43 % Selling, general and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to our 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 comparable prior year periods is due to costs incurred as part of the Meta acquisition and integration, as well as general increases in investor relations expenses, professional fees, travel and living expenses, trade show expense, and amortization of intangible assets acquired in the Meta & Interpoint transactions.Product Research and Development ExpenseProduct research and development expenses consisted of the following (in thousands): Three Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 867 $ 304 $ 563 185 % 601 579 22 3 % $ 1,468 $ 883 $ 585 66 % Nine Months Ended, October 31, 2012 October 31, 2011 Change % Change $ 1,834 $ 1,064 $ 770 72 % 1,571 1,970 (399 ) (20 )% $ 3,405 $ 3,034 $ 371 12 % 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 increased $563,000 and $770,000, respectively, from the prior year comparable periods. The quarterly and year-to-date increases in research and development expense is a result of increaseddevelopment time spent on non-capitalizable products as well as incremental expense of $391,000 attributable to Meta research and development. Quarterly and year-to-date capitalized software development costs (not including purchased internally developed software from Meta And Interpoint) decreased as compared to the prior year primarily due to a decrease in costs eligible for capitalization. The total research and development expenditures on a quarterly and year-to-date basis have increased by $585,000 and $371,000, respectively, when considering both capitalized software development costs and non-capitalizable research and development expense; this is primarily due to increases in post general release software hotfixes and reductions in staffing, as well as the addition of Meta research & development.Other Income (Expense)Quarterly and year-to-date interest expense for the period ending October 31, 2012 was $895,000 and $1,494,000, respectively, compared to $26,000 and $68,000 in the prior year comparable periods. Interest expense consists of interest and commitment feesmaterial adverse effect on the lineCompany’s financial condition, and results of credit, interest and success fees on the term loans entered into in conjunction with the Interpoint and Meta acquisitions, interest on the convertible notes entered into in conjunction with the Interpoint and Meta acquisitions, loss on the Interpoint note conversion, and amortization of deferred financing costs and discounts on convertible notes payable related to these transactions. The increase over prior comparable three and nine month periods is primarily due to the term loans and convertible note interest as well as accruals for success fees associated with the term loan. Interest expense also includes the impact of the amortization of deferred financing costs of $79,000 and $118,000, and $112,000 of amortization of debt discounts, for the three and nine month periods ended October 31, 2012, as compared to zero for the prior comparable periods. Other income and expense consists of foreign currency exchange gains and advertising sponsorships.Income Taxes Benefit (Expense)The quarterly and year-to-date tax provision in fiscal 2012 and 2011 is comprised of state and local provisions. As a result of the deferred tax liabilities recorded in conjunction with the Meta acquisition, we were able to reduce our valuation allowance by approximately $3,600,000 representing the significant deferred tax benefit recorded in the three and nine months ended October 31, 2012.wethe Company 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, Adjusted EBITDA Margin, and Adjusted EBITDA Margin.ourCompany results as reported under GAAP. We compensateThe Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us,the Company, may differ from and may not be comparable to similarly titled measures used by other companies.We define:incomeearnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net incomeearnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, non-recurringstock-based compensation expense, and transaction expenses and stock-based compensation expense;other one-time costs; (iii) Adjusted EBITDA Margin, as Adjusted EBITDA as a percentage of net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing ourthe Company’s operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and, items outside the control of the management team (taxes). Adjusted EBITDA removes the impact of, and costs that we expect to be non-recurring including: transaction related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are not expected to be recurring in the normal course of our business.non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item outside of management’s control.item. Adjusted EBITDA per diluted share will include incremental shares in the share count that would be considered anti-dilutive in a GAAP net loss position.Our a variation of Adjusted EBITDA to assess our operating performance. OurThe Company’s credit agreements with ourits lender require delivery of compliance reports certifying compliance with financial covenants certain of which are based on an adjusted EBITDA measurement that is similar tothe same as the Adjusted EBITDA measurement reviewed by our management and board of directors.ourCompany results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA, and its variations are:we encouragethe Company encourages readers to review the GAAP financial statements included elsewhere in this quarterly report on Form 10-Q, and not rely on any single financial measure to evaluate our business. WeThe Company also strongly urgeurges readers to review the reconciliation of GAAP net earnings (loss) to Adjusted EBITDA, and GAAP earnings (loss) per diluted share to Adjusted EBITDA per diluted share in this section, along with the Condensed Consolidated Statement of OperationsFinancial Statements included elsewhere in this quarterly report on Form 10-Q.income,earnings (loss), 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 does not consider in assessing ourthe Company’s on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess ourthe Company’s comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash chargesnon-recurring expenses 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 ourthe Company’s operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.threefiscal periods ended April 30, 2013 and nine months ended October 31, 2012 and 2011 (amounts in thousands, except per share data): Three Months Ended, Nine Months Ended, October 31,
2012 October 31,
2011 October 31,
2012 October 31,
2011 $ 2,400 $ 296 $ 2,428 $ 8 895 26 1,494 68 (3,553 ) 5 (3,520 ) 12 184 163 548 553 708 454 1,930 1,455 229 — 254 — 863 944 3,134 2,096 245 133 645 529 494 — 1,043 — $ 1,602 $ 1,077 $ 4,822 $ 2,625 $ 0.15 $ 0.03 $ 0.18 $ 0.00 $ 0.10 $ 0.11 $ 0.39 $ 0.27 15,365,238 9,958,947 12,417,256 9,837,750 Three Months Ended Adjusted EBITDA Reconciliation April 30, 2013 April 30, 2012 Net earnings (loss) $ (2,710 ) $ 492 Interest expense 567 208 Tax expenses 20 9 Depreciation 171 180 Amortization of capitalized software development costs 695 555 Amortization of intangible assets 314 91 Amortization of other costs 10 — EBITDA (933 ) 1,535 Stock-based compensation expense 467 178 Associate severances and other costs relating to transactions or corporate restructuring 383 — Non-cash valuation adjustments to assets and liabilities 645 — Transaction related professional fees, advisory fees, and other internal direct costs 74 — Other non-recurring operating expenses 49 — Adjusted EBITDA $ 685 $ 1,713 Adjusted EBITDA margin(1) 11 % 31 % Adjusted EBITDA per diluted share April 30, 2013 April 30, 2012 Earnings (loss) per share — diluted $ (0.24 ) $ 0.05 Adjusted EBITDA per adjusted diluted share (2) $ 0.04 $ 0.17 Diluted weighted average shares 12,534,474 10,337,109 Includable incremental shares — adjusted EBITDA(3) 5,213,514 — Adjusted diluted shares 17,747,988 10,337,109 (1) Adjusted EBITDA as a percentage of GAAP revenues (2) Adjusted EBITDA per adjusted diluted share for the Company's common stock is computed using the more dilutive of the two-class method or the if-converted method (3) The number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP profit is earned in the current period, no additional incremental shares are assumed OurOurThe Company’s primary cash requirements include regular payment of payroll and other business expenses, interest payments on debt, and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center. Operations are funded by cash generated by operations and borrowings under credit facilities. We believeThe Company believes that the cash flows from operations and available credit facilities are adequate to fund our current obligations for the next twelve months. Cash and cash equivalents balances at October 31, 2012April 30, 2013 and January 31, 20122013 were $10,529,000$4,001,000 and $2,243,000,$7,500,000 , respectively. Continued expansion may require usthe Company to take on additional debt, or raise capital through issuance of equities, or a combination of both. There can be no assurance that wethe Company will be able to raise the capital required to fund further expansion.(in thousands) As of April 30 2013 2012 Term loans $ 13,375 $ 13,688 Contingent consideration for earn-out (1) 1,320 1,320 Capital leases (2) — — (1) Estimated for financial disclosure purposes only. Please reference “Note F – Debt” in the Notes to the Condensed Consolidated Financial Statements for additional information. (2) We entered into a capital lease for computer equipment that will commence in the second quarter of fiscal 2013. The lease is for a 24-month period and we will be obligated to pay approximately $298,000 over that period. Cash Flow Activities Nine months ended October 31, (in thousands) 2012 2011 $ 2,428 $ 8 184 2,604 (143 ) (1,986 ) $ 2,469 $ 626 (in thousands) Three Months Ended April 30, 2013 April 30, 2012 Net earnings (loss) $ (2,710 ) $ 492 Non-cash adjustments to net earnings (loss) 2,376 1,024 Cash impact of changes in assets and liabilities (2,375 ) 110 Operating cash flow $ (2,709 ) $ 1,626 for the nine months ended October 31, 2012 increasedin fiscal 2013 decreased in the current year primarily due to oura decrease in profitability, decreases in accounts payable, as well as an increase in accounts receivablereceivables. This was offset primarily by non-cash adjustmentsincreases from increased depreciation andincreases in amortization expense of property and equipment, amortization ofexpenses from capitalized software development costs intangibles amortization and debt discount amortization. This was partially offset by a decrease in profitability andintangible assets, increased share based compensation expense, an increase to the warrant liability, and a reduction in deferred revenues which were recognized out of backlog.Ourrevenue.ourthe Company’s solutions, which have good credit histories and payments have been receivedCash Flow Activities Nine months ended October 31, (in thousands) 2012 2011 $ (546 ) $ (245 ) (1,571 ) (1,970 ) (12,162 ) — $ (14,279 ) $ (2,215 ) (in thousands) Three Months Ended April 30, 2013 April 30, 2012 Purchases of property and equipment $ (79 ) $ (228 ) Capitalized software development costs (460 ) (507 ) Investing cash flow $ (539 ) $ (735 ) use ofdecrease in cash used for investing cash flowsactivities is primarily attributable toa result of a reduction in the acquisition of Meta in August of 2012,hours available for capitalization as well as capitalization of software development costs. We estimatea decrease in capital expenditures as compared to the prior comparable quarter. The Company estimates that replicating ourto replicate its existing internally developed software would cost significantly more than the stated net book value.value of $12,582,000, including acquired internally developed software of Meta and Interpoint, at April 30, 2013. Many of the programs related to capitalized software development continue to have significant value to ourthe Company’s current solutions and those under development, as the concepts, ideas, and software code are readily transferable and are incorporated into new solutions. Nine months ended October 31, (in thousands) 2012 2011 $ 9,880 $ 550 162 93 (1,246 ) — 12,000 — (700 ) — — (157 ) $ 20,096 $ 486 (in thousands) Three Months Ended April 30, 2013 April 30, 2012 Principal repayments on term loans $ (313 ) $ — Other 62 — Financing cash flow $ (251 ) $ — increasedecrease in cash provided byfrom financing activities was primarily the result of the private placement financing that we completed in August 2012, as well as the increase inrepayments on the term loan borrowings.loans.ourthe Chief Executive Officer and Chief Financial Officer, concluded that there is reasonable assurance that our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this quarterly report on Form 10-Q.There The Company's policies and procedures did not provide for a sufficiently detailed review of contract terms. As a result, a few instances were identified during the current quarter related to the inaccurate application of U.S. generally accepted accounting principles (GAAP) with respect to certain contract terms. Following completion of the quarter, we strengthened the depth of our internal financial team with the addition of a Chief Accounting Officer with significant industry and accounting experience. In addition, we performed additional analysis and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with GAAP. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented.three months ended October 31, 2012most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.PartItem 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSOn October 19, 2012, we issued 200,000 warrants to our placement agent as a portion of the fees for services rendered in the private placement investment. The warrants have an initial exercise date of May 1, 2013 and are exercisable for a five year term thereafter at a stated exercise price of $4.06 per share and could be exercised in whole or in part of any time. The warrants also included a cashless exercise option which allowed the holder to receive a number of shares of common stock based on an agreed formula in exchange for the warrants rather than paying cash to exercise. The warrants have no reset provisions.registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.STREAMLINE HEALTHSOLUTIONS, INC.DATE: December 14, 2012By:/s/ Robert E. WatsonRobert E. WatsonChief Executive OfficerDATE: December 14, 2012By:/s/ Stephen H. MurdockStephen H. MurdockChief Financial OfficerINDEX TO EXHIBITSExhibitNo. Description of ExhibitDATE: June 14, 2013 By: DATE: June 14, 2013 By: 31.1Exhibit No.Description of Exhibit 3.1(a) Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a/ LanVision Systems, Inc. (Incorporated herein by reference from the Registration Statement on Form S-1, File Number 333-01494, as filed with the Commission on April 15, 1996.) 3.1(b) Certificate of Incorporation of Streamline Health Solutions, Inc., amendment No. 1. (Incorporated herein by reference from Exhibit 3.1(b) of the Form 10-Q, as filed with the Commission on September 8, 2006.) 3.2 Bylaws of Streamline Health Solutions, Inc., as amended and restated on July 22, 2010, (Incorporated herein by reference from Exhibit 3.2 of Form 10-Q, as filed with the Commission on September 9, 2010.) 3.3 Certificate of the Designations, Powers, Preferences and Rights of the Convertible Preferred Stock (Par Value $.01 Per Share) of Streamline Health Solutions, Inc. (Incorporated herein by reference from the Registration Statement on Form S-1, File Number 333-01494, as filed with the Commission on April 15, 1996.) 10.1# Employment Agreement dated April 22, 2013 between Streamline Health Solutions, Inc. and Robert E. Watson (Incorporated herein by reference from Exhibit 10.1 of the Form 8-K, as filed with the Commission on April 26, 2013.) 10.2# Form of Stock Option Agreement pursuant to the 2013 Stock Incentive Plan of Streamline Health Solutions, Inc. 10.3# Form of Restricted Stock Award Agreement (for Directors) pursuant to the 2013 Stock Incentive Plan of Streamline Health Solutions, Inc. 31.1*** Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.231.2*** Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.132.1*** Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.232.2*** Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following financial information from Streamline Health Solutions, Inc.'s Quarterly Report on Form 10-Q for the three month period ended April 30, 2013 filed with the SEC on June 14, 2013, formatted in XBRL includes: (i) Condensed Consolidated Balance Sheets at April 30, 2013 and January 31, 2013, (ii)Condensed Consolidated Statements of Operations for three month periods ended April 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Cash Flows for the three month periods ended April 30, 2013 and 2012, and (iv) Notes to the Condensed Consolidated Financial Statements. 101.INSXBRL Instance Document101.SCH***XBRL Taxonomy Extension Schema DocumentIncluded herein101.CAL#XBRL Taxonomy Extension Calculation Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentManagement Contracts and Compensatory Arrangements.26