STREAMLINE HEALTH SOLUTIONS, INC. Executive Overview
The Company has 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. We continue to make decisions supporting our focus in the middle of the revenue cycle. Our healthcare provider customers are acute-care hospitals and related clinics. 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 2022, generally, in the same levels as fiscal 2021. InAugust 2021 , the Company acquired Avelead, a national provider of consulting services and software solutions focused on the middle of the revenue cycle. Avelead's flagship RevID software solution is a unique automated charge reconciliation tool that identifies discrepancies between a provider's clinical and billing departments, ensuring that every medical service is tracked, accounted for, and ultimately accurately billed, thereby reducing revenue leakage. RevID's 24-hour charge reconciliation is a significant improvement over legacy charge reconciliation methods in use today. There are significant development activities planned for RevID, and other Avelead solutions in fiscal 2022.
With the focus on the middle of the revenue cycle, the Company is committed to leading an industry movement to improve hospitals' financial performance by moving billing interventions upstream, to improve coding accuracy before billing, enabling our customers to reduce revenue leakage, mitigate both under-billing and over-billing risk, and reduce denials and days in accounts receivable. 20
By narrowing our focus to the middle of the revenue cycle, we believe there is a distinct and compelling value proposition that can help us attract more customers. 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 revenue cycle solutions like eValuator, CDI, Abstracting, RevID, and Avelead Compare are competitive in the market and enabled us to engage eight significant new customers in fiscal 2021. These eight new customers are some of the largest names in healthcare as we have focused our salesforce on industry-leading customers whose processes are often duplicated by smaller facilities.
Acquisitions and Divestitures:
The Company divested its ECM Assets onFebruary 24, 2020 . As discussed above, such divestiture is consistent with 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 13 - Discontinued Operations to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data". OnAugust 16, 2021 , the Company completed an acquisition of Avelead, a recognized leader in providing solutions and services to improve Revenue Integrity for healthcare providers nationwide. The Company believes Avelead's solutions will complement and extend the value the Company can deliver to its customers. Refer to Note 3 - Business Combination and Divestiture in our consolidated financial statements included in Part I, Item I, "Financial Statements" for further information on the Avelead acquisition. Macro-Economic Conditions:
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 customers and various resellers to provide information technology solutions to help providers meet these new requirements. Near the end of the Company's fiscal year endedJanuary 31, 2020 , the COVID-19 pandemic emerged globally, and it continued through the Company's fiscal year endedJanuary 31, 2022 . The pandemic, and its attendant economic damage, has had an adverse impact on our revenue and may continue to adversely affect our business, results of operations and financial condition. The ultimate extent of its impact on us will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and actions taken to contain COVID-19 or treat its impact among others. These and other potential impacts of COVID-19 could therefore continue to materially and adversely affect our business, results of operations and financial condition. In addition, theU.S. government, and other governments in jurisdictions in which we operate, have imposed severe sanctions and export controls againstRussia and Russian interests and threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them byRussia , is currently unknown and they could adversely affect our business, partners
or customers. 21 Results of Operations Statements of Operations for the fiscal years endedJanuary 31 (in thousands): 2022 (2) 2021 $ Change % Change Software licenses$ 1,057 $ 590 467 79 % Professional services 2,026 618 1,408 228 % Audit services 1,896 1,891 5 0 % Maintenance and support 4,323 4,586 (263 ) (6 )% Software as a service 8,077 3,661 4,416 121 % Total revenues 17,379 11,346 6,033 53 % Cost of sales 8,577 5,689 2,888 51 %
Selling, general and administrative 11,931 8,565 3,366
39 %
Research and development 4,782 2,933 1,849 63 %
Non-routine costs 2,856 - 2,856 100 %Loss on exit of operating lease - 105 (105
) (100 )% Total operating expenses 28,146 17,292 10,854 63 % Operating loss (10,767 ) (5,946 ) (4,821 ) 81 % Other income (expense), net 3,959 (113 ) 4,072 (3,604 )% Income tax (expense) benefit (109 ) 1,260 (1,369 ) (109 )%
Loss from continuing operations$ (6,917 ) $ (4,799 ) (2,118
) 44 % Adjusted EBITDA(1)$ (2,037 ) $ (1,893 ) (143 ) 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.
(2) We acquired all of the equity interests of Avelead on
the revenue and expenses associated with Avelead are included from that date
to the end of the Company's fiscal year ended January 31, 2022 .
The following table sets forth, for each fiscal year indicated, certain operating data as percentages of total revenues:
Statements of Operations (1)
Fiscal Year
2021 2020
Software licenses 6.1 % 5.2 %
Professional services 11.7 5.4
Audit services 10.9 16.7
Maintenance and support 24.9 40.4
Software as a service 46.5 32.3
Total revenues 100.0 % 100.0 %
Cost of sales 49.4 % 50.1 %Selling, general and administrative 68.7 75.5 Research and development 27.5 25.9 Non-Routine costs 16.4 - Loss on exit of operating lease - 0.9
Total operating expenses 162.0 % 152.4 % Operating loss (62.0 )% (52.4 )% Other expense, net 22.8 (1.0 ) Income tax (expense) benefit (0.6 ) 11.1
Loss from continuing operations (39.8 )% (42.3
)%
Cost of Sales to Revenues ratio, by revenue stream: Software licenses 45.9 % 84.9 % Services, maintenance and support 56.7 % 46.3
% Software as a service 42.3 % 52.1 %
(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 software licenses 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.
22
Comparison of Fiscal 2021 with 2020
Revenues
Fiscal Year 2021 to 2020 Change
(in thousands): 2021 2020 $ %
Software licenses:Proprietary software - perpetual license$ 582 $ 437 $ 145 33 % Term license 475 153 322 210 % Professional services 2,026 618 1,408 228 % Audit services 1,896 1,891 5 0 % Maintenance and support 4,323 4,586
(263 ) (6 )%
Software as a service 8,077 3,661 4,416 121 %
Total Revenues $ 17,379 $ 11,346 $ 6,033 53 %
Proprietary software and term licenses - Proprietary software revenues
recognized in fiscal 2021 were $582,000 , as compared to $437,000 in fiscal 2020.
The Company is experiencing a shift in business from perpetual software licenses
to software as a service. The increase in fiscal 2021 revenues as compared to
fiscal 2020 revenues was mainly driven by 3 larger perpetual license sales of
our CDI & Abstracting that signed late in fiscal 2021. The software license
sales come primarily from our channel partners. The Company has the ability to
influence sales of these products; however, the timing is difficult to manage as
sales are essentially the result of these channel partners. Term license revenue
for fiscal 2021 increased $322,000 from fiscal 2020, to $475,000 as one large
customers' multi-year term license renewed during fiscal 2021.
Professional services - Revenues from professional services in fiscal 2021 were
$2,026,000 as compared to $618,000 in fiscal 2020. The increase in professional
services included $1,735,000 of Avelead professional services revenue recorded
since the date of acquisition. The addition of Avelead professional services
revenue was offset by a decline in the legacy professional services revenue of
$327,000 . This decrease was due to a slower sales cycle coupled with delays in
ongoing implementation projects due to COVID-19. We anticipate an increase in
professional services revenue in fiscal 2022 as a result of contracts signed at
the end of fiscal 2021 in addition to expected fiscal 2022 bookings.
Audit services - Audit services revenue for fiscal 2021, as compared to fiscal
2020 revenue, remained flat. Looking ahead to fiscal 2022, the Company continues
to see demand for on-shore, technically proficient auditors in the marketplace.
The Company believes it has a competitive advantage utilizing eValuator for
these professional services. The Company expects modest growth for its audit
services business during fiscal 2022.
Maintenance and support - Revenues from maintenance and support in fiscal 2021
were $4,323,000 as compared to $4,586,000 in fiscal 2020. The decrease in
maintenance and support revenue in fiscal 2021 was primarily driven by a
decrease of $345,000 related to the Company's sunsetting of the clinical
analytics software and a customer cancellation. This decrease was partially
offset by maintenance revenue on new contracts. The Company expects a slight
decrease for the maintenance and support revenue for fiscal 2022 from pricing
pressure and terminations offset with new sales.
23
Software as a service (SaaS) - Revenues from SaaS in fiscal 2021 were
$8,077,000 , as compared to $3,661,000 in fiscal 2020. The increases in SaaS
revenue in fiscal 2021 include $2,790,000 of Avelead SaaS revenue recorded since
the date of acquisition. The remaining increase in fiscal 2021 revenue was
primarily attributable to growth associated with the Company's eValuator
product. The Company's eValuator product had five significant sales during
fiscal 2020 that resulted in full year revenue for fiscal 2021 compared to
partial year revenue in fiscal 2020 resulting in an increase to revenue of
1,278,000 year over year. The Company's eValuator product had five new
significant sales during fiscal 2021 that resulted in an increase to fiscal 2021
revenue of $834,000 We experienced one customer termination during Fiscal 2021
resulting in an impact to fiscal 2021 revenue. The Company expects substantial
growth in its SaaS business, year-over-year, and sequentially, in each quarter
of fiscal 2022.
Cost of Sales
Fiscal Year 2021 to 2020 Change
(in thousands): 2021 2020 $ %
Cost of software licenses $ 485 $ 501 $ (16 ) (3 )%
Cost of professional services 2,782 1,040 1,742 168 %
Cost of audit services 1,559 1,558 1 0 %Cost of maintenance and support 334 684 (350 )
(51 )% Cost of software as a service 3,417 1,906 1,511 79 % Total cost of sales$ 8,577 $ 5,689 $ 2,888 51 %
Total cost of sales includes personnel directly affiliated with earning the revenue, amortization of capitalized software expenditures, and royalties on third-party licensing of products used by the Company to deliver its solutions and services. The increase in total cost of sales includes$2,563,000 of Avelead cost of sales recorded since the date of acquisition. We incurred total amortization expense on internally developed software of$2,173,000 and$1,662,000 in fiscal 2021 and fiscal 2020, respectively. Cost of software licenses consists of costs associated with amortization of capitalized software costs for our CDI & Abstracting Solutions. The change from fiscal 2020 to fiscal 2021 remained relatively flat due to lower capitalization rates for these software solutions. The cost of professional services includes compensation and benefits for personnel and related expenses. The increase in cost of professional services for fiscal 2021 includes$1,517,000 related toAvelead Consulting since the date of acquisition. The remaining increase is attributable to an increase in employee costs related to compensation and benefits. The cost of audit services includes compensation and benefits for audit services personnel, and related expenses. These costs remained consistent, similar to revenue, from fiscal 2020 to fiscal 2021. The cost of maintenance and support includes compensation and benefits for customer support personnel. Total cost of maintenance and support for fiscal 2021 includes$40,000 related to Avelead since the date of acquisition. The addition of expense from the Avelead acquisition was offset by a decrease in cost of maintenance and support from fiscal 2020 to fiscal 2021 resulting from a reduction of salary and salary related expenses for employees that were terminated or reassigned to other products. The Company was able to redeploy existing resources to mitigate costs on certain legacy products. The cost of SaaS solutions consists of costs (i) associated with amortization of capitalized software costs for our eValuator, Financial Management, Avelead RevID and Avelead Compare Solutions, (ii) royalties payable to third-parties for use of their coding related content, and (iii) personnel and network related expenses to provision the application for each customer. The increase in cost of SaaS for fiscal 2021 includes$1,006,000 related to Avelead since the date of acquisition. The number of eValuator projects placed into service in fiscal 2021 compared to fiscal 2020, in addition to the increased investment in eValuator during fiscal 2021, resulted in an increase in related amortization expense of$195,000 . The royalty and network related agreements are becoming variable as the cost is derived by attributes of the customer's accessing the system. The royalties payable to third parties increased by$247,000 for fiscal 2021 compared to fiscal 2020. The growth in royalties payable is directly attributable to new customers beginning to use the system and triggering fees owed to the third-party coding content providers. The remaining year over year increase was driven by personnel related and infrastructure related expenses. The Company invested in additional personnel to support SaaS solutions as the customer base has been expanding. The Company anticipates the costs in these categories will continue to rise in fiscal 2022 as the Company continues to invest in eValuator and as new customers begin to use the system. 24
Selling, General and Administrative Expense
Fiscal Year 2021 to 2020 Change
(in thousands): 2021 2020 $ %
General and administrative expenses $ 7,896 $ 5,550 $ 2,346 42 %
Sales and marketing expenses 4,035 3,015 1,020 34 %
Total selling, general, and
administrative expense $ 11,931 $ 8,565 $ 3,366 39 %
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 increase in general and
administrative expenses for fiscal 2021 as compared to fiscal 2020 is primarily
attributed to the Avelead acquisition, resulting in an additional $1,178,000
expense for fiscal 2021. There was also an increase of professional fees of
$464,000 primarily attributable to the Avelead acquisition, along with expenses
related to the Special Meeting of Stockholders held in connection with the
Avelead acquisition. Further, share-based compensation was approximately
$429,000 higher in the fiscal 2021 as compared to the prior year. The Company
has previously announced an initial accelerated vesting schedule of granted
equity awards for its executives in lieu of cash bonuses. These accelerated
equity awards are causing a near-term increase in amortization of share-based
compensation for fiscal 2021. The remaining increase is primarily driven by
salaries and benefits associated with the Company's increase in executive and
administrative personnel.
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. Sales and marketing expenses for fiscal 2021 increased by approximately$647,000 , as compared to fiscal 2020, due to the Avelead acquisition. The remaining increases are primarily due to an increase in salaries and benefits associated with the Company's expansion and upgrade of its direct and indirect sales personnel. The Company has had limited travel as a result of the COVID-19 pandemic. The Company has been productive using web-based meeting media to continue its sales and customer service processes. As hospitals open themselves up to visitors, the Company looks forward to resuming travel and meeting its customers and prospects face-to-face. Research and Development Fiscal Year 2021 to 2020 Change (in thousands): 2021 2020 $ %
Research and development expense
63 %
Plus: Capitalized research and
development cost 1,431 1,825 (394 ) (22 )%
Total research and development cost
31 %
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, if material. Total research and development costs for fiscal 2021 include
$865,000 related to Avelead since the date of acquisition. The remaining
increase was related to increased spend with our development partner. The
Company continues to focus on and be more efficient in research and development
activities on those products with its highest growth prospects, primarily
eValuator. The Company expects fiscal 2022 total research and development spend
to continue at approximately the same level as fiscal 2021. For fiscal 2021, as
a percentage of revenue, total research and development costs were 36%. In
fiscal 2021, the Company was awarded $39,000 from the State of Georgia for its
annual research and development tax credit. At the end of fiscal 2021, the
cumulative balance of unused research and development credits was $125,000 .
These research and development tax credits can be applied to current Georgia
payroll taxes due. The fiscal 2022 and future research and development tax
credits are expected to be higher than fiscal 2021 due to the acquisition of
Avelead.
25
Non-Routine Costs
Fiscal Year 2021 to 2020 Change
(in thousands): 2021 2020 $ %
Non-routine costs $ 2,856 $ - $ 2,856 100 %
Refer to Note 2 - Summary of Significant Accounting Policies - Other Operating
Costs - Non-routine costs - in the consolidated financial statements included in
Part II, Item 8, "Financial Statements and Supplementary Data" for further
details with respect to Non-routine costs. The Non-routine costs for fiscal 2021
are primarily related to the transaction costs of Avelead acquisition and
executive bonuses that were transactional in nature.
Loss on Exit of Operating Lease
Fiscal Year 2021 to 2020 Change
(in thousands): 2021 2020 $ %
Loss on exit of operating lease $ -
Refer to Note 4 - Operating Leases in our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further details with respect to the Company's former shared office arrangement inAtlanta . In fiscal 2020, we recorded$105,000 in cost related to the remaining payments required under the agreement with the landlord on shared office space inAtlanta that was abandoned when the Company entered a new lease for office space inAlpharetta, Georgia . Other Income (Expense) Fiscal Year 2021 to 2020 Change (in thousands): 2021 2020 $ % Interest expense$ (236 ) $ (51 ) $ (185 ) (363 )%
Loss on early extinguishment of debt (43 ) - (43 )
(100 )%
Other 1,911 (62 ) 1,973 3,182 %
PPP Loan Forgiveness 2,327 - 2,327 100 %
Total other income (expense) $ 3,959 $ (113 ) $ 4,072 3604 %
Interest expense consists of interest associated with the term loan, deferred
financing costs, and less interest related to capitalization of software.
Interest expense increased for fiscal 2021 from the prior year primarily due to
the $10,000,000 term loan with Bridge Bank (Refer to Note 5 - Debt in the
consolidated financial statements included in Part II, Item 8, "Financial
Statements and Supplementary Data").
On March 2, 2021 , the Company entered into an Amended and Restated Loan and
Security Agreement, which replaced and superseded the Loan and Security
Agreement. This revolving credit facility was replaced with the Second Amended
and Restated Loan and Security Agreement that was put in place on August 26,
2021 . Accordingly, the Company wrote off $43,000 of deferred financing costs
from this loan as a loss on extinguishment of debt
Other income for fiscal year includes a valuation adjustment of $1,851,000 ,
related to the earnout liabilities associated with the Avelead acquisition
(Refer to Note 3 - Business Combination and Divestiture of the consolidated
financial statements included in Part II, Item 8, "Financial Statements and
Supplementary Data"), and $64,000 related to the sublease of the Alpharetta
location (Refer to Note 4 - Operating Leases of the consolidated financial
statements included in Part II, Item 8, "Financial Statements and Supplementary
Data"). Other expense for fiscal 2020 includes valuation adjustments on the
Montefiore minimum royalty liability and certain foreign exchange transaction
losses. Refer to Note 12 - Commitments and Contingencies to our consolidated
financial statements included in Part II, Item 8, "Financial Statements and
Supplementary Data" for further information concerning the resolution of the
Montefiore liability.
PPP Loan Forgiveness for fiscal 2021 reflects the financial impact of the
26 Provision for Income Taxes For continuing operations for the fiscal 2021 and 2020, we recorded income tax expense of$109,000 and income tax benefit of$1,260,000 , respectively, which is comprised of estimated federal, state, and local income tax provisions. The income tax benefit from continuing operations was netted with the income tax provision on discontinued operations as disclosed in prior filings resulting in$0 federal tax expense in fiscal 2020. The Company has a substantial amount of net operating losses for federal and state income tax purposes. For fiscal 2021, the net income tax expense is reported under continuing operations. Refer to Note 7 - Income Taxes - in the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for more information on the Company's adoption of ASU 2019-12.
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 Report 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 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, share-based compensation expense, transaction related expenses, and other expenses that do not relate to our core operations such as severance 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 in nature. 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 Second Amended and Restated 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. 27 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 Report 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 Second Amended and Restated
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 Report, 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, "Financial Statements and Supplementary Data".
The following table reconciles EBITDA and Adjusted EBITDA to net loss from continuing operations, and Adjusted EBITDA per diluted share to loss per diluted share for the fiscal years endedJanuary 31, 2022 and 2021 (amounts in thousands, except for share data). All of the items included in the reconciliation from EBITDA and Adjusted EBITDA to net loss from continuing operations 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.
28
Fiscal YearIn thousands, except per share data 2021
2020
Adjusted EBITDA Reconciliation Loss from continuing operations$ (6,917 )
$ (4,799 ) Interest expense 236 51 Income tax expense (benefit) 109 (1,260 ) Depreciation 68 64
Amortization of capitalized software development costs 1,848
1,662
Amortization of intangible assets 1,281
491
Amortization of other costs 449 359
EBITDA (2,926 ) (3,432 )Share-based compensation expense 2,216
1,403
Non-cash valuation adjustments to assets and liabilities (1,851 ) 31 Non-routine Costs 2,856 - Forgiveness of PPP Loan and accrued interest (2,327 ) - Other non-recurring expenses (48 ) - Loss on early extinguishment of debt 43 - Loss on exit of operating lease -
105
Adjusted EBITDA $ (2,037 ) $ (1,893 )
Adjusted EBITDA margin (1) (12 )% (17 )%
Adjusted EBITDA per Diluted Share Reconciliation
Loss from continuing operations per common share - diluted $ (0.16 ) $ (0.16 )
Net (loss) income per common share - diluted (3) $ (0.15 ) $ 0.01
Adjusted EBITDA per adjusted diluted share (2) $ (0.05 ) Diluted weighted average shares (3) 42,815,239
30,152,383
Includable incremental shares - adjusted EBITDA (4) 458,335
488,359
Adjusted diluted shares 43,273,574 30,640,742
(1) Adjusted EBITDA as a percentage of GAAP net revenues.
(2) Adjusted EBITDA per adjusted diluted share for the Company's common stock is
computed using the treasury stock method.
(3) Diluted weighted average shares and diluted EPS for our common stock method
was computed using the treasury stock method.
(4) The number of incremental shares that would be dilutive under an assumption
that the Company is profitable during the reported period, which is only
applicable for a period in which the Company reports a GAAP net loss. If a
GAAP profit is earned in the reported periods, no additional incremental
shares are assumed.
Application of Critical Accounting Policies
The 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, "Financial Statements and Supplementary Data" for a complete discussion of the significant accounting policies and methods used in the preparation of our consolidated financial statements. 29 Revenue Recognition
The Company derives revenue from the sale of internally developed software, either by licensing for local installation or by a SaaS delivery model, through our direct sales force or through third-party resellers. Licensed, locally installed customers 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 and consulting services 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-cancellable or contain significant penalties for early
cancellation, although customers 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. The Company recognizes revenue for implementation for certain of its
eValuator SaaS solution over the contract term, as it has been determined that
those implementation services are not a distinct performance obligation.
Services for other SaaS and Software solutions such as CDI, RevID and Compare,
have been determined as a distinct performance obligation. For these agreements,
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, software as a service 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, "Financial Statements and Supplementary
Data" 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 customers 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 to reduce total receivables reported to reflect only the amounts expected to be paid.
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 customers, 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 software
licenses 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 two 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 four 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.
30
Goodwill and other intangible assets were recognized in conjunction with the acquisitions ofInterpoint Partners, LLC ("Interpoint"),Meta Health Technology, Inc. ("Meta"), Clinical Looking Glass® ("CLG"), Opportune IT,Unibased Systems Architecture, Inc. ("Unibased"), and Avelead. Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally-developed software, customer 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 15 years, using the straight-line method. 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, "Financial Statements and Supplementary Data" 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 customers, (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 minor amounts of 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 the bank credit facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for twelve months from the date of issuance of the audit report on the Company's consolidated financial statements. Cash and cash equivalent balances atJanuary 31, 2022 and 2021 were$9,885,000 and$2,409,000 , respectively. 31 Capital Raise OnFebruary 25, 2021 , the Company entered into an underwriting agreement withCraig-Hallum Capital Group LLC , as the sole managing underwriter, relating to the underwritten public offering of an aggregate of 10,062,500 shares of the Company's common stock, par value$0.01 per share, which included 1,312,500 shares of common stock sold pursuant to the underwriter's exercise of an option to purchase additional shares of common stock to cover over-allotments (the "Offering"). The price to the public in the Offering was$1.60 per share of common stock. The gross proceeds to the Company from the Offering were approximately$16.1 million , before deducting underwriting discounts, commissions, and estimated offering expenses. The Offering closed onMarch 2, 2021 . The Company believes that cash flows from operations, the cash from the Offering and available credit facilities are adequate to fund current obligations for the next twelve months from issuance of the financial statements included in this report. 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. Authorized Shares Amendment OnMay 24, 2021 , the Company amended its Certificate of Incorporation, as amended, to increase the total number of authorized shares of the Company's common stock from 45,000,000 shares to 65,000,000 shares (the "Charter Amendment"). The Charter Amendment was initially approved by the board of directors of the Company, subject to stockholder approval, approved by the Company's stockholders at the 2021 Annual Meeting of Stockholders of the Company, held onMay 20, 2021 (the "2021 Annual Meeting"), and ratified by the Company's stockholders onJuly 29, 2021 at the Special Meeting (as defined and described in further detail below).
Also, at the 2021 Annual Meeting, the Company's stockholders approved an
amendment to the
As described in the Company's definitive proxy statement on Schedule 14A filed with theSEC onJuly 6, 2021 , because there may have been uncertainty regarding the validity or effectiveness of the prior approval of the Charter Amendment, the authorized shares increase effected thereby and the Third Amended 2013 Plan Amendment at the Annual Meeting, the board of directors of the Company asked the Company's stockholders to ratify the approval, filing and effectiveness of the Charter Amendment and the approval and effectiveness of the Third Amended 2013 Plan Amendment at a special meeting of the stockholders held onJuly 29, 2021 in order to eliminate such uncertainty (the "Special Meeting"). At the Special Meeting, the Company's stockholders ratified the approval, filing and effectiveness of the Charter Amendment and the approval and effectiveness of the Third Amended 2013 Plan Amendment. Credit Facility
The Company has liquidity through the Second Amended and Restated Loan and Security Agreement described in more detail in Note 5 - Debt in our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data". The Company has a new term loan facility with an initial, maximum, principal amount of$10,000,000 . Amounts outstanding under the Second Amended and Restated Loan and Security Agreement bear interest at a per annum rate equal to the Prime Rate (as published inThe Wall Street Journal ) plus 1.5%, with a Prime "floor" rate of 3.25%. Pursuant to the Second Amended and Restated Loan and Security Agreement, the Company's prior$3,000,000 revolving credit facility withBridge Bank was terminated. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility.
The Second Amended and Restated Loan and Security Agreement includes customary financial covenants as follows:
a. Minimum Cash. Borrowers shall, at all times, maintain unrestricted cash in an
amount not less than (i) on the Closing Date and for the first eleven (11)
months immediately following the Closing Date, Five Million Dollars
($5,000,000 ) and (ii) at all times thereafter, Three Million Dollars
($3,000,000 ).
b. Maximum Debt to ARR Ratio. Borrowers' Maximum Debt to ARR Ratio, measured on
a quarterly basis as of the last day of each fiscal quarter, shall not be
greater than the amount set forth under the heading "Maximum Debt to ARRRatio" as of, and for each of the dates appearing adjacent to such "Maximum
Debt to ARR Ratio".
Maximum Debt to
Quarter Ending ARR Ratio
October 31, 2021 0.80 to 1.00
January 31, 2022 0.75 to 1.00
April 30, 2022 0.65 to 1.00
July 31, 2022 0.55 to 1.00
October 31, 2022 0.50 to 1.00
January 31, 2023 0.45 to 1.00
c. Maximum Debt to Adjusted EBITDA Ratio. Commencing with the quarter ending
a quarterly basis as of the last day of each fiscal quarter for the trailing
four (4) quarter period then ended, shall not be greater than the amount set
forth under the heading "Maximum Debt to Adjusted EBITDA Ratio" as of, and
for each of the dates appearing adjacent to such "Maximum Debt to Adjusted
EBITDA Ratio".
Maximum Debt to
Adjusted EBITDA
Quarter Ending Ratio
April 30, 2023 11.30 to 1.00
July 31, 2023 4.15 to 1.00
October 31, 2023 2.50
to 1.00
d. Fixed Charge Coverage Ratio. Commencing with the quarter ending
2023, Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than
1.20 to 1.00, measured on a quarterly basis as of the last day of each fiscal
quarter for the trailing four (4) quarter period then ended.
The Second Amended and Restated Loan and Security Agreement also includes
customary negative covenants, subject to exceptions, which limit transfers,
capital expenditures, indebtedness, certain liens, investments, acquisitions,
dispositions of assets, restricted payments, and the business activities of the
Company, as well as customary representations and warranties, affirmative
covenants and events of default, including cross defaults and a change of
control default. The line of credit also is subject to customary prepayment
requirements. For the period ended January 31, 2022 , the Company was in
compliance with the Second Amended and Restated Loan and Security Agreementcovenants. 32 PPP Loan The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was signed into law onMarch 17, 2020 . Among other things, the CARES Act provided for a business loan program known as the Paycheck Protection Program ("PPP"). Qualifying companies were able to borrow, through theU.S. Small Business Administration ("SBA"), up to two months of payroll expenses. OnApril 21, 2020 , the Company received approximately$2,301,000 through the SBA under the PPP. These funds were utilized by the Company to fund payroll expenses and avoid staffing reductions during the slowdown resulting from COVID-19. The loan required principal payments, beginning after the seventh monthly anniversary, and was required to be paid in two years. The PPP loan bore an interest rate of 1.0% per annum. InJune 2021 , the Company received notification that the PPP loan principal amount of$2,301,000 and accrued interest of$26,000 had been forgiven in full. Significant cash obligations As of January, 31 (in thousands) 2022 2021 Term loan (1)$ 9,904 $ 2,301
(1) Term loan balance is reported net of deferred financing costs of
our consolidated financial statements included in Part II, Item 8, "Financial
Statements and Supplementary Data" for additional information. The term loan
balance as of
and Restated Loan and Security Agreement. The term loan payable as of January
31, 2021 is the Company's PPP loan.
Operating cash flow activities
Fiscal Year
(in thousands) 2021 2020
Loss from continuing operations $ (6,917 ) $ (4,799 )
Non-cash adjustments to net loss 1,884 2,810
Cash impact of changes in assets and liabilities 1,149 (1,504 ) Net cash used in operating activities
$ (3,884 ) $ (3,493 ) The use of cash from operating activities was relatively consistent between fiscal 2021 and 2020. The Company had a higher net loss from operations and lower impact of changes in assets and liabilities in fiscal 2021 compared to fiscal 2020. Within non-cash adjustments to net loss, the Company excluded the PPP loan and related interest of$2,327,000 that was forgiven in fiscal 2021 as well as the valuation adjustment of$1,851,000 on the acquisition earnout liability. Net cash used in operating activities was adversely impacted by certain severance cost in 2019 that were paid in 2020 and certain non-routine costs paid in 2021 associated with the acquisition. The Company's customers are 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 customers 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. 33
Investing cash flow activities
Fiscal Year
(in thousands) 2021 2020
Investment in Avelead, net of cash $ (12,470 ) $ -
Purchases of property and equipment (41 ) (44 )
Proceeds from sale of ECM Assets 800 11,288
Capitalized software development costs (1,458 )
(1,784 )
Net cash (used in) provided by investing activities
The cash used in investing activities for fiscal 2021 included the cash used to acquire Avelead, capitalized software development costs, off-set by the release of escrowed funds in fiscal 2021 from the sale of the ECM Assets. Refer to Note 3 - Business Combination and Divestiture to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further details on Avelead and the sale of the ECM Assets. The proceeds from the sale of the ECM Assets in fiscal 2020 are net of direct transaction expenses. Refer to Note 13 - Discontinued Operations to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further details on the sale of the ECM Assets. Operationally, the Company has a focused effort on the spend for software development projects that will result in in increasing its revenue. See discussion and analysis in "Research and development costs" above.
Financing cash flow activities
Fiscal Year
(in thousands) 2021 2020Proceeds from issuance of common stock$ 16,100 $
-
Payments for costs directly attributable to the issuance of common stock (1,313 )
-
Repayment of bank term loan - (4,000 ) Proceeds from term loan payable 10,000
2,301
Payments related to settlement of employee shared-based awards (464 ) (256 ) Payment of deferred financing costs (168 )
-
Payment on royalty liability - (1,000 ) Other (6 )
12
Net cash provided by (used in) financing activities
(2,943 ) The cash provided by financing activities for fiscal 2021 was primarily from the public Offering of the Company's common stock, which closed onMarch 2, 2021 . Refer to Note 8 - Equity to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further details. Additionally, the Company received proceeds of$10,000,000 as a result of the Second Amended and Restated Loan and Security Agreement entered into onAugust 26, 2021 . Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further details. The cash used in financing activities for fiscal 2020 was primarily the result of the repayment of the Company's term loan onFebruary 24, 2020 , upon the closing of the sale of the ECM Assets. The Company was required to repay the term loan at close and funding of the sale of the ECM Assets. Additionally, the Company filed for, and received, a PPP loan in the amount of$2,301,000 .
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