FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report and in other materials we file with theSecurities 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 endedJanuary 31, 2020 and in our subsequent filings with theSecurities 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; 22
? 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
? 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 % 23 Proprietary software and term licenses - Proprietary software revenue recognized for the three months endedJuly 31, 2020 increased by$104,000 and six months endedJuly 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 endedJuly 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 endedJuly 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 endedJuly 31, 2020 decreased by$45,000 and$239,000 andJuly 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 onJune 30, 2020 . Accordingly, the Company recognized$69,000 lower revenue from Clinical Analytics in the three months and six months endedJuly 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 endedJuly 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 endedJuly 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. 24
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
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 endedJuly 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 endedJuly 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 endedJuly 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 endedJuly 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 endedJanuary 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 endedJuly 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 endedJuly 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 endedJuly 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. 25 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 endedJuly 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 endedJuly 31, 2020 was lower than that from the prior comparable period. The Company previously announced an employee rationalization onJanuary 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 endedJuly 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 inAtlanta that was abandoned when the Company entered a new lease for office space inAlpharetta, Georgia . 26 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 endedJuly 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 onFebruary 24, 2020 , upon closing the sale of the ECM Assets.
The components of miscellaneous expense for the three and six-month periods endedJuly 31, 2020 and 2019 is primarily the valuation allowance on the Montefiore liability and any currency transaction. Miscellaneous expense for the six-month period endedJuly 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 endedJuly 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 endedJuly 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 endedJuly 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. 27
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 endedJanuary 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 endedJanuary 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 endedJanuary 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, onFebruary 24, 2020 , the Company generated over$5.4 million in proceeds from the sale of the ECM Assets, after repaying its$4.0 million term loan. The Company believes that cash flows from operations, the cash from the sale of the ECM Assets and available credit facilities are adequate to fund current obligations for the next twelve months from issuance of these financial statements. Cash and cash equivalent balances atJuly 31, 2020 andJanuary 31, 2020 were$ 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 toHyland Software, Inc onFebruary 24, 2020 . The Company used the proceeds to pay off its term loan withBridge Bank and to fund the continuing development and incremental investment in sales and marketing in support of its eValuator™ cloud-based pre- and post-bill coding analysis platform. The 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 datedApril 11, 2020 . The Company obtained a waiver atJanuary 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 atJuly 31, 2020 . Based upon the borrowing base formula set forth in the Credit Agreement, as ofJuly 31, 2020 , the Company had access to$627,000 of the full$2,000,000 revolving line of credit. As ofJuly 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 onMarch 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 $- and
as of
Debt to the condensed consolidated financial statements for additional
information. The term loan balance as of
loan. The term loan payable as of
(2) Refer to Note 7- Commitments and Contingencies to the condensed consolidated
financial statements for additional information.
Operating cash flow activities
Six Months Ended (in thousands) July 31, 2020 July 31, 2019
Net loss from continuing operations$ (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 endedJuly 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 endedApril 30, 2020 . These were inclusive of approximately$300 of severance liabilities for an employee rationalization that occurred onJanuary 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 endedJuly 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 endedJuly 31, 2020 was primarily the result of the repayment of the Company's term loan onFebruary 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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