STREAMLINE HEALTH SO

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

09/10/2020 | 05:33pm

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.
This Report, therefore, contains statements about future events and expectations
which are forward-looking statements within the meaning of Sections 27A of the
Securities Act of 1933, as amended (the "Securities Act", and 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). 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" and elsewhere in our Annual Report on Form 10-K for the fiscal year
ended January 31, 2020 and in our subsequent filings with the Securities
Exchange Commission
, and include among others, the following:



? competitive products and pricing;

? product demand and market acceptance;

? entry into new markets;

? new product and services development and commercialization;



? key strategic alliances with vendors and channel partners that resell our



products;



? uncertainty in continued relationships with clients due to termination rights;



? our ability to control costs;



? availability, quality and security of products produced and services provided



by third-party vendors;

? the healthcare regulatory environment;




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? 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.





Some of these factors and risks have been, and may further be, exacerbated by
the COVID-19 pandemic.



Most of these factors are beyond our ability to predict or control. Any of these
factors, or a combination of these factors, could materially affect our future
financial condition or results of operations and the ultimate accuracy of our
forward-looking statements. There also are other factors that we may not
describe (generally because we currently do not perceive them to be material)
that could cause actual results to differ materially from our expectations.



We expressly disclaim any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law.



Results of Operations



Revenues



Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change

System sales $ 215 $ 111 $ 104 94 %
Professional services 179 203 (24 ) (12 )%
Audit services 463 354 109 31 %
Maintenance and support 1,228 1,273 (45 ) (4 )%
Software as a service 802 548 254 46 %
Total Revenues $ 2,887 $ 2,489 $ 398 16 %




Six-Months Ended %



(in thousands): July 31, 2020 July 31, 2019 Change



Change

System sales $ 215 $ 332 $ (117 ) (35 )%
Professional services 360 658 (298 ) (45 )%
Audit services 1,007 749 258 34 %
Maintenance and support 2,486 2,725 (239 ) (9 )%
Software as a service 1,663 1,189 474 40 %
Total Revenues $ 5,731 $ 5,653 $ 78 1 %




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Proprietary software and term licenses - Proprietary software revenue recognized
for the three months ended July 31, 2020 increased by $104,000 and six months
ended July 31, 2020 decreased by $117,000 over their respective prior comparable
periods. The Company is able to influence sales of these products; however, the
timing is difficult to manage as sales generally result from our distribution
partners, certain delays in contracting for systems sales are a result of the
COVID-19. Perpetual license sales of our Streamline Health® Abstracting™
solution began to pick-up in the latter part of the second quarter of fiscal
2020. The Company is unable to ascertain the timing or extent of the impact of
COVD-19 on the Company's on-ongoing performance relative to perpetual software
sales.




Professional services - For the three- and six-month periods ended July 31,
2020
, revenues from professional services decreased by $24,000 and $298,000 from
the prior comparable period. This decrease in professional services revenue is
primarily due to the timing of completion of a few, large, professional services
agreements in the first half of fiscal year 2019. Additionally, the lower
professional services in the current was a result of COVID-19 as it delayed
customer decisions on and their ability to staff projects during the first half
of 2020. The Company is unable to ascertain the timing or extent of the impact
of COVID-19 on the Company's on-ongoing performance relative to professional
services.



Audit services - Audit services revenue for the three- and six-month periods
ended July 31, 2020 increased by $109,000 and $258,000, respectively, over the
prior comparable periods. The Company realized higher demand for audit services
in the fourth quarter of 2019, and that higher demand has continued into the
first half of 2020. 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. We did experience a
temporary reduction in volumes for approximately 45 days from certain customers
that were primarily physician based, as a result of COVID-19. This occurred late
in the first quarter and early in the second quarter of fiscal 2020. Volumes
showed signs of recovery toward the end of the second quarter of fiscal 2020
with some customers increasing the number of requested encounters to be audited.
The Company has customer opportunities in the market combining the eValuator
technology with audit services to provide customers with a comprehensive
solution ("a technology enabled service").



Maintenance and support - Revenue from maintenance and support for the three-
and six-month periods ended July 31, 2020 decreased by $45,000 and $239,000 and
July 31, 2020 was lower than the prior comparable six-month period by 9%. The
Company is expecting lower revenue for the full year 2020, over prior comparable
periods, due to pricing pressure and cancellations by certain customers of our
legacy products, primarily clinical analytics. The Company's agreement for
Clinical Analytics with Montefiore terminated on June 30, 2020. Accordingly, the
Company recognized $69,000 lower revenue from Clinical Analytics in the three
months and six months ended July 31, 2020 as compared with the same period in
2019. The customer pricing differences and rate of customer cancellations has
not exceeded the Company's budget for fiscal 2020.



Software as a Service (SaaS) - Revenue from SaaS for the three- and six-month
periods ended July 31, 2020 increased by $254,000 and $474,000, respectively
from the prior comparable periods. The increase resulted from new customers of
our growth product, eValuator. The Company's legacy product, Financial
Management Systems, has been consistent and is not expected to see a shortfall
in fiscal 2020. The eValuator SaaS revenue base should continue to grow in
fiscal 2020 as we experience go-lives on already sold eValuator customers, and
sales of new eValuator customers that will go-live later in fiscal 2020. We have
experienced slower first contact to contracting as result of COVID-19. While we
have seen some positive activity, we are unable to estimate the impact of
COVID-19 on future contracting processes with our customers.



Cost of Sales



Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Cost of system sales $ 125 $ 27 $ 98 363 %
Cost of professional services 293 462 (169 ) (37 )%
Cost of audit services 373 321 52 16 %
Cost of maintenance and support 182 176 6 3 %
Cost of software as a service 379 140 239 171 %
Total cost of sales $ 1,352 $ 1,126 $ 226 20 %




Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Cost of system sales $ 202 $ 91 $ 111 122 %
Cost of professional services 557 888 (331 ) (37 )%
Cost of audit services 733 624 109 17 %
Cost of maintenance and support 368 303



65 21 %
Cost of software as a service 761 247 514 208 %
Total cost of sales $ 2,621 $ 2,153 $ 469 22 %




The increase in overall cost of sales for the three and six months ended July
31, 2020
from the comparable prior period is primarily due to the increase in
amortization of software development. The Company placed larger amounts of
software development into service in the third and fourth quarter of fiscal
2019. The placement of the software into service is resulting in higher rates of
amortization for fiscal 2020.



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Cost of system sales includes amortization and impairment of capitalized
software expenditures and the cost of third-party software. The increase in
expense for the three- and six-month periods ended July 31, 2020 from the
comparable prior period was primarily due to the increase in amortization of
capitalized software costs as discussed above.






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 lower
rates of professional services required for SaaS type implementations. The SaaS
solutions are more efficient to implement 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 substantially
more cost.



The cost of audit services includes compensation and benefits for audit services
personnel, and related expenses. The increase in expense for the three- and
six-month periods ended July 31, 2020 is attributed to the higher volumes of
coding transaction processed, and the related higher revenue. The Company 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. The increase in expense for the three- and six-month
period ended July 31, 2020 was primarily due to increases in compensation for
this department.



The cost of SaaS solutions is relatively fixed, subject to inflation for the
goods and services it requires. The increase in expense for the three- and
six-month periods ended July 31, 2020 was primarily due to the amortization of
capitalized software development costs and the movement of headcount to support
this growth product.




Selling, General and Administrative Expense






Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
General and administrative
expenses $ 1,596 $ 1,501 $ 95 6 %
Sales and marketing expenses 688 901 (213 ) (24 )%
Total selling, general, and
administrative expense $ 2,284 $ 2,402 $ (118 ) (5 )%




Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
General and administrative
expenses $ 3,052 $ 3,152 $ (100 ) (3 )%
Sales and marketing expenses 1,524 1,671 (147 ) (9 )%
Total selling, general, and
administrative expense $ 4,576 $ 4,823



$ (247 ) (5 )%




General and administrative expenses consist primarily of compensation and
related benefits, reimbursable travel and entertainment expenses related to our
executive and administrative staff, general corporate expenses, amortization of
intangible assets, and occupancy costs. The decrease in general and
administrative expenses for the six-months ended July 31, 2020 from the
comparable prior period is primarily attributed to a reduction in salaries and
benefits and professional fees associated with the company's annual audit and
annual shareholders meeting. The Company previously announced, at the end of
fiscal year ended January 31, 2020, a rationalization to better match expenses
with its lower revenues as a result of the sale of the ECM Assets. The
rationalization impacted personnel beyond that of those directly attributable to
the ECM Assets. The Company records a disproportionate amount of professional
fees in the first quarter of each fiscal year related 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, 2020



and
2019.




Sales and marketing expenses consist primarily of compensation and related
benefits and reimbursable travel and entertainment expenses related to our sales
and marketing staff, as well as advertising and marketing expenses, including
trade shows. The decrease in sales and marketing expense for the three and six
months ended July 31, 2020 from the comparable prior period was primarily due to
reduction in salaries and benefits as positions vacated in the latter half of
fiscal 2020 were not backfilled, Travel and entertainment expenses and marketing
trade show expenses have also decreased during the six-months ended July 30,
2010
over the prior comparable period as an impact of the novel Coronavirus. The
Company has temporarily stopped travel until its employee safety can be assured.
There is no anticipated date to re-institute travel for its sales, and other
personnel. The Company has been productive using web-based meeting media to
continue its sales and customer service processes.



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Research and Development



Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Research and development expense $ 509 $ 660 $ (151 ) (23 )%
Plus: Capitalized research and
development cost 653 753 (100 ) (13 )%
Total research and development cost $ 1,162 $ 1,413 $ (251 ) (18 )%




Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change



Research and development expense $ 1,193 $ 1,249 $ (56 ) (4 )%
Plus: Capitalized research and
development cost 1,131 1,543 (412 ) (27 )%
Total research and development cost $ 2,324 $ 2,792



$ (468 ) (17 )%




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. The three-month period ended July 31,
2020
includes $38,000 of capitalized non-employee stock compensation as
explained in Note 9 - Related Party Transactions. Total research and development
cost for the three- and six-month periods ended July 31, 2020 was lower than
that from the prior comparable period. The Company previously announced an
employee rationalization on January 31, 2020, which research and development
personnel were impacted. The Company has continued to be more efficient in
research and development while focusing on its growth products, primarily
eValuator. The Company is spending fewer dollars on maintenance for its legacy
products as these have attained maturity in the marketplace. The Company is
expecting that total research and development expenses will continue at the
second quarter 2020 levels throughout fiscal year 2020. For the six months ended
July 31, 2020 and 2019, as a percentage of revenues, total research and
development costs were 41% and 49%, respectively.




Executive transition cost






Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Executive transition cost $ - 140 (140 ) (100 )%




Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 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 included placement fees,
retention bonuses for existing key personnel and certain required consulting
cost. Each of these costs are directly attributable to the successful placement
of a new CEO with the Company. All executive transition costs were recorded
throughout fiscal 2019 and none were incurred during fiscal 2020.




Loss on exit of operating lease






Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change



Loss on exit of operating lease $ 105 $



- 105 100 %





Refer to Note 3 - Operating Leases. We recorded $105,000 in cost related to the
remaining payments required under the agreement with the landlord on shared
office space in Atlanta that was abandoned when the Company entered a new lease
for office space in Alpharetta, Georgia.



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Other Expense



Three-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Interest expense $ (13 ) $ (70 ) 57 (81 )%
Miscellaneous expense (64 ) (103 ) 39 (38 )%
Total other expense $ (77 ) $ (173 ) 96 (55 )%




Six-Months Ended %
(in thousands): July 31, 2020 July 31, 2019 Change Change
Interest expense $ (27 ) $ (148 ) 121 (82 )%
Miscellaneous expense (82 ) (119 ) 37 (31 )%
Total other expense $ (109 ) $ (267 ) 158 (59 )%




Interest expense consists of interest and commitment fees on the line of credit,
interest on the term loan, the Company's PPP Loan and is inclusive of deferred
financing cost amortization expense. Interest expense decreased for the three
and six months ended July 31, 2020 from the prior comparable period primarily
due to the reduction in outstanding principal on our term loan. The Company
re-paid its term loan with Bridge bank on February 24, 2020, upon closing the
sale of the ECM Assets.




The components of miscellaneous expense for the three and six-month periods
ended July 31, 2020 and 2019 is primarily the valuation allowance on the
Montefiore liability and any currency transaction. Miscellaneous expense for the
six-month period ended July 31, 2020 includes each of (i) a $50 impact for
currency transaction revaluation, and (ii) $31 for Montefiore valuation
adjustment. Miscellaneous expense for the six-month period ended July 31, 2019
includes (i) valuation adjustment for Montefiore, (ii) certain foreign currency
transactions, and (iii) a $70 one-time expense for a failed refinancing effort.



Provision for Income Taxes




We recorded an income tax benefit of $(172) and $(356) for the three months
ended July 31, 2020 and 2019, which is comprised of estimated federal, state and
local income tax provisions. The income tax benefit is partially off-set by an
income tax from discontinued operations. The Company has a substantial amount of
net operating losses for federal and state income tax purposes. We do not
anticipate any tax from the sale of the ECM Assets, or income from continuing or
discontinued operations for the full year fiscal 2020. For the three months
ended July 31, 2020. The net income tax expense from continuing and discontinued
operations will continue to reverse out of the Company's statement of operations
through the fiscal year 2020.




Use of Non-GAAP Financial Measures






In order to provide investors with greater insight, and allow for a more
comprehensive understanding of the information used by management and the Board
of Directors in its financial and operational decision-making, the Company has
supplemented the condensed consolidated financial statements presented on a GAAP
basis in this quarterly report on Form 10-Q with the following non-GAAP
financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted
EBITDA per diluted share.




These non-GAAP financial measures have limitations as analytical tools and
should not be considered in isolation or as a substitute for analysis of Company
results as reported under GAAP. The Company compensates for such limitations by
relying primarily on our GAAP results and using non-GAAP financial measures only
as supplemental data. We also provide a reconciliation of non-GAAP to GAAP
measures used. Investors are encouraged to carefully review this reconciliation.
In addition, because these non-GAAP measures are not measures of financial
performance under GAAP and are susceptible to varying calculations, these
measures, as defined by us, may differ from and may not be comparable to
similarly titled measures used by other companies.



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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
related expenses and other expenses that do not relate to our core operations
such as severances and impairment charges; (iii) Adjusted EBITDA Margin as
Adjusted EBITDA as a percentage of GAAP net revenue; and (iv) Adjusted EBITDA
per diluted share as Adjusted EBITDA divided by adjusted diluted shares
outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA
per diluted share are used to facilitate a comparison of our operating
performance on a consistent basis from period to period and provide for a more
complete understanding of factors and trends affecting our business than GAAP
measures alone. These measures assist management and the board and may be useful
to investors in comparing our operating performance consistently over time as
they remove the impact of our capital structure (primarily interest charges),
asset base (primarily depreciation and amortization), items outside the control
of the management team (taxes) and expenses that do not relate to our core
operations including: transaction-related expenses (such as professional and
advisory services), corporate restructuring expenses (such as severances) and
other operating costs that are expected to be non-recurring. Adjusted EBITDA
removes the impact of share-based compensation expense, which is another
non-cash item. Adjusted EBITDA per diluted share includes incremental shares in
the share count that are considered anti-dilutive in a GAAP net loss position.



The Board of Directors and management also use these measures (i) as one of the
primary methods for planning and forecasting overall expectations and for
evaluating, on at least a quarterly and annual basis, actual results against
such expectations; and (ii) as a performance evaluation metric in determining
achievement of certain executive and associate incentive compensation programs.



Our lender uses a measurement that is similar to the Adjusted EBITDA measurement
described herein to assess our operating performance. The lender under our Loan
and Security Agreement requires delivery of compliance reports certifying
compliance with financial covenants, certain of which are based on a measurement
that is similar to the Adjusted EBITDA measurement reviewed by our management
and Board of Directors.



EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity
under GAAP or otherwise, and are not alternatives to cash flow from continuing
operating activities, despite the advantages regarding the use and analysis of
these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA
Margin, and Adjusted EBITDA per diluted share, as disclosed in this annual
report on Form 10-K have limitations as analytical tools, and you should not
consider these measures in isolation or as a substitute for analysis of our
results as reported under GAAP; nor are these measures intended to be measures
of liquidity or free cash flow for our discretionary use. Some of the
limitations of EBITDA and its variations are:




? EBITDA does not reflect our cash expenditures or future requirements for



capital expenditures or contractual commitments;



? EBITDA does not reflect changes in, or cash requirements for, our working



capital needs;



? EBITDA does not reflect the interest expense, or the cash requirements to



service interest or principal payments under our Loan and Security Agreement ;



? EBITDA does not reflect income tax payments that we may be required to make;



and



? Although depreciation and amortization are non-cash charges, the assets being



depreciated and amortized often will have to be replaced in the future, and



EBITDA does not reflect any cash requirements for such replacements.





Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and
prudently evaluate our business, the Company encourages readers to review the
GAAP financial statements included elsewhere in this annual report on Form 10-K,
and not rely on any single financial measure to evaluate our business. We also
strongly urge readers to review the reconciliation of these non-GAAP financial
measures to the most comparable GAAP measure in this section, along with the
condensed consolidated financial statements included above.



28







The following table reconciles EBITDA and Adjusted EBITDA to net loss, and
Adjusted EBITDA per diluted share to loss per diluted share for the fiscal years
ended January 31, 2020 and 2019 (amounts in thousands, except per share data).
All of the items included in the reconciliation from EBITDA and Adjusted EBITDA
to net loss and the related per share calculations are either recurring non-cash
items, or items that management does not consider in assessing our on-going
operating performance. In the case of the non-cash items, management believes
that investors may find it useful to assess the Company's comparative operating
performance because the measures without such items are less susceptible to
variances in actual performance resulting from depreciation, amortization and
other expenses that do not relate to our core operations and are more reflective
of other factors that affect operating performance. In the case of items that do
not relate to our core operations, management believes that investors may find
it useful to assess our operating performance if the measures are presented
without these items because their financial impact does not reflect ongoing
operating performance.



Three-Months Ended Six Months Ended
In thousands, except per
share data July 31, 2020 July 31, 2019 July 31, 2020 July 31, 2019
Adjusted EBITDA
Reconciliation
Loss from continuing
operations $ (1,163 ) $ (1,656 ) $ (2,140 ) $ (2,298 )
Interest expense 13 70 27 148
Income tax benefit (172 ) (356 ) (733 ) (681 )
Depreciation 17 14 31 22
Amortization of capitalized
software development costs 362 110 651 236
Amortization of intangible
assets 124 142 247 285
Amortization of other costs 78 70 153 136
EBITDA (741 ) (1,606 ) (1,764 ) (2,152 )
Share-based compensation
expense 349 160 613 429
Non-cash valuation
adjustments 14 16 31 31
Loss on exit of operating
lease - - 105 -
Adjusted EBITDA $ (378 ) $ (1,430 ) $ (1,015 ) $ (1,692 )
Adjusted EBITDA margin (1) (13 )% (57 )% (18 )% (30 )%

Adjusted EBITDA per Diluted
Share Reconciliation
Loss from continuing
operations per common share
- diluted $ (0.04 ) $ (0.08 ) $ (0.07 ) $ (0.12 )
Net loss per common share -
diluted $ (0.04 ) $ (0.03 ) $ 0.08 $ (0.03 )
Adjusted EBITDA per adjusted
diluted share (2) $ (0.01 ) $ (0.07 ) $ (0.03 ) $ (0.09 )

Diluted weighted average
shares (3) 30,026,658 19,913,658 29,897,236 19,853,510
Includable incremental
shares - adjusted EBITDA (4) 394,815 3,163,149 332,359 3,097,413
Adjusted diluted shares 30,421,473 23,076,807 30,229,595 22,950,923




(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.




29







Application of Critical Accounting Policies






The preparation of financial statements in conformity with GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenue and expenses
during the reporting period. Management considers an accounting policy to be
critical if the accounting policy requires management to make particularly
difficult, subjective or complex judgments about matters that are inherently
uncertain. A summary of our critical accounting policies is included in Note 2
to our consolidated financial statements in our Annual Report on Form 10-K for
the fiscal year ended January 31, 2020. There have been no material changes to
the critical accounting policies disclosed in our Annual Report on Form 10-K for
the fiscal year ended January 31, 2020.




Liquidity and Capital Resources






The Company's liquidity is dependent upon numerous factors including: (i) the
timing and amount of revenues and collection of contractual amounts from
clients, (ii) amounts invested in research and development and capital
expenditures, and (iii) the level of operating expenses, all of which can vary
significantly from quarter-to-quarter. The Company's primary cash requirements
include regular payment of payroll and other business expenses, principal and
interest payments on debt and capital expenditures. Capital expenditures
generally include computer hardware and computer software to support internal
development efforts or SaaS data center infrastructure. Operations are funded
with cash generated by operations and borrowings under credit facilities.
Additionally, on February 24, 2020, the Company generated over $5.4 million in
proceeds from the sale of the ECM Assets, after repaying its $4.0 million term
loan. The Company believes that cash flows from operations, the cash from the
sale of the ECM Assets and available credit facilities are adequate to fund
current obligations for the next twelve months from issuance of these financial
statements. Cash and cash equivalent balances at July 31, 2020 and January 31,
2020
were $ 5,707,000 and $1,649,000, respectively. Continued expansion may
require the Company to take on additional debt or raise capital through issuance
of equities, or a combination of both. There can be no assurance the Company
will be able to raise the capital required to fund further expansion.



As discussed in Note 8 - Discontinued Operations of the financial statements,
the Company closed on its agreement to sell the legacy ECM Assets to Hyland
Software, Inc
on February 24, 2020. The Company used the proceeds to pay off its
term loan with Bridge Bank and to fund the continuing development and
incremental investment in sales and marketing in support of its eValuator™
cloud-based pre- and post-bill coding analysis platform.



The Company has liquidity through the Loan and Security Agreement described in
more detail in Note 4 - Debt of our condensed consolidated financial statements.
The Company has a $2,000,000 revolving credit facility, which can be advanced
based upon 80% of eligible accounts receivable, as defined in the Loan and
Security Agreement. In order to draw upon the revolving credit facility, the
Company's must comply with certain financial covenants, including the
requirement that the Company maintain certain minimum recurring revenue and Bank
EBITDA levels, calculated pursuant to the Loan and Security Agreement, measured
on a monthly basis over a trailing three-month period and year-to-date then
ended, and which shall not deviate by the greater of (i) thirty percent of its
projected Bank EBITDA or (ii) $150,000, or 15% or 20% of the Company's recurring
revenue for the trailing three and twelve-month period then ended, respectively.
Our lender uses a measurement that is similar to the Adjusted EBITDA, a non-GAAP
financial measure described above. The bank uses an Adjusted EBITDA that is
further reduced by the Company's spend on capitalized software development for
the period. The bank agreement initially required the Company to maintain a
minimum Asset Coverage Ratio. However, the Asset Coverage Ratio was eliminated
as a covenant under an amendment dated April 11, 2020. The Company obtained a
waiver at January 31, 2020 against its existing covenants. The Company has
provided guidance to the bank for purposes of setting its fiscal year 2020
covenants.



The Company was in compliance with the foregoing loan covenants at July 31,
2020
. Based upon the borrowing base formula set forth in the Credit Agreement,
as of July 31, 2020, the Company had access to $627,000 of the full $2,000,000
revolving line of credit. As of July 31, 2020, there were no outstanding
borrowings under the line of credit.



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



30






The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES
Act, was signed into law on March 17, 2020. Among other things, the Cares Act
provided for a business loan program known as the Paycheck Protection Act
("PPP"). Companies are able to borrow, through the SBA, up to two months of
payroll. The Company received approximately $2,301,000 through the SBA for the
PPP loan program. These funds are utilized by the Company to fund payroll during
the novel corona virus and avoid further staffing reductions during the
slowdown. The loan requires principal payments, beginning after the seventh
monthly anniversary, and must be fully paid in two years. The PPP loan bears an
interest rate of 1.0% per annum.




Significant cash obligations






(in thousands) July 31, 2020 January 31, 2020
Term loan (1) $ 2,301 $ 3,872
Royalty liability (2) 1,000 969





(1) Term loan balance is reported net of deferred financing costs of $- and $128



as of July 31, 2020 and January 31, 2020, respectively. Refer to Note 4 -



Debt to the condensed consolidated financial statements for additional



information. The term loan balance as of July 31, 2020 is the Company's PPP



loan. The term loan payable as of January 31, 2020 was bank term debt.



(2) Refer to Note 7- Commitments and Contingencies to the condensed consolidated



financial statements for additional information.





Operating cash flow activities






Six Months Ended
(in thousands) July 31, 2020 July 31, 2019



Net loss from continuing operations $ (2,140 ) $ (2,298 )
Non-cash adjustments to net loss 1,045



331



Cash impact of changes in assets and liabilities (876 ) (1,108 )
Net cash used in operating activities $ (1,971 ) $



(3,075 )




The use of cash from operating activities is due to the loss from operations for
the second quarter ended July 31, 2020 as well as certain non-recurring cost
paid in the first quarter of fiscal year 2020. We had some $600 of non-recurring
cost accrued at the end of fiscal 2019, that were funded in the first quarter
ended April 30, 2020. These were inclusive of approximately $300 of severance
liabilities for an employee rationalization that occurred on January 31, 2020.




Investing cash flow activities






Six-Months Ended
(in thousands) July 31, 2020 July 31, 2019



Purchases of property and equipment $ (34 ) $ (46 )
Proceeds from sale of ECM Assets 11,288 -
Capitalized software development costs (1,094 ) (1,543 )
Net cash provided by (used in) investing activities $ 10,160 $



(1,589 )





The improvement in the cash used in investing activities in the six months ended
July 31, 2020 over the prior comparable period is primarily due to the proceeds
from our sale of the ECM Assets, and lower capitalized software development
costs. Refer to Note 8 - Discontinued Operations for more information on the
sale of the ECM Assets. Operationally, the Company has a more focused effort on
the spend for software development projects. See discussion and analysis in
"Research and development costs" above. The proceeds from the sale of the ECM
Assets are net of direct transaction expenses.



31







Financing cash flow activities






Six-Months Ended
(in thousands) July 31, 2020 July 31, 2019



Proceeds from line of credit 2,301 1,000
Principal repayments on term loan $ (4,000 ) $ (298 )
Other (58 ) (14 )


Net cash (used in) provided by financing activities $ (1,757 ) $


688




The cash used in financing activities in the six months ended July 31, 2020 was
primarily the result of the repayment of the Company's term loan on February 24,
2020
, upon the closing 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. Refer to Note 4 - Debt.

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