UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One) | |
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2019 | ||
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period fromto | ||
Commission File Number: 000‑28132 |
STREAMLINE HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 31‑1455414 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1175 Peachtree Street, NE, Suite 600,
Atlanta, GA 30309
(Address of principal executive offices) (Zip Code)
(888) 997‑8732
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.01 par value | STRM | The 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 x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
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-212b‑2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act). Yes ¨☐ No ☒x
The number of shares outstanding of the Registrant’s Common Stock, $.01$0.01 par value, as of November 30, 2017:
Page | ||
2 | ||
2 | ||
Condensed Consolidated Balance Sheets at October 31, | 2 | |
4 | ||
5 | ||
7 | ||
8 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
33 | ||
33 | ||
34 | ||
34 | ||
35 | ||
47 | ||
47 | ||
47 | ||
49 |
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(rounded to the nearest thousand dollars,except share and per share information)
(Unaudited)
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| As of | ||||
|
| October 31, 2019 |
| January 31, 2019 | ||
ASSETS |
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|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,220,000 |
| $ | 2,376,000 |
Accounts receivable, net of allowance for doubtful accounts of $98,000 and $345,000, respectively |
|
| 2,214,000 |
|
| 2,933,000 |
Contract receivables |
|
| 704,000 |
|
| 1,263,000 |
Prepaid and other current assets |
|
| 1,285,000 |
|
| 1,235,000 |
Total current assets |
|
| 5,423,000 |
|
| 7,807,000 |
Non-current assets: |
|
|
|
|
|
|
Property and equipment, net of accumulated amortization of $1,587,000 and $1,516,000, respectively |
|
| 175,000 |
|
| 237,000 |
Contract receivables, less current portion |
|
| 355,000 |
|
| 407,000 |
Capitalized software development costs, net of accumulated amortization of $20,544,000 and $19,689,000, respectively |
|
| 7,785,000 |
|
| 5,698,000 |
Intangible assets, net of accumulated amortization of $4,282,000 and $3,858,000, respectively |
|
| 1,245,000 |
|
| 1,669,000 |
Goodwill |
|
| 15,537,000 |
|
| 15,537,000 |
Other |
|
| 756,000 |
|
| 385,000 |
Total non-current assets |
|
| 25,853,000 |
|
| 23,933,000 |
Total assets |
| $ | 31,276,000 |
| $ | 31,740,000 |
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 |
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 |
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(rounded to the nearest thousand dollars,except share and per share information)
(Unaudited)
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| As of | ||||
|
| October 31, 2019 |
| January 31, 2019 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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|
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Current liabilities: |
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|
|
|
|
|
Accounts payable |
| $ | 629,000 |
| $ | 1,280,000 |
Accrued expenses |
|
| 1,407,000 |
|
| 1,814,000 |
Current portion of term loan, net of deferred financing costs |
|
| 3,472,000 |
|
| 597,000 |
Deferred revenues |
|
| 6,310,000 |
|
| 8,338,000 |
Royalty liability |
|
| 953,000 |
|
| — |
Other |
|
| 94,000 |
|
| 94,000 |
Total current liabilities |
|
| 12,865,000 |
|
| 12,123,000 |
Non-current liabilities: |
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|
|
|
|
|
Term loan, net of current portion and deferred financing costs |
|
| — |
|
| 3,351,000 |
Royalty liability |
|
| — |
|
| 905,000 |
Deferred revenues, less current portion |
|
| 123,000 |
|
| 432,000 |
Other |
|
| 19,000 |
|
| 41,000 |
Total non-current liabilities |
|
| 142,000 |
|
| 4,729,000 |
Total liabilities |
|
| 13,007,000 |
|
| 16,852,000 |
Series A 0% Convertible Redeemable Preferred Stock, $0.01 par value per share, 5,000,000 shares authorized, no and 2,895,464 shares issued and outstanding, respectively |
|
| — |
|
| 8,686,000 |
Stockholders’ equity: |
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|
Common stock, $0.01 par value per share, 45,000,000 shares authorized; 30,767,439 and 20,767,708 shares issued and outstanding, respectively |
|
| 308,000 |
|
| 208,000 |
Additional paid in capital |
|
| 94,970,000 |
|
| 82,544,000 |
Accumulated deficit |
|
| (77,009,000) |
|
| (76,550,000) |
Total stockholders’ equity |
|
| 18,269,000 |
|
| 6,202,000 |
Total liabilities and stockholders' equity |
| $ | 31,276,000 |
| $ | 31,740,000 |
See accompanying notes to condensed consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(rounded to the nearest thousand dollars, except share and per share information)
(Unaudited)
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| Three Months Ended October 31, |
| Nine Months Ended October 31, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenues: |
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System sales |
| $ | 668,000 |
| $ | 309,000 |
| $ | 1,046,000 |
| $ | 1,827,000 |
Professional services |
|
| 626,000 |
|
| 577,000 |
|
| 1,615,000 |
|
| 1,086,000 |
Audit services |
|
| 517,000 |
|
| 234,000 |
|
| 1,266,000 |
|
| 841,000 |
Maintenance and support |
|
| 2,827,000 |
|
| 3,051,000 |
|
| 8,537,000 |
|
| 9,577,000 |
Software as a service |
|
| 1,150,000 |
|
| 1,198,000 |
|
| 3,474,000 |
|
| 3,570,000 |
Total revenues |
|
| 5,788,000 |
|
| 5,369,000 |
|
| 15,938,000 |
|
| 16,901,000 |
Operating expenses: |
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Cost of system sales |
|
| 135,000 |
|
| 223,000 |
|
| 391,000 |
|
| 763,000 |
Cost of professional services |
|
| 493,000 |
|
| 675,000 |
|
| 1,616,000 |
|
| 2,079,000 |
Cost of audit services |
|
| 325,000 |
|
| 323,000 |
|
| 949,000 |
|
| 1,017,000 |
Cost of maintenance and support |
|
| 453,000 |
|
| 506,000 |
|
| 1,275,000 |
|
| 1,720,000 |
Cost of software as a service |
|
| 356,000 |
|
| 207,000 |
|
| 936,000 |
|
| 805,000 |
Selling, general and administrative expense |
|
| 2,800,000 |
|
| 2,392,000 |
|
| 7,745,000 |
|
| 8,160,000 |
Research and development |
|
| 726,000 |
|
| 1,026,000 |
|
| 2,385,000 |
|
| 3,302,000 |
Executive transition cost |
|
| 481,000 |
|
| — |
|
| 621,000 |
|
| — |
Loss on exit of operating lease |
|
| — |
|
| 562,000 |
|
| — |
|
| 1,368,000 |
Total operating expenses |
|
| 5,769,000 |
|
| 5,914,000 |
|
| 15,918,000 |
|
| 19,214,000 |
Operating income (loss) |
|
| 19,000 |
|
| (545,000) |
|
| 20,000 |
|
| (2,313,000) |
Other expense: |
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|
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Interest expense |
|
| (91,000) |
|
| (106,000) |
|
| (239,000) |
|
| (332,000) |
Miscellaneous expense |
|
| (80,000) |
|
| (25,000) |
|
| (224,000) |
|
| (118,000) |
Loss before income taxes |
|
| (152,000) |
|
| (676,000) |
|
| (443,000) |
|
| (2,763,000) |
Income tax expense |
|
| (12,000) |
|
| (2,000) |
|
| (16,000) |
|
| (5,000) |
Net loss |
| $ | (164,000) |
| $ | (678,000) |
| $ | (459,000) |
| $ | (2,768,000) |
Add: Redemption of Series A Preferred Stock |
|
| 4,894,000 |
|
| — |
|
| 4,894,000 |
|
| — |
Net income (loss) attributable to common shareholders |
|
| 4,730,000 |
|
| (678,000) |
|
| 4,435,000 |
|
| (2,768,000) |
Net income (loss) per common share - basic |
| $ | 0.22 |
| $ | (0.03) |
| $ | 0.22 |
| $ | (0.14) |
Weighted average number of common shares - basic |
|
| 21,598,146 |
|
| 19,655,882 |
|
| 20,435,055 |
|
| 19,495,745 |
Net loss per common share - diluted |
| $ | (0.01) |
| $ | (0.03) |
| $ | (0.02) |
| $ | (0.14) |
Weighted average number of common shares - diluted |
|
| 21,598,146 |
|
| 19,655,882 |
|
| 20,435,055 |
|
| 19,495,745 |
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 |
See accompanying notes to condensed consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(rounded to the nearest thousand dollars,except share information)
(Unaudited)
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| Additional |
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| ||
|
| Common |
| Common |
| paid in |
| Accumulated |
| Total | ||||
|
| stock shares |
| stock |
| capital |
| deficit |
| stockholders’ equity | ||||
Balance at January 31, 2018 |
| 20,005,977 |
| $ | 200,000 |
| $ | 81,777,000 |
| $ | (72,125,000) |
| $ | 9,852,000 |
Cumulative effect of ASC 606 implementation |
| — |
|
| — |
|
| — |
|
| 1,440,000 |
|
| 1,440,000 |
Surrender of stock |
| (26,062) |
|
| — |
|
| (47,000) |
|
| — |
|
| (47,000) |
Conversion of Series A Preferred Stock |
| 54,531 |
|
| 1,000 |
|
| 163,000 |
|
| — |
|
| 164,000 |
Share-based compensation expense |
| — |
|
| — |
|
| 222,000 |
|
| — |
|
| 222,000 |
Net loss |
| — |
|
| — |
|
| — |
|
| (569,000) |
|
| (569,000) |
Balance at April 30, 2018 |
| 20,034,446 |
| $ | 201,000 |
| $ | 82,115,000 |
| $ | (71,254,000) |
| $ | 11,062,000 |
Stock issued |
| 35,277 |
|
| — |
|
| 35,000 |
|
| — |
|
| 35,000 |
Surrender of stock |
| (7,330) |
|
| — |
|
| (11,000) |
|
| — |
|
| (11,000) |
Restricted stock issued |
| 100,000 |
|
| 1,000 |
|
| (1,000) |
|
| — |
|
| — |
Restricted stock forfeited |
| (122,500) |
|
| (1,000) |
|
| 1,000 |
|
| — |
|
| — |
Share-based compensation expense |
| — |
|
| — |
|
| 145,000 |
|
| — |
|
| 145,000 |
Net loss |
|
|
|
|
|
|
|
|
|
| (1,521,000) |
|
| (1,521,000) |
Balance at July 31, 2018 |
| 20,039,893 |
| $ | 201,000 |
| $ | 82,284,000 |
| $ | (72,775,000) |
| $ | 9,710,000 |
Surrender of stock |
| (3,857) |
|
| — |
|
| (4,000) |
|
| — |
|
| (4,000) |
Restricted stock issued |
| 100,000 |
|
| 1,000 |
|
| (1,000) |
|
| — |
|
| — |
Restricted stock forfeited |
| (8,333) |
|
| — |
|
| — |
|
| — |
|
| — |
Share-based compensation expense |
| — |
|
| — |
|
| 125,000 |
|
| — |
|
| 125,000 |
Net loss |
|
|
|
|
|
|
|
|
|
| (678,000) |
|
| (678,000) |
Balance at October 31, 2018 |
| 20,127,703 |
| $ | 202,000 |
| $ | 82,404,000 |
| $ | (73,453,000) |
| $ | 9,153,000 |
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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 |
See accompanying notes to condensed consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(rounded to the nearest thousand dollars,except share information)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| ||
|
| Common |
| Common |
| paid in |
| Accumulated |
| Total | ||||
|
| stock shares |
| stock |
| capital |
| deficit |
| stockholders’ 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 expense |
| — |
|
| — |
|
| 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 |
| 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 stock |
| (21,708) |
|
| — |
|
| (31,000) |
|
| — |
|
| (31,000) |
Share-based compensation expense |
| — |
|
| — |
|
| 160,000 |
|
| — |
|
| 160,000 |
Capital contribution |
| — |
|
| — |
|
| 16,000 |
|
| — |
|
| 16,000 |
Net loss |
| — |
|
| — |
|
| — |
|
| (608,000) |
|
| (608,000) |
Balance at July 31, 2019 |
| 20,789,473 |
| $ | 208,000 |
| $ | 82,962,000 |
| $ | (76,845,000) |
| $ | 6,325,000 |
Restricted stock issued |
| 550,000 |
|
| 5,000 |
|
| (6,000) |
|
| — |
|
| (1,000) |
Restricted stock forfeited |
| (32,060) |
|
| — |
|
| 1,000 |
|
| — |
|
| 1,000 |
Issuance of common stock, net of $681,000 directly attributable offering expenses |
| 9,473,691 |
|
| 95,000 |
|
| 8,887,000 |
|
| — |
|
| 8,982,000 |
Redemption of Series A Preferred Stock |
| — |
|
| — |
|
| 2,873,000 |
|
| — |
|
| 2,873,000 |
Surrender of stock |
| (13,665) |
|
| — |
|
| (37,000) |
|
| — |
|
| (37,000) |
Share-based compensation expense |
| — |
|
| — |
|
| 290,000 |
|
| — |
|
| 290,000 |
Net loss |
| — |
|
| — |
|
| — |
|
| (164,000) |
|
| (164,000) |
Balance at October 31, 2019 |
| 30,767,439 |
| $ | 308,000 |
| $ | 94,970,000 |
| $ | (77,009,000) |
| $ | 18,269,000 |
See accompanying notes to condensed consolidated financial statements.
6
STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(rounded to the nearest thousand dollars)
(Unaudited)
|
|
|
|
|
|
|
|
| Nine Months Ended October 31, | ||||
|
| 2019 |
| 2018 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
| $ | (459,000) |
| $ | (2,768,000) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation |
|
| 113,000 |
|
| 411,000 |
Amortization of capitalized software development costs |
|
| 644,000 |
|
| 895,000 |
Amortization of intangible assets |
|
| 424,000 |
|
| 705,000 |
Amortization of other deferred costs |
|
| 208,000 |
|
| 347,000 |
Valuation adjustments |
|
| 48,000 |
|
| 71,000 |
Loss on exit of operating lease |
|
| — |
|
| 1,368,000 |
Gain on disposal of fixed assets |
|
| — |
|
| 5,000 |
Share-based compensation expense |
|
| 719,000 |
|
| 492,000 |
Provision for accounts receivable |
|
| (125,000) |
|
| (24,000) |
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts and contract receivables |
|
| 1,455,000 |
|
| 591,000 |
Other assets |
|
| (572,000) |
|
| 272,000 |
Accounts payable |
|
| (651,000) |
|
| 1,049,000 |
Accrued expenses |
|
| (442,000) |
|
| 54,000 |
Deferred revenues |
|
| (2,337,000) |
|
| (4,176,000) |
Net cash provided by operating activities |
|
| (975,000) |
|
| (708,000) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
|
| (51,000) |
|
| (21,000) |
Proceeds from sales of property and equipment |
|
| — |
|
| 20,000 |
Capitalization of software development costs |
|
| (2,730,000) |
|
| (2,288,000) |
Net cash used in investing activities |
|
| (2,781,000) |
|
| (2,289,000) |
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 9,663,000 |
|
| — |
Payments for costs directly attributable to the issuance of common stock |
|
| (681,000) |
|
| — |
Principal payments on term loan |
|
| (448,000) |
|
| (448,000) |
Payments related to settlement of employee shared-based awards |
|
| (50,000) |
|
| (62,000) |
Redemption of Series A Convertible Preferred Stock |
|
| (5,791,000) |
|
| — |
Fees paid for redemption of Series A Convertible Preferred Stock |
|
| (22,000) |
|
| — |
Payment of deferred financing costs |
|
| (73,000) |
|
| — |
Other |
|
| 2,000 |
|
| 31,000 |
Net cash provided by (used in) financing activities |
|
| 2,600,000 |
|
| (479,000) |
Net decrease in cash and cash equivalents |
|
| (1,156,000) |
|
| (3,476,000) |
Cash and cash equivalents at beginning of period |
|
| 2,376,000 |
|
| 4,620,000 |
Cash and cash equivalents at end of period |
| $ | 1,220,000 |
| $ | 1,144,000 |
See accompanying notes to condensed consolidated financial statements.
7
STREAMLINE HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of January 31, 2019, which has been derived from audited financial statements, and the unaudited Condensed Consolidated Financial Statementsinterim condensed consolidated financial statements have been prepared by Streamline Health Solutions, Inc. (“we”, “us”, “our”, “Streamline”, or the “Company”), pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q10‑Q of the U.S. Securities and Exchange Commission.Commission the “SEC”. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company’s financial position at October 31, 2019, and the results of its operations for a fair presentation of the Condensed Consolidated Financial Statements have been included.three and nine month months ended October 31, 2019 and October 31, 2018, and its cash flows for the nine months ended October 31, 2019 and 2018. 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,10‑K, Commission File Number 0-28132.0‑28132. Operating results for the nine months ended
The Company determined that it has one operating segment and one reporting unit due to the singular nature of our products, product development and distribution process, and customer base as a provider of computer software-based solutions and services for healthcare providers.
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.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year 20162018 Annual Report on Form 10-K.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-K10‑K when reviewing interim financial results.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Immaterial Correction of Errors
In connection with the preparation of the Company’s financial statements for the third quarter ended October 31, 2019, the Company discovered certain errors in “Capitalized software development costs” and related amortization expense for previous periods. The errors resulted from (i) assets that did not begin to be amortized timely, and (ii) an incorrect method of amortizing the assets.
The assets that did not begin amortizing timely resulted from an administrative error, while the incorrect method of amortization was related to a misapplication of GAAP. Certain general release documentation was not prepared timely, and distributed, and, accordingly, the Company did not place certain enhancements into service and begin amortization.
8
Further, the Company has corrected its underlying financial records to utilize the “carry-over” method for amortizing capitalized software development cost. Under the “carry-over” method, the costs of the enhancements are added to the unamortized costs of the previous version of the product and the combined amount is amortized over the remaining useful life of the product. Including unamortized cost of the original product with the cost of the enhancement for purposes of applying the net realizable value test and amortization provisions is consistent with accounting guidance for software companies that improve their software and discontinue selling or marketing the older versions. While this method reduced amortization of the underlying assets, the Company’s evaluation of the net book value of the underlying software development assets in relation to net realizable value and future cash flows each period ensured the carrying value was not in excess of the net realizable value of a solution for any period. Further, in accordance with guidance for software companies under ASC 985, the Company ensures that amortization is the greater of (i) the ratio of the software product’s current gross revenues to the total of current and expected gross revenues or (ii) straight-line over the remaining economic useful life of the software. The Company continues to monitor its estimated useful life on the underlying products, taking into consideration the product, the market and the industry.
The two corrections relating to the amortization of capitalized software development costs off-set one another in certain previous periods. Additionally, the differences between (i) the amounts calculated, as adjusted for these corrections, and (ii) the amount recorded in previous periods substantially self-corrected by the end of the third quarter, October 31, 2019.
The Company, in consultation with the Audit Committee of the Board of Directors, evaluated the effect of these adjustments on the Company’s financial statements under Accounting Standards Codification (“ASC”) 250: Accounting Changes and Error Corrections and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined it was not necessary to restate its previously issued financial statements, or unaudited interim period financial statements, because the errors did not materially misstate any previously issued financial statements and the correction of the errors in the current fiscal year is also not material. The Company looked at both quantitative and qualitative characteristics of the required corrections.
The net impact of these errors resulted in a $214,000 and $532,000 understatement of amortization expense for capitalized software development costs for the three- and nine-month periods ended October 31, 2019, respectively. The Company’s previously reported amortization expense for capitalized software development costs was misstated by the following amounts:
|
|
|
|
|
|
| Overstatement / |
|
|
| (Understatement) of |
Period |
|
| Amortization Expense |
Prior to fiscal year ended January 31, 2019 |
| $ | 532,000 |
Three months ended April 30, 2019 |
| $ | (153,000) |
Three months ended July 31, 2019 |
| $ | (165,000) |
9
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 Condensed 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. Capitalized software development costs for software to be sold, leased, or marketed, net of accumulated amortization, totaled $3,470,000 and $2,921,000 as of October 31, 2019 and January 31, 2019, respectively.
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 Condensed Consolidated Statements of Operations. Capitalized software development costs for internal-use software, net of accumulated amortization, totaled $4,153,000 and $2,565,000 as of October 31, 2019 and January 31, 2019, respectively.
The estimated useful lives of software (including software to be sold and internal-use software) are reviewed frequently and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing functionality. The Company reviews, on an on-going basis, the carrying value of its capitalized software development expenditures, net of accumulated amortization.
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
10
on the amounts approximate the market interest rate. Long-term debt is classified as Level 2.
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices in |
| Significant Other |
| Significant | ||||
|
| Total Fair |
| Active Markets |
| Observable Inputs |
| Unobservable Inputs | ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
At October 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1) |
| $ | 953,000 |
| $ | — |
| $ | — |
| $ | 953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1) |
| $ | 905,000 |
| $ | — |
| $ | — |
| $ | 905,000 |
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) |
The fair value of the royalty liability |
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,ASC 605-25,606, Revenue Recognition — Multiple-Element Arrangementsfrom Contracts with Customers, and (“ASC 605-10-S99.606”). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
We commence revenue recognition when all of(Step 5 below) in accordance with that core principle after applying the following criteria have been met:steps:
· | Step 1: Identify the contract(s) with a customer |
· | Step 2: Identify the performance obligations in the contract |
· | Step 3: Determine the transaction price |
· | Step 4: Allocate the transaction price to the performance obligations in the contract |
· | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
We follow the accounting revenue guidance under ASC 606 to determine whether 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 deemed to be satisfied. Maintenance and support and SaaS agreements are generally non-cancelablenon-
11
cancelable or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable.
Significant judgment is required to determine the 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 good or services and/or right-to-use assets. To qualify aspromised in the agreements represent a separate unit of accounting,single performance obligation. The conclusions reached can impact the delivered item must have value 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 performanceallocation of the undelivered item or items must be considered probabletransaction price to each performance obligation and substantially in the controltiming 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.
Software-Based Solution Professional Services
The Company provides various professional services components that are not essential to the functionality of thecustomers with software licenses. These include project management, software implementation and software modification services. Revenues from timearrangements to time, are sold separately by us. Similarprovide professional services are sold bygenerally distinct from the other vendors,promises in the contract and clients can elect to perform similar services in-house. When professional services revenues are a separate unit of accounting, revenues are recognized as the related services are performed.
Software as a Service
SaaS-based contracts include use of the Company’s platform, implementation, support and other services related to coding compliance, recovery audit contractor consulting, and ICD-10 readiness are consideredwhich represent 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.
12
We defer the associated direct costs, forwhich include salaries, benefits and benefits expensecontractor fees, for professional services related to SaaS contracts. These deferred costs will be amortized ratably over the identical term as the associated revenues. As of October 31, 20172019, and January 31, 2017,2019, we had deferred costs of $506,000$210,000 and $500,000,$251,000, respectively, net of accumulated amortization of $283,000$244,000 and $370,000,$399,000, respectively. Amortization expense of these costs was $51,000$45,000 and $36,000$91,000 for the three months ended October 31, 20172019 and 2016,2018, respectively, and $177,000$150,000 and $80,000$193,000 for the nine months ended October 31, 20172019 and 2016,2018, respectively.
Audit Services
Audit services relating to audit services are provided separately from software solutions, even those that may relate to coding and coding audit processes. These services are not essential to any software offering and are a separate unit of accounting. Accordingly, the revenues are recognizedperformance obligation. We recognize revenue over time as the services are performed.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type and nature of revenue stream:
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended October 31, 2019 | |||||||
|
| Recurring Revenue |
| Non-recurring Revenue |
| Total | |||
Systems sales |
| $ | 27,000 |
| $ | 1,019,000 |
| $ | 1,046,000 |
Professional services |
|
| — |
|
| 1,615,000 |
|
| 1,615,000 |
Audit services |
|
| — |
|
| 1,266,000 |
|
| 1,266,000 |
Maintenance and support |
|
| 8,537,000 |
|
| — |
|
| 8,537,000 |
Software as a service |
|
| 3,474,000 |
|
| — |
|
| 3,474,000 |
Total revenue: |
| $ | 12,038,000 |
| $ | 3,900,000 |
| $ | 15,938,000 |
Contract Receivables and Deferred Revenues
The Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related to time,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 enter into termination agreements with associates that may include supplemental cash payments,expect to bill the customer. Deferred revenue is classified as well as contributionscurrent or noncurrent based on the timing of when we expect to health and other benefits for a specific timerecognize revenue. In the nine-month period subsequent to termination. For the three months ended October 31, 20172019 we recognized $6,244,000 in revenue from deferred revenues outstanding as of January 31, 2019.
Transaction price allocated to the remaining performance obligations
Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and 2016,amounts that will be invoiced and recognized as revenue in future periods. Revenue allocated to remaining performance obligations was $24 million as of October 31, 2019, of which the Company expects to recognize approximately 70% over the next 12 months and the remainder thereafter.
Deferred commissions costs (contract acquisition costs)
Contract acquisition costs, which consist of sales commissions paid or payable, are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line basis over the contract term. As a practical expedient, we expense sales commissions as incurred zerowhen the amortization period of related deferred commission costs would have been one year or less.
Deferred commissions costs paid and $110,000 in severance expenses,payable, which are included on the condensed consolidated balance sheets within prepaid and other current assets and other non-current assets totaled $155,000 and $319,000, respectively, as of October 31, 2019. For the three- and $58,000 and $227,000 for the nine monthsnine-month periods ended October 31, 20172019, $95,000 and 2016, respectively. At$150,000, respectively,
13
in amortization expense associated with sales commissions was included in selling, general and administrative expenses on the condensed consolidated statements of operations. There were no impairment losses for these capitalized costs for the three- and nine-months ended October 31, 20172019 and January 31, 2017, we had accrued severance expenses of zero and $9,000, respectively.
Equity Awards
We account for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as expense over the requisite vesting period. We incurred total compensation expense related to stock-based awards of $290,000 and $432,000$125,000 for the three months ended October 31, 20172019 and 2016,2018, respectively, and $845,000$719,000 and $1,343,000$492,000 for the nine months ended October 31, 20172019 and 2016,2018, respectively.
The fair value of the stock options granted is estimated at the date of grant using a Black-Scholes option pricing model. The option pricing model inputs (such as expected term, expected volatility, and risk-free interest 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 (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.
We periodically issue restricted stock awards in the form of our common stock. The fair value of these awards is based on the market closing price per share on the date of grant. We expense 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. InDuring the nine monthsthird quarter 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, the2019, the Company awarded 220,33750,000 shares of restricted stock to directorsits President and Chief Executive Officer that vested immediately, in addition to a performance award of 100,000 shares of restricted stock that will vest based upon 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 basis 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 consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. We establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
We provide 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 have appropriately accounted for any uncertain tax positions. The Company has recorded $262,000$296,000 and $263,000$275,000 in reserves for uncertain tax positions and corresponding interest and penalties as of October 31, 20172019 and January 31, 2017,2019, 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, 2015. All material state and local income tax matters have been concluded for years through January 31, 2014. 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.
14
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 to 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.
The following is the calculation of the basic and diluted net earnings (loss)loss per share of common stock:
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| October 31, 2019 |
| October 31, 2018 | ||
Net loss |
| $ | (164,000) |
| $ | (678,000) |
Add: redemption of Series A Convertible Preferred Stock |
|
| 4,894,000 |
|
| — |
Net income (loss) attributable to common shareholders |
|
| 4,730,000 |
|
| (678,000) |
Weighted average shares outstanding - Basic (1) |
|
| 21,598,146 |
|
| 19,655,882 |
Effect of dilutive securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (2) |
|
| — |
|
| — |
Weighted average shares outstanding - Diluted |
|
| 21,598,146 |
|
| 19,655,882 |
Basic net income (loss) per share of common stock |
| $ | 0.22 |
| $ | (0.03) |
Diluted net loss per share of common stock |
| $ | (0.01) |
| $ | (0.03) |
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| October 31, 2019 |
| October 31, 2018 | ||
Net loss |
| $ | (459,000) |
| $ | (2,768,000) |
Add: redemption of Series A Convertible Preferred Stock |
|
| 4,894,000 |
|
| — |
Net income (loss) attributable to common shareholders |
|
| 4,435,000 |
|
| (2,768,000) |
Weighted average shares outstanding - Basic (1) |
|
| 20,435,055 |
|
| 19,495,745 |
Effect of dilutive securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (2) |
|
| — |
|
| — |
Weighted average shares outstanding - Diluted |
|
| 20,435,055 |
|
| 19,495,745 |
Basic net income (loss) per share of common stock |
| $ | 0.22 |
| $ | (0.14) |
Diluted net loss per share of common stock |
| $ | (0.02) |
| $ | (0.14) |
|
|
|
|
|
|
|
(1) | Excludes 1,185,918 unvested restricted shares of common stock as of October 31, 2019, which are considered non-participating securities. |
15
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 | ) |
(2) | Diluted net loss per share excludes the effect of shares that are anti-dilutive. For the three and nine months ended October 31, 2019, diluted EPS excludes 2,895,464 shares of Series A Convertible Preferred Stock, 938,671 outstanding stock options and 1,185,918 unvested restricted shares of common stock. For the three and nine months ended October 31, 2018, diluted EPS excludes 2,895,464 shares of Series A Convertible Preferred Stock, 1,612,990 outstanding stock options and 2,239,047 unvested restricted shares of common stock. |
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,2016‑02, Leases (Topic 842)(“ASC 842”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The update will bebecame effective for us on February 1, 2019. Early
We adopted the new lease standards under ASC 842 on February 1, 2019 using the effective date transition method. This method requires us to recognize an adoption impact as a cumulative-effect adjustment as of the adoption date. Prior period balances were not adjusted upon adoption of this standard. We have elected the group of practical expedients under ASU 2016-02 to forego assessing upon adoption: (1) whether any expired contracts are or contain leases; (2) the lease classification for any existing or expired leases; and (3) any indirect costs that would have qualified for capitalization for any existing leases. The adoption of the update is permitted. We are currently evaluatingnew standard resulted in the impactrecording of the adoptiona right-of-use asset of this update on$175,000 and an operating lease liability of $464,000 as of February 1, 2019. The standard did not materially impact our consolidated financial statementsresults of operations and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for us on February 1, 2018. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.
In May 2017,August 2018, the FASB issued ASU 2017-09,2018-13, CompensationFair Value Measurement (Topic 820) - Stock Compensation(Topic 718), Scope of Modification AccountingDisclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, to clarify which changesremove, modify, and add certain disclosure requirements within Topic 820 in order to improve the terms or conditionseffectiveness of a share-based payment award require an entityfair value disclosures in the notes to apply modification accounting in Topic 718. financial statements. The updatestandard will be effective for us on February 1, 2018. We do2020. The Company is currently evaluating the impact of adoption of this new standard and does not expectbelieve that the adoption of this ASU will have a significant impact on ourits consolidated financial statements.
NOTE 3 — ACQUISITIONS AND DIVESTITURESLEASES
We determine whether an arrangement is a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our incremental borrowing rate for the expected remaining lease term at commencement date for new leases, or as of February 1, 2019 for existing leases, in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.
Our only operating lease relates to our New York office sublease, which expired in November 2019. In the second quarter of fiscal year 2018, we closed our New York office and subleased the office space for the remaining period of the original lease term. As a result of vacating and subleasing the office, we recorded a $472,000 loss on exit of the operating lease in fiscal year 2018. The associated lease liability reduced the right-of-use asset upon adoption of ASC 842. As of October 31, 2019, the total minimum rentals due to our lessor by us and to be received by us from our sublessee were $48,000 and $24,000, respectively.
As of October 31, 2019, operating lease right-of use assets totaling $17,000 are recorded in Prepaid and other current assets, and the associated lease liability of $48,000 is included in Accrued expenses within the condensed consolidated balance sheets. The Company used a discount rate of 8.0% to determine the lease liability.
16
Total costs associated with leased assets are as follows:
|
|
|
|
|
| Three Months Ended October 31, 2019 | |
Operating lease cost |
| $ | 54,000 |
Sublease income |
|
| (72,000) |
Total operating lease income |
| $ | (18,000) |
|
|
|
|
|
| Nine Months Ended October 31, 2019 | |
Operating lease cost |
| $ | 171,000 |
Sublease income |
|
| (216,000) |
Total operating lease income |
| $ | (45,000) |
In the third quarter of fiscal year 2018, we assigned our then current Atlanta office lease that would have expired in November 2022 and entered into a membership agreement to occupy shared office space in Atlanta. As a result of assigning the office lease, we recorded a $562,000 loss on exit of the operating lease in the third quarter of fiscal year 2018. The membership agreement does not qualify as a lease under ASC 842 as the owner has substantive substitution rights, therefore the Company recognizes expenses as incurred. See Note 7 – Commitments and Contingencies for further details on our shared office arrangement.
NOTE 4 — DEBT
Term Loan and Line of Credit
During October 2019 the Company entered into a sixth amendment to its Credit Agreement (the “Sixth Amendment”) with Wells Fargo Bank, N.A., as administrative agent, and other lender parties thereto. Pursuant to the terms of the Sixth Amendment, the Company received consent to proceed with the redemption of the Series A Convertible Preferred Stock. Amounts outstanding under the Credit Agreement continued to bear interest at either LIBOR or the base rate, as elected by the Company, plus an applicable margin, plus, after the effective date of the amendment to the Credit Agreement entered into as of September 11, 2019 (the “Fifth Amendment”), a “paid in kind” rate, or PIK Rate, of 2.75%.
Subject to the Company’s leverage ratio, pursuant to the terms of the amendment to the Credit Agreement entered into as of April 15, 2015, the applicable LIBOR rate margin varied from 4.25% to 6.25%, and the applicable base rate margin varied from 3.25% to 5.25%. The original term loan and line of credit maturity date of May 21, 2020 was extended to August 21, 2020. Additionally, the Credit Agreement, as amended by the Fifth Amendment, requires the payment of certain other fees and expenses, including (a) an amendment fee of up to $200,000 ($50,000 per quarter) and (b) consulting costs of approximately $100,000.
The Sixth Amendment reduced the Company’s capacity on the existing revolving credit from $5,000,000 to $1,500,000, subject to other restrictions as described herein.
The Credit Agreement, as amended, included customary financial covenants, including the requirements that the Company maintain minimum liquidity and achieve certain minimum EBITDA levels (as defined in the Credit Agreement), among other covenants, including a requirement that the Company refrain from paying dividends on the common and any preferred stock. In addition, the Credit Agreement, as amended by the Fifth Amendment, required that the Company (i) engage a consultant for purposes of preparing a budget to be shared with the administrative agent and to be adhered to by the Company and other financial information requested by the administrative agent, (ii) enter into amendments to the Company’s licensing agreements with Montefiore, (iii) pursue a refinancing transaction for purposes of satisfying its obligations under the Credit Agreement, and in connection therewith, achieve certain refinancing milestones and provide the administrative agent with certain deliverables, information and access to its personnel and
17
records, and (iv) on or before October 15, 2019, provide evidence of a Montefiore Medical Center Solutioncommon equity contribution of no less than $1,500,000.
Pursuant to the terms of the Credit Agreement, as amended by the Sixth Amendment, the Company was required to maintain minimum liquidity of at least $1,000,000 at all times.
The following table shows our minimum monthly (“Bank EBITDA”) defined as Adjusted EBITDA, less capitalized software development costs for the applicable period, covenant thresholds, as modified by the Fifth Amendment:
Applicable period | Minimum | ||
For the twelve-month period ending August 31, 2019 | $ | (505,000) | |
For the twelve-month period ending September 30, 2019 | (752,000) | ||
For the twelve-month period ending October 31, 2019 | (850,000) | ||
For the twelve-month period ending November 30, 2019 | (597,000) | ||
For the twelve-month period ending December 31, 2019 | (608,000) | ||
For the twelve-month period ending January 31, 2020 | (289,000) | ||
For the twelve-month period ending February 29, 2020 | (124,000) | ||
For the twelve-month period ending March 31, 2020 | (195,000) | ||
For the twelve-month period ending April 30, 2020 | (683,000) | ||
For the twelve-month period ending May 31, 2020 | (560,000) | ||
For the twelve-month period ending June 30, 2020 | (368,000) | ||
For the twelve-month period ending July 31, 2020 and for the twelve-month period ending on the last day of each month thereafter | (374,000) |
As of October 31, 2019, the Company had no borrowings under the revolving line of credit, and had accrued $17,000 in interest and unused line fees. Based upon the borrowing base formula set forth in the Credit Agreement, as of October 31, 2019, the Company had access to the full amount of the $1,500,000 revolving line of credit.
As described in Note 9, the Company entered into the Loan and Security Agreement with Bridge Bank and into a definitive asset purchase agreement with Hyland Healthcare, who will acquire certain assets of and assume certain identified liabilities of the Company’s legacy Enterprise Content Management business (the “ECM Business”) upon the satisfaction of certain customary closing conditions, including the receipt of approval of the Company’s stockholders. Under the terms of the Loan and Security Agreement, the Company must prepay the Term Advance (as defined under the Loan and Security Agreement) from all available proceeds of the sale of the ECM Business. As such, the Company is required and will have both the intent and ability to repay its term loan and, accordingly, has reclassified the term loan from non-current to current.
Outstanding principal balances on debt consisted of the following at:
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|
|
|
|
|
|
|
| October 31, 2019 |
| January 31, 2019 | ||
Line of Credit |
| $ | — |
| $ | — |
Term loan |
|
| 3,582,000 |
|
| 4,030,000 |
Total |
|
| 3,582,000 |
|
| 4,030,000 |
Deferred financing cost |
|
| (110,000) |
|
| (82,000) |
Total |
|
| 3,472,000 |
|
| 3,948,000 |
Less: Current portion |
|
| (3,472,000) |
|
| (597,000) |
Non-current portion of debt |
| $ | — |
| $ | 3,351,000 |
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NOTE 5 — CONVERTIBLE PREFERRED STOCK
Redemption of Series A Convertible Preferred Stock
On October 16, 2019, the Company issued 9,473,691 shares of common stock in consideration for aggregate proceeds of $9,663,000 in a private placement transaction. Each share of common stock was sold to the purchasers at $1.02 per share. The proceeds from the sale of common stock were used to redeem all 2,895,464 outstanding shares of Series A Convertible Preferred Stock, which were redeemed for a redemption price equal to $2.00 per share for a total redemption payment of $5,813,000 including $22,000 of direct costs associated with the redemption.
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, net of issuance costs, of $8,686,000 to the fair value of the consideration 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 stockholders 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 the three and nine months ended October 31, 2019.
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|
|
|
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 |
See Note 2 for the Company’s basic and diluted EPS calculations.
NOTE 6 — INCOME TAXES
Income tax expense consists of federal, state and local tax provisions. For the nine months ended October 31, 2019 and 2018, we recorded federal tax expense of zero. For the nine months ended both October 31, 2019 and 2018, we recorded state and local tax expense of $16,000.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Membership agreement to occupy shared office space
In fiscal year 2018, the Company entered into a membership agreement to occupy shared office space in Atlanta, Georgia. Our new 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. As of October 31, 2019, minimum fees due under the shared office arrangement totaled $160,000.
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-year15‑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, and we are obligated to pay on-going quarterly royalty amounts related to future sublicensing of CLG by us.$3,000,000. Additionally, we haveoriginally committed that Montefiore willwould 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
19
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 October 31, 20172019, we had $552,000 in deferred revenues associated with this modified royalty liability. The fair value of the royalty liability as of October 31, 2019 was determined based on the amount payable in cash. As of October 31, 2019 and January 31, 2017,2019, the present value of this royalty liability was $2,456,000$953,000 and $2,351,000,$905,000, respectively.
NOTE 8 — RELATED PARTY TRANSACTIONS
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 |
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 |
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 |
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 |
Senior Term Loan (1) | ||||
2017 | $ | 149,000 | ||
2018 | 597,000 | |||
2019 | 4,030,000 | |||
Total repayments | $ | 4,776,000 |
For the nine months ended
NOTE 89 — SUBSEQUENT EVENTS
We have evaluated subsequent events occurring after October 31, 2017,2019 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.
Loan and Security Agreement 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 Loan and Security Agreement 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 installments of principal, plus monthly payments of accrued interest.
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 can be advanced based upon 80% of eligible accounts receivable, as defined in the Loan and Security Agreement.
Upon closing and funding of the sale of the ECM Business (see below), the Company is required to repay the Term Loan, however, the Company will continue to have access to the Revolving Credit Facility. The Company has classified the prior term loan from Wells Fargo, as current as of October 31, 2019, because of its intent and ability to pay the replacement Term Loan, in full, on or before, a twelve month period extending from the October 31, 2019 balance sheet date.
The Loan and Security Agreement, as amended, includes financial covenants, including requirements that the Company maintain a minimum asset coverage ratio and certain other financial covenants, including requirements that the Company shall not deviate by more than fifteen percent its revenue projections over a trailing three-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 revenue projections. In addition, beginning on December 31, 2019, the Company’s Bank EBITDA, measured on a monthly basis over a trailing three-month period then ended, shall not deviate by the greater of thirty percent its projected Bank EBITDA or $150,000. The agreement also requires the Company to maintain a minimum Asset Coverage Ratio. The Asset Coverage Ratio is determined based on the ratio of unrestricted cash plus certain accounts that arise in the ordinary course the Company’s business divided by all outstanding obligations to the bank. Pursuant to the terms of the new Loan and Security Agreement, the Company is required to maintain a minimum Asset Coverage Ratio of at least 0.75 to 1.00 from December 31, 2019 through November 30, 2020 and a minimum Asset Coverage Ratio of at least 1.50 to 1.00 each month thereafter.
The foregoing discussion regarding the Loan and Security Agreement does not purport to be complete and is qualified in its entirety by reference to the Loan and Security Agreement itself, which has been filed as Exhibit 10.5 to this Quarterly Report on Form 10-Q.
Wells Fargo Credit Agreement. In connection with entering into the Loan and Security Agreement discussed above, the Company terminated the Credit Agreement, dated November 21, 2014, by and among Wells Fargo Bank, National Association, a banking association, as administrative agent for the Lenders (as defined thereunder), the Lenders, the Company, and Streamline Health, Inc., an Ohio corporation and wholly-owned subsidiary of the Company, as amended from time to time, effective December 11, 2019, and repaid all outstanding amounts due thereunder.
Sale of ECM Business. On December 17, 2019, the Company entered into a definitive asset purchase agreement with Hyland Software, Inc. (the “Purchase Agreement”) who is acquiring the assets of and certain identified liabilities of the Company’s ECM Business. The purchase price for the transaction is $16 million, subject to certain adjustments for customer prepayments as set forth in the Purchase Agreement.
The Purchase Agreement and related transactions remain subject to approval of the stockholders of the Company, and is the transaction anticipated to close no later than March 31, 2020.
The foregoing discussion regarding the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement itself, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K, which was filed with the SEC on December 18, 2019.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report and in other materials we file with the Securities and Exchange Commission (“SEC”)SEC or otherwise make public. In this Report, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. In addition, our senior management makes forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue, income, receivables, backlog, client attrition, acquisitions and other growth opportunities, sources of funding operations and acquisitions, the integration of our solutions, the performance of our channel partner relationships, the sufficiency of available liquidity, research and development, and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting
21
undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” set forth in Part II, Item 1A, and the other cautionary statements in other documents we file with the SEC, including the following:
· | competitive products and pricing; |
· | product demand and market acceptance; |
· | entry into new markets; |
· | new product and services development and commercialization; |
· | key strategic alliances with vendors and channel partners that resell our products; |
· | uncertainty in continued relationships with clients due to termination rights; |
· | our ability to control costs; |
· | availability, quality and security of products produced and services provided by third-party vendors; |
· | the healthcare regulatory environment; |
· | potential changes in legislation, regulation and government funding affecting the healthcare industry; |
· | healthcare information systems budgets; |
· | availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems; |
· | the success of our relationships with channel partners; |
· | fluctuations in operating results; |
· | 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; |
· | our ability to complete the sale of the ECM Business; |
· | critical accounting policies and judgments; |
· | changes in accounting policies or procedures as may be required by the FASB or other standard-setting organizations; |
· | changes in economic, business and market conditions impacting the healthcare industry and the markets in which we operate; |
22
· | our ability to maintain compliance with the terms of our credit arrangements; and |
· | our ability to maintain compliance with the continued listing standards of The NASDAQ Capital Market. |
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
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| Three Months Ended |
|
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Systems sales: |
|
|
|
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|
|
|
|
|
|
|
|
|
Proprietary software - perpetual license |
| $ | 636 |
| $ | — |
| $ | 636 |
| 100 | % |
|
Term license |
|
| — |
|
| 231 |
|
| (231) |
| (100) | % |
|
Hardware and third-party software |
|
| 32 |
|
| 78 |
|
| (46) |
| (59) | % |
|
Professional services |
|
| 626 |
|
| 577 |
|
| 49 |
| 8 | % |
|
Audit services |
|
| 517 |
|
| 234 |
|
| 283 |
| 121 | % |
|
Maintenance and support |
|
| 2,827 |
|
| 3,051 |
|
| (224) |
| (7) | % |
|
Software as a service |
|
| 1,150 |
|
| 1,198 |
|
| (48) |
| (4) | % |
|
Total Revenues |
| $ | 5,788 |
| $ | 5,369 |
| $ | 419 |
| 8 | % |
|
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|
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|
|
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| Nine Months Ended |
|
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
System sales: |
|
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|
|
|
|
|
|
|
|
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|
|
Proprietary software - perpetual license |
| $ | 936 |
| $ | 1,243 |
| $ | (307) |
| (25) | % |
|
Term license |
|
| 27 |
|
| 397 |
|
| (370) |
| (93) | % |
|
Hardware and third-party software |
|
| 83 |
|
| 187 |
|
| (104) |
| (56) | % |
|
Professional services |
|
| 1,615 |
|
| 1,086 |
|
| 529 |
| 49 | % |
|
Audit services |
|
| 1,266 |
|
| 841 |
|
| 425 |
| 51 | % |
|
Maintenance and support |
|
| 8,537 |
|
| 9,577 |
|
| (1,040) |
| (11) | % |
|
Software as a service |
|
| 3,474 |
|
| 3,570 |
|
| (96) |
| (3) | % |
|
Total Revenues |
| $ | 15,938 |
| $ | 16,901 |
| $ | (963) |
| (6) | % |
|
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 October 31, 20172019 increased by $59,000 over the prior comparable period due to improved sales of our CDI solution in the third quarter of fiscal 2017. Proprietary software revenue recognized$636,000 and decreased by $307,000 for the nine months ended October 31, 2017 decreased by $791,0002019, over the prior comparable period.periods. As previously reported, perpetual license sales are less predictable, from a timing standpoint, than other solutions sold by the Company. 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 license revenue for the nine months ended October 31, 20172019 is attributable to a large perpetual license sale of our Abstracting™ solution in the first quarter of fiscal year 2018. The Company is able to influence sales of these products; however, the timing can be difficult to manage as sales result from our distribution partners or, from existing customers adding licenses. Accordingly, we have less control over the timing of contract close for perpetual licenses. Term license revenue recognized for the three and nine months ended October 31, 2019 decreased by $231,000 and $370,000, respectively, over the prior comparable period is primarilyperiods due to the expiration of one Clinical Analytics contract and the reduction of license fees on a separate Clinical Analytics contract.lost customers.
Hardware and third-party software — Revenue from hardware and third-party software sales for the three and nine months ended October 31, 20172019 decreased by $12,000$46,000 and $174,000,$104,000, respectively, over the prior comparable periods.
23
Fluctuations from period to period are a function of client demand.
Professional services — For the three-month periodthree and nine-month periods ended October 31, 2017,2019, revenues from professional services increased by $171,000$49,000 and $529,000, respectively, from the prior comparable period.periods. This increase in professional services revenue is primarily due to the timing of completion of a software version upgrade by a customerseveral, large, professional services agreements. The Company had previously re-assigned certain professional staff to support the success of our Streamline Health® Enterprise Content Management™ (“ECM”) solution and partially offsetseValuator. However, the decreaseCompany was able to return these staff to billable projects in revenuesthe first quarter of fiscal year 2019, resulting in higher professional services revenue for the nine-month periodthree and nine-months ended October 31, 2017, which resulted primarily from2019 over the sale of our Patient Engagement suite of solutions in the fourth quarter of fiscal 2016, as well as cancellations by two customers of our Streamline Health® Financial Management™ solution (“Financial Management”).prior comparable period.
Audit services — Audit services revenue recognized for the three and nine months ended October 31, 20172019 increased by $46,000$283,000 and $685,000,$425,000, 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.2018, and that higher demand has continued through the first nine months of 2019. 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 provided by the Company. The Company continues to expect higher volumes of audit services throughout the remainder of 2019.
Maintenance and support — Revenue from maintenance and support for the three and nine months ended October 31, 20172019 decreased by $500,000$224,000 and $1,354,000,$1,040,000, respectively, fromover the prior comparable periods. These decreases wereThe decrease is primarily
Software as a Service (SaaS) — Revenue from SaaS for the three and nine months ended October 31, 20172019 decreased by $559,000$48,000 and $96,000, respectively from the prior comparable period.periods. This decrease resulted primarily from cancellations by a few customers of our Financial Management and ECM solutions,legacy products, primarily our financial management software. The growth in eValuator revenue overcame a portion of the revenue loss from financial management. The Company is expecting net revenue growth as well as the saleeValuator is expected to overcome any loss of our Patient Engagement suite of solutionsrevenue from financial management software in the fourthfirst quarter of fiscal 2016.year 2020. The Company expects the recent bookings of eValuator to positively impact revenue into the first quarter of fiscal year 2020.
Cost of Sales
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|
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| Three Months Ended |
|
|
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|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of systems sales |
| $ | 135 |
| $ | 223 |
| $ | (88) |
| (39) | % |
|
Cost of professional services |
|
| 493 |
|
| 675 |
|
| (182) |
| (27) | % |
|
Cost of audit services |
|
| 325 |
|
| 323 |
|
| 2 |
| 1 | % |
|
Cost of maintenance and support |
|
| 453 |
|
| 506 |
|
| (53) |
| (10) | % |
|
Cost of software as a service |
|
| 356 |
|
| 207 |
|
| 149 |
| 72 | % |
|
Total cost of sales |
| $ | 1,762 |
| $ | 1,934 |
| $ | (172) |
| (9) | % |
|
24
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, 2019 |
| October 31, 2018 |
| Change |
| % Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of system sales |
| $ | 391 |
| $ | 763 |
| $ | (372) |
| (49) | % |
Cost of professional services |
|
| 1,616 |
|
| 2,079 |
|
| (463) |
| (22) | % |
Cost of audit services |
|
| 949 |
|
| 1,017 |
|
| (68) |
| (7) | % |
Cost of maintenance and support |
|
| 1,275 |
|
| 1,720 |
|
| (445) |
| (26) | % |
Cost of software as a service |
|
| 936 |
|
| 805 |
|
| 131 |
| 16 | % |
Total cost of sales |
| $ | 5,167 |
| $ | 6,384 |
| $ | (1,217) |
| (19) | % |
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 | )% |
The decrease in overall cost of sales for the three and nine months ended October 31, 20172019 from the comparable prior periods is primarily due to the reduction in depreciation and amortization of capitalized software costs as a result of a few assets becoming fully amortized, as well as a reduction in client support personnel costs. As previously disclosed, the saleCompany has lower depreciation and amortization due to certain assets being fully amortized and impairments of our Patient Engagement suite of solutions incertain assets from previous quarters. Further, for the fourththird quarter of fiscal 2016. In addition,year 2019, the decrease in overall cost of sales for the three months ended October 31, 2017 from the comparable prior period is further attributed to theCompany had a net reduction in audit services personnel costs following the acquisitioncapitalized software development amortization expense of Opportune IT in September 2016.
Cost of systemssystem sales includes amortization and impairment of capitalized software expenditures royalties, and the cost of third-party hardware and software. The decrease in expense for the three-three and nine-month periods ended October 31, 20172019 from the comparable prior periods was primarily due to the reduction in amortization of capitalized software costs as a result of the sale ofassets becoming fully amortized, including 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-three and nine-month periods from the prior comparable periods is primarily due to the increasedecrease in professional services related to SaaS and term licenses,implementations, for which costs are deferred and amortized ratably over the initial contract term,estimated life of the SaaS customer relationship. The Company is benefiting from the effort required to implement SaaS related engagements as wellcompared to the legacy on-premise software implementations. On-premise implementations, as was the decrease in personnel costs.
The cost of audit services includes compensation and benefits for audit services personnel, and related expenses. The increase in the cost associated with the three-month period ended October 31, 2019 is related to the increased volumes (and increased revenue) from the comparable period a year ago. The decrease in expense for the nine-month period ended October 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, 20172019 is attributed to the reduction in associatepersonnel. The Company’s audit services personnel utilize eValuator and contractor costs from synergies resulting fromit is believed that the full integration of 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. The decrease in expense for the three- and nine-month periods ended October 31, 2019 was primarily due to a decrease in third-party maintenance contracts costs and personnel costs and isa reduction in linethird-party maintenance contracts. The lower cost associated with these reductions are expected to benefit the decrease in the associated maintenanceremainder of fiscal year 2019, and support revenue.
The cost of SaaS solutions is relatively fixed, subject to inflation for the goods and services it requires. The decrease inexpense for the three- and nine-month periods ended October 31, 2019 was slightly higher, as a result of higher amortization cost of capitalized software development, as compared to the previous periods. This is a different trend from the prior comparable periods was primarily related toCompany’s capitalized software development amortization trends overall, and for the Company’s other product categories. The higher amortization for the Company’s SaaS products (the different trend) is a reduction in personnel costs, asresult of the amount of investment that the Company is putting into its newest product, eValuator.
25
Selling, General and Administrative Expense
|
|
|
|
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|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
General and administrative expenses |
| $ | 1,609 |
| $ | 1,613 |
| $ | (4) |
| (0) | % |
|
Sales and marketing expenses |
|
| 1,191 |
|
| 779 |
|
| 412 |
| 53 | % |
|
Total selling, general, and administrative expense |
| $ | 2,800 |
| $ | 2,392 |
| $ | 408 |
| 17 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
| |||
General and administrative expenses |
| $ | 4,869 |
| $ | 5,314 |
| $ | (445) |
| (8) | % |
Sales and marketing expenses |
|
| 2,876 |
|
| 2,846 |
|
| 30 |
| 1 | % |
Total selling, general, and administrative expense |
| $ | 7,745 |
| $ | 8,160 |
| $ | (415) |
| (5) | % |
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 | )% |
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 monthsnine-months ended October 31, 20172019 from the comparable prior periods wasis primarily dueattributed to a reduction in personnelfacility costs, stockbad debt expense and amortization of intangible assets. The Company continues to realize a benefit from lower facility costs as compared to the same period in the prior year. In the third quarter of fiscal year 2019, however, some of those savings were absorbed by higher share-based compensation, costs for professional services (financial and legal), and certain transaction costs. We previously disclosed the Company’s reduction in facility costs due to relocation of the corporate headquarters in Atlanta, Georgia and subleasing of the New York City office. The Company expects to continue to see less of this benefit in comparison to prior years, as the costs in the prior year were beginning to be realized, and the Company continues to expect higher share-based compensation and severance expense, as well as a reduction in professional fees for accounting 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 decreaseincrease in sales and marketing expenses include several factors that have been previously reported by the Company, including (i) the appointment of the Company’s Chief Revenue Officer, a senior-level sales operations leader, and additional members of the Company’s Advisory Board, , (ii) payments to sales agents, and (iii) costs related to the share-based compensation expense forincurred in connection with the threeappointments referenced in (i), each of which resulted in additional expenses not incurred in prior periods. The Company has re-focused its sales and nine months ended October 31, 2017 from the comparable prior periods was primarily duemarketing dollars. The targeted and focused approach has resulted in dollars that have a higher return. Higher levels of sales and marketing costs should be expected as we continue to a reduction in stock compensation and severance expense.
Research and Development
|
|
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|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Research and development expense |
| $ | 726 |
| $ | 1,026 |
| $ | (300) |
| (29) | % |
|
Plus: Capitalized research and development cost |
|
| 852 |
|
| 759 |
|
| 93 |
| 12 | % |
|
Total research and development cost |
| $ | 1,578 |
| $ | 1,785 |
| $ | (207) |
| (12) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
|
|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Research and development expense |
| $ | 2,385 |
| $ | 3,302 |
| $ | (917) |
| (28) | % |
|
Plus: Capitalized research and development cost |
|
| 2,730 |
|
| 2,288 |
|
| 442 |
| 19 | % |
|
Total research and development cost |
| $ | 5,115 |
| $ | 5,590 |
| $ | (475) |
| (8) | % |
|
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 | )% |
Research and development cost consistsconsist primarily of compensation and related benefits, the use of independent contractors for specific near-term development projects, and an allocated portion of general overhead costs, including occupancy. The decrease in totaloccupancy expense. Total research and
26
development cost for the three- and nine-month periods ended October 31, 20172019 was consistent with that from the prior comparable periods is primarily dueperiods. The Company has started an initiative to a reduction in development personnel headcount and consultant fees and $366,000 inreduce its research and development tax credits awardedcosts as it focuses on the middle of the revenue cycle products, and no longer focuses on certain legacy products. The Company continues to evaluate the need for a flatter organization within engineering and to increase velocity and value in the core products offered by the State of GeorgiaCompany. The Company is spending fewer dollars on maintenance for its legacy products from its engineering group as these products have attained maturity in fiscal 2017. Research and development expenses forthe marketplace. For the nine months ended October 31, 20172019 and 2016,2018, as a percentage of revenues, total research and development costs were 22%32% and 28%33%, respectively.
Executive transition cost
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| Three Months Ended |
|
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|
| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
| |||
Executive transition cost |
| $ | 481 |
| $ | — |
| $ | 481 |
| 100 | % |
|
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| Nine Months Ended |
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
| |||
Executive transition cost |
| $ | 621 |
| $ | — |
| $ | 621 |
| 100 | % |
We recorded $481,000 in cost related to replacing the Company’s CEO in the third quarter of fiscal year 2019. These costs, which include placement fees, retention bonuses for existing key personnel and certain required consulting costs are expected to total $800,000 for fiscal year 2019. Each of these costs are directly attributable to the successful placement of our new CEO with the Company.
Loss on exit of operating lease
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| Three Months Ended |
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(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Loss on exit of operating lease |
| $ | — |
| $ | 562 |
| $ | (562) |
| (100) | % |
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| Nine Months Ended |
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Loss on exit of operating lease |
| $ | — |
| $ | 1,368 |
| $ | (1,368) |
| (100) | % |
|
In an effort to reduce our operating expenses, we closed our New York office in the second quarter of fiscal year 2018 and subleased the office space for the remaining period of the original lease term, which ends in November 2019. As a result of vacating and subleasing the office, we recorded a $1,368,000 loss on exit of the operating lease in the nine months ended October 31, 2018, which captures the net cash flows associated with the vacated premises, including receipts of rent from our sublessee, and the loss incurred on the disposals of fixed assets.
Other Expense
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| Three Months Ended |
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
|
| |||
Interest expense |
| $ | (91) |
| $ | (106) |
| $ | 15 |
| (14) | % |
|
Miscellaneous expense |
|
| (80) |
|
| (25) |
|
| (55) |
| 220 | % |
|
Total other expense |
| $ | (171) |
| $ | (131) |
| $ | (40) |
| 31 | % |
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| Nine Months Ended |
|
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| ||||
(in thousands): |
| October 31, 2019 |
| October 31, 2018 |
| Change |
| % Change |
| |||
Interest expense |
| $ | (239) |
| $ | (332) |
| $ | 93 |
| 28 | % |
Miscellaneous expense |
|
| (224) |
|
| (118) |
|
| (106) |
| (90) | % |
Total other expense |
| $ | (463) |
| $ | (450) |
| $ | (13) |
| 3 | % |
27
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 | % |
Interest expense consists of interest and commitment fees on the line of credit, interest on the term loans,loan, and is inclusive of deferred financing cost amortization expense. Interest expense decreased for the three and nine months ended October 31, 20172019 from the prior comparable period primarily due to the expirationincrease in capitalized interest on our internally developed software. The higher miscellaneous expense for the three and nine-month periods ended October 31, 2019 are a direct result of two capital leasea one-time finance cost associated with our work to refinance the Company’s debt arrangements. The increaseCompany incurred costs in interestconnection with the refinancing of the debt arrangements, as well as ongoing costs in connection with its existing debt arrangements. The costs include consulting, legal and administrative cost of the lender associated with the refinancing. On a quarterly basis, the Company records the valuation adjustment to the Montefiore liability (See Note 7 to consolidated financial statements) through miscellaneous expense.
Provision for Income Taxes
We recorded tax expense for the three months ended October 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-2019 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 Statements presented on a GAAP basis in this quarterly report on Form 10-Q10‑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.
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We define: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, transaction expenses and other expenses that do not relate to our core operations; (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing our operating performance consistently 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: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 and valuation adjustments to assets and liabilities, which is anotherare non-cash item.items. 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 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
28
expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance. The lender under our Credit Agreement requires delivery of compliance reportscertificates 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 quarterly report on Form 10-Q,10‑Q, have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA, and its variations are:
· | EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
· | EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
· | EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement; |
· | EBITDA does not reflect income tax payments that we may be required to make; and |
· | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. |
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encourage readers to review the GAAP financial statements included elsewhere in this quarterly report on Form 10-Q,10‑Q, 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 Statements included elsewhere in this quarterly report on Form 10-Q.
The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net loss, athe most comparable GAAP-based measure, as well as Adjusted EBITDA per diluted share to net loss per diluted share. 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 our 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
29
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.
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| Three Months Ended |
| Nine Months Ended |
| ||||||||
In thousands, except per share data |
| October 31, 2019 |
| October 31, 2018 |
| October 31, 2019 |
| October 31, 2018 |
| ||||
Adjusted EBITDA Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (164) |
| $ | (678) |
| $ | (459) |
| $ | (2,768) |
|
Interest expense |
|
| 91 |
|
| 106 |
|
| 239 |
|
| 332 |
|
Income tax expense |
|
| 12 |
|
| 2 |
|
| 16 |
|
| 5 |
|
Depreciation |
|
| 37 |
|
| 87 |
|
| 113 |
|
| 411 |
|
Amortization of capitalized software development costs |
|
| 227 |
|
| 249 |
|
| 644 |
|
| 895 |
|
Amortization of intangible assets |
|
| 138 |
|
| 235 |
|
| 424 |
|
| 705 |
|
Amortization of other costs |
|
| 45 |
|
| 101 |
|
| 150 |
|
| 294 |
|
EBITDA |
|
| 386 |
|
| 102 |
|
| 1,127 |
|
| (126) |
|
Share-based compensation expense |
|
| 290 |
|
| 125 |
|
| 719 |
|
| 492 |
|
Loss on disposal of fixed assets |
|
| — |
|
| 7 |
|
| — |
|
| 5 |
|
Non-cash valuation adjustments to assets and liabilities |
|
| 16 |
|
| 15 |
|
| 48 |
|
| 71 |
|
Other non-recurring operating expenses |
|
| 481 |
|
| 562 |
|
| 562 |
|
| 1,368 |
|
Other non-recurring expenses |
|
| 131 |
|
| — |
|
| 205 |
|
| — |
|
Adjusted EBITDA |
| $ | 1,304 |
| $ | 811 |
| $ | 2,661 |
| $ | 1,810 |
|
Adjusted EBITDA margin (1) |
|
| 23 | % |
| 15 | % |
| 17 | % |
| 11 | % |
|
|
|
|
|
|
|
|
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|
|
Adjusted EBITDA per Diluted Share Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share — diluted |
| $ | 0.22 |
| $ | (0.03) |
| $ | (0.02) |
| $ | (0.14) |
|
Adjusted EBITDA per adjusted diluted share (2) |
| $ | 0.05 |
| $ | 0.04 |
| $ | 0.11 |
|
| 0.08 |
|
Diluted weighted average shares (3) |
|
| 21,598,146 |
|
| 19,655,882 |
|
| 20,435,055 |
|
| 19,495,745 |
|
Includable incremental shares — adjusted EBITDA (4) |
|
| 2,736,075 |
|
| 2,971,381 |
|
| 2,976,967 |
|
| 3,033,263 |
|
Adjusted diluted shares |
|
| 24,334,221 |
|
| 22,627,263 |
|
| 23,412,022 |
|
| 22,529,008 |
|
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 |
(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. |
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-K10‑K for the fiscal year ended January 31, 2017.2019. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K10‑K for the fiscal year ended January 31, 2017.2019, except as described in Note 2, Correction of Immaterial Errors, and below.
We adopted ASC 842 on February 1, 2019 using the effective date transition method. This method requires us to recognize an adoption impact as a cumulative-effect adjustment to the February 1, 2019 retained earnings balance. Prior period balances were not adjusted upon adoption this standard. The standard requires that leased assets and
30
corresponding lease liabilities be recognized within the consolidated balance sheets as right-to-use assets and operating or financing lease liabilities. Please refer to Note 3, “Leases”, to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10‑Q for additional information regarding the impact of adoption.
Liquidity and Capital Resources
Our 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. Our primary cash requirements include regular payment of payroll and other business expenses, capital expenditures, and principal and interest payments on debt and capital expenditures.debt. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center. Operations are funded with cash generated by operations and borrowings under our credit facilities.arrangements. The Company believes that cash flows from operations and available credit facilitiesarrangements are adequate to fund current obligations for the next twelve months. Cash and cash equivalent balances at October 31, 20172019 and January 31, 20172019 were $1,892,000$1,220,000 and $5,654,000,$2,376,000, respectively. The decrease in cash during the current fiscal period wasis primarily the result of significant payments made towardsnormal seasonality on the timing of our debtlarge maintenance invoices that are invoiced to customers and interest thereon, as well as payroll and accounts payable. Continued expansion may requirepaid in the Company to take onfourth quarter every year. See additional debt or raise capital through issuance of equities, or a combination of both.discussion below. There can be no assurance the Company will be able to raise the capital required to fund further expansion.
As discussed in Note 9, in connection with entering into the Loan and Security Agreement, the Company hasterminated the Credit Agreement, effective December 11, 2019, and repaid all outstanding amounts due thereunder. Prior to its termination, the Company had liquidity through the Credit Agreement, which is described in more detail in Note 54 to our condensed consolidated financial statements included herein. The Company’s primary operating subsidiary has a $5,000,000 revolving line of credit that has not been drawn upon as of the date of this report. In order to draw upon the revolving line of credit, the Company’s primary operating subsidiary mustwas required to comply with customary information delivery and 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 has continuing liquidity through its new Loan and Security Agreement entered into on December 11, 2019 with Bridge Bank, a measurementdivision of Western Alliance Bank, consisting of a $4,000,000 new Term Loan and a $2,000,000 new Revolving Credit Facility, see Note 9. 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 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 Loan and Security Agreement 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 installments of principal, plus monthly payments of accrued interest. 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 Line of Credit Facility can be advanced based upon 80% of eligible accounts receivable, as defined in the Loan and Security Agreement.
The Loan and Security Agreement, as amended, includes financial covenants, including requirements that is similar tothe Company maintain a minimum asset coverage ratio and certain other financial covenants, including requirements that the Company shall not deviate by more than fifteen percent its revenue projections over a trailing three-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 revenue projections. In addition, beginning on December 31, 2019, the Company’s Adjusted EBITDA, measured on a non-GAAP financial measure described above.monthly basis over a trailing three-month period then ended, shall not deviate by the greater of thirty percent its projected Adjusted EBITDA or $150,000. The agreement also requires the Company to maintain a minimum Asset Coverage Ratio. The Asset Coverage Ratio is determined based on the ratio of unrestricted cash plus certain accounts that arise in the ordinary course the Company’s business divided by all outstanding obligations to the bank. Pursuant to the terms of the new Loan and Security Agreement, the Company is required to maintain a minimum EBITDA level for the four-quarter period ended OctoberAsset Coverage
31
Ratio of at least 0.75 to 1.00 from December 31, 2017 was $(1,000,000).
The Company was in compliance with theits applicable loan covenants at October 31, 2017. Based upon2019. As of October 31, 2019, there were no outstanding borrowings under its line of credit.
Upon closing and funding of the borrowing base formula set forth insale of the ECM Business (see below), the Company is required to repay the Term Loan; however, the Company will continue to have access to the Revolving Credit Agreement,Facility. The Company has classified the prior term loan from Wells Fargo, as current as of October 31, 2017,2019, because of its intent and ability to repay the replacement Term Loan, in full, on or before, a twelve-month period extending from the October 31, 2019 balance sheet date.
As discussed in Note 9, the Company had accesssigned a definitive agreement to sell its legacy ECM business to and plans to use the full amountproceeds of the $5,000,000 revolving linesale 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 credit.
Significant cash obligations
|
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|
|
(in thousands) |
| October 31, 2019 |
| January 31, 2019 |
| ||
Term loan (1) |
| $ | 3,472 |
| $ | 3,948 |
|
Royalty liability (2) |
|
| 953 |
|
| 905 |
|
(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 |
(1) | Term loan balance is reported net of deferred financing costs of $110,000 and $82,000 as of October 31, 2019 and January 31, 2019, respectively. See Note |
(2) | See Note |
Operating cash flow activities
|
|
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|
|
|
|
|
|
| Nine Months Ended |
| ||||
(in thousands) |
| October 31, 2019 |
| October 31, 2018 |
| ||
Net loss |
| $ | (459) |
| $ | (2,768) |
|
Non-cash adjustments to net loss |
|
| 2,031 |
|
| 4,270 |
|
Cash impact of changes in assets and liabilities |
|
| (2,547) |
|
| (2,210) |
|
Net cash provided by operating activities |
| $ | (975) |
| $ | (708) |
|
(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 | ) |
The increasedecrease in net cash usedprovided by operating activities is due to the use of cash by the Company to pay liabilities associated with restructuring the office spaces in fiscal year 2018. Accrued expenses are lower collectionsby approximately $400,000 in the nine-month period ended October 31, 2017 over the prior comparable period, primarily attributable to a larger perpetual license sale of our abstracting solution in the second quarter2019 compared with end of fiscal 2016.
Our typical clients are well-established hospitals, medical facilities and major health information system companies that resell our solutions, which generally have had good credit and payment histories for the industry. However, some healthcare organizations have recently experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the liquidity for some of our clients.
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The Company has large maintenance contracts that renew in its fourth quarter each year. The use of cash from operations has been a historical trend, that has continued for fiscal year 2019. The Company expects these maintenance agreements to be invoiced and collected similarly to years past, and, accordingly, the fourth quarter of fiscal year 2019, is expected to show a substantial cash inflow.
Investing cash flow activities
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
(in thousands) |
| October 31, 2019 |
| October 31, 2018 |
| ||
Purchases of property and equipment |
| $ | (51) |
| $ | (21) |
|
Proceeds from sales of property and equipment |
|
| — |
|
| 20 |
|
Capitalized software development costs |
|
| (2,730) |
|
| (2,288) |
|
Net cash used in investing activities |
| $ | (2,781) |
| $ | (2,289) |
|
(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 | ) |
The increase in cash used for investing activities was higher in the nine months ended October 31, 2016 compared to2019 over the current yearprior comparable period is primarily asthe result of the acquisition of Opportune ITincrease in September 2016.
Financing cash flow activities
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
(in thousands) |
| October 31, 2019 |
| October 31, 2018 |
| ||
Proceeds from issuance of common stock |
| $ | 9,663 |
| $ | — |
|
Payments for costs directly attributable to the issuance of common stock |
|
| (681) |
|
| — |
|
Principal payments on term loan |
|
| (448) |
|
| (448) |
|
Payments related to settlement of employee shared-based awards |
|
| (50) |
|
| (62) |
|
Redemption of Series A Convertible Preferred Stock |
|
| (5,791) |
|
| — |
|
Fees paid for redemption of Series A Convertible Preferred Stock |
|
| (22) |
|
| — |
|
Payment of deferred financing costs |
|
| (73) |
|
| — |
|
Other |
|
| 2 |
|
| 31 |
|
Net cash provided by financing activities |
| $ | 2,600 |
| $ | (479) |
|
(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 | ) |
The decreaseincrease in cash used inprovided by financing activities in the nine months ended October 31, 2017 over2019 as compared to the prior year period was primarily the result of higher prepayments towardsissuance of 9,473,691 shares of common stock in consideration for aggregate proceeds of $9,663,000 in a private placement transaction offset by the redemption of all outstanding Series A Preferred Stock. See Note 5 for further discussion of the redemption of our term loan in fiscal 2016, as well as the termination of two capital leases, one during the third quarter of fiscal 2016 and another in the third quarter of fiscal 2017.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that there is reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e)13a‑15(e) and 15d-15(e)15d‑15(e). In designing and evaluating the disclosure controls and procedures, management
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recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, projections of any evaluation of effectiveness of our disclosure controls and procedures to future periods are subject to the risk that controls or procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls or procedures may deteriorate.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
We have advised our Audit Committee of a material weakness in our internal control over financial reporting. The weakness relates to the Company’s accounting for amortization expenses for (i) certain software projects underlying its “Capitalized Software Development costs” by not timely amortizing projects that were completed, and (ii) the application of GAAP on amortization of all the capitalized software development costs, as more thoroughly discussed in Note 2 and below, which resulted in the asset not being appropriately amortized and, accordingly, the corresponding amortization expenses and net Capitalized Software Development costs balance not being correct in the Company’s consolidated financial statements for fiscal years 2017 and 2018 and the first half of fiscal year 2019.
Changes in Internal Control over Financial Reporting
The Company has taken the following actions during the fiscal fourth quarter of 2019 in an attempt to remediate the material weakness described above; (i) implementing a number of additional policies and procedures (ii) improving the communication between the accounting and engineering departments through required meetings (iii) supervisory review of projects to ensure compliance with the new policies and procedures and (iv) periodic reporting to more effectively monitor the status of projects. The additional policies and procedures include but are not limited to; (a) guidelines on completing projects within two sprints under the Company’s processes for engineering, (b) assignment of accountability, and (c) strict policies around placing projects on temporary “HOLD.”
The Company adopted ASC 842 on February 1, 2019, which required management to make changes to our policies and processes and to implement new or modify existing internal controls over financial reporting. This included modifications to our existing internal controls over contract reviews and new controls related to the enhanced disclosure requirements.
Except as set forth above, there were no materialother changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are, from time to time, a party to various legal proceedings and claims, which arise in the ordinary course of business. We are not aware of any legal matters that could have a material adverse effect on the Company’s condensed consolidated results of operations, financial position, or cash flows.
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Item 1A. RISK FACTORS
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our sales have been concentrated in a small number of clients.
Our revenues have been concentrated in a relatively small number of large clients, and we have historically derived a substantial percentage of our total revenues from a few clients. For theboth fiscal years ended January 31, 20172019 and 2016,2018, our five largest clients accounted for 30% and 28%29% 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 material adverse effect on our business, financial condition and results of operations.
A significant increase in new SaaS contracts could reduce near term profitability and require a significant cash outlay, which could adversely affect near term cash flow and financial flexibility.
If new or existing clients purchase significant amounts of our SaaS services, we may have to expend a significant amount of initial setup costs and time before those new clients are able to begin using such services, and we cannot begin to recognize revenues from those SaaS agreements until the commencement of such services. Accordingly, we anticipate that our near term cash flow, revenue and profitability may be adversely affected by significant incremental setup costs from new SaaS clients that would not be offset by revenue until new SaaS clients go into production. While we anticipate long-term growth in profitability through increases in recurring SaaS subscription fees and significantly improved profit visibility, any inability to adequately finance setup costs for new SaaS solutions could result in the failure to put new SaaS solutions into production, and could have a material adverse effect on our liquidity, financial position and results of operations. In addition, this near term cash flow demand could adversely impact our financial flexibility and cause us to forego otherwise attractive business opportunities or investments.
Our eValuator platform, coding audit services and associated software and technologies represent a relatively new market for the Company, and we may not see the anticipated market interest or growth due to being a new player in the industry.
The Company is currently investing in the eValuator platform as well as in new software-based technologies relating to high automation and machine-based analytics regarding a client’s coding audit process. These technologies have previously been used solely for internal purposes and have not been commercialized. The return on this investment requires that the product developments arecontinue to be defined and completed in a timely and cost-effective manner, there isremains general interest in the marketplace (for both existing and future clients) for this technology, the demand for the product generates sufficient revenue in light of the development costs and that the Company is able to execute anda successful product launch for these technologies. If the Company is unable to meet these requirements when launching these technologies, or if there is a delay in the launch process, the Company may not see an increase in revenue to offset the current development costs or otherwise translate to added growth and revenue for the Company.
Clients may exercise termination rights within their contracts, which may cause uncertainty in anticipated and future revenue streams.
The Company generally does not allow for termination of a client’s agreement except at the end of the agreed upon term or for cause. However, certain of the Company’s client contracts provide that the client may terminate the contract without cause prior to the end of the term of the agreement by providing written notice, sometimes with relatively short notice periods. The Company also provides trial or evaluation periods for certain clients, especially for new products and services. Furthermore, there can be no assurance that a client will not cancel all or any portion of an agreement, even without an express early termination right. And, the Company may face additional costs or hardships collecting on
35
amounts owed if a client terminates an agreement without such a right. Whether resulting from termination for cause or the limited termination for
Changes in healthcare regulations impacting coding, payers and other aspects of the healthcare regulatory cycle could have substantial impact on our financial performance, growth and operating costs.
Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. Unanticipated regulatory changes could materially impact the need for and/or value of our solutions. For example, if governmental or other third-party payors materially reduce reimbursement rates or fail to reimburse our clients adequately, our clients may suffer adverse financial consequences. Changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could also directly impact the capabilities our solutions and services provide and the pricing arrangements we are required to offer to be competitive in the market. Similarly, the U.S. Congress may adopt legislation that may change, override, conflict with or preempt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information and/or impact the value of the functionality our products and services provide.
These situations would, in turn, reduce the demand for our solutions or services and/or the ability for a client to purchase our solutions or services. This could have a material impact on our financial performance. In addition, the speed with which the Company can respond to and address any such changes when compared with the response of other companies in the same market (especially companies who may accurately anticipate the evolving healthcare industry structure and identify unmet needs) are important competitive factors. If the Company is not able to address the modifications in a timely manner compared with our competition, that may further reduce demand for our solutions and services.
The potential impact on us of new or changes in existing federal, state and local regulations governing healthcare information could be substantial.
Healthcare regulations issued to date have not had a material adverse effect on our business. However, we cannot predict the potential impact of new or revised regulations that have not yet been released or made final, or any other regulations that might be adopted. The U.S. Congress may adopt legislation that may change, override, conflict with or preempt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information. Although the features and architecture of our existing solutions can be modified, it may be difficult to address the changing regulation of healthcare information.
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the group purchasing business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our solutions and services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry, as well as our ability to increase the number of solutions that we sell to our clients. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operation and, ultimately, the operating funds of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as any increased
36
regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications to our solutions and services, or result in delays or cancellations of orders or reduce funds and demand for our solutions and services.
Our clients derive a substantial portion of their revenue from third-party private and governmental payors, including through Medicare, Medicaid and other government-sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. If governmental or other third-party payors materially
We face significant competition, including from companies with significantly greater resources.
We currently compete with many other companies for the licensing of similar software solutions and related services. Several companies historically have dominated the clinical information systems software market and several of these companies have either acquired, developed or are developing their own content management, analytics and coding/clinical documentation improvement solutions, as well as the resultant workflow technologies. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Many of these companies are larger than us and have significantly more resources to invest in their business. In addition, information and document management companies serving other industries may enter the market. Suppliers and companies with whom we may establish strategic alliances also may compete with us. Such companies and vendors may either individually, or by forming alliances excluding us, place bids for large agreements in competition with us. A decision on the part of any of these competitors to focus additional resources in any one of our three solutions stacks (content management, analytics and coding/clinical documentation improvement), workflow technologies and other markets addressed by us could have a material adverse effect on us.
The healthcare industry is evolving rapidly, which may make it more difficult for us to be competitive in the future.
The U.S. healthcare system is under intense pressure to improve in many areas, including modernization, universal access and controlling skyrocketing costs of care. We believe that the principal competitive factors in our market are client recommendations and references, company reputation, system reliability, system features and functionality (including ease of use), technological advancements, client service and support, breadth and quality of the systems, the potential for enhancements and future compatible solutions, the effectiveness of marketing and sales efforts, price and the size and perceived financial stability of the vendor. In addition, we believe that the speed with which companies in our market can anticipate the evolving healthcare industry structure and identify unmet needs is an important competitive factor. If we are unable to keep pace with changing conditions and new developments, we will not be able to compete successfully in the future against existing or potential competitors.
Rapid technology changes and short product life cycles could harm our business.
The market for our solutions and services is characterized by rapidly changing technologies, regulatory requirements, evolving industry standards and new product introductions and enhancements that may render existing solutions obsolete or less competitive. As a result, our position in the healthcare information technology market could change rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend, in part, upon our ability to enhance our existing solutions and services and to develop and introduce new solutions and services to meet changing requirements. Moreover, competitors may develop competitive products that could adversely affect our operating results. We need to maintain an ongoing research and development program to continue to develop new solutions and apply new technologies to our existing solutions but may not have sufficient funds with which to undertake such required research and development. If we are not able to foresee changes or to react in a timely manner to such developments, we may experience a material, adverse impact on our business, operating results and financial condition.
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Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our solutions and services.
Our intellectual property, which represents an important asset to us, has some protection against infringement through copyright and trademark law. We generally have little patent protection on our software. We rely upon license agreements, employment agreements, confidentiality agreements, nondisclosure agreements and similar agreements to maintain the confidentiality of our proprietary information and trade secrets. Notwithstanding these precautions, others may copy, reverse engineer or independently design technology similar to our solutions. If we fail to protect adequately our intellectual property through trademarks and copyrights, license agreements, employment agreements, confidentiality agreements, nondisclosure agreements or similar agreements, our intellectual property rights may be misappropriated by others, invalidated or challenged, and our competitors could duplicate our technology or may otherwise limit any competitive technology advantage we may have. It may be necessary to litigate to enforce or defend our proprietary technology or to determine the validity of the intellectual property rights of others. Any litigation, successful or unsuccessful, may result in substantial cost and require significant attention by management and technical personnel.
Due to the rapid pace of technological change, we believe our future success is likely to depend upon continued innovation, technical expertise, marketing skills and client support and services rather than on legal protection of our
We could be subjected to claims of intellectual property infringement that could be expensive to defend.
While we do not believe that our solutions and services infringe upon the intellectual property rights of third parties, the potential for intellectual property infringement claims continually increases as the number of software patents and copyrighted and trademarked materials continues to rapidly expand. Any claim for intellectual property right infringement, even if not meritorious, could be expensive to defend. If we were held liable for infringing third-party intellectual property rights, we could incur substantial damage awards, and potentially be required to cease using the technology, produce non-infringing technology or obtain a license to use such technology. Such potential liabilities or increased costs could be material to us.
Over the last several years, we have completed a number of acquisitions and may undertake additional acquisitions in the future. Any failure to adequately integrate past and future acquisitions into our business could have a material adverse effect on us.
Over the last several years, we have completed several acquisitions of businesses through asset and stock purchases. We expect that we will make additional acquisitions in the future.
Acquisitions involve a number of risks, including, but not limited to:
· | the potential failure to achieve the expected benefits of the acquisition, including the inability to generate sufficient revenue to offset acquisition costs, or the inability to achieve expected synergies or cost savings; |
· | unanticipated expenses related to acquired businesses or technologies and their integration into our existing businesses or technology; |
· | the diversion of financial, managerial and other resources from existing operations; |
· | the risks of entering into new markets in which we have little or no experience or where competitors may have stronger positions; |
· | potential write-offs or amortization of acquired assets or investments; |
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· | the potential loss of key employees, clients or partners of an acquired business; |
· | delays in client purchases due to uncertainty related to any acquisition; |
· | potential unknown liabilities associated with an acquisition; and |
· | the tax effects of any such acquisitions. |
If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses, which could have an adverse effect on our business and financial condition.
Finally, if we finance acquisitions by issuing equity or convertible or other debt securities, our existing stockholders may be diluted, or we could face constraints related to the terms of and repayment obligations related to the incurrence of indebtedness. This could adversely affect the market price of our securities.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not ultimately consummated, which could materially adversely affect our financial condition and subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
Third-party products are essential to our software.
Our software incorporates software licensed from various vendors into our proprietary software. In addition, third-party, stand-alone software is required to operate some of our proprietary software modules. The loss of the ability to use these third-party products, or ability to obtain substitute third-party software at comparable prices, could have a material adverse effect on our ability to license our software.
Our solutions may not be error-free and could result in claims of breach of contract and liabilities.
Our solutions are very complex and may not be error-free, especially when first released. Although we perform extensive testing, failure of any solution to operate in accordance with its specifications and documentation could constitute a breach of the license agreement and require us to correct the deficiency. If such deficiency is not corrected within the agreed-upon contractual limitations on liability and cannot be corrected in a timely manner, it could constitute a material breach of a contract allowing the termination thereof and possibly subjecting us to liability. Also, we sometimes indemnify our clients against third-party infringement claims. If such claims are made, even if they are without merit, they could be expensive to defend. Our license and SaaS agreements generally limit our liability arising from these types of claims, but such limits may not be enforceable in some jurisdictions or under some circumstances. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
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We could be liable to third parties from the use of our solutions.
Our solutions provide access to patient information used by physicians and other medical personnel in providing medical care. The medical care provided by physicians and other medical personnel are subject to numerous medical malpractice and other claims. We attempt to limit any potential liability of ours to clients by limiting the warranties on our solutions in our agreements with our clients (i.e., healthcare providers). However, such agreements do not protect us from third-party claims by patients who may seek damages from any or all persons or entities connected to the process of delivering patient care. We maintain insurance, which provides limited protection from such claims, if such claims result in liability to us. Although no such claims have been brought against us to date regarding injuries related to the use of our solutions, such claims may be made in the future. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
Our SaaS and support services could experience interruptions.
We provide SaaS for many clients, including the storage of critical patient, financial and administrative data. In addition, we provide support services to clients through our client support organization. We have redundancies, such as backup generators, redundant telecommunications lines and backup facilities built into our operations to prevent disruptions. However, complete failure of all generators, impairment of all telecommunications lines or severe casualty damage to the primary building or equipment inside the primary building housing our hosting center or client support facilities could cause a temporary disruption in operations and adversely affect clients who depend on the application hosting services. Any interruption in operations at our data center or client support facility could cause us to lose existing clients, impede our ability to obtain new clients, result in revenue loss, cause potential liability to our clients and increase our operating costs.
Our SaaS solutions are provided over an internet connection. Any breach of security or confidentiality of protected health information could expose us to significant expense and harm our reputation.
We provide remote SaaSSaaS-model solutions for clients, including the storage of critical patient, financial and administrative data. We have security measures in place to prevent or detect misappropriation of protected health information. We must maintain facility and systems security measures to preserve the confidentiality of data belonging to clients, as well as their patients, that resides on computer equipment in our data center, which we handle via application hosting services, or that is otherwise in our possession. Notwithstanding efforts undertaken to protect data, it can be vulnerable to infiltration as well as unintentional lapse. If confidential information is compromised, we could face claims for contract breach, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences and serious harm to our reputation.
The loss of key personnel could adversely affect our business.
Our success depends, to a significant degree, on our management, sales force and technical personnel. We must recruit, motivate and retain highly skilled managers, sales, consulting and technical personnel, including solution programmers, database specialists, consultants and system architects who have the requisite expertise in the technical environments in which our solutions operate. Competition for such technical expertise is intense. Our failure to attract and retain qualified personnel could have a material adverse effect on us.
Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our clients’ requirements.
We will need to expand our operations if we successfully achieve greater demand for our products and services. We cannot be certain that our systems, procedures, controls and human resources will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases. Difficulties in managing any future
40
businesses, could cause us to incur unexpected expenses or render us unable to meet our clients’ requirements, and consequently have a significant negative impact on our business, financial condition and operating results.
We may not have access to sufficient or cost-efficient capital to support our growth, execute our business plans and remain competitive in our markets.
As our operations grow and as we implement our business strategies, we expect to use both internal and external sources of capital. In addition to cash flow from normal operations, we may need additional capital in the form of debt or equity to operate and support our growth, execute our business plans and remain competitive in our markets. We may have no or limited availability to such external capital, in which case our future prospects may be materially impaired. Furthermore, we may not be able to access external sources of capital on reasonable or favorable terms. Our business operations could be subject to both financial and operational covenants that may limit the activities we may undertake, even if we believe they would benefit our company.
We previously entered into a software license and royalty agreement with Montefiore Medical Center pursuant to which we are obligated to pay Montefiore $1,000,000 in cash by July 31, 2020. The payment of this obligation could adversely affect our business.
On October 25, 2013, we entered into a software license and royalty agreement with Montefiore Medical Center (“Montefiore”) pursuant to which Montefiore granted us an exclusive, worldwide 15‑year license of Montefiore’s proprietary clinical analytics platform solution, Clinical Looking Glass® (“CLG”), now known as our Clinical Analytics solution. We originally committed that Montefiore would receive at least an additional $3,000,000 of on-going royalty payments related to future sublicensing of CLG by us within the first six and one-half years of the license term. On July 1, 2018, we entered into an amendment to software license and royalty agreement to modify our payment obligations such that under the modified provisions, our obligation to pay on-going royalties was replaced with the obligation to, among other things, pay $1,000,000 in cash by July 31, 2020. To the extent that cash flow from operations is insufficient to pay this obligation, we may pay all or some of this obligation from, among other things, drawings on our credit arrangement, proceeds from asset sales or the sale of our securities. The payment of this obligation may reduce the amount of proceeds available for acquisitions, negatively impact the value of our common stock and reduce the overall return.
Potential disruptions in the credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows and financial condition.
If internally generated funds are not available from operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Our access to funds under our revolving credit facilityarrangements or pursuant to arrangements with other financial institutions is dependent on the financial institution'sinstitution’s ability to meet funding commitments. Financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience high volumes of borrowing requests from other borrowers within a short period of time.
We must maintain compliance with the terms of our existing credit facilitiesarrangements or receive a waiver for any non-compliance. The failure to maintain compliance could have a material adverse effect on our ability to finance our ongoing operations and we may not be able to find an alternative lending source if a default occurs.
In November 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, and other lender partieslenders party 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. The Credit Agreement includesincluded customary financial covenants, including the requirements that the Company maintain certain minimum liquidity and achieve certain minimum EBITDA levels.
In order to draw upon its revolving line of credit, pursuant to the terms of the third amendment to the Credit Agreement, entered into as of June 19, 2017, the Company iswas required to comply with customary information delivery and financial covenants (as described in greater detail in Note
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9), 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.$1,000,000. The Company was in compliance with the applicable loan covenants at October 31, 2017.
If we do not maintain compliance with all of the continuing covenants and other terms and conditions of the credit facilityarrangements or secure a waiver for any non-compliance, we could be required to repay outstanding borrowings on an accelerated basis, which could subject us to decreased liquidity and other negative impacts on our business, results of operations and financial condition. Furthermore, if we needed to do so, it may be difficult for us to find an alternative lending source. In addition, because our assets are pledged as a security under our credit facilities,arrangements, 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 a sufficient credit facility,arrangement, we would be 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.
If we are unable to repay, extend or refinance our existing and warrants have significant redemption and repayment rights that could havefuture debt as it becomes due on terms reasonably acceptable to us, or at all, we may be unable to continue as a material adverse effect on our liquidity and available financing for our ongoing operations.
Absent any action with respect to the termsrepayment or refinancing of our existing indebtedness or any waivers or amendments to the Subordinationagreements governing our existing indebtedness, the Loan and IntercreditorSecurity Agreement the preferred stock is redeemable at the option of the holders thereof anytime after August 31, 2016 if not previously converted into shares of common stock.scheduled to mature on December 11, 2023. We may not achieve the thresholds requiredbe able to trigger automatic conversion of the preferred stockextend, replace or refinance our existing Loan and alternatively, holdersSecurity Agreement on terms reasonably acceptable to us, or at all, with our current lender or with a replacement lender. If we are able to obtain replacement financing, it may not voluntarily elect to
Economic conditions in the U.S. and globally may have significant effects on our clients and suppliers that could result in material adverse effects on our business, operating results and stock price.
Economic conditions in the U.S. and globally could deteriorate and the concern thatcause the worldwide economy mayto enter into a prolonged stagnant period that could materially adversely affect our clients'clients’ access to capital or willingness to spend capital on our solutions and services or their levels of cash liquidity with which to pay for solutions that they will order or have already ordered from us. Continued challengingChallenging economic conditions also would likely negatively impact our business, which could result in: (1) reduced demand for our solutions and services; (2) increased price competition for our solutions and services; (3) increased risk of collectability of cash from our clients; (4) increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable; (5) reduced revenues; and (6) higher operating costs as a percentage of revenues.
All of the foregoing potential consequences of the currenta deterioration of economic conditions are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of future results. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect the market price of our common stock and other securities.
The variability of our quarterly operating results can be significant.
Our operating results have fluctuated from quarter-to-quarter in the past, and we may experience continued fluctuations in the future. Future revenues and operating results may vary significantly from quarter-to-quarter as a result of a number of factors, many of which are outside of our control. These factors include: the relatively large size of client agreements; unpredictability in the number and timing of 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
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development and introduction of new products and services; the loss of significant clients or remarketing partners; changes in government regulations, particularly as they relate to the healthcare industry; the size and growth of the overall healthcare information technology markets; any liability and other claims that may be asserted against us; our ability to attract and retain qualified personnel; national and local general economic and market conditions; and other factors discussed in this report and our other filings with the SEC.
The preparation of our financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the capitalization of software development costs. Due to the inherent nature of these estimates, we may be required to significantly increase or decrease such estimates upon determination of the actual results. Any required adjustments could have a material adverse effect on us and our results of operations.
Failure to improve and maintain the quality of internal control over financial reporting and disclosure controls and procedures or other lapses in compliance could materially and adversely affect our ability to provide timely and accurate financial information about us or subject us to potential liability.
In connection with the preparation of the consolidated financial statements for each of our fiscal years, our management conducts a review of our internal control over financial reporting. We are also required to maintain effective disclosure controls and procedures. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm operating results, or cause failure to meet reporting obligations in a timely and accurate manner.
We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on the internal control over financial reporting.
In connection with the preparation of our financial statements for the third quarter ended October 31, 2019, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.
Our operations are subject to foreign currency exchange rate risk.
In connection with our expansion into foreign markets, which primarily consists of Canada, we sometimes receive payment in currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect our net sales and gross margins from our non-U.S. dollar denominated revenue, as
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Risks Relating to an Investment in Our Securities
The market price of our common stock is likely to be highly volatile as the stock market in general can be highly volatile.
The public trading of our common stock is based on many factors that could cause fluctuation in the price of our common stock. These factors may include, but are not limited to:
· | General economic and market conditions; |
· | Actual or anticipated variations in annual or quarterly operating results; |
· | Lack of or negative research coverage by securities analysts; |
· | Conditions or trends in the healthcare information technology industry; |
· | Changes in the market valuations of other companies in our industry; |
· | Announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; |
· | Announced or anticipated capital commitments; |
· | Ability to maintain listing of our common stock on The NASDAQ Capital Market; |
· | Additions or departures of key personnel; and |
· | Sales and repurchases of our common stock by us, our officers and directors or our significant stockholders, if any. |
Most of these factors are beyond our control. Further, as a result of our relatively small public float, our common stock may be less liquid, and the trading price for our common stock may be more affected by relatively small volumes of trading than is the case for the common stock of companies with a broader public ownership. These factors may cause the market price of our common stock to decline, regardless of our operating performance or financial condition.
If equity research analysts do not publish research reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock may rely in part on the research and reports that equity research analysts publish about our business and us. We do not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about our business or us. Furthermore, if no equity research analysts conduct research or publish reports about our business and us, the market price of our common stock could decline.
All of our debt obligations our existing preferred stock and any preferred stock that we may issue in the future will have priority over our common stock with respect to payment in the event of a bankruptcy, liquidation, dissolution or winding up.
In any bankruptcy, liquidation, dissolution or winding up of the Company, our shares of common stock would rank in right of payment or distribution below all debt claims against us and all of our outstanding shares of preferred stock, if any. As a result, holders of our shares of common stock will not be entitled to receive any payment or other distribution of assets in the event of a bankruptcy or upon a liquidation or dissolution until after all of our obligations to our debt holders and holders of preferred stock have been satisfied. Accordingly, holders of our common stock may lose their entire investment in the event of a bankruptcy, liquidation, dissolution or winding up of our company. Similarly, holders
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There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are generally not restricted from issuing in public or private offerings additional shares of common stock or preferred stock, (except for certain restrictions under the terms of our outstanding preferred stock), and other securities that are convertible into or exchangeable for, or that represent a right to receive, common stock or preferred stock or any substantially
The issuance of an additionala series of preferred stock could adversely affect holders of shares of our common stock, which may negatively impact your investment.
Our Board of Directors is authorized to issue classes or series of preferred stock without any action on the part of the stockholders. The Board of Directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including rights and preferences over the shares of common stock with respect to dividends or upon our dissolution, winding-up or liquidation, and other terms. If we issue preferred stock in the future that has a preference over the shares of our common stock with respect to the payment of dividends or upon our dissolution, winding up or liquidation, or if we issue preferred stock with voting rights that dilute the voting power of the shares of our common stock, the rights of the holders of shares of our common stock or the market price of our common stock could be adversely affected.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend solely on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. The trading price of our common stock could decline and you could lose all or part of your investment.
Sales of shares of our common stock or securities convertible into our common stock in the public market may cause the market price of our common stock to fall.
The issuance of shares of our common stock or securities convertible into our common stock in an offering from time to time could have the effect of depressing the market price for shares of our common stock. In addition, because our common stock is thinly traded, resales of shares of our common stock by our largest stockholders or insiders could have the effect of depressing market prices for our common stock.
If we are unable to maintain compliance with NASDAQ listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected.
Our common stock is listed on The NASDAQ Capital Market. We cannot assure you that we will be able to maintain compliance with NASDAQ’s current listing standards, or that NASDAQ will not implement additional listing standards with which we will be unable to comply. Failure to maintain compliance with NASDAQ listing requirements could result in the delisting of our shares from NASDAQ, which could have a material adverse effect on the trading price, volume and marketability of our common stock. Furthermore, a delisting could adversely affect our ability to issue additional securities and obtain additional financing in the future or result in a loss of confidence by investors or employees.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial,
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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 byby law.
The following table sets forth information with respect to our repurchases of common stock during the three months ended October 31, 2017:2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| Announced Plans or |
| under the Plans or | |
|
| (1) |
| Paid per Share |
| Programs |
| Programs | |
August 1 - August 31 |
| 3,732 |
| $ | 1.41 |
| — |
| — |
September 1 - September 30 |
| 9,933 |
|
| 1.39 |
| — |
| — |
October 1 - October 31 |
| — |
|
| - |
| — |
| — |
Total |
| 13,665 |
| $ | 1.40 |
| — |
| — |
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 | — | — |
(1) | Amount represents shares surrendered by employees to satisfy tax withholding obligations resulting from restricted stock that vested during the three months ended October 31, 2019. |
Effective December 31, 2019, the withholdingCompany terminated the Streamline Health Solutions, Inc. 1996 Associate Stock Purchase Plan (as amended and restated effective July 1, 2013).
On January 7, 2020, the Company entered into an amendment to the Purchase Agreement (“Amendment No. 1”) with Hyland Healthcare to modify certain dates related to the payment of sharesthe Pro-Rata Contract Amount (as defined under the Purchase Agreement) and certain other amounts on maintenance contracts that may be received between signing and closing. The foregoing description of Amendment No. 1 does not purport to pay taxes due upon vestingbe complete and is subject to, and qualified in its entirety, by the full text of restricted stock is permitted outside the scope of a board-authorized repurchase plan, these amounts exclude shares of stock returnedAmendment No. 1, which has been filed as Exhibit 10.6 to us by employees in satisfaction of withholding tax requirementsthis Quarterly Report on vested stock grants. There were 3,977 such shares returned to us during the three months ended October 31, 2017.
Item 6. EXHIBITS
INDEX TO EXHIBITS
Exhibit No. | Description of Exhibit | |
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5* | ||
10.6* | ||
31.1* | Certification by Chief Executive Officer pursuant to Rule 13a‑14(a) of the Exchange Act. | |
31.2* | Certification by Chief Financial Officer pursuant to Rule 13a‑14(a) of the Exchange Act. | |
32.1* | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350. | |
32.2* | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | |
101 | The following financial information from Streamline Health Solutions, Inc.’s Quarterly Report on Form 10‑Q for the three-month period ended October 31, 2019 filed with the SEC on January 7, 2020 formatted in XBRL includes: (i) Condensed Consolidated Balance Sheets at October 31, 2019 and January 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three- and nine-month periods ended October 31, 2019 and 2018, (iii) Condensed Consolidated Statements of Shareholders’ Equity for the nine-month periods ended October 31, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 2019 and 2018, and (v) Notes to the Condensed Consolidated Financial Statements. |
*Filed herewith.
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 | ||
Chief Executive Officer | ||
DATE: | By: | /S/ |
Thomas J. Gibson | ||
Chief Financial Officer |
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