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STREAMLINE HEALTH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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09/12/2019 | 10:07 pm

FORWARD-LOOKING STATEMENTS




We make forward-looking statements in this Report and in other materials we file
with the Securities and Exchange Commission ("SEC") or otherwise make public. In
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 undue reliance on forward-looking statements or projecting any future
results based on such statements or present or historical earnings levels.

Among the factors that could cause actual future results to differ materially
from our expectations are the risks and uncertainties described under "Risk
Factors" set forth in Part II, Item 1A, and the other cautionary statements in
other documents we file with the SEC, including the following:

· competitive products and pricing;


· product demand and market acceptance;


· entry into new markets;


· new product and services development and commercialization;


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· 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;



· critical accounting policies and judgments;



· changes in accounting policies or procedures as may be required by the



Financial Accounting Standards Board or other standard-setting organizations;



· changes in economic, business and market conditions impacting the healthcare



industry and the markets in which we operate;



· our ability to maintain compliance with the terms of our credit facilities; and



· our ability to maintain compliance with the continued listing standards of the



Nasdaq Global Market.





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.

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Results of Operations

Revenues




Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Systems sales:
Proprietary software - perpetual license $ 84 $ 191 $ (107) (56) %
Term license 27 122 (95) (78) %
Hardware and third-party software 36 73 (37) (51) %
Professional services 408 271 137 51 %
Audit services 354 248 106 43 %
Maintenance and support 2,759 3,216 (457) (14) %
Software as a service 1,125 1,148 (23) (2) %
Total Revenues $ 4,793 $ 5,269 $ (476) (9) %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
System sales:
Proprietary software - perpetual license $ 300 $ 1,244 $ (944) (76) %
Term license 27 165 (138) (84) %
Hardware and third-party software 51 109 (58) (53) %
Professional services 989 509 480 94 %
Audit services 749 608 141 23 %
Maintenance and support 5,710 6,525 (815) (12) %
Software as a service 2,324 2,372 (48) (2) %
Total Revenues $ 10,150 $ 11,532 $ (1,382) (12) %




Proprietary software and term licenses - Proprietary software revenue recognized
for the three and six months ended July 31, 2019 decreased by $107,000 and
$944,000, respectively, 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 is attributable to a
large perpetual license sale of our Abstracting™ solution in the first quarter
of fiscal 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 our direct channel from existing customers adding
licenses from acquisitions or strategic partnerships. The timing can be
difficult to manage because we do not control our distribution partners, and
their sense of urgency on closing perpetual licenses and we do not control our
existing customers adding facilities through acquisition or strategic
partnerships. The Company is expecting higher perpetual license sales in the
third and fourth quarter of fiscal 2019. We believe this is supported by the
Company's pipeline, however, the timing is different from fiscal year
2018. Term license revenue recognized for the three and six months ended July
31, 2019
decreased by $95,000 and $138,000, respectively, over the prior
comparable periods due to lost customers. Term license revenue is expected to be
higher in the third and fourth quarters of fiscal 2019, but not to the levels of
fiscal 2018.


Hardware and third-party software - Revenue from hardware and third-party
software sales for the three and six months ended July 31, 2019 decreased by
$37,000 and $58,000, respectively, over the prior comparable periods.
Fluctuations from period to period are a function of client demand.




Professional services - For the three and six month periods ended July 31, 2019,
revenues from professional services increased by $137,000 and $480,000,
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 2019, resulting in higher professional services revenue for the three
and six-months ended July 31, 2019 over the prior comparable period. The Company
is not expecting professional services to recur at these higher revenue levels
throughout 2019.

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Audit services - Audit services revenue for the three and six months ended July
31, 2019
increased by $106,000 and $141,000, 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 into the first
two quarters 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 and revenue of audit
services throughout 2019.

Maintenance and support - Revenue from maintenance and support for the three and
six months ended July 31, 2019 decreased by $457,000 and $815,000, respectively,
over the prior comparable periods. The decrease is primarily due to pricing
pressure and cancellations by certain customers of our legacy products,
primarily content management (ECM). The customer pricing differences and rate of
customer cancellations has not exceeded the Company's budget for fiscal
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 six months
ended July 31, 2019 decreased by $23,000 and $48,000, 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 fiscal 2019. The Company expects the recent bookings of eValuator to
positively impact revenue into the fourth quarter of fiscal 2019.

Cost of Sales




Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Cost of systems sales $ 143 $ 290 $ (147) (51) %
Cost of professional services 581 697 (116) (17) %
Cost of audit services 321 300 21 7 %
Cost of maintenance and support 413 566 (153) (27) %
Cost of software as a service 300 282 18 6 %
Total cost of sales $ 1,758 $ 2,135 $ (377) (18) %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Cost of system sales $ 256 $ 540 $ (284) (53) %
Cost of professional services 1,123 1,404 (281) (20) %
Cost of audit services 624 694 (70) (10) %
Cost of maintenance and support 822 1,215 (393) (32) %
Cost of software as a service 580 598 (18) (3) %
Total cost of sales $ 3,405 $ 4,451 $ (1,046) (24) %




The decrease in overall cost of sales for the three and six months ended July
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.

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 six month periods ended July 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.

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The cost of professional services includes compensation and benefits for
personnel and related expenses. The decrease in expense for the three and six
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 ended July 31, 2019 is related to the increased volumes (and
increased revenue) from the comparable period a year ago. The decrease in
expense for the six-month period ended July 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 six-month periods ended July 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 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 six-month periods
ended July 31, 2019 remained consistent with the expense for the prior
comparable periods.


Selling, General and Administrative Expense







Three Months Ended
(in thousands): July 31, 2019 July 31,



2018 Change % Change
General and administrative expenses $ 1,552 $ 1,513 $ 39


3 %
Sales and marketing expenses 909 1,006 (97) (10) %
Total selling, general, and
administrative expense $ 2,461 $ 2,519 $ (58) (2) %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
General and administrative expenses $ 3,260 $ 3,701 $ (441) (12) %
Sales and marketing expenses 1,685 2,067 (382) (18) %
Total selling, general, and
administrative expense $ 4,945 $ 5,768 $ (823) (14) %




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 six-months ended July 31, 2019 from
the comparable prior periods is primarily attributed to a reduction in facility
cost, bad debt expense and in amortization of intangible assets. The Company
realized over $600,000 in savings from the six months ended July 31, 2019
compared with July 31, 2018 for facility cost, alone. The facility cost savings
are offset, somewhat, by higher legal cost of $200,000 in the same period. The
higher legal costs are related to the annual meeting; and other securities
matters in the first and second quarter of fiscal 2019. We previously disclosed
the Company's reduction in facility cost due to relocation of the corporate
headquarters in Atlanta, Georgia and subleasing of the New York City office. The
Company records a disproportionate amount of professional fees in the first
quarter of fiscal 2019 attributable to the annual audit and the Company's annual
shareholder meeting. This disproportionate amount of professional fees occurred
in both three-month periods ended July 31, 2019 and 2018.

Sales and marketing expenses consist primarily of compensation and related
benefits and reimbursable travel and entertainment expenses related to our sales
and marketing staff, as well as advertising and marketing expenses, including
trade shows. The decrease in sales and marketing expense for the three and six
months ended July 31, 2019 from the comparable prior periods was primarily due
to a reduction in personnel cost, trade shows expense, and sales, marketing, and
investor relations consultant fees. The Company has re-focused its sales and
marketing dollars. The targeted and

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focused approach has resulted in fewer dollars that have a higher return,
evidenced by the second quarter bookings number.






Research and Development




Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Research and development expense $ 867 $ 1,213 $ (346) (29) %
Plus: Capitalized research and
development cost 907 803 104 13 %
Total research and development cost $ 1,774 $ 2,016 $ (242) (12) %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Research and development expense $ 1,659 $ 2,275 $ (616) (27) %
Plus: Capitalized research and
development cost 1,878


1,529 349 23 %
Total research and development cost $ 3,537 $ 3,804 $ (267) (7) %







Research and development cost consists primarily of compensation and related
benefits, the use of independent contractors for specific near-term development
projects, and allocated occupancy expense. Total research and development cost
for the three and six month periods ended July 31, 2019 was consistent with that
from the prior comparable periods. The Company spent, however, more dollars on
capitalized research and development cost due to the effort on eValuator
development. 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. The Company is expecting that total research and development
expenses will continue at these levels throughout fiscal 2019. For the six
months ended July 31, 2019 and 2018, as a percentage of revenues, total research
and development costs were 35% and 33%, respectively. The higher percentage of
total research and development cost over revenues is consistent with our Company
investing in its most recent product, eValuator.


Executive transition cost







Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Executive transition cost $ 140 $ - $ 140 100 %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Executive transition cost $ 140 $ - $ 140 100 %






We recorded $140,000 in cost related to replacing the Company's CEO in the
second quarter of fiscal 2019. These costs, which include placement fees,
retention bonuses for existing key personnel and certain required consulting
cost are expected to total $800,000 for fiscal 2019. Each of these costs are
directly attributable to the successful placement of a new CEO with the Company.


Loss on exit of operating lease







Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Loss on exit of operating lease $ - $ 806 $ (806) (100) %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Loss on exit of operating lease $ - $ 806 $ (806) (100) %


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In an effort to reduce our operating expenses, we closed our New York office in
the second quarter of fiscal 2018 and subleased the office space for the
remaining period of the original lease term, which ends on November 2019. As a
result of vacating and subleasing the office, we recorded an $806,000 loss on
exit of the operating lease in the second quarter of fiscal 2018, which captures
the net cash flows associated with the vacated premises, including receipts of
rent from our sublessee, and the loss incurred on the disposals of fixed assets.

Other Expense




Three Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Interest expense $ (70) $ (110) $ 40 (36) %
Miscellaneous expense (103) (5) (98) 1,960 %
Total other expense $ (173) $ (115) $ (58) 50 %





Six Months Ended
(in thousands): July 31, 2019 July 31, 2018 Change % Change
Interest expense $ (148) $ (227) $ 79 (35) %
Miscellaneous expense (144) (93) (51) 55 %
Total other expense $ (292) $ (320) $ 28 (9) %




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 six months
ended July 31, 2019 from the prior comparable period primarily due to the
reduction in outstanding principal on our term loan and the increase in
capitalized interest on our internally developed software. The higher
miscellaneous expense for the three and six-month periods ended July 31, 2019
are a direct result of a write-off of one-time finance cost associated with our
work to refinance the senior lender. The $70,000 one-time financing cost was
reported in the second quarter 2019 and is not expected to recur in fiscal
2019. 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 of $4,000 for the three months ended both July 31, 2019
and 2018, and $4,000 for the six months ended both July 31, 2019 and 2018, which
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 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.

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EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted
share




We define: (i) EBITDA as net earnings (loss) before net interest expense, income
tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as
net earnings (loss) before net interest expense, income tax expense (benefit),
depreciation, amortization, stock-based compensation expense, transaction
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 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

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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 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 Six Months Ended
In thousands, except per share
data July 31, 2019 July 31, 2018 July 31, 2019 July 31, 2018
Adjusted EBITDA Reconciliation
Net loss $ (608) $ (1,522) $ (295) $ (2,091)
Interest expense 70 110 148 227
Income tax expense 2 2 4 3
Depreciation 41 153 76 325
Amortization of capitalized
software development costs 211 331 417 646
Amortization of intangible assets 142 235 285 470
Amortization of other costs 55 91 105 193
EBITDA (87) (600) 740 (227)
Share-based compensation expense 160 144 429 367
Gain on disposal of fixed assets - - - (2)
Non-cash valuation adjustments to
assets and liabilities 16 5 31 56
Other non-recurring operating
expenses 75 806 75 806
Other non-recurring expenses 74 - 74 -
Adjusted EBITDA $ 238 $ 355 $ 1,349 $ 1,000
Adjusted EBITDA margin (1) 5 % 7 % 13 % 9 %

Adjusted EBITDA per Diluted Share
Reconciliation
Net loss per common share -
diluted $ (0.03) $ (0.08) $ (0.01) $ (0.11)
Adjusted EBITDA per adjusted
diluted share (2) $ 0.01 $ 0.02 $ 0.06 0.04
Diluted weighted average shares
(3) 19,913,658 19,532,044 19,853,510 19,415,676
Includable incremental shares -
adjusted EBITDA (4) 3,163,149 3,053,210 3,097,413 3,064,204
Adjusted diluted shares 23,076,807 22,585,254


22,950,923 22,479,880



--------------------------------------------------------------------------------



(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 a



GAAP profit is earned in the reported periods, no additional incremental



shares are assumed.



Application of Critical Accounting Policies



The preparation of financial statements in conformity with GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the




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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 ended January 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 ended January 31, 2019, except as described below.

We adopted the new lease standards ("ASC 842") on February 1, 2019 using the
effective date transition method. This method requires us to recognize an
adoption impact as a cumulative-effect adjustment to the February 1, 2019
retained earnings balance. Prior period balances were not adjusted upon adoption
this standard. The standard requires that leased assets and 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 facilities. The Company
believes that cash flows from operations and available credit facilities are
adequate to fund current obligations for the next twelve months. Cash and cash
equivalent balances at July 31, 2019 and January 31, 2019 were $1,229,000 and
$2,376,000, respectively. The decrease in cash during the current fiscal period
was primarily the result of payments made towards our debt and interest thereon,
as well as payroll and accounts payable. Continued expansion may require the
Company to take on additional debt or raise capital through issuance of
equities, or a combination of both. There can be no assurance the Company will
be able to raise the capital required to fund further expansion.

The Company has liquidity through the Credit Agreement described in more detail
in Note 4 to our condensed consolidated financial statements included herein.
The Company's primary operating subsidiary has a $5,000,000 revolving line of
credit. In order to draw upon the revolving line of credit, the Company's
primary operating subsidiary must comply with customary information delivery and
financial covenants, including the requirement that the Company maintain minimum
liquidity of at least $4,000,000 (See Note 9 - Subsequent Events for description
of the minimum liquidity requirements effective for liquidity tests occurring
after the effective date of the Fifth Amendment). Pursuant to the Credit
Agreement's definition, the liquidity of the Company's primary operating
subsidiary as of July 31, 2019 was $5,229,000, which satisfies the minimum
liquidity financial covenant in the Credit Agreement.

The Credit Agreement also requires the Company to 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 to the Credit Agreement, 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, Item1 herein for the applicable period set forth therein. Our lender
uses a measurement that is similar to Adjusted EBITDA, a non-GAAP financial
measure described above. The required minimum EBITDA level for the four-fiscal
quarter period ended July 31, 2019 was $180,000.

The Company was in compliance with the foregoing loan covenants at July 31,
2019
. Based upon the borrowing base formula set forth in the Credit Agreement,
as of July 31, 2019, the Company had access to the full amount of the $5,000,000
revolving line of credit. As of July 31, 2019, outstanding borrowings under the
line of credit totaled $1,000,000.

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The Credit Agreement expressly permits transactions between affiliates that are
parties to the Credit Agreement, which includes the Company and its primary
operating subsidiary, including loans made between such affiliate loan parties.
However, the Credit Agreement prohibits the Company and its subsidiary from
declaring or paying any dividend or making any other payment or distribution,
directly or indirectly, on account of equity interests issued by the Company if
such equity interests: (a) mature or are mandatorily redeemable pursuant to a
sinking fund obligation or otherwise (except as a result of a change of control
or asset sale so long as any rights of the holders thereof upon the occurrence
of a change of control or asset sale event shall be subject to the prior
repayment in full of the loans and all other obligations that are accrued and
payable upon the termination of the Credit Agreement), (b) are redeemable at the
option of the holder thereof, in whole or in part, (c) provide for the scheduled
payments of dividends in cash, or (d) are or become convertible into or
exchangeable for indebtedness or any other equity interests that would
constitute disqualified equity interests pursuant to clauses (a) through
(c) hereof, in each case, prior to the date that is 180 days after the maturity
date of the Credit Agreement.

The Company executed a fifth amendment to the Credit Agreement ("Fifth
Amendment") on September 11, 2019. This amendment extends the term loan and
revolving credit facility to a maturity date of August 21, 2020. The Company
intends to refinance the current term loan and credit facility in the third
quarter of fiscal 2019. The aggregate amount of financing currently available to
the Company under the current term loan and revolving credit facility is $9
million
as of July 31, 2019. The Company is in negotiations to replace the
current credit facility.

The Company can demonstrate its ability to refinance the existing term loan and
credit facility. Additionally, the Company will produce cash flow from the
business over the next 12 months. Accordingly, the Company believes it has
sufficient cash and credit necessary to continue as a going concern for 12
months from the Company's reporting date. This conclusion is supported, in part,
by the Company's ability to extend or re-finance its existing term loan and
revolving credit facility.

Significant cash obligations



(in thousands) July 31, 2019 January 31, 2019
Term loan (1) $ 3,678 $ 3,948
Royalty liability (2) 936 905



--------------------------------------------------------------------------------



(1) Term loan balance is reported net of deferred financing costs of $53,000 and



$82,000 as of July 31, 2019 and January 31, 2019, respectively. See Note 4 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





Six Months Ended
(in thousands) July 31, 2019 July 31, 2018
Net loss $ (295) $ (2,091)
Non-cash adjustments to net loss 1,249 2,832
Cash impact of changes in assets and liabilities (865) (265)
Net cash provided by operating activities $ 89 $ 476




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 2018. Accrued expenses are lower by approximately $600,000 in
July 2019 compared with end of fiscal 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

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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.


Investing cash flow activities





Six Months Ended
(in thousands) July 31, 2019 July


31, 2018



Purchases of property and equipment $ (46) $


(14)



Proceeds from sales of property and equipment -


14



Capitalized software development costs (1,878)


(1,529)



Net cash used in investing activities $ (1,924) $ (1,529)




The increase in cash used for investing activities in the six months ended July
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. See discussion and
analysis in "Research and development costs" above.


Financing cash flow activities





Six Months Ended
(in thousands) July 31, 2019 July 31, 2018
Proceeds from line of credit $ 1,000 $ -
Principal repayments on term loan (298) (298)
Proceeds from exercise of stock options and stock
purchase plan 4 35
Other (18) (58)
Net cash used in financing activities $ 688 $ (321)




The increase in cash provided by financing activities in the six months ended
July 31, 2019 as compared to the prior year period was primarily the result of
the $1 million advance against the revolving credit facility.

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