Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive
Overview
In
fiscal 2016, the Company evaluated all of its solutions and determined it could best assist healthcare providers in improving
their revenue cycle management by providing solutions and services in the middle portion of the revenue cycle, that is, the revenue
cycle operations from initial charge capture to bill drop. Since that time in 2016, the Company continues to make decisions supporting
our focus in the middle of the revenue cycle. In late fiscal 2017, the Company introduced a new product for the middle of the
revenue cycle, eValuator. This product has significant implications to the timing and accuracy of our customers’ invoicing
through rules that are created to review the accuracy of invoicing prior to the physical invoices being released. This is a notable
change to existing processes of our customers. The development activities continued through the end of fiscal 2018. There are
continued development efforts planned for eValuator in fiscal 2020, generally, in the same levels as fiscal 2019 and 2018.
Fiscal
year 2017 was the first full year of this new, more narrowly focused effort to sell solutions and services in the middle of the
revenue cycle, improving healthcare providers’ coding accuracy to help them capture all of the financial reimbursement they
deserve for the patient care they provide. With this focus, the Company is committed to leading an industry movement to improve
hospitals’ financial performance by moving mid-cycle billing interventions upstream, to improve coding accuracy before billing,
enabling our clients to reduce revenue leakage, mitigate overbill risk, and reduce denials and days in accounts receivable.
By
narrowing our focus to the middle of the revenue cycle we believe we have a more distinct and compelling value proposition that
can help us attract more clients. By innovating new technologies, we have been able to expand our target markets beyond just hospitals
and into outpatient centers, clinics and physician practices. Our coding solutions like CDI, Physician Query, Abstracting and
eValuator are competitive in the market and enabled us to engage three significant new clients in fiscal year 2019. These three
new clients are some of the largest names in healthcare as we moved upstream to clients that were more likely to change their
internal processes to the pre-bill audit.
The
Company divested its ECM Assets on February 24, 2020 (after its fiscal year end of January 31, 2020). As discussed (above), this
continues the Company’s efforts to focus on the middle of the revenue cycle and its pre-bill technology, eValuator. Management
believes that the revenue cycle technology platforms have higher growth opportunities than its legacy products, including the
ECM Assets. The Company accounted for the sale of the ECM Assets as a sale of assets. See Note 14 to the audited consolidated
financial statements for more information about the sale of the assets.
The
Company has continued to implement and maintain tight cost and investment controls so that the transition to focusing our efforts
in the middle of the revenue cycle has not resulted in a negative impact to our cash flows. While there have been lower revenues
as a result of the Company’s focus on the mid-revenue cycle products, the Company’s earnings and EBITDA have expanded.
During fiscal 2019, the Company recorded non-recurring costs that are added back to adjusted EBITDA. These costs include; (i)
$789,000 for executive transition, (ii) $631,000 of transaction costs toward the sale of the ECM Assets, (iii) $388,000 for severance
related to the Company’s previously disclosed workforce rationalization plan, (iv) $150,000 related to the extinguishment
of the Wells Fargo term loan and revolving credit facility, and (v) $230,000 related to the Company’s correction of immaterial
errors (See Note 2 to the audited consolidated financial statements).
Regardless
of the state of the Affordable Care Act, the healthcare industry continues to face sweeping changes and new standards of care
that are putting greater pressure on healthcare providers to be more efficient in every aspect of their operations. We believe
these changes represent ongoing opportunities for our Company to work with our direct clients and partner with various resellers
to provide information technology solutions to help providers meet these new requirements.
As
reported nationally, near the end of the Company’s fiscal year ended January 31, 2020, an outbreak of a novel strain of
coronavirus (COVID-19) emerged globally. Additionally, there was a number of cases in the United States by the balance sheet date,
January 31, 2020. The Company serves acute care hospitals throughout the United States. While the Company has not been materially
impacted by the “shelter in place” movements of local and state governments across the United States, it is not possible
to reliably estimate the length or severity of the pandemic, and whether it may have an adverse financial impact on the Company’s
financial condition.
Results
of Operations
Statements
of Operations for the fiscal years ended January 31 (in thousands):
|
|
2020
|
|
|
2019
|
|
|
$
Change
|
|
|
%
Change
|
|
Systems sales
|
|
$
|
1,219
|
|
|
$
|
2,472
|
|
|
$
|
(1,253
|
)
|
|
|
(51
|
)%
|
Professional services
|
|
|
1,801
|
|
|
|
1,336
|
|
|
|
465
|
|
|
|
35
|
%
|
Audit services
|
|
|
1,712
|
|
|
|
1,118
|
|
|
|
594
|
|
|
|
53
|
%
|
Maintenance and support
|
|
|
11,309
|
|
|
|
12,586
|
|
|
|
(1,277
|
)
|
|
|
(10
|
)%
|
Software as a
service
|
|
|
4,702
|
|
|
|
4,853
|
|
|
|
(151
|
)
|
|
|
(3
|
)%
|
Total
revenues
|
|
|
20,743
|
|
|
|
22,365
|
|
|
|
(1,622
|
)
|
|
|
(7
|
)%
|
Cost of sales
|
|
|
7,480
|
|
|
|
8,137
|
|
|
|
(657
|
)
|
|
|
(8
|
)%
|
Selling, general and administrative
|
|
|
9,811
|
|
|
|
10,554
|
|
|
|
(743
|
)
|
|
|
(7
|
)%
|
Research and development
|
|
|
3,555
|
|
|
|
4,261
|
|
|
|
(706
|
)
|
|
|
(17
|
)%
|
Executive transition cost
|
|
|
789
|
|
|
|
—
|
|
|
|
789
|
|
|
|
100
|
%
|
Rationalization charges
|
|
|
388
|
|
|
|
—
|
|
|
|
388
|
|
|
|
100
|
%
|
Transaction costs
|
|
|
861
|
|
|
|
—
|
|
|
|
861
|
|
|
|
100
|
%
|
Impairment of long-lived assets
|
|
|
—
|
|
|
|
3,681
|
|
|
|
(3,681
|
)
|
|
|
(100
|
)%
|
Loss on exit
of operating lease
|
|
|
—
|
|
|
|
1,034
|
|
|
|
(1,034
|
)
|
|
|
(100
|
)%
|
Total
operating expenses
|
|
|
22,884
|
|
|
|
27,667
|
|
|
|
(4,783
|
)
|
|
|
(17
|
)%
|
Operating loss
|
|
|
(2,141
|
)
|
|
|
(5,302
|
)
|
|
|
3,161
|
|
|
|
(60
|
)%
|
Other expense, net
|
|
|
(700
|
)
|
|
|
(563
|
)
|
|
|
(137
|
)
|
|
|
24
|
%
|
Income tax benefit
|
|
|
(22
|
)
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
100
|
%
|
Net loss
|
|
$
|
(2,863
|
)
|
|
$
|
(5,865
|
)
|
|
$
|
3,002
|
|
|
|
(51
|
)%
|
Adjusted EBITDA(1)
|
|
$
|
3,133
|
|
|
$
|
2,889
|
|
|
$
|
244
|
|
|
|
8
|
%
|
(1)
|
Non-GAAP
measure meaning net earnings (loss) before net interest expense, tax expense (benefit), depreciation, amortization, stock-based
compensation expense, transactional and other expenses that do not relate to our core operations. See “Use of Non-GAAP
Financial Measures” below for additional information and reconciliation.
|
The
following table sets forth, for each fiscal year indicated, certain operating data as percentages of total revenues:
Statements
of Operations (1)
|
|
Fiscal
Year
|
|
|
|
2019
|
|
|
2018
|
|
Systems sales
|
|
|
5.9
|
%
|
|
|
11.1
|
%
|
Professional services
|
|
|
8.7
|
|
|
|
6.0
|
|
Audit services
|
|
|
8.3
|
|
|
|
5.0
|
|
Maintenance and support
|
|
|
54.5
|
|
|
|
56.2
|
|
Software as a
service
|
|
|
22.7
|
|
|
|
21.7
|
|
Total
revenues
|
|
|
100.1
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
36.1
|
|
|
|
36.4
|
|
Selling, general and administrative
|
|
|
47.3
|
|
|
|
47.2
|
|
Research and development
|
|
|
17.1
|
|
|
|
19.1
|
|
Executive transition cost
|
|
|
3.8
|
|
|
|
—
|
|
Rationalization charges
|
|
|
1.9
|
|
|
|
—
|
|
Transaction costs
|
|
|
4.2
|
|
|
|
—
|
|
Impairment of long-lived assets
|
|
|
—
|
|
|
|
16.5
|
|
Loss on exit
of operating lease
|
|
|
—
|
|
|
|
4.6
|
|
Total
operating expenses
|
|
|
110.4
|
|
|
|
123.8
|
|
Operating loss
|
|
|
(10.3
|
)
|
|
|
(23.7
|
)
|
Other expense, net
|
|
|
(3.4
|
)
|
|
|
(2.5
|
)
|
Income tax benefit
|
|
|
(0.1
|
)
|
|
|
—
|
|
Net loss
|
|
|
(13.8
|
)%
|
|
|
(26.2
|
)%
|
Cost of Sales to Revenues ratio, by
revenue stream:
|
|
|
|
|
|
|
|
|
Systems
sales
|
|
|
83.8
|
%
|
|
|
38.1
|
%
|
Services,
maintenance and support
|
|
|
34.0
|
%
|
|
|
41.2
|
%
|
Software
as a service
|
|
|
30.1
|
%
|
|
|
20.4
|
%
|
(1)
|
Because
a significant percentage of the operating costs are incurred at levels that are not necessarily correlated with revenue levels,
a variation in the timing of systems sales and installations and the resulting revenue recognition can cause significant variations
in operating results. As a result, period-to-period comparisons may not be meaningful with respect to the past results nor
are they necessarily indicative of the future results of the Company in the near or long-term. The data in the table is presented
solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated.
|
Comparison
of fiscal year 2019 with 2018
Revenues
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Systems sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
software - perpetual license
|
|
$
|
936
|
|
|
$
|
1,398
|
|
|
$
|
(462
|
)
|
|
|
(33
|
)%
|
Term license
|
|
|
180
|
|
|
|
899
|
|
|
|
(719
|
)
|
|
|
(80
|
)%
|
Hardware and third-party
software
|
|
|
103
|
|
|
|
175
|
|
|
|
(72
|
)
|
|
|
(41
|
)%
|
Professional services
|
|
|
1,801
|
|
|
|
1,336
|
|
|
|
465
|
|
|
|
35
|
%
|
Audit services
|
|
|
1,712
|
|
|
|
1,118
|
|
|
|
594
|
|
|
|
53
|
%
|
Maintenance and support
|
|
|
11,309
|
|
|
|
12,586
|
|
|
|
(1,277
|
)
|
|
|
(10
|
)%
|
Software as a
service
|
|
|
4,702
|
|
|
|
4,853
|
|
|
|
(151
|
)
|
|
|
(3
|
)%
|
Total
Revenues
|
|
$
|
20,743
|
|
|
$
|
22,365
|
|
|
$
|
(1,622
|
)
|
|
|
(7
|
)%
|
Proprietary
software and term licenses — Proprietary software revenues recognized in fiscal 2019 were $936,000, as compared
to $1,398,000 in fiscal 2018. The decreased fiscal 2019 revenues as compared to 2018 revenues are primarily attributable to two
larger perpetual license sales of our Streamline Health® Abstracting; one in our first quarter and one in our second quarter
of fiscal 2018. These perpetual license sales have been gaining traction from a significant distributor partner to the Company.
The Company continues to see a positive trend in the volumes with this significant distributor partner. Term license revenue for
fiscal 2019 decreased $719,000 from fiscal 2018, to $180,000. The decrease is related to the lower revenues from certain Clinical
Analytics contracts that terminated in fiscal 2018.
Hardware
and third-party software — Revenues from hardware and third-party software sales in fiscal 2019 were $103,000, as
compared to $175,000 in fiscal 2018. Fluctuations from year to year are a function of client demand and the customers’ timing
of replacing or enhancing their scanning capabilities through our vendors. This revenue stream is from the ECM Assets. The ECM
Assets were sold to Hyland Software on February 24, 2020 in a transaction accounted for a sale of assets. See Note 14 of the audited
consolidated financial statements for additional information.
Professional
services — Revenues from professional services in fiscal 2019 were $1,801,000, as compared to $1,336,000 in fiscal
2018. The increases in professional services revenue are primarily due to the completion of large implementation projects in fiscal
2019. These professional fees are driven, primarily, from certain large CDI & Abstracting projects that were sold in 2018
and 2019, and the related implementation and services associated with these. A portion of this revenue is related to the ECM Assets
that were sold on February 24, 2020 in a transaction accounted for as a sale of assets. See Note 14 of the audited consolidated
financial statements for additional information on the transaction.
Audit
services — Audit services revenue for fiscal 2019 increased, to $1,712,000 from $1,118,000 in fiscal 2018. Audit
services revenue was positively impacted by the Company’s audit services personnel using the eValuator solution to increase
efficiency and effectiveness. Looking ahead to fiscal 2020, the Company continues to see demand for on-shore, technically proficient
auditors in the marketplace. The Company has technically proficient and on-shore resources to address this need.
Maintenance
and support — Revenues from maintenance and support in fiscal 2019 were $11,309,000 as compared to $12,586,000 in
fiscal 2018. The decrease in maintenance and support revenues in fiscal 2019 resulted primarily from pricing pressure and certain
terminations on the Company’s content management software solution, ECM Assets. The Company believes it has mitigated future
pricing pressure and terminations through aggressively pursuing long-term contracts with our significant legacy product customers.
These activities have proven useful, as they have resulted in substantially better visibility in the near-term revenue base for
our Company. This “Maintenance and Support” revenue category will be most impacted by the Company’s divestiture
of the ECM Assets. See Note 14 to the audited consolidated financial statements for additional information on the sale of the
ECM Assets.
Software
as a service (SaaS) — Revenues from SaaS in fiscal 2019 were $4,702,000, as compared to $4,853,000 in fiscal 2018.
The decrease in fiscal 2019 revenue was attributable to cancellations by a few customers of our Financial Management solutions,
offset by growth associated with the Company’s new eValuator product. The Company’s new eValuator product had three,
new, significant sales in the second quarter, of fiscal 2019. These did not have substantial impact to the full year fiscal 2019
revenue, however, will have a significant impact to the Company’s fiscal 2020 revenue, because of the way revenue is recognized
on these SaaS products. eValuator revenue was $360,000 in fiscal 2018, that grew approximately three times, to $970,000 for fiscal
2019.
Cost
of Sales
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Cost of systems sales
|
|
$
|
1,022
|
|
|
$
|
942
|
|
|
$
|
80
|
|
|
|
8
|
%
|
Cost of professional services
|
|
|
2,103
|
|
|
|
2,657
|
|
|
|
(554
|
)
|
|
|
(21
|
)%
|
Cost of audit services
|
|
|
1,255
|
|
|
|
1,373
|
|
|
|
(118
|
)
|
|
|
(9
|
)%
|
Cost of maintenance and support
|
|
|
1,685
|
|
|
|
2,173
|
|
|
|
(488
|
)
|
|
|
(22
|
)%
|
Cost of software
as a service
|
|
|
1,415
|
|
|
|
992
|
|
|
|
423
|
|
|
|
43
|
%
|
Total cost of
sales
|
|
$
|
7,480
|
|
|
$
|
8,137
|
|
|
$
|
(657
|
)
|
|
|
(8
|
)%
|
Total
cost of sales includes personnel directly affiliated with earning the revenue, amortization and impairment of capitalized software
expenditures, depreciation and amortization, royalties and the cost of third-party hardware and software. The Company realized
cost savings from its cost containment efforts in all categories of total cost of sales. The decrease in expense for fiscal 2019
compared with fiscal 2018 was derived primarily due to its cost reduction initiatives completed in fiscal 2017 and 2018, with
the impacts being fully realized in fiscal 2019. These cost increases offset a reduction in amortization on internally-developed
software. We incurred amortization expense on internally-developed software of $1,458,000 and $1,160,000 in fiscal 2019 and 2018,
respectively. Increases in amortization expense for internally-developed software correlate to increases in the number and magnitude
of projects placed into service.
Cost
of systems sales varies from period-to-period depending on hardware and software configurations of the systems sold. The increase
in cost of systems sales in fiscal 2019 from 2018 was primarily due to an increase in amortization of capitalized software costs
due to an increased number of projects being placed into service in fiscal 2018 and 2019.
The
cost of professional services includes compensation and benefits for personnel and related expenses. The decrease in expense for
fiscal 2019 as compared with 2018 is primarily due to the decrease in professional services personnel as the implementation effort
for SaaS implementations requires substantially less time than our legacy on-premise products.
The
cost of audit services includes compensation and benefits for audit services personnel, and related expenses. The decrease in
expense for fiscal 2019 compared to 2018 is attributed to the reduction in personnel. Again, the Company is beginning to receive
renewed interest in its audit services as a result of the Company’s on-shore capabilities and expertise in pre-billing audit
and coding services. Further, the internal use of eValuator is making our coders and auditors more efficient. Accordingly, the
Company is experiencing lower cost on higher volumes of revenue for Audit Services.
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 fiscal 2019 as compared with 2018 was primarily due to a decrease in personnel costs and
a reduction in third-party maintenance contracts. The decrease in the cost of maintenance and support is proportionate with the
decrease in the corresponding revenue.
The
cost of SaaS solutions is relatively fixed, subject to inflation for the goods and services it requires. The increase in expense
for fiscal 2019 as compared to 2018 was primarily due to the increase in amortization expense as a result of the increased number
projects being put into service in fiscal year 2018 and 2019, primarily related to the increased investment in eValuator.
Selling,
General and Administrative Expense
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
General and administrative
expenses
|
|
$
|
5,951
|
|
|
$
|
6,782
|
|
|
$
|
(831
|
)
|
|
|
(12
|
)%
|
Sales and marketing expenses
|
|
|
3,860
|
|
|
|
3,772
|
|
|
|
88
|
|
|
|
2
|
%
|
Total selling, general,
and administrative expense
|
|
$
|
9,811
|
|
|
$
|
10,554
|
|
|
$
|
(743
|
)
|
|
|
(7
|
)%
|
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 fiscal 2019 as compared to fiscal 2018 is primarily the result
of lower bonus expense. A large portion of the bonuses for fiscal year 2019 are included in the Company’s CEO transition
cost, while fiscal year 2018 bonuses of $799,000 were included in general and administrative expenses. The bonuses recorded in
fiscal 2018 was $647,000 higher than fiscal year 2019 within general and administrative costs. The Company continues to critically
analyze the overhead cost of the Company, relative to is revenue. The Company announced a rationalization as of January 30, 2020,
where the Company reduced its headcount by 20% and will result in approximately $2,500,000 of annualized savings. This will benefit
future periods in terms of lower cost.
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 expenses related to trade shows.
The slight increase in sales and marketing expense for fiscal 2019 compared with 2018 was primarily due to the Company’s
continued investment in its sales and marketing efforts. The Company’s previously announced a rationalization that has little
impact on sales and marketing expenses. The Company expects to continue investment in sales and marketing at the same levels of
fiscal 2019, for fiscal 2020 in an effort to grow certain products, primarily eValuator, through personnel cost, trade shows expense,
and sales, marketing, and investor relations consultant fees.
Research
and Development
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Research and development
expense
|
|
$
|
3,555
|
|
|
$
|
4,261
|
|
|
$
|
(706
|
)
|
|
|
(17
|
)%
|
Plus: Capitalized
research and development cost
|
|
|
3,358
|
|
|
|
3,003
|
|
|
|
355
|
|
|
|
12
|
%
|
Total
research and development cost
|
|
$
|
6,913
|
|
|
$
|
7,264
|
|
|
$
|
(351
|
)
|
|
|
(5
|
)%
|
Research
and development expenses consist primarily of compensation and related benefits, the use of independent contractors for specific
near-term development projects and an allocated portion of general overhead costs, including occupancy costs. The Company invested
in its technology relatively consistently between fiscal 2019 and 2018. The lower total cost comes from fewer personnel and the
Company’s desire to focus development activities on those products with its highest growth prospects. However, more of the
cost in fiscal 2019 was apportioned to enhancements. This is primarily related to the Company’s investment in its new eValuator
product. In fiscal 2018 tax year, the Company was awarded $94,000. At the end of fiscal 2019, the cumulative balance of unused
research and development credits is $108,000. These research and development tax credit can be applied to current Georgia Payroll
Taxes due. The fiscal 2020 and future research and development tax credits are expected to be approximately $70,000 per year.
Total research and development cost will come down, in fiscal year 2020 and beyond, due to the sale of the ECM Assets (see Note
14 to audited consolidated financial statements) and the Company’s previously announced efforts to focus its development
activity to those products with higher growth potential.
Executive
Transition Cost
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Executive transition
cost
|
|
$
|
789
|
|
|
$
|
—
|
|
|
$
|
789
|
|
|
|
100
|
%
|
We
recorded $789,000 in cost related to replacing the Company’s CEO in the fiscal year ended January 31, 2020. These costs,
which include placement fees, retention bonuses for existing key personnel and certain required consulting costs were previously
announced and 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.
Rationalization
Costs
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Rationalization charges
|
|
$
|
388
|
|
|
$
|
—
|
|
|
$
|
388
|
|
|
|
100
|
%
|
In
the fourth quarter of fiscal 2019, we implemented a rationalization plan to make the operation of the Company more efficient and
for the purpose of aligning its personnel needs and capital requirements in light of the Company’s sale of its enterprise
content management business. The rationalization plan included a reduction in workforce resulting in the termination of approximately
twenty (20) employees, or approximately twenty percent (20%) of the Company’s workforce. As a result of the rationalization
plan, the Company recorded $388,000 in one-time severance and other employee termination-related costs and expects to realize
annualized savings of approximately $2,500,000, excluding the impact of any additional hires necessary to strengthen and invest
in the eValuator™ platform. The Company is not currently aware of any other significant charges it will incur as a result
of the rationalization plan.
Transaction
Costs
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Transaction costs
|
|
$
|
861
|
|
|
$
|
—
|
|
|
$
|
861
|
|
|
|
100
|
%
|
In
fiscal 2019, the Company incurred cost to (i) sale the ECM Assets and (ii) account for the immaterial correction of an error.
In the sale of the ECM Assets, the Company incurred approximately $631,000 of cost from its financial adviser and legal cost that
were not conditioned upon the successful sale of the ECM Assets. These costs were accrued as of January 31, 2020. The Company
incurred approximately $1,300,000 of additional transaction cost that were incurred or conditioned upon closing the sale of the
ECM Assets that are recorded in February 2020 (the date of closing the ECM Assets). Separately, the Company incurred approximately
$230,000 of legal and accounting cost in conjunction with the company’s immaterial correction of an error (See Note 2 to
the consolidated financial statements). These costs were necessary to file the Company’s third quarter, 10-Q, for the period
ended October 30, 2019 and this was completed on January 8, 2020.
Impairment
of Long-Lived Assets
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Impairment of long-lived
assets
|
|
$
|
—
|
|
|
$
|
3,681
|
|
|
$
|
(3,681
|
)
|
|
|
(100
|
)%
|
The
Company acquired a product known as Clinical Analytics in its portfolio in October 2013. As a result of its focused attention
in the marketplace on the middle of the revenue cycle, the Company moved away from selling the product. The Company identified
a triggering event in the fourth quarter of fiscal 2018 for impairment of long-lived asset associated with Clinical Analytics.
The Company sole customer on Clinical Analytics terminated its contract. Upon review, the Company has determined that the market
for Clinical Analytics and for the middle of the revenue cycle are very different, and accordingly, the Company does not anticipate
or forecast future sales for this product. The Company has determined that intangible assets and remaining software development
associated with Clinical Analytics were fully impaired and should be removed from its balance sheet. In the fourth quarter of
fiscal 2018, we took a charge to income of $3,681,000 for impairment of the long-lived intangible assets ($3,226,000) and the
remaining software development costs ($455,000) associated with this product. The Company has no other intangible assets or software
development that is not associated with its core solutions in the middle of the revenue cycle.
Loss
on Exit of Operating Lease
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Loss on exit of operating
lease
|
|
$
|
—
|
|
|
$
|
1,034
|
|
|
$
|
(1,034
|
)
|
|
|
(100
|
)%
|
In
an effort to reduce ongoing operating expenses, we closed our New York office in the second quarter of fiscal 2018 and subleased
the office space for the remaining period of the original lease term, which ended on November 2019. As a result of vacating and
subleasing the office, we recorded a $472,000 loss on exit of the operating lease in the second quarter of fiscal 2018, which
captures the net cash flows associated with the vacated premises, including receipts of rent from our sublessee totaling $384,000,
and the $48,000 loss incurred on the disposal of fixed assets. In addition, in the third quarter of fiscal 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 fiscal 2018.
Refer
to Note 12 – Commitments and Contingencies in our consolidated financial statements included in Part II, Item 8 for further
details and development with respect to the shared office arrangement in Atlanta.
Other
Expense
|
|
Fiscal
Year
|
|
|
2019
to 2018 Change
|
|
(in
thousands):
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Interest expense
|
|
$
|
(309
|
)
|
|
$
|
(384
|
)
|
|
$
|
75
|
|
|
|
(20
|
)%
|
Loss on early extinguishment of debt
|
|
|
(150
|
)
|
|
|
—
|
|
|
|
(150
|
)
|
|
|
100
|
%
|
Miscellaneous
expense
|
|
|
(241
|
)
|
|
|
(179
|
)
|
|
|
(62
|
)
|
|
|
35
|
%
|
Total other
expense
|
|
$
|
(700
|
)
|
|
$
|
(563
|
)
|
|
$
|
(137
|
)
|
|
|
24
|
%
|
Interest
expense consists of interest and commitment fees on the revolving credit facility and interest on the term loans, and is inclusive
of deferred financing cost amortization. Amortization of deferred financing cost was $82,000 and $69,000 in fiscal 2019 and 2018,
respectively. Interest expense was lower in fiscal 2019 as compared with 2018 primarily due to higher amounts of interest expense
that is capitalized to software development cost. The interest capitalized to software development in fiscal 2019 and 2018 was
$191,000 and $69,000, respectively. The interest capitalized to software development cost reduces the Company’s interest
expense recognized in the consolidated statements of operations.
The
Company refinanced its term loan and revolving credit facility to a new bank on December 12, 2019. Upon completion of the refinancing,
the Company had charges to income for (i) the write-off of deferred finance cost on the refinanced debt and (ii) legal and finance
cost to close out the previous indebtedness. Aggregate extinguishment costs of $150,000 were recorded in the fourth quarter of
fiscal 2019.
The
increase in miscellaneous expense in fiscal 2019 as compared to fiscal 2018 was primarily a result of losses from (i) certain
failed financing cost, and (ii) losses from the acquisition of certain options from individuals that were about to expire, and
were vacillating between in the money and out of the money. The Company had a minor amount of failed financing cost that it recorded
as a miscellaneous expense on certain banks that it was not successful in completing the refinance. Additionally, the Company
purchased certain options that were close to being “in the money” to allow the forfeited options back into the Company’s
Employee Stock Compensation Plan pool. Other items reported in miscellaneous expense are the valuation adjustments on the Montefiore
minimum royalty liability and certain foreign exchange losses. The foreign exchange losses have been extinguished in fiscal 2019
due to a conversion of a contract that was required to be settled in Canadian dollars, to the contract being settled in US dollars.
Refer to Note 12 – Commitments and Contingencies to our consolidated financial statements included in Part II, Item 8 for
further information concerning the Montefiore liability.
Provision
for Income Taxes
We
recorded tax expense of $22,000 and zero in fiscal 2019 and 2018, respectively. Refer to Note 7 - Income Taxes to our consolidated
financial statements included in Part II, Item 8 for details on the provision for income taxes.
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 Consolidated Financial
Statements presented on a GAAP basis in this annual report on Form 10-K 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
the Company, 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 related expenses and other expenses that do not relate to our core operations such
as severances and impairment charges; (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net revenue; and
(iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA,
Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance
on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our
business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing
our operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges),
asset base (primarily depreciation and amortization), items outside the control of the management team (taxes) and expenses that
do not relate to our core operations including: transaction-related expenses (such as professional and advisory services), corporate
restructuring expenses (such as severances) and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes
the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share includes incremental
shares in the share count that are considered anti-dilutive in a GAAP net loss position.
The
Board of Directors and management also use these measures (i) as one of the primary methods for planning and forecasting overall
expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii)
as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our
lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance.
The lender under our Loan and Security Agreement requires delivery of compliance reports certifying compliance with financial
covenants, certain of which are based on a measurement that is similar to the Adjusted EBITDA measurement reviewed by our management
and Board of Directors.
EBITDA,
Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP or otherwise, and are not alternatives to
cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned
above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share, as disclosed in this annual report
on Form 10-K have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute
for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow
for our discretionary use. Some of the limitations of EBITDA and its variations are:
|
●
|
EBITDA
does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
EBITDA
does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
EBITDA
does not reflect the interest expense, or the cash requirements to service interest or principal payments under our Loan and
Security Agreement ;
|
|
|
|
|
●
|
EBITDA
does not reflect income tax payments that we may be required to make; and
|
|
|
|
|
●
|
Although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced
in the future, and EBITDA does not reflect any cash requirements for such replacements.
|
Adjusted
EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers
to review the GAAP financial statements included elsewhere in this annual report on Form 10-K, and not rely on any single
financial measure to evaluate our business. We also strongly urge readers to review the reconciliation of these non-GAAP financial
measures to the most comparable GAAP measure in this section, along with the consolidated financial statements included in Part
II, Item 8.
The
following table reconciles EBITDA and Adjusted EBITDA to net loss, and Adjusted EBITDA per diluted share to loss per diluted share
for the fiscal years ended January 31, 2020 and 2019 (amounts in thousands, except per share data). All of the items included
in the reconciliation from EBITDA and Adjusted EBITDA to net loss and the related per share calculations are either recurring
non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the
non-cash items, management believes that investors may find it useful to assess the Company’s comparative operating performance
because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization
and other expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance.
In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess
our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing
operating performance.
|
|
Fiscal
Year
|
|
In
thousands, except per share data
|
|
2019
|
|
|
2018
|
|
Adjusted EBITDA
Reconciliation
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,863
|
)
|
|
$
|
(5,865
|
)
|
Interest expense
|
|
|
309
|
|
|
|
384
|
|
Income tax expense
|
|
|
22
|
|
|
|
—
|
|
Depreciation
|
|
|
137
|
|
|
|
450
|
|
Amortization
of capitalized software development costs
|
|
|
1,458
|
|
|
|
1,160
|
|
Amortization
of intangible assets
|
|
|
554
|
|
|
|
937
|
|
Amortization
of other costs
|
|
|
237
|
|
|
|
346
|
|
EBITDA
|
|
|
(146
|
)
|
|
|
(2,588
|
)
|
Share-based compensation
expense
|
|
|
934
|
|
|
|
629
|
|
Impairment of
long-lived assets
|
|
|
—
|
|
|
|
3,681
|
|
Loss on disposal
of fixed assets
|
|
|
—
|
|
|
|
7
|
|
Non-cash valuation
adjustments to assets and liabilities
|
|
|
64
|
|
|
|
126
|
|
Executive transition
cost (1)
|
|
|
725
|
|
|
|
—
|
|
Rationalization
charges
|
|
|
388
|
|
|
|
—
|
|
Transaction costs
|
|
|
861
|
|
|
|
—
|
|
Loss on early
extinguishment of debt
|
|
|
150
|
|
|
|
—
|
|
Loss on exit
of operating lease
|
|
|
—
|
|
|
|
1,034
|
|
Other
non-recurring expenses
|
|
|
157
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
3,133
|
|
|
$
|
2,889
|
|
Adjusted EBITDA
margin (2)
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
per Diluted Share Reconciliation
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
— diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.30
|
)
|
Adjusted EBITDA
per adjusted diluted share
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
Diluted weighted average shares (3)
|
|
|
22,739,679
|
|
|
|
19,540,980
|
|
Includable
incremental shares — adjusted EBITDA (4)
|
|
|
2,343,382
|
|
|
|
3,065,402
|
|
Adjusted diluted
shares
|
|
|
25,083,061
|
|
|
|
22,606,382
|
|
(1)
|
Executive
transition cost on the consolidated statement of operations includes $64,000 in stock compensation expense for fiscal 2019,
which is included within Share-based compensation expense in the Adjusted EBITDA calculation above.
|
|
|
(2)
|
Adjusted
EBITDA as a percentage of GAAP net revenues.
|
|
|
(3)
|
Adjusted
EBITDA per adjusted diluted share for the Company’s common stock is computed using the more dilutive of the two-class
method or the if-converted method.
|
|
|
(4)
|
The
number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP
profit is earned in the current period, no additional incremental shares are assumed.
|
Application
of Critical Accounting Policies
The
following is a summary of the Company’s most critical accounting policies. Refer to Note 2 - Significant Accounting Policies
to our consolidated financial statements included in Part II, Item 8 for a complete discussion of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
Revenue
Recognition
The
Company derives 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. The Company also derives 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. The Company 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.
Performance
obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are
promised to the customer. If we determine that we have not satisfied a performance obligation, we will defer recognition of the
revenue until the performance obligation is deemed to be satisfied. Maintenance and support and SaaS agreements are generally
non-cancelable or contain significant penalties for early cancellation, although clients typically have the right to terminate
their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard
performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such
criteria. Significant judgment is required to determine the standalone selling price (“SSP”) for each performance
obligation, the amount allocated to each performance obligation and whether it depicts the amount that the Company expects to
receive in exchange for the related product and/or service. As the selling prices of the Company’s software licenses are
highly variable, the Company estimates SSP of its software licenses using the residual approach when the software license is sold
with other services and observable SSPs exist for the other services. The Company estimates the SSP for maintenance, professional
services, and audit services based on observable standalone sales.
Refer
to Note 2 - Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8 for additional
information regarding our revenue recognition policies.
Allowance
for Doubtful Accounts
Accounts
and contract receivables are comprised of amounts owed the Company for solutions and services provided. Contracts with individual
clients and resellers determine when receivables are due and payable. In determining the allowances for doubtful accounts, the
unpaid receivables are reviewed periodically to determine the payment status based upon the most currently available information.
During these periodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting
from the unwillingness or inability of its clients or resellers to make required payments.
Capitalized
Software Development Costs
Software
development costs for software to be sold, leased, or marketed are accounted for in accordance with Accounting Standards Codification
(“ASC”) 985-20, Software — Costs of Software to be Sold, Leased or Marketed. Costs associated with
the planning and design phase of software development are classified as research and development costs and are expensed as incurred.
Once technological feasibility has been established, a portion of the costs incurred in development, including coding, testing
and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower
of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is included in Cost
of system sales on the consolidated statements of operations. Annual amortization is measured at the greater of a) the ratio of
the software product’s current gross revenues to the total of current and expected gross revenues or b) straight-line over
the remaining economic life of the software (typically three to five years). Unamortized capitalized costs determined to be in
excess of the net realizable value of a solution are expensed at the date of such determination.
Internal-use
software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The costs incurred in
the preliminary stages of development are expensed as research and development costs as incurred. Once an application has reached
the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on
a straight-line basis over the estimated useful life of the software (typically three to five years). Maintenance and enhancement
costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to
substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized
and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value
for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives
should be modified. Amortization expense related to capitalized internal-use software development costs is included in Cost of
software as a service on the consolidated statements of operations.
Goodwill
and Intangible Assets
Goodwill
and other intangible assets were recognized in conjunction with the acquisitions of Interpoint Partners, LLC (“Interpoint”),
Meta Health Technology, Inc. (“Meta”), Clinical Looking Glass® (“CLG”), Opportune IT and Unibased
Systems Architecture, Inc. (“Unibased”). Identifiable intangible assets include purchased intangible assets with finite
lives, which primarily consist of internally-developed software, client relationships, non-compete agreements and license agreements.
Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one
month to 10 years, using the straight-line and undiscounted expected future cash flows methods.
We
assess the useful lives and possible impairment of existing recognized goodwill on at least an annual basis, and goodwill and
intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review
include:
|
●
|
significant
under-performance relative to historical or projected future operating results;
|
|
|
|
|
●
|
significant
changes in the manner of use of the acquired assets or the strategy for the overall business;
|
|
|
|
|
●
|
identification
of other impaired assets within a reporting unit;
|
|
|
|
|
●
|
disposition
of a significant portion of an operating segment;
|
|
|
|
|
●
|
significant
negative industry or economic trends;
|
|
|
|
|
●
|
significant
decline in the Company’s stock price for a sustained period; and
|
|
|
|
|
●
|
a
decline in the market capitalization relative to the net book value.
|
Determining
whether a triggering event has occurred involves significant judgment by 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 bases and for tax credits 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. Refer to Note 7 - Income Taxes to our consolidated financial statements included in Part II,
Item 8 for further details.
Liquidity
and Capital Resources
The
Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of
contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level
of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company’s primary cash requirements
include regular payment of payroll and other business expenses, principal and interest payments on debt and capital expenditures.
Capital expenditures generally include computer hardware and computer software to support internal development efforts or SaaS
data center infrastructure. Operations are funded with cash generated by operations and borrowings under credit facilities. The
Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for
the next twelve months. Cash and cash equivalent balances at January 31, 2020 and 2019 were $1,649,000 and $2,376,000, respectively.
Continued expansion may require the Company to take on additional debt or raise capital through issuance of equities, or a combination
of both. There can be no assurance the Company will be able to raise the capital required to fund further expansion.
The
Company has liquidity through the Loan and Security Agreement described in more detail in Note 5 - Debt to our consolidated financial
statements included in Part II, Item 8. The Company has a $2,000,000 revolving credit facility, which can be advanced based upon
80% of eligible accounts receivable, as defined in the Loan and Security Agreement. In order to draw upon the revolving credit
facility, the Company’s must comply with certain financial covenants, including the requirement that the Company maintain
certain minimum Bank EBITDA levels, calculated pursuant to the Loan and Security Agreement, measured on a monthly basis over a
trailing three-month period then ended, and which shall not deviate by the greater of (i) thirty percent of its projected Bank
EBITDA or (ii) $150,000. Our lender uses a measurement that is similar to the Adjusted EBITDA, a non-GAAP financial measure described
above. The bank uses an Adjusted EBITDA that is further reduced by the Company’s spend on capitalized software development
for the period. The required minimum EBITDA level for the period ended January 31, 2020 was $364,000. The Company was not in compliance
with its minimum EBITDA covenant as of January 31, 2020. Accordingly, Bridge Bank provided a waiver of this covenant as of January
31, 2020. The Company’s future EBITDA covenants for fiscal year 2020 are based upon its budget prepared and submitted by
the Company to Bridge Bank which necessarily excludes the ECM Assets (and revenues and expenses). Accordingly, the Company does
not believe that this covenant violation would continue in the future.
The
Loan and Security Agreement also requires the Company to (i) achieve a minimum asset coverage ratio of at least 0.75 to 1.00 from
December 31, 2019 through November 30, 2020 and of at least 1.50 to 1.00 each month thereafter, and (ii) not deviate by more than
15% percent from its revenue projections over a trailing 3-month basis or not deviate its recurring revenue by more than 20% over
a cumulative year-to-date basis from its revenue projections. Pursuant to the Loan and Security Agreement’s definition,
the Company’s minimum asset coverage ratio as of January 31, 2020 was 1.29, which satisfies the minimum asset coverage ratio
financial covenant in the Loan and Security Agreement.
The
Company was in compliance with the asset coverage ratio covenant, however, was not compliant with the EBITDA covenant, as described
above. An appropriate waiver was received by Bridge Bank for the covenant violation as of January 31, 2020. Based upon the borrowing
base formula set forth in the Loan and Security Agreement, as of January 31, 2020, the Company had access to the full amount of
the $2,000,000 revolving credit facility.
The
Loan and Security Agreement prohibits the Company from declaring or paying any dividend or making any other payment or distribution,
directly or indirectly, on account of equity interests issued by the Company if such equity interests: (a) mature or are mandatorily
redeemable pursuant to a sinking fund obligation or otherwise (except as a result of a change of control or asset sale so long
as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior
repayment in full of the loans and all other obligations that are accrued and payable upon the termination of the Loan and Security
Agreement), (b) are redeemable at the option of the holder thereof, in whole or in part, (c) provide for the scheduled payments
of dividends in cash, or (d) are or become convertible into or exchangeable for indebtedness or any other equity interests that
would constitute disqualified equity interests pursuant to clauses (a) through (c) hereof, in each case, prior to the date that
is 180 days after the maturity date of the Loan and Security Agreement.
Upon
closing and funding of the sale of the ECM Assets, the Company repaid the Term Loan; however, the Company will continue to have
access to the revolving credit facility. Accordingly, the Company has classified the term loan as current as of January 31, 2020,
because of its intent and ability to repay the Term Loan, in full, upon closing and funding the sale of the ECM Assets.
The
Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law on March 17, 2020. Among
other things, the Cares Act provided for a business loan program known as the Paycheck Protection Act (“PPP”). Companies
are able to borrow, through the SBA, up to two months of payroll. The Company has filed for approximately $2,300,000 through the
SBA for the PPP loan program. The Company has not signed definitive debt agreements, nor has it been notified of funding as it
relates to this program.
As
discussed in Note 14 to the audited and consolidated financial statements, the Company signed a definitive agreement to sell its
legacy ECM business to Hyland Software and plans to use the proceeds of the sale to pay off its term loan with Bridge Bank and
to fund the continuing development and incremental investment in sales and marketing in support of its eValuator™ cloud-based
pre- and post-bill coding analysis platform. The closing of the transaction is subject to customary closing conditions, including
the approval of the transaction by Streamline Health’s stockholders, and the Company closed the transaction on February
24, 2020. As a result, the Company received approximately $6.0 million in cash and cash equivalents after all transaction related
expenses and repaying its term loan.
Significant
cash obligations
|
|
As
of January, 31
|
|
(in
thousands)
|
|
2020
|
|
|
2019
|
|
Term loan (1)
|
|
$
|
3,825
|
|
|
$
|
3,948
|
|
Royalty liability (2)
|
|
|
969
|
|
|
|
905
|
|
Refer
to Note 12 — Commitments and Contingencies, Note 5 — Debt and Note 14 — Subsequent Events to our consolidated
financial statements included in Part II, Item 8 for additional information. Subsequent to year end, the Company settled the term
loan at the time of closing on the sale of the ECM Assets on February 24, 2020. The term loan is reflected as current in the accompanying
consolidated balance sheet as the Company had the intention and ability to settle the loan as a result of the closing of sale
of the ECM Assets.
Operating
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(2,863
|
)
|
|
$
|
(5,865
|
)
|
Non-cash adjustments to net loss
|
|
|
3,576
|
|
|
|
8,452
|
|
Cash impact
of changes in assets and liabilities
|
|
|
(721
|
)
|
|
|
(1,190
|
)
|
Net
cash (used in) provided by operating activities
|
|
$
|
(8
|
)
|
|
$
|
1,397
|
|
The
decrease in net cash provided by operating activities is primarily due to the impacts of the Company’s non-recurring expenses
of approximately $2.3 million for fiscal 2019 that was not present in fiscal 2018. These cost include; (i) $789,000 for executive
transition, (ii) $631,000 of transaction cost toward the sale of the ECM Assets, (iii) $388,000 for severance related to the Company’s
previously disclosed workforce rationalization plan, (iv) $150,000 related to the extinguishment of the Wells Fargo term loan
and revolving credit facility, and $230,000 related to the Company’s correction of immaterial errors (See Note 2 to the
consolidated financial statements).
The
Company’s clients typically have been well-established hospitals, medical facilities or major health information system
companies that resell the Company’s solutions, which have good credit histories, and payments have been received within
normal time frames for the industry. However, some healthcare organizations have experienced significant operating losses as a
result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often
involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as
well as uncertainty in the credit markets, may adversely affect the liquidity for some of our clients.
Investing
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2019
|
|
|
2018
|
|
Purchases of property
and equipment
|
|
$
|
(52
|
)
|
|
$
|
(21
|
)
|
Proceeds from sales of property and
equipment
|
|
|
—
|
|
|
|
21
|
|
Capitalized
software development costs
|
|
|
(3,358
|
)
|
|
|
(3,003
|
)
|
Net
cash used in investing activities
|
|
$
|
(3,410
|
)
|
|
$
|
(3,003
|
)
|
Cash
used for investing activities in fiscal 2019 was approximately $407,000 higher than fiscal 2018. See research and development
cost (above). The reason that the investment in capitalized software development costs in fiscal 2019 was higher than 2018 is
related, primarily, to the apportionment of costs to capitalized costs.
The
Company estimates that to replicate its existing internally-developed software would cost significantly more than the stated net
book value of $7,598,000, including the acquired internally-developed software of Opportune IT, at January 31, 2020. Many of the
programs related to capitalized software development continue to have significant value to our current solutions and those under
development, as the concepts, ideas and software code are readily transferable and are incorporated into new solutions.
Financing
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2019
|
|
|
2018
|
|
Proceeds from issuance
of common stock
|
|
$
|
9,663
|
|
|
$
|
—
|
|
Payments for costs directly attributable
to the issuance of common stock
|
|
|
(711
|
)
|
|
|
—
|
|
Proceeds from term loan
|
|
|
4,000
|
|
|
|
—
|
|
Principal payments on term loan
|
|
|
(4,030
|
)
|
|
|
(597
|
)
|
Payments related to settlement of
employee shared-based awards
|
|
|
(99
|
)
|
|
|
(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
|
|
|
(325
|
)
|
|
|
(23
|
)
|
Other
|
|
|
6
|
|
|
|
44
|
|
Net
cash provided by (used in) financing activities
|
|
$
|
2,691
|
|
|
$
|
(638
|
)
|
The
substantial increase in cash from financing activities in fiscal 2019 over the prior year was primarily the result of the Company’s
private placement that occurred in the third quarter of fiscal 2019. The Company raised $9,663,000 (before expenses) to redeem
the Company’s preferred shares. The Company executed on the private placement and redemption of the preferred stock to finalize
its ability to refinance the company’s senior debt. The redemption of the preferred was beneficial to the Company in selling
its ECM Assets. Each of the initiatives built upon themselves and were dependent upon one-another to achieve them all.
Item
8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
All
other financial statement schedules are omitted because they are not applicable or the required information is included in the
consolidated financial statements or notes thereto.
Report
of Independent Registered Public Accounting Firm
To
the Stockholders and Board of Directors of Streamline Health Solutions, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheet of Streamline Health Solutions, Inc. and its subsidiary (the “Company”)
as of January 31, 2020, and the related consolidated statements of operations, changes in stockholders’ equity and cash
flows for the year then ended, and the related notes and financial statement schedule II (collectively, the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
January 31, 2020, and the results of their operations and their cash flows for the year ended, in conformity with U.S. generally
accepted accounting principles.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
|
/s/
Dixon Hughes Goodman LLP
|
|
|
|
|
|
We
have served as the Company’s auditor since 2019.
|
|
Atlanta,
Georgia
April
22, 2020
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors of Streamline Health Solutions, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheet of Streamline Health Solutions, Inc. and its subsidiary (the Company)
as of January 31, 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows
for the year then ended, and the related notes to the consolidated financial statements and schedule (collectively, the financial
statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of January 31, 2019, and the results of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
We
served as the Company’s auditor from December 10, 2015 to April 22, 2019.
Atlanta,
Georgia
April
22, 2019
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(rounded
to the nearest thousand dollars, except share and per share information)
|
|
January
31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,649,000
|
|
|
$
|
2,376,000
|
|
Accounts receivable,
net of allowance for doubtful accounts of $96,000 and $345,000, respectively
|
|
|
3,166,000
|
|
|
|
2,933,000
|
|
Contract receivables
|
|
|
820,000
|
|
|
|
1,263,000
|
|
Prepaid
and other current assets
|
|
|
919,000
|
|
|
|
1,048,000
|
|
Total
current assets
|
|
|
6,554,000
|
|
|
|
7,620,000
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property and
equipment, net of accumulated amortization of $1,589,000 and $1,516,000, respectively
|
|
|
152,000
|
|
|
|
237,000
|
|
Contract receivables,
less current portion
|
|
|
—
|
|
|
|
407,000
|
|
Capitalized software
development costs, net of accumulated amortization of $21,004,000 and $19,689,000, respectively
|
|
|
7,598,000
|
|
|
|
5,698,000
|
|
Intangible assets,
net of accumulated amortization of $4,282,000 and $3,858,000, respectively
|
|
|
1,115,000
|
|
|
|
1,669,000
|
|
Goodwill
|
|
|
15,537,000
|
|
|
|
15,537,000
|
|
Other
|
|
|
695,000
|
|
|
|
572,000
|
|
Total
non-current assets
|
|
|
25,097,000
|
|
|
|
24,120,000
|
|
Total
assets
|
|
$
|
31,651,000
|
|
|
$
|
31,740,000
|
|
See
accompanying notes to consolidated financial statements.
|
|
January
31,
|
|
|
|
2020
|
|
|
2019
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,270,000
|
|
|
$
|
1,280,000
|
|
Accrued expenses
|
|
|
1,537,000
|
|
|
|
1,814,000
|
|
Current portion
of term loan, net of deferred financing costs
|
|
|
3,825,000
|
|
|
|
597,000
|
|
Deferred revenues
|
|
|
7,990,000
|
|
|
|
8,338,000
|
|
Royalty liability
|
|
|
969,000
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
94,000
|
|
Total
current liabilities
|
|
|
15,591,000
|
|
|
|
12,123,000
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Term loan, net
of current portion and deferred financing costs
|
|
|
—
|
|
|
|
3,351,000
|
|
Royalty liability
|
|
|
—
|
|
|
|
905,000
|
|
Deferred revenues,
less current portion
|
|
|
55,000
|
|
|
|
432,000
|
|
Other
|
|
|
—
|
|
|
|
41,000
|
|
Total
non-current liabilities
|
|
|
55,000
|
|
|
|
4,729,000
|
|
Total
liabilities
|
|
|
15,646,000
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
Common stock,
$0.01 par value per share, 45,000,000 shares authorized; 30,530,643 and 20,767,708 shares issued and outstanding, respectively
|
|
|
305,000
|
|
|
|
208,000
|
|
Additional paid
in capital
|
|
|
95,113,000
|
|
|
|
82,544,000
|
|
Accumulated
deficit
|
|
|
(79,413,000
|
)
|
|
|
(76,550,000
|
)
|
Total
stockholders’ equity
|
|
|
16,005,000
|
|
|
|
6,202,000
|
|
Total liabilities
and stockholders’ equity
|
|
$
|
31,651,000
|
|
|
$
|
31,740,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(rounded
to the nearest thousand dollars, except share and per share information)
|
|
Fiscal
Year
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
System
sales
|
|
$
|
1,219,000
|
|
|
$
|
2,472,000
|
|
Professional
services
|
|
|
1,801,000
|
|
|
|
1,336,000
|
|
Audit services
|
|
|
1,712,000
|
|
|
|
1,118,000
|
|
Maintenance and
support
|
|
|
11,309,000
|
|
|
|
12,586,000
|
|
Software
as a service
|
|
|
4,702,000
|
|
|
|
4,853,000
|
|
Total
revenues
|
|
|
20,743,000
|
|
|
|
22,365,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of system
sales
|
|
|
1,022,000
|
|
|
|
942,000
|
|
Cost of professional
services
|
|
|
2,103,000
|
|
|
|
2,657,000
|
|
Cost of audit
services
|
|
|
1,255,000
|
|
|
|
1,373,000
|
|
Cost of maintenance
and support
|
|
|
1,685,000
|
|
|
|
2,173,000
|
|
Cost of software
as a service
|
|
|
1,415,000
|
|
|
|
992,000
|
|
Selling, general
and administrative expense
|
|
|
9,811,000
|
|
|
|
10,554,000
|
|
Research and
development
|
|
|
3,555,000
|
|
|
|
4,261,000
|
|
Executive transition
cost
|
|
|
789,000
|
|
|
|
—
|
|
Rationalization
charges
|
|
|
388,000
|
|
|
|
—
|
|
Transaction costs
|
|
|
861,000
|
|
|
|
—
|
|
Impairment of
long-lived assets
|
|
|
—
|
|
|
|
3,681,000
|
|
Loss
on exit of operating lease
|
|
|
—
|
|
|
|
1,034,000
|
|
Total
operating expenses
|
|
|
22,884,000
|
|
|
|
27,667,000
|
|
Operating loss
|
|
|
(2,141,000
|
)
|
|
|
(5,302,000
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(309,000
|
)
|
|
|
(384,000
|
)
|
Loss on early
extinguishment of debt
|
|
|
(150,000
|
)
|
|
|
—
|
|
Miscellaneous
expense
|
|
|
(241,000
|
)
|
|
|
(179,000
|
)
|
Loss before income taxes
|
|
|
(2,841,000
|
)
|
|
|
(5,865,000
|
)
|
Income
tax expense
|
|
|
(22,000
|
)
|
|
|
—
|
|
Net loss
|
|
|
(2,863,000
|
)
|
|
|
(5,865,000
|
)
|
Add: Redemption
of Series A Preferred Stock
|
|
|
4,894,000
|
|
|
|
—
|
|
Net income
(loss) attributable to common shareholders
|
|
|
2,031,000
|
|
|
|
(5,865,000
|
)
|
Net income
(loss) per common share - basic
|
|
$
|
0.09
|
|
|
$
|
(0.30
|
)
|
Weighted average
number of common shares - basic
|
|
|
22,739,679
|
|
|
|
19,540,980
|
|
Net loss per
common share - diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.30
|
)
|
Weighted average
number of common shares - diluted
|
|
|
22,739,679
|
|
|
|
19,540,980
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(rounded
to the nearest thousand dollars, except share information)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
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
|
|
Stock
issued pursuant to Employee Stock Purchase Plan and exercise of stock options
|
|
|
48,616
|
|
|
|
—
|
|
|
|
44,000
|
|
|
|
—
|
|
|
|
44,000
|
|
Restricted
stock issued
|
|
|
826,666
|
|
|
|
8,000
|
|
|
|
(8,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Restricted
stock forfeited
|
|
|
(130,833
|
)
|
|
|
(1,000
|
)
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
Surrender
of stock
|
|
|
(37,249
|
)
|
|
|
—
|
|
|
|
(62,000
|
)
|
|
|
—
|
|
|
|
(62,000
|
)
|
Conversion
of Series A Preferred Stock
|
|
|
54,531
|
|
|
|
1,000
|
|
|
|
163,000
|
|
|
|
—
|
|
|
|
164,000
|
|
Share-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
629,000
|
|
|
|
—
|
|
|
|
629,000
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,865,000
|
)
|
|
|
(5,865,000
|
)
|
Balance
at January 31, 2019
|
|
|
20,767,708
|
|
|
$
|
208,000
|
|
|
$
|
82,544,000
|
|
|
$
|
(76,550,000
|
)
|
|
$
|
6,202,000
|
|
Stock
issued pursuant to Employee Stock Purchase Plan and exercise of stock options
|
|
|
8,310
|
|
|
|
—
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
8,000
|
|
Restricted
stock issued
|
|
|
912,518
|
|
|
|
9,000
|
|
|
|
(9,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Restricted
stock forfeited
|
|
|
(556,097
|
)
|
|
|
(6,000
|
)
|
|
|
6,000
|
|
|
|
—
|
|
|
|
—
|
|
Surrender
of stock
|
|
|
(75,487
|
)
|
|
|
(1,000
|
)
|
|
|
(98,000
|
)
|
|
|
—
|
|
|
|
(99,000
|
)
|
Issuance
of common stock, net of $711,000 directly attributable offering expenses
|
|
|
9,473,691
|
|
|
|
95,000
|
|
|
|
8,857,000
|
|
|
|
|
|
|
|
8,952,000
|
|
Redemption
of Series A Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
2,873,000
|
|
|
|
—
|
|
|
|
2,873,000
|
|
Share-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
934,000
|
|
|
|
—
|
|
|
|
934,000
|
|
Stock
Options repurchased
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,000
|
)
|
|
|
—
|
|
|
|
(18,000
|
)
|
Capital
contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
16,000
|
|
|
|
—
|
|
|
|
16,000
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,863,000
|
)
|
|
|
(2,863,000
|
)
|
Balance
at January 31, 2020
|
|
|
30,530,643
|
|
|
$
|
305,000
|
|
|
$
|
95,113,000
|
|
|
$
|
(79,413,000
|
)
|
|
$
|
16,005,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(rounded
to the nearest thousand dollars, except share information)
|
|
Fiscal
Year
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,863,000
|
)
|
|
$
|
(5,865,000
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
137,000
|
|
|
|
450,000
|
|
Amortization
of capitalized software development costs
|
|
|
1,458,000
|
|
|
|
1,160,000
|
|
Amortization
of intangible assets
|
|
|
554,000
|
|
|
|
937,000
|
|
Amortization
of other deferred costs
|
|
|
480,000
|
|
|
|
415,000
|
|
Valuation
adjustments
|
|
|
64,000
|
|
|
|
126,000
|
|
Loss
on early extinguishment of debt
|
|
|
150,000
|
|
|
|
—
|
|
Impairment
of long-lived assets
|
|
|
—
|
|
|
|
3,681,000
|
|
Loss
on exit of operating lease
|
|
|
—
|
|
|
|
1,034,000
|
|
Loss
on disposal of fixed assets
|
|
|
—
|
|
|
|
7,000
|
|
Share-based
compensation expense
|
|
|
934,000
|
|
|
|
629,000
|
|
Accounts
receivable provision (reversal)
|
|
|
(201,000
|
)
|
|
|
13,000
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and contract receivables
|
|
|
818,000
|
|
|
|
(640,000
|
)
|
Other
assets
|
|
|
(392,000
|
)
|
|
|
466,000
|
|
Accounts
payable
|
|
|
(10,000
|
)
|
|
|
859,000
|
|
Accrued
expenses
|
|
|
(412,000
|
)
|
|
|
129,000
|
|
Deferred
revenues
|
|
|
(725,000
|
)
|
|
|
(2,004,000
|
)
|
Net cash (used in)
provided by operating activities
|
|
|
(8,000
|
)
|
|
|
1,397,000
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(52,000
|
)
|
|
|
(21,000
|
)
|
Proceeds
from sales of property and equipment
|
|
|
—
|
|
|
|
21,000
|
|
Capitalization
of software development costs
|
|
|
(3,358,000
|
)
|
|
|
(3,003,000
|
)
|
Net cash used in
investing activities
|
|
|
(3,410,000
|
)
|
|
|
(3,003,000
|
)
|
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
|
|
|
(711,000
|
)
|
|
|
—
|
|
Proceeds
from term loan
|
|
|
4,000,000
|
|
|
|
—
|
|
Principal
payments on term loan
|
|
|
(4,030,000
|
)
|
|
|
(597,000
|
)
|
Payments
related to settlement of employee shared-based awards
|
|
|
(99,000
|
)
|
|
|
(62,000
|
)
|
Proceeds
from exercise of stock options and stock purchase plan
|
|
|
8,000
|
|
|
|
44,000
|
|
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
|
|
|
(325,000
|
)
|
|
|
(23,000
|
)
|
Other
|
|
|
(2,000
|
)
|
|
|
—
|
|
Net cash provided
by (used in) financing activities
|
|
|
2,691,000
|
|
|
|
(638,000
|
)
|
Net decrease in
cash and cash equivalents
|
|
|
(727,000
|
)
|
|
|
(2,244,000
|
)
|
Cash and cash equivalents
at beginning of period
|
|
|
2,376,000
|
|
|
|
4,620,000
|
|
Cash and cash equivalents
at end of period
|
|
$
|
1,649,000
|
|
|
$
|
2,376,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
|
Interest
paid, net of amounts capitalized
|
|
$
|
337,000
|
|
|
$
|
417,000
|
|
Income
taxes paid
|
|
$
|
9,000
|
|
|
$
|
11,000
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Conversion
of shares of Series A Preferred Stock to common shares
|
|
$
|
—
|
|
|
$
|
164,000
|
|
Modification
of royalty liability associated with the acquisition of Clinical Analytics
|
|
$
|
—
|
|
|
$
|
1,644,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
January
31, 2020 and 2019
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Streamline
Health Solutions, Inc. and its subsidiary (“we”, “us”, “our”, “Streamline”, or
the “Company”) operates in one segment as a provider of healthcare information technology solutions and associated
services. The Company provides these capabilities through the licensing of its HIM, Coding & CDI, eValuator Coding Analysis
Platform, Financial Management and Patient Care solutions and other workflow software applications and the use of such applications
by software as a service (“SaaS”). The Company also provides audit services to help clients optimize their internal
clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions.
The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and
Canada to capture, store, manage, route, retrieve and process patient clinical, financial and other healthcare provider information
related to the patient revenue cycle.
Fiscal
Year
All
references to a fiscal year refer to the fiscal year commencing February 1 in that calendar year and ending on January 31 of the
following calendar year.
NOTE
2 — SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of Streamline Health Solutions, Inc. and its wholly-owned subsidiary, Streamline
Health, Inc. All significant intercompany transactions and balances are eliminated in consolidation. All amounts in the consolidated
financial statements, notes and tables have been rounded to the nearest thousand dollars, except share and per share amounts,
unless otherwise indicated.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
On an ongoing basis, management evaluates its estimates and judgments, including those related to the recognition of revenue,
stock-based compensation, capitalization of software development costs, intangible assets, the allowance for doubtful accounts,
and income taxes. Actual results could differ from those estimates.
Reclassification
Certain
amounts in the preparation of financial statements for fiscal year 2019, resulted in reclassifications of fiscal year 2018 amounts,
with a total of $298,000 current prepaid assets being reclassed to other non-current assets.
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.
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 Accounting Standards Codification (“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 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 $532,000 overstatement and a corresponding $532,000 understatement of amortization expense
for capitalized software development costs for the years ended January, 31 2020 and 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
|
)
|
Three months ended
October 31, 2019
|
|
$
|
(214,000
|
)
|
Cash
and Cash Equivalents
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash demand deposits.
Cash deposits are placed in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Cash deposits
may exceed FDIC insured levels from time to time. For purposes of the consolidated balance sheets and consolidated statements
of cash flows, the Company considers all highly-liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Receivables
Accounts
and contract receivables are comprised of amounts owed to the Company for licensed software, professional services, including
coding audit services, maintenance services, and software as a service and are presented net of the allowance for doubtful accounts.
The timing of revenue recognition may not coincide with the billing terms of the client contract, resulting in unbilled receivables
or deferred revenues; therefore certain contract receivables represent revenues recognized prior to client billings. Individual
contract terms with clients or resellers determine when receivables are due. Accounts receivable represent amounts that the entity
has an unconditional right to consideration. For billings where the criteria for revenue recognition have not been met, deferred
revenue is recorded until the Company satisfies the respective performance obligations.
Allowance
for Doubtful Accounts
The
Company adjusts accounts receivable down to net realizable value with its allowance methodology. In determining the allowance
for doubtful accounts, aged receivables are analyzed periodically by management. Each identified receivable is reviewed based
upon the most recent information available and the status of any open or unresolved issues with the client preventing the payment
thereof. Corrective action, if necessary, is taken by the Company to resolve open issues related to unpaid receivables. During
these periodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from
the unwillingness or inability of its clients or resellers to make required payments. The allowance for doubtful accounts was
approximately $96,000 and $345,000 at January 31, 2020 and 2019, respectively. The Company believes that its reserve is adequate,
however results may differ in future periods.
Bad
debt expense for fiscal years 2019 and 2018 was as follows:
|
|
2019
|
|
|
2018
|
|
Bad debt expense
|
|
$
|
(201,000
|
)
|
|
$
|
13,000
|
|
Concessions
Accrual
In
determining the concessions accrual, the Company evaluates historical concessions granted relative to revenue. The company records
a provision, reducing revenue, each period for the estimated amount of concessions incurred. The Company evaluates the amount
of the provision and the concession accrual each period. The concession accrual included in accrued other expenses on the Company’s
consolidated balance sheets was $43,000 and $44,000 as of January 31, 2020 and 2019, respectively.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the straight-line method, over the estimated useful lives of
the related assets. Estimated useful lives are as follows:
Computer equipment and
software
|
|
3-4 years
|
Office equipment
|
|
5 years
|
Office furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
Term of lease or estimated useful
life, whichever is shorter
|
Depreciation
expense for property and equipment in fiscal 2019 and 2018 was $137,000 and $450,000, respectively.
Normal
repair and maintenance is expensed as incurred. Replacements are capitalized and the property and equipment accounts are relieved
of the items being replaced or disposed of, if no longer of value. The related cost and accumulated depreciation of the disposed
assets are eliminated and any gain or loss on disposition is included in the results of operations in the year of disposal.
Leases
We
adopted ASC 842, Leases on February 1, 2019 using the effective date transition method. Prior period balances were not
adjusted upon adoption of this standard. We elected the group of practical expedients 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 new standard resulted in the recording
of a right-of-use asset of $175,000 and an operating lease liability of $464,000 as of February 1, 2019 and did not materially
impact our consolidated results of operations and had no impact on cash flows.
We
recognize operating lease cost on a straight-line basis by aggregating any rent abatement with the total expected rental payments
and amortizing the expense ratably over the term of the lease. See Note 4 – Operating Leases for further details.
As
of January 31, 2020 and 2019, the Company had no financing or capital lease obligations.
Debt
Issuance Costs
Costs
related to the issuance of debt are capitalized and amortized to interest expense on a straight-line basis, which is not materially
different from the effective interest method, over the term of the related debt. Deferred financing costs are presented on the
Company’s consolidated balance sheets as a direct deduction from the carrying amount of the non-current portion of our term
loan.
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of long-lived assets for impairment whenever facts and circumstances exist that would suggest
that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the
evaluation are changes in market position and profitability. If facts and circumstances are present which may indicate that the
carrying amount of the assets may not be recoverable, the Company will prepare a projection of the undiscounted cash flows of
the specific asset or asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows.
If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair values.
Capitalized
Software Development Costs
Software
development costs for software to be sold, leased, or marketed are accounted for in accordance with ASC 985-20, Software
— Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and design phase of software
development are classified as research and development costs and are expensed as incurred. Once technological feasibility has
been established, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized
until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value.
Amortization is calculated on a solution-by-solution basis and is included in Cost of system sales on the consolidated statements
of operations. Annual amortization is measured at the greater of a) the ratio of the software product’s current gross revenues
to the total of current and expected gross revenues or b) straight-line over the remaining economic life of the software (typically
three to five years). Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed
at the date of such determination. Capitalized software development costs for software to be sold, leased, or marketed, net of
accumulated amortization, totaled $3,089,000 and $2,919,000 as of January 31, 2020 and 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 consolidated statements of operations. Capitalized software development costs for internal-use software,
net of accumulated amortization, totaled $4,509,000 and $2,779,000 as of January 31, 2020 and 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.
Amortization
expense on all capitalized software development cost was $1,458,000 and $1,160,000 in fiscal 2019 and 2018, respectively. Further,
the Company recognized an impairment of approximately $354,000 for cancelled or abandoned enhancement projects during fiscal 2019
that has been recognized within amortization expense. There were no impairments recognized during fiscal 2018.
|
|
Fiscal
Year
|
|
|
|
2019
|
|
|
2018
|
|
Amortization expense on internally-developed
software included in:
|
|
|
|
|
|
|
|
|
Cost
of systems sales
|
|
$
|
928,000
|
|
|
$
|
768,000
|
|
Cost of software
as a service
|
|
|
517,000
|
|
|
|
379,000
|
|
Cost of audit
services
|
|
|
13,000
|
|
|
|
13,000
|
|
Total amortization
expense on internally-developed software
|
|
$
|
1,458,000
|
|
|
$
|
1,160,000
|
|
Interest
capitalized to software development cost in fiscal 2019 and 2018 was $191,000 and $69,000, respectively. The interest capitalized
to software development cost reduces the Company’s interest expense recognized in the consolidated statements of operations.
Research
and development expense was $3,555,000 and $4,261,000 in fiscal 2019 and 2018, respectively.
Fair
Value of Financial Instruments
The
FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure
about fair value measurements. This guidance enables the 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 the Company’s long-term debt approximates fair value since the variable interest rates being paid on the amounts approximate
the market interest rate. Long-term debt is classified as Level 2. The Company recognizes transfers between levels at the end
of period. There were no transfers of assets or liabilities between Levels 1, 2, or 3 as of January 31, 2020 or 2019.
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 January 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1)
|
|
$
|
969,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
969,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1)
|
|
$
|
905,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
905,000
|
|
(1)
|
The
fair value of the royalty liability was determined based on discounting the portion of the modified royalty commitment payable
in cash (refer to Note 12 – Commitments and Contingencies for additional information on our royalty liability). During
fiscal 2019 and 2018, the Company recognized fair value adjustments of $64,000 and $126,000, respectively. There were no changes
to the fair value methods. Fair value adjustments are included within miscellaneous expense in the consolidated statements
of operations.
|
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) 606, Revenue from Contracts with Customers
(“ASC 606”), under the core principle of recognizing revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.
We
commence revenue recognition (Step 5 below) in accordance with that core principle after applying the following 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
|
Often
contracts contain more than one performance obligation. Performance obligations are the unit of accounting for revenue recognition
and generally represent the distinct goods or services that are promised to the customer. Revenue is recognized net of any taxes
collected from customers and subsequently remitted to governmental authorities.
If
we determine that we have not satisfied a performance obligation, we defer recognition of the revenue until the performance
obligation is satisfied. Maintenance and support and SaaS agreements are generally non-cancelable or contain significant
penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail
to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or
cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria.
The
determined transaction price is allocated based on the standalone selling price of the performance obligations in contract. Significant
judgment is required to determine the standalone selling price (“SSP”) for each performance obligation, the amount
allocated to each performance obligation and whether it depicts the amount that the Company expects to receive in exchange for
the related product and/or service. As the selling prices of the Company’s software licenses are highly variable, the Company
estimates SSP of its software licenses using the residual approach when the software license is sold with other services and observable
SSPs exist for the other services. The Company estimates the SSP for maintenance, professional services, and audit services based
on observable standalone sales.
Contract
Combination
The
Company may execute more than one contract 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 consideration to be paid in one agreement depends on the
price and/or performance of another agreement, or whether the goods or services promised in the agreements represent a single
performance obligation. The conclusions reached can impact the allocation of the transaction price to each performance obligation
and the timing of revenue recognition related to those arrangements.
The
Company has utilized the portfolio approach as the practical expedient. We have applied the revenue model to a portfolio of contracts
with similar characteristics where we expected that the financial statements would not differ materially from applying it to the
individual contracts within that portfolio.
Systems
Sales
The
Company’s software license arrangements provide the customer with the right to use functional intellectual property. Implementation,
support, and other services are typically considered distinct performance obligations when sold with a software license unless
these services are determined to significantly modify the software. Revenue is recognized at a point in time. Typically, this
is upon shipment of components or electronic download of software.
Maintenance
and Support Services
Our
maintenance and support obligations include multiple discrete performance obligations, with the two 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 multiple discrete performance obligations within our overall maintenance and support obligations can be viewed as a single
performance obligation since both the unspecified upgrades and technical support are activities to fulfill the maintenance performance
obligation and are rendered concurrently. Maintenance and support agreements entitle clients to technology support, version upgrades,
bug fixes and service packs. We recognize maintenance and support revenue over the contract term.
Software-Based
Solution Professional Services
The
Company provides various professional services to customers with software licenses. These include project management, software
implementation and software modification services. Revenues from arrangements to provide professional services are generally distinct
from the other promises in the contract and are recognized as the related services are performed. Consideration payable under
these arrangements is either fixed fee or on a time-and-materials basis, and is recognized over time as the services are performed.
Software
as a Service
SaaS-based
contracts include use of the Company’s platform, implementation, support and other services which represent a single promise
to provide continuous access to its software solutions. The Company recognizes revenue over time for the life of the contract.
Audit
Services
The
Company provides technology-enabled coding audit services to help clients review and optimize their internal clinical documentation
and coding functions across the applicable segment of the client’s enterprise. Audit services are a separate performance
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:
|
|
Year Ended January 31, 2020
|
|
|
|
Recurring Revenue
|
|
|
Non-recurring Revenue
|
|
|
Total
|
|
Systems sales
|
|
$
|
180,000
|
|
|
$
|
1,039,000
|
|
|
$
|
1,219,000
|
|
Professional services
|
|
|
—
|
|
|
|
1,801,000
|
|
|
|
1,801,000
|
|
Audit services
|
|
|
—
|
|
|
|
1,712,000
|
|
|
|
1,712,000
|
|
Maintenance and support
|
|
|
11,309,000
|
|
|
|
—
|
|
|
|
11,309,000
|
|
Software as a service
|
|
|
4,702,000
|
|
|
|
—
|
|
|
|
4,702,000
|
|
Total revenue:
|
|
$
|
16,191,000
|
|
|
$
|
4,552,000
|
|
|
$
|
20,743,000
|
|
Contract
Receivables and Deferred Revenues
The Company receives
payments from customers based upon contractual billing schedules. Contract receivables include amounts related to the Company’s
contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenues include payments
received in advance of performance under the contract. Our contract receivables and deferred revenue are reported on an individual
contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent based on the
timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of
when we expect to recognize revenue. In the year ended January 31, 2020, we recognized $7,838,000 in revenue from deferred revenues
outstanding as of January 31, 2019. Revenue allocated to remaining performance obligations was $21 million as of January
31, 2020, of which the Company expects to recognize approximately 56% over the next 12 months and the remainder thereafter.
Deferred
costs (costs to fulfill a contract and contract acquisition costs)
We
defer the direct costs, which include salaries and benefits, for professional services related to SaaS contracts as a cost to
fulfill a contract. These deferred costs will be amortized on a straight-line basis over the contractual term. As of January 31,
2020, and 2019, we had deferred costs of $144,000 and $251,000, respectively, net of accumulated amortization of $332,000 and
$399,000, respectively. Amortization expense of these costs was $237,000 and $346,000 in fiscal 2019 and 2018, respectively. There
were no impairment losses for these capitalized costs for the fiscal years 2019 and 2018.
Contract
acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining
a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line
basis over the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period
of related deferred commission costs would have been one year or less.
Deferred
commissions costs paid and payable, which are included on the consolidated balance sheets within other non-current assets totaled
$421,000 and $298,000, respectively, as of January 31, 2019 and 2018. In fiscal 2019 and 2018, $161,000 and $145,000, respectively,
in amortization expense associated with deferred sales commissions was included in selling, general and administrative expenses
on the consolidated statements of operations. There were no impairment losses for these capitalized costs for the years ended
January 31, 2020 and 2019.
Concentrations
Financial
instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of accounts receivable.
The Company’s accounts receivable are concentrated in the healthcare industry. However, the Company’s clients typically
are well-established hospitals, medical facilities or major health information systems companies that resell the Company’s
solutions that have good credit histories. Payments from clients have been received within normal time frames for the industry.
However, some hospitals and medical facilities have experienced significant operating losses as a result of limits on third-party
reimbursements from insurance companies and governmental entities and extended payment of receivables from these entities is not
uncommon.
To
date, the Company has relied on a limited number of clients and remarketing partners for a substantial portion of its total revenues.
The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of clients
and its remarketing partners.
The
Company currently buys all of its hardware and some major software components of its healthcare information systems from third-party
vendors. Although there are a limited number of vendors capable of supplying these components, management believes that other
suppliers could provide similar components on comparable terms.
Goodwill
and Intangible Assets
Goodwill
and other intangible assets were recognized in conjunction with the Interpoint, Meta, CLG and Opportune IT acquisitions, as well
as the Unibased acquisition (prior to divestiture of such assets). Identifiable intangible assets include purchased intangible
assets with finite lives, which primarily consist of internally-developed software and client relationships. Finite-lived purchased
intangible assets are amortized over their expected period of benefit, which generally ranges from one to 10 years, using the
straight-line and undiscounted expected future cash flows methods.
The
Company assesses the useful lives and possible impairment of intangible assets when an event occurs that may trigger such a review.
Factors considered important which could trigger a review include:
|
●
|
significant
underperformance relative to historical or projected future operating results;
|
|
|
|
|
●
|
significant
changes in the manner of use of the acquired assets or the strategy for the overall business;
|
|
|
|
|
●
|
identification
of other impaired assets within a reporting unit;
|
|
|
|
|
●
|
disposition
of a significant portion of an operating segment;
|
|
|
|
|
●
|
significant
negative industry or economic trends;
|
|
|
|
|
●
|
significant
decline in the Company’s stock price for a sustained period; and
|
|
|
|
|
●
|
a
decline in the market capitalization relative to the net book value.
|
Determining
whether a triggering event has occurred involves significant judgment by the Company.
The
Company assesses goodwill annually (as of November 1), or more frequently when events and circumstances, such as the ones
mentioned above, occur indicating that the recorded goodwill may be impaired. During the years ended January 31, 2020 and
2019, the Company did not note any of the above qualitative factors, which would be considered a triggering event for
goodwill impairment. In assessing qualitative factors to determine whether it is more likely than not that the fair value of
a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances that may impact the
fair value and the carrying amount of a reporting unit. The identification of relevant events and circumstances and how these
may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These
judgments include the consideration of macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, events which are specific to the Company and trends in the market price of the Company’s common
stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the
magnitude of any such impact.
The
two-step goodwill impairment test requires the Company to identify its reporting units and to determine estimates of the fair
values of those reporting units as of the impairment testing date. Reporting units are determined based on the organizational
structure the entity has in place at the date of the impairment test. A reporting unit is an operating segment or component business
unit with the following characteristics: (a) it has discrete financial information, (b) segment management regularly reviews its
operating results (generally an operating segment has a segment manager who is directly accountable to and maintains regular contact
with the chief operating decision maker to discuss operating activities, financial results, forecasts or plans for the segment),
and (c) its economic characteristics are dissimilar from other units (this contemplates the nature of the products and services,
the nature of the production process, the type or class of customer for the products and services and the methods used to distribute
the products and services).
The
Company determined that it has one operating segment and one reporting unit.
To
conduct a quantitative two-step goodwill impairment test, the fair value of the reporting unit is first compared to its carrying
value. If the reporting unit’s carrying value exceeds its fair value, the Company performs the second step and records an
impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. The Company estimates the fair
value of its reporting unit using a blend of market and income approaches. The market approach consists of two separate methods,
including reference to the Company’s market capitalization, as well as the guideline publicly traded company method. The
market capitalization valuation method is based on an analysis of the Company’s stock price on and around the testing date,
plus a control premium. The guideline publicly traded company method was made by reference to a list of publicly traded software
companies providing services to healthcare organizations, as determined by management. The market value of common equity for each
comparable company was derived by multiplying the price per share on the testing date by the total common shares outstanding,
plus a control premium. Selected valuation multiples are then determined and applied to appropriate financial statistics based
on the Company’s historical and forecasted results. The Company estimates the fair value of its reporting unit using the
income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free”
rate of return on an investment, the weighted average cost of capital of a market participant and future revenue, operating margin,
working capital and capital expenditure trends. Determining the fair value of reporting unit and goodwill includes significant
judgment by management, and different judgments could yield different results.
The
Company performed its annual assessment of goodwill during the fourth quarter of fiscal 2019, using the two-step approach described
above. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting
unit with its carrying amount, including goodwill. Based on the analysis performed for step one, the fair value of the reporting
unit exceeded the carrying amount of the reporting unit, including goodwill, and, therefore, a goodwill impairment loss was not
recognized. As the Company passed step one of the analysis, step two was not required.
In
fiscal 2018, long-lived assets associated with our Clinical Analytics solution were deemed impaired and their corresponding balance
was fully written off (see Note 6 - Goodwill and Intangible Assets to our consolidated financial statements included herein).
Equity
Awards
The
Company accounts for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as
expense over the requisite service period. The Company incurred total annual compensation expense related to stock-based awards
of $934,000 and $629,000 in fiscal 2019 and 2018, respectively.
The
fair value of the stock options granted in fiscal 2019 and 2018 was estimated at the date of grant using a Black-Scholes option
pricing model. Option pricing model input assumptions 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 data (such as, volatility factor,
expected term and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material
impact on reported expenses depending upon the number, value and vesting period of future awards.
The
Company issues restricted stock awards in the form of Company common stock. The fair value of these awards is based on the market
close price per share on the grant date. The Company expenses the compensation cost of these awards as the restriction period
lapses, which is typically a one- to four-year service period to the Company. In fiscal 2019 and 2018, 75,487 and 37,249 shares
of common stock were surrendered to the Company to satisfy tax withholding obligations totaling $99,000 and $62,000, respectively,
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. The Company awarded 862,518 and
501,666 shares of restricted stock to officers and directors of the Company in fiscal 2019 and 2018, respectively.
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 bases 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, the Company considers whether it is more likely than not that some or all of
the deferred tax assets will not be realized. The Company establishes a valuation allowance when it is more likely than not that
all or a portion of deferred tax assets will not be realized. See Note 7 - Income Taxes for further details.
The
Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of
whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. At January 31, 2020,
the Company believes it has appropriately accounted for any uncertain tax positions.
Net
Loss Per Common Share
The
Company presents basic and diluted earnings per share (“EPS”) data for our common stock. Our Series A Convertible
Preferred Stock were considered participating securities under ASC 260, Earnings Per Share (“ASC 260”) which
means the security may participate in undistributed earnings with common stock. The holders of the Series A Convertible Preferred
Stock were entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends,
other than dividends in the form of common stock. In accordance with ASC 260, the Company is required to use the two-class method
when computing EPS. The two-class method is an earnings allocation formula that determines EPS for each class of common stock
and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating
securities based on their respective weighted-average shares outstanding for the period (with the exception of the gain on the
redemption of our Series A Convertible Preferred Stock, which was allocated in its entirety to the common stock).
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 vesting term. In accordance with ASC 260, securities are deemed not to
be participating in losses if there is no obligation to fund such losses. The Series A Convertible Preferred Stock does not participate
in losses, and as a result, the Company does not allocate losses to these securities in periods of loss. Diluted EPS for our common
stock is computed using the more dilutive of the two-class method or the “if-converted” and treasury stock methods.
See Note 3 – Preferred Stock for further discussion of the redemption of our Series A Convertible Preferred Stock.
The
following is the calculation of the basic and diluted net loss per share of common stock:
|
|
Fiscal Year
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(2,863,000
|
)
|
|
$
|
(5,865,000
|
)
|
Add: redemption of Series A Convertible Preferred Stock
|
|
|
4,894,000
|
|
|
|
—
|
|
Net income (loss) attributable to common shareholders
|
|
|
2,031,000
|
|
|
|
(5,865,000
|
)
|
Weighted average shares outstanding - Basic (1)
|
|
|
22,739,679
|
|
|
|
19,540,980
|
|
Effect of dilutive securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (2)
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding - Diluted
|
|
|
22,739,679
|
|
|
|
19,540,980
|
|
Basic net income (loss) per share of common stock (3)
|
|
$
|
0.09
|
|
|
$
|
(0.30
|
)
|
Diluted net loss per share of common stock (3)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.30
|
)
|
|
(1)
|
Excludes
803,498 and 1,063,866 unvested restricted shares of common stock as of January 31, 2020 and 2019, respectively, which are
considered non-participating securities.
|
|
|
|
|
(2)
|
Diluted
net loss per share excludes the effect of shares that are anti-dilutive. As of January 31, 2020, there were zero outstanding
shares of Series A Convertible Preferred Stock, 798,603 outstanding stock options and 803,498 unvested restricted shares of
common stock. As of January 31, 2019, there were 2,895,464 shares of Series A Convertible Preferred Stock, 1,580,657 outstanding
stock options and 1,063,866 unvested restricted shares of common stock.
|
|
|
|
|
(3)
|
See
Note 3 – Preferred Stock for further discussion of the redemption of our Series A Convertible Preferred Stock, which
resulted in an adjustment to net income (loss) attributable to common stockholders in the Company’s basic and diluted
EPS calculations for year ended January 31, 2020.
|
Other
Operating Costs
Executive
Transition Costs
We
recorded $789,000 in cost related to replacing the Company’s CEO in the fiscal year ended January 31, 2020. These costs,
which include placement fees, retention bonuses for existing key personnel and certain required consulting costs. Each of these
costs are directly attributable to the successful placement of our new CEO with the Company.
Rationalization
Charges
In
the fourth quarter of fiscal 2019, we implemented a rationalization plan to make the operation of the Company more efficient and
for the purpose of aligning its personnel needs and capital requirements with the sale of the ECM Assets. The rationalization
plan included a reduction in workforce of approximately twenty (20) employees, or approximately twenty percent (20%) of the Company’s
total workforce. As a result of the rationalization plan, the Company recorded $388,000 in one-time severance and other employee
termination-related costs that has been accrued for within accrued expenses and will paid in fiscal 2020. The Company is not currently
aware of any other significant charges it will incur as a result of the rationalization plan.
Transaction
Costs
The
Company incurred costs to (i) sell the ECM Assets and (ii) account for the immaterial correction of an error in the third quarter
ended October 31, 2019. In the sale of the ECM Assets, the Company incurred approximately $631,000 of cost from its financial
adviser, legal cost and certain consulting costs that were not conditioned upon the successful sale of the ECM Assets. These costs
were accrued as of January 31, 2020. The Company incurred approximately $1,300,000 of additional transaction cost that were incurred
or conditioned upon closing the sale of the ECM Assets that are recorded in February 2020 (the date of closing the ECM Assets).
Separately, the Company incurred approximately $230,000 of legal and accounting cost in conjunction with the company’s immaterial
correction of an error (See above in this Note). These costs were necessary to file the Company’s third quarter, 10-Q, for
the period ended October 30, 2019 and this was completed on January 8, 2020.
Impairment
of Long-Lived Assets
The
Company acquired a product known as Clinical Analytics in its portfolio in October 2013. As a result of its focused attention
in the marketplace on the middle of the revenue cycle, the Company moved away from selling the product. The Company identified
a triggering event in the fourth quarter of fiscal 2018 for impairment of long-lived asset associated with Clinical Analytics.
The Company sole customer on Clinical Analytics terminated its contract. Upon review, the Company has determined that the market
for Clinical Analytics and for the middle of the revenue cycle are very different, and accordingly, the Company does not anticipate
or forecast future sales for this product. The Company has determined that intangible assets and remaining software development
associated with Clinical Analytics were fully impaired and should be removed from its balance sheet. In the fourth quarter of
fiscal 2018, we took a charge to income of $3,681,000 for impairment of the long-lived intangible assets ($3,226,000) and the
remaining software development costs ($455,000) associated with this product. The Company has no other intangible assets or software
development that is not associated with its core solutions in the middle of the revenue cycle.
Loss
on Exit of Operating Lease
In
an effort to reduce ongoing operating expenses, we closed our New York office in the second quarter of fiscal 2018 and subleased
the office space for the remaining period of the original lease term, which ended on November 2019. As a result of vacating and
subleasing the office, we recorded a $472,000 loss on exit of the operating lease in the second quarter of fiscal 2018, which
captures the net cash flows associated with the vacated premises, including receipts of rent from our sublessee totaling $384,000,
and the $48,000 loss incurred on the disposal of fixed assets. In addition, in the third quarter of fiscal 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 fiscal 2018.
Loss
Contingencies
We
are subject to the possibility of various loss contingencies arising in the normal course of business. We consider the likelihood
of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount
of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been
incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information
available to us to determine whether to accrue for a loss contingency and adjust any previous accrual.
Recent
Accounting Pronouncements
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which removes Step 2 from the goodwill impairment test. The standard became effective for us on February 1, 2020.
Early adoption of this update is permitted. We do not expect that the adoption of this ASU will have a significant impact on our
consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, to remove, modify, and add certain disclosure requirements within Topic 820 in order
to improve the effectiveness of fair value disclosures in the notes to financial statements. The standard became effective for
us on February 1, 2020. We are currently evaluating the impact of adoption of this new standard and do not believe that the adoption
of this ASU will have a significant impact on our consolidated financial statements.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the
general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting
entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual
periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period.
Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on
a retrospective or modified retrospective basis. The standard will become effective for us on February 1, 2021. We are currently
evaluating the impact of the new standard on our consolidated financial statements and related disclosures.
NOTE
3 — 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 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 at $2.00 per share for a total
redemption payment of $5,813,000, which includes $22,000 in 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 year ended January 31, 2020.
Balance at January 31, 2019
|
|
$
|
8,686,000
|
|
Redemption of Series A Convertible Preferred Stock
|
|
|
(5,791,000
|
)
|
Fees paid for redemption of Series A Convertible Preferred Stock
|
|
|
(22,000
|
)
|
Previously recognized beneficial conversion feature
|
|
|
2,021,000
|
|
Return from the preferred stockholders
|
|
$
|
4,894,000
|
|
See
Note 2 for the Company’s basic and diluted EPS calculations.
NOTE
4 — OPERATING LEASES
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 Company sub-subleases the office space for $24,000 per month until the lease expired on November 30, 2019. The Company has
not been relieved of its leasing obligation during the sub-lease period. The associated cease use liability reduced the right-of-use
asset upon adoption of ASC 842. The Company used a discount rate of 8.0% to determine the lease liability.
Total
costs associated with leased assets are as follows:
|
|
Year Ended
January 31, 2020
|
|
Operating lease cost
|
|
$
|
189,000
|
|
Sublease income
|
|
|
(240,000
|
)
|
Total operating lease income
|
|
$
|
(51,000
|
)
|
In
fiscal 2019, operating lease payments of $478,000 and cash receipts from the sublease totaling $240,000 were included within cash
flows from operating activities in the consolidated statements of cash flows.
In
the third quarter of fiscal 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 2018. As of January 31, 2019, the total minimum
rentals due and to be received under this noncancelable sublease were $478,000 and $216,000, respectively. 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 12 – Commitments and Contingencies for further details on our shared office arrangement.
Rent
and leasing expense for facilities and equipment was $174,000 and $964,000 for fiscal years 2019 and 2018, respectively.
Substantially all, of the Company’s rent expense for fiscal year 2019 is related to the membership agreement with WeWork
(a shared office space located in Atlanta, GA) which is not considered a lease.
The
Company entered into a new operating lease for its corporate headquarters subsequent to January 31, 2020, see Note 14.
NOTE
5 — DEBT
Term
Loan and Line of Credit with Wells Fargo
On
November 21, 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative
agent, and other lender parties thereto. Pursuant to the Credit Agreement, the lenders agreed to provide a $10,000,000 senior
term loan and a $5,000,000 revolving line of credit to our primary operating subsidiary. Amounts outstanding under the Credit
Agreement bear interest at either LIBOR or the base rate, as elected by the Company, plus an applicable margin. Subject to the
Company’s leverage ratio, pursuant to the terms of the amendment to the Credit Agreement entered into as of April 15, 2015,
the applicable LIBOR rate margin varies from 4.25% to 6.25%, and the applicable base rate margin varies from 3.25% to 5.25%, plus,
after the effective date of the amendment to the Credit Agreement entered into as of September 11, 2019, a “paid in kind”
rate, or PIK Rate, of 2.75%. Amendments to the Credit Agreement reduced the Company’s capacity on the existing revolving
credit from $5,000,000 to $1,500,000 and extended the original term loan and line of credit maturity date to August 21, 2020.
The senior term loan principal balance was payable in quarterly installments, which started in March 2015 and would continue through
the maturity date, with the full remaining unpaid principal balance due at maturity. Financing costs associated with the new credit
facility were being amortized over its term on a straight-line basis, which is not materially different from the effective interest
method.
The
Credit Agreement 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). In addition, the Credit Agreement prohibited the
Company from paying dividends on the common and preferred stock.
In
connection with entering into the Loan and Security Agreement with Bridge Bank as discussed below, the Company terminated the
Credit Agreement, as amended from time to time, effective December 11, 2019, and repaid all outstanding amounts due thereunder.
Term
Loan and Revolving Credit Facility with Bridge Bank
On
December 11, 2019, the Company entered into a new Loan and Security Agreement (the “Loan and Security Agreement”)
with Bridge Bank, a division of Western Alliance Bank, consisting of a $4,000,000 term loan and a $2,000,000 revolving credit
facility. The proceeds from the term loan were used to repay all outstanding balances under its existing term loan with Wells
Fargo Bank. Amounts outstanding under the new term loan shall bear interest at a per annum rate equal to the higher of (a) the
Prime Rate (as published in The Wall Street Journal) plus 1.50% or (b) 6.50%. Under the terms of the 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 term
loan and revolving credit facility provide support for working capital, capital expenditures and other general corporate purposes,
including permitted acquisitions. The outstanding term loan is secured by substantially all of our assets. Financing costs associated
with the Loan and Security Agreement are being amortized over its term on a straight-line basis, which is not materially different
from the effective interest method.
The
new revolving credit facility has a maturity date of twenty-four months and advances shall bear interest at a per annum rate equal
to the higher of (a) the Prime Rate (as published in The Wall Street Journal) plus 1.25% or (b) 6.25%. The revolving credit facility
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 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 Company was in compliance with the asset coverage ratio covenant, however, was not compliant
with the EBITDA covenant, as described above. An appropriate waiver was received by Bridge Bank for the covenant violation as
of January 31, 2020. Based upon the borrowing base formula set forth in the Loan and Security Agreement, as of January 31, 2020,
the Company had access to the full amount of the $2,000,000 revolving credit facility. As of January 31, 2020, the Company had
no outstanding borrowings under the revolving credit facility
In
connection with entering into the Loan and Security Agreement discussed above, effective December 11, 2019 the Company terminated
the Credit Agreement with Wells Fargo Bank, N.A., as administrative agent, and other lender parties thereto., dated November 21,
2014, as amended from time to time, and repaid all outstanding amounts due thereunder.
As
described in Note 14 – Subsequent Events, in February 2020 the Company prepaid the $4.0 million outstanding term loan with
Bridge Bank in full with proceeds from the sale of the ECM Business, as required under the Loan and Security Agreement. Accordingly,
we reclassified the term loan from non-current to current on the consolidated balance sheet as of January 31, 2020.
Outstanding
principal balances on debt consisted of the following at:
|
|
January 31, 2020
|
|
|
January 31, 2019
|
|
Term loan
|
|
$
|
4,000,000
|
|
|
$
|
4,030,000
|
|
Deferred financing cost
|
|
|
(175,000
|
)
|
|
|
(82,000
|
)
|
Total
|
|
|
3,825,000
|
|
|
|
3,948,000
|
|
Less: Current portion
|
|
|
(3,825,000
|
)
|
|
|
(597,000
|
)
|
Non-current portion of debt
|
|
$
|
—
|
|
|
$
|
3,351,000
|
|
NOTE
6 — GOODWILL AND INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
January 31, 2020
|
|
|
Estimated
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Net Assets
|
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
5-10 years
|
|
$
|
5,397,000
|
|
|
$
|
4,282,000
|
|
|
$
|
1,115,000
|
|
|
|
January 31, 2019
|
|
|
Estimated
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Net Assets
|
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
5-10 years
|
|
$
|
5,397,000
|
|
|
$
|
3,756,000
|
|
|
$
|
1,641,000
|
|
Covenants not to compete
|
|
3 years
|
|
|
130,000
|
|
|
|
102,000
|
|
|
|
28,000
|
|
Total
|
|
|
|
$
|
5,527,000
|
|
|
$
|
3,858,000
|
|
|
$
|
1,669,000
|
|
In
fiscal 2018, we recognized an impairment charge of $3,681,000 as the carrying value of finite-lived intangible assets and capitalized
product development cost relating to our Clinical Analytics solution no longer appeared recoverable. This impairment charge is
included in the “Impairment of long-lived assets” line in our consolidated statements of operations. See Note 12 –
Commitments and Contingencies for royalty liability associated with our Clinical Analytics solution.
The
Company recognized amortization expense on intangible assets of $554,000 and $937,000 for fiscal years 2019 and 2018, respectively.
Future
amortization expense for intangible assets is estimated as follows:
|
|
Annual Amortization Expense
|
|
2020
|
|
$
|
491,000
|
|
2021
|
|
|
455,000
|
|
2022
|
|
|
169,000
|
|
Total
|
|
$
|
1,115,000
|
|
NOTE
7 — INCOME TAXES
Income
taxes consist of the following:
|
|
Fiscal Year
|
|
|
|
2019
|
|
|
2018
|
|
Current tax (expense) benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
7,000
|
|
State
|
|
|
(22,000
|
)
|
|
|
(7,000
|
)
|
Total current provision
|
|
|
(22,000
|
)
|
|
|
—
|
|
Deferred tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax benefit
|
|
|
—
|
|
|
|
—
|
|
Current and deferred tax expense
|
|
$
|
(22,000
|
)
|
|
$
|
—
|
|
The
income tax benefit differs from the amount computed using the federal statutory income tax rates of 21% for fiscal 2019 and 2018
as follows:
|
|
Fiscal Year
|
|
|
|
2019
|
|
|
2018
|
|
Federal tax benefit at statutory rate
|
|
$
|
(591,000
|
)
|
|
$
|
(1,232,000
|
)
|
State and local tax expense, net of federal (benefit)
|
|
|
18,000
|
|
|
|
(95,000
|
)
|
Decrease in valuation allowance
|
|
|
(178,000
|
)
|
|
|
(767,000
|
)
|
Permanent items:
|
|
|
|
|
|
|
|
|
Incentive stock options
|
|
|
8,000
|
|
|
|
18,000
|
|
Other
|
|
|
7,000
|
|
|
|
1,000
|
|
Reserve for uncertain tax position
|
|
|
29,000
|
|
|
|
32,000
|
|
R&D Credit (Federal)
|
|
|
(144,000
|
)
|
|
|
(158,000
|
)
|
R&D Credit (State)
|
|
|
—
|
|
|
|
134,000
|
|
Expiring carryforwards
|
|
|
463,000
|
|
|
|
1,965,000
|
|
Stock-based compensation
|
|
|
70,000
|
|
|
|
73,000
|
|
Other
|
|
|
340,000
|
|
|
|
29,000
|
|
Income tax expense
|
|
$
|
22,000
|
|
|
$
|
—
|
|
The
Company provides deferred income taxes for temporary differences between assets and liabilities recognized for financial reporting
and income tax purposes. The income tax effects of these temporary differences and credits are as follows:
|
|
January 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
24,000
|
|
|
$
|
84,000
|
|
Deferred revenue
|
|
|
26,000
|
|
|
|
63,000
|
|
Accruals
|
|
|
45,000
|
|
|
|
141,000
|
|
Net operating loss carryforwards
|
|
|
10,063,000
|
|
|
|
9,532,000
|
|
Stock compensation expense
|
|
|
70,000
|
|
|
|
205,000
|
|
Property and equipment
|
|
|
6,000
|
|
|
|
30,000
|
|
R&D credit
|
|
|
1,365,000
|
|
|
|
1,102,000
|
|
Other
|
|
|
153,000
|
|
|
|
133,000
|
|
Total deferred tax assets
|
|
|
11,752,000
|
|
|
|
11,290,000
|
|
Valuation allowance
|
|
|
(10,902,000
|
)
|
|
|
(11,045,000
|
)
|
Net deferred tax assets
|
|
|
850,000
|
|
|
|
245,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets
|
|
|
(850,000
|
)
|
|
|
(245,000
|
)
|
Total deferred tax liabilities
|
|
|
(850,000
|
)
|
|
|
(245,000
|
)
|
Net deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
At
January 31, 2020, the Company had U.S. federal net operating loss carry forwards of $43,053,000. $32,920,000 of these net operating
losses expire at various dates through fiscal 2037. The remaining $10,133,000 of these net operating losses can be carried forward
indefinitely under the provisions of the Tax Cuts and Jobs Act (TCJA). The TCJA also eliminated the ability to carryback net operating
losses. The Company also had state net operating loss carry forwards of $16,845,000 and Federal R&D credit carry forwards
of $1,521,000, and Georgia R&D credit carry forwards of $188,000, all of which expire through fiscal 2039.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The
Company established a valuation allowance of $10,902,000 and $11,045,000 at January 31, 2020 and 2019, respectively. The decrease
in the valuation allowance of $143,000 was driven primarily by the expiration of federal net operating loss carry forwards.
The
Company and its subsidiary are subject to U.S. federal income tax as well as income taxes in multiple state and local jurisdictions.
The Company has concluded all U.S. federal tax matters for years through January 31, 2016. All material state and local income
tax matters have been concluded for years through January 31, 2015. The Company is no longer subject to IRS examination for periods
prior to the tax year ended January 31, 2016; however, carryforward losses that were generated prior to the tax year ended January
31, 2016 may still be adjusted by the IRS if they are used in a future period.
The
Company has recorded a reserve, including interest and penalties, for uncertain tax positions of $304,000 and $275,000 as of January
31, 2020 and 2019, respectively. As of January 31, 2020 and 2019, the Company had no accrued interest and penalties associated
with unrecognized tax benefits.
A
reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as
follows:
|
|
2019
|
|
|
2018
|
|
Beginning of fiscal year
|
|
$
|
275,000
|
|
|
$
|
295,000
|
|
Additions for tax positions for the current year
|
|
|
30,000
|
|
|
|
32,000
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Subtractions for tax positions of prior years
|
|
|
(1,000
|
)
|
|
|
(52,000
|
)
|
End of fiscal year
|
|
$
|
304,000
|
|
|
$
|
275,000
|
|
NOTE
8 — MAJOR CLIENTS
During
fiscal year 2019 and 2018, no one individual client accounted for 10% or more of our total revenues. Four clients represented
17%, 15%, 11% and 10%, respectively, of total accounts receivable as of January 31, 2020 and two clients represented 12% and 9%,
respectively, of total accounts receivable as of January 31, 2019.
NOTE
9 — EMPLOYEE RETIREMENT PLAN
The
Company has established a 401(k) retirement plan that covers all associates. Company contributions to the plan may be made at
the discretion of the board of directors. The Company matched 100% up to the first 4% of compensation deferred by each associate
in the 401(k) plan through December 31, 2018. Effective January 1, 2019, the Company’s matched amount was decreased to 50%
up to the first 4% of compensation deferred by each associate. The total compensation expense for this matching contribution was
$262,000 and $483,000 in fiscal 2019 and 2018, respectively.
NOTE
10 — EMPLOYEE STOCK PURCHASE PLAN
Though
December 2019, the Company had an Employee Stock Purchase Plan under which associates were able to purchase up to 1,000,000 shares
of common stock. Under the plan, eligible associates could elect to contribute, through payroll deductions, up to 10% of their
base pay to a trust during any plan year, i.e., January 1 through December 31 of the same year. Semi-annually, typically in January
and July of each year, the plan issued, for the benefit of the employees, shares of common stock at the lesser of (a) 85% of the
fair market value of the common stock on the first day of the vesting period (January 1 or July 1), or (b) 85% of the fair market
value of the common stock on the last day of the vesting period (June 30 or December 31 of the same year).
The
Company recognized compensation expense of $4,000 for fiscal years 2019 and 2018 under this plan.
During
fiscal 2019, 5,072 shares were purchased at the price of $0.75 per share and 3,238 shares were purchased at the price of $1.18
per share; during fiscal 2018, 13,339 shares were purchased at the price of $0.69 per share and 10,370 shares were purchased at
the price of $1.20 per share. The cash received for shares purchased from the plan was $8,000 and $22,000 in fiscal 2019 and 2018,
respectively.
Effective
January 1, 2020, the Company discontinued its Employee Stock Purchase Plan.