NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July
31, 2020
NOTE
1 — BASIS OF PRESENTATION
Streamline
Health Solutions, Inc. and its subsidiary (“we”, “us”, “our”, “Streamline”, or
the “Company”) operates in one segment as a provider of healthcare information
technology solutions and associated services. The Company provides these capabilities through the licensing of its CDI, Abstracting
and eValuator coding analysis platform, and financial management solutions through both licensing arrangements and software as
a service (“SaaS”) contracts. The Company also provides audit and coding services to help clients optimize their internal
clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions.
The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and
Canada to capture, store, manage, route, retrieve and process patient clinical, financial and other healthcare provider information
related to the patient revenue cycle.
The
accompanying unaudited condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations
applicable to quarterly reports on Form 10-Q of the U.S. Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate
to make the information not misleading. The condensed consolidated financial statements include the accounts of Streamline Health
Solutions, Inc. and its wholly-owned subsidiary, Streamline Health, Inc. In the opinion of our management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements
have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in our most recent annual report on Form 10-K, Commission File Number 0-28132. Operating
results for the six months ended July 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal
year ending January 31, 2021.
The
Company determined that it has one operating segment and one reporting unit due to the single nature of our products, product
development, distribution process, and customer base as a provider of computer software-based solutions and services for healthcare
providers.
On
February 24, 2020, the Company sold a portion of its business (the ECM Assets). The Company signed the definitive agreement in
December 2019 and prepared and filed a proxy statement to obtain shareholder vote on the transaction. We applied the standard
of ASC 205-20-1 to ascertain the timing of accounting for the discontinued operations. Based on ASC 205-20-1, the
Company determined that it did not have the authority to sell the assets until the date of the shareholder vote which was February
21, 2020. Accordingly, the Company did not present the ECM Assets as held for sale in previously filed financial statements. On
February 21, 2020, the Company having the authority and ability to consummate the sale of the ECM Assets, met the criteria to
present discontinued operations as described in ASC 205-20-1. Accordingly, the Company is reporting the results of operations
and cash flows, and related balance sheet items associated with the ECM Assets in discontinued operations in the accompanying
condensed consolidated statements of operations, cash flows and balance sheets for the current and comparative prior periods.
Refer to Note 8 – Discontinued Operations for details of our discontinued operations.
All
amounts in the condensed consolidated financial statements, notes and tables have been rounded to the nearest thousand dollars,
except share and per share amounts, unless otherwise indicated. All references to a fiscal year refer to the fiscal year commencing
February 1 in that calendar year and ending on January 31 of the following calendar year.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our
significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year
2019 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to
the consolidated financial statements contained in the Annual Report on Form 10-K when reviewing interim financial results.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
On an ongoing basis, management evaluates its estimates and judgments, including those related to the recognition of revenue,
stock-based compensation, capitalization of software development costs, intangible assets, the allowance for doubtful accounts,
and income taxes. Actual results could differ from those estimates.
Reclassification
Certain
amounts in the preparation of financial statements for the three and six months ended July 31, 2020, resulted in reclassifications
of the three and six months ended July 31, 2019 and balance sheet as of January 31, 2020. A total of $47,000 for deferred financing
cost related to the revolving credit agreement was reclassified from debt to other assets in the accompanying condensed consolidated
balance sheet as of January 31, 2020 to be consistent with the presentation as of July 31, 2020. The Company paid the term loan
on February 24, 2020, and accordingly wrote-off the portion of deferred financing cost related to the term loan through discontinued
operations.
Fair
Value of Financial Instruments
The
Financial Accounting Standards Board’s (“FASB”) authoritative guidance on fair value measurements establishes
a framework for measuring fair value. This guidance enables the reader of the financial statements to assess the inputs used to
develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine
fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the
following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs that are not corroborated by market data.
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value
based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount
of our long-term debt approximates fair value since the variable interest rates being paid on the amounts approximate the market
interest rate. Long-term debt is classified as Level 2. There were no transfers of assets or liabilities between Levels 1, 2,
or 3 during the six months ended July 31, 2020 and 2019.
The
table below provides information on our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
Quoted Prices
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Total Fair
|
|
|
in Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
At July 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1)
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty liability (1)
|
|
$
|
969,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
969,000
|
|
(1)
|
The
fair value of the royalty liability was determined based on discounting the portion of the modified royalty commitment payable
in cash (refer to Note 7 – Commitments and Contingencies for additional information on our royalty liability). Fair
value adjustments are included within miscellaneous expense in the condensed consolidated statements of operations.
|
Revenue
Recognition
We
derive revenue from the sale of internally-developed software, either by licensing for local installation or by a software as
a service (“SaaS”) delivery model, through our direct sales force or through third-party resellers. Licensed, locally-installed
clients on a perpetual model utilize our support and maintenance services for a separate fee, whereas term-based locally installed
license fees and SaaS fees include support and maintenance. We also derive revenue from professional services that support the
implementation, configuration, training and optimization of the applications, as well as audit services provided to help clients
review their internal coding audit processes. Additional revenues are also derived from reselling third-party software and hardware
components.
We
recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers
(“ASC 606”), under the core principle of recognizing revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.
We
commence revenue recognition (Step 5 below) in accordance with that core principle after applying the following steps:
|
●
|
Step
1: Identify the contract(s) with a customer
|
|
|
|
|
●
|
Step
2: Identify the performance obligations in the contract
|
|
|
|
|
●
|
Step
3: Determine the transaction price
|
|
|
|
|
●
|
Step
4: Allocate the transaction price to the performance obligations in the contract
|
|
|
|
|
●
|
Step
5: Recognize revenue when (or as) the entity satisfies a performance obligation
|
Often
contracts contain more than one performance obligation. Performance obligations are the unit of accounting for revenue recognition
and generally represent the distinct goods or services that are promised to the customer. Revenue is recognized net of any taxes
collected from customers and subsequently remitted to governmental authorities.
If
we determine that we have not satisfied a performance obligation, we defer recognition of the revenue until the performance obligation
is satisfied. Maintenance and support and SaaS agreements are generally non-cancellable or contain significant penalties for early
cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material
obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund
terms are required, revenue is recognized upon the satisfaction of such criteria.
The
determined transaction price is allocated based on the standalone selling price of the performance obligations in contract. Significant
judgment is required to determine the standalone selling price (“SSP”) for each performance obligation, the amount
allocated to each performance obligation and whether it depicts the amount that the Company expects to receive in exchange for
the related product and/or service. As the selling prices of the Company’s software licenses are highly variable, the Company
estimates SSP of its software licenses using the residual approach when the software license is sold with other services and observable
SSPs exist for the other services. The Company estimates the SSP for maintenance, professional services, and audit services based
on observable standalone sales.
Contract Combination
The
Company may execute more than one contract or agreement with a single customer. The Company evaluates whether the agreements were
negotiated as a package with a single objective, whether the amount of consideration to be paid in one agreement depends on the
price and/or performance of another agreement, or whether the goods or services promised in the agreements represent a single
performance obligation. The conclusions reached can impact the allocation of the transaction price to each performance obligation
and the timing of revenue recognition related to those arrangements.
The
Company has utilized the portfolio approach as the practical expedient. We have applied the revenue model to a portfolio of contracts
with similar characteristics where we expected that the financial statements would not differ materially from applying it to the
individual contracts within that portfolio.
Systems Sales
The
Company’s software license arrangements provide the customer with the right to use functional intellectual property. Implementation,
support, and other services are typically considered distinct performance obligations when sold with a software license unless
these services are determined to significantly modify the software. Revenue is recognized at a point in time. Typically, this
is upon shipment of components or electronic download of software.
Maintenance and Support Services
Our
maintenance and support obligations include multiple discrete performance obligations, with the two largest being unspecified
product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe
that the multiple discrete performance obligations within our overall maintenance and support obligations can be viewed as a single
performance obligation since both the unspecified upgrades and technical support are activities to fulfill the maintenance performance
obligation and are rendered concurrently. Maintenance and support agreements entitle clients to technology support, version upgrades,
bug fixes and service packs. We recognize maintenance and support revenue over the contract term.
Software-Based Solution Professional Services
The
Company provides various professional services to customers with software licenses. These include project management, software
implementation and software modification services. Revenues from arrangements to provide professional services are generally distinct
from the other promises in the contract and are recognized as the related services are performed. Consideration payable under
these arrangements is either fixed fee or on a time-and-materials basis, and is recognized over time as the services are performed
Software as a Service
SaaS-based
contracts include use of the Company’s platform, implementation, support and other services which represent a single promise
to provide continuous access to its software solutions. The Company recognizes revenue over the term of the life of the contract.
Audit Services
The
Company provides technology-enabled coding audit services to help clients review and optimize their internal clinical documentation
and coding functions across the applicable segment of the client’s enterprise. Audit services are a separate performance
obligation. We recognize revenue as the services are performed.
Disaggregation of Revenue
The
following table provides information about disaggregated revenue by type and nature of revenue stream:
|
|
Six-Months Ended July 31, 2020
|
|
|
|
Recurring Revenue
|
|
|
Non-recurring Revenue
|
|
|
Total
|
|
Systems sales
|
|
$
|
—
|
|
|
$
|
215,000
|
|
|
$
|
215,000
|
|
Professional services
|
|
|
—
|
|
|
|
360,000
|
|
|
|
360,000
|
|
Audit services
|
|
|
—
|
|
|
|
1,007,000
|
|
|
|
1,007,000
|
|
Maintenance and support
|
|
|
2,486,000
|
|
|
|
—
|
|
|
|
2,486,000
|
|
Software as a service
|
|
|
1,663,000
|
|
|
|
—
|
|
|
|
1,663,000
|
|
Total revenue:
|
|
$
|
4,149,000
|
|
|
$
|
1,582,000
|
|
|
$
|
5,731,000
|
|
Contract Receivables and Deferred Revenues
The
Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related
to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenues
include payments received in advance of performance under the contract. Our contract receivables and deferred revenue are reported
on an individual contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent
based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the
timing of when we expect to recognize revenue. In the year first six months ended July 31, 2020, we recognized approximately $2.7
million in revenue from deferred revenues outstanding as of January 31, 2020. Revenue allocated to remaining performance obligations
was $17.8 million as of July 31, 2020, of which the Company expects to recognize approximately 49% over the next 12 months and
the remainder thereafter.
Deferred
costs (costs to fulfill a contract and contract acquisition costs)
We
defer the direct costs, which include salaries and benefits, for professional services related to SaaS contracts as a cost to
fulfill a contract. These deferred costs will be amortized on a straight-line basis over the contractual term. During the quarter
ended July 31, 2020, both deferred costs and accumulated amortization accounts were reduced by $180,000 for costs fully amortized.
As of July 31, 2020 and January 31, 2020, we had deferred costs of $173,000 and $144,000, respectively, net of accumulated amortization
of $166,000 and $332,000, respectively. Amortization expense of these costs was $28,000 and $55,000 for the three months ended
July 31, 2020 and 2019 respectively and $61,000 and $105,000 for the six months ended July 31, 2020 and 2019, respectively. There
were no impairment losses for these capitalized costs for the fiscal years 2019 and 2018.
Contract
acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining
a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line
basis over the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period
of related deferred commission costs would have been one year or less.
Deferred
commissions costs paid and payable, which are included on the consolidated balance sheets within other non-current assets totaled
$585,000 and $421,000, respectively, as of July 31, 2020 and January 31, 2020. Amortization expense associated with sales
commissions included in selling, general and administrative expenses on the consolidated statements of operations was $43,000
and $37,000 for the three months ended July 31, 2020 and 2019, respectively, and $74,000 and $55,000 for the six
months ended July 31, 2020 and 2019, respectively.. There were no impairment losses for these capitalized costs for these periods.
Capitalized
Software Development Costs
Software
development costs for software to be sold, leased, or marketed are accounted for in accordance with ASC 985-20, Software —
Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and design phase of software development
are classified as research and development costs and are expensed as incurred. Once technological feasibility has been established,
a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available
for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization
is calculated on a solution-by-solution basis and is included in Cost of system sales on the consolidated statements of operations.
Annual amortization is measured at the greater of a) the ratio of the software product’s current gross revenues to the total
of current and expected gross revenues or b) straight-line over the remaining economic life of the software (typically three to
five years). Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at
the date of such determination.
Internal-use
software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The costs incurred in
the preliminary stages of development are expensed as research and development costs as incurred. Once an application has reached
the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on
a straight-line basis over the estimated useful life of the software (typically three to five years). Maintenance and enhancement
costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to
substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized
and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value
for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives
should be modified. Amortization expense related to capitalized internal-use software development costs is included in Cost of
software as a service on the consolidated statements of operations.
The
Company wrote-off $5,274,000 of aggregate cost and associated amortization of capitalized software development as of and for the
period ended July 31, 2020 as it was fully amortized. During the three month period ended July 31, 2020, the Company capitalized
$38,000 of non-employee stock compensation to capitalized software development cost reflecting the earned stock awards to 180
Consulting – See Note 9 – Related Party Transactions.
Equity
Awards
The
Company accounts for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as
expense over the requisite service period. For awards to non-employees, the Company recognizes compensation expense in the same
manner as if the entity had paid cash for the goods or services. The Company incurred total compensation expense related to stock-based
awards of $349,000 and $160,000 for the three months ended July 31, 2020 and 2019, respectively, and $612,000 and $429,000 for
the six months ended July 31, 2020 and 2019, respectively.
The
fair value of the stock options granted was estimated at the date of grant using a Black-Scholes option pricing model. Option
pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate.
Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and are generally
derived from external (such as, risk-free rate of interest) and historical data (such as, volatility factor, expected term and
forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported
expenses depending upon the number, value and vesting period of future awards.
The
Company issues restricted stock awards in the form of Company common stock. The fair value of these awards is based on the market
close price per share on the grant date. The Company expenses the compensation cost of these awards as the restriction period
lapses, which is typically a one- to four-year service period to the Company.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. In assessing net deferred tax assets, the Company considers whether it is more likely than not that some or all of
the deferred tax assets will not be realized. The Company establishes a valuation allowance when it is more likely than not that
all or a portion of deferred tax assets will not be realized. Refer to Note 6 - Income Taxes for further details.
The
Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of
whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. At July 31, 2020,
the Company believes it has appropriately accounted for any uncertain tax positions.
Net
Earnings (Loss) Per Common Share
The
Company presents basic and diluted earnings per share (“EPS”) data for our common stock. Our Series A Convertible
Preferred Stock were considered participating securities under ASC 260, Earnings Per Share (“ASC 260”) which
means the security may participate in undistributed earnings with common stock. The holders of the Series A Convertible Preferred
Stock were entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends,
other than dividends in the form of common stock. In accordance with ASC 260, the Company is required to use the two-class method
when computing EPS. The two-class method is an earnings allocation formula that determines EPS for each class of common stock
and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating
securities based on their respective weighted-average shares outstanding for the period (with the exception of the gain on the
redemption of our Series A Convertible Preferred Stock, which was allocated in its entirety to the common stock).
Our
unvested restricted stock awards are considered non-participating securities because holders are not entitled to non-forfeitable
rights to dividends or dividend equivalents during the vesting term. In accordance with ASC 260, securities are deemed not to
be participating in losses if there is no obligation to fund such losses. The Series A Convertible Preferred Stock does not participate
in losses, and as a result, the Company does not allocate losses to these securities in periods of loss. Diluted EPS for our common
stock is computed using the more dilutive of the two-class method or the “if-converted” and treasury stock methods.
Refer to Note 5 – Convertible Preferred Stock for further discussion of the redemption of our Series A Convertible Preferred
Stock.
The
following is the calculation of the basic and diluted net earnings (loss) per share of common stock:
|
|
Three-Months Ended
|
|
|
Six-Months Ended
|
|
|
|
July 31, 2020
|
|
|
July 31, 2019
|
|
|
July 31, 2020
|
|
|
July 31, 2019
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of tax
|
|
$
|
(1,163,000
|
)
|
|
$
|
(1,656,000
|
)
|
|
$
|
(2,140,000
|
)
|
|
$
|
(2,298,000
|
)
|
Basic net loss per share of common stock from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
|
(0.07
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from discontinued operations, net of tax
|
|
$
|
28,000
|
|
|
$
|
1,048,000
|
|
|
$
|
4,678,000
|
|
|
$
|
2,003,000
|
|
Less: Allocation of earnings to participating securities
|
|
|
—
|
|
|
|
(133,000
|
)
|
|
|
—
|
|
|
|
(260,000
|
)
|
Income available to common shareholders from discontinued operations
|
|
$
|
28,000
|
|
|
$
|
915,000
|
|
|
|
4,678,000
|
|
|
|
1,743,000
|
|
Basic net earnings per share of common stock from discontinued operations
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
0.16
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders from continuing operations
|
|
$
|
(1,163,000
|
)
|
|
$
|
(1,656,000
|
)
|
|
|
(2,140,000
|
)
|
|
|
(2,298,000
|
)
|
Diluted net loss per share of common stock from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
|
(0.07
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders from discontinued operations
|
|
$
|
28,000
|
|
|
$
|
1,048,000
|
|
|
|
4,678,000
|
|
|
|
2,003,000
|
|
Diluted net earnings per share of common stock from discontinued operations
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,135,000
|
)
|
|
$
|
(608,000
|
)
|
|
$
|
2,538,000
|
|
|
$
|
(295,000
|
)
|
Weighted average shares outstanding - Basic (1)
|
|
|
30,026,658
|
|
|
|
19,913,658
|
|
|
|
29,897,236
|
|
|
|
19,853,510
|
|
Effect of dilutive securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (3)
|
|
|
394,815
|
|
|
|
3,163,149
|
|
|
|
332,359
|
|
|
|
3,097,413
|
|
Weighted average shares outstanding – Diluted
|
|
|
30,421,473
|
|
|
|
23,076,807
|
|
|
|
30,229,595
|
|
|
|
22,950,923
|
|
Basic net loss per share of common stock
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.03
|
)
|
Diluted net loss per share of common stock
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.03
|
)
|
|
(1)
|
Excludes
the effect of unvested restricted shares of common stock, which are considered non-participating securities. As of July 31,
2020 and 2019, there were 1,421,825 and 760,978 unvested restricted shares of common stock outstanding, respectively.
|
|
(2)
|
Diluted
EPS for our common stock was computed using the if-converted method, which yields the same result as the two-class method.
The two-class method has not been used in the current period as a result of the redemption of the participating securities,
See Note 5.
|
|
(3)
|
Diluted
net loss per share excludes the effect of shares that are anti-dilutive. For the three and six months ended July 31, 2020,
diluted EPS excludes 624,330 outstanding stock options and 1,421,825 unvested restricted shares of common stock. For the three
and six months ended July 31, 2019, diluted EPS excludes 2,895,464 shares of Series A Convertible Preferred Stock, 1,516,913
outstanding stock options and 760,978 unvested restricted shares of common stock.
|
Other
Operating Costs
Loss
on Exit of Membership Agreement
As
of July 31, 2020, minimum fees due under the shared office arrangement totalled approximately $67,000. The Company recorded an
expense for the minimum future commitment under the agreement and accrued the cost to the accompanying consolidated balance sheet
in the first six months ended July 31, 2020 to reflect the liability at the time it abandoned the space. Refer to Note 3 –
Operating Leases.
Non-Cash
Items
The
Company had the following items that were non-cash items related to the condensed consolidated statements of cash flows:
|
|
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
Escrowed funds from sale of ECM Assets
|
|
$
|
800,000
|
|
|
$
|
—
|
|
Right-of Use Assets from operating lease
|
|
|
540,000
|
|
|
|
—
|
|
Capitalized software purchased with stock (Note 9)
|
|
|
38,000
|
|
|
|
—
|
|
Recent
Accounting Pronouncements
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which removes Step 2 from the goodwill impairment test. The standard became effective for us on February 1, 2020.
The adoption of this ASU did not have a significant impact on our condensed consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, to remove, modify, and add certain disclosure requirements within Topic 820 in order
to improve the effectiveness of fair value disclosures in the notes to financial statements. The standard became effective for
us on February 1, 2020. The adoption of this ASU did not have a significant impact on our condensed consolidated financial statements.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the
general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting
entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual
periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period.
Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on
a retrospective or modified retrospective basis. The standard will become effective for us on February 1, 2021. We are currently
evaluating the impact of the new standard on our condensed consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,” which amends the impairment model to utilize an expected loss methodology in place
of the current incurred loss methodology, which will result in the more timely recognition of losses. For smaller reporting entities,
ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years.
The ASU, including the subsequently issued codification improvements update (“Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-04)
and the targeted transition relief update (“Financial Instruments-Credit Losses (Topic 326),” ASU 2019-05), is not
expected to have a significant impact on the consolidated condensed financial statements.
NOTE
3 — OPERATING LEASES
We
determine whether an arrangement is a lease at inception. Right-of-use assets represent our right to use an underlying asset for
the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use
assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease
term. Since our lease arrangements do not provide an implicit rate, we use our incremental borrowing rate for the expected remaining
lease term at commencement date for new leases and for existing leases, in determining the present value of future lease payments.
Operating lease expense is recognized on a straight-line basis over the lease term. The Company has made the accounting policy
election for building leases to not separate non-leases components.
The
Company entered into a new lease for office space in Alpharetta, Georgia, on March 1, 2020. The lease terminates on March 31,
2023. At inception, the Company recorded a right-of use asset of $540,000, and related current and long-term operating lease obligation
in the accompanying consolidated balance sheet. As of July 31, 2020, operating lease right-of use assets totalling $473,000, and
the associated lease liability is included in both current and long-term liabilities of $195,000 and $309,000, respectively. The
Company used a discount rate of 6.5% to the determine the lease liability. For the three- and six-month periods ended July 31,
2020, the Company had operating cost of approximately $48,000 and $97,000. In addition, there was $33,000 paid for amounts included
in the measurement of operating cash flows from operating leases as a result of lease incentives and previous pre-paid rent that
has been included as an adjustment to the right-of-use asset at lease inception.
Maturities
of operating lease liabilities associated with the Company’s operating lease as of July 31, 2020 are as follows for payments
due based upon the Company’s fiscal year:
2020
|
|
$
|
99,000
|
|
2021
|
|
|
204,000
|
|
2022
|
|
|
210,000
|
|
2023
|
|
|
35,000
|
|
Total lease payments
|
|
|
548,000
|
|
Less present value adjustment
|
|
|
(44,000
|
)
|
Present value of lease liabilities
|
|
$
|
504,000
|
|
Upon
signing the new lease in March 2020, the Company abandoned its shared office space in Atlanta and recorded an expense and related
liability of $105,000 for the minimum remaining payments required under the agreement with the landlord. The associated expense
is recorded in “Loss on exit of membership agreement” in the accompanying statements of operations and is accrued
in “accrued expenses” in the accompanying balance sheet. The membership agreement did not qualify as a lease as the
owner had substantive substitution rights.
During
fiscal year 2019, we had one operating lease related to our New York office sublease, which expired in November 2019. In the second
quarter of fiscal 2018, we closed our New York office and subleased the office space for the remaining period of the original
lease term. As a result of vacating and subleasing the office, we recorded a $472,000 loss on exit of the operating lease in fiscal
2018. The associated lease liability reduced the right-of-use asset upon adoption of ASC 842. As of November 2019, the lease had
expired and there was no minimum rentals due to our lessor or amounts to be received by us from our sublessee. As of July 31,
2019, operating lease right-of use assets totalling $70,000 are recorded in Prepaid and other current assets, and the associated
lease liability of $191,000 is included in Accrued expenses within the condensed consolidated balance sheets. The Company used
a discount rate of 8.0% to the determine the lease liability. In the six months ended July 31, 2019, the Company had operating
cost, and cash operating cash flows, associated the New York lease of $117,000, offset by operating lease income of $144,000.
NOTE
4 — DEBT
Term
Loan and Line of Credit with Wells Fargo
On
November 21, 2014, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative
agent, and other lender parties thereto. Pursuant to the Credit Agreement, the lenders agreed to provide a $10,000,000 senior
term loan and a $5,000,000 revolving line of credit to our primary operating subsidiary. Amounts outstanding under the Credit
Agreement bear interest at either LIBOR or the base rate, as elected by the Company, plus an applicable margin. Subject to the
Company’s leverage ratio, pursuant to the terms of the amendment to the Credit Agreement entered into as of April 15, 2015,
the applicable LIBOR rate margin varies from 4.25% to 6.25%, and the applicable base rate margin varies from 3.25% to 5.25%, plus,
after the effective date of the amendment to the Credit Agreement entered into as of September 11, 2019, a “paid in kind”
rate, or PIK Rate, of 2.75%. Amendments to the Credit Agreement reduced the Company’s capacity on the existing revolving
credit from $5,000,000 to $1,500,000 and extended the original term loan and line of credit maturity date to August 21, 2020.
The senior term loan principal balance was payable in quarterly instalments, which started in March 2015 and would continue through
the maturity date, with the full remaining unpaid principal balance due at maturity. Financing costs associated with the new credit
facility were being amortized over its term on a straight-line basis, which is not materially different from the effective interest
method.
The
Credit Agreement included customary financial covenants, including the requirements that the Company maintain minimum liquidity
and achieve certain minimum EBITDA levels (as defined in the Credit Agreement). In addition, the Credit Agreement prohibited the
Company from paying dividends on the common and preferred stock.
In
connection with entering into the Loan and Security Agreement with Bridge Bank on December 11, 2019, as discussed below, the Company
terminated the Credit Agreement and repaid all outstanding amounts due thereunder.
Term
Loan and Revolving Credit Facility with Bridge Bank
On
December 11, 2019, the Company entered into a new Loan and Security Agreement (the “Loan and Security Agreement”)
with Bridge Bank, a division of Western Alliance Bank, consisting of a $4,000,000 term loan and a $2,000,000 revolving credit
facility. The proceeds from the term loan were used to repay all outstanding balances under its existing term loan with Wells
Fargo Bank. Amounts outstanding under the new term loan shall bear interest at a per annum rate equal to the higher of (a) the
Prime Rate (as published in The Wall Street Journal) plus 1.50% or (b) 6.50%. Under the terms of the Loan and Security Agreement
the Company shall make interest-only payments through the twelve-month anniversary date after which the Company shall repay the
new term loan in thirty-six equal and consecutive instalments of principal, plus monthly payments of accrued interest. The term
loan and revolving credit facility provide support for working capital, capital expenditures and other general corporate purposes,
including permitted acquisitions. The outstanding term loan is secured by substantially all of our assets. Financing costs associated
with the Loan and Security Agreement are being amortized over its term on a straight-line basis, which is not materially different
from the effective interest method.
The
new revolving credit facility has a maturity date of twenty-four months and advances shall bear interest at a per annum rate equal
to the higher of (a) the Prime Rate (as published in The Wall Street Journal) plus 1.25% or (b) 6.25%. The revolving credit facility
can be advanced based upon 80% of eligible accounts receivable, as defined in the Loan and Security Agreement.
The
Loan and Security Agreement, as amended, includes financial covenant requirements that the Company requirements that it shall
not deviate by more than fifteen percent of its revenue projections over a trailing three-month basis or the Company’s recurring
revenue shall not deviate by more than twenty percent over a cumulative year-to-date basis of its projections. In addition, the
Company’s Bank EBITDA, measured on a monthly basis over a trailing three-month period then ended, shall not deviate by the
greater of thirty percent its projected Bank EBITDA or $150,000. The 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 both January 31, 2020 and April 30, 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 and January 31, 2020, the Company had no outstanding borrowings under the revolving credit facility.
As
described herein, on February 24, 2020, the Company prepaid the $4.0 million outstanding term loan with Bridge Bank in full with
proceeds from the sale of the ECM Assets, as required under the Loan and Security Agreement. Accordingly, we reclassified the
term loan from non-current to current on the consolidated balance sheet as of January 31, 2020. Contemporaneously with the closing
of the sale and payment of the term loan, the Company wrote-off approximately $125,000 of deferred financing cost apportioned
to the term loan to discontinued operations. The Company reclassified the remaining amount of deferred financing to other assets
in the accompanying consolidated balance sheet.
Outstanding
principal balances on debt consisted of the following at:
|
|
July
31, 2020
|
|
|
January 31, 2020
|
|
Term loan
|
|
$
|
—
|
|
|
$
|
4,000,000
|
|
Deferred financing cost
|
|
|
—
|
|
|
|
(128,000
|
)
|
Total
|
|
|
—
|
|
|
|
3,872,000
|
|
Less: Current portion
|
|
|
—
|
|
|
|
(3,872,000
|
)
|
Non-current portion of debt
|
|
$
|
—
|
|
|
$
|
—
|
|
Term
Loan related to “The Coronavirus Aid, Relief, and Economic Security Act”
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”). Qualifying
companies are able to borrow, through the SBA, up to two months of payroll. We filed for and obtained $2,301,000 through the SBA
for the PPP loan program. The Company finalized its agreement for the PPP Loan on April 21, 2020 and was funded on the same date.
The
PPP loan carries an interest rate of 1.0% per annum. Principal and interest payments are due, beginning on the seventh month from
the effective date, sufficient to satisfy the loan on the second anniversary date. However, under certain criteria, the loan may
be forgiven. The Company is accruing interest at 1% in the accompanying condensed consolidated financial statements. The future
maturities under the loan are $1,071,000, and $1,229,000 in the next two twelve-month periods from July 31, 2020, respectively.
NOTE
5 — CONVERTIBLE PREFERRED STOCK
Redemption
of Series A Convertible Preferred Stock
On
October 16, 2019, the Company issued 9,473,691 shares of common stock in consideration for aggregate proceeds of $9,663,000 in
a private placement transaction. Each share of common stock was sold at $1.02 per share. The proceeds from the sale of common
stock were used to redeem all 2,895,464 outstanding shares of Series A Convertible Preferred Stock at $2.00 per share for a total
redemption payment of $5,813,000, which includes $22,000 in direct costs associated with the redemption.
Pursuant
to the guidance in ASC 260-10-S99-2 for redemptions of preferred stock, the Company compared the difference between the carrying
amount of the Series A Convertible Preferred Stock, net of issuance costs, of $8,686,000 to the fair value of the consideration
transferred of $5,813,000, which was reduced by the commitment date intrinsic value of the conversion option since the redemption
included the reacquisition of a previously recognized beneficial conversion feature of $2,021,000, and added this difference to
net income to arrive at income available to common stockholders in the calculation of basic earnings per share. As the carrying
value of the Series A Convertible Preferred Stock was $8,686,000 on the date of redemption, the Company reflected the resulting
return from the preferred stockholders of $4,894,000 as an adjustment to net income (loss) attributable to common stockholders
in the Company’s basic and diluted EPS calculations for year ended January 31, 2020.