STREAMLINE HEALTH SOLUTIONS, INC. FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report and in other materials we file with theSEC or otherwise make public. In this Report, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements. In addition, our senior management makes forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue, income, receivables, backlog, client attrition, acquisitions and other growth opportunities, sources of funding operations and acquisitions, the integration of our solutions, the performance of our channel partner relationships, the sufficiency of available liquidity, research and development, and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting 21
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undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.
Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under "Risk Factors" set forth in Part II, Item 1A, and the other cautionary statements in other documents we file with theSEC , including the following:
· competitive products and pricing;
· product demand and market acceptance;
· entry into new markets;
· new product and services development and commercialization;
· key strategic alliances with vendors and channel partners that resell our
products;
· uncertainty in continued relationships with clients due to termination rights;
· our ability to control costs;
· availability, quality and security of products produced and services provided
by third-party vendors;
· the healthcare regulatory environment;
· potential changes in legislation, regulation and government funding affecting
the healthcare industry;
· healthcare information systems budgets;
· availability of healthcare information systems trained personnel for
implementation of new systems, as well as maintenance of legacy systems;
· the success of our relationships with channel partners;
· fluctuations in operating results;
· our future cash needs;
· the consummation of resources in researching acquisitions, business
opportunities or financings and capital market transactions;
· the failure to adequately integrate past and future acquisitions into our
business;
· our ability to complete the sale of the ECM Business;
· critical accounting policies and judgments;
· changes in accounting policies or procedures as may be required by the FASB or
other standard-setting organizations;
· changes in economic, business and market conditions impacting the healthcare
industry and the markets in which we operate;
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· our ability to maintain compliance with the terms of our credit arrangements;
and
· our ability to maintain compliance with the continued listing standards of The
NASDAQ Capital Market.
Most of these factors are beyond our ability to predict or control. Any of these
factors, or a combination of these factors, could materially affect our future
financial condition or results of operations and the ultimate accuracy of our
forward-looking statements. There also are other factors that we may not
describe (generally because we currently do not perceive them to be material)
that could cause actual results to differ materially from our expectations.
We expressly disclaim any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law.
Results of Operations
Revenues
Three Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Systems sales:
Proprietary software - perpetual license $ 636 $ - $ 636 100 %
Term license - 231 (231) (100) %
Hardware and third-party software 32 78 (46) (59) %
Professional services 626 577 49 8 %
Audit services 517 234 283 121 %
Maintenance and support 2,827 3,051 (224) (7) %
Software as a service 1,150 1,198 (48) (4) %
Total Revenues $ 5,788 $ 5,369 $ 419 8 %
Nine Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
System sales:
Proprietary software - perpetual license $ 936 $ 1,243 $ (307) (25) %
Term license 27 397 (370) (93) %
Hardware and third-party software 83 187 (104) (56) %
Professional services 1,615 1,086 529 49 %
Audit services 1,266 841 425 51 %
Maintenance and support 8,537 9,577 (1,040) (11) %
Software as a service 3,474 3,570 (96) (3) %
Total Revenues $ 15,938 $ 16,901 $ (963) (6) %
Proprietary software and term licenses - Proprietary software revenue recognized
for the three months ended October 31, 2019 increased by $636,000 and decreased
by $307,000 for the nine months ended October 31, 2019 , over the prior
comparable periods. As previously reported, perpetual license sales are less
predictable, from a timing standpoint, than other solutions sold by the
Company. This decrease for the nine months ended October 31, 2019 is
attributable to a large perpetual license sale of our Abstracting™ solution in
the first quarter of fiscal year 2018. The Company is able to influence sales of
these products; however, the timing can be difficult to manage as sales result
from our distribution partners or, from existing customers adding
licenses. Accordingly, we have less control over the timing of contract close
for perpetual licenses. Term license revenue recognized for the three and nine
months ended October 31, 2019 decreased by $231,000 and $370,000 , respectively,
over the prior comparable periods due to lost customers.
Hardware and third-party software - Revenue from hardware and third-party
software sales for the three and nine months ended
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Fluctuations from period to period are a function of client demand for ancillary scanners and copiers supporting the Company's ECM Business.
Professional services - For the three and nine-month periods endedOctober 31, 2019 , revenues from professional services increased by$49,000 and$529,000 , respectively, from the prior comparable periods. This increase in professional services revenue is primarily due to the timing of completion of a several, large, professional services agreements. The Company had previously re-assigned certain professional staff to support the success of eValuator. However, the Company was able to return these staff to billable projects in the first quarter of fiscal year 2019, resulting in higher professional services revenue for the three and nine-months endedOctober 31, 2019 over the prior comparable period. Audit services - Audit services revenue for the three and nine months endedOctober 31, 2019 increased by$283,000 and$425,000 , respectively, over the prior comparable periods. The Company realized higher demand for audit services in the fourth quarter of 2018, and that higher demand has continued through the first nine months of 2019. The Company's expertise, demonstrated and supported by eValuator, and the fact that our professional staff is onshore is believed to be a competitive advantage with regard to the audit services provided by the Company. The Company continues to expect higher volumes of audit services throughout the remainder of 2019. Maintenance and support - Revenue from maintenance and support for the three and nine months endedOctober 31, 2019 decreased by$224,000 and$1,040,000 , respectively, over the prior comparable periods. The decrease is primarily due to pricing pressure and cancellations by certain customers of our legacy products, primarily enterprise content management (ECM). The customer pricing difference and rate of customer cancellations has not exceeded the Company's budget for fiscal year 2019. The Company has worked the last 18 months to negotiate multi-year agreements on the majority of its current maintenance and support contracts comprising its current, legacy revenue base. This has had the impact of lowering revenues in exchange for longer, sustained revenue. The lower quarterly revenues, as compared to quarterly revenues in the prior year, will continue throughout fiscal 2019. Software as a Service (SaaS) - Revenue from SaaS for the three and nine months endedOctober 31, 2019 decreased by$48,000 and$96,000 , respectively from the prior comparable periods. This decrease resulted from cancellations by a few customers of our legacy products, primarily our financial management software. The growth in eValuator revenue overcame a portion of the revenue loss from financial management. The Company is expecting net revenue growth as eValuator is expected to overcome any loss of revenue from financial management software in the first quarter of fiscal year 2020. The Company expects the recent bookings of eValuator to positively impact revenue into the first quarter of fiscal year 2020. Cost of Sales Three Months Ended (in thousands): October 31, 2019 October 31, 2018 Change % Change Cost of systems sales $ 135 $ 223$ (88) (39) % Cost of professional services 493 675 (182) (27) % Cost of audit services 325 323 2 1 % Cost of maintenance and support 453 506 (53) (10) % Cost of software as a service 356 207 149 72 % Total cost of sales $ 1,762 $ 1,934$ (172) (9) % 24 Table of Contents Nine Months Ended (in thousands): October 31, 2019 October 31, 2018 Change % Change Cost of system sales $ 391 $ 763$ (372) (49) % Cost of professional services 1,616 2,079 (463) (22) % Cost of audit services 949 1,017 (68) (7) % Cost of maintenance and support 1,275 1,720 (445) (26) % Cost of software as a service 936 805 131 16 % Total cost of sales $ 5,167 $ 6,384$ (1,217) (19) % The decrease in overall cost of sales for the three and nine months endedOctober 31, 2019 from the comparable prior periods is primarily due to the reduction in depreciation and amortization as well as a reduction in client support personnel costs. As previously disclosed, the Company has lower depreciation and amortization due to certain assets being fully amortized and impairments of certain assets from previous quarters. Further, for the third quarter of fiscal year 2019, the Company had a net reduction in capitalized software development amortization expense of approximately$214,000 related to a correction of an immaterial error (See Note 2). Cost of system sales includes amortization and impairment of capitalized software expenditures and the cost of third-party hardware and software. The decrease in expense for the three and nine-month periods endedOctober 31, 2019 from the comparable prior periods was primarily due to the reduction in amortization of capitalized software costs as a result of assets becoming fully amortized, including our internally developed software. The cost of professional services includes compensation and benefits for personnel and related expenses. The decrease in expense for the three and nine-month periods from the prior comparable periods is primarily due to the decrease in professional services related to SaaS implementations, for which costs are deferred and amortized ratably over the estimated life of the SaaS customer relationship. The Company is benefiting from the effort required to implement SaaS related engagements as compared to the legacy on-premise software implementations. On-premise implementations, as was the case with legacy software products implementations, took longer and involved more cost. The cost of audit services includes compensation and benefits for audit services personnel, and related expenses. The increase in the cost associated with the three-month period endedOctober 31, 2019 is related to the increased volumes (and increased revenue) from the comparable period a year ago. The decrease in expense for the nine-month period endedOctober 31, 2019 is attributed to the reduction in personnel. The Company's audit services personnel utilize eValuator and it is believed that the product makes them more productive and efficient. The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third-party maintenance contracts. The decrease in expense for the three- and nine-month periods endedOctober 31, 2019 was primarily due to a decrease in personnel costs and a reduction in third-party maintenance contracts. The lower cost associated with these reductions are expected to benefit the remainder of fiscal year 2019, and beyond. The cost of SaaS solutions is relatively fixed, subject to inflation for the goods and services it requires. The expense for the three- and nine-month periods endedOctober 31, 2019 was slightly higher, as a result of higher amortization cost of capitalized software development, as compared to the previous periods. This is a different trend from the Company's capitalized software development amortization trends overall, and for the Company's other product categories. The higher amortization for the Company's SaaS products (the different trend) is a result of the amount of investment that the Company is putting into its newest product, eValuator. 25
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Selling, General and Administrative Expense
Three Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
General and administrative expenses $ 1,609 $ 1,613 $ (4) (0) %
Sales and marketing expenses 1,191 779 412 53 %
Total selling, general, and
administrative expense $ 2,800 $ 2,392 $ 408 17 %
Nine Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
General and administrative expenses $ 4,869 $ 5,314 $ (445) (8) %
Sales and marketing expenses 2,876 2,846 30 1 %
Total selling, general, and
administrative expense $ 7,745 $ 8,160 $ (415) (5) %
General and administrative expenses consist primarily of compensation and
related benefits, reimbursable travel and entertainment expenses related to our
executive and administrative staff, general corporate expenses, amortization of
intangible assets, and occupancy costs. The decrease in general and
administrative expenses for the three and nine-months ended October 31, 2019
from the comparable prior periods is primarily attributed to a reduction in
facility costs, bad debt expense and amortization of intangible assets. The
Company continues to realize a benefit from lower facility costs as compared to
the same period in the prior year. In the third quarter of fiscal year 2019,
however, some of those savings were absorbed by higher share-based compensation,
costs for professional services (financial and legal), and certain transaction
costs. We previously disclosed the Company's reduction in facility costs due to
relocation of the corporate headquarters in Atlanta, Georgia and subleasing of
the New York City office. The Company expects to continue to see less of this
benefit in comparison to prior years, as the costs in the prior year were
beginning to be realized, and the Company continues to expect higher share-based
compensation and professional costs through the end of fiscal year 2019.
Sales and marketing expenses consist primarily of compensation and related
benefits and reimbursable travel and entertainment expenses related to our sales
and marketing staff, as well as advertising and marketing expenses, including
trade shows. The increase in sales and marketing expenses include several
factors that have been previously reported by the Company, including (i) the
appointment of the Company's Chief Revenue Officer, a senior-level sales
operations leader, and additional members of the Company's Advisory Board , ,
(ii) payments to sales agents, and (iii) costs related to the share-based
compensation expense incurred in connection with the appointments referenced in
(i), each of which resulted in additional expenses not incurred in prior
periods. The Company has re-focused its sales and marketing dollars. The
targeted and focused approach has resulted in dollars that have a higher return.
Higher levels of sales and marketing costs should be expected as we continue to
move toward velocity driven, entrepreneurial growth trajectory.
Research and Development
Three Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Research and development expense $ 726 $ 1,026 $ (300) (29) %
Plus: Capitalized research and
development cost 852 759 93 12 %
Total research and development cost $ 1,578 $ 1,785 $ (207) (12) %
Nine Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Research and development expense $ 2,385 $ 3,302 $ (917) (28) %
Plus: Capitalized research and
development cost 2,730 2,288 442 19 %
Total research and development cost $ 5,115 $ 5,590 $ (475) (8) %
Research and development cost consist primarily of compensation and related benefits, the use of independent contractors for specific near-term development projects, and allocated occupancy expense. Total research and
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development cost for the three- and nine-month periods endedOctober 31, 2019 was consistent with that from the prior comparable periods. The Company has started an initiative to reduce its research and development costs as it focuses on the middle of the revenue cycle products, and no longer focuses on certain legacy products. The Company continues to evaluate the need for a flatter organization within engineering and to increase velocity and value in the core products offered by the Company. The Company is spending fewer dollars on maintenance for its legacy products from its engineering group as these products have attained maturity in the marketplace. For the nine months endedOctober 31, 2019 and 2018, as a percentage of revenues, total research and development costs were 32% and 33%, respectively. Executive transition cost Three Months Ended (in thousands): October 31, 2019 October 31, 2018 Change % Change
Executive transition cost $ 481 $ -$ 481 100 % Nine Months Ended (in thousands): October 31, 2019 October 31, 2018 Change % Change Executive transition cost $ 621 $ -$ 621 100 % We recorded$481,000 in cost related to replacing the Company's CEO in the third quarter of fiscal year 2019. These costs, which include placement fees, retention bonuses for existing key personnel and certain required consulting costs are expected to total$800,000 for fiscal year 2019. Each of these costs are directly attributable to the successful placement of our new CEO with the Company.
Loss on exit of operating lease
Three Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Loss on exit of operating lease $ - $ 562 $ (562) (100) %
Nine Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Loss on exit of operating lease $ - $ 1,368 $ (1,368) (100) %
In an effort to reduce our operating expenses, we closed our New York office in
the second quarter of fiscal year 2018 and subleased the office space for the
remaining period of the original lease term, which ends in November 2019 . As a
result of vacating and subleasing the office, we recorded a $1,368,000 loss on
exit of the operating lease in the nine months ended October 31, 2018 , which
captures the net cash flows associated with the vacated premises, including
receipts of rent from our sublessee, and the loss incurred on the disposals of
fixed assets.
Other Expense
Three Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Interest expense $ (91) $ (106) $ 15 (14) %
Miscellaneous expense (80) (25) (55) 220 %
Total other expense $ (171) $ (131) $ (40) 31 %
Nine Months Ended
(in thousands): October 31, 2019 October 31, 2018 Change % Change
Interest expense $ (239) $ (332) $ 93 28 %
Miscellaneous expense (224) (118) (106) (90) %
Total other expense $ (463) $ (450) $ (13) 3 %
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Interest expense consists of interest and commitment fees on the line of credit,
interest on the term loan, and is inclusive of deferred financing cost
amortization expense. Interest expense decreased for the three and nine months
ended October 31, 2019 from the prior comparable period primarily due to the
increase in capitalized interest on our internally developed software. The
higher miscellaneous expense for the three and nine-month periods ended October
31, 2019 are a direct result of a one-time finance cost associated with our work
to refinance the Company's debt arrangements. The Company incurred costs in
connection with the refinancing of the debt arrangements, as well as ongoing
costs in connection with its existing debt arrangements. The costs include
consulting, legal and administrative cost of the lender associated with the
refinancing. On a quarterly basis, the Company records the valuation adjustment
to the Montefiore liability (See Note 7 to consolidated financial statements)
through miscellaneous expense.
Provision for Income Taxes
We recorded tax expense for the three months endedOctober 31, 2019 and 2018 of$12,000 and$2,000 respectively. For the nine months endedOctober 31, 2019 and 2018 we recorded tax expense of$16,000 and$5,000 , respectively. Tax expense is comprised of estimated federal, state and local income tax provisions. The Company has significant net operating loss carryforwards and is not expected to be a federal tax payer in fiscal year 2019.
Use of Non-GAAP Financial Measures
In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used by management and the Board of Directors in its financial and operational decision-making, the Company has supplemented the Condensed Consolidated Financial Statements presented on a GAAP basis in this quarterly report on Form 10Q with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We define: (i) EBITDA as net earnings (loss) before net interest expense, income
tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as
net earnings (loss) before net interest expense, income tax expense (benefit),
depreciation, amortization, stock-based compensation expense, transaction
expenses and other expenses that do not relate to our core operations;
(iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net
revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided
by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA
Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison
of our operating performance on a consistent basis from period to period and
provide for a more complete understanding of factors and trends affecting our
business than GAAP measures alone. These measures assist management and the
board and may be useful to investors in comparing our operating performance
consistently over time as they remove the impact of our capital structure
(primarily interest charges), asset base (primarily depreciation and
amortization), items outside the control of the management team (taxes), and
expenses that do not relate to our core operations, including
transaction-related expenses (such as professional and advisory services) and
other costs that are expected to be non-recurring. Adjusted EBITDA removes the
impact of share-based compensation expense and valuation adjustments to assets
and liabilities, which are non-cash items. Adjusted EBITDA per diluted share
includes incremental shares in the share count that are considered anti-dilutive
in a GAAP net loss position.
The Board of Directors and management also use these measures as (i) one of the
primary methods for planning and forecasting overall expectations and for
evaluating, on at least a quarterly and annual basis, actual results against
such
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expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance. The lender under our Credit Agreement requires delivery of compliance certificates certifying compliance with financial covenants, certain of which are based on a measurement that is similar to the Adjusted EBITDA measurement reviewed by our management and Board of Directors. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share, as disclosed in this quarterly report on Form 10Q, have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA, and its variations are:
· EBITDA does not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments;
· EBITDA does not reflect changes in, or cash requirements for, our working
capital needs;
· EBITDA does not reflect the interest expense, or the cash requirements to
service interest or principal payments under our credit agreement;
· EBITDA does not reflect income tax payments that we may be required to
make; and
· Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and
EBITDA does not reflect any cash requirements for such replacements.
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and
prudently evaluate our business, we encourage readers to review the GAAP
financial statements included elsewhere in this quarterly report on Form 10Q,
and not rely on any single financial measure to evaluate our business. We also
strongly urge readers to review the reconciliation of these non-GAAP financial
measures to the most comparable GAAP measure in this section, along with the
Condensed Consolidated Financial Statements included elsewhere in this quarterly
report on Form 10Q.
The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to
net loss, the most comparable GAAP-based measure, as well as Adjusted EBITDA per
diluted share to net loss per diluted share. All of the items included in the
reconciliation from EBITDA and Adjusted EBITDA to loss and the related per share
calculations are either recurring non-cash items, or items that management does
not consider in assessing our on-going operating performance. In the case of the
non-cash items, management believes that investors may find it useful to assess
our comparative operating performance because the measures without such items
are less susceptible to variances in actual performance resulting from
depreciation, amortization and other expenses that do not relate to our core
operations and are more reflective of other factors that affect operating
performance. In the case of items that do not relate to our core
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operations, management believes that investors may find it useful to assess our
operating performance if the measures are presented without these items because
their financial impact does not reflect ongoing operating performance.
Three Months Ended Nine Months Ended
In thousands, except per share data October 31, 2019 October 31, 2018 October 31, 2019 October 31, 2018
Adjusted EBITDA Reconciliation
Net loss $ (164) $ (678) $ (459) $ (2,768)
Interest expense 91 106 239 332
Income tax expense 12 2 16 5
Depreciation 37 87 113 411
Amortization of capitalized software
development costs 227 249 644 895
Amortization of intangible assets 138 235 424 705
Amortization of other costs 45 101 150 294
EBITDA 386 102 1,127 (126)
Share-based compensation expense 290 125 719 492
Loss on disposal of fixed assets - 7 - 5
Non-cash valuation adjustments to
assets and liabilities 16 15 48 71
Other non-recurring operating expenses 481 562 562 1,368
Other non-recurring expenses 131 - 205 -
Adjusted EBITDA $ 1,304 $ 811 $ 2,661 $ 1,810
Adjusted EBITDA margin (1) 23 % 15 % 17 % 11 %
Adjusted EBITDA per Diluted Share
Reconciliation
Net income (loss) per common share -
diluted $ 0.22 $ (0.03) $ (0.02) $ (0.14)
Adjusted EBITDA per adjusted diluted
share (2) $ 0.05 $ 0.04 $ 0.11 0.08
Diluted weighted average shares (3) 21,598,146 19,655,882 20,435,055 19,495,745
Includable incremental shares -
adjusted EBITDA (4) 2,736,075 2,971,381 2,976,967 3,033,263
Adjusted diluted shares 24,334,221 22,627,263 23,412,022 22,529,008
--------------------------------------------------------------------------------
(1) Adjusted EBITDA as a percentage of GAAP net revenue.
(2) Adjusted EBITDA per adjusted diluted share for our common stock is computed
using the more dilutive of the two-class method or the if-converted method.
(3) Diluted EPS for our common stock was computed using the if-converted method,
which yields the same result as the two-class method.
(4) The number of incremental shares that would be dilutive under an assumption
that the Company is profitable during the reported period, which is only
applicable for a period in which the Company reports a GAAP net loss. If aGAAP profit is earned in the reported periods, no additional incremental
shares are assumed.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Note 2 to our consolidated financial statements in our Annual Report on Form 10K for the fiscal year endedJanuary 31, 2019 . There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10K for the fiscal year endedJanuary 31, 2019 , except as described in Note 2, Correction of Immaterial Errors, and below.
We adopted ASC 842 on
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corresponding lease liabilities be recognized within the consolidated balance sheets as right-to-use assets and operating or financing lease liabilities. Please refer to Note 3, "Leases", to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10Q for additional information regarding the impact of adoption.
Liquidity and Capital Resources
Our liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. Our primary cash requirements include regular payment of payroll and other business expenses, capital expenditures, and principal and interest payments on debt. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center. Operations are funded with cash generated by operations and borrowings under our credit arrangements. The Company believes that cash flows from operations and available credit arrangements are adequate to fund current obligations for the next twelve months. Cash and cash equivalent balances atOctober 31, 2019 andJanuary 31, 2019 were$1,220,000 and$2,376,000 , respectively. The decrease in cash during the current fiscal period is primarily the result of normal seasonality on the timing of our large maintenance invoices that are invoiced to customers and paid in the fourth quarter every year. See additional discussion below. There can be no assurance the Company will be able to raise the capital required to fund further expansion. As discussed in Note 9, in connection with entering into the Loan and Security Agreement, the Company terminated the Credit Agreement, effectiveDecember 11, 2019 , and repaid all outstanding amounts due thereunder. Prior to its termination, the Company had liquidity through the Credit Agreement, which is described in more detail in Note 4 to our condensed consolidated financial statements included herein. In order to draw upon the revolving line of credit, the Company's primary operating subsidiary was required to comply with customary information delivery and financial covenants, including the requirement that the Company maintain minimum liquidity of at least$1,000,000 . The Credit Agreement also required that the Company achieve certain minimum EBITDA levels, calculated pursuant to the Credit Agreement and measured, at all times prior to the effective date of the Fifth Amendment, on a quarter-end basis, of at least the required amounts in the relevant table set forth in Note 4 to our condensed consolidated financial statements included in Part I, Item 1 herein for the applicable period set forth therein. The Company has continuing liquidity through its new Loan and Security Agreement entered into onDecember 11, 2019 withBridge Bank , a division ofWestern Alliance Bank , consisting of a$4,000,000 new Term Loan and a$2,000,000 new Revolving Credit Facility, see Note 9. The proceeds from the term loan were used to repay all outstanding balances under its existing term loan withWells Fargo Bank . Amounts outstanding under the new Term Loan shall bear interest at per annum rate equal to the higher of (a) the Prime Rate (as published inThe Wall Street Journal ) plus 1.50% or (b) 6.50%. Under the terms of the Loan and Security Agreement the Company shall make interest-only payments through the twelve-month anniversary date after which the Company shall repay the new Term Loan in thirty-six equal and consecutive installments of principal, plus monthly payments of accrued interest. The new Revolving Credit Facility has a maturity date of twenty-four months and advances shall bear interest at a per annum rate equal to the higher of (a) the Prime Rate (as published inThe Wall Street Journal ) plus 1.25% or (b) 6.25%. The Revolving Line of Credit Facility can be advanced based upon 80% of eligible accounts receivable, as defined in the Loan and Security Agreement. The Loan and Security Agreement, as amended, includes financial covenants, including requirements that 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 onDecember 31, 2019 , the Company's Adjusted 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 Adjusted EBITDA or$150,000 . The agreement also requires the Company to maintain a minimum Asset Coverage Ratio. The Asset Coverage Ratio is determined based on the ratio of unrestricted cash plus certain accounts that arise in the ordinary course the Company's business divided by all outstanding obligations to the bank. Pursuant to the terms of the new Loan and Security Agreement, the Company is required to maintain a minimum Asset Coverage 31
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Ratio of at least 0.75 to 1.00 from
The Company was in compliance with its applicable loan covenants atOctober 31, 2019 . As ofOctober 31, 2019 , there were no outstanding borrowings under its line of credit. Upon closing and funding of the sale of the ECM Business (see below), the Company is required to repay the Term Loan; however, the Company will continue to have access to the Revolving Credit Facility. The Company has classified the prior term loan from Wells Fargo, as current as ofOctober 31, 2019 , because of its intent and ability to repay the replacement Term Loan, in full, on or before, a twelve-month period extending from theOctober 31, 2019 balance sheet date. As discussed in Note 9, the Company signed a definitive agreement to sell its legacy ECM business to and plans to use the proceeds of the sale to pay off its term loan withBridge 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 byStreamline Health's stockholders, and the Company expects the transaction to close no later thanMarch 31, 2020 and expects to receive$9.6 million in cash and cash equivalents after repaying its term loan and transaction fees.
Significant cash obligations
(in thousands) October 31, 2019 January 31, 2019
Term loan (1) $ 3,472 $ 3,948
Royalty liability (2) 953 905
--------------------------------------------------------------------------------
(1) Term loan balance is reported net of deferred financing costs of
to the condensed consolidated financial statements for additional
information.
(2) See Note 7 to the condensed consolidated financial statements for additional
information.
Operating cash flow activities
Nine Months Ended
(in thousands) October 31, 2019 October 31, 2018
Net loss $ (459) $ (2,768)
Non-cash adjustments to net loss 2,031 4,270
Cash impact of changes in assets and liabilities (2,547) (2,210)
Net cash provided by operating activities $ (975) $ (708)
The decrease in net cash provided by operating activities is due to the use of
cash by the Company to pay liabilities associated with restructuring the office
spaces in fiscal year 2018. Accrued expenses are lower by approximately
$400,000 in October 2019 compared with end of fiscal year 2018. This reflects
the payments of the lease obligations, as well as, certain other commitments.
Our typical clients are well-established hospitals, medical facilities and major
health information system companies that resell our solutions, which generally
have had good credit and payment histories for the industry. However, some
healthcare organizations have recently experienced significant operating losses
as a result of limits on third-party reimbursements from insurance companies and
governmental entities. Agreements with clients often involve significant amounts
and contract terms typically require clients to make progress payments. Adverse
economic events, as well as uncertainty in the credit markets, may adversely
affect the liquidity for some of our clients.
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The Company has large maintenance contracts that renew in its fourth quarter each year. The use of cash from operations has been a historical trend, that has continued for fiscal year 2019. The Company expects these maintenance agreements to be invoiced and collected similarly to years past, and, accordingly, the fourth quarter of fiscal year 2019, is expected to show a substantial cash inflow.
Investing cash flow activities
Nine Months Ended
(in thousands) October 31, 2019 October 31, 2018
Purchases of property and equipment $ (51) $ (21)
Proceeds from sales of property and equipment - 20
Capitalized software development costs (2,730) (2,288)
Net cash used in investing activities $ (2,781) $ (2,289)
The increase in cash used for investing activities in the nine months ended
October 31, 2019 over the prior comparable period is primarily the result of the
increase in capitalized software development costs, which is associated with the
higher effort spent on software development projects such as our newest product,
eValuator. See discussion and analysis in "Research and development costs"
above.
Financing cash flow activities
Nine Months Ended
(in thousands) October 31, 2019 October 31, 2018
Proceeds from issuance of common stock $ 9,663 $ -
Payments for costs directly attributable to the issuance of common stock
(681) -
Principal payments on term loan (448) (448)
Payments related to settlement of employee shared-based awards
(50) (62)
Redemption of Series A Convertible Preferred Stock (5,791) -
Fees paid for redemption of Series A Convertible Preferred Stock
(22) -
Payment of deferred financing costs (73) -
Other 2 31
Net cash provided by financing activities $ 2,600 $ (479)
The increase in cash provided by financing activities in the nine months ended
October 31, 2019 as compared to the prior year period was primarily the result
of issuance of 9,473,691 shares of common stock in consideration for aggregate
proceeds of $9,663,000 in a private placement transaction offset by the
redemption of all outstanding Series A Preferred Stock. See Note 5 for further
discussion of the redemption of our Series A Convertible Preferred Stock.
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