Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive
Overview
The
Company has determined it could best assist healthcare providers in improving their revenue cycle management by providing solutions
and services in the middle portion of the revenue cycle, that is, the revenue cycle operations from initial charge capture to
bill drop. We continue to make decisions supporting our focus in the middle of the revenue cycle. In late fiscal 2017, the Company
introduced a new product for the middle of the revenue cycle, eValuator. This product has significant implications to the timing
and accuracy of our customers’ invoicing through rules that are created to review the accuracy of invoicing prior to the
physical invoices being released. This is a notable change to existing processes of our customers. The development activities
continued through the end of fiscal 2018. There are continued development efforts planned for eValuator in fiscal 2021, generally,
in the same levels as fiscal 2020.
With
the focus on the middle of the revenue cycle, the Company is committed to leading an industry movement to improve hospitals’
financial performance by moving billing interventions upstream, to improve coding accuracy before billing, enabling our customers
to reduce revenue leakage, mitigate both under-billing and over-billing risk, and reduce denials and days in accounts receivable.
By
narrowing our focus to the middle of the revenue cycle, we believe there is a distinct and compelling value proposition that can
help us attract more customers. By innovating new technologies, we have been able to expand our target markets beyond just hospitals
and into outpatient centers, clinics and physician practices. Our coding solutions like CDI, Physician Query, Abstracting and
eValuator are competitive in the market and enabled us to engage five significant new eValuator customers in fiscal year 2020.
These five new eValuator customers are some of the largest names in healthcare as we moved upstream to customers that were more
likely to change their internal processes to the pre-bill audit.
The
Company divested its ECM Assets on February 24, 2020. As discussed above, such divestiture is consistent with the Company’s
efforts to focus on the middle of the revenue cycle and its pre-bill technology, eValuator. Management believes that the revenue
cycle technology platforms have higher growth opportunities than its legacy products, including the ECM Assets. The Company accounted
for the sale of the ECM Assets as a sale of assets. See Note 13 – Discontinued Operations to our consolidated financial
statements included in Part II, Item 8, “Financial Statements and Supplementary Data”.
The
Company has continued to implement and maintain tight cost and investment controls so that the transition to focusing our efforts
in the middle of the revenue cycle has not resulted in a negative impact to our cash flows. While there have been lower revenues
in the most recent fiscal years, the Company’s earnings and EBITDA have expanded and the Company is focused on achieving
cash generation. During fiscal 2019, the Company recorded non-recurring costs that are added back to Adjusted EBITDA. These costs
include; (i) $789,000 for executive transition, (ii) $388,000 for severance related to the Company’s previously disclosed
workforce rationalization plan, (iii) $150,000 related to the extinguishment of the Wells Fargo term loan and revolving
credit facility, and (iv) $230,000 related to professional fees associated with the Company’s correction of immaterial errors.
Regardless
of the state of the Affordable Care Act, the healthcare industry continues to face sweeping changes and new standards of care
that are putting greater pressure on healthcare providers to be more efficient in every aspect of their operations. We believe
these changes represent ongoing opportunities for our Company to work with our direct customers and partner with various resellers
to provide information technology solutions to help providers meet these new requirements.
Near
the end of the Company’s fiscal year ended January 31, 2020, the COVID-19 pandemic emerged globally, and it continued through
the Company’s fiscal year ended January 31, 2021. The pandemic, and its attendant economic damage, has had an adverse impact
on our revenue and may continue to adversely affect our business, results of operations and financial condition. The ultimate
extent of its impact on us will depend on future developments, which are highly uncertain and cannot be predicted, including new
information that may emerge concerning the severity of the pandemic and actions taken to contain or prevent its further spread,
including the widespread availability and use of effective vaccines, among others. These and other potential impacts of COVID-19
could therefore continue to materially and adversely affect our business, results of operations and financial condition.
Results
of Operations
Statements
of Operations for the fiscal years ended January 31 (in thousands):
|
|
2021
|
|
|
2020
|
|
|
$
Change
|
|
|
%
Change
|
|
Systems sales
|
|
$
|
590
|
|
|
$
|
1,121
|
|
|
$
|
(531
|
)
|
|
|
(47
|
)%
|
Professional services
|
|
|
618
|
|
|
|
1,163
|
|
|
|
(545
|
)
|
|
|
(47
|
)%
|
Audit services
|
|
|
1,891
|
|
|
|
1,712
|
|
|
|
179
|
|
|
|
10
|
%
|
Maintenance and support
|
|
|
4,586
|
|
|
|
5,356
|
|
|
|
(770
|
)
|
|
|
(14
|
)%
|
Software as a
service
|
|
|
3,661
|
|
|
|
2,501
|
|
|
|
1,160
|
|
|
|
46
|
%
|
Total
revenues
|
|
|
11,346
|
|
|
|
11,853
|
|
|
|
(507
|
)
|
|
|
(4
|
)%
|
Cost of sales
|
|
|
5,689
|
|
|
|
5,351
|
|
|
|
338
|
|
|
|
6
|
%
|
Selling, general and administrative
|
|
|
8,565
|
|
|
|
9,606
|
|
|
|
(1,041
|
)
|
|
|
(11
|
)%
|
Research and development
|
|
|
2,933
|
|
|
|
2,690
|
|
|
|
243
|
|
|
|
9
|
%
|
Executive transition cost
|
|
|
—
|
|
|
|
789
|
|
|
|
(789
|
)
|
|
|
(100
|
)%
|
Rationalization charges
|
|
|
—
|
|
|
|
388
|
|
|
|
(388
|
)
|
|
|
(100
|
)%
|
Transaction costs
|
|
|
—
|
|
|
|
230
|
|
|
|
(230
|
)
|
|
|
(100
|
)%
|
Loss on exit
of operating lease
|
|
|
105
|
|
|
|
—
|
|
|
|
105
|
|
|
|
100
|
%
|
Total
operating expenses
|
|
|
17,292
|
|
|
|
19,054
|
|
|
|
(1,762
|
)
|
|
|
(9
|
)%
|
Operating loss
|
|
|
(5,946
|
)
|
|
|
(7,201
|
)
|
|
|
1,255
|
|
|
|
(17
|
)%
|
Other expense, net
|
|
|
(113
|
)
|
|
|
(675
|
)
|
|
|
562
|
|
|
|
(83
|
)%
|
Income tax benefit
|
|
|
1,260
|
|
|
|
1,632
|
|
|
|
(372
|
)
|
|
|
(23
|
)%
|
Loss from continuing
operations
|
|
$
|
(4,799
|
)
|
|
$
|
(6,244
|
)
|
|
$
|
1,445
|
|
|
|
(23
|
)%
|
Add: Redemption
of Series A Preferred Stock
|
|
|
—
|
|
|
|
4,894
|
|
|
|
(4,894
|
)
|
|
|
(100
|
)%
|
Net loss from
continuing operations
|
|
$
|
(4,799
|
)
|
|
|
(1,350
|
)
|
|
|
(3,449
|
)
|
|
|
255
|
%
|
Adjusted EBITDA(1)
|
|
$
|
(1,893
|
)
|
|
$
|
(2,348
|
)
|
|
$
|
455
|
|
|
|
19
|
%
|
(1)
|
Non-GAAP
measure meaning net earnings (loss) before net interest expense, tax expense (benefit), depreciation, amortization, stock-based
compensation expense, transactional and other expenses that do not relate to our core operations. See “Use of Non-GAAP
Financial Measures” below for additional information and reconciliation.
|
The
following table sets forth, for each fiscal year indicated, certain operating data as percentages of total revenues:
Statements
of Operations (1)
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Systems sales
|
|
|
5.2
|
%
|
|
|
9.8
|
%
|
Professional services
|
|
|
5.4
|
|
|
|
9.2
|
|
Audit services
|
|
|
16.7
|
|
|
|
14.4
|
|
Maintenance and support
|
|
|
40.4
|
|
|
|
45.2
|
|
Software as a
service
|
|
|
32.3
|
|
|
|
21.1
|
|
Total
revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
50.1
|
%
|
|
|
45.1
|
%
|
Selling, general and administrative
|
|
|
75.5
|
|
|
|
81.0
|
|
Research and development
|
|
|
25.9
|
|
|
|
22.7
|
|
Executive transition cost
|
|
|
—
|
|
|
|
6.7
|
|
Rationalization charges
|
|
|
—
|
|
|
|
3.3
|
|
Transaction costs
|
|
|
—
|
|
|
|
1.9
|
|
Loss on exit
of operating lease
|
|
|
0.9
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
152.4
|
%
|
|
|
160.8
|
%
|
Operating loss
|
|
|
(52.4
|
)%
|
|
|
(60.8
|
)%
|
Other expense, net
|
|
|
(1.0
|
)
|
|
|
(5.7
|
)
|
Income tax benefit
|
|
|
11.1
|
|
|
|
13.8
|
|
Loss from continuing
operations
|
|
|
(42.3
|
)%
|
|
|
(52.7
|
)%
|
Add: Redemption
of Series A Preferred Stock
|
|
|
—
|
|
|
|
41.3
|
%
|
Net loss from
continuing operations
|
|
|
(42.3
|
)%
|
|
|
(11.4
|
)%
|
Cost of Sales to Revenues ratio, by
revenue stream:
|
|
|
|
|
|
|
|
|
Systems
sales
|
|
|
84.9
|
%
|
|
|
89.6
|
%
|
Services,
maintenance and support
|
|
|
46.3
|
%
|
|
|
42.0
|
|
Software
as a service
|
|
|
52.1
|
%
|
|
|
35.5
|
%
|
(1)
|
Because
a significant percentage of the operating costs are incurred at levels that are not necessarily correlated with revenue levels,
a variation in the timing of systems sales and installations and the resulting revenue recognition can cause significant variations
in operating results. As a result, period-to-period comparisons may not be meaningful with respect to the past results nor
are they necessarily indicative of the future results of the Company in the near or long-term. The data in the table is presented
solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated.
|
Comparison
of fiscal year 2020 with 2019
Revenues
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Systems sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
software - perpetual license
|
|
$
|
437
|
|
|
$
|
941
|
|
|
$
|
(504
|
)
|
|
|
(54
|
)%
|
Term license
|
|
|
153
|
|
|
|
180
|
|
|
|
(27
|
)
|
|
|
(15
|
)%
|
Professional services
|
|
|
618
|
|
|
|
1,163
|
|
|
|
(545
|
)
|
|
|
(47
|
)%
|
Audit services
|
|
|
1,891
|
|
|
|
1,712
|
|
|
|
179
|
|
|
|
10
|
%
|
Maintenance and support
|
|
|
4,586
|
|
|
|
5,356
|
|
|
|
(770
|
)
|
|
|
(14
|
)%
|
Software as a
service
|
|
|
3,661
|
|
|
|
2,501
|
|
|
|
1,160
|
|
|
|
46
|
%
|
Total
Revenues
|
|
$
|
11,346
|
|
|
$
|
11,853
|
|
|
$
|
(507
|
)
|
|
|
(4
|
)%
|
Proprietary
software and term licenses — Proprietary software revenues recognized in fiscal 2020 were $437,000, as compared
to $941,000 in fiscal 2019. The decreased fiscal 2020 revenues as compared to fiscal 2019 revenues are primarily attributable
to two larger perpetual license sales of our Streamline Health® Abstracting. During fiscal 2020, the Company’s distributor
partners experienced a slower sales cycle as their customers, which are hospital systems, prioritized addressing the COVID-19
pandemic over software projects. Term license revenue for fiscal 2020 decreased $27,000 from fiscal 2019, to $153,000.
Professional
services — Revenues from professional services in fiscal 2020 were $618,000 as compared to $1,163,000 in fiscal
2019. The decrease in professional services revenue is primarily due to the completion of large implementation projects in fiscal
2019 combined with customer-initiated delays in ongoing implementation projects in fiscal 2020. Fiscal 2020 professional services
fees are driven, primarily, from certain large CDI & Abstracting projects that were sold in 2019 and 2020, and the related
implementation and services associated with these. The COVID-19 pandemic contributed to the decrease in revenue as our customers
temporarily placed implementation projects on hold. We expect these projects to restart and revenues to return to 2019 levels
as our customers shift priorities away from addressing COVID-19.
Audit
services — Audit services revenue for fiscal 2020 increased, to $1,891,000 from $1,712,000, in fiscal 2019. Audit
services revenue increase was primarily impacted by the Company’s audit services personnel being on-shore and the use of
the Company’s proprietary product, eValuator. Looking ahead to fiscal 2021, the Company continues to see demand for on-shore,
technically proficient auditors in the marketplace. The Company believes it has a competitive advantage utilizing eValuator for
these professional services. The Company expects modest growth for its audit services business in fiscal 2021.
Maintenance
and support — Revenues from maintenance and support in fiscal 2020 were $4,586,000 as compared to $5,356,000 in
fiscal 2019. The decrease in maintenance and support revenues in fiscal 2020 resulted primarily from (i) $482,000 related to maintenance
terminations due to the Company’s sunsetting of the clinical analytics software and (ii) the termination of a large coding
software maintenance customer. The Company believes it has mitigated future terminations through aggressively pursuing long-term
contracts with our significant legacy product customers. These activities have proven useful, as they have resulted in substantially
better visibility in the near-term revenue base for the Company. The Company expects minimal growth for the maintenance and support
line item for fiscal 2021 because pricing pressure and terminations should keep pace with new sales.
Software
as a service (SaaS) — Revenues from SaaS in fiscal 2020 were $3,661,000, as compared to $2,501,000 in fiscal 2019.
The increase in fiscal 2020 revenue was primarily attributable to growth associated with the Company’s new eValuator product.
The Company’s new eValuator product had five new significant sales during fiscal 2020. Not all five of the fiscal 2020 sales
had a substantial impact to the full year fiscal 2020 revenue, however, they will have a significant impact to the Company’s
fiscal 2021 revenue. The Company expects substantial growth for its SaaS business, year-over-year, and sequentially, in each quarter
of fiscal 2021.
Cost
of Sales
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Cost of systems sales
|
|
$
|
501
|
|
|
$
|
1,004
|
|
|
$
|
(503
|
)
|
|
|
(50
|
)%
|
Cost of professional services
|
|
|
1,040
|
|
|
|
1,548
|
|
|
|
(508
|
)
|
|
|
(33
|
)%
|
Cost of audit services
|
|
|
1,558
|
|
|
|
1,255
|
|
|
|
303
|
|
|
|
24
|
%
|
Cost of maintenance and support
|
|
|
684
|
|
|
|
676
|
|
|
|
8
|
|
|
|
1
|
%
|
Cost of software
as a service
|
|
|
1,906
|
|
|
|
868
|
|
|
|
1,038
|
|
|
|
120
|
%
|
Total
cost of sales
|
|
$
|
5,689
|
|
|
$
|
5,351
|
|
|
$
|
338
|
|
|
|
6
|
%
|
Total
cost of sales includes personnel directly affiliated with earning the revenue, amortization of capitalized software expenditures,
and royalties on third-party licensing of products used by the Company to deliver its solutions and services. The increase in
expense for fiscal 2020 compared with fiscal 2019 was primarily due to a change in the way the Company moved projects through
the agile method of development. In fiscal 2021, as previously announced, the Company shortened the time which it was developing
specific projects. The change was primarily related to creating velocity and focus on moving projects through the Company’s
development quicker. Such change was successful and resulted in higher rates of amortization from new projects placed in service
as compared to the previous year. We incurred total amortization expense on internally developed software of $1,662,000 and $1,494,000
in fiscal 2020 and fiscal 2019, respectively.
Cost
of systems sales consists of costs associated with amortization of capitalized software costs for our Coding & CDI Solutions.
The decrease in expense of systems sales in fiscal 2020 from fiscal 2019 was primarily due to the decrease in amortization of
capitalized software costs related to adjustments made to correct immaterial errors in fiscal 2019. Refer to the Immaterial
Corrections of Errors section of Note 2 to the consolidated financial statements in the Company’s Annual Report on Form
10-K for the fiscal year ended January 31, 2020 for further discussion on these corrections.
The
cost of professional services includes compensation and benefits for personnel and related expenses. The decrease in expense for
fiscal 2020 as compared with fiscal 2019 is primarily due to the decrease in professional services personnel as the implementation
effort for SaaS implementations requires substantially less time than our legacy on-premise products.
The
cost of audit services includes compensation and benefits for audit services personnel, and related expenses. The increase in
expense for fiscal 2020 compared to fiscal 2019 is attributed to additional coding auditors required to review higher volumes
of coding transactions processed, and the related higher revenue. Again, the Company is beginning to receive renewed interest
in its audit services as a result of the Company’s on-shore capabilities and expertise in pre-billing audit and coding services.
Further, the internal use of eValuator is making our coders and auditors more efficient.
The
cost of maintenance and support includes compensation and benefits for customer support personnel. Expenses for fiscal 2020 as
compared with fiscal 2019 were flat.
The
cost of SaaS solutions consists of costs (i) associated with amortization of capitalized software costs for our eValuator and
Financial Management solutions, (ii) royalties payable to third-parties for use of their coding related content, and (iii) personnel
and network related expenses to provision the application for each customer. The royalty and network related agreements are becoming
variable as the cost is derived by attributes of the customer’s accessing the system. Amortization expense increased $631,000,
from $517,000 in fiscal 2019 to $1,148,000 in fiscal 2020. The additional amortization expense was driven by the increased number
of projects put into service in fiscal 2020 compared to fiscal 2019, primarily related to the increased investment in eValuator.
The royalties payable to third-parties increased by $134,000 for fiscal 2020 compared to fiscal 2019, with $177,000 and $43,000
being reported in the respective periods. The growth in royalties payable is directly attributable to new customers beginning
to use the system and triggering fees owed to the third-party coding content providers. Personnel related expenses also increased
in fiscal 2020 compared to fiscal 2019 by $230,000 with $472,000 and $242,000 reported in the respective periods. The Company
invested in additional personnel to support SaaS solutions as the customer base has been expanding. The Company anticipates the
costs in these categories will continue to rise in fiscal 2021 as the Company continues to invest in eValuator and as new customers
begin to use the system.
Selling,
General and Administrative Expense
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
General and administrative
expenses
|
|
$
|
5,550
|
|
|
$
|
5,793
|
|
|
$
|
(243
|
)
|
|
|
(4
|
)%
|
Sales and marketing
expenses
|
|
|
3,015
|
|
|
|
3,813
|
|
|
|
(798
|
)
|
|
|
(21
|
)%
|
Total
selling, general, and administrative expense
|
|
$
|
8,565
|
|
|
$
|
9,606
|
|
|
$
|
(1,041
|
)
|
|
|
(11
|
)%
|
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 fiscal 2020 as compared to fiscal 2019 is primarily the result
of lower expense incurred for audit, financial, and legal professional services. The Company continues to critically analyze the
overhead cost of the Company, relative to its revenue.
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 expenses related to trade shows.
The decrease in sales and marketing expense for fiscal 2020 compared with fiscal 2019 was primarily due to reduction in salaries
and benefits as positions vacated in the latter half of fiscal 2019 were not backfilled. Travel and entertainment expenses and
marketing trade show expenses have also decreased for fiscal 2020 compared to fiscal 2019 as a result of the COVID-19 pandemic.
The Company has temporarily stopped travel until its employee safety can be assured. There is no 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. For fiscal 2021, the Company expects to increase investment in sales and marketing compared to fiscal 2020,
in an effort to grow certain products, primarily eValuator, through personnel cost, trade shows expense, sales and marketing,
and investor relations consultant fees.
Research
and Development
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Research and development
expense
|
|
$
|
2,933
|
|
|
$
|
2,690
|
|
|
$
|
243
|
|
|
|
9
|
%
|
Plus: Capitalized
research and development cost
|
|
|
1,825
|
|
|
|
2,800
|
|
|
|
(975
|
)
|
|
|
(35
|
)%
|
Total
research and development cost
|
|
$
|
4,758
|
|
|
$
|
5,490
|
|
|
$
|
(732
|
)
|
|
|
(13
|
)%
|
Research
and development expenses consist primarily of compensation and related benefits, the use of independent contractors for specific
near-term development projects and an allocated portion of general overhead costs, including occupancy costs, if material. Fiscal
2020 capitalized costs include $40,528 of capitalized non-employee stock compensation as explained in Note 12 – Commitments
and Contingencies to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary
Data”. Total research and development costs for fiscal 2020 include increased spend with our development partner. The overall
lower total cost comes from fewer personnel as a result of employee rationalization announced January 31, 2020, which impacted
research and development personnel. The Company continues to focus on and be more efficient in research and development activities
on those products with its highest growth prospects, primarily eValuator. The Company expects fiscal 2021 total research and development
spend to continue at approximately the same level as fiscal 2020. For fiscal 2020, as a percentage of revenue, total research
and development costs were 42%. In fiscal 2020, the Company was awarded $86,000 from the State of Georgia for its annual research
and development tax credit. At the end of fiscal 2020, the cumulative balance of unused research and development credits was $86,000.
These research and development tax credits can be applied to current Georgia Payroll Taxes due. The fiscal 2021 and future research
and development tax credits are expected to be approximately $74,000 per year.
Executive
Transition Cost
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Executive transition
cost
|
|
$
|
—
|
|
|
$
|
789
|
|
|
$
|
(789
|
)
|
|
|
(100
|
)%
|
We
recorded $789,000 in cost related to replacing the Company’s CEO in the fiscal year ended January 31, 2020. These costs
included placement fees, retention bonuses for existing key personnel and certain required consulting costs directly attributable
to the successful placement of our new CEO with the Company. The Company did not incur any executive transition costs in fiscal
year 2020.
Rationalization
Costs
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Rationalization
charges
|
|
$
|
—
|
|
|
$
|
388
|
|
|
$
|
(388)
|
|
|
|
(100)
|
%
|
In
the fourth quarter of fiscal 2019, we implemented a rationalization plan to make the operation of the Company more efficient and
for the purpose of aligning the Company’s personnel needs and capital requirements in light of the Company’s sale
of its enterprise content management business. The rationalization plan included a reduction in workforce resulting in the termination
of approximately twenty (20) employees, or approximately twenty percent (20%) of the Company’s workforce. As a result of
the rationalization plan, the Company recorded $388,000 in one-time severance and other employee termination-related costs. The
Company did not incur any rationalization charges in fiscal year 2020.
Transaction
Costs
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Transaction
costs
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
(230)
|
|
|
|
(100)
|
%
|
In
fiscal 2019, the Company incurred cost to account for the immaterial correction of an error. The Company incurred approximately
$230,000 of legal and accounting cost in conjunction with the company’s immaterial correction of an error. See Note 2 -
Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, “Financial Statements
and Supplementary Data”. These costs were necessary to file the Company’s third quarter Form 10-Q for the period ended
October 30, 2019 and were completed on January 8, 2020. The Company did not incur any transaction costs in fiscal year 2020.
Loss
on Exit of Operating Lease
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Loss
on exit of operating lease
|
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
105
|
|
|
|
100
|
%
|
Refer
to Note 4 – Operating Leases in our consolidated financial statements included in Part II, Item 8, “Financial Statements
and Supplementary Data” for further details and development with respect to the shared office arrangement in Atlanta. 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.
Other
Expense
|
|
Fiscal
Year
|
|
|
2020
to 2019 Change
|
|
(in
thousands):
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Interest
expense
|
|
$
|
(51)
|
|
|
$
|
(309
|
)
|
|
$
|
258
|
|
|
|
(83)
|
%
|
Loss
on early extinguishment of debt
|
|
|
—
|
|
|
|
(150
|
)
|
|
|
150
|
|
|
|
(100)
|
%
|
Miscellaneous
expense
|
|
|
(62)
|
|
|
|
(216
|
)
|
|
|
154
|
|
|
|
(71)
|
%
|
Total
other expense
|
|
$
|
(113)
|
|
|
$
|
(675
|
)
|
|
$
|
562
|
|
|
|
(83)
|
%
|
Interest
expense consists of interest and commitment fees on the line of credit, term loan, the Company’s PPP (as defined below)
loan and is inclusive of deferred financing cost amortization. Amortization of deferred financing cost was $28,000 and $82,000
in fiscal 2020 and fiscal 2019, respectively. Interest expense was $23,000 and $227,000 in fiscal 2020 and fiscal 2019, respectively.
The
Company refinanced its term loan and revolving credit facility to a new bank on December 12, 2019. Upon completion of the refinancing,
the Company had charges to income for (i) the write-off of deferred finance cost on the refinanced debt and (ii) legal and finance
cost to close out the previous indebtedness. Aggregate extinguishment costs of $150,000 were recorded in the fourth quarter of
fiscal 2019.
The
decrease in miscellaneous expense in fiscal 2020 as compared to fiscal 2019 was primarily a result of losses reported in fiscal
2019 from (i) certain failed financing cost, and (ii) the purchase of certain options from a terminated employee that were about
to expire. Other items reported in miscellaneous expense are the valuation adjustments on the Montefiore minimum royalty liability
and certain foreign exchange losses. Refer to Note 12 – Commitments and Contingencies to our consolidated financial statements
included in Part II, Item 8, “Financial Statements and Supplementary Data” for further information concerning the
resolution of the Montefiore liability.
Provision
for Income Taxes
We
recorded an income tax benefit from continuing operations of $1,260,000 and $1,632,000 in fiscal 2020 and fiscal 2019, respectively.
Refer to Note 7 - Income Taxes to our consolidated financial statements included in Part II, Item 8, “Financial Statements
and Supplementary Data” for details on the provision for income taxes.
The
income tax benefit from continuing operations was netted with the income tax provision on discontinued operations as disclosed
in prior filings resulting in $0 federal tax expense in fiscal 2020. The Company has a substantial amount of net operating losses
for federal and state income tax purposes.
Use
of Non-GAAP Financial Measures
In
order to provide investors with greater insight and allow for a more comprehensive understanding of the information used by management
and the Board of Directors in its financial and operational decision-making, the Company has supplemented the Consolidated Financial
Statements presented on a GAAP basis in this Report with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted
EBITDA Margin and Adjusted EBITDA per diluted share.
These
non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute
for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our
GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to
GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures
are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by
the Company, may differ from and may not be comparable to similarly titled measures used by other companies.
EBITDA,
Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
We
define: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization;
(ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization,
stock-based compensation expense, and in the Company’s fiscal year ended January 31, 2020 Adjusted EBITDA, 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 in nature. Adjusted EBITDA removes the impact of share-based compensation expense,
which is another non-cash item. Adjusted EBITDA per diluted share includes incremental shares in the share count that are considered
anti-dilutive in a GAAP net loss position.
The
Board of Directors and management also use these measures (i) as one of the primary methods for planning and forecasting overall
expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii)
as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs.
Our
lender uses a measurement that is similar to the Adjusted EBITDA measurement described herein to assess our operating performance.
The lender under our 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 Report have
limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our
results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary
use. Some of the limitations of EBITDA and its variations are:
|
●
|
EBITDA
does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
EBITDA
does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
EBITDA
does not reflect the interest expense, or the cash requirements to service interest or principal payments under our Loan and
Security Agreement;
|
|
|
|
|
●
|
EBITDA
does not reflect income tax payments that we may be required to make; and
|
|
|
|
|
●
|
Although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced
in the future, and EBITDA does not reflect any cash requirements for such replacements.
|
Adjusted
EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers
to review the GAAP financial statements included elsewhere in this Report, and not rely on any single financial measure to evaluate
our business. We also strongly urge readers to review the reconciliation of these non-GAAP financial measures to the most comparable
GAAP measure in this section, along with the consolidated financial statements included in Part II, Item 8, “Financial Statements
and Supplementary Data”.
The
following table reconciles EBITDA and Adjusted EBITDA to net loss from continuing operations, and Adjusted EBITDA per diluted
share to loss per diluted share for the fiscal years ended January 31, 2021 and 2020. All of the items included in the reconciliation
from EBITDA and Adjusted EBITDA to net loss from continuing operations and the related per share calculations are either recurring
non-cash items, or items that management does not consider in assessing our on-going operating performance. In the case of the
non-cash items, management believes that investors may find it useful to assess the Company’s comparative operating performance
because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization
and other expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance.
In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess
our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing
operating performance.
|
|
Fiscal
Year
|
|
In
thousands, except per share data
|
|
2020
|
|
|
2019
|
|
Adjusted EBITDA
Reconciliation
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
$
|
(4,799
|
)
|
|
$
|
(6,244
|
)
|
Interest expense
|
|
|
51
|
|
|
|
309
|
|
Income tax benefit
|
|
|
(1,260
|
)
|
|
|
(1,632
|
)
|
Depreciation
|
|
|
64
|
|
|
|
43
|
|
Amortization
of capitalized software development costs
|
|
|
1,662
|
|
|
|
1,494
|
|
Amortization
of intangible assets
|
|
|
491
|
|
|
|
554
|
|
Amortization
of other costs
|
|
|
359
|
|
|
|
480
|
|
EBITDA
|
|
|
(3,432
|
)
|
|
|
(4,996
|
)
|
Share-based compensation
expense
|
|
|
1,403
|
|
|
|
934
|
|
Non-cash valuation
adjustments to assets and liabilities
|
|
|
31
|
|
|
|
64
|
|
Other non-recurring
operating expenses (1)
|
|
|
—
|
|
|
|
1,342
|
|
Other non-recurring
expenses
|
|
|
—
|
|
|
|
308
|
|
Loss
on exit of operating lease
|
|
|
105
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(1,893
|
)
|
|
$
|
(2,348
|
)
|
Adjusted EBITDA
margin (2)
|
|
|
(17
|
)%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
per Diluted Share Reconciliation
|
|
|
|
|
|
|
|
|
Net loss per
common share — diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
Adjusted EBITDA
per adjusted diluted share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
Diluted weighted average shares (3)
|
|
|
30,152,383
|
|
|
|
22,739,679
|
|
Includable
incremental shares — adjusted EBITDA (4)
|
|
|
488,359
|
|
|
|
2,343,382
|
|
Adjusted diluted
shares
|
|
|
30,640,742
|
|
|
|
25,083,061
|
|
(1)
|
In
fiscal year 2020 and 2019, executive transition cost on the consolidated statement of operations includes $0 and $64,000 in
stock compensation expense, respectively, which is included within Share-based compensation expense in the Adjusted EBITDA
calculation above.
|
|
|
(2)
|
Adjusted
EBITDA as a percentage of GAAP net revenues.
|
|
|
(3)
|
Adjusted
EBITDA per adjusted diluted share for the Company’s common stock is computed using the more dilutive of the two-class
method or the if-converted method.
|
|
|
(4)
|
The
number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP
profit is earned in the current period, no additional incremental shares are assumed.
|
Application
of Critical Accounting Policies
The
following is a summary of the Company’s most critical accounting policies. Refer to Note 2 - Significant Accounting Policies
to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”
for a complete discussion of the significant accounting policies and methods used in the preparation of our consolidated financial
statements.
Revenue
Recognition
The
Company derives revenue from the sale of internally developed software, either by licensing for local installation or by a SaaS
delivery model, through our direct sales force or through third-party resellers. Licensed, locally installed customers on a perpetual
model utilize our support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS
fees include support and maintenance. The Company also derives revenue from professional services that support the implementation,
configuration, training and optimization of the applications, as well as audit services provided to help customers review their
internal coding audit processes. Additional revenues are also derived from reselling third-party software and hardware components.
The Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.
Performance
obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are
promised to the customer. If we determine that we have not satisfied a performance obligation, we will defer recognition of the
revenue until the performance obligation is deemed to be satisfied. Maintenance and support and SaaS agreements are generally
non-cancellable or contain significant penalties for early cancellation, although customers typically have the right to terminate
their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard
performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such
criteria. Significant judgment is required to determine the standalone selling price (“SSP”) for each performance
obligation, the amount allocated to each performance obligation and whether it depicts the amount that the Company expects to
receive in exchange for the related product and/or service. 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.
Refer
to Note 2 - Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, “Financial
Statements and Supplementary Data” for additional information regarding our revenue recognition policies.
Allowance
for Doubtful Accounts
Accounts
and contract receivables are comprised of amounts owed the Company for solutions and services provided. Contracts with individual
customers and resellers determine when receivables are due and payable. In determining the allowances for doubtful accounts, the
unpaid receivables are reviewed periodically to determine the payment status based upon the most currently available information.
During these periodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting
from the unwillingness or inability of its customers or resellers to make required payments.
Capitalized
Software Development Costs
Software
development costs for software to be sold, leased, or marketed are accounted for in accordance with Accounting Standards Codification
(“ASC”) 985-20, Software — Costs of Software to be Sold, Leased or Marketed. Costs associated with the
planning and design phase of software development are classified as research and development costs and are expensed as incurred.
Once technological feasibility has been established, a portion of the costs incurred in development, including coding, testing
and quality assurance, are capitalized until available for general release to customers, and subsequently reported at the lower
of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is included in Cost
of 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 two years). Unamortized capitalized costs determined to be in excess of
the net realizable value of a solution are expensed at the date of such determination.
Internal-use
software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The costs incurred in
the preliminary stages of development are expensed as research and development costs as incurred. Once an application has reached
the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on
a straight-line basis over the estimated useful life of the software (typically three to 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.
Goodwill
and Intangible Assets
Goodwill
and other intangible assets were recognized in conjunction with the acquisitions of Interpoint Partners, LLC (“Interpoint”),
Meta Health Technology, Inc. (“Meta”), Clinical Looking Glass® (“CLG”), Opportune IT and Unibased
Systems Architecture, Inc. (“Unibased”). Identifiable intangible assets include purchased intangible assets with finite
lives, which primarily consist of internally-developed software, customer relationships, non-compete agreements and license agreements.
Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one
month to 10 years, using the straight-line and undiscounted expected future cash flows methods.
We
assess the useful lives and possible impairment of existing recognized goodwill on at least an annual basis, and goodwill and
intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review
include:
|
●
|
significant
under-performance relative to historical or projected future operating results;
|
|
|
|
|
●
|
significant
changes in the manner of use of the acquired assets or the strategy for the overall business;
|
|
|
|
|
●
|
identification
of other impaired assets within a reporting unit;
|
|
|
|
|
●
|
disposition
of a significant portion of an operating segment;
|
|
|
|
|
●
|
significant
negative industry or economic trends;
|
|
|
|
|
●
|
significant
decline in the Company’s stock price for a sustained period; and
|
|
|
|
|
●
|
a
decline in the market capitalization relative to the net book value.
|
Determining
whether a triggering event has occurred involves significant judgment by the Company.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and for tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. In assessing net deferred tax assets, we consider whether it is more likely than not that some or all of the deferred
tax assets will not be realized. We establish a valuation allowance when it is more likely than not that all or a portion of deferred
tax assets will not be realized. Refer to Note 7 - Income Taxes to our consolidated financial statements included in Part II,
Item 8, “Financial Statements and Supplementary Data” for further details.
Liquidity
and Capital Resources
The
Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of
contractual amounts from customers, (ii) amounts invested in research and development and capital expenditures, and (iii) the
level of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company’s primary cash requirements
include regular payment of payroll and other business expenses, principal and interest payments on debt and minor amounts of capital
expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts
or SaaS data center infrastructure. Operations are funded with cash generated by operations and borrowings under the bank credit
facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current
obligations for twelve months from the date of issuance of the audit report on the Company’s consolidated financial statements.
Cash and cash equivalent balances at January 31, 2021 and 2020 were $2,409,000 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.
Capital
Raise
On
March 2, 2021, the Company completed an underwritten public offering of $16.1 million in common stock, including the underwriters’
exercise of an option to purchase additional shares of common stock to cover over-allotments. The proceeds from such capital raise
are to be utilized for working capital, general corporate purposes and potential strategic partnerships that will complement or
assist in the future growth of eValuator. See Note 15 - Subsequent Events to our consolidated financial statements included in
Part II, Item 8, “Financial Statements and Supplementary Data”.
Credit
Facility
The
Company has liquidity through the Loan and Security Agreement described in more detail in Note 5 - Debt to our consolidated
financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”. 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 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 was in compliance with the foregoing loan covenants on January 31, 2021. The Company was not compliant during one month
of the covenant calculation, November 2020. That one month of non-compliance was waived in the Company’s new credit facility
(see below). Based upon the borrowing base formula set forth in the Loan and Security Agreement, as of January 31, 2021, the Company
had access to the full amount of the $2,000,000 revolving credit facility.
On
March 2, 2021, upon closing of the $16.1 million capital raise, the Company also closed on a new credit facility with Bridge Bank.
The new credit facility is a recurring revenue line of credit with a $3,000,000 capacity and an initial two-year term. The new
credit facility has substantially the same interest rate as the previous asset-based line of credit. Interest on the recurring
revenue line of credit is accrued at 1.0% over the base rate (defined as the prime interest rate). We believe that the recurring
revenue line is structured to assist with the anticipated eValuator growth. The covenants on the new recurring revenue line are
(i) recurring revenue and (ii) Adjusted EBITDA as set by the Company’s annual plan. See Note 15 - Subsequent Events to our
consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”.
The
Company’s asset based loan and recurring revenue line 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.
PPP
Loan
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 Program (“PPP”).
Qualifying companies are able to borrow, through the U.S. Small Business Administration (“SBA”), up to two months
of payroll expenses. On April 21, 2020, the Company received approximately $2,301,000 through the SBA under the PPP. These funds
were utilized by the Company to fund payroll expenses and avoid further staffing reductions during the slowdown resulting from
COVID-19. The loan requires principal payments, beginning after the tenth month anniversary, and must be fully paid in two years.
The PPP loan bears an interest rate of 1.0% per annum.
Significant
cash obligations
|
|
As
of January, 31
|
|
(in
thousands)
|
|
2021
|
|
|
2020
|
|
Term loan (1)
|
|
$
|
2,301
|
|
|
$
|
3,872
|
|
Royalty liability (2)
|
|
|
—
|
|
|
|
969
|
|
(1)
|
Term
loan balance is reported net of deferred financing costs of $ - and $128,000 as of January 31, 2021 and 2020, respectively.
Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, “Financial Statements and
Supplementary Data” for additional information and further description of the PPP loan. The term loan balance as of
January 31, 2021 is the Company’s PPP loan. The term loan payable as of January 31, 2020 was bank term debt.
|
|
|
(2)
|
Refer
to Note 12 — Commitments and Contingencies in Part II, Item 8, “Financial Statements and Supplementary Data”
to the consolidated financial statements for additional information.
|
Operating
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2020
|
|
|
2019
|
|
Loss
from continuing operations
|
|
$
|
(4,799)
|
|
|
$
|
(6,244
|
)
|
Non-cash
adjustments to net loss
|
|
|
2,810
|
|
|
|
1,864
|
|
Cash
impact of changes in assets and liabilities
|
|
|
(1,504)
|
|
|
|
(1,329
|
)
|
Net
cash (used in) provided by operating activities
|
|
$
|
(3,493)
|
|
|
$
|
(5,709
|
)
|
The
increase in net cash provided by operating activities is primarily due to the impacts of the Company’s non-recurring expenses
of approximately $1,407,000 million for fiscal 2019 that were not present in fiscal 2020. These cost include; (i) $789,000 for
executive transition, (ii) $388,000 for severance related to the Company’s previously disclosed workforce rationalization
plan, and (iii) $230,000 related to the Company’s costs associated with an out of period correction.
The
Company’s customers are well-established hospitals, medical facilities or major health information system companies that
resell the Company’s solutions, which have good credit histories, and payments have been received within normal time frames
for the industry. However, some healthcare organizations have experienced significant operating losses as a result of limits on
third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant
amounts and contract terms typically require customers to make progress payments. Adverse economic events, as well as uncertainty
in the credit markets, may adversely affect the liquidity for some of our clients.
Investing
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2020
|
|
|
2019
|
|
Purchases
of property and equipment
|
|
$
|
(44)
|
|
|
$
|
(52
|
)
|
Proceeds
from sale of ECM Assets
|
|
|
11,288
|
|
|
|
—
|
|
Capitalized
software development costs
|
|
|
(1,784)
|
|
|
|
(2,800
|
)
|
Net
cash provided by (used in) investing activities
|
|
$
|
9,460
|
|
|
$
|
(2,852
|
)
|
Cash
provided by investing activities in fiscal 2020 was approximately $13 million higher than fiscal 2019 primarily due to the realization
of proceeds from the sale of the ECM Assets. See research and development cost (above). The investment in capitalized software
development costs in fiscal 2020 was lower than fiscal 2019 primarily due to the sale of the ECM Assets in fiscal 2020.
The
Company estimates that to replicate its existing internally-developed software would cost significantly more than the stated net
book value of $5,945,000 at January 31, 2021, including the acquired internally-developed software of Opportune IT. Many of the
programs related to capitalized software development continue to have significant value to our current solutions and those under
development, as the concepts, ideas and software code are readily transferable and are incorporated into new solutions.
Financing
cash flow activities
|
|
Fiscal
Year
|
|
(in
thousands)
|
|
2020
|
|
|
2019
|
|
Proceeds
from issuance of common stock
|
|
$
|
—
|
|
|
$
|
9,663
|
|
Payments
for costs directly attributable to the issuance of common stock
|
|
|
—
|
|
|
|
(711
|
)
|
Proceeds
from term loan
|
|
|
—
|
|
|
|
4,000
|
|
Principal
payments on term loan
|
|
|
—
|
|
|
|
(4,030
|
)
|
Repayment
of bank term loan
|
|
|
(4,000)
|
|
|
|
—
|
|
Proceeds
from term loan payable
|
|
|
2,301
|
|
|
|
—
|
|
Payments
related to settlement of employee shared-based awards
|
|
|
(256)
|
|
|
|
(99
|
)
|
Redemption
of Series A Convertible Preferred Stock
|
|
|
—
|
|
|
|
(5,791
|
)
|
Payment
of deferred financing costs
|
|
|
—
|
|
|
|
(325
|
)
|
Payment
on royalty liability
|
|
|
(1,000)
|
|
|
|
—
|
|
Other
|
|
|
12
|
|
|
|
(16)
|
|
Net
cash (used in) provided by financing activities
|
|
$
|
(2,943)
|
|
|
$
|
2,691
|
|
The
decrease in cash provided by financing activities in fiscal 2020 over the prior year was the result of proceeds from issuance
of common stock in fiscal 2019 that did not occur in fiscal 2020. In fiscal 2020 the Company also repaid the bank term loan on
February 24, 2020, upon closing the sale of the ECM Assets. The company was required to repay the bank term loan at close and
funding of the sale of the ECM Assets. Additionally, The Company filed for, and received, a PPP loan in the amount of $2,301,000
as accounted for in the “Proceeds from term loan payable” line item. See Note 5 - Debt to our consolidated financial
statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information on the
PPP loan.
Item
8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
All
other financial statement schedules are omitted because they are not applicable or the required information is included in the
consolidated financial statements or notes thereto.
Report
of Independent Registered Public Accounting Firm
Stockholders
and Board of Directors
Streamline
Health Solutions, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Streamline Health Solutions, Inc. and its subsidiary (the “Company”)
as of January 31, 2021 and 2020, and the related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the two years in the period ended January 31, 2021, and the related notes and financial statement schedule
II (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of January 31, 2021 and 2020, and the results of its operations and its cash
flows for each of the two years in the period ended January 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Capitalized
Software Development Costs
As
described in Note 2 to the financial statements, the Company develops software within the scope of both ASC 350-40, Internal-Use
Software (“Topic 350”) and ASC 985-20, Software – Costs of Software to be Sold, Leased or Marketed (“Topic
985”).
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. 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.
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.
We
identified capitalized software development costs as a critical audit matter. Our principal considerations for this determination
were the high degree of auditor judgment and subjectivity required in evaluating management’s
determination of the activities and costs that qualify for capitalization and the relevant software development guidance to be
applied under the applicable accounting standards.
The
primary procedures we performed to address this critical audit matter included:
|
●
|
We
obtained an understanding of the Company’s process for determining the activities and costs that qualify for capitalization
and the relevant software development guidance to be applied under the applicable accounting standards.
|
|
|
|
|
●
|
We
tested the mathematical accuracy of the roll forward of capitalized software and related amortization expense. We also tested
the completeness and accuracy of applicable system-generated reports, including reconcilements of details to associated sub-ledgers.
|
|
|
|
|
●
|
For
a sample of capitalized costs, we evaluated the relevance of the software development guidance applied, by performing the
following:
|
|
○
|
We
inspected underlying documentation and assessed the eligibility of costs for capitalization, to the application of the correct
guidance, and whether during the application development stage or after the attainment of technological feasibility, as applicable.
|
|
|
|
|
○
|
We
recalculated the capitalized amount based on hours incurred and direct payroll related costs or associated vendor contracts
and invoices for work performed by third parties.
|
|
|
|
|
○
|
We
evaluated the software implementation timelines and related underlying documentation supporting the capitalization periods
for implementation and development amounts as well as the date the costs were placed in service.
|
|
|
|
|
○
|
We
inquired of project managers for significant projects to assess the nature of the costs, the time devoted to capitalizable
activities and the underlying documentation.
|
|
●
|
For
eligible costs within the scope of Topic 985, we assessed whether amortization was the greater of amortization derived from
either a straight-line basis or the ratio of current revenues to total current and anticipated revenues.
|
Discontinued
Operations and Gain on Sale
As
described in Notes 2 and 13 of the financial statements, on February 24, 2020, the Company sold a portion of its business (the
ECM Assets) and in accordance ASC 205-20, Presentation of Financial Statements – Discontinued Operations (“Topic
205”) met the criteria to present discontinued operations. Accordingly, the Company reported 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.
As
part of the transaction, the Company allocated $4,825,000 in goodwill to the sale of the ECM Assets using a valuation of the ECM
Assets and the remaining, go-forward business. The amount of goodwill included in that carrying amount was based on the relative
fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Furthermore, the Company
recognized a gain of $6,013,000 in connection with the sale of ECM.
We
identified discontinued operations as a critical audit matter. Our principal considerations for this determination were the high
degree of auditor effort and subjectivity in
designing and performing procedures to evaluate management’s accounting for the transaction and the complexity associated
with auditing management’s fair value determination, including assessing significant assumptions such as forecasts for the
retained business and weighted average cost of capital, as well as the allocation of goodwill to discontinued operations.
The
primary procedures we performed to address this critical audit matter included:
|
●
|
We
evaluated management’s determination that the ECM Assets met the criteria to be
presented as discontinued operations and the appropriateness of the related financial
reporting classifications and disclosures.
|
|
|
|
|
●
|
We
obtained the agreements associated with the sale of the ECM Assets and assessed the completeness
and accuracy of assets and liabilities identified by management in determining the gain
on disposal and evaluated the presentation of comparative amounts as discontinued operations.
|
|
|
|
|
●
|
We
evaluated, with the assistance of our internal valuation specialists, management’s
valuation estimates for purposes of allocating goodwill to ECM Assets by:
|
|
○
|
Evaluating
the methodologies used to determine relative fair values.
|
|
|
|
|
○
|
Evaluating
significant inputs to the valuation methods including forecasts for the retained business and independently determined a weighted
average cost of capital.
|
/s/
Dixon Hughes Goodman LLP
We
have served as the Company’s auditor since 2019.
Atlanta,
GA
April
22, 2021
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(rounded
to the nearest thousand dollars, except share and per share information)
|
|
January
31,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,409,000
|
|
|
$
|
1,649,000
|
|
Accounts receivable,
net of allowance for doubtful accounts of $65,000 and $96,000, respectively
|
|
|
2,929,000
|
|
|
|
2,016,000
|
|
Contract receivables
|
|
|
174,000
|
|
|
|
803,000
|
|
Assets held in escrow
|
|
|
800,000
|
|
|
|
—
|
|
Prepaid and other
current assets
|
|
|
416,000
|
|
|
|
501,000
|
|
Current
assets of discontinued operations
|
|
|
587,000
|
|
|
|
1,585,000
|
|
Total
current assets
|
|
|
7,315,000
|
|
|
|
6,554,000
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property and equipment,
net of accumulated amortization of $452,000 and $406,000 respectively
|
|
|
104,000
|
|
|
|
98,000
|
|
Right-of use asset
for operating lease
|
|
|
391,000
|
|
|
|
—
|
|
Capitalized software
development costs, net of accumulated amortization of $3,507,000 and $7,283,000, respectively
|
|
|
5,945,000
|
|
|
|
5,782,000
|
|
Intangible assets,
net of accumulated amortization of $4,773,000 and $4,282,000, respectively
|
|
|
624,000
|
|
|
|
1,115,000
|
|
Goodwill
|
|
|
10,712,000
|
|
|
|
10,712,000
|
|
Other
|
|
|
873,000
|
|
|
|
611,000
|
|
Long-term
assets of discontinued operations
|
|
|
13,000
|
|
|
|
6,826,000
|
|
Total
non-current assets
|
|
|
18,662,000
|
|
|
|
25,144,000
|
|
Total
assets
|
|
$
|
25,977,000
|
|
|
$
|
31,698,000
|
|
See
accompanying notes to consolidated financial statements.
|
|
January
31,
|
|
|
|
2021
|
|
|
2020
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
272,000
|
|
|
$
|
756,000
|
|
Accrued expenses
|
|
|
908,000
|
|
|
|
1,395,000
|
|
Current portion
of term loan, net of deferred financing costs
|
|
|
1,534,000
|
|
|
|
3,872,000
|
|
Deferred revenues
|
|
|
3,862,000
|
|
|
|
3,593,000
|
|
Royalty liability
|
|
|
—
|
|
|
|
969,000
|
|
Current portion
of operating lease obligation
|
|
|
198,000
|
|
|
|
—
|
|
Current
liabilities of discontinued operations
|
|
|
595,000
|
|
|
|
5,053,000
|
|
Total current liabilities
|
|
|
7,369,000
|
|
|
|
15,638,000
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Term loan, net of
current portion and deferred financing costs
|
|
|
767,000
|
|
|
|
—
|
|
Deferred revenues,
less current portion
|
|
|
130,000
|
|
|
|
55,000
|
|
Operating
lease obligations, less current portion
|
|
|
222,000
|
|
|
|
—
|
|
Total
non-current liabilities
|
|
|
1,119,000
|
|
|
|
55,000
|
|
Total
liabilities
|
|
|
8,488,000
|
|
|
|
15,693,000
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01
par value per share, 45,000,000 shares authorized; 31,597,975 and 30,530,643 shares issued and outstanding, respectively
|
|
|
316,000
|
|
|
|
305,000
|
|
Additional paid
in capital
|
|
|
96,290,000
|
|
|
|
95,113,000
|
|
Accumulated
deficit
|
|
|
(79,117,000
|
)
|
|
|
(79,413,000
|
)
|
Total
stockholders’ equity
|
|
|
17,489,000
|
|
|
|
16,005,000
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
25,977,000
|
|
|
$
|
31,698,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(rounded
to the nearest thousand dollars, except share and per share information)
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
System
sales
|
|
$
|
590,000
|
|
|
$
|
1,121,000
|
|
Professional
services
|
|
|
618,000
|
|
|
|
1,163,000
|
|
Audit services
|
|
|
1,891,000
|
|
|
|
1,712,000
|
|
Maintenance and
support
|
|
|
4,586,000
|
|
|
|
5,356,000
|
|
Software
as a service
|
|
|
3,661,000
|
|
|
|
2,501,000
|
|
Total
revenues
|
|
|
11,346,000
|
|
|
|
11,853,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of system
sales
|
|
|
501,000
|
|
|
|
1,004,000
|
|
Cost of professional
services
|
|
|
1,040,000
|
|
|
|
1,548,000
|
|
Cost of audit
services
|
|
|
1,558,000
|
|
|
|
1,255,000
|
|
Cost of maintenance
and support
|
|
|
684,000
|
|
|
|
676,000
|
|
Cost of software
as a service
|
|
|
1,906,000
|
|
|
|
868,000
|
|
Selling, general
and administrative expense
|
|
|
8,565,000
|
|
|
|
9,606,000
|
|
Research and
development
|
|
|
2,933,000
|
|
|
|
2,690,000
|
|
Executive transition
cost
|
|
|
—
|
|
|
|
789,000
|
|
Rationalization
charges
|
|
|
—
|
|
|
|
388,000
|
|
Transaction costs
|
|
|
—
|
|
|
|
230,000
|
|
Loss
on exit of membership agreement
|
|
|
105,000
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
17,292,000
|
|
|
|
19,054,000
|
|
Operating loss
|
|
|
(5,946,000
|
)
|
|
|
(7,201,000
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(51,000
|
)
|
|
|
(309,000
|
)
|
Loss on early
extinguishment of debt
|
|
|
—
|
|
|
|
(150,000
|
)
|
Miscellaneous
expense
|
|
|
(62,000
|
)
|
|
|
(216,000
|
)
|
Loss from continuing operations before
income taxes
|
|
|
(6,059,000
|
)
|
|
|
(7,876,000
|
)
|
Income
tax benefit
|
|
|
1,260,000
|
|
|
|
1,632,000
|
|
Loss from
continuing operations
|
|
|
(4,799,000
|
)
|
|
|
(6,244,000
|
)
|
Income from discontinued
operations:
|
|
|
|
|
|
|
|
|
Gain on sale
of discontinued operations
|
|
|
6,013,000
|
|
|
|
—
|
|
Income from discontinued
operations
|
|
|
356,000
|
|
|
|
5,035,000
|
|
Income
tax expense
|
|
|
(1,274,000
|
)
|
|
|
(1,654,000
|
)
|
Income
from discontinued operations, net of tax
|
|
|
5,095,000
|
|
|
|
3,381,000
|
|
Net income (loss)
|
|
|
296,000
|
|
|
|
(2,863,000
|
)
|
Add: Redemption
of Series A Preferred Stock
|
|
|
—
|
|
|
|
4,894,000
|
|
Net income from
continuing operations attributable to common stockholders
|
|
|
296,000
|
|
|
|
2,031,000
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
Discontinued
operations
|
|
|
0.17
|
|
|
|
0.14
|
|
Net income
|
|
$
|
0.01
|
|
|
$
|
0.08
|
|
Weighted average
number of common shares - basic
|
|
|
30,152,383
|
|
|
|
22,739,679
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
Discontinued
operations
|
|
|
0.17
|
|
|
|
0.13
|
|
Net income
(loss) per common share - diluted
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
Weighted average
number of common shares - diluted
|
|
|
30,640,742
|
|
|
|
25,083,061
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(rounded
to the nearest thousand dollars, except share information)
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
stock
|
|
|
Common
|
|
|
paid
in
|
|
|
Accumulated
|
|
|
stockholders’
|
|
|
|
shares
|
|
|
stock
|
|
|
capital
|
|
|
deficit
|
|
|
equity
|
|
Balance at January 31, 2019
|
|
|
20,767,708
|
|
|
$
|
208,000
|
|
|
$
|
82,544,000
|
|
|
$
|
(76,550,000
|
)
|
|
$
|
6,202,000
|
|
Stock issued pursuant
to ESPP
|
|
|
8,310
|
|
|
|
—
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
8,000
|
|
Restricted stock
issued
|
|
|
912,518
|
|
|
|
9,000
|
|
|
|
(9,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Restricted stock
forfeited
|
|
|
(556,097
|
)
|
|
|
(6,000
|
)
|
|
|
6,000
|
|
|
|
—
|
|
|
|
—
|
|
Surrender of stock
|
|
|
(75,487
|
)
|
|
|
(1,000
|
)
|
|
|
(98,000
|
)
|
|
|
—
|
|
|
|
(99,000
|
)
|
Issuance of common
stock, net of $711,000 offering expenses
|
|
|
9,473,691
|
|
|
|
95,000
|
|
|
|
8,857,000
|
|
|
|
|
|
|
|
8,952,000
|
|
Redemption of Series
A Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
2,873,000
|
|
|
|
—
|
|
|
|
2,873,000
|
|
Share-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
934,000
|
|
|
|
—
|
|
|
|
934,000
|
|
Stock Options repurchased
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,000
|
)
|
|
|
—
|
|
|
|
(18,000
|
)
|
Capital contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
16,000
|
|
|
|
—
|
|
|
|
16,000
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,863,000
|
)
|
|
|
(2,863,000
|
)
|
Balance at January 31, 2020
|
|
|
30,530,643
|
|
|
|
305,000
|
|
|
|
95,113,000
|
|
|
|
(79,413,000
|
)
|
|
|
16,005,000
|
|
Restricted stock
issued
|
|
|
1,395,917
|
|
|
|
14,000
|
|
|
|
(14,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Restricted stock
forfeited
|
|
|
(166,490
|
)
|
|
|
(2,000
|
)
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
Surrender of stock
|
|
|
(162,095
|
)
|
|
|
(1,000
|
)
|
|
|
(255,000
|
)
|
|
|
—
|
|
|
|
(256,000
|
)
|
Share-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
1,444,000
|
|
|
|
—
|
|
|
|
1,444,000
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
296,000
|
|
|
|
296,000
|
|
Balance at January 31, 2021
|
|
|
31,597,975
|
|
|
$
|
316,000
|
|
|
$
|
96,290,000
|
|
|
$
|
(79,117,000
|
)
|
|
$
|
17,489,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(rounded
to the nearest thousand dollars, except share information)
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
296,000
|
|
|
$
|
(2,863,000
|
)
|
LESS: Income
from discontinued operations, net of tax
|
|
|
5,095,000
|
|
|
|
3,381,000
|
|
Loss from continuing
operations, net of tax
|
|
|
(4,799,000
|
)
|
|
|
(6,244,000
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
64,000
|
|
|
|
43,000
|
|
Amortization
of capitalized software development costs
|
|
|
1,662,000
|
|
|
|
1,494,000
|
|
Amortization
of intangible assets
|
|
|
491,000
|
|
|
|
554,000
|
|
Amortization
of other deferred costs
|
|
|
359,000
|
|
|
|
480,000
|
|
Valuation adjustments
|
|
|
31,000
|
|
|
|
64,000
|
|
Loss on early
extinguishment of debt
|
|
|
—
|
|
|
|
150,000
|
|
Provision for
income taxes
|
|
|
(1,274,000
|
)
|
|
|
(1,654,000
|
)
|
Loss on exit
of operating lease
|
|
|
105,000
|
|
|
|
—
|
|
Share-based compensation
expense
|
|
|
1,403,000
|
|
|
|
934,000
|
|
Benefit for accounts
receivable allowance
|
|
|
(31,000
|
)
|
|
|
(201,000
|
)
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and
contract receivables
|
|
|
(253,000
|
)
|
|
|
250,000
|
|
Other assets
|
|
|
(519,000
|
)
|
|
|
(338,000
|
)
|
Accounts payable
|
|
|
(484,000
|
)
|
|
|
281,000
|
|
Accrued expenses
|
|
|
(592,000
|
)
|
|
|
(580,000
|
)
|
Deferred
revenues
|
|
|
344,000
|
|
|
|
(942,000
|
)
|
Net cash used
in operating activities – continuing operations
|
|
|
(3,493,000
|
)
|
|
|
(5,709,000
|
)
|
Net cash (used
in) provided by operating activities – discontinued operations
|
|
|
(2,264,000
|
)
|
|
|
5,701,000
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
(44,000
|
)
|
|
|
(52,000
|
)
|
Proceeds from
sale of ECM assets
|
|
|
11,288,000
|
|
|
|
—
|
|
Capitalization
of software development costs
|
|
|
(1,784,000
|
)
|
|
|
(2,800,000
|
)
|
Net cash provided
by (used in) investing activities – continuing operations
|
|
|
9,460,000
|
|
|
|
(2,852,000
|
)
|
Net cash used
in investing activities – discontinued operations
|
|
|
—
|
|
|
|
(558,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of common stock
|
|
|
—
|
|
|
|
9,663,000
|
|
Payments for
costs directly attributable to the issuance of common stock
|
|
|
—
|
|
|
|
(711,000
|
)
|
Proceeds from
term loan
|
|
|
—
|
|
|
|
4,000,000
|
|
Principal payments
on term loan
|
|
|
—
|
|
|
|
(4,030,000
|
)
|
Repayment of
bank term loan
|
|
|
(4,000,000
|
)
|
|
|
—
|
|
Proceeds from
term loan payable
|
|
|
2,301,000
|
|
|
|
—
|
|
Payments related
to settlement of employee shared-based awards
|
|
|
(256,000
|
)
|
|
|
(99,000
|
)
|
Redemption of
Series A Convertible Preferred Stock
|
|
|
—
|
|
|
|
(5,791,000
|
)
|
Payment of deferred
financing costs
|
|
|
—
|
|
|
|
(325,000
|
)
|
Payment on royalty
liability
|
|
|
(1,000,000
|
)
|
|
|
—
|
|
Other
|
|
|
12,000
|
|
|
|
(16,000
|
)
|
Net cash (used
in) provided by financing activities – continuing operations
|
|
|
(2,943,000
|
)
|
|
|
2,691,000
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
760,000
|
|
|
|
(727,000
|
)
|
Cash and cash
equivalents at beginning of period
|
|
|
1,649,000
|
|
|
|
2,376,000
|
|
Cash and cash
equivalents at end of period
|
|
$
|
2,409,000
|
|
|
$
|
1,649,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash
flow disclosures:
|
|
|
|
|
|
|
|
|
Interest
paid, net of amounts capitalized
|
|
$
|
17,000
|
|
|
$
|
337,000
|
|
Income
taxes paid
|
|
$
|
—
|
|
|
$
|
9,000
|
|
See
accompanying notes to consolidated financial statements.
STREAMLINE
HEALTH SOLUTIONS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
January
31, 2021 and 2020
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
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 Coding & CDI, eValuator Coding Analysis Platform,
Financial Management and Patient Care solutions and other workflow software applications and the use of such applications by software
as a service (“SaaS”). The Company also provides audit services to help customers 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.
Fiscal
Year
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 — SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of Streamline Health Solutions, Inc. and its wholly-owned subsidiary, Streamline
Health, Inc. All significant intercompany transactions and balances are eliminated in consolidation. All amounts in the consolidated
financial statements, notes and tables have been rounded to the nearest thousand dollars, except share and per share amounts,
unless otherwise indicated.
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 with
respect to the sale of the ECM Assets in December 2019 and prepared and filed a proxy statement to obtain stockholder approval
of 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 stockholder
approval, 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 consolidated statements of operations, cash flows and balance sheets for the current and comparative prior
periods. Refer to Note 13 – Discontinued Operations for further details.
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.
Reclassifications
Certain
amounts in the preparation of financial statements for fiscal year 2020 resulted in reclassifications of fiscal year 2019 amounts,
with a total of $47,000 current prepaid assets being reclassed to other non-current assets for deferred financing costs relating
to the revolving credit agreement.
ASC
606-10-25-19(a) provides guidance on the presentation of revenue as it relates to identifying distinct performance obligations
in contracts containing multiple deliverables. As the Company has begun to shift to a primarily SaaS solution, the professional
services revenue related to implementation of SaaS contracts has grown. With this growth, and expected continued growth, of professional
services which are not determined to be a distinct performance obligation for our SaaS contracts, we have reclassed SaaS professional
services from professional services revenue and cost of sales on the consolidated statement of operations to Software as a Service
revenue and cost of sales. For fiscal 2020 and fiscal 2019, the reclass of revenue was $95,000 and $41,000, respectively. For
fiscal 2020 and fiscal 2019, the reclass of cost of sales was $111,000 and $85,000, respectively.
Cash
and Cash Equivalents
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash demand deposits.
Cash deposits are placed in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Cash deposits
may exceed FDIC insured levels from time to time. For purposes of the consolidated balance sheets and consolidated statements
of cash flows, the Company considers all highly-liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Non-Cash
Items
The
Company had the following items that were non-cash items related to the consolidated statements of cash flows:
|
|
Fiscal
Year
|
|
|
|
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 12)
|
|
|
41,000
|
|
|
|
—
|
|
Receivables
Accounts
and contract receivables are comprised of amounts owed to the Company for licensed software, professional services, including
coding audit services, maintenance services, and software as a service and are presented net of the allowance for doubtful accounts.
The timing of revenue recognition may not coincide with the billing terms of the customer contract, resulting in unbilled receivables
or deferred revenues; therefore, certain contract receivables represent revenues recognized prior to customer billings. Individual
contract terms with customers or resellers determine when receivables are due. Accounts receivable represent amounts that the
entity has an unconditional right to consideration. For billings where the criteria for revenue recognition have not been met,
deferred revenue is recorded until the Company satisfies the respective performance obligations.
Allowance
for Doubtful Accounts
The
Company adjusts accounts receivable down to net realizable value with its allowance methodology. In determining the allowance
for doubtful accounts, aged receivables are analysed periodically by management. Each identified receivable is reviewed based
upon the most recent information available and the status of any open or unresolved issues with the customer preventing the payment
thereof. Corrective action, if necessary, is taken by the Company to resolve open issues related to unpaid receivables. During
these periodic reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from
the unwillingness or inability of its customers or resellers to make required payments. The allowance for doubtful accounts was
approximately $65,000 and $96,000 at January 31, 2021 and 2020, respectively. The Company believes that its reserve is adequate,
however, results may differ in future periods.
Bad
debt benefit for fiscal years 2020 and 2019 was as follows:
|
|
2020
|
|
|
2019
|
|
Bad debt benefit
|
|
$
|
(31,000
|
)
|
|
$
|
(201,000
|
)
|
Concessions
Accrual
In
determining the concessions accrual, the Company evaluates historical concessions granted relative to revenue. The Company records
a provision, reducing revenue, each period for the estimated amount of concessions incurred. The Company evaluates the amount
of the provision and the concession accrual each period. The concession accrual included in accrued other expenses on the Company’s
consolidated balance sheets was $99,000 and $44,000 as of January 31, 2021 and 2020, respectively.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the straight-line method, over the estimated useful lives of
the related assets. Estimated useful lives are as follows:
Computer equipment and
software
|
|
3-4 years
|
Office equipment
|
|
5 years
|
Office furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
Term of lease or estimated useful life,
whichever is shorter
|
Depreciation
expense for property and equipment in fiscal 2020 and 2019 was $64,000 and $43,000, respectively.
Normal
repairs and maintenance are expensed as incurred. Replacements are capitalized and the property and equipment accounts are relieved
of the items being replaced or disposed of, if no longer of value. The related cost and accumulated depreciation of the disposed
assets are eliminated and any gain or loss on disposition is included in the results of operations in the year of disposal.
Leases
We
adopted ASC 842, Leases, on February 1, 2019 using the effective date transition method. Prior period balances were not
adjusted upon adoption of this standard. We elected the group of practical expedients to forego assessing upon adoption: (1) whether
any expired contracts are or contain leases; (2) the lease classification for any existing or expired leases; and (3) any indirect
costs that would have qualified for capitalization for any existing leases. The adoption of the new standard resulted in the recording
of a right-of-use asset of $175,000 and an operating lease liability of $464,000 as of February 1, 2019 and did not materially
impact our consolidated results of operations and had no impact on cash flows.
We
recognize operating lease cost on a straight-line basis by aggregating any rent abatement with the total expected rental payments
and amortizing the expense ratably over the term of the lease. See Note 4 – Operating Leases for further details.
As
of January 31, 2021 and 2020, the Company had no financing lease obligations.
Debt
Issuance Costs
Costs
related to the issuance of debt are capitalized and amortized to interest expense on a straight-line basis, which is not materially
different from the effective interest method, over the term of the related debt. Deferred financing costs are presented on the
Company’s consolidated balance sheets as a direct deduction from the carrying amount of the non-current portion of our term
loan.
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of long-lived assets for impairment whenever facts and circumstances exist that would suggest
that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the
evaluation are changes in market position and profitability. If facts and circumstances are present which may indicate that the
carrying amount of the assets may not be recoverable, the Company will prepare a projection of the undiscounted cash flows of
the specific asset or asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows.
If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair values.
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 customers, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization
is calculated on a solution-by-solution basis and is included in Cost of 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. Capitalized software development costs for software to be sold, leased, or marketed, net of accumulated
amortization, totalled $1,103,000 and $1,274,000 as of January 31, 2021 and 2020, respectively.
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. Capitalized software development costs for internal-use software,
net of accumulated amortization, totalled $4,842,000 and $4,509,000 as of January 31, 2021 and 2020, respectively.
The
estimated useful lives of software (including software to be sold and internal-use software) are reviewed frequently and adjusted
as appropriate to reflect upcoming development activities that may include significant upgrades and/or enhancements to the existing
functionality. The Company reviews, on an on-going basis, the carrying value of its capitalized software development expenditures,
net of accumulated amortization.
Amortization
expense on all capitalized software development cost was $1,662,000 and $1,494,000 in fiscal 2020 and 2019, respectively. Further,
the Company recognized an impairment of approximately $164,000 and $354,000 in fiscal 2020 and fiscal 2019, respectively, related
to cancelled or abandoned enhancement projects during fiscal 2020 and fiscal 2019 that has been recognized within amortization
expense. Additionally, in fiscal 2020, approximately $5,437,000 of fully amortized and abandoned assets, including previously
acquired assets, were cleared from their corresponding capitalization and accumulated amortization balance sheet accounts.
The
Company uses the “carry-over” method for amortizing capitalized software development costs. Under the “carry-over”
method, the costs of the enhancements are added to the unamortized costs of the previous version of the product and the combined
amount is amortized over the remaining useful life of the product. Including unamortized cost of the original product with the
cost of the enhancement for purposes of applying the net realizable value test and amortization provisions is consistent with
accounting guidance for software companies that improve their software and discontinue selling or marketing the older versions.
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Amortization expense on internally-developed
software included in:
|
|
|
|
|
|
|
|
|
Cost
of systems sales
|
|
$
|
501,000
|
|
|
$
|
964,000
|
|
Cost of software
as a service
|
|
|
1,148,000
|
|
|
|
517,000
|
|
Cost
of audit services
|
|
|
13,000
|
|
|
|
13,000
|
|
Total
amortization expense on internally-developed software
|
|
$
|
1,662,000
|
|
|
$
|
1,494,000
|
|
Interest
capitalized to software development cost in fiscal 2020 and 2019 was $13,000 and $191,000,
respectively. The interest capitalized to software development cost reduces the Company’s interest expense recognized in
the consolidated statements of operations.
Research
and development expense was $2,933,000 and $2,690,000 in fiscal 2020 and 2019, respectively.
Fair
Value of Financial Instruments
The
FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure
about fair value measurements. 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. For fiscal 2019, the
carrying amount of the Company’s long-term debt approximates fair value since the variable interest rates being paid on
the amounts approximate the market interest rate. For fiscal 2019, long-term debt is classified as Level 2.
The
table below provides information on our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Total
Fair
|
|
|
Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
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. During fiscal 2020 and 2019, the Company recognized a fair value adjustment of $31,000 and $64,000, respectively.
In fiscal 2020, the royalty liability was paid in full (refer to Note 12 – Commitments and Contingencies for additional
information on our royalty liability). There were no changes to the fair value methods. Fair value adjustments are included
within miscellaneous expense in the consolidated statements of operations.
|
The
fair value of the PPP loan was determined based on discounting the loan amount as of January 31, 2021. The fair value using market
rates the Company believes would be available for similar types of financial instruments would have resulted in a lower fair value
of $2,206,000 as compared to the book value of $2,301,000, a reduction of $95,000.
Revenue
Recognition
We
derive revenue from the sale of internally-developed software, either by licensing for local installation or by a SaaS delivery
model, through our direct sales force or through third-party resellers. Licensed, locally-installed customers on a perpetual model
utilize our support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees
include support and maintenance. 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 customers 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 customers typically have the right to terminate their contracts for cause if we fail to perform material
obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund
terms are required, revenue is recognized upon the satisfaction of such criteria.
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 customers 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 time for the life of the contract.
Audit
Services
The
Company provides technology-enabled coding audit services to help customers review and optimize their internal clinical documentation
and coding functions across the applicable segment of the customer’s enterprise. Audit services are a separate performance
obligation. We recognize revenue over time as the services are performed.
Disaggregation
of Revenue
The
following table provides information about disaggregated revenue by type and nature of revenue stream:
|
|
Year
Ended January 31, 2021
|
|
|
|
Recurring
Revenue
|
|
|
Non-recurring
Revenue
|
|
|
Total
|
|
Systems sales
|
|
$
|
153,000
|
|
|
$
|
437,000
|
|
|
$
|
590,000
|
|
Professional services
|
|
|
—
|
|
|
|
618,000
|
|
|
|
618,000
|
|
Audit services
|
|
|
—
|
|
|
|
1,891,000
|
|
|
|
1,891,000
|
|
Maintenance and support
|
|
|
4,586,000
|
|
|
|
—
|
|
|
|
4,586,000
|
|
Software as a
service
|
|
|
3,661,000
|
|
|
|
—
|
|
|
|
3,661,000
|
|
Total
revenue:
|
|
$
|
8,400,000
|
|
|
$
|
2,946,000
|
|
|
$
|
11,346,000
|
|
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 ended January 31, 2021, we recognized approximately $4.026 million
in revenue from deferred revenues outstanding as of January 31, 2020. Revenue allocated to remaining performance obligations was
$17.031 million as of January 31, 2021, of which the Company expects to recognize approximately 55.56% 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. As of January 31,
2021, and 2020, we had deferred costs of $168,000 and $140,000, respectively, net of accumulated amortization of $126,000 and
$284,000, respectively. Amortization expense of these costs was $125,000 and $227,000 in fiscal 2020 and 2019, respectively. There
were no impairment losses for these capitalized costs for the fiscal years 2020 and 2019. In fiscal 2020, the deferred cost to
fulfill a contract and the associated accumulated amortization accounts were reduced by $283,000 for projects with fully amortized
costs.
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 totalled
$666,000 and $394,000, respectively, as of January 31, 2021 and 2020. In fiscal 2020 and 2019, $206,000 and $150,000, respectively,
in amortization expense associated with deferred sales commissions was included in selling, general and administrative expenses
on the consolidated statements of operations. There were no impairment losses for these capitalized costs for the years ended
January 31, 2021 and 2020.
Concentrations
Financial
instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of accounts receivable.
The Company’s accounts receivable are concentrated in the healthcare industry. However, the Company’s customers typically
are well-established hospitals, medical facilities or major health information systems companies with good credit histories that
resell the Company’s solutions. Payments from customers have been received within normal time frames for the industry. However,
some hospitals and medical facilities have experienced significant operating losses as a result of limits on third-party reimbursements
from insurance companies and governmental entities and extended payment of receivables from these entities is not uncommon.
To
date, the Company has relied on a limited number of customers and remarketing partners for a substantial portion of its total
revenues. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number
of customers and its remarketing partners.
Goodwill
and Intangible Assets
Goodwill
and other intangible assets were recognized in conjunction with the Interpoint, Meta, CLG and Opportune IT acquisitions, as well
as the Unibased acquisition (prior to divestiture of such assets). Identifiable intangible assets include purchased intangible
assets with finite lives, which primarily consist of internally-developed software and customer relationships. Finite-lived purchased
intangible assets are amortized over their expected period of benefit, which generally ranges from one to 10 years, using the
straight-line and undiscounted expected future cash flows methods.
The
Company assesses the useful lives and possible impairment of intangible assets when an event occurs that may trigger such a review.
Factors considered important which could trigger a review include:
|
●
|
significant
underperformance relative to historical or projected future operating results;
|
|
|
|
|
●
|
significant
changes in the manner of use of the acquired assets or the strategy for the overall business;
|
|
|
|
|
●
|
identification
of other impaired assets within a reporting unit;
|
|
|
|
|
●
|
disposition
of a significant portion of an operating segment;
|
|
|
|
|
●
|
significant
negative industry or economic trends;
|
|
|
|
|
●
|
significant
decline in the Company’s stock price for a sustained period; and
|
|
|
|
|
●
|
a
decline in the market capitalization relative to the net book value.
|
Determining
whether a triggering event has occurred involves significant judgment by the Company.
The
Company assesses goodwill annually (as of November 1), or more frequently when events and circumstances, such as the ones mentioned
above, occur indicating that the recorded goodwill may be impaired. During the years ended January 31, 2021 and 2020, the Company
did not note any of the above qualitative factors, which would be considered a triggering event for goodwill impairment. In assessing
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of a reporting
unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or
carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions,
industry and market considerations, cost factors, overall financial performance, events which are specific to the Company and
trends in the market price of the Company’s common stock. Each factor is assessed to determine whether it impacts the impairment
test positively or negatively, and the magnitude of any such impact.
Reporting
units are determined based on the organizational structure the entity has in place at the date of the impairment test. A reporting
unit is an operating segment or component business unit with the following characteristics: (a) it has discrete financial information,
(b) segment management regularly reviews its operating results (generally an operating segment has a segment manager who is directly
accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial
results, forecasts or plans for the segment), and (c) its economic characteristics are dissimilar from other units (this contemplates
the nature of the products and services, the nature of the production process, the type or class of customer for the products
and services and the methods used to distribute the products and services). The Company determined that it has one operating segment
and one reporting unit.
The
Company estimates the fair value of its reporting unit using a blend of market and income approaches. The market approach consists
of two separate methods, including reference to the Company’s market capitalization, as well as the guideline publicly traded
company method. The market capitalization valuation method is based on an analysis of the Company’s stock price on and around
the testing date, plus a control premium. The guideline publicly traded company method was made by reference to a list of publicly
traded software companies providing services to healthcare organizations, as determined by management. The market value of common
equity for each comparable company was derived by multiplying the price per share on the testing date by the total common shares
outstanding, plus a control premium. Selected valuation multiples are then determined and applied to appropriate financial statistics
based on the Company’s historical and forecasted results. The Company estimates the fair value of its reporting unit using
the income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free”
rate of return on an investment, the weighted average cost of capital of a market participant and future revenue, operating margin,
working capital and capital expenditure trends. Determining the fair value of reporting unit and goodwill includes significant
judgment by management, and different judgments could yield different results.
The
Company performed its annual assessment of goodwill during the fourth quarter of fiscal 2020, using the approach described above.
Based on the analysis performed, the fair value of the reporting unit exceeded the carrying amount of the reporting unit, including
goodwill, and, therefore, a goodwill impairment loss was not recognized.
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 annual compensation expense related to stock-based awards of $1,444,000 and $934,000 in fiscal 2020 and 2019, respectively.
The
fair value of the stock options granted are 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. In fiscal 2020 and 2019, 162,095 and 75,487 shares
of common stock were surrendered to the Company to satisfy tax withholding obligations totalling $256,000 and $99,000, respectively,
in connection with the vesting of restricted stock awards. Shares surrendered by the restricted stock award recipients in accordance
with the applicable plan are deemed cancelled, and therefore are not available to be reissued. The Company awarded 748,245 and
862,518 shares of restricted stock to officers and directors of the Company in fiscal 2020 and 2019, respectively.
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. See Note 7 - 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 January 31, 2021,
the Company believes it has appropriately accounted for any uncertain tax positions.
Net
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.
See Note 3 – 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 loss per share of common stock:
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Loss from continuing operations,
net of tax
|
|
$
|
(4,799,000
|
)
|
|
$
|
(6,244,000
|
)
|
Add: Redemption
of Series A Preferred Stock
|
|
|
—
|
|
|
|
4,894,000
|
|
Net loss from
continuing operations
|
|
$
|
(4,799,000
|
)
|
|
$
|
(1,350,000
|
)
|
Basic net loss
per share of common stock from continuing operations
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Gain from discontinued operations, net
of tax
|
|
$
|
5,095,000
|
|
|
$
|
3,381,000
|
|
Less: Allocation
of earnings to participating securities
|
|
|
—
|
|
|
|
(281,000
|
)
|
Income available
to common stockholders from discontinued operations
|
|
$
|
5,095,000
|
|
|
$
|
3,100,000
|
|
Basic net earnings
per share of common stock from discontinued operations
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share (1):
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Loss available
to common stockholders from continuing operations
|
|
$
|
(4,799,000
|
)
|
|
$
|
(6,244,000
|
)
|
Diluted net loss
per share of common stock from continuing operations (3)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Income available
to common stockholders from discontinued operations
|
|
$
|
5,095,000
|
|
|
$
|
3,381,000
|
|
Diluted net earnings
per share of common stock from discontinued operations
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
296,000
|
|
|
$
|
2,031,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic (2)
|
|
|
30,152,383
|
|
|
|
22,739,679
|
|
Effect of dilutive
securities - Stock options, Restricted stock and Series A Convertible Preferred Stock (3)
|
|
|
488,359
|
|
|
|
2,343,382
|
|
Weighted average shares outstanding
– Diluted
|
|
|
30,640,742
|
|
|
|
25,083,061
|
|
Basic net income per share of common
stock
|
|
$
|
0.01
|
|
|
$
|
0.08
|
|
Diluted net income (loss) per share
of common stock
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
(1)
|
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.
|
|
|
|
|
(2)
|
Excludes
the effect of unvested restricted shares of common stock, which are considered non-participating securities. As of January
31, 2021 and 2020, there were 931,125 and 803,498 unvested restricted shares of common stock, respectively.
|
|
|
|
|
(3)
|
Diluted
net loss per share excludes the effect of shares that are anti-dilutive. As of January 31, 2021, there were zero outstanding
shares of Series A Convertible Preferred Stock, 625,830 outstanding stock options and 931,125 unvested restricted shares of
common stock. As of January 31, 2020, there were zero outstanding shares of Series A Convertible Preferred Stock, 798,603
outstanding stock options and 803,498 unvested restricted shares of common stock.
|
Other
Operating Costs
Executive
Transition Costs
We
recorded $789,000 in cost related to replacing the Company’s CEO in the fiscal year ended January 31, 2020. These costs
included placement fees, retention bonuses for existing key personnel and certain required consulting costs. Each of these costs
were directly attributable to the successful placement of our new CEO with the Company.
Rationalization
Charges
In
the fourth quarter of fiscal 2019, we implemented a rationalization plan to make the operation of the Company more efficient and
for the purpose of aligning its personnel needs and capital requirements with the sale of the ECM Assets. The rationalization
plan included a reduction in workforce of approximately twenty (20) employees, or approximately twenty percent (20%) of the Company’s
total workforce. As a result of the rationalization plan, the Company recorded $388,000 in one-time severance and other employee
termination-related costs that was recorded within accrued expenses in fiscal 2019 and was paid in fiscal 2020. The Company did
not incur, in fiscal 2020, any other significant charges as a result of the rationalization plan.
Transaction
Costs
The
Company incurred approximately $230,000 of legal and accounting cost in conjunction with the Company’s immaterial correction
of an error in the prior year. These costs were necessary to file the Company’s Quarterly Report on Form 10-Q for the quarter
ended October 30, 2019, which was filed on January 7, 2020.
Loss
on Exit of Membership Agreement
In
the first quarter of fiscal 2020, the Company decided to exit the membership agreement to occupy shared office space in Atlanta.
As a result of that decision, we recorded a $105,000 loss on exit of the membership agreement in fiscal 2020.
Loss
Contingencies
We
are subject to the possibility of various loss contingencies arising in the normal course of business. We consider the likelihood
of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount
of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been
incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information
available to us to determine whether to accrue for a loss contingency and adjust any previous accrual.
Recent
Accounting Pronouncements
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 became effective for us on February 1, 2021. We do not anticipate
that the adoption of this ASU will have a material impact on our consolidated financial statements or disclosures.
In
November 2019, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which improves guidance around accounting for financial losses on accounts receivable. For
smaller reporting entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods
within those fiscal years. We do not anticipate that the adoption of this ASU will have a material impact on our consolidated
financial statements.
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 any material impact on our 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 material impact on our consolidated financial statements.
NOTE
3 — 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 the year ended January 31, 2020.
Balance at January 31, 2019
|
|
$
|
8,686,000
|
|
Redemption of Series A Convertible Preferred
Stock
|
|
|
(5,791,000
|
)
|
Fees paid for redemption of Series A
Convertible Preferred Stock
|
|
|
(22,000
|
)
|
Previously recognized
beneficial conversion feature
|
|
|
2,021,000
|
|
Return from the
preferred stockholders
|
|
$
|
4,894,000
|
|
See
Note 2 for the Company’s basic and diluted EPS calculations.
NOTE
4 — 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, or as of February 1, 2019 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 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 January 31, 2021, operating lease right-of use assets totalled $391,000,
and the associated lease liability is included in both current and long-term liabilities of $198,000 and $222,000, respectively.
The Company used a discount rate of 6.5% to the determine the lease liability. For fiscal 2021, the Company had operating cost
of approximately $178,000. In addition, there was $132,000 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 January 31, 2021 are as follows for payments due based upon the Company’s fiscal year:
2021
|
|
$
|
204,000
|
|
2022
|
|
|
210,000
|
|
2023
|
|
|
35,000
|
|
Total
Lease Payments
|
|
|
449,000
|
|
Less present
value adjustment
|
|
|
(29,000
|
)
|
Present
value of lease liabilities
|
|
$
|
420,000
|
|
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 recorded
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 Company sub-leased the office space for $24,000 per month until the lease expired on November 30, 2019. The Company
used a discount rate of 8% to determine the lease liability. In fiscal 2019, the Company had operating cost and operating cash
flows associated with the New York lease of $189,000, offset by operating lease income of $240,000.
Rent
and leasing expense for facilities and equipment was $212,000 and $174,000 for fiscal years 2020 and 2019, respectively. Substantially
all of the Company’s rent expense for fiscal year 2020 is related to the operating lease of the new office space in Alpharetta,
Georgia. Substantially all of the Company’s rent expense for fiscal year 2019 is related to the membership agreement with
WeWork (a shared office space located in Atlanta, Georgia) which is not considered a lease.
NOTE
5 — 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 installments, 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 as discussed below, the Company terminated the
Credit Agreement, as amended from time to time, effective December 11, 2019, 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, N.A.. 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 installments 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. See Note 15 –
Subsequent Events for a description of the amended recurring revenue line effective March 2, 2021.
The
Loan and Security Agreement, as amended, includes financial covenants, including requirements that the Company maintain a minimum
asset coverage ratio and certain other financial covenants, including requirements that the Company shall not deviate by more
than fifteen percent 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 revenue projections. In addition, beginning
on December 31, 2019, 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 minimum Asset Coverage Ratio requirement was eliminated as a
covenant under an amendment to the Loan and Security Agreement dated April 11, 2020.
The
Company was in compliance with the foregoing loan covenants at January 31, 2021. Based upon the borrowing base formula set forth
in the Credit Agreement, as of January 31, 2021, the Company had access to the full $2,000,000 revolving line of credit. As of
January 31, 2021 and 2020, the Company had no outstanding borrowings under the revolving credit facility.
In
connection with entering into the Loan and Security Agreement discussed above, effective December 11, 2019 the Company terminated
the Credit Agreement with Wells Fargo Bank, N.A. and repaid all outstanding amounts due thereunder.
In
February 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.
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 Program (“PPP”).
Qualifying companies are able to borrow, through the U.S. Small Business Administration (“SBA”), up to two months
of payroll expenses. On April 21, 2020, the Company received approximately $2,301,000 through the SBA under the PPP. These funds
were utilized by the Company to fund payroll expenses and avoid further staffing reductions during the slowdown resulting from
COVID-19.
The
PPP loan carries an interest rate of 1.0% per annum. Principal and interest payments are due, beginning on the tenth 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 consolidated financial statements. The future maturities
under the loan are $1,534,000, and $767,000 in the next two twelve-month periods from January 31, 2021, respectively.
Outstanding
principal balances on debt consisted of the following at:
|
|
January
31, 2021
|
|
|
January
31, 2020
|
|
Term loan
|
|
$
|
2,301,000
|
|
|
$
|
4,000,000
|
|
Deferred financing
cost
|
|
|
—
|
|
|
|
(128,000
|
)
|
Total
|
|
|
2,301,000
|
|
|
|
3,872,000
|
|
Less:
Current portion
|
|
|
(1,534,000
|
)
|
|
|
(3,872,000
|
)
|
Non-current portion
of debt
|
|
$
|
767,000
|
|
|
$
|
—
|
|
NOTE
6 — GOODWILL AND INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
January
31, 2021
|
|
|
|
Estimated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful
Life
|
|
|
Gross
Assets
|
|
|
Amortization
|
|
|
Net
Assets
|
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
5-10
years
|
|
|
$
|
5,397,000
|
|
|
$
|
4,773,000
|
|
|
$
|
624,000
|
|
|
|
January
31, 2020
|
|
|
|
Estimated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful
Life
|
|
|
Gross
Assets
|
|
|
Amortization
|
|
|
Net
Assets
|
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
5-10
years
|
|
|
$
|
5,397,000
|
|
|
$
|
4,282,000
|
|
|
$
|
1,115,000
|
|
The
Company recognized amortization expense on intangible assets of $491,000 and $554,000 for fiscal years 2020 and 2019, respectively.
Future
amortization expense for intangible assets is estimated as follows:
|
|
Annual
Amortization Expense
|
|
2021
|
|
$
|
455,000
|
|
2022
|
|
|
169,000
|
|
Total
|
|
$
|
624,000
|
|
NOTE
7 — INCOME TAXES
Income
taxes consist of the following:
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Current tax (expense) benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
(14,000
|
)
|
|
|
(22,000
|
)
|
Total
current provision
|
|
$
|
(14,000
|
)
|
|
$
|
(22,000
|
)
|
The
income tax benefit differs from the amount computed using the federal statutory income tax rates of 21% for fiscal 2020 and 2019
as follows:
|
|
Fiscal
Year
|
|
|
|
2020
|
|
|
2019
|
|
Federal tax benefit at statutory
rate
|
|
$
|
(1,272,000
|
)
|
|
$
|
(1,649,000
|
)
|
State and local tax expense, net of
federal
|
|
|
11,000
|
|
|
|
18,000
|
|
Increase in valuation allowance
|
|
|
1,693,000
|
|
|
|
879,000
|
|
Permanent items:
|
|
|
|
|
|
|
|
|
Incentive stock
options
|
|
|
—
|
|
|
|
8,000
|
|
Other
|
|
|
5,000
|
|
|
|
7,000
|
|
Reserve for uncertain tax position
|
|
|
35,000
|
|
|
|
29,000
|
|
R&D Credit (Federal)
|
|
|
(174,000
|
)
|
|
|
(144,000
|
)
|
Expiring carryforwards
|
|
|
5,000
|
|
|
|
463,000
|
|
Stock-based compensation
|
|
|
(305,000
|
)
|
|
|
70,000
|
|
Other
|
|
|
16,000
|
|
|
|
341,000
|
|
Income tax expense
|
|
$
|
14,000
|
|
|
$
|
22,000
|
|
The
Company provides deferred income taxes for temporary differences between assets and liabilities recognized for financial reporting
and income tax purposes. The income tax effects of these temporary differences and credits are as follows:
|
|
January
31,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
16,000
|
|
|
$
|
24,000
|
|
Deferred revenue
|
|
|
12,000
|
|
|
|
18,000
|
|
Accruals
|
|
|
47,000
|
|
|
|
45,000
|
|
Net operating loss
carryforwards
|
|
|
8,651,000
|
|
|
|
10,063,000
|
|
Stock compensation
expense
|
|
|
367,000
|
|
|
|
70,000
|
|
Property and equipment
|
|
|
(5,000
|
)
|
|
|
6,000
|
|
R&D credit
|
|
|
1,431,000
|
|
|
|
1,365,000
|
|
Other
|
|
|
7,000
|
|
|
|
153,000
|
|
Total deferred tax
assets
|
|
|
10,526,000
|
|
|
|
11,744,000
|
|
Valuation
allowance
|
|
|
(9,992,000
|
)
|
|
|
(11,346,000
|
)
|
Net
deferred tax assets
|
|
|
534,000
|
|
|
|
398,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Finite-lived
intangible assets
|
|
|
(534,000
|
)
|
|
|
(398,000
|
)
|
Total
deferred tax liabilities
|
|
|
(534,000
|
)
|
|
|
(398,000
|
)
|
Net deferred
tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
At
January 31, 2021, the Company had U.S. federal net operating loss carry forwards of $37,554,000 and $27,363,000 of these net operating
losses expire at various dates through fiscal 2037. The remaining $10,191,000 of these net operating losses can be carried forward
indefinitely under the provisions of the Tax Cuts and Jobs Act (TCJA). The TCJA also eliminated the ability to carryback net operating
losses. The Company also had state net operating loss carry forwards of $12,519,000 and Federal R&D credit carry forwards
of $1,356,000, and Georgia R&D credit carry forwards of $94,000, all of which expire through fiscal 2039.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The
Company established a valuation allowance of $9,992,000 and $11,346,000 at January 31, 2021 and 2020, respectively. The decrease
in the valuation allowance of $1,354,000 was driven primarily by the utilization of federal net operating loss carry forwards.
The
Company and its subsidiary are subject to U.S. federal income tax as well as income taxes in multiple state and local jurisdictions.
The Company has concluded all U.S. federal tax matters for years through January 31, 2017. All material state and local income
tax matters have been concluded for years through January 31, 2016. The Company is no longer subject to IRS examination for periods
prior to the tax year ended January 31, 2017; however, carryforward losses that were generated prior to the tax year ended January
31, 2017 may still be adjusted by the IRS if they are used in a future period.
The
Company has recorded a reserve, including interest and penalties, for uncertain tax positions of $339,000 and $304,000 as of January
31, 2021 and 2020, respectively. As of January 31, 2021 and 2020, the Company had no accrued interest and penalties associated
with unrecognized tax benefits.
A
reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as
follows:
|
|
2020
|
|
|
2019
|
|
Beginning of fiscal year
|
|
$
|
304,000
|
|
|
$
|
275,000
|
|
Additions for tax positions for the
current year
|
|
|
33,000
|
|
|
|
30,000
|
|
Additions for tax positions of prior
years
|
|
|
2,000
|
|
|
|
—
|
|
Subtractions
for tax positions of prior years
|
|
|
—
|
|
|
|
(1,000
|
)
|
End of fiscal
year
|
|
$
|
339,000
|
|
|
$
|
304,000
|
|
NOTE
8 — MAJOR CUSTOMERS
During
fiscal year 2020, no one individual customer accounted for 10% or more of our continuing operations revenue. During fiscal year
2019, the Company had two customers who individually accounted for 10% or more of our continuing operations revenue. These two
customers represent an aggregate of 14% and 20% of total continuing operations revenue for fiscal year 2020 and 2019 respectively.
Four customers represented 31%, 16%, 14% and 13%, respectively, of continuing operations accounts receivable as of January 31,
2021 and four customers represented 27%, 23%, 15% and 5%, respectively, of continuing operations accounts receivable as of January
31, 2020. Many of our customers are invoiced on an annual basis. As such, while no individual customers constituted 10% or more
of the Company’s continuing operations revenue in fiscal 2020, certain invoices for our customers may exceed 10% of the
current continuing operations accounts receivable.
NOTE
9 — EMPLOYEE RETIREMENT PLAN
The
Company has established a 401(k) retirement plan that covers all associates. Company contributions to the plan may be made at
the discretion of the board of directors. Effective January 1, 2019, the Company’s matched amount is 50% up to the first
4% of compensation deferred by each associate. The total compensation expense for this matching contribution was $164,000 and
$231,000 in fiscal 2020 and 2019, respectively.
NOTE
10 — EMPLOYEE STOCK PURCHASE PLAN
Through
December 2019, the Company maintained an Employee Stock Purchase Plan under which associates were able to purchase up to 1,000,000
shares of common stock. Under the plan, eligible associates could elect to contribute, through payroll deductions, up to 10% of
their base pay to a trust during any plan year, i.e., January 1 through December 31 of the same year. Semi-annually, typically
in January and July of each year, the plan issued, for the benefit of the employees, shares of common stock at the lesser of (a)
85% of the fair market value of the common stock on the first day of the vesting period (January 1 or July 1), or (b) 85% of the
fair market value of the common stock on the last day of the vesting period (June 30 or December 31 of the same year).
The
Company recognized compensation expense of $4,000 for fiscal year 2019 under this plan.
During
fiscal 2019, 5,072 shares were purchased at the price of $0.75 per share and 3,238 shares were purchased at the price of $1.18
per share. The cash received for shares purchased from the plan was $8,000 in fiscal 2019.
Effective
January 1, 2020, the Company discontinued its Employee Stock Purchase Plan.