UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| (Mark One) | |
| [X] | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to | |
For the transition period from to
STREAMLINE HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 31-1455414 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11800 Amber Park Drive, Suite 600,
Alpharetta, GA 30309
(Address of principal executive offices) (Zip Code)
(888) 997-8732
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.01 par value | ||||
| STRM | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [X] | Smaller reporting company [X] | |||
| Emerging growth company [ ] | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of November 30, 2017:
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(rounded to the nearest thousand dollars, except share and per share information)
(Unaudited)
| As of | |||||||
| October 31, 2017 | January 31, 2017 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,892,182 | $ | 5,654,093 | |||
| Accounts receivable, net of allowance for doubtful accounts of $301,773 and $198,449, respectively | 2,532,941 | 4,489,789 | |||||
| Contract receivables | 283,973 | 466,423 | |||||
| Prepaid hardware and third-party software for future delivery | 5,858 | 5,858 | |||||
| Prepaid client maintenance contracts | 587,960 | 595,633 | |||||
| Other prepaid assets | 837,649 | 732,496 | |||||
| Other current assets | 392,449 | 439 | |||||
| Total current assets | 6,533,012 | 11,944,731 | |||||
| Non-current assets: | |||||||
| Property and equipment: | |||||||
| Computer equipment | 2,971,361 | 3,110,274 | |||||
| Computer software | 725,700 | 827,642 | |||||
| Office furniture, fixtures and equipment | 683,443 | 683,443 | |||||
| Leasehold improvements | 729,348 | 729,348 | |||||
| 5,109,852 | 5,350,707 | ||||||
| Accumulated depreciation and amortization | (3,762,821 | ) | (3,447,198 | ) | |||
| Property and equipment, net | 1,347,031 | 1,903,509 | |||||
| Capitalized software development costs, net of accumulated amortization of $18,119,290 and $16,544,797, respectively | 4,346,694 | 4,584,245 | |||||
| Intangible assets, net of accumulated amortization of $6,729,799 and $5,807,338, respectively | 6,074,137 | 6,996,599 | |||||
| Goodwill | 15,537,281 | 15,537,281 | |||||
| Other | 677,319 | 672,133 | |||||
| Total non-current assets | 27,982,462 | 29,693,767 | |||||
| $ | 34,515,474 | $ | 41,638,498 | ||||
| As of | ||||||||
| July 31, 2020 | January 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,707,000 | $ | 1,649,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $80,000 and $96,000, respectively | 418,000 | 2,016,000 | ||||||
| Contract receivables | 1,193,000 | 803,000 | ||||||
| Prepaid and other current assets | 747,000 | 501,000 | ||||||
| Current assets of discontinued operations | 154,000 | 1,585,000 | ||||||
| Total current assets | 8,219,000 | 6,554,000 | ||||||
| Non-current assets: | ||||||||
| Property and equipment, net | 101,000 | 98,000 | ||||||
| Right-of use asset for operating lease | 473,000 | — | ||||||
| Capitalized software development costs, net of accumulated amortization of $2,660,000 and $7,283,000, respectively | 6,263,000 | 5,782,000 | ||||||
| Intangible assets, net of accumulated amortization of $4,529,000 and $4,282,000, respectively | 868,000 | 1,115,000 | ||||||
| Goodwill | 10,712,000 | 10,712,000 | ||||||
| Other | 1,611,000 | 611,000 | ||||||
| Long-term assets of discontinued operations | 42,000 | 6,826,000 | ||||||
| Total non-current assets | 20,070,000 | 25,144,000 | ||||||
| Total assets | $ | 28,289,000 | $ | 31,698,000 | ||||
See accompanying notes to condensed consolidated financial statements.
| 2 |
STREAMLINE HEALTH SOLUTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||
| As of | |||||||
| October 31, 2017 | January 31, 2017 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 807,778 | $ | 1,116,525 | |||
| Accrued compensation | 593,510 | 496,706 | |||||
| Accrued other expenses | 587,209 | 484,391 | |||||
| Current portion of term loan | 596,984 | 655,804 | |||||
| Deferred revenues | 6,130,259 | 9,916,454 | |||||
| Current portion of capital lease obligations | — | 91,337 | |||||
| Total current liabilities | 8,715,740 | 12,761,217 | |||||
| Non-current liabilities: | |||||||
| Term loan, net of deferred financing cost of $146,009 and $199,211, respectively | 4,032,865 | 4,883,286 | |||||
| Warrants liability | 150,857 | 46,191 | |||||
| Royalty liability | 2,456,233 | 2,350,754 | |||||
| Lease incentive liability | 293,322 | 339,676 | |||||
| Deferred revenues, less current portion | 487,832 | 568,515 | |||||
| Total non-current liabilities | 7,421,109 | 8,188,422 | |||||
| Total liabilities | 16,136,849 | 20,949,639 | |||||
| Series A 0% Convertible Redeemable Preferred Stock, $.01 par value per share, $8,849,985 redemption value, 4,000,000 shares authorized, 2,949,995 shares issued and outstanding, net of unamortized preferred stock discount of $0 | 8,849,985 | 8,849,985 | |||||
| Stockholders’ equity: | |||||||
| Common stock, $.01 par value per share, 45,000,000 shares authorized; 19,984,743 and 19,695,391 shares issued and outstanding, respectively | 199,847 | 196,954 | |||||
| Additional paid in capital | 81,491,728 | 80,667,771 | |||||
| Accumulated deficit | (72,162,935 | ) | (69,025,851 | ) | |||
| Total stockholders’ equity | 9,528,640 | 11,838,874 | |||||
| $ | 34,515,474 | $ | 41,638,498 | ||||
(Unaudited)
| As of | ||||||||
| July 31, 2020 | January 31, 2020 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 121,000 | $ | 756,000 | ||||
| Accrued expenses | 1,049,000 | 1,395,000 | ||||||
| Accrued income taxes | 843,000 | — | ||||||
| Current portion of term loan, less deferred financing cost | 1,071,000 | 3,872,000 | ||||||
| Deferred revenues | 3,149,000 | 3,593,000 | ||||||
| Royalty liability | 1,000,000 | 969,000 | ||||||
| Current portion of operating lease obligation | 195,000 | — | ||||||
| Current liabilities of discontinued operations | 190,000 | 5,053,000 | ||||||
| Total current liabilities | 7,618,000 | 15,638,000 | ||||||
| Non-current liabilities: | ||||||||
| Term loan payable, less current portion | 1,229,000 | — | ||||||
| Deferred revenues, less current portion | 36,000 | 55,000 | ||||||
| Operating lease obligation, less current portion | 309,000 | — | ||||||
| Total non-current liabilities | 1,574,000 | 55,000 | ||||||
| Total liabilities | 9,192,000 | 15,693,000 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.01 par value per share, 45,000,000 shares authorized; 31,636,665 and 30,530,643 shares issued and outstanding, respectively | 316,000 | 305,000 | ||||||
| Additional paid in capital | 95,656,000 | 95,113,000 | ||||||
| Accumulated deficit | (76,875,000 | ) | (79,413,000 | ) | ||||
| Total stockholders’ equity | 19,097,000 | 16,005,000 | ||||||
| $ | 28,289,000 | $ | 31,698,000 | |||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
STREAMLINE HEALTH SOLUTIONS, INC.
(rounded to the nearest thousand dollars, except share and per share information)
(Unaudited)
| Three Months Ended October 31 | Nine Months Ended October 31 | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenues: | |||||||||||||||
| Systems sales | $ | 348,526 | $ | 314,218 | $ | 1,055,941 | $ | 2,190,256 | |||||||
| Professional services | 801,771 | 630,961 | 1,793,618 | 1,869,656 | |||||||||||
| Audit services | 280,025 | 234,347 | 919,485 | 234,347 | |||||||||||
| Maintenance and support | 3,250,229 | 3,749,596 | 9,883,563 | 11,237,637 | |||||||||||
| Software as a service | 1,718,748 | 1,706,366 | 4,586,532 | 5,144,876 | |||||||||||
| Total revenues | 6,399,299 | 6,635,488 | 18,239,139 | 20,676,772 | |||||||||||
| Operating expenses: | |||||||||||||||
| Cost of systems sales | 434,138 | 663,148 | 1,596,988 | 2,080,263 | |||||||||||
| Cost of professional services | 555,815 | 723,358 | 1,814,236 | 1,891,146 | |||||||||||
| Cost of audit services | 404,280 | 595,575 | 1,236,358 | 595,575 | |||||||||||
| Cost of maintenance and support | 667,307 | 790,291 | 2,241,969 | 2,483,462 | |||||||||||
| Cost of software as a service | 289,503 | 450,695 | 914,711 | 1,390,308 | |||||||||||
| Selling, general and administrative | 2,819,549 | 3,212,350 | 8,983,248 | 10,153,140 | |||||||||||
| Research and development | 932,251 | 1,969,415 | 3,985,161 | 5,800,169 | |||||||||||
| Total operating expenses | 6,102,843 | 8,404,832 | 20,772,671 | 24,394,063 | |||||||||||
| Operating income (loss) | 296,456 | (1,769,344 | ) | (2,533,532 | ) | (3,717,291 | ) | ||||||||
| Other expense: | |||||||||||||||
| Interest expense | (113,078 | ) | (98,871 | ) | (360,723 | ) | (380,897 | ) | |||||||
| Miscellaneous expense | (177,282 | ) | (60,555 | ) | (235,007 | ) | (39,089 | ) | |||||||
| Earnings (loss) before income taxes | 6,096 | (1,928,770 | ) | (3,129,262 | ) | (4,137,277 | ) | ||||||||
| Income tax expense | (2,607 | ) | (1,702 | ) | (7,822 | ) | (5,104 | ) | |||||||
| Net earnings (loss) | $ | 3,489 | $ | (1,930,472 | ) | $ | (3,137,084 | ) | $ | (4,142,381 | ) | ||||
| Less: deemed dividends on Series A Preferred Shares | — | (72,710 | ) | — | (875,935 | ) | |||||||||
| Net earnings (loss) attributable to common stockholders | $ | 3,489 | $ | (2,003,182 | ) | $ | (3,137,084 | ) | $ | (5,018,316 | ) | ||||
| Basic net earnings (loss) per common share | $ | — | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.26 | ) | ||||
| Number of shares used in basic per common share computation | 19,985,822 | 19,645,521 | 19,838,691 | 19,477,538 | |||||||||||
| Diluted net earnings (loss) per common share | $ | — | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.26 | ) | ||||
| Number of shares used in diluted per common share computation | 23,068,423 | 19,645,521 | 19,838,691 | 19,477,538 | |||||||||||
Three-Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| System sales | $ | 215,000 | $ | 111,000 | 215,000 | 332,000 | ||||||||||
| Professional services | 179,000 | 203,000 | 360,000 | 658,000 | ||||||||||||
| Audit services | 463,000 | 354,000 | 1,007,000 | 749,000 | ||||||||||||
| Maintenance and support | 1,228,000 | 1,273,000 | 2,486,000 | 2,725,000 | ||||||||||||
| Software as a service | 802,000 | 548,000 | 1,663,000 | 1,189,000 | ||||||||||||
| Total revenues | 2,887,000 | 2,489,000 | 5,731,000 | 5,653,000 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of system sales | 125,000 | 27,000 | 202,000 | 91,000 | ||||||||||||
| Cost of professional services | 293,000 | 462,000 | 557,000 | 888,000 | ||||||||||||
| Cost of audit services | 373,000 | 321,000 | 733,000 | 624,000 | ||||||||||||
| Cost of maintenance and support | 182,000 | 176,000 | 368,000 | 303,000 | ||||||||||||
| Cost of software as a service | 379,000 | 140,000 | 761,000 | 247,000 | ||||||||||||
| Selling, general and administrative expense | 2,284,000 | 2,402,000 | 4,576,000 | 4,823,000 | ||||||||||||
| Research and development | 509,000 | 660,000 | 1,193,000 | 1,249,000 | ||||||||||||
| Executive transition cost | — | 140,000 | — | 140,000 | ||||||||||||
| Loss on exit of membership agreement | — | — | 105,000 | — | ||||||||||||
| Total operating expenses | 4,145,000 | 4,328,000 | 8,495,000 | 8,365,000 | ||||||||||||
| Operating loss | (1,258,000 | ) | (1,839,000 | ) | (2,764,000 | ) | (2,712,000 | ) | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense | (13,000 | ) | (70,000 | ) | (27,000 | ) | (148,000 | ) | ||||||||
| Miscellaneous expense | (64,000 | ) | (103,000 | ) | (82,000 | ) | (119,000 | ) | ||||||||
| Loss from continuing operations before income taxes | (1,335,000 | ) | (2,012,000 | ) | (2,873,000 | ) | (2,979,000 | ) | ||||||||
| Income tax benefit | 172,000 | 356,000 | 733,000 | 681,000 | ||||||||||||
| Loss from continuing operations | (1,163,000 | ) | (1,656,000 | ) | (2,140,000 | ) | (2,298,000 | ) | ||||||||
| Income from discontinued operations: | ||||||||||||||||
| Gain on sale of discontinued operations | 4,000 | — | 6,013,000 | — | ||||||||||||
| Income from discontinued operations | 104,000 | 1,406,000 | 241,000 | 2,688,000 | ||||||||||||
| Income tax benefit (expense) | (80,000 | ) | (358,000 | ) | (1,576,000 | ) | (685,000 | ) | ||||||||
| Income from discontinued operations, net of tax | 28,000 | 1,048,000 | 4,678,000 | 2,003,000 | ||||||||||||
| Net (loss) income | $ | (1,135,000 | ) | $ | (608,000 | ) | 2,538,000 | (295,000 | ) | |||||||
| Basic Earnings Per Share: | ||||||||||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.07 | ) | $ | (0.12 | ) | ||||
| Discontinued operations | — | 0.05 | 0.16 | 0.09 | ||||||||||||
| Net income | $ | (0.04 | ) | $ | (0.03 | ) | $ | 0.09 | $ | (0.03 | ) | |||||
| Weighted average number of common shares – basic | 30,026,658 | 19,913,658 | 29,897,236 | 19,853,510 | ||||||||||||
| Diluted Earnings Per Share: | ||||||||||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.07 | ) | $ | (0.12 | ) | ||||
| Discontinued operations | — | 0.05 | 0.15 | 0.09 | ||||||||||||
| Net loss per common share - basic and diluted | $ | (0.04 | ) | $ | (0.03 | ) | $ | 0.08 | $ | (0.03 | ) | |||||
| Weighted average number of common shares - basic and diluted | 30,421,473 | 23,076,807 | 30,229,595 | 22,950,923 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
STREAMLINE HEALTH SOLUTIONS, INC.
(rounded to the nearest thousand dollars, except share information)
(Unaudited)
| Nine Months Ended October 31 | |||||||
| 2017 | 2016 | ||||||
| Operating activities: | |||||||
| Net loss | $ | (3,137,084 | ) | $ | (4,142,381 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
| Depreciation | 595,866 | 895,438 | |||||
| Amortization of capitalized software development costs | 1,574,493 | 2,146,374 | |||||
| Amortization of intangible assets | 922,462 | 976,338 | |||||
| Amortization of other deferred costs | 229,780 | 192,947 | |||||
| Valuation adjustment for warrants liability | 104,666 | (36,875 | ) | ||||
| Share-based compensation expense | 844,960 | 1,342,513 | |||||
| Other valuation adjustments | 124,423 | 120,912 | |||||
| (Gain) loss on disposal of property and equipment | (14,871 | ) | 567 | ||||
| Provision for accounts receivable | 181,859 | 136,693 | |||||
| Changes in assets and liabilities, net of effects of acquisitions: | |||||||
| Accounts and contract receivables | 1,957,439 | 1,679,810 | |||||
| Other assets | (671,254 | ) | 130,875 | ||||
| Accounts payable | (308,747 | ) | (78,320 | ) | |||
| Accrued expenses | 134,324 | (814,707 | ) | ||||
| Deferred revenues | (3,866,878 | ) | (3,793,603 | ) | |||
| Net cash used in operating activities | (1,328,562 | ) | (1,243,419 | ) | |||
| Investing activities: | |||||||
| Purchases of property and equipment | (24,517 | ) | (501,148 | ) | |||
| Capitalization of software development costs | (1,336,942 | ) | (1,420,678 | ) | |||
| Payment for acquisition, net of cash received | — | (1,400,000 | ) | ||||
| Net cash used in investing activities | (1,361,459 | ) | (3,321,826 | ) | |||
| Financing activities: | |||||||
| Principal repayments on term loan | (962,443 | ) | (2,243,624 | ) | |||
| Principal payments on capital lease obligation | (91,337 | ) | (535,896 | ) | |||
| Proceeds from exercise of stock options and stock purchase plan | 23,703 | 14,793 | |||||
| Payments related to settlement of employee shared-based awards | (41,813 | ) | (11,702 | ) | |||
| Net cash used in financing activities | (1,071,890 | ) | (2,776,429 | ) | |||
| Net decrease in cash and cash equivalents | (3,761,911 | ) | (7,341,674 | ) | |||
| Cash and cash equivalents at beginning of period | 5,654,093 | 9,882,136 | |||||
| Cash and cash equivalents at end of period | $ | 1,892,182 | $ | 2,540,462 | |||
| Common | Additional | Total | ||||||||||||||||||
| stock | Common | paid in | Accumulated | stockholders’ | ||||||||||||||||
| shares | Stock | capital | deficit | equity | ||||||||||||||||
| Balance at January 31, 2019 | 20,767,708 | $ | 208,000 | $ | 82,544,000 | $ | (76,550,000 | ) | $ | 6,202,000 | ||||||||||
| Restricted stock issued | 140,000 | 1,000 | (1,000 | ) | — | — | ||||||||||||||
| Restricted stock forfeited | (5,367 | ) | — | — | — | — | ||||||||||||||
| Share-based compensation | — | — | 269,000 | — | 269,000 | |||||||||||||||
| Net income | — | — | — | 313,000 | 313,000 | |||||||||||||||
| Balance at April 30, 2019 | 20,902,341 | $ | 209,000 | $ | 82,812,000 | $ | (76,237,000 | ) | $ | 6,784,000 | ||||||||||
| Stock issued pursuant to ESPP | 5,072 | — | 4,000 | — | 4,000 | |||||||||||||||
| Restricted stock issued | 222,518 | 2,000 | (2,000 | ) | — | — | ||||||||||||||
| Restricted stock forfeited | (318,750 | ) | (3,000 | ) | 3,000 | — | — | |||||||||||||
| Surrender of shares | (21,708 | ) | — | (31,000 | ) | — | (31,000 | ) | ||||||||||||
| Share-based compensation | — | — | 160,000 | — | 160,000 | |||||||||||||||
| Capital contribution | — | — | 16,000 | — | 16,000 | |||||||||||||||
| Net income | — | — | — | (608,000 | ) | (608,000 | ) | |||||||||||||
| Balance at July 31, 2019 | 20,789,473 | $ | 208,000 | $ | 82,962,000 | $ | (76,845,000 | ) | $ | 6,325,000 | ||||||||||
| Balance at January 31, 2020 | 30,530,643 | $ | 305,000 | $ | 95,113,000 | $ | (79,413,000 | ) | $ | 16,005,000 | ||||||||||
| Restricted stock issued | 440,000 | 4,000 | (4,000 | ) | — | — | ||||||||||||||
| Restricted stock forfeited | (34,790 | ) | — | — | — | — | ||||||||||||||
| Surrender of shares | (21,027 | ) | — | (22,000 | ) | — | (22,000 | ) | ||||||||||||
| Share-based compensation | — | — | 263,000 | — | 263,000 | |||||||||||||||
| Net income | — | — | — | 3,673,000 | 3,673,000 | |||||||||||||||
| Balance at April 30, 2020 | 30,914,826 | $ | 309,000 | $ | 95,350,000 | $ | (75,740,000 | ) | $ | 19,919,000 | ||||||||||
| Restricted stock issued | 855,543 | 9,000 | (9,000 | ) | — | — | ||||||||||||||
| Restricted stock forfeited | (100,000 | ) | (1,000 | ) | 1,000 | — | — | |||||||||||||
| Surrender of shares | (33,704 | ) | (1,000 | ) | (35,000 | ) | — | (36,000 | ) | |||||||||||
| Share-based compensation | — | — | 349,000 | — | 349,000 | |||||||||||||||
| Net loss | — | — | — | (1,135,000 | ) | (1,135,000 | ) | |||||||||||||
| Balance at July 31, 2020 | 31,636,665 | $ | 316,000 | $ | 95,656,000 | $ | (76,875,000 | ) | $ | 19,097,000 | ||||||||||
See accompanying notes to condensed consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(rounded to the nearest thousand dollars)
(Unaudited)
| Six-Months Ended July 31, | ||||||||
| 2020 | 2019 | |||||||
| Net Income (loss) | $ | 2,538,000 | $ | (295,000 | ) | |||
| LESS: Income from discontinued operations, net of tax | 4,678,000 | 2,003,000 | ||||||
| Loss from continuing operations, net of tax | (2,140,000 | ) | (2,298,000 | ) | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation | 31,000 | 22,000 | ||||||
| Amortization of capitalized software development costs | 651,000 | 236,000 | ||||||
| Amortization of intangible assets | 247,000 | 285,000 | ||||||
| Amortization of other deferred costs | 153,000 | 136,000 | ||||||
| Valuation adjustments | 31,000 | 31,000 | ||||||
| Benefit for income taxes | (733,000 | ) | (683,000 | ) | ||||
| Loss on exit of membership agreement | 105,000 | — | ||||||
| Share-based compensation expense | 575,000 | 429,000 | ||||||
| Benefit for accounts receivable allowance | (15,000 | ) | (125,000 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accounts and contract receivables | 1,223,000 | (496,000 | ) | |||||
| Other assets | (556,000 | ) | (575,000 | ) | ||||
| Accounts payable | (635,000 | ) | (253,000 | ) | ||||
| Accrued expenses and other liabilities | (445,000 | ) | (431,000 | ) | ||||
| Deferred revenues | (463,000 | ) | 647,000 | |||||
| Net cash used in operating activities | (1,971,000 | ) | (3,075,000 | ) | ||||
| Net cash from operating activities – discontinued operations | (2,374,000 | ) | 3,164,000 | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of ECM Assets | 11,288,000 | — | ||||||
| Purchases of property and equipment | (34,000 | ) | (46,000 | ) | ||||
| Capitalization of software development costs | (1,094,000 | ) | (1,543,000 | ) | ||||
| Net cash provided by (used in) investing activities | 10,160,000 | (1,589,000 | ) | |||||
| Net cash from investing activities – discontinued operations | — | (335,000 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Repayment of bank term loan | (4,000,000 | ) | (298,000 | ) | ||||
| Proceeds from term loan payable | 2,301,000 | 1,000,000 | ||||||
| Other | (58,000 | ) | (14,000 | ) | ||||
| Net cash (used in) provided by financing activities | (1,757,000 | ) | 688,000 | |||||
| Net increase (decrease) in cash and cash equivalents | 4,058,000 | (1,147,000 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,649,000 | 2,376,000 | ||||||
| Cash and cash equivalents at end of period | $ | 5,707,000 | $ | 1,229,000 | ||||
See accompanying notes to condensed consolidated financial statements.
| 6 |
STREAMLINE HEALTH SOLUTIONS, INC.
(Unaudited)
July 31, 2017
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Streamline Health Solutions, Inc. and its subsidiary (“we”, “us”, “our”, “Streamline”, or the “Company”), operates in one segment as a provider of healthcare information technology solutions and associated services. The Company provides these capabilities through the licensing of its CDI, Abstracting and eValuator coding analysis platform, and financial management solutions through both licensing arrangements and software as a service (“SaaS”) contracts. The Company also provides audit and coding services to help clients optimize their internal clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions. The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and Canada to capture, store, manage, route, retrieve and process patient clinical, financial and other healthcare provider information related to the patient revenue cycle.
The accompanying unaudited condensed consolidated financial statements have been prepared by us 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. The condensed consolidated financial statements include the accounts of Streamline Health Solutions, Inc. and its wholly-owned subsidiary, Streamline Health, Inc. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Condensed Consolidated Financial Statementscondensed consolidated financial statements have been included. These Condensed Consolidated Financial Statementscondensed consolidated financial statements should be read in conjunction with the consolidated 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 ninesix months ended OctoberJuly 31, 20172020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2018.2021.
The Company determined that it has one operating segment and one reporting unit due to the single nature of our products, product development, distribution process, and customer base as a provider of computer software-based solutions and services for healthcare providers.
On February 24, 2020, the Company sold a portion of its business (the ECM Assets). The Company signed the definitive agreement in December 2019 and prepared and filed a proxy statement to obtain shareholder vote on the transaction. We applied the standard of ASC 205-20-1 to ascertain the timing of accounting for the discontinued operations. Based on ASC 205-20-1, the Company determined that it did not have the authority to sell the assets until the date of the shareholder vote which was February 21, 2020. Accordingly, the Company did not present the ECM Assets as held for sale in previously filed financial statements. On February 21, 2020, the Company having the authority and ability to consummate the sale of the ECM Assets, met the criteria to present discontinued operations as described in ASC 205-20-1. Accordingly, the Company is reporting the results of operations and cash flows, and related balance sheet items associated with the ECM Assets in discontinued operations in the accompanying condensed consolidated statements of operations, cash flows and balance sheets for the current and comparative prior periods. Refer to Note 8 – Discontinued Operations for details of our discontinued operations.
All amounts in the condensed consolidated financial statements, notes and tables have been rounded to the nearest thousand dollars, except share and per share amounts, unless otherwise indicated. All references to a fiscal year refer to the fiscal year commencing February 1 in that calendar year and ending on January 31 of the following calendar year.
| 7 |
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year 20162019 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the consolidated financial statements contained in the Annual Report on Form 10-K when reviewing interim financial results.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to the recognition of revenue, stock-based compensation, capitalization of software development costs, intangible assets, the allowance for doubtful accounts, and income taxes. Actual results could differ from those estimates.
Reclassification
Certain amounts in the preparation of financial statements for the three and six months ended July 31, 2020, resulted in reclassifications of the three and six months ended July 31, 2019 and balance sheet as of January 31, 2020. A total of $47,000 for deferred financing cost related to the revolving credit agreement was reclassified from debt to other assets in the accompanying condensed consolidated balance sheet as of January 31, 2020 to be consistent with the presentation as of July 31, 2020. The Company paid the term loan on February 24, 2020, and accordingly wrote-off the portion of deferred financing cost related to the term loan through discontinued operations.
Fair Value of Financial Instruments
The Financial Accounting Standards Board’s (“FASB”) authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements.value. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount of our long-term debt approximates fair value since the variable interest rates being paid on the amounts approximate the market interest rate. Long-term debt is classified as Level 2. There were no transfers of assets or liabilities between Levels 1, 2, or 3 during the six months ended July 31, 2020 and 2019.
| 8 |
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
| Quoted Prices | Significant Other | Significant | ||||||||||||||
| Total Fair | in Active Markets | Observable | Unobservable Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| At July 31, 2020 | ||||||||||||||||
| Royalty liability (1) | $ | 1,000,000 | $ | — | $ | — | $ | 1,000,000 | ||||||||
| At January 31, 2020 | ||||||||||||||||
| Royalty liability (1) | $ | 969,000 | $ | — | $ | — | $ | 969,000 | ||||||||
| Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| At October 31, 2017 | |||||||||||||||
| Warrants liability (1) | $ | 151,000 | $ | — | $ | — | $ | 151,000 | |||||||
| Royalty liability (2) | 2,456,000 | — | — | 2,456,000 | |||||||||||
| At January 31, 2017 | |||||||||||||||
| Warrants liability (1) | $ | 46,000 | $ | — | $ | — | $ | 46,000 | |||||||
| Royalty liability (2) | 2,351,000 | — | — | 2,351,000 | |||||||||||
| (1) |
Revenue Recognition
We derive revenue from the sale of internally-developed software, either by licensing for local installation or by a software as a service (“SaaS”) delivery model, through our direct sales force or through third-party resellers. Licensed, locally-installed clients on a perpetual model utilize our support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees include support and maintenance. We also derive revenue from professional services that support the implementation, configuration, training and optimization of the applications, as well as audit services provided to help clients review their internal coding audit processes. Additional revenues are also derived from reselling third-party software and hardware components.
We recognize revenue in accordance with Accounting Standards Codification (ASC) 985-605, Software-Revenue Recognition,606, Revenue from Contracts with Customers (“ASC 605-25, Revenue Recognition — Multiple-Element Arrangements606”), and ASC 605-10-S99.under the core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
We commence revenue recognition when all of(Step 5 below) in accordance with that core principle after applying the following criteria have been met:
| ● | Step 1: Identify the contract(s) with a customer | |
| ● | Step 2: Identify the performance obligations in the contract | |
| ● | Step 3: Determine the transaction price | |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract | |
| ● | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
Often contracts contain more than one performance obligation. Performance obligations are the unit of an arrangement exists,
If we determine that any of the above criteriawe have not been met,satisfied a performance obligation, we will defer recognition of the revenue until all the criteria have been met.performance obligation is satisfied. Maintenance and support and SaaS agreements are generally non-cancelablenon-cancellable or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable.criteria.
| 9 |
The determined transaction price is allocated based on the accounting revenue guidance under Accounting Standards Update (ASU) 2009-13,
Contract Combination
The Company may execute more than one unitcontract or agreement with a single customer. The Company evaluates whether the agreements were negotiated as a package with a single objective, whether the amount of accounting. Multiple-element arrangements requireconsideration to be paid in one agreement depends on the delivery price and/or performance of multiple solutions,another agreement, or whether the goods or services and/or right-to-use assets. To qualifypromised in the agreements represent a single performance obligation. The conclusions reached can impact the allocation of the transaction price to each performance obligation and the timing of revenue recognition related to those arrangements.
The Company has utilized the portfolio approach as the practical expedient. We have applied the revenue model to a separate unitportfolio of accounting,contracts with similar characteristics where we expected that the delivered item must have valuefinancial statements would not differ materially from applying it to the client on a stand-alone basis. An item has stand-alone value to a client when it can be sold separately by any vendor or the client could resell the item on a stand-alone basis. Additionally, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items must be considered probable and substantially in the control of the vendor.
Systems Sales
The Company’s software license fees.
Maintenance and Support Services
Our maintenance and support components are not essential toobligations include multiple discrete performance obligations, with the functionality oftwo largest being unspecified product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe that the software, and clients renew maintenance contracts separately from software purchases at renewal rates materially similar to the initial rate charged for maintenance on the initial purchase of software. We use VSOE of fair value to determine fair value ofmultiple discrete performance obligations within our overall maintenance and support services. Rates are set based on market rates for these types of services, and our rates are comparable to rates charged by our competitors, which are based on the knowledge of the marketplace by senior management. Generally, maintenance and support is calculatedobligations can be viewed as a percentage ofsingle performance obligation since both the list price ofunspecified upgrades and technical support are activities to fulfill the proprietary license being purchased by a client. Clients have the option of purchasing additional annual maintenance service renewals each year for which ratesperformance obligation and are not materially different from the initial rate but typically include a nominal rate increase based on the consumer price index. Annual maintenancerendered concurrently. Maintenance and support agreements entitle clients to technology support, version upgrades, bug fixes and service packs.
TM (“CDI”) products generally does not require material modification to achieve its contracted function.
The Company provides various professional services components thatto customers with software licenses. These include project management, software implementation and software modification services. Revenues from arrangements to provide professional services are not essential togenerally distinct from the functionalityother promises in the contract and are recognized as the related services are performed. Consideration payable under these arrangements is either fixed fee or on a time-and-materials basis, and is recognized over time as the services are performed
Software as a Service
SaaS-based contracts include use of the Company’s platform, implementation, support and other services which represent a single promise to provide continuous access to its software from timesolutions. The Company recognizes revenue over the term of the life of the contract.
| 10 |
Audit Services
The Company provides technology-enabled coding audit services to time, are sold separately by us. Similarhelp clients review and optimize their internal clinical documentation and coding functions across the applicable segment of the client’s enterprise. Audit services are sold by other vendors, and clients can elect to perform similar services in-house. When professional services revenues are a separate unit of accounting, revenues are recognizedperformance obligation. We recognize revenue as the services are performed.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type and nature of revenue stream:
| Six-Months Ended July 31, 2020 | ||||||||||||
| Recurring Revenue | Non-recurring Revenue | Total | ||||||||||
| Systems sales | $ | — | $ | 215,000 | $ | 215,000 | ||||||
| Professional services | — | 360,000 | 360,000 | |||||||||
| Audit services | — | 1,007,000 | 1,007,000 | |||||||||
| Maintenance and support | 2,486,000 | — | 2,486,000 | |||||||||
| Software as a service | 1,663,000 | — | 1,663,000 | |||||||||
| Total revenue: | $ | 4,149,000 | $ | 1,582,000 | $ | 5,731,000 | ||||||
Contract Receivables and Deferred Revenues
The Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenues include payments received in advance of performance under the contract. Our contract receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue. In the year first six months ended July 31, 2020, we recognized approximately $2.7 million in revenue from deferred revenues outstanding as of January 31, 2020. Revenue allocated to remaining performance obligations was $17.8 million as of July 31, 2020, of which the Company expects to recognize approximately 49% over the next 12 months and the remainder thereafter.
Deferred costs (costs to fulfill a contract and contract acquisition costs)
We defer the direct costs, which include salaries and benefits, for professional services related to coding compliance, recovery audit contractor consulting, and ICD-10 readiness are consideredSaaS contracts as a single unit of accounting where we recognize revenue using proportional performance over the service period when all applicable revenue recognition criteria have been met.
Contract acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial and renewal contracts are essential to the functionality of perpetually licensed softwaredeferred and are not consideredthen amortized on a separate unit of accounting are recognized using the percentage-of-completion methodstraight-line basis over the professional service period.
Deferred commissions costs paid and payable, which are sold with perpetually licensed software, we use VSOE of fair value basedincluded on the hourly rate charged when services are sold separately to determine fair valueconsolidated balance sheets within other non-current assets totaled $585,000 and $421,000, respectively, as of professional services. We typically sell professional servicesJuly 31, 2020 and January 31, 2020. Amortization expense associated with sales commissions included in selling, general and administrative expenses on an hourly or fixed fee basis. We monitor projects to assure that the expectedconsolidated statements of operations was $43,000 and historical rate earned remains within a reasonable range to the established selling price.
Capitalized Software Development Costs
Software development costs for software to be sold, leased, or marketed are accounted for in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and design phase of software development are classified as research and development costs and are expensed as incurred. Once technological feasibility has been established, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is included in Cost of system sales on the consolidated statements of operations. Annual amortization is measured at the greater of a) the ratio of the software product’s current gross revenues to the total of current and expected gross revenues or b) straight-line over the remaining economic life of the software (typically three to five years). Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at the date of such determination.
Internal-use software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The costs incurred in the preliminary stages of development are expensed as research and development costs as incurred. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over the estimated useful life of the software (typically three to five years). Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Amortization expense related to capitalized internal-use software development costs is included in Cost of software as a service on the consolidated statements of operations.
The Company wrote-off $5,274,000 of aggregate cost and associated amortization of capitalized software development as of and for the period ended July 31, 2017 and January2020 as it was fully amortized. During the three month period ended July 31, 2017, we had accrued severance expenses2020, the Company capitalized $38,000 of zero and $9,000, respectively.non-employee stock compensation to capitalized software development cost reflecting the earned stock awards to 180 Consulting – See Note 9 – Related Party Transactions.
| 11 |
Equity Awards
The Company accounts for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as expense over the requisite vestingservice period. WeFor awards to non-employees, the Company recognizes compensation expense in the same manner as if the entity had paid cash for the goods or services. The Company incurred total compensation expense related to stock-based awards of $290,000$349,000 and $432,000$160,000 for the three months ended OctoberJuly 31, 20172020 and 2016,2019, respectively, and $845,000$612,000 and $1,343,000$429,000 for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, respectively.
The fair value of the stock options granted iswas estimated at the date of grant using a Black-Scholes option pricing model. The optionOption pricing model inputs (suchinput assumptions such as expected term, expected volatility and risk-free interest rate)rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and are generally derived from external (such as, risk-free rate of interest) and historical data (such as, volatility factor, expected term and forfeiture rates) data.. Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon the number, value and vesting period of future awards.
The Company issues restricted stock awards in the form of ourCompany common stock. The fair value of these awards is based on the market closingclose price per share on the date of grant. We expensegrant date. The Company expenses the compensation cost of these awards as the restriction period lapses, which is typically a one-yearone- to four-year service period to the Company. In the nine months ended October 31, 2017, 32,033 shares of common stock were surrendered to the Company to satisfy tax withholding obligations totaling $42,000 in connection with the vesting of restricted stock awards. Shares surrendered by the restricted stock award recipients in accordance with the applicable plan are deemed canceled, and therefore are not available to be reissued. In the nine months ended October 31, 2017, the Company awarded 220,337 shares of restricted stock to directors of the Company.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basisbases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, we considerthe Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. We establishThe Company establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
The Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. We believe we haveAt July 31, 2020, the Company believes it has appropriately accounted for any uncertain tax positions. The Company has recorded $262,000 and $263,000 in reserves for uncertain tax positions and corresponding interest and penalties as of October 31, 2017 and January 31, 2017, respectively.
Net Earnings (Loss) Per Common Share
The Company presents basic and diluted earnings per share (“EPS”) data for our common stock. Basic EPS is calculated by dividing the net earnings (loss) attributable to common stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated based on the profit or loss attributable to common stockholders and the weighted average number of shares of common stock outstanding, adjusted for the effects of all potential dilutive common stock issuances related to options, unvested restricted stock, warrants and convertible preferred stock. Potential common stock dilution related to outstanding stock options, unvested restricted stock and warrants is determined using the treasury stock method, while potential common stock dilution related toOur Series A Convertible Preferred Stock is determined using the “if converted” method.
Our unvested restricted stock awards are considered non-participating securities because holders are not entitled to non-forfeitable rights to dividends or dividend equivalents during the if-converted method.
| 12 |
The following is the calculation of the basic and diluted net earnings (loss) per share of common stock:
| Three-Months Ended | Six-Months Ended | |||||||||||||||
| July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||
| Continuing operations | ||||||||||||||||
| Loss from continuing operations, net of tax | $ | (1,163,000 | ) | $ | (1,656,000 | ) | $ | (2,140,000 | ) | $ | (2,298,000 | ) | ||||
| Basic net loss per share of common stock from continuing operations | $ | (0.04 | ) | $ | (0.08 | ) | (0.07 | ) | (0.12 | ) | ||||||
| Discontinued operations | ||||||||||||||||
| Gain from discontinued operations, net of tax | $ | 28,000 | $ | 1,048,000 | $ | 4,678,000 | $ | 2,003,000 | ||||||||
| Less: Allocation of earnings to participating securities | — | (133,000 | ) | — | (260,000 | ) | ||||||||||
| Income available to common shareholders from discontinued operations | $ | 28,000 | $ | 915,000 | 4,678,000 | 1,743,000 | ||||||||||
| Basic net earnings per share of common stock from discontinued operations | $ | — | $ | 0.05 | $ | 0.16 | $ | 0.09 | ||||||||
| Diluted earnings (loss) per share (2): | ||||||||||||||||
| Continuing operations | ||||||||||||||||
| Income available to common shareholders from continuing operations | $ | (1,163,000 | ) | $ | (1,656,000 | ) | (2,140,000 | ) | (2,298,000 | ) | ||||||
| Diluted net loss per share of common stock from continuing operations | $ | (0.04 | ) | $ | (0.08 | ) | (0.07 | ) | (0.12 | ) | ||||||
| Discontinued operations | ||||||||||||||||
| Income available to common shareholders from discontinued operations | $ | 28,000 | $ | 1,048,000 | 4,678,000 | 2,003,000 | ||||||||||
| Diluted net earnings per share of common stock from discontinued operations | $ | — | $ | 0.05 | $ | 0.15 | $ | 0.09 | ||||||||
| Net loss | $ | (1,135,000 | ) | $ | (608,000 | ) | $ | 2,538,000 | $ | (295,000 | ) | |||||
| Weighted average shares outstanding - Basic (1) | 30,026,658 | 19,913,658 | 29,897,236 | 19,853,510 | ||||||||||||
| Effect of dilutive securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (3) | 394,815 | 3,163,149 | 332,359 | 3,097,413 | ||||||||||||
| Weighted average shares outstanding – Diluted | 30,421,473 | 23,076,807 | 30,229,595 | 22,950,923 | ||||||||||||
| Basic net loss per share of common stock | $ | (0.04 | ) | $ | (0.03 | ) | $ | 0.09 | $ | (0.03 | ) | |||||
| Diluted net loss per share of common stock | $ | (0.04 | ) | $ | (0.03 | ) | $ | 0.08 | $ | (0.03 | ) | |||||
| Three Months Ended | |||||||
| October 31, 2017 | October 31, 2016 | ||||||
| Net earnings (loss) | $ | 3,489 | $ | (1,930,472 | ) | ||
| Less: deemed dividends on Series A Preferred Stock | — | (72,710 | ) | ||||
| Net earnings (loss) attributable to common stockholders | $ | 3,489 | $ | (2,003,182 | ) | ||
| Weighted average shares outstanding used in basic per common share computations | 19,985,822 | 19,645,521 | |||||
| Restricted stock and Series A Convertible Preferred Stock | 3,082,601 | — | |||||
| Number of shares used in diluted per common share computation | 23,068,423 | 19,645,521 | |||||
| Basic net earnings (loss) per share of common stock | $ | 0.00 | $ | (0.10 | ) | ||
| Diluted net earnings (loss) per share of common stock | $ | 0.00 | $ | (0.10 | ) | ||
| Nine Months Ended | |||||||
| October 31, 2017 | October 31, 2016 | ||||||
| Net loss | $ | (3,137,084 | ) | $ | (4,142,381 | ) | |
| Less: deemed dividends on Series A Preferred Stock | — | (875,935 | ) | ||||
| Net loss attributable to common stockholders | $ | (3,137,084 | ) | $ | (5,018,316 | ) | |
| Weighted average shares outstanding used in basic per common share computations | 19,838,691 | 19,477,538 | |||||
| Restricted stock and Series A Convertible Preferred Stock | — | — | |||||
| Number of shares used in diluted per common share computation | 19,838,691 | 19,477,538 | |||||
| Basic net loss per share of common stock | $ | (0.16 | ) | $ | (0.26 | ) | |
| Diluted net loss per share of common stock | $ | (0.16 | ) | $ | (0.26 | ) | |
| (1) | Excludes the effect of unvested restricted shares of common stock, which are considered non-participating securities. As of July 31, 2020 and 2019, there were 1,421,825 and 760,978 unvested restricted shares of common stock outstanding, respectively. | |
| (2) | Diluted EPS for our common stock was computed using the if-converted method, which yields the same result as the two-class method. The two-class method has not been used in the current period as a result of the redemption of the participating securities, See Note 5. | |
| (3) | Diluted net loss per share excludes the effect of shares that are anti-dilutive. For the three and six months ended July 31, 2020, diluted EPS excludes 624,330 outstanding stock options and 1,421,825 unvested restricted shares of common stock. For the three and six months ended July 31, 2019, diluted EPS excludes 2,895,464 shares of Series A Convertible Preferred Stock, 1,516,913 outstanding stock options and 760,978 unvested restricted shares of common stock. |
Other Operating Costs
Loss on Exit of Membership Agreement
As of July 31, 2020, minimum fees due under the shared office arrangement totalled approximately $67,000. The Company recorded an expense for the threeminimum future commitment under the agreement and nineaccrued the cost to the accompanying consolidated balance sheet in the first six months ended OctoberJuly 31, 2017 and 2016, respectively. 2020 to reflect the liability at the time it abandoned the space. Refer to Note 3 – Operating Leases.
Non-Cash Items
The inclusionCompany had the following items that were non-cash items related to the condensed consolidated statements of these stock options would have been anti-dilutive. For the three and nine months ended October 31, 2017 and 2016, the warrants to purchase
| July 31, | ||||||||
| 2020 | 2019 | |||||||
| Escrowed funds from sale of ECM Assets | $ | 800,000 | $ | — | ||||
| Right-of Use Assets from operating lease | 540,000 | — | ||||||
| Capitalized software purchased with stock (Note 9) | 38,000 | — | ||||||
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Recent Accounting Pronouncements
In May 2014,January 2017, the FASB issued ASU 2014-09, Revenue from Contracts with Customers2017-04, Intangibles—Goodwill and Other (Topic 606)350): Simplifying the Test for Goodwill Impairment, which supersedesremoves Step 2 from the revenue recognition requirements in ASC 605, Revenue Recognition.goodwill impairment test. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2016, the FASB delayed the effective date by one year and the guidance will now be effective for us on February 1, 2018. Early adoption of the update is permitted. The guidance is to be applied using one of two retrospective application methods. We are in the process of applying the five-step model of the new standard to customer contracts and will compare the results to our current accounting practices. We plan to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on February 1, 2018. We elected the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, we would not restate the prior financial statements presented. Therefore, the new standard requires additional disclosures of the amount by which each financial statement line item is affected in the fiscal year 2018 reporting period. We are currently in the process of assessing the impact of the new standard and have not yet determined the effect of the standard on our consolidated financial statements.
In August 2016,2018, the FASB issued ASU 2016-15, Statement of Cash Flows(Topic 230): Classification of Certain Cash Receipts and Cash Payments2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, to clarify howremove, modify, and add certain cash receipts and cash payments should be presented and classifieddisclosure requirements within Topic 820 in order to improve the effectiveness of fair value disclosures in the statement of cash flows. The ASU should be applied using a retrospective transition methodnotes to each period presented.financial statements. The standard will bebecame effective for us on February 1, 2018. Early2020. The adoption of this updateASU did not have a significant impact on our condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The standard will become effective for us on February 1, 2021. We are currently evaluating the impact of the adoption of this new standard on our condensed consolidated financial statements and related disclosures.
In January 2017,June 2016, the FASB issued ASU 2017-01, Business CombinationsNo. 2016-13, “Financial Instruments - Credit Losses (Topic 805)326): ClarifyingMeasurement of Credit Losses on Financial Instruments,” which amends the Definitionimpairment model to utilize an expected loss methodology in place of a Business, to clarify the definitioncurrent incurred loss methodology, which will result in the more timely recognition of a business to assistlosses. For smaller reporting entities, with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will beASU 2016-13 is effective for us on February 1, 2018. We doannual periods beginning after December 15, 2022, including interim periods within those fiscal years. The ASU, including the subsequently issued codification improvements update (“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-04) and the targeted transition relief update (“Financial Instruments-Credit Losses (Topic 326),” ASU 2019-05), is not expect that the adoption of this ASU willexpected to have a significant impact on ourthe consolidated condensed financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. The standard will be effective for us on February 1, 2020. Early adoption of this update is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.
We determine whether an arrangement is a Montefiore Medical Center Solution
The Company entered into a new lease for office space in Alpharetta, Georgia, on March 1, 2020. The lease terminates on March 31, 2023. At inception, the Company recorded a right-of use asset of solutions (“Patient Engagement”), which$540,000, and related current and long-term operating lease obligation in the accompanying consolidated balance sheet. As of July 31, 2020, operating lease right-of use assets totalling $473,000, and the associated lease liability is included in both current and long-term liabilities of $195,000 and $309,000, respectively. The Company used a discount rate of 6.5% to the determine the lease liability. For the three- and six-month periods ended July 31, 2020, the Company had operating cost of approximately $48,000 and $97,000. In addition, there was $33,000 paid for amounts included in the measurement of operating cash flows from operating leases as a result of lease incentives and previous pre-paid rent that has been included as an adjustment to the right-of-use asset at lease inception.
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Maturities of operating lease liabilities associated with the Company’s operating lease as of July 31, 2020 are as follows for payments due based upon the legacy ForSite2020 solution acquired from UnibasedCompany’s fiscal year:
| 2020 | $ | 99,000 | ||
| 2021 | 204,000 | |||
| 2022 | 210,000 | |||
| 2023 | 35,000 | |||
| Total lease payments | 548,000 | |||
| Less present value adjustment | (44,000 | ) | ||
| Present value of lease liabilities | $ | 504,000 |
Upon signing the new lease in February 2014. As a result, we recognized a gainMarch 2020, the Company abandoned its shared office space in Atlanta and recorded an expense and related liability of $105,000 for the minimum remaining payments required under the agreement with the landlord. The associated expense is recorded in “Loss on saleexit of business of $238,000membership agreement” in the fourth quarteraccompanying statements of fiscal 2016, which represents the amount by which the sale proceeds exceeded net assets associated with Patient Engagement operations including accounts receivable, intangible assets and deferred revenue. We used the proceeds to make two prepayments of $500,000 on our term loan with Wells Fargo, oneis accrued in “accrued expenses” in the fourth quarter ofaccompanying balance sheet. The membership agreement did not qualify as a lease as the owner had substantive substitution rights.
During fiscal 2016 and anotheryear 2019, we had one operating lease related to our New York office sublease, which expired in November 2019. In the second quarter of fiscal 2017.
| Balance at September 8, 2016 | |||
| Assets purchased: | |||
| Accounts and contracts receivable | 792,000 | ||
| Other assets | 32,000 | ||
| Internally-developed software | 350,000 | ||
| Intangible assets | 650,000 | ||
| Total assets purchased | 1,824,000 | ||
| Liabilities assumed: | |||
| Accounts payable and accrued liabilities | 424,000 | ||
| Net assets acquired | $ | 1,400,000 | |
| Cash paid | $ | 1,400,000 | |
NOTE 4 — LEASES
| Facilities | Equipment | Fiscal Year Totals | |||||||||
| 2017 (three months remaining) | $ | 256,000 | $ | 3,000 | $ | 259,000 | |||||
| 2018 | 1,039,000 | 11,000 | 1,050,000 | ||||||||
| 2019 | 967,000 | 11,000 | 978,000 | ||||||||
| 2020 | 504,000 | 11,000 | 515,000 | ||||||||
| 2021 | 519,000 | 2,000 | 521,000 | ||||||||
| Thereafter | 445,000 | — | 445,000 | ||||||||
| Total | $ | 3,730,000 | $ | 38,000 | $ | 3,768,000 | |||||
Term Loan and Line of Credit
On November 21, 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, and other lender parties thereto. Pursuant to the Credit Agreement, the lenders agreed to provide a $10,000,000 senior term loan and a $5,000,000 revolving line of credit to our primary operating subsidiary. Amounts outstanding under the Credit Agreement bear interest at either LIBOR or the base rate, as elected by the Company, plus an applicable margin. Subject to the Company’s leverage ratio, under the terms of the original Credit Agreement, the applicable LIBOR rate margin varied from 4.25% to 5.25%, and the applicable base rate margin varied from 3.25% to 4.25%. Pursuantpursuant to the terms of the amendment to the Credit Agreement entered into as of April 15, 2015, the applicable LIBOR rate margin was amended to varyvaries from 4.25% to 6.25%, and the applicable base rate margin was amended to varyvaries from 3.25% to 5.25%, plus, after the effective date of the amendment to the Credit Agreement entered into as of September 11, 2019, a “paid in kind” rate, or PIK Rate, of 2.75%. TheAmendments to the Credit Agreement reduced the Company’s capacity on the existing revolving credit from $5,000,000 to $1,500,000 and extended the original term loan and line of credit mature on Novembermaturity date to August 21, 2019 and provide support for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. The outstanding senior term loan is secured by substantially all of our assets.2020. The senior term loan principal balance iswas payable in quarterly installments,instalments, which started in March 2015 and
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The Credit Agreement includesincluded customary financial covenants, including the requirements that the Company maintain minimum liquidity and achieve certain minimum EBITDA levels (as defined in the Credit Agreement). In addition, the Credit Agreement prohibitsprohibited the Company from paying dividends on the common and preferred stock. Pursuant
In connection with entering into the Loan and Security Agreement with Bridge Bank on December 11, 2019, as discussed below, the Company terminated the Credit Agreement and repaid all outstanding amounts due thereunder.
Term Loan and Revolving Credit Facility with Bridge Bank
On December 11, 2019, the Company entered into a new Loan and Security Agreement (the “Loan and Security Agreement”) with Bridge Bank, a division of Western Alliance Bank, consisting of a $4,000,000 term loan and a $2,000,000 revolving credit facility. The proceeds from the term loan were used to repay all outstanding balances under its existing term loan with Wells Fargo Bank. Amounts outstanding under the new term loan shall bear interest at a per annum rate equal to the higher of (a) the Prime Rate (as published in The Wall Street Journal) plus 1.50% or (b) 6.50%. Under the terms of the third amendment to the CreditLoan and Security Agreement entered into as of June 19, 2017, the Company shall make interest-only payments through the twelve-month anniversary date after which the Company shall repay the new term loan in thirty-six equal and consecutive instalments of principal, plus monthly payments of accrued interest. The term loan and revolving credit facility provide support for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions. The outstanding term loan is required to maintain minimum liquiditysecured by substantially all of at least (i) $5,000,000 through January 31, 2018, (ii) $4,000,000our assets. Financing costs associated with the Loan and Security Agreement are being amortized over its term on a straight-line basis, which is not materially different from February 1, 2018 through and including January 31, 2019, and (iii) $3,000,000 from February 1, 2019 through and including the effective interest method.
The new revolving credit facility has a maturity date of twenty-four months and advances shall bear interest at a per annum rate equal to the higher of (a) the Prime Rate (as published in The Wall Street Journal) plus 1.25% or (b) 6.25%. The revolving credit facility.
The following table shows our minimumLoan and Security Agreement, as amended, includes financial covenant requirements that the Company requirements that it shall not deviate by more than fifteen percent of its revenue projections over a trailing four quarterthree-month basis or the Company’s recurring revenue shall not deviate by more than twenty percent over a cumulative year-to-date basis of its projections. In addition, the Company’s Bank EBITDA, measured on a monthly basis over a trailing three-month period EBITDA covenant thresholds, as modifiedthen ended, shall not deviate by the thirdgreater of thirty percent its projected Bank EBITDA or $150,000. The agreement initially required the Company to maintain a minimum Asset Coverage Ratio. However, the Asset Coverage Ratio was eliminated as a covenant under an amendment dated April 11, 2020. The Company obtained a waiver at both January 31, 2020 and April 30, 2020 against its existing covenants. The Company has provided guidance to the Credit Agreement:
| For the four-quarter period ending | Minimum EBITDA | |||
| July 31, 2017 | $ | (1,250,000 | ) | |
| October 31, 2017 | (1,000,000 | ) | ||
| January 31, 2018 | (700,000 | ) | ||
| April 30, 2018 | (35,869 | ) | ||
| July 31, 2018 | 414,953 | |||
| October 31, 2018 | 1,080,126 | |||
| January 31, 2019 | 1,634,130 | |||
| April 30, 2019 | 1,842,610 | |||
| July 31, 2019 | 2,657,362 | |||
October 31, 2019 and each fiscal quarter thereafter | 3,613,810 | |||
The Company was in compliance with the applicableforegoing loan covenants at OctoberJuly 31, 2017.
As described herein, on February 24, 2020, the Company prepaid the $4.0 million outstanding term loan with Bridge Bank in full with proceeds from the sale of the ECM Assets, as required under the Loan and Security Agreement. Accordingly, we reclassified the term loan from non-current to current on the consolidated balance sheet as of January 31, 2020. Contemporaneously with the closing of the sale and payment of the term loan, the Company wrote-off approximately $125,000 of deferred financing cost apportioned to the term loan to discontinued operations. The Company reclassified the remaining amount of deferred financing to other assets in the accompanying consolidated balance sheet.
Outstanding principal balances on debt consisted of the following at:
July 31, 2020 | January 31, 2020 | |||||||
| Term loan | $ | — | $ | 4,000,000 | ||||
| Deferred financing cost | — | (128,000 | ) | |||||
| Total | — | 3,872,000 | ||||||
| Less: Current portion | — | (3,872,000 | ) | |||||
| Non-current portion of debt | $ | — | $ | — | ||||
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| October 31, 2017 | January 31, 2017 | ||||||
| Senior term loan | $ | 4,630,000 | $ | 5,539,000 | |||
| Capital lease | — | 91,000 | |||||
| Total | 4,630,000 | 5,630,000 | |||||
| Less: Current portion | (597,000 | ) | (747,000 | ) | |||
| Non-current portion of debt | $ | 4,033,000 | $ | 4,883,000 | |||
Term Loan related to “The Coronavirus Aid, Relief, and Economic Security Act”
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law on March 17, 2020. Among other things, the Cares Act provided for a resultbusiness loan program known as the Paycheck Protection Act (“PPP”). Qualifying companies are able to borrow, through the SBA, up to two months of excess cash flows achieved aspayroll. We filed for and obtained $2,301,000 through the SBA for the PPP loan program. The Company finalized its agreement for the PPP Loan on April 21, 2020 and was funded on the same date.
The PPP loan carries an interest rate of January1.0% per annum. Principal and interest payments are due, beginning on the seventh month from the effective date, sufficient to satisfy the loan on the second anniversary date. However, under certain criteria, the loan may be forgiven. The Company is accruing interest at 1% in the accompanying condensed consolidated financial statements. The future maturities under the loan are $1,071,000, and $1,229,000 in the next two twelve-month periods from July 31, 2016 and as required pursuant to2020, respectively.
NOTE 5 — CONVERTIBLE PREFERRED STOCK
Redemption of Series A Convertible Preferred Stock
On October 16, 2019, the mandatory prepayment provisionsCompany issued 9,473,691 shares of the Credit Agreement, we madecommon stock in consideration for aggregate proceeds of $9,663,000 in a $1,738,000 paymentprivate placement transaction. Each share of principal towards the term loan with Wells Fargo. We used thecommon stock was sold at $1.02 per share. The proceeds from the sale of our Patient Engagement suite of solutionscommon stock were used to make two prepayments on our term loan with Wells Fargo, one in December 2016 and one in June 2017, each in the amount of $500,000. As a result of these prepayments, the schedule of future principal payments was revised to reduce each future principal payment on a pro rata basis.
| Senior Term Loan (1) | ||||
| 2017 | $ | 149,000 | ||
| 2018 | 597,000 | |||
| 2019 | 4,030,000 | |||
| Total repayments | $ | 4,776,000 | ||
Pursuant to the guidance in ASC 260-10-S99-2 for redemptions of preferred stock, the Company compared the difference between the carrying amount of the Series A Convertible Preferred Stock, is convertible into one sharenet of issuance costs, of $8,686,000 to the fair value of the Company'sconsideration transferred of $5,813,000, which was reduced by the commitment date intrinsic value of the conversion option since the redemption included the reacquisition of a previously recognized beneficial conversion feature of $2,021,000, and added this difference to net income to arrive at income available to common stock. Thestockholders in the calculation of basic earnings per share. As the carrying value of the Series A Convertible Preferred Stock was $8,686,000 on the date of redemption, the Company reflected the resulting return from the preferred stockholders of $4,894,000 as an adjustment to net income (loss) attributable to common stockholders in the Company’s basic and diluted EPS calculations for year ended January 31, 2020.
| Balance at January 31, 2019 | $ | 8,686,000 | ||
| Redemption of Series A Convertible Preferred Stock | (5,791,000 | ) | ||
| Fees paid for redemption of Series A Convertible Preferred Stock | (22,000 | ) | ||
| Previously recognized beneficial conversion feature | 2,021,000 | |||
| Return from the preferred stockholders | $ | 4,894,000 |
Refer to Note 2 for the Company’s basic and diluted EPS calculations.
NOTE 6 — INCOME TAXES
Income taxes consist of the following:
| July 31, | ||||||||
| 2020 | 2019 | |||||||
| Current tax benefit: | ||||||||
| Federal | $ | 603,000 | $ | 681,000 | ||||
| State | 130,000 | — | ||||||
| Total current income tax provision | $ | 733,000 | $ | 681,000 | ||||
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The benefit from income taxes from continuing operations are off-set by taxes on the gain on sale and taxes from operations of discontinued operations. Additionally, certain tax in the six months of July 31, 2020, will generate benefits in the future quarters of fiscal 2020 such that the Company will have no full-year tax payable.
The effective tax rates for income tax rates on continuing operations for six months ending July 31, 2020 and 2019 were approximately 25.5% and 22.8%, respectively. The Company maintains a full valuation allowance against the deferred tax assets.
The Company has recorded $327,000 and $304,000 in reserves for uncertain tax positions as of July 31, 2020 and 2019, respectively.
The Company and its subsidiary are subject to U.S. federal income tax as well as income taxes in multiple state and local jurisdictions. The Company has concluded all U.S. federal tax matters for years through January 31, 2016. All material state and local income tax matters have been concluded for years through January 31, 2015. The Company is no longer subject to IRS examination for periods prior to the tax year ended January 31, 2016; however, carryforward losses that were generated prior to the tax year ended January 31, 2016 may still be adjusted by the IRS if they are used in a future period.
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NOTE 7 — COMMITMENTS AND CONTINGENCIES
Membership agreement to occupy shared office space
In fiscal 2018, the Company entered into a membership agreement to occupy shared office space in Atlanta, Georgia. Our shared office arrangement commenced upon taking possession of the space and ends in November 2020. Fees due under the membership agreement are based on the number of contracted seats and the use of optional office services. The Company abandoned this shared space in March 2020. As of July 31, 2020, minimum fees due under the shared office arrangement totalled $67,000. Accordingly, we recorded an expense for the minimum future commitment under agreement and accrued the cost to the accompanying consolidated balance sheet. Refer to Note 3 – Operating Leases.
Royalty Liability
On October 25, 2013, we entered into a Software License and Royalty Agreement (the “Royalty Agreement”) with Montefiore Medical Center (“Montefiore”) pursuant to which Montefiore granted us an exclusive, worldwide 15-year license of Montefiore’s proprietary clinical analytics platform solution, Clinical Looking Glass® (“CLG”), now known as our Clinical Analytics solution. In addition, Montefiore assigned to us the existing license agreement with a customer using CLG. As consideration under the Royalty Agreement, we paid Montefiore a one-time initial base royalty fee of $3,000,000. Additionally, we originally committed that Montefiore would receive at least an additional $3,000,000 of on-going royalty payments related to future sublicensing of CLG by us within the first six and one-half years of the license term. On July 1, 2018, we entered into a joint amendment to the Royalty Agreement and the existing Software License and Support Agreement with Montefiore to modify the payment obligations of the parties under both agreements. According to the modified provisions, our obligation to pay on-going royalties under the Royalty Agreement was replaced with the obligation to (i) provide maintenance services for 24 months and waive associated maintenance fees, and (ii) pay $1,000,000 in cash by July 31, 2020. As a result of the commitment to fulfill a portion of our obligation by providing maintenance services at no cost, the royalty liability was significantly reduced, with a corresponding increase to deferred revenues. As of July 31, 2020 and January 31, 2020, we had $-0- and $345,000, respectively, in deferred revenues associated with this modified royalty liability. The fair value of the royalty liability was determined based on the amount payable in cash. As of July 31, 2020 and January 31, 2020, the present value of this royalty liability was $1,000,000 and $ 969,000, respectively.
COVID-19
As reported nationally, near the end of the Company’s fiscal year ended January 31, 2020, an outbreak of a novel strain of coronavirus (COVID-19) emerged globally. Additionally, there was a number of cases in the United States by the balance sheet date, January 31, 2020. The Company serves acute care hospitals throughout the United States. These hospitals have been materially impacted by the increased rates of illness based upon the respective geography. The Company has not been materially impacted by the “shelter in place” movements of local and state governments across the United States. Although it is not possible to reliably estimate the length or severity of the pandemic, it could have an adverse financial impact on the Company’s financial condition.
NOTE 8 – DISCONTINUED OPERATIONS
On February 24, 2020, the Company consummated the previously-announced sale of the Company’s legacy Enterprise Content Management business (the “ECM Assets”) pursuant to that certain Asset Purchase Agreement, dated December 17, 2019, as amended (the “Asset Purchase Agreement”), to Hyland Software, Inc. (the “Purchaser”),
Pursuant to the Asset Purchase Agreement, the Purchaser has acquired the ECM Assets and assumed certain liabilities of the Seller for a purchase price of $16.0 million, subject to certain adjustments for customer prepayments as set forth in the Asset Purchase Agreement.
At closing, the Company realized approximately $5.4 million in net proceeds after (i) repaying the $4.0 million Company’s term loan with Bridge Bank, (ii) adjusting for certain customer prepayments, (iii) the escrow funds of $800,000 and (iv) certain transaction cost. The gain on the sale of assets is summarized as follows:
| Net Proceeds, including escrowed funds | $ | 12,088,000 | ||
| Net tangible assets sold: | ||||
| Accounts Receivable | (1,130,000 | ) | ||
| Prepaid Expenses | (576,000 | ) | ||
| Deferred Revenues | 4,010,000 | |||
| Net tangible assets sold | 2,304,000 | |||
| Capitalized software development costs | (1,772,000 | ) | ||
| Goodwill | (4,825,000 | ) | ||
| Transaction cost | (1,782,000 | ) | ||
| Gain on sale of discontinued operations | $ | 6,013,000 |
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The transaction costs were primarily broker cost and cost of legal and accounting to affect the transaction. The Company allocated $4,825,000 in goodwill to the sale of the ECM Assets using a valuation of the ECM Assets and the remaining, go-forward business, to bifurcate its existing goodwill as of February 24, 2020. The amount of goodwill to be included in that carrying amount was based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Further, in accordance ASC 350-20-35-3A, when only a portion of goodwill is allocated to a business to be disposed of, the remaining portion of the goodwill associated with the reporting unit to be retained was tested for impairment and no impairment was recognized.
The Company recorded the following into discontinued operations on the accompanying consolidated balance sheets:
| As of | ||||||||
| July 31, 2020 | January 31, 2020 | |||||||
| Current assets of discontinued operations: | ||||||||
| Accounts receivable | $ | 154,000 | $ | 1,150,000 | ||||
| Contract receivables | — | 17,000 | ||||||
| Prepaid Assets | — | 418,000 | ||||||
| Current assets of discontinued operations | $ | 154,000 | $ | 1,585,000 | ||||
| Long-term assets of discontinued operations: | ||||||||
| Property and equipment, net | $ | 42,000 | $ | 54,000 | ||||
| Capitalized software development cost, net | — | 1,816,000 | ||||||
| Goodwill | — | 4,825,000 | ||||||
| Other | — | 131,000 | ||||||
| Long-term assets of discontinued operations | $ | 42,000 | $ | 6,826,000 | ||||
| Current liabilities of discontinued operations: | ||||||||
| Accounts payable | $ | — | $ | 514,000 | ||||
| Accrued expenses | 33,000 | 142,000 | ||||||
| Deferred revenues | 157,000 | 4,397,000 | ||||||
| Current liabilities of discontinued operations | $ | 190,000 | $ | 5,053,000 | ||||
For the three- and six- months ended July 31, 2020 and 2019, the Company recorded the following into discontinued operations in the accompanying consolidated statements of operations:
| Three Months Ended | Six Months Ended | |||||||||||||||
| July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| System sales | $ | — | $ | 36,000 | $ | — | $ | 46,000 | ||||||||
| Professional services | — | 205,000 | — | 331,000 | ||||||||||||
| Maintenance and support | — | 1,486,000 | 412,000 | 2,985,000 | ||||||||||||
| Software as a service | — | 577,000 | 138,000 | 1,135,000 | ||||||||||||
| Transition service fees | 157,000 | — | 157,000 | — | ||||||||||||
| Total revenues | $ | 157,000 | $ | 2,304,000 | $ | 707,000 | $ | 4,497,000 | ||||||||
| Expenses: | ||||||||||||||||
| Cost of Sales | 5,000 | 632,000 | 290,000 | 1,252,000 | ||||||||||||
| Selling, general and administrative expenses | — | 59,000 | — | 122,000 | ||||||||||||
| Research and development | — | 207,000 | — | 410,000 | ||||||||||||
| Transition service cost | 48,000 | 48,000 | ||||||||||||||
| Deferred financing cost | — | — | 128,000 | |||||||||||||
| Other expenses | — | — | — | 25,000 | ||||||||||||
| Total expenses | 53,000 | 898,000 | 466,000 | 1,809,000 | ||||||||||||
| Income from discontinued operations | $ | 104,000 | $ | 1,406,000 | $ | 241,000 | $ | 2,688,000 | ||||||||
| 20 |
We entered into an agreement with the Purchaser of the ECM Assets to maintain the current data center through a transition period that is expected to be approximately seven months. The Company will continue to pay the rent and maintain the servers within the data center during the transition services period and these amounts will continue to be presented as discontinued operations in future periods throughout fiscal year 2020. In consideration of these transition services, the Company maintained rights to certain customer contracts that provides a revenue stream of approximately $40,000 per month. Therefore, during the transition period as defined the sale agreement, the Company will receive approximately $40,000 in revenue per month and have cost of approximately $30,000. The transition services does not payhave a dividend;finite ending date, however, the holders are entitledgoals of both the Purchaser and the Company is to receive dividends equal (on an as-if-converted-to-common-stock basis)complete the transition as quickly as possible, and with a goal of ending this portion of the agreement by October 2020. The cost to andmaintain the data center can be eliminated upon the completion of the transition services as described in the same form as dividends (other than dividendsAsset Purchase Agreement. Our on-going cost to maintain the data center includes rent, cost of the servers, certain third-party software arrangements, and depreciation of the servers. The property and equipment on the Company’s balance sheet in discontinued operations is the net book value for the related servers in the formdata center.
NOTE 9 - RELATED PARTY TRANSACTIONS
In the second quarter of common stock) actually paid on sharesfiscal year 2019, in connection with the appointment of Wyche T. “Tee” Green, III, Chairman of the common stock. The Preferred Stock has voting rights on a modified as-if-converted-to-common-stock-basis. The 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 Preferred Stock can be converted to common shares at any time by the holders, or at the optionBoard of the Company if the arithmetic averageand Managing Member of 121G, LLC (“121G”), as interim President and Chief Executive Officer of the daily volume weighted average priceCompany, we entered into a consulting agreement with 121G Consulting, LLC (“121G Consulting”), to provide an assessment of the common stockCompany’s innovation and growth teams and strategies and to develop a set of prioritized recommendations to be consolidated into a strategic plan for the 10 day period priorCompany’s leadership team. Mr. Green is a “member” of 121G Consulting, and, accordingly, has a financial interest in that entity. In October 2019, Mr. Green was appointed as President and Chief Executive Officer of the Company on a full-time basis.
For the year ended January 31, 2020, 121G Consulting fees totalled $276,000. Of that amount, $88,000 was included in executive transition cost and $188,000 was included in the Company’s operating cost in the accompanying consolidated statements of operations. As of January 31, 2020, consulting fees payable to 121G Consulting totalled $40,000 and are included in accounts payable in the measurementaccompanying consolidated balance sheet.
On March 19, 2020, as previously disclosed in an 8-K, the Company entered into a Master Services Agreement (the “MSA”) with 180 Consulting, LLC (“180 Consulting”), pursuant to which 180 Consulting will provide a variety of consulting services including product management, internal systems platform integration and software engineering services, among others, through separate statements of work (“SOWs”). Contemporaneously, the Company entered into three SOWs under the MSA and has contracted to enter into two more SOWs within sixty (60) days of the date is greater than $8.00 per share,of entry into the MSA, SOW #4 and SOW #2A was entered into on June 8, 2020 and July 21, 2020, respectively. While no related person has a direct or indirect material interest in this MSA or the related SOWs, individuals providing services to us under the MSA and the average daily trading volume forSOWs may share workspace and administrative costs with 121G Consulting.
During the 60 dayfirst six-month period immediately prior toended July 31, 2020, the measurement date exceeds 100,000 shares. The conversion price is $3.00 per share, subject to certain adjustments.
NOTE 7 — INCOME TAXES
We have evaluated subsequent events occurring after OctoberJuly 31, 2017,2020, and based on our evaluation we did not identify any events that would have required recognition or disclosure in these condensed consolidated financial statements.statements, except for the following.
Montefiore Final Minimum Royalty Payment
As discussed in Note 7 – Commitments and Contingencies, the Company has a contractual obligation to pay Montefiore $1,000,000 that originated from the acquisition of Clinical Analytics (Clinical Looking Glass) in October 2013. The final payment has been previously adjusted in July 2018. The Company is currently discussing a payment plan for this final liability with Montefiore. The Company is expecting to pay the full payment; however, it may extend the payment terms further into Fiscal 2020.
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FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report and in other materials we file with the Securities and Exchange Commission (“SEC”) or otherwise make public. In thisThis Report, Part I, Item 2, “Management’s Discussiontherefore, contains statements about future events and Analysisexpectations which are forward-looking statements within the meaning of Financial ConditionSections 27A of the Securities Act of 1933, as amended (the “Securities Act”, and Results21E of Operations,” contains forward-looking statements.the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, our senior management makes forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue, income, receivables, backlog, client attrition, acquisitions and other growth opportunities, sources of funding operations and acquisitions, the integration of our solutions, the performance of our channel partner relationships, the sufficiency of available liquidity, research and development, and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forthand elsewhere in Part II, Item 1A,our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 and the other cautionary statements in other documents we fileour subsequent filings with the SEC, includingSecurities Exchange Commission, and include among others, the following:
| ● | competitive products and pricing; | |
| ● | product demand and market acceptance; | |
| ● | entry into new markets; | |
| ● | new product and services development and commercialization; | |
| ● | key strategic alliances with vendors and channel partners that resell our products; | |
| ● | uncertainty in continued relationships with clients due to termination rights; | |
| ● | our ability to control costs; | |
| ● | availability, quality and security of products produced and services provided by third-party vendors; | |
| ● | the healthcare regulatory environment; |
| 22 |
| ● | potential changes in legislation, regulation and government funding affecting the healthcare industry; | |
| ● | healthcare information systems budgets; | |
| ● | availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems; | |
| ● | the success of our relationships with channel partners; | |
| ● | fluctuations in operating results; | |
| ● | our future cash needs; | |
| ● | the consummation of resources in researching acquisitions, business opportunities or financings and capital market transactions; | |
| ● | the failure to adequately integrate past and future acquisitions into our business; | |
| ● | critical accounting policies and judgments; | |
| ● | changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other standard-setting organizations; | |
| ● | changes in economic, business and market conditions impacting the healthcare industry and the markets in which we operate; | |
| ● | our ability to maintain compliance with the terms of our credit facilities; and | |
| ● | our ability to maintain compliance with the continued listing standards of the Nasdaq Global Market. |
Some of these factors and risks have been, and may further be, exacerbated by the Financial Accounting Standards Board or other standard-setting organizations;
Most of these factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (generally because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Results of Operations
Revenues
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| System sales | $ | 215 | $ | 111 | $ | 104 | 94 | % | ||||||||
| Professional services | 179 | 203 | (24 | ) | (12 | )% | ||||||||||
| Audit services | 463 | 354 | 109 | 31 | % | |||||||||||
| Maintenance and support | 1,228 | 1,273 | (45 | ) | (4 | )% | ||||||||||
| Software as a service | 802 | 548 | 254 | 46 | % | |||||||||||
| Total Revenues | $ | 2,887 | $ | 2,489 | $ | 398 | 16 | % | ||||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| System sales | $ | 215 | $ | 332 | $ | (117 | ) | (35 | )% | |||||||
| Professional services | 360 | 658 | (298 | ) | (45 | )% | ||||||||||
| Audit services | 1,007 | 749 | 258 | 34 | % | |||||||||||
| Maintenance and support | 2,486 | 2,725 | (239 | ) | (9 | )% | ||||||||||
| Software as a service | 1,663 | 1,189 | 474 | 40 | % | |||||||||||
| Total Revenues | $ | 5,731 | $ | 5,653 | $ | 78 | 1 | % | ||||||||
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| Three Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Systems Sales: | ||||||||||||||
| Proprietary software - perpetual license | $ | 79 | $ | 20 | $ | 59 | 295 | % | ||||||
| Term license | 257 | 269 | (12 | ) | (4 | )% | ||||||||
| Hardware and third-party software | 13 | 25 | (12 | ) | (48 | )% | ||||||||
| Professional services | 802 | 631 | 171 | 27 | % | |||||||||
| Audit Services | 280 | 234 | 46 | 20 | % | |||||||||
| Maintenance and support | 3,250 | 3,750 | (500 | ) | (13 | )% | ||||||||
| Software as a service | 1,718 | 1,706 | 12 | 1 | % | |||||||||
| Total Revenues | $ | 6,399 | $ | 6,635 | $ | (236 | ) | (4 | )% | |||||
| Nine Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| System Sales: | ||||||||||||||
| Proprietary software - perpetual license | $ | 249 | $ | 1,040 | $ | (791 | ) | (76 | )% | |||||
| Term license | 736 | 905 | (169 | ) | (19 | )% | ||||||||
| Hardware and third-party software | 71 | 245 | (174 | ) | (71 | )% | ||||||||
| Professional services | 1,794 | 1,870 | (76 | ) | (4 | )% | ||||||||
| Audit Services | 919 | 234 | 685 | 293 | % | |||||||||
| Maintenance and support | 9,884 | 11,238 | (1,354 | ) | (12 | )% | ||||||||
| Software as a service | 4,586 | 5,145 | (559 | ) | (11 | )% | ||||||||
| Total Revenues | $ | 18,239 | $ | 20,677 | $ | (2,438 | ) | (12 | )% | |||||
Proprietary software and term licenses — Proprietary software revenue recognized for the three months ended OctoberJuly 31, 20172020 increased by $59,000$104,000 and six months ended July 31, 2020 decreased by $117,000 over thetheir respective prior comparable period dueperiods. The Company is able to improvedinfluence sales of these products; however, the timing is difficult to manage as sales generally result from our distribution partners, certain delays in contracting for systems sales are a result of the COVID-19. Perpetual license sales of our CDIStreamline Health® Abstracting™ solution began to pick-up in the thirdlatter part of the second quarter of fiscal 2017. Proprietary2020. The Company is unable to ascertain the timing or extent of the impact of COVD-19 on the Company’s on-ongoing performance relative to perpetual software revenue recognized forsales.
Professional services — For the nine monthsthree- and six-month periods ended OctoberJuly 31, 20172020, revenues from professional services decreased by $791,000 over$24,000 and $298,000 from the prior comparable period. This decrease is attributable to a larger perpetual license sale of our Streamline Health® Abstracting™ solution in the second quarter of fiscal 2016. The $169,000 decrease in term licenseprofessional services revenue for the nine months ended October 31, 2017 over the prior comparable period is primarily due to the expirationtiming of one Clinical Analytics contract and the reductioncompletion of license fees on a separate Clinical Analytics contract.
Audit services — Audit services revenue recognized for the threethree- and nine monthssix-month periods ended OctoberJuly 31, 20172020 increased by $46,000$109,000 and $685,000,$258,000, respectively, over the prior comparable periods. The Company began offeringrealized higher demand for audit services in September 2016, following the acquisitionfourth quarter of Opportune IT.2019, and that higher demand has continued into the first half of 2020. The Company’s expertise, demonstrated and supported by eValuator, and the fact that our professional staff is onshore is believed to be a competitive advantage with regard to the audit services. We did experience a temporary reduction in volumes for approximately 45 days from certain customers that were primarily physician based, as a result of COVID-19. This occurred late in the first quarter and early in the second quarter of fiscal 2020. Volumes showed signs of recovery toward the end of the second quarter of fiscal 2020 with some customers increasing the number of requested encounters to be audited. The Company has customer opportunities in the market combining the eValuator technology with audit services to provide customers with a comprehensive solution (“a technology enabled service”).
Maintenance and support — Revenue from maintenance and support for the three- and six-month periods ended July 31, 2020 decreased by $45,000 and $239,000 and July 31, 2020 was lower than the prior comparable six-month period by 9%. The Company is expecting lower revenue for the full year 2020, over prior comparable periods, due to pricing pressure and cancellations by certain customers of our legacy products, primarily clinical analytics. The Company’s agreement for Clinical Analytics with Montefiore terminated on June 30, 2020. Accordingly, the Company recognized $69,000 lower revenue from Clinical Analytics in the three months and ninesix months ended OctoberJuly 31, 2017 decreased2020 as compared with the same period in 2019. The customer pricing differences and rate of customer cancellations has not exceeded the Company’s budget for fiscal 2020.
Software as a Service (SaaS) — Revenue from SaaS for the three- and six-month periods ended July 31, 2020 increased by $500,000$254,000 and $1,354,000,$474,000, respectively from the prior comparable periods. These decreases were primarily
Cost of Sales
| Three Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Cost of systems sales | $ | 434 | $ | 663 | $ | (229 | ) | (35 | )% | |||||
| Cost of professional services | 556 | 723 | (167 | ) | (23 | )% | ||||||||
| Cost of audit services | 404 | 596 | (192 | ) | (32 | )% | ||||||||
| Cost of maintenance and support | 667 | 790 | (123 | ) | (16 | )% | ||||||||
| Cost of software as a service | 290 | 451 | (161 | ) | (36 | )% | ||||||||
| Total cost of sales | $ | 2,351 | $ | 3,223 | $ | (872 | ) | (27 | )% | |||||
| Nine Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Cost of systems sales | $ | 1,597 | $ | 2,080 | $ | (483 | ) | (23 | )% | |||||
| Cost of professional services | 1,814 | 1,891 | (77 | ) | (4 | )% | ||||||||
| Cost of audit services | 1,236 | 596 | 640 | 107 | % | |||||||||
| Cost of maintenance and support | 2,242 | 2,483 | (241 | ) | (10 | )% | ||||||||
| Cost of software as a service | 915 | 1,390 | (475 | ) | (34 | )% | ||||||||
| Total cost of sales | $ | 7,804 | $ | 8,440 | $ | (636 | ) | (8 | )% | |||||
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Cost of system sales | $ | 125 | $ | 27 | $ | 98 | 363 | % | ||||||||
| Cost of professional services | 293 | 462 | (169 | ) | (37 | )% | ||||||||||
| Cost of audit services | 373 | 321 | 52 | 16 | % | |||||||||||
| Cost of maintenance and support | 182 | 176 | 6 | 3 | % | |||||||||||
| Cost of software as a service | 379 | 140 | 239 | 171 | % | |||||||||||
| Total cost of sales | $ | 1,352 | $ | 1,126 | $ | 226 | 20 | % | ||||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Cost of system sales | $ | 202 | $ | 91 | $ | 111 | 122 | % | ||||||||
| Cost of professional services | 557 | 888 | (331 | ) | (37 | )% | ||||||||||
| Cost of audit services | 733 | 624 | 109 | 17 | % | |||||||||||
| Cost of maintenance and support | 368 | 303 | 65 | 21 | % | |||||||||||
| Cost of software as a service | 761 | 247 | 514 | 208 | % | |||||||||||
| Total cost of sales | $ | 2,621 | $ | 2,153 | $ | 469 | 22 | % | ||||||||
The decreaseincrease in overall cost of sales for the three and ninesix months ended OctoberJuly 31, 2017 from the comparable prior periods is primarily due to the reduction in amortization of capitalized software costs as a result of a few assets becoming fully amortized, as well as the sale of our Patient Engagement suite of solutions in the fourth quarter of fiscal 2016. In addition, the decrease in overall cost of sales for the three months ended October 31, 20172020 from the comparable prior period is further attributedprimarily due to the reductionincrease in audit services personnel costs followingamortization of software development. The Company placed larger amounts of software development into service in the acquisitionthird and fourth quarter of Opportune ITfiscal 2019. The placement of the software into service is resulting in September 2016.higher rates of amortization for fiscal 2020.
| 24 |
Cost of systemssystem sales includes amortization and impairment of capitalized software expenditures royalties, and the cost of third-party hardware and software. The decreaseincrease in expense for the three- and nine-monthsix-month periods ended OctoberJuly 31, 20172020 from the comparable prior period was primarily due to the reductionincrease in amortization of capitalized software costs as a result of the sale of our Patient Engagement suite of solutions in the fourth quarter of fiscal 2016, as well as the internally-developed software acquired from Meta Health Technology, Inc. in 2012 reaching the end of its assigned economic life in the third quarter of fiscal 2017.
The cost of professional services includes compensation and benefits for personnel and related expenses. The decrease in expense for the three- and nine-monthsix-month periods from the prior comparable periods is primarily due to the increase inlower rates of professional services relatedrequired for SaaS type implementations. The SaaS solutions are more efficient to SaaSimplement as compared to the legacy on-premise software implementations. On-premise implementations, as was the case with legacy software products implementations, took longer and term licenses, for which costs are deferred and amortized ratably over the initial contract term, as well as the decrease in personnel costs.
The cost of audit services includes compensation and benefits for audit services personnel, and related expenses. The increase in expense for the nine-month periodthree- and six-month periods ended OctoberJuly 31, 2017 is due to the Company beginning to offer audit services in September 2016, following the acquisition of Opportune IT. The decrease in expense for the three-month period ended October 31, 20172020 is attributed to the reduction in associatehigher volumes of coding transaction processed, and contractor costs from synergies resulting from the full integration ofrelated higher revenue. The Company audit services personnel utilize eValuator and it is believed that the acquired business.
The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third-party maintenance contracts.personnel. The decreaseincrease in expense for the three- and nine-month periodssix-month period ended July 31, 2020 was primarily due to a decreaseincreases in third-party maintenance contracts costs and personnel costs, and is in line with the decrease in the associated maintenance and support revenue.
The cost of SaaS solutions is relatively fixed, subject to inflation for the goods and services it requires. The decreaseincrease in expense for the three- and nine-monthsix-month periods from the prior comparable periodsended July 31, 2020 was primarily relateddue to a reduction in personnelthe amortization of capitalized software development costs as
Selling, General and Administrative Expense
| Three Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| General and administrative expenses | $ | 1,681 | $ | 1,980 | $ | (299 | ) | (15 | )% | |||||
| Sales and marketing expenses | 1,139 | 1,232 | (93 | ) | (8 | )% | ||||||||
| Total selling, general, and administrative expense | $ | 2,820 | $ | 3,212 | $ | (392 | ) | (12 | )% | |||||
| Nine Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| General and administrative expenses | $ | 5,673 | $ | 6,668 | $ | (995 | ) | (15 | )% | |||||
| Sales and marketing expenses | 3,310 | 3,485 | (175 | ) | (5 | )% | ||||||||
| Total selling, general, and administrative expense | $ | 8,983 | $ | 10,153 | $ | (1,170 | ) | (12 | )% | |||||
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| General and administrative expenses | $ | 1,596 | $ | 1,501 | $ | 95 | 6 | % | ||||||||
| Sales and marketing expenses | 688 | 901 | (213 | ) | (24 | )% | ||||||||||
| Total selling, general, and administrative expense | $ | 2,284 | $ | 2,402 | $ | (118 | ) | (5 | )% | |||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| General and administrative expenses | $ | 3,052 | $ | 3,152 | $ | (100 | ) | (3 | )% | |||||||
| Sales and marketing expenses | 1,524 | 1,671 | (147 | ) | (9 | )% | ||||||||||
| Total selling, general, and administrative expense | $ | 4,576 | $ | 4,823 | $ | (247 | ) | (5 | )% | |||||||
General and administrative expenses consist primarily of compensation and related benefits, reimbursable travel and entertainment expenses related to our executive and administrative staff, general corporate expenses, amortization of intangible assets, and occupancy costs. The decrease in general and administrative expenses for the three and nine monthssix-months ended OctoberJuly 31, 20172020 from the comparable prior periods wasperiod is primarily dueattributed to a reduction in personnel costs, stock compensationsalaries and severance expense, as wellbenefits and professional fees associated with the company’s annual audit and annual shareholders meeting. The Company previously announced, at the end of fiscal year ended January 31, 2020, a rationalization to better match expenses with its lower revenues as a reduction inresult of the sale of the ECM Assets. The rationalization impacted personnel beyond that of those directly attributable to the ECM Assets. The Company records a disproportionate amount of professional fees for accountingin the first quarter of each fiscal year related to the annual audit and legal services.
Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and entertainment expenses related to our sales and marketing staff, as well as advertising and marketing expenses, including trade shows. The decrease in sales and marketing expense for the three and ninesix months ended OctoberJuly 31, 20172020 from the comparable prior periodsperiod was primarily due to a reduction in stock compensationsalaries and severance expense.benefits as positions vacated in the latter half of fiscal 2020 were not backfilled, Travel and entertainment expenses and marketing trade show expenses have also decreased during the six-months ended July 30, 2010 over the prior comparable period as an impact of the novel Coronavirus. The Company has temporarily stopped travel until its employee safety can be assured. There is no anticipated date to re-institute travel for its sales, and other personnel. The Company has been productive using web-based meeting media to continue its sales and customer service processes.
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Research and Development
| Three Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Research and development expense | $ | 932 | $ | 1,969 | $ | (1,037 | ) | (53 | )% | |||||
| Plus: Capitalized research and development cost | 493 | 484 | 9 | 2 | % | |||||||||
| Total research and development cost | $ | 1,425 | $ | 2,453 | $ | (1,028 | ) | (42 | )% | |||||
| Nine Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Research and development expense | $ | 3,985 | $ | 5,800 | $ | (1,815 | ) | (31 | )% | |||||
| Plus: Capitalized research and development cost | 1,337 | 1,421 | (84 | ) | (6 | )% | ||||||||
| Total research and development cost | $ | 5,322 | $ | 7,221 | $ | (1,899 | ) | (26 | )% | |||||
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Research and development expense | $ | 509 | $ | 660 | $ | (151 | ) | (23 | )% | |||||||
| Plus: Capitalized research and development cost | 653 | 753 | (100 | ) | (13 | )% | ||||||||||
| Total research and development cost | $ | 1,162 | $ | 1,413 | $ | (251 | ) | (18 | )% | |||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Research and development expense | $ | 1,193 | $ | 1,249 | $ | (56 | ) | (4 | )% | |||||||
| Plus: Capitalized research and development cost | 1,131 | 1,543 | (412 | ) | (27 | )% | ||||||||||
| Total research and development cost | $ | 2,324 | $ | 2,792 | $ | (468 | ) | (17 | )% | |||||||
Research and development cost consists primarily of compensation and related benefits, the use of independent contractors for specific near-term development projects, and an allocated portionoccupancy expense. The three-month period ended July 31, 2020 includes $38,000 of general overhead costs, including occupancy. The decreasecapitalized non-employee stock compensation as explained in totalNote 9 – Related Party Transactions. Total research and development cost for the three- and nine-monthsix-month periods ended OctoberJuly 31, 20172020 was lower than that from the prior comparable periods is primarily due to a reduction inperiod. The Company previously announced an employee rationalization on January 31, 2020, which research and development personnel headcount and consultant fees and $366,000were impacted. The Company has continued to be more efficient in research and development tax credits awarded bywhile focusing on its growth products, primarily eValuator. The Company is spending fewer dollars on maintenance for its legacy products as these have attained maturity in the State of Georgia in fiscal 2017. Researchmarketplace. The Company is expecting that total research and development expenses forwill continue at the ninesecond quarter 2020 levels throughout fiscal year 2020. For the six months ended OctoberJuly 31, 20172020 and 2016,2019, as a percentage of revenues, total research and development costs were 22%41% and 28%49%, respectively.
Executive transition cost
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Executive transition cost | $ | — | 140 | (140 | ) | (100 | )% | |||||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Executive transition cost | $ | — | 140 | (140 | ) | (100 | )% | |||||||||
We recorded $140,000 in cost related to replacing the Company’s CEO in the second quarter of fiscal 2019. These costs, which included placement fees, retention bonuses for existing key personnel and certain required consulting cost. Each of these costs are directly attributable to the successful placement of a new CEO with the Company. All executive transition costs were recorded throughout fiscal 2019 and none were incurred during fiscal 2020.
Loss on exit of operating lease
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Loss on exit of operating lease | $ | 105 | $ | — | 105 | 100 | % | |||||||||
Refer to Note 3 – Operating Leases. We recorded $105,000 in cost related to the remaining payments required under the agreement with the landlord on shared office space in Atlanta that was abandoned when the Company entered a new lease for office space in Alpharetta, Georgia.
| 26 |
Other Income (Expense)
| Three Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Interest expense | $ | (113 | ) | $ | (99 | ) | $ | (14 | ) | 14 | % | |||
| Miscellaneous expense | (177 | ) | (61 | ) | (116 | ) | 190 | % | ||||||
| Total other expense | $ | (290 | ) | $ | (160 | ) | $ | (130 | ) | 81 | % | |||
| Nine Months Ended | ||||||||||||||
| (in thousands): | October 31, 2017 | October 31, 2016 | Change | % Change | ||||||||||
| Interest expense | $ | (361 | ) | $ | (381 | ) | $ | 20 | (5 | )% | ||||
| Miscellaneous expense | (235 | ) | (39 | ) | (196 | ) | 503 | % | ||||||
| Total other expense | $ | (596 | ) | $ | (420 | ) | $ | (176 | ) | 42 | % | |||
| Three-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Interest expense | $ | (13 | ) | $ | (70 | ) | 57 | (81 | )% | |||||||
| Miscellaneous expense | (64 | ) | (103 | ) | 39 | (38 | )% | |||||||||
| Total other expense | $ | (77 | ) | $ | (173 | ) | 96 | (55 | )% | |||||||
| Six-Months Ended | % | |||||||||||||||
| (in thousands): | July 31, 2020 | July 31, 2019 | Change | Change | ||||||||||||
| Interest expense | $ | (27 | ) | $ | (148 | ) | 121 | (82 | )% | |||||||
| Miscellaneous expense | (82 | ) | (119 | ) | 37 | (31 | )% | |||||||||
| Total other expense | $ | (109 | ) | $ | (267 | ) | 158 | (59 | )% | |||||||
Interest expense consists of interest and commitment fees on the line of credit, interest on the term loans,loan, the Company’s PPP Loan and is inclusive of deferred financing cost amortization expense. Interest expense decreased for the ninethree and six months ended OctoberJuly 31, 20172020 from the prior comparable period primarily due to the expirationreduction in outstanding principal on our term loan. The Company re-paid its term loan with Bridge bank on February 24, 2020, upon closing the sale of two capital lease arrangements. the ECM Assets.
The increase in interestcomponents of miscellaneous expense for the three and six-month periods ended July 31, 2020 and 2019 is primarily the valuation allowance on the Montefiore liability and any currency transaction. Miscellaneous expense for the six-month period ended July 31, 2020 includes each of (i) a $50 impact for currency transaction revaluation, and (ii) $31 for Montefiore valuation adjustment. Miscellaneous expense for the six-month period ended July 31, 2019 includes (i) valuation adjustment for Montefiore, (ii) certain foreign currency transactions, and (iii) a $70 one-time expense for a failed refinancing effort.
Provision for Income Taxes
We recorded an income tax benefit of $(172) and $(356) for the three months ended OctoberJuly 31, 2017 from the prior comparable period is attributed to an increase in interest rate on our term loan. Fluctuation in miscellaneous expense for the three-2020 and nine-month periods ended October 31, 2017 from the prior comparable periods is primarily due to revaluation adjustments to our warrant liability, which were driven by the fluctuations in the Company’s stock price.
| October 31, 2017 | October 31, 2016 | ||||||
| Company proprietary software | $ | 10,892,000 | $ | 15,551,000 | |||
| Third-party hardware and software | — | 200,000 | |||||
| Professional services | 2,824,000 | 4,973,000 | |||||
| Audit services | 1,454,000 | 1,849,000 | |||||
| Maintenance and support | 18,256,000 | 19,413,000 | |||||
| Software as a service | 14,242,000 | 12,929,000 | |||||
| Total | $ | 47,668,000 | $ | 54,915,000 | |||
Use of Non-GAAP Financial Measures
In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used by management and the Board of Directors in its financial and operational decision-making, the Company has supplemented the Condensed Consolidated Financial Statementscondensed 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 per diluted share.
These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.
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EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We define: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, transaction related expenses and other expenses that do not relate to our core operations;operations such as severances and impairment charges; (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing our operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization), items outside the control of the management team (taxes), and expenses that do not relate to our core operations including: transaction-related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share includes incremental shares in the share count that are considered anti-dilutive in a GAAP net loss position.
The Board of Directors and management also use these measures (i) as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance. The lender under our CreditLoan and Security Agreement requires delivery of compliance reports certifying compliance with financial covenants, certain of which are based on a measurement that is similar to the Adjusted EBITDA measurement reviewed by our management and Board of Directors.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP or otherwise, and are not alternatives to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share, as disclosed in this quarterlyannual report on Form 10-Q,10-K have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA and its variations are:
| ● | EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; | |
| ● | EBITDA does not reflect changes in, or cash requirements for, our working capital needs; | |
| ● | EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our Loan and Security Agreement ; | |
| ● | EBITDA does not reflect income tax payments that we may be required to make; and | |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. |
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encouragethe Company encourages readers to review the GAAP financial statements included elsewhere in this quarterlyannual report on Form 10-Q,10-K, and not rely on any single financial measure to evaluate our business. We also strongly urge readers to review the reconciliation of these non-GAAP financial measures to the most comparable GAAP measure in this section, along with the Condensed Consolidated Financial Statementscondensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.above.
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The following table sets forth a reconciliation ofreconciles EBITDA and Adjusted EBITDA to net loss, a comparable GAAP-based measure, as well asand Adjusted EBITDA per diluted share to loss per diluted share.share for the fiscal years ended January 31, 2020 and 2019 (amounts in thousands, except per share data). All of the items included in the reconciliation from EBITDA and Adjusted EBITDA to net loss and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess 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 expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance. In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.
| Three Months Ended | Nine Months Ended | ||||||||||||||
| In thousands, except per share data | October 31, 2017 | October 31, 2016 | October 31, 2017 | October 31, 2016 | |||||||||||
| Net earnings (loss) | $ | 3 | $ | (1,930 | ) | $ | (3,137 | ) | $ | (4,142 | ) | ||||
| Interest expense | 113 | 99 | 361 | 381 | |||||||||||
| Income tax expense | 3 | 2 | 8 | 5 | |||||||||||
| Depreciation | 193 | 265 | 596 | 895 | |||||||||||
| Amortization of capitalized software development costs | 431 | 720 | 1,574 | 2,146 | |||||||||||
| Amortization of intangible assets | 256 | 325 | 922 | 976 | |||||||||||
| Amortization of other costs | 51 | 60 | 177 | 140 | |||||||||||
| EBITDA | 1,050 | (459 | ) | 501 | 401 | ||||||||||
| Share-based compensation expense | 290 | 433 | 845 | 1,343 | |||||||||||
| (Gain) loss on disposal of fixed assets | (14 | ) | — | (15 | ) | 1 | |||||||||
| Associate severance and other costs relating to transactions or corporate restructuring | — | 89 | — | 199 | |||||||||||
| Non-cash valuation adjustments to assets and liabilities | 188 | 62 | 229 | 84 | |||||||||||
| Transaction related professional fees, advisory fees, and other internal direct costs | — | 103 | — | 358 | |||||||||||
| Adjusted EBITDA | $ | 1,514 | $ | 228 | $ | 1,560 | $ | 2,386 | |||||||
| Adjusted EBITDA margin (1) | 24 | % | 3 | % | 9 | % | 12 | % | |||||||
| Earnings (loss) per share — diluted | $ | — | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.26 | ) | ||||
| Adjusted EBITDA per adjusted diluted share (2) | $ | 0.07 | $ | 0.01 | $ | 0.07 | $ | 0.10 | |||||||
| Diluted weighted average shares | 23,068,423 | 19,645,521 | 19,838,691 | 19,477,538 | |||||||||||
| Includable incremental shares — adjusted EBITDA (3) | — | 3,340,390 | 3,242,413 | 3,322,710 | |||||||||||
| Adjusted diluted shares | 23,068,423 | 22,985,911 | 23,081,104 | 22,800,248 | |||||||||||
| Three-Months Ended | Six Months Ended | |||||||||||||||
| In thousands, except per share data | July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | ||||||||||||
| Adjusted EBITDA Reconciliation | ||||||||||||||||
| Loss from continuing operations | $ | (1,163 | ) | $ | (1,656 | ) | $ | (2,140 | ) | $ | (2,298 | ) | ||||
| Interest expense | 13 | 70 | 27 | 148 | ||||||||||||
| Income tax benefit | (172 | ) | (356 | ) | (733 | ) | (681 | ) | ||||||||
| Depreciation | 17 | 14 | 31 | 22 | ||||||||||||
| Amortization of capitalized software development costs | 362 | 110 | 651 | 236 | ||||||||||||
| Amortization of intangible assets | 124 | 142 | 247 | 285 | ||||||||||||
| Amortization of other costs | 78 | 70 | 153 | 136 | ||||||||||||
| EBITDA | (741 | ) | (1,606 | ) | (1,764 | ) | (2,152 | ) | ||||||||
| Share-based compensation expense | 349 | 160 | 613 | 429 | ||||||||||||
| Non-cash valuation adjustments | 14 | 16 | 31 | 31 | ||||||||||||
| Loss on exit of operating lease | — | — | 105 | — | ||||||||||||
| Adjusted EBITDA | $ | (378 | ) | $ | (1,430 | ) | $ | (1,015 | ) | $ | (1,692 | ) | ||||
| Adjusted EBITDA margin (1) | (13 | )% | (57 | )% | (18 | )% | (30 | )% | ||||||||
| Adjusted EBITDA per Diluted Share Reconciliation | ||||||||||||||||
| Loss from continuing operations per common share — diluted | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.07 | ) | $ | (0.12 | ) | ||||
| Net loss per common share — diluted | $ | (0.04 | ) | $ | (0.03 | ) | $ | 0.08 | $ | (0.03 | ) | |||||
| Adjusted EBITDA per adjusted diluted share (2) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.09 | ) | ||||
| Diluted weighted average shares (3) | 30,026,658 | 19,913,658 | 29,897,236 | 19,853,510 | ||||||||||||
| Includable incremental shares — adjusted EBITDA (4) | 394,815 | 3,163,149 | 332,359 | 3,097,413 | ||||||||||||
| Adjusted diluted shares | 30,421,473 | 23,076,807 | 30,229,595 | 22,950,923 | ||||||||||||
| (1) | |
| Adjusted EBITDA as a percentage of GAAP net |
| (2) | Adjusted EBITDA per adjusted diluted share for our common stock is computed using the more dilutive of the two-class method or the if-converted method. |
| (3) | Diluted EPS for our common stock was computed using the if-converted method, which yields the same result as the two-class method. | |
| (4) | The number of incremental shares that would be dilutive under an assumption that the Company is profitable during the reported period, which is only applicable for a period in which the Company reports a GAAP net loss. If a GAAP profit is earned in the reported periods, no additional incremental shares are assumed. |
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Application of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.2020. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
Liquidity and Capital Resources
The Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. OurThe Company’s primary cash requirements include regular payment of payroll and other business expenses, principal and interest payments on debt and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center.center infrastructure. Operations are funded with cash generated by operations and borrowings under credit facilities. Additionally, on February 24, 2020, the Company generated over $5.4 million in proceeds from the sale of the ECM Assets, after repaying its $4.0 million term loan. The Company believes that cash flows from operations, the cash from the sale of the ECM Assets and available credit facilities are adequate to fund current obligations for the next twelve months.months from issuance of these financial statements. Cash and cash equivalent balances at OctoberJuly 31, 20172020 and January 31, 20172020 were $1,892,000$ 5,707,000 and $5,654,000,$1,649,000, respectively. The decrease in cash during the current fiscal period was primarily the result of significant payments made towards our debt and interest thereon, as well as payroll and accounts payable. Continued expansion may require the Company to take on additional debt or raise capital through issuance of equities, or a combination of both. There can be no assurance the Company will be able to raise the capital required to fund further expansion.
As discussed in Note 8 – Discontinued Operations of the financial statements, the Company closed on its agreement to sell the legacy ECM Assets to Hyland Software, Inc on February 24, 2020. The Company used the proceeds to pay off its term loan with Bridge Bank and to fund the continuing development and incremental investment in sales and marketing in support of its eValuator™ cloud-based pre- and post-bill coding analysis platform.
The Company has liquidity through the CreditLoan and Security Agreement described in more detail in Note 5 to4 - Debt of our condensed consolidated financial statements included herein.statements. The Company’s primary operating subsidiaryCompany has a $5,000,000$2,000,000 revolving linecredit facility, which can be advanced based upon 80% of credit that has not been drawn uponeligible accounts receivable, as ofdefined in the date of this report.Loan and Security Agreement. In order to draw upon the revolving line of credit facility, the Company’s primary operating subsidiary must comply with customarycertain financial covenants, including the requirement that the Company maintain minimum liquidity of at least (i) $5,000,000 through January 31, 2018, (ii) $4,000,000 from February 1, 2018 through and including January 31, 2019, and (iii) $3,000,000 from February 1, 2019 through and including the maturity date of the credit facility. Pursuant to the Credit Agreement’s definition, the liquidity of the Company’s primary operating subsidiary as of October 31, 2017 was $6,892,000, which satisfies the minimum liquidity financial covenant in the Credit Agreement.
The Company was in compliance with the applicableforegoing loan covenants at OctoberJuly 31, 2017.2020. Based upon the borrowing base formula set forth in the Credit Agreement, as of OctoberJuly 31, 2017,2020, the Company had access to $627,000 of the full amount of the $5,000,000$2,000,000 revolving line of credit.
The Credit Agreement expressly permits transactions between affiliates that are parties to the Credit Agreement, which includes the CompanyLoan and its primary operating subsidiary, including loans made between such affiliate loan parties. However, the CreditSecurity Agreement prohibits the Company and its subsidiary from declaring or paying any dividend or making any other payment or distribution, directly or indirectly, on account of equity interests issued by the Company if such equity interests: (a) mature or are mandatorily redeemable pursuant to a sinking fund obligation or otherwise (except as a result of a change of control or asset sale so long as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior repayment in full of the loans and all other obligations that are accrued and payable upon the termination of the CreditLoan and Security Agreement), (b) are redeemable at the option of the holder thereof, in whole or in part, (c) provide for the scheduled payments of dividends in cash, or (d) are or become convertible into or exchangeable for indebtedness or any other equity interests that would constitute disqualified equity interests pursuant to clauses (a) through (c) hereof, in each case, prior to the date that is 180 days after the maturity date of the CreditLoan and Security Agreement.
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The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law on March 17, 2020. Among other things, the Cares Act provided for a business loan program known as the Paycheck Protection Act (“PPP”). Companies are able to borrow, through the SBA, up to two months of payroll. The Company received approximately $2,301,000 through the SBA for the PPP loan program. These funds are utilized by the Company to fund payroll during the novel corona virus and avoid further staffing reductions during the slowdown. The loan requires principal payments, beginning after the seventh monthly anniversary, and must be fully paid in two years. The PPP loan bears an interest rate of 1.0% per annum.
Significant cash obligations
| (in thousands) | October 31, 2017 | January 31, 2017 | |||||
| Term loans (1) | $ | 4,630 | $ | 5,539 | |||
| Capital leases (1) | — | 91 | |||||
| Royalty liability (2) | 2,456 | 2,351 | |||||
| (in thousands) | July 31, 2020 | January 31, 2020 | ||||||
| Term loan (1) | $ | 2,301 | $ | 3,872 | ||||
| Royalty liability (2) | 1,000 | 969 | ||||||
| (1) | |
| (2) | Refer to Note 7- Commitments and Contingencies to the condensed consolidated financial statements for additional information. |
Operating cash flow activities
| (in thousands) | Nine Months Ended | ||||||
| October 31, 2017 | October 31, 2016 | ||||||
| Net loss | $ | (3,137 | ) | $ | (4,142 | ) | |
| Non-cash adjustments to net loss | 4,564 | 5,775 | |||||
| Cash impact of changes in assets and liabilities | (2,755 | ) | (2,876 | ) | |||
| Operating cash flow | $ | (1,328 | ) | $ | (1,243 | ) | |
| Six Months Ended | ||||||||
| (in thousands) | July 31, 2020 | July 31, 2019 | ||||||
| Net loss from continuing operations | $ | (2,140 | ) | $ | (2,298 | ) | ||
| Non-cash adjustments to net loss | 1,045 | 331 | ||||||
| Cash impact of changes in assets and liabilities | (876 | ) | (1,108 | ) | ||||
| Net cash used in operating activities | $ | (1,971 | ) | $ | (3,075 | ) | ||
The increase in netuse of cash used byfrom operating activities is due to lower collectionsthe loss from operations for the second quarter ended July 31, 2020 as well as certain non-recurring cost paid in the nine-month periodfirst quarter of fiscal year 2020. We had some $600 of non-recurring cost accrued at the end of fiscal 2019, that were funded in the first quarter ended OctoberApril 30, 2020. These were inclusive of approximately $300 of severance liabilities for an employee rationalization that occurred on January 31, 20172020.
Investing cash flow activities
| Six-Months Ended | ||||||||
| (in thousands) | July 31, 2020 | July 31, 2019 | ||||||
| Purchases of property and equipment | $ | (34 | ) | $ | (46 | ) | ||
| Proceeds from sale of ECM Assets | 11,288 | — | ||||||
| Capitalized software development costs | (1,094 | ) | (1,543 | ) | ||||
| Net cash provided by (used in) investing activities | $ | 10,160 | $ | (1,589 | ) | |||
The improvement in the cash used in investing activities in the six months ended July 31, 2020 over the prior comparable period is primarily attributabledue to a larger perpetual licensethe proceeds from our sale of our abstracting solution in the second quarter of fiscal 2016.
| (in thousands) | Nine Months Ended | ||||||
| October 31, 2017 | October 31, 2016 | ||||||
| Purchases of property and equipment | $ | (25 | ) | $ | (501 | ) | |
| Capitalized software development costs | (1,337 | ) | (1,421 | ) | |||
| Payments for acquisitions | — | (1,400 | ) | ||||
| Investing cash flow | $ | (1,362 | ) | $ | (3,322 | ) | |
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Financing cash flow activities
| (in thousands) | Nine Months Ended | ||||||
| October 31, 2017 | October 31, 2016 | ||||||
| Principal repayments on term loan | $ | (962 | ) | $ | (2,244 | ) | |
| Principal payments on capital lease obligations | (91 | ) | (536 | ) | |||
| Return of shares of common stock in connection with the vesting or exercise of equity incentive awards | (42 | ) | (12 | ) | |||
| Proceeds from the exercise of stock options and stock purchase plans | 24 | 15 | |||||
| Financing cash flow | $ | (1,071 | ) | $ | (2,777 | ) | |
| Six-Months Ended | ||||||||
| (in thousands) | July 31, 2020 | July 31, 2019 | ||||||
| Proceeds from line of credit | 2,301 | 1,000 | ||||||
| Principal repayments on term loan | $ | (4,000 | ) | $ | (298 | ) | ||
| Other | (58 | ) | (14 | ) | ||||
| Net cash (used in) provided by financing activities | $ | (1,757 | ) | $ | 688 | |||
The decrease in cash used in financing activities in the ninesix months ended OctoberJuly 31, 2017 over the prior year period2020 was primarily the result of higher prepayments towards ourthe repayment of the Company’s term loan on February 24, 2020, upon the closing the sale of the ECM Assets. The Company was required to repay the term loan at close and funding of the sale of the ECM Assets. Additionally, the Company filed for, and received, a PPP loan in fiscal 2016, as well as the terminationamount of two capital leases, one$2,301. Refer to Note 4 – Debt.
Item 2. ISSUER OF EQUITY SECURITIES
The following table sets forth information with respect to our repurchases of common stock during the third quarter of fiscal 2016 and another in the third quarter of fiscal 2017.
| Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
| Total Number of | as Part of Publicly | Yet Be Purchased | ||||||||||||||
Shares Purchased | Average Price Paid | Announced Plans or | under the Plans or | |||||||||||||
| (1) | per Share | Programs | Programs | |||||||||||||
| May 1 - May 31 | 24,358 | $ | 0.96 | — | — | |||||||||||
| June 1 - June 30 | — | — | — | — | ||||||||||||
| July 1 - July 31 | 9,346 | $ | 1.32 | — | — | |||||||||||
| Total | 33,704 | $ | 1.06 | — | — | |||||||||||
| (1) | Amount represents shares surrendered by employees to satisfy tax withholding obligations resulting from restricted stock that vested during the three months ended July 31, 2020. |
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Evaluation of Disclosure Controls and Procedures
Our President (who serves as our principal executive officer) and procedures that are designed to ensure that there is reasonable assurance thatour Senior Vice President (who serves as our principal financial officer) have evaluated the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because(as defined in Exchange Act Rule 13a-15(e)) as of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.
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Changes in Internal Control over Financial Reporting
During the three and six months periods ended July 31, 2020, there were no material changes in our internal control over financial reporting duringidentified in connection with the most recently completed fiscal quarterevaluation required by Exchange Act Rule 13a-15(d) that have materially affected, or are reasonably likely to materially affect, our internal controlcontrol. We have not experienced any material impact to our internal controls over financial reporting.
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stockAnnual Report on Form 10-K for the year ended January 31, 2020 which Report includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as disclosed in our Annual Report, except as set forth below. Nevertheless, many of the risk factors disclosed in Item 1A of our Annual Report have been, and we expect will continue to intensify or other securities.be aggravated by the impact of the COVID-19 pandemic. If any of the following risks developsdevelop into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline, and you may lose all or part of your investment.
The ongoing COVID-19 pandemic and we have historically derived a substantial percentage of our total revenues from a few clients. For the fiscal years ended January 31, 2017 and 2016, our five largest clients accounted for 30% and 28% of our total revenues, respectively. If one or more clients terminate all or any portion of a master agreement, delay installations or if we fail to procure additional agreements, there could be a materialresulting adverse effect on our business, financial condition and results of operations.
The global outbreak of the coronavirus disease (COVID-19), which the World Health Organization has characterized as a security under our credit facilities, if we are not able to cure any default or repay outstanding borrowings, our assets are subject to the risk of foreclosure by our lenders. Without“pandemic” in March 2020, has resulted in a sufficient credit facility, we would becrisis affecting economies and financial markets worldwide. The pandemic, and its attendant economic damage, could adversely affected by a lack of access to liquidity needed to operate our business. Any disruption in access to credit could force us to take measures to conserve cash, such as deferring important research and development expenses, which measures could have a material adverse effect on us.
Prolonged unfavorable economic conditions which arouse in response to COVID-19, by local, state and could adversely affect the market price of our common stockfederal and numerous non-US governmental authorities imposing, among other restrictions, travel bans, business closures and other securities.
We have fluctuated from quarter-to-quarteradjusted our business practices to combat the effects by closing the company’s primary corporate office, restricting employee travel, implementing social distancing and additional sanitary measures. These actions are being taken in response to recommendations issued by local, state and national government authorities. There has been no further reductions in the past, and we may experience continued fluctuations in the future. Future revenues and operating results may vary significantly from quarter-to-quarterworkforce as a result of a number of factors, many of which are outside of our control. These factors include: the relatively large size of client agreements; unpredictability in the number and timing of system sales and sales of application hosting services; length of the sales cycle; delays in installations; changes in clients’ financial conditions or budgets; increased competition; the development and introduction of new products and services; the loss of significant clients or remarketing partners; changes in government regulations, particularly as they relate to the healthcare industry; the size and growth of the overall healthcare information technology markets; any liability and other claims that may be asserted against us; our ability to attract and retain qualified personnel; national and local general economic and market conditions; and other factors discussed in this report and our other filings with the SEC.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the market price of our common stock or other securities could decline and you could lose all or part of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Item 2. ISSUER PURCHASESUNREGISTERED SALES OF EQUITY SECURITIES
On May 29, 2020, we issued 157,298 shares of common stock duringto 180 Consulting, LLC as compensation for services provided pursuant to the three months ended October 31, 2017:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1) | |||||||||
| August 1 - August 31 | 3,977 | $ | 1.20 | — | — | |||||||
| September 1 - September 30 | — | — | — | — | ||||||||
| October 1 - October 31 | — | — | — | — | ||||||||
| Total | 3,977 | $ | 1.20 | — | — | |||||||
See Index to Exhibits.
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INDEX TO EXHIBITS
| * | Filed herewith. |
| † | Certain portions of the exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv) because they are both (i) not material to investors and (ii) likely to cause competitive harm to the Company if publicly disclosed. |
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 000-28132.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STREAMLINE HEALTH SOLUTIONS, INC. | |||
| DATE: | By: | /S/ WYCHE T. “TEE” GREEN, III | |
Wyche T. “Tee” Green, III Chief Executive Officer | |||
| DATE: September 10, 2020 | By: | /S/ Thomas J. Gibson | |
| Thomas J. Gibson | |||
| Chief Financial Officer | |||
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