EDGAR 10-K Filing

Company CIK: 1008586
Filing Year: 2024
Filename: 1008586_10-K_2024_0001493152-24-017297.json

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ITEM 1. BUSINESS
Item 1. Business
Company Overview
Incorporated in 1989, Streamline Health Solutions, Inc. is a provider of solutions and services in the middle of the revenue cycle for healthcare providers throughout the United States and Canada. Streamline Health’s technology helps hospitals improve their financial performance by optimizing data and coding for every patient encounter prior to bill submission. By performing these activities before billing, providers can drive net revenue through reduced revenue leakage, overbilling, and days in accounts receivable. This enables providers to achieve more predictable revenue streams using technology rather than manual intervention.
The Company provides software solutions, professional consulting, and auditing services, which capture, aggregate, and translate structured and unstructured data to deliver intelligently organized, easily-accessible predictive insights to its clients. Hospitals and certain hospital-owned-and operated physician groups use the knowledge generated by Streamline Health to help them improve their financial performance.
The Company’s software solutions are delivered to clients either by access to the Company’s hosted web applications in the cloud through a secure connection, commonly referred to as a software as a service (“SaaS”) delivery method, or by a fixed-term or perpetual license, where such software is installed locally in the client’s data center.
The Company operates exclusively in one segment as a provider of health information technology solutions and associated services that improve healthcare processes and information flows within a healthcare facility. The Company sells its solutions and services in North America to hospitals and health systems through its direct sales force and its reseller partnerships.
Unless the context requires otherwise, references to “Streamline Health,” the “Company,” “we,” “us” and “our” in this Report are intended to mean Streamline Health Solutions, Inc. and its wholly-owned subsidiaries. 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.
Solutions
The Company offers solutions and services to assist its clients in revenue cycle management including its two flagship technologies RevIDTM and eValuatorTM. RevID offers automated, daily reconciliation of clinical event activity to patient billing charge items prior to billing. eValuator provides 100% automated coding analysis prior to billing. In addition, the Company offers an array of professional services, including system implementation. The Company’s solutions and services are designed to improve the flow of critical revenue cycle information throughout the enterprise. The solutions and services help to transform the structure of information between disparate information technology systems into actionable data, giving the end user comprehensive access to clinical and business intelligence to enhance billing accuracy and decision-making. Solutions can be accessed securely through SaaS or delivered either by a perpetual license or by a fixed-term license installed locally.
RevID Automated Revenue Reconciliation - RevID is a cloud-based SaaS solution that delivers automated, daily charge reconciliation. RevID identifies discrepancies between a provider’s clinical and billing departments and ensures that every medical service is tracked, accounted for, and ultimately accurately billed, thereby reducing revenue leakage. RevID functions on a pre-bill basis, allowing providers to catch mistakes and discrepancies prior to billing.
eValuator Coding Analysis Platform - This technology is a cloud-based SaaS solution that delivers the capability of fully automated analysis on 100% of billing codes entered by a healthcare provider’s coding team. This is done on a pre-bill basis, enabling providers to identify and address their highest-impact cases prior to billing. Rule sets are enabled for inpatient, outpatient and pro-fee cases. With eValuator, providers can add an audit function on a pre-bill basis to all cases, allowing the provider to better optimize reimbursements and mitigate risk on its billing practices.
Data Comparison Engine (“DCE” or “Compare”) - Compare is a cloud-based SaaS system synchronization module that reconciles data in different software used by hospitals within their operations. Compare operates continuously and automates the reconciliation of these systems to identify discrepancies or errors occurring between systems. Additionally, the Compare module can be utilized as a maintenance check when a hospital adds additional disparate software systems or converts to a new software system.
Coding & CDI Solutions - CDI provides an integrated on-premise or cloud-based software suite that enhances the productivity of CDI and Coding staff and enables the seamless sharing of patient data. This suite of solutions includes workflows such as CDI, Abstracting and Physician Query.
Financial Management Solutions (FMBA) - FMBA has been sunset by the Company. FMBA solutions enable financial staff across the healthcare enterprise to drill down quickly into actionable and real-time financial data and key performance indicators to improve revenue realization. This suite of solutions includes individual workflows such as accounts receivable management, denials management, claims processing, spend management and audit management.
Professional Services
Audit and Coding Services - The Company provides technology-enabled audit and coding services to help clients review and optimize their internal clinical documentation and coding functions across the applicable segment of the client’s enterprise. The Company offers its Audit and Coding services to primarily support eValuator clients by expanding audit capacity to drive net revenue retention rates. The Company provides these services using experienced coders and auditors through use of its eValuator proprietary software to improve the targeting of records with the highest likelihood of requiring an audit. The audit services are provided for inpatient diagnostic-related group (DRG) code auditing, outpatient ambulatory payment classification (APC) auditing, hierarchical condition categories (HCC) auditing and Physician/Pro-Fee services coding and auditing.
Software Services - Software services relates to implementation of our core software modules, including data collection, configuration of the software based on the clients’ needs, training and support. Support services include non-specified upgrades to the software.
Professional Services - The Company’s professional services are typically associated with hospital revenue cycle assistance and include troubleshooting, staff augmentation and “ad hoc” services. Services may include, but are not limited to, review of workflow processes, development and optimization of new workflows, optimization of interfaces, performance of audits and reconciliations, interim resources and project management of system implementations or conversions. The Company has replaced its emphasis on professional services with technology solutions. The Company’s premise is that technology on the front end of the revenue cycle process will reduce waste and errors in the coding and the backend.
Clients and Strategic Partners
The Company provides transformational, data-driven solutions to some of the most well-respected healthcare enterprises in the United States and Canada. The Company provides these solutions through a combination of direct sales and relationships with strategic channel partners.
During fiscal 2023, one individual client accounted for 10% or more of our revenue and represented approximately $5.1 million of total revenue. During fiscal 2022, two individual clients accounted for 10% or more of our revenue and represented approximately $7.9 million of total revenue. A SaaS client who accounted for approximately $4.4 million, or 19%, and $4.2 million, or 17%, of our revenues for fiscal 2023 and fiscal 2022, respectively, did not renew a contract with the Company, effective December 31, 2023. Four clients represented 14%, 12%, 12% and 11% respectively, of accounts receivable as of January 31, 2024, and four clients represented 13%, 12%, 12% and 10%, respectively, of accounts receivable as of January 31, 2023. Many of our clients are invoiced on an annual basis.
For more information regarding our major clients, please see “Risks Relating to Our Business - Our sales have been concentrated in a small number of clients” in Part 1, Item 1A, “Risk Factors” herein.
Acquisitions
The Company regularly evaluates opportunities for acquisitions for portions of the Company that may not align with current growth strategies.
The Company acquired all of the equity interests of Avelead as part of the Company’s strategic expansion into the revenue cycle management, acute-care healthcare space. The acquisition was completed on August 16, 2021. The aggregate consideration for the purchase of Avelead was approximately $29.7 million (at fair value) consisting of (i) $12.5 million in cash, net of cash acquired, (ii) $6.5 million in common stock, and (iii) approximately $10.7 million in contingent consideration. The Company issued 5,021,972 shares of its restricted common stock to Avelead equity holders in connection with the acquisition. See Note 3 - Business Combination to our consolidated financial statements included in Part II Item 8, “Financial Statements and Supplementary Data” for additional information regarding the acquisition.
Business Segments
The Company has determined it has only one operating segment based on the guidance of ASC 280-10-50 paragraphs 1 through 8, The Company has a sole chief operating decision maker who reviews a single set of financials, information, has accountability for the performance of the organization, and allocates resources to drive success.
For fiscal 2022, the Company had two reporting units for evaluation of goodwill: Streamline Solutions and Avelead Solutions. The Company determined that, effective January 1, 2023, it has one reporting unit for purposes of evaluation of goodwill, which was used for evaluation of goodwill for fiscal 2023. At the end of fiscal 2022, the Company consolidated and combined its operations for Streamline Solutions and Avelead Solutions. For total assets at January 31, 2024 and 2023 and total revenue and net loss for the fiscal years ended January 31, 2024 and 2023, see our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” herein.
Contracts, License and Services Fees
The Company enters into agreements with its clients that specify the scope of the system to be installed and/or services to be provided by the Company, as well as the agreed-upon pricing, applicable term duration and the timetable for the associated licenses and services.
For clients purchasing software to be installed locally or provided on a SaaS model, there are multiple performance obligations that include either a perpetual or term license and right to access the applicable software functionality (whether installed locally at the client site or the right to use the Company’s solutions as a part of SaaS services), terms regarding maintenance and support services, and professional services for implementation, integration, process engineering, optimization and training, as well as fees and payment terms for each of the foregoing. If the client purchases solutions on a perpetual license model, the client is billed the license fee up front. Maintenance and support is provided on a term basis for separate fees, with an initial term typically from one to five years in length. The maintenance and support fee is charged annually, in advance, commencing either upon contract execution or deployment of the solution in live production. If the client purchases solutions on a term-based model, the client is billed periodically a combined access fee for a specified term, typically from one to seven years in length. The access fee includes the access rights along with all maintenance and support services.
The Company also generally provides software and SaaS clients professional services for implementation, integration, process engineering, optimization and training. These services and the associated fees are separate from the license, maintenance and access fees. Professional services are provided on either a fixed-fee or hourly arrangements billable to clients based on agreed-to payment milestones (fixed fee) or monthly payment structure on hours incurred (hourly). These services can either be included at the time the related locally installed software or SaaS solution is licensed as part of the initial purchase agreement or added as an addendum to the existing agreement for services required after the initial implementation. The Company recognizes revenue for implementation for certain of its eValuator SaaS solution over the contract term, as it has been determined that those implementation services are not a distinct performance obligation, whereas for other SaaS and Software solutions such as Coding & CDI, RevID and Compare, it has been determined that its implementation services are a distinct performance obligation and, accordingly, are recognized separately as professional services.
Audit and Coding services are provided through a stand-alone services agreement or services addendum to an existing master services agreement with the client. These review services are available as either a one-time service or recurring monthly, quarterly or annual review structure. These services are typically provided on a per reviewed account/chart basis. Monthly minimums are required where material discounts have been offered. Revenue is generally recognized when the chart is reviewed (i.e, service is completed).
The commencement of revenue recognition on software solutions varies depending on the size and complexity of the system and/or services involved, the implementation or performance schedule requested by the client and usage by clients of SaaS for software-based components. The Company’s agreements are generally non-cancellable but provide that the client may terminate its agreement upon a material breach by the Company and/or may delay certain aspects of the installation or associated payments in such events. The Company does allow for termination for convenience in certain situations. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period, and a termination or installation delay of one or more phases of an agreement, or the failure of the Company to procure additional agreements, could have a material adverse effect on the Company’s business, financial condition, and results of operations, as further discussed in Part 1, Item 1A, “Risk Factors” herein. In the third quarter of fiscal 2023, the Company received a notice from a significant SaaS client who accounted for approximately 19% and 17% of our revenue for fiscal 2023 and fiscal 2022, respectively, of its intent not to renew its contract following the expiration of the current term on December 31, 2023. With the exception of the foregoing, the Company has not historically experienced a material amount of contract cancellations; however, the Company sometimes experiences delays in the course of contract performance and the Company accounts for them accordingly.
Third-Party License Fees
The Company incorporates software licensed from various third-party vendors into its proprietary software. The Company licenses these software products and pays the required license fees when such software is delivered to clients.
Associates
As of January 31, 2024, the Company had 77 employees, a net decrease of 35 employees during fiscal 2023. All employees are full-time employees. The Company utilizes independent contractors to supplement its staff, as needed. None of the Company’s associates are represented by a labor union or subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. The Company’s success depends, to a significant degree, on its management, sales and technical personnel.
For more information on contracts, backlog, acquisitions and research and development, see also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Competition
The RevID product has competition in charge reconciliation, generally. The Company believes RevID’s automated charge reconciliation technique is unique in the industry as it interacts with disparate clinical systems identifying unbilled services. There are products that purport to provide similar services, including FinThrive’s Charge Capture Audit Tool and CloudMed Tool set. The Company anticipates that additional competition may develop as pre-bill, daily charge reconciliation becomes a standard within the industry.
The eValuator product has numerous competitors in the auditing software industry. The Company believes eValuator is unique in that it is designed and has the requisite workflow to perform audits on a pre-bill basis. The Company believes it is an industry leader in pre-bill auditing technology. We have seen competition on similar products that are being utilized by clients as a pre-bill auditing tool, such as PwC Smart and 3M, however, these similar products are intended to be utilized for post-bill auditing which is a different workflow than what is necessary for pre-bill auditing. We expect to have competition in the pre-bill technology industry. Client processes dictate that correcting errors prior to billing is more efficient and effective than having an audit after billing. There will be larger and more sophisticated competitors than our Company. Accordingly, using the time we have to gain market share prior to direct competition is critical to the Company’s success.
The Compare product has little direct competition outside of manual reconciliations. The Company believes few systems exist that can accurately compare the various software systems used by hospitals. Examples of potential competitors include Vitalware, Craneware and FinThrive’s Chargemaster toolkit. The Company believes Compare is unique because it can be easily fine-tuned to work with a wide array of hospital systems to create a bespoke offering for specific clients, easing transitions to new platforms or acting as an ongoing maintenance check tool.
Regarding our Coding and CDI Solutions and eValuator Coding Analysis Platform, several companies historically have dominated the clinical information system software market. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Strategic alliances between vendors of other healthcare systems are increasing. Barriers to entry to this market include technological and application sophistication, the ability to offer a proven product, creating and utilizing a well-established client base and distribution channels, brand recognition, the ability to operate on a variety of operating systems and hardware platforms, the ability to integrate with pre-existing systems and capital for sustained development and marketing activities. The Company has many competitors including clinical information system vendors that are larger, more established and have substantially more resources than the Company.
Regarding our Audit and Coding Services, there are numerous companies and independent consultants who offer these services. Barriers to entry to this market include creating and utilizing a well-established client base and distribution channels, brand recognition, establishing differentiators for our services and capital for sustained development and marketing activities.
The Company believes that these obstacles taken together represent a moderate to high-level barrier to entry. The Company believes that the principal competitive factors in its market are client recommendations and references, company reputation, system reliability, system features and functionality (including ease of use), technological advancements, client service and support, breadth and quality of the systems, the potential for enhancements and future compatible products, the effectiveness of marketing and sales efforts, price, and the size and perceived financial stability of the vendor. In addition, the Company believes that the speed with which companies in its market can anticipate the evolving healthcare industry structure and identify unmet needs are important competitive factors.
Additional Intellectual Property Rights
In addition to the software licenses described in other sections of this Item 1, “Business”, the Company also holds registered trademarks for its Streamline Health® and other key trademarks used in selling its products. These marks are currently active, with registrations being valid for a period of three years each. The Company actively renews these marks at the end of each registration period.
Regulations
Our clients derive a substantial portion of their revenue from third-party private and governmental payors, including through Medicare, Medicaid and other government-sponsored programs. Our clients also have express handling and retention obligations under information-based laws such as the Health Insurance Portability and Accountability Act of 1996. There are no material regulatory proposals of which the Company is aware that we believe currently have a high likelihood of passage that we anticipate would have a material impact on the operation or demand of the Company’s products and services. However, the Company acknowledges there is currently great uncertainty in the U.S. healthcare market, generally, from a regulatory perspective. In addition, there is regulatory uncertainty in the data and technology sectors as it relates to information security regulations. Material changes could have unanticipated impact on demand or usability of the Company’s solutions, require the Company to incur additional development and/or operating costs (on a one-time or recurring basis) or cause clients to terminate their agreements or otherwise be unable to pay amounts owed to the Company, as further discussed in Part 1, Item 1A, “Risk Factors” herein.
Environmental Matters
We believe we are compliant in all material aspects with all applicable environmental laws. We do not anticipate that such compliance will have a material effect on capital expenditures, earnings or the competitive position of our operations.
Code of Business Conduct and Ethics
We have a Code of Business Conduct and Ethics that guides and binds each of our employees, officers and directors which is available on the “Investor Relations” page of our website, www.streamlinehealth.net, under the “Corporate Governance” tab. We use an anonymous compliance hotline for employees and outside parties to report potential instances of noncompliance.
Available Information
Copies of documents filed by the Company with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those reports and statements, if any, can be found at the website http://investor.streamlinehealth.net as soon as practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on the Company’s website is not part of, or incorporated by reference into, this Report. Copies can be downloaded free of charge from the Company’s website or directly from the SEC website, https://www.sec.gov. Also, copies of the Company’s annual report on Form 10-K will be made available, free of charge, upon written request to the Company, attention: Corporate Secretary, 2400 Old Milton Pkwy, Box 1353, Alpharetta, GA 30009.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock or other securities. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our sales have been concentrated in a small number of clients.
Our revenues have been concentrated in a relatively small number of large clients, and we have historically derived a substantial percentage of our total revenue from a few clients. For the fiscal years ended January 31, 2024 and 2023, our five largest clients accounted for 38% and 46%, respectively, of our total revenue. A client who accounted for approximately $4.4 million, or 19%, of our revenue for fiscal 2023, and $4.2 million, or 17%, of our revenue for fiscal 2022, terminated its contract with the Company, effective December 31, 2023. If one or more clients terminate all or any portion of a master agreement, delay installations or if we fail to procure additional agreements, there could be a material adverse effect on our business, financial condition and results of operations. See Note 9 - Major Clients to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, herein for further information regarding representation of the Company’s largest individual major clients.
Over the last several years, we have completed acquisitions, and may undertake additional acquisitions in the future. Any failure to adequately integrate past and future acquisitions into our business could have a material adverse effect on us.
Acquisitions will require that we integrate into our existing operations separate companies that historically operated independently or as part of another, larger organization, and had different systems, processes and cultures. Acquisitions may require integration of finance and administrative organizations and involve exposure to different legal and regulatory regimes in jurisdictions in which we have not previously operated.
Over the last several years, we have completed acquisitions of businesses through asset and stock purchases. We expect that we will make additional acquisitions in the future.
Acquisitions involve a number of risks, including, but not limited to:
● the potential failure to achieve the expected benefits of the acquisition, including the inability to generate sufficient revenue to offset acquisition costs, or the inability to achieve expected synergies or cost savings;
● unanticipated expenses related to acquired businesses or technologies and their integration into our existing businesses or technology;
● the diversion of financial, managerial and other resources from existing operations;
● the risks of entering into new markets in which we have little or no experience or where competitors may have stronger positions;
● potential write-offs or amortization of acquired assets or investments;
● the potential loss of key employees, clients or partners of an acquired business;
● delays in client purchases due to uncertainty related to any acquisition;
● potential unknown liabilities associated with an acquisition; and
● the tax effects of any such acquisitions.
If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses, which could have an adverse effect on our business and financial condition.
Finally, if we finance acquisitions by issuing equity or convertible or other debt securities, our existing stockholders may be diluted, or we could face constraints related to the terms of and repayment obligations related to the incurrence of indebtedness. This could adversely affect the market price of our securities.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not ultimately consummated, which could materially adversely affect our financial condition and subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
A significant increase in new SaaS contracts could require a significant cash outlay, which could adversely affect near term cash flow.
If new or existing clients purchase significant amounts of our SaaS services, we may have to expend a significant amount of initial setup costs and time before those new clients are able to begin using such services, and we cannot begin to recognize revenues from those SaaS agreements until the commencement of such services. Accordingly, we anticipate that our near-term cash flow may be adversely affected by significant incremental setup costs from new SaaS clients that would not be offset by revenue until new SaaS clients go into production. While we anticipate long-term growth in profitability through increases in recurring SaaS subscription fees and significantly improved profit visibility, any inability to adequately finance setup costs for new SaaS solutions could result in the failure to put new SaaS solutions into production and could have a material adverse effect on our liquidity, financial position and results of operations. In addition, this near-term cash flow demand could adversely impact our financial flexibility and cause us to forego otherwise attractive business opportunities or investments.
We may not see the anticipated market interest or growth in our software solutions. In addition, coding audit services and associated software and technologies represent a new market for the Company, and we may not see the anticipated market interest or growth due to being a new player in the industry.
The Company is currently investing in the eValuator platform as well as new software-based technologies relating to high automation and machine-based analytics regarding a client’s coding audit process. The return on this investment requires that the product developments continue to be defined and completed in a timely and cost-effective manner, there remains general interest in the marketplace (for both existing and future clients) for this technology, the demand for the product generates sufficient revenue in light of the development costs and that the Company is able to execute a successful product launch for these technologies. If the Company is unable to meet these requirements when launching these technologies, or if there is a delay in the launch process, the Company may not see an increase in revenue to offset the current development costs or otherwise translate to added growth and revenue for the Company.
Clients may exercise termination rights within their contracts, which may cause uncertainty in anticipated and future revenue streams.
The Company generally does not allow for termination of a client’s agreement except at the end of the agreed upon term or for cause. However, certain of the Company’s client contracts provide that the client may terminate the contract without cause prior to the end of the term of the agreement by providing written notice, sometimes with relatively short notice periods. In the third quarter of fiscal 2023, a client who accounted for approximately $4.4 million, or 19%, of our revenue for fiscal 2023, and $4.2 million, or 17%, of our revenue for fiscal 2022, terminated its contract with the Company, effective December 31, 2023. The Company also provides trial or evaluation periods for certain clients, especially for new products and services. Furthermore, there can be no assurance that a client will not cancel all or any portion of an agreement, even without an express early termination right, and the Company may face additional costs or hardships collecting on amounts owed if a client terminates an agreement without such a right. Whether resulting from termination for cause or the limited termination for convenience rights discussed above, the existence of contractual relationships with these clients is not an assurance that we will continue to provide services for our clients through the entire term of their respective agreements. If clients representing a significant portion of our revenue terminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenue and income from such contracts and this would have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. In addition, client contract terminations could harm our reputation within the industry, especially any termination for cause, which could negatively impact our ability to obtain new clients.
Changes in healthcare regulations impacting coding, payers and other aspects of the healthcare regulatory cycle could have substantial impact on our financial performance, growth and operating costs.
Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. Unanticipated regulatory changes could materially impact the need for and/or value of our solutions. For example, if governmental or other third-party payors materially reduce reimbursement rates or fail to reimburse our clients adequately, our clients may suffer adverse financial consequences. Changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could also directly impact the capabilities our solutions and services provide and the pricing arrangements we are required to offer to be competitive in the market. Similarly, the U.S. Congress may adopt legislation that may change, override, conflict with or pre-empt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information and/or impact the value of the functionality our products and services provide.
These situations would, in turn, reduce the demand for our solutions or services and/or the ability for a client to purchase our solutions or services. This could have a material impact on our financial performance. In addition, the speed with which the Company can respond to and address any such changes when compared with the response of other companies in the same market (especially companies who may accurately anticipate the evolving healthcare industry structure and identify unmet needs) are important competitive factors. If the Company is not able to address the modifications in a timely manner compared with our competition, that may further reduce demand for our solutions and services.
The potential impact on us of new or changes in existing federal, state and local regulations governing healthcare information could be substantial.
Healthcare regulations issued to date have not had a material adverse effect on our business. However, we cannot predict the potential impact of new or revised regulations that have not yet been released or made final, or any other regulations that might be adopted. The U.S. Congress may adopt legislation that may change, override, conflict with or pre-empt the currently existing regulations and which could restrict the ability of clients to obtain, use or disseminate patient health information. Although the features and architecture of our existing solutions can be modified, it may be difficult to address the changing regulation of healthcare information.
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the group purchasing business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our solutions and services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry, as well as our ability to increase the number of solutions that we sell to our clients. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operation and, ultimately, the operating funds of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications to our solutions and services, or result in delays or cancellations of orders or reduce funds and demand for our solutions and services.
Our clients derive a substantial portion of their revenue from third-party private and governmental payors, including through Medicare, Medicaid and other government-sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for medical care provided is available from governmental health programs, private health insurers, managed care plans and other third-party payors. If governmental or other third-party payors materially reduce reimbursement rates or fail to reimburse our clients adequately, our clients may suffer adverse financial consequences, which in turn, may reduce the demand for and ability to purchase our solutions or services.
We face significant competition, including from companies with significantly greater resources.
We currently compete with many other companies for the licensing of similar software solutions and related services. Several companies historically have dominated the clinical information systems software market and several of these companies have either acquired, developed, or are developing their own analytics and coding/clinical documentation improvement solutions, as well as the resultant workflow technologies. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Many of these companies are larger than us and have significantly more resources to invest in their business. In addition, information and document management companies serving other industries may enter the market. Suppliers and companies with whom we may establish strategic alliances also may compete with us. Such companies and vendors may either individually, or by forming alliances excluding us, place bids for large agreements in competition with us. A decision on the part of any of these competitors to focus additional resources in any of our solution focuses (charge reconciliation, coding audit solutions, analytics and coding/clinical documentation improvement), workflow technologies and other markets addressed by us could have a material adverse effect on us.
The healthcare industry is evolving rapidly, which may make it more difficult for us to be competitive in the future.
The U.S. healthcare system is under intense pressure to improve in many areas, including modernization, universal access and controlling skyrocketing costs of care. We believe that the principal competitive factors in our market are client recommendations and references, company reputation, system reliability, system features and functionality (including ease of use), technological advancements, client service and support, breadth and quality of the systems, the potential for enhancements and future compatible solutions, the effectiveness of marketing and sales efforts, price and the size and perceived financial stability of the vendor. In addition, we believe that the speed with which companies in our market can anticipate the evolving healthcare industry structure and identify unmet needs is an important competitive factor. If we are unable to keep pace with changing conditions and new developments, we will not be able to compete successfully in the future against existing or potential competitors.
Rapid technology changes and short product life cycles could harm our business.
The market for our solutions and services is characterized by rapidly changing technologies, regulatory requirements, evolving industry standards and new product introductions and enhancements that may render existing solutions obsolete or less competitive. As a result, our position in the healthcare information technology market could change rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend, in part, upon our ability to enhance our existing solutions and services and to develop and introduce new solutions and services to meet changing requirements. Moreover, competitors may develop competitive products that could adversely affect our operating results. We need to maintain an ongoing research and development program to continue to develop new solutions and apply new technologies to our existing solutions but may not have sufficient funds with which to undertake such required research and development. If we are not able to foresee changes or to react in a timely manner to such developments, we may experience a material, adverse impact on our business, operating results and financial condition.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our solutions and services.
Our intellectual property, which represents an important asset to us, has some protection against infringement through copyright and trademark law. We generally have little patent protection on our software. We rely upon license agreements, employment agreements, confidentiality agreements, nondisclosure agreements and similar agreements to maintain the confidentiality of our proprietary information and trade secrets. Notwithstanding these precautions, others may copy, reverse engineer or independently design technology similar to our solutions. If we fail to protect adequately our intellectual property through trademarks and copyrights, license agreements, employment agreements, confidentiality agreements, nondisclosure agreements or similar agreements, our intellectual property rights may be misappropriated by others, invalidated or challenged, and our competitors could duplicate our technology or may otherwise limit any competitive technology advantage we may have. It may be necessary to litigate to enforce or defend our proprietary technology or to determine the validity of the intellectual property rights of others. Any litigation, successful or unsuccessful, may result in substantial cost and require significant attention by management and technical personnel.
Due to the rapid pace of technological change, we believe our future success is likely to depend upon continued innovation, technical expertise, marketing skills and client support and services rather than on legal protection of our intellectual property rights. However, we have aggressively asserted our intellectual property rights when necessary and intend to do so in the future.
We could be subjected to claims of intellectual property infringement that could be expensive to defend.
While we do not believe that our solutions and services infringe upon the intellectual property rights of third parties, the potential for intellectual property infringement claims continually increases as the number of software patents and copyrighted and trademarked materials continues to rapidly expand. Any claim for intellectual property right infringement, even if not meritorious, could be expensive to defend. If we were held liable for infringing third party intellectual property rights, we could incur substantial damage awards, and potentially be required to cease using the technology, produce non-infringing technology or obtain a license to use such technology. Such potential liabilities or increased costs could be material to us.
If we are unable to maintain effective internal control over financial reporting, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial statements.
In connection with the preparation of the consolidated financial statements for each of our fiscal years, our management conducts a review of our internal control over financial reporting. We are also required to maintain effective disclosure controls and procedures. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm operating results, or cause failure to meet reporting obligations in a timely and accurate manner.
Third party products are essential to our software.
Our software incorporates software licensed from various vendors into our proprietary software. In addition, third-party, stand-alone software is required to operate some of our proprietary software modules. The loss of the ability to use these third-party products, or ability to obtain substitute third-party software at comparable prices, could have a material adverse effect on our ability to license our software.
Our solutions may not be error-free and could result in claims of breach of contract and liabilities.
Our solutions are very complex and may not be error-free, especially when first released. Although we perform extensive testing, failure of any solution to operate in accordance with its specifications and documentation could constitute a breach of the license agreement and require us to correct the deficiency. If such deficiency is not corrected within the agreed-upon contractual limitations on liability and cannot be corrected in a timely manner, it could constitute a material breach of a contract allowing the termination thereof and possibly subjecting us to liability. Also, we sometimes indemnify our clients against third-party infringement claims. If such claims are made, even if they are without merit, they could be expensive to defend. Our license and SaaS agreements generally limit our liability arising from these types of claims, but such limits may not be enforceable in some jurisdictions or under some circumstances. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
We could be liable to third parties from the use of our solutions.
Our solutions provide access to patient information used by physicians and other medical personnel in providing medical care. The medical care provided by physicians and other medical personnel are subject to numerous medical malpractice and other claims. We attempt to limit any potential liability of ours to clients by limiting the warranties on our solutions in our agreements with our clients (i.e., healthcare providers). However, such agreements do not protect us from third-party claims by patients who may seek damages from any or all persons or entities connected to the process of delivering patient care. We maintain insurance, which provides limited protection from such claims, if such claims result in liability to us. Although no such claims have been brought against us to date regarding injuries related to the use of our solutions, such claims may be made in the future. A significant uninsured or under-insured judgment against us could have a material adverse impact on us.
Our SaaS and support services could experience interruptions.
We provide SaaS for many clients, including the storage of critical patient, financial and administrative data. In addition, we provide support services to clients through our client support organization. We have redundancies, such as backup generators, redundant telecommunications lines and backup facilities built into our operations to prevent disruptions. However, complete failure of all generators, impairment of all telecommunications lines or severe casualty damage to the primary building or equipment inside the primary building housing our hosting center or client support facilities could cause a temporary disruption in operations and adversely affect clients who depend on the application hosting services. Any interruption in operations at our data center or client support facility could cause us to lose existing clients, impede our ability to obtain new clients, result in revenue loss, cause potential liability to our clients, and increase our operating costs.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or a deficiency in our cybersecurity. Our SaaS solutions are provided over an internet connection and any breach of security or confidentiality of protected health information could expose us to significant expense and harm our reputation.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from a variety of causes, including computer viruses, malware, intentional or accidental mistakes or errors by users with authorized access to our computer systems, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, or attachments to emails. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, non-U.S. governments, extra-state actors and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
We provide remote SaaS solutions for clients, including the storage of critical patient, financial and administrative data. We have security measures in place to prevent or detect misappropriation of protected health information. We must maintain facility and systems security measures to preserve the confidentiality of data belonging to clients, as well as their patients, that resides on computer equipment in our data center, which we handle via application hosting services, or that is otherwise in our possession. Notwithstanding efforts undertaken to protect data, it can be vulnerable to infiltration as well as unintentional lapse. If any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could face claims for contract breach, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences and serious harm to our reputation.
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, clients, or others to disclose information or unwittingly provide access to systems or data. We can provide no assurance that our current IT systems, software, or third-party services, or any updates or upgrades thereto will be fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats.
Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT systems to accommodate these changes. We have experienced and expect to continue to experience sophisticated attempted cyber-attacks of our IT networks. Although none of these attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future.
The loss of key personnel could adversely affect our business.
Our success depends, to a significant degree, on our management, sales force and technical personnel. We must recruit, motivate and retain highly skilled managers, sales, consulting and technical personnel, including solution programmers, database specialists, consultants and system architects who have the requisite expertise in the technical environments in which our solutions operate. Competition for such technical expertise is intense. Our failure to attract and retain qualified personnel could have a material adverse effect on us.
Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our clients’ requirements.
We will need to expand our operations if we successfully achieve greater demand for our products and services. We cannot be certain that our systems, procedures, controls and human resources will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases. Difficulties in managing any future growth, including as a result of integrating any prior or future acquisition with our existing businesses, could cause us to incur unexpected expenses or render us unable to meet our clients’ requirements, and consequently have a significant negative impact on our business, financial condition and operating results.
We may not have access to sufficient or cost-efficient capital to support our growth, execute our business plans and remain competitive in our markets.
As our operations grow and as we implement our business strategies, we expect to use both internal and external sources of capital. In addition to cash flow from normal operations, we may need additional capital in the form of debt or equity to operate and support our growth, execute our business plans and remain competitive in our markets. We may have no or limited availability to such external capital, in which case our future prospects may be materially impaired. Furthermore, we may not be able to access external sources of capital on reasonable or favorable terms. Our business operations could be subject to both financial and operational covenants that may limit the activities we may undertake, even if we believe they would benefit the Company. While we believe our existing sources of liquidity will provide sufficient resources to meet our current working capital and cash requirements, if we require an increase in capital to meet our future business needs or if we are unable to comply with covenants under our credit facilities, such capital may not be available to us on terms acceptable to us, or at all.
Unstable market and economic conditions and potential disruptions in the credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows and financial condition.
If internally generated funds are not available from operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Our access to funds under our revolving credit facility or pursuant to arrangements with other financial institutions is dependent on the financial institution’s ability to meet funding commitments. Financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience high volumes of borrowing requests from other borrowers within a short period of time.
Global credit and financial markets have recently, and may continue to, experience extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, inflationary pressure and interest rate changes and uncertainty about economic stability. There can be no assurance that future credit and financial market instability and a deterioration in confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, liquidity shortages, volatile business environment or continued unpredictable and unstable market conditions. If the equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions, it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, financial institutions, manufacturers and other partners may be adversely affected by the foregoing risks, which could directly affect our ability to attain our operating goals on schedule and on budget.
We must maintain compliance with the terms of our existing credit facilities or receive a waiver for any non-compliance. The failure to maintain compliance could have a material adverse effect on our ability to finance our ongoing operations and we may not be able to find an alternative lending source if a default occurs.
We have a credit facility with Western Alliance Bank (“WAB”) pursuant that certain Second Amended and Restated Loan and Security Agreement (as amended and modified, the “Loan Agreement”). The Loan Agreement includes (i) a term loan facility with an initial maximum principal amount of $10,000,000 and (ii) a $2,000,000 revolving line of credit. The Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of our affiliates.
The Loan Agreement has a five-year term, and the maximum principal amount was advanced in a single-cash advance on or about the closing date. Interest accrued under the Loan Agreement is due monthly, and the Company is required to make monthly interest-only payments through the one-year anniversary of the closing date. From the first anniversary of the closing date through the maturity date, the Company is required to make monthly payments of principal and interest that increase over the term of the agreement. The Loan Agreement requires principal repayments of $500,000 in the second year, $1,000,000 in the third year, $2,000,000 in the fourth year, and $3,000,000 in the fifth year, respectively, with the remaining outstanding principal balance and all accrued but unpaid interest due in full on the maturity date. The Loan Agreement may also require early repayments if certain conditions are met.
The Loan Agreement also includes negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default. Specifically, the Loan Agreement requires us to satisfy a Maximum ARR Net Leverage Ratio, Maximum Debt to Adjusted EBITDA Ratio, and Fixed Charge Coverage Ratio (as such terms are defined in the Loan Agreement) and maintain minimum Adjusted EBITDA on an ongoing basis, measured at the end of each fiscal quarter. For the period ended January 31, 2024, the Company was not in compliance with certain financial covenants under the Loan Agreement; however, on February 7, 2024, the Company received a waiver from WAB pursuant to that certain Third Modification and Waiver (the “Third Modification”) to the Loan Agreement (see Refer to Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Third Modification.).
If we do not maintain compliance with all of the continuing covenants and other terms and conditions of our existing credit facilities or secure a waiver for any non-compliance, we could be required to repay outstanding borrowings on an accelerated basis, which could subject us to decreased liquidity and other negative impacts on our business, results of operations and financial condition. Furthermore, if we needed to do so, it may be difficult for us to find an alternative lending source. In addition, because our assets are pledged as a security under our credit facilities, if we are not able to cure any default or repay outstanding borrowings, our assets are subject to the risk of foreclosure by our lenders. Without a sufficient credit facility, we would be adversely affected by a lack of access to liquidity needed to operate our business. Any disruption in access to credit could force us to take measures to conserve cash, such as deferring important research and development expenses, which measures could have a material adverse effect on us.
Economic conditions in the U.S. and globally may have significant effects on our clients and suppliers that could result in material adverse effects on our business, operating results and stock price.
Economic conditions in the U.S. and globally could deteriorate and cause the worldwide economy to enter into a stagnant period that could materially adversely affect our clients’ access to capital or willingness to spend capital on our solutions and services or their levels of cash liquidity with which to pay for solutions that they will order or have already ordered from us. In addition, the ongoing conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries that could negatively impact our operations. The U.S. government, and other governments in jurisdictions in which we operate, have imposed severe sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is currently unknown and they could adversely affect our business, partners or clients. Challenging economic conditions also would likely negatively impact our business, which could result in: (1) reduced demand for our solutions and services; (2) increased price competition for our solutions and services; (3) increased risk of collectability of cash from our clients; (4) increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable; (5) reduced revenues; and (6) higher operating costs as a percentage of revenues.
All of the foregoing potential consequences of a deterioration of economic conditions are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of future results. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect the market price of our common stock and other securities.
The variability of our quarterly operating results can be significant.
Our operating results have fluctuated from quarter-to-quarter in the past, and we may experience continued fluctuations in the future. Future revenues and operating results may vary significantly from quarter-to-quarter as a result of a number of factors, many of which are outside of our control. These factors include: the relatively large size of client agreements; unpredictability in the number and timing of software licenses and sales of application hosting services; length of the sales cycle; delays in installations; changes in clients’ financial conditions or budgets; increased competition; the development and introduction of new products and services; the loss of significant clients or remarketing partners; changes in government regulations, particularly as they relate to the healthcare industry; the size and growth of the overall healthcare information technology markets; any liability and other claims that may be asserted against us; our ability to attract and retain qualified personnel; national and local general economic and market conditions; and other factors discussed in this Report and our other filings with the SEC.
Our business, results of operations and financial condition has been, and may continue to be, materially adversely affected by the COVID-19 pandemic.
The COVID-19 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. These and other potential impacts of COVID-19 may continue to materially and adversely affect our business, results of operations and financial condition. We may experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future as a result of the COVID-19 pandemic. For instance, changes in the behavior of customers, businesses and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted, are unknown. Furthermore, the financial condition of our customers and vendors may be adversely impacted, which may result in a decrease in the demand for our products, the inability and our franchisees’ ability to operate store locations or a disruption to our supply chain. Any of these events may, in turn, have a material adverse impact our business, results of operations and financial condition.
The preparation of our financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the capitalization of software development costs. Due to the inherent nature of these estimates, we may be required to significantly increase or decrease such estimates upon determination of the actual results. Any required adjustments could have a material adverse effect on us and our results of operations.
Failure to improve and maintain the quality of internal control over financial reporting and disclosure controls and procedures or other lapses in compliance could materially and adversely affect our ability to provide timely and accurate financial information about us or subject us to potential liability.
In connection with the preparation of the consolidated financial statements for each of our fiscal years, our management conducts a review of our internal control over financial reporting. We are also required to maintain effective disclosure controls and procedures. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm operating results, or cause failure to meet reporting obligations in a timely and accurate manner.
Risks Relating to our Common Stock
The market price of our common stock is likely to be highly volatile as the stock market in general can be highly volatile.
The public trading of our common stock is based on many factors that could cause fluctuation in the price of our common stock. These factors may include, but are not limited to:
● General economic and market conditions;
● Actual or anticipated variations in annual or quarterly operating results;
● Lack of or negative research coverage by securities analysts;
● Conditions or trends in the healthcare information technology industry;
● Changes in the market valuations of other companies in our industry;
● Announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives;
● Announced or anticipated capital commitments;
● Ability to maintain listing of our common stock on Nasdaq;
● Additions or departures of key personnel; and
● Sales and repurchases of our common stock by us, our officers and directors or our significant stockholders, if any.
Most of these factors are beyond our control. Further, as a result of our relatively small public float, our common stock may be less liquid, and the trading price for our common stock may be more affected by relatively small volumes of trading than is the case for the common stock of companies with a broader public ownership. These factors may cause the market price of our common stock to decline, regardless of our operating performance or financial condition.
If equity research analysts do not publish research reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock may rely in part on the research and reports that equity research analysts publish about our business and us. We do not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about our business or us. Furthermore, if no equity research analysts conduct research or publish reports about our business and us, the market price of our common stock could decline.
All of our debt obligations and any preferred stock that we may issue in the future will have priority over our common stock with respect to payment in the event of a bankruptcy, liquidation, dissolution or winding up.
In any bankruptcy, liquidation, dissolution or winding up of the Company, our shares of common stock would rank in right of payment or distribution below all debt claims against us and all of our outstanding shares of preferred stock, if any. As a result, holders of our shares of common stock will not be entitled to receive any payment or other distribution of assets in the event of a bankruptcy or upon a liquidation or dissolution until after all of our obligations to our debt holders and holders of preferred stock have been satisfied. Accordingly, holders of our common stock may lose their entire investment in the event of a bankruptcy, liquidation, dissolution or winding up of the Company. Similarly, holders of our preferred stock would rank junior to our debt holders and creditors in the event of a bankruptcy, liquidation, dissolution or winding up of the Company.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
As of January 31, 2024, we had outstanding options and warrants to purchase 67,500 and no shares of the Company’s common stock, respectively. The exercise of such options and warrants and conversion of convertible securities would dilute the ownership percentages of our existing stockholders, and any sales in the public market of common stock underlying such securities could adversely affect prevailing market prices for our common stock. We are generally not restricted from issuing in public or private offerings additional shares of common stock or preferred stock, and other securities that are convertible into or exchangeable for, or that represent a right to receive, common stock or preferred stock or any substantially similar securities. Such offerings represent the potential for a significant increase in the number of outstanding shares of our common stock. The market price of our common stock could decline as a result of sales of common stock, preferred stock or similar securities in the market made after an offering or the perception that such sales could occur.
The issuance of preferred stock could adversely affect holders of shares of our common stock, which may negatively impact your investment.
Our Board of Directors is authorized to issue classes or series of preferred stock without any action on the part of the stockholders. The Board of Directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including rights and preferences over the shares of common stock with respect to dividends or upon our dissolution, winding-up or liquidation, and other terms. If we issue preferred stock in the future that has a preference over the shares of our common stock with respect to the payment of dividends or upon our dissolution, winding up or liquidation, or if we issue preferred stock with voting rights that dilute the voting power of the shares of our common stock, the rights of the holders of shares of our common stock or the market price of our common stock could be adversely affected.
As of January 31, 2024, we had no shares of preferred stock outstanding.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend solely on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. The trading price of our common stock could decline and you could lose all or part of your investment.
Sales of shares of our common stock or securities convertible into our common stock in the public market may cause the market price of our common stock to fall.
The issuance of shares of our common stock or securities convertible into our common stock in an offering from time to time could have the effect of depressing the market price for shares of our common stock. In addition, because our common stock is thinly traded, resales of shares of our common stock by our largest stockholders or insiders could have the effect of depressing market prices for our common stock.
If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected.
Our common stock is listed on The Nasdaq Capital Market. To maintain listing on The Nasdaq Capital Market, we must satisfy minimum financial and other continued listing requirements and standards, including the Minimum Bid Price Requirement (as discussed below) and those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements.
We are required to maintain a minimum bid price of $1.00 per share. On October 24, 2023, we received a letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market indicating that the closing bid price of our common stock had been below the minimum bid price of $1.00 per share for the previous 30 consecutive business days, which is required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Nasdaq has provided the Company with 180 calendar days, or until April 22, 2024, to regain compliance with the Minimum Bid Price Requirement. During this period, our common stock will continue to trade uninterrupted on The Nasdaq Capital Market under the symbol “STRM.” To regain compliance, the closing bid price of our common stock must be at least $1.00 for a minimum of 10 consecutive business days at any time before April 22, 2024. If by April 22, 2024, the Company cannot demonstrate compliance with the Minimum Bid Price Requirement, it may be eligible for additional time, subject to meeting the continued listing requirements for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement. If the Company meets these requirements, we will have an additional 180 calendar days to comply with the Minimum Bid Price Requirement to maintain the listing of our common stock on The Nasdaq Capital Market. If we are not eligible for the second compliance period, the Staff will provide notice that our common stock will be subject to delisting, which determination may be appealed to the Nasdaq Hearings Panel.
There can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement, even if we maintain compliance with the other listing requirements. In the event that our common stock is delisted from The Nasdaq Capital Market and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
Such a delisting would also likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we may take actions to restore our compliance with The Nasdaq Stock Market’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Minimum Bid Price Requirement or prevent future non-compliance with The Nasdaq Stock Market’s listing requirements.
Note Regarding Risk Factors
The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing the Company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the market price of our common stock or other securities could decline and you could lose all or part of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
In March 2020, the Company moved its principal offices to a subleased office space at 11800 Amber Park Drive, Suite 125, Alpharetta, Georgia 30009. The office space totals 7,409 square feet and the sublease expired on March 31, 2023. In October 2021, we subleased this space to a third party for the remaining lease period.
On August 16, 2021, contemporaneous with the acquisition of Avelead, the Company assumed a lease of office space at 1172 Satellite Boulevard NW, Office Suite 100, Suwannee, Georgia 30024. The lease expired on February 28, 2022. The lease was renewed in February 2022 for one year on substantially the same terms. The tenant of the lease is an entity controlled by the former owner of Avelead and former Chief Strategy Officer of the Company. The lease expired on February 28, 2023 and was not renewed.
Prior to occupying the subleased office space located in Alpharetta, Georgia, the Company occupied shared office space under a membership agreement which provides for membership fees based on the number of contracted seats.
The Company has moved to a virtual office model and does not have a physical office space. Membership agreements and daily space rentals are leveraged by the Company when groups need to meet in person. Our mailing address is 2400 Old Milton Pkwy, Box 1353, Alpharetta, GA 30009. We believe the virtual environment is adequate for the Company’s current and planned future operations. Suitable alternative space is available to accommodate expansion of the Company’s operations.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are, from time to time, a party to various legal proceedings and claims, which arise in the ordinary course of business. We are not aware of any legal matters that could have a material adverse effect on our consolidated results of operations, financial position or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock trades on the NASDAQ Capital Market under the symbol STRM.
According to the Company’s stock transfer agent’s records, the Company had 215 stockholders of record as of April 29, 2024. Because brokers and other institutions on behalf of stockholders hold many of such shares, the Company is unable to determine with complete accuracy the current total number of stockholders represented by these record holders. The Company estimates that it has approximately 2,728 stockholders, based on information provided by Broadridge Financial Solutions.
The Company has never declared or paid any cash dividends on its common stock and does not currently intend to do so for the foreseeable future. The Company currently intends to invest its future earnings, if any, to fund its growth.
For the fiscal year ended January 31, 2024, we issued an aggregate of 459,117 shares of common stock to 180 Consulting (as defined below) as compensation for services provided pursuant to the Master Services Agreement, effective March 19, 2020, by and between the Company and 180 Consulting and related statements of work. The shares were issued in reliance on the exemption from registration available under Section 4(a)(2) of the Securities Act and the certificates representing such shares have a legend imprinted on them stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration.
Consulting has earned, cumulatively, through the Master Services Agreement, 1,479,911 shares of common stock through January 31, 2024. 206,517 shares of common stock were earned but not issued as of the end of our fiscal year ended January 31, 2024. In June 2023, the Company filed a Registration Statement on Form S-3 to register 394,127 shares of common stock that were previously issued to 180 Consulting pursuant to Rule 416 of the Securities Act of 1933. See Note 12 - Commitments and Contingencies to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”.
The following table sets forth information with respect to our repurchases of common stock during the three months ended January 31, 2024:
Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs
November 1 - November 30 14,529 $ 0.43 - -
December 1 - December 31 - - - -
January 1 - January 31 - - - -
Total 14,529 $ 0.43 - -
(1)
Amount represents shares surrendered by employees to satisfy tax withholding obligations resulting from restricted stock that vested during the three months ended January 31, 2024.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
The Company has identified its primary role as aiding healthcare providers to enhance their revenue cycle management by concentrating on the intermediary stages of the revenue cycle, specifically from initial charge capture to bill drop. This strategic focus remains consistent as the Company continues to prioritize initiatives within this segment. Our clients predominantly consist of acute-care hospital systems and their affiliated clinics.
Our commitment to this segment is underscored by our two flagship software solutions: RevID and eValuator. The Company is dedicated to spearheading an industry-wide effort aimed at improving the financial performance of healthcare providers by shifting billing interventions upstream to enhance coding accuracy. As a result of our solutions, clients have reduced revenue leakage, mitigated risks of under-billing and over-billing, and reduced both denials and accounts receivable turnover.
By focusing on the intermediary stages of the revenue cycle, we believe we offer a distinctive and compelling value proposition that can help us attract more clients. Through innovation and strategic acquisitions, we have broadened our target markets beyond inpatient facilities to encompass outpatient centers, clinics, and physician practices. Our suite of revenue cycle solutions, including eValuator and RevID, is highly competitive, enabling us to secure five significant new clients and our first enterprise client (using multiple products) in fiscal 2023. These clients represent some of the most renowned names in healthcare, reflecting our salesforce’s emphasis on industry-leading organizations whose processes often serve as benchmarks for smaller facilities.
On October 16, 2023, the Company announced it was executing a strategic restructuring designed to reduce expenses while maintaining the Company’s ability to expand its SaaS business (the “Strategic Restructuring”). The Strategic Restructuring initiatives included a reduction in force, resulting in the termination of 26 employees, or approximately 24% of the Company’s workforce. To execute the Strategic Restructuring, the Company recognized one-time restructuring costs associated with the workforce reduction of $759,000, which consisted of approximately $731,000 in severance and other employee termination-related expenses and approximately $28,000 in incurred legal fees, in fiscal 2023. The Company expects to realize approximately $5,800,000 in annualized cost savings as a result of the Strategic Restructuring. Approximately 60% of the expected savings related to the reduction in force were realized during the fourth quarter of fiscal 2023. The remaining expected cost savings are vendor-related expenses which are expected to be recognized beginning in the first quarter of fiscal 2024.
Acquisitions
On August 16, 2021, the Company completed an acquisition of Avelead, a recognized leader in providing solutions and services to improve revenue integrity for healthcare providers nationwide. The Company believes Avelead’s solutions will complement and extend the value the Company can deliver to its clients. Refer to Note 3 - Business Combination in our consolidated financial statements included in Part I, Item I, “Financial Statements” for further information on the Avelead acquisition.
Macro-Economic Conditions
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 clients and various resellers to provide information technology solutions to help providers meet these new requirements.
The COVID-19 pandemic, and its attendant economic damage, had an adverse impact on our revenue. Our healthcare clients were significantly impacted by the pandemic, and continue to struggle with high turnover rates and a challenging labor market in clinical and administrative departments resulting in a backlog of IT projects. As a result, our market has become highly unpredictable, diminishing our ability to accurately forecast the timing of sales and implementations.
Results of Operations
Statements of Operations for the fiscal years ended January 31, 2024 and 2023 (in thousands):
$ Change % Change
Software as a Service $ 14,075 $ 12,326 $ 1,749 14 %
Maintenance and Support 4,318 4,483 (165 ) (4 )%
Professional fees and licenses 4,203 8,080 (3,877 ) (48 )%
Total revenues 22,596 24,889 (2,293 ) (9 )%
Cost of sales 11,053 13,395 (2,342 ) (17 )%
Selling, general and administrative 14,710 16,283 (1,573 ) (10 )%
Research and development 5,704 6,042 (338 ) (6 )%
Impairment of goodwill 9,813 - 9,813 100 %
Impairment of long-lived assets - 100 %
Total operating expenses 42,243 35,720 6,523 18 %
Operating loss (19,647 ) (10,831 ) (8,816 ) 81 %
Other (expense) income, net (477 ) 1,381 (290 )%
Income tax benefit (expense) (71 ) (165 )%
Net loss $ (18,697 ) $ (11,379 ) $ (7,318 ) (64 )%
Adjusted EBITDA(1) $ (1,386 ) $ (3,757 ) $ 2,371 63 %
(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
Software as a service 62.3 % 49.5 %
Maintenance and support 19.1 18.0
Professional fees and licenses 18.6 32.5
Total revenues 100 % 100 %
Cost of sales 48.9 % 53.8 %
Selling, general and administrative 65.1 65.4
Research and development 25.2 24.3
Impairment of goodwill 43.4 -
Impairment of long-lived assets 4.3 -
Total operating expenses 186.9 % 143.5 %
Operating loss (86.9 )% (43.5 )%
Other (expense) income, net 4.0 (1.9 )
Income tax benefit (expense) 0.2 (0.3 )
Net loss (82.7 )% (45.7 )%
Cost of Sales to Revenues ratio, by revenue stream:
Software as a service 46.7 % 51.6 %
Maintenance and support 7.3 % 9.5 %
Professional fees and licenses 99.1 % 81.8 %
(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 software licenses 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 2023 with Fiscal 2022
Revenues
Fiscal Year 2023 to 2022 Change
(in thousands): $ %
Software as a service $ 14,075 $ 12,326 $ 1,749 14 %
Maintenance and support 4,318 4,483 (165 ) (4 )%
Professional fees and licenses 4,203 8,080 (3,877 ) (48 )%
Total Revenues $ 22,596 $ 24,889 $ (2,293 ) (9 )%
Software as a service (SaaS) - Revenues from SaaS are primarily comprised of the Company’s flagship products; eValuator and RevID. Revenues from SaaS in fiscal 2023 were $14,075,000, as compared to $12,326,000 in fiscal 2022. The $1,749,000 increase in SaaS revenue was primarily attributable to new client wins, incremental sales to existing clients and recognition of a full year of revenue from certain clients that implemented our solutions during fiscal 2022, partially offset by client non-renewals. In fiscal 2023, the Company received notice from a significant SaaS client of its intent not to renew its contract following the expiration of the current term on December 31, 2023. Fiscal 2023 SaaS revenue reflects losing one month of revenue related to that client. The Company expects minimal growth in its SaaS business year-over-year but expects sequential growth in each quarter of fiscal 2024 as the Company replenishes the lost revenue related to the non-renewal of the client contract. At January 31, 2024, the Company had approximately $3,900,000 in SaaS annual contract value for contracts that has not been implemented.
Maintenance and support - Revenues from maintenance and support are derived from our legacy CDI and Abstracting products. In fiscal 2023, these revenues were slightly lower as compared to fiscal 2022. $381,000 of the revenue decline was the result of site terminations and reductions, which was offset by $137,000 of new sales acquired through our channel partner and $78,000 of new revenue from existing clients related to CPI adjustments. As the Company maintains its focus on SaaS products the Company expects maintenance and support revenue will continue to decrease in fiscal 2024 as a result of pricing pressure, anticipated non-renewal of contracts and minimal new sales.
Professional fees and licenses - Revenues from professional fees and licenses include proprietary software, term license, professional services and audit and coding services revenues. Total professional fees and licenses revenues in fiscal 2023 were $4,203,000, a decline of $3,877,000 as compared to $8,080,000 in fiscal 2022.
There were no perpetual software license revenues recognized in fiscal 2023, as compared to $663,000 in fiscal 2022. The Company has primarily shifted its business from perpetual software licenses to a SaaS model. Software license sales come primarily from channel partners who were nonproductive in fiscal 2023. As a result of these channel partner relationships the Company has limited ability to influence sales of these products. Term license revenue for fiscal 2023 decreased $318,000 from fiscal 2022 to a total of $238,000 due to a term license non-renewal.
Professional services revenues in fiscal 2023 were $1,764,000 as compared to $4,319,000 in fiscal 2022. The decrease in professional services revenue was attributable to the Company and certain clients choosing at the end of fiscal 2022 to not renew consulting contracts which accounted for approximately $3,100,000 of professional services revenue in fiscal 2022. The consulting services contracts had low margins compared to our SaaS solutions and the Company does not intend to pursue such professional services contracts in the future. The decrease in professional services revenue was partially offset by $700,000 of revenue from new and ongoing implementation services for the Company’s RevID solution.
Revenues from audit and coding services in fiscal 2023 were $2,201,000, as compared to $2,542,000 in fiscal 2022. Certain revenue-generating clients from fiscal 2022 did not require audit services in fiscal 2023 resulting in a decrease of $985,000 in revenue for fiscal 2023 compared to fiscal 2022. Existing clients had various shifts in their demand for audit services that resulted in $554,000 of incremental revenue for fiscal 2023 compared to fiscal 2022. The Company believes demand for its onshore, technically proficient coders and auditors in the marketplace is strong and that it has a competitive edge in providing audit and coding services as an offering with the eValuator solution as a technology-enabled service. The Company anticipates the audit and coding services business to remain relatively flat in fiscal 2024 to support shifting demand among clients.
Cost of Revenue
Fiscal Year 2023 to 2022 Change
(in thousands): $ %
Cost of software as a service $ 6,573 $ 6,358 $ 215 3 %
Cost of maintenance and support (112 ) (26 )%
Cost of professional fees and licenses 4,165 6,610 (2,445 ) (37 )%
Total cost of sales $ 11,053 $ 13,395 $ (2,342 ) (17 )%
Cost of software as a service (SaaS) - The Cost of SaaS consists of expenses associated with (i) amortization of capitalized software, (ii) royalties payable to third-parties for use of their coding related content, and (iii) personnel and network infrastructure required to deploy and support applications for each client. Expenses related to SaaS increased by $215,000 in fiscal 2023 compared to fiscal 2022, driven by an increase of $161,000 for fiscal 2023 compared to fiscal 2022 for amortization of capitalized software features that were put into service during the fiscal year. The Company expects amortization of capitalized software costs to stay relatively consistent in fiscal 2024 as compared to fiscal 2023.
Certain expenses included in our cost of SaaS are tied to volumes. These expenses include coding tools supporting eValuator and a third-party system that translates data from the hospital system to the Company’s systems. In fiscal 2023 and 2022, cost of SaaS included non-cash amortization of capitalized software amounts of $2,229,000 and $2,068,000, respectively. The non-cash amounts impacted fiscal 2023 and 2022 margins by 16% and 17%, respectively. The company expects SaaS margins will expand as it implements new clients. Certain expenses included in cost of SaaS, such as labor and third-party content providers, negatively impact gross margin before a client is fully implemented and revenue is recognized.
Cost of maintenance and support - The cost of maintenance and support includes compensation and benefits for client support personnel required to provide product support for clients on our CDI and Abstracting software licenses. This cost decreased by approximately $62,000 related to staff augmentation for client support personnel in fiscal 2023 compared to fiscal 2022. The Company continuously analyzes the allocation of its support resources and adjusts their alignment accordingly as the Company shifts away from license-based software to its flagship SaaS products. The cost of maintenance and support decreased by $77,000 in fiscal 2023 compared to fiscal 2022 as a result of reduced royalties related to third party components of our CDI and Abstracting software. As clients move to other solutions, we expect these costs to continue to decline. The Company expects the overall cost of maintenance and support to remain relatively flat in fiscal 2024 compared to fiscal 2023.
Cost of professional fees and licenses - The cost of professional fees and licenses includes the cost of software licenses, the cost of professional services and the cost of audit and coding services. The aggregate cost of professional fees and licenses was $4,165,000 and $6,610,000 for fiscal 2023 and fiscal 2022 respectively. The decrease in cost of professional fees and licenses was attributable to a reduction of personnel, contractors, and expenses related to a significant consulting-based client contract that was terminated in the fourth quarter of fiscal 2022 which led to a decrease of $2,461,000 in employee, staff augmentation and related expenses for fiscal 2023 as compared to fiscal 2022. In fiscal 2023, slight increases related to the cost of providing audit services with compensation and benefits for internal audit services personnel, and related expenses resulted in total increased costs of $163,000, while outside contracting decreased by $57,000 as compared to fiscal 2022. This cost shift reflects a move from contract labor to employee labor to provide better service to our audit services clients.
Software license costs decreased $121,000 from fiscal 2022 to fiscal 2023 as a result of lower amortization of development costs associated with the Company’s Coding and CDI product. The Company expects the remaining capitalized Coding and CDI software license costs to be fully amortized by the end of fiscal 2024.
The gross margin on professional fees and licenses revenue decreased in fiscal 2023 as compared to fiscal 2022 primarily due to the 48% decrease in related revenue including the high margin software license revenue.
Selling, General and Administrative Expense
Fiscal Year 2023 to 2022 Change
(in thousands): $ %
General and administrative expenses $ 9,841 $ 10,718 $ (877 ) (8 )%
Sales and marketing expenses 4,869 5,565 (696 ) (13 )%
Total selling, general, and administrative expense $ 14,710 $ 16,283 $ (1,573 ) (10 )%
General and administrative expenses comprise various costs including compensation and associated benefits, reimbursable travel and entertainment expenses related to our executive and administrative staff, general corporate expenditures, amortization of intangible assets, and occupancy costs. For fiscal 2023, the decrease of $877,000 as compared to fiscal 2022 was primarily attributable to a reduction of $222,000 in employee compensation and related benefits, a $211,000 decrease in amortization costs, a $199,000 decrease in rent expense, and a $189,000 decrease in bad debt expenses as compared to fiscal 2022.
In alignment with the Company’s strategic plan to streamline operations, these expenses are strategically managed to support sustainable growth, enhanced profitability, and improved cash flows. Additionally, recent adjustments in response to the loss of a major customer underscore our commitment to adaptability and resilience in challenging market conditions. This comprehensive approach reflects our commitment to simplifying our business operations while pursuing our overarching objectives.
Sales and marketing expenses primarily encompass compensation, associated benefits, travel and entertainment costs for our sales and marketing personnel. Additionally, sales and marketing expenses include costs from third parties related to advertising, marketing and trade show attendance. In fiscal 2023, sales and marketing expenses decreased by $696,000 compared to fiscal 2022. The decline in sales and marketing expense was comprised of a reduction in overall staff augmentation and other related expenses of approximately $472,000 and a reduction of $182,000 related to trade shows and various other marketing services in fiscal 2023 as compared to fiscal 2022.
For fiscal 2024, the Company expects increased expenses related to trade show participation and travel.
Research and Development
Fiscal Year 2023 to 2022 Change
(in thousands): $ %
Research and development expense $ 5,704 $ 6,042 $ (338 ) (6 )%
Capitalized research and development cost 1,697 2,019 (322 ) (16 )%
Research and development expenses consist primarily of employee 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. Total research and development expense and capitalized research and development expense for fiscal 2023 were $5,704,000 and $1,697,000, respectively. The $338,000 decrease in research and development expense was driven by decreases of $529,000 for employee compensation and related benefits and a decrease of $150,000 in independent contractor expense for fiscal 2023 compared to fiscal 2022. The decrease in employee and independent contractor expenses drove a reduction of capitalized research and development cost of $322,000 in fiscal 2023 as compared to fiscal 2022. The Company continues to focus research and development activities on eValuator and RevID, its flagship SaaS solutions.
For fiscal 2023 and fiscal 2022, as a percentage of revenue, total research and development costs were approximately 23% and 25%, respectively. In fiscal 2023, the Company was awarded $61,000 from the State of Georgia for its annual research and development tax credit. At the end of fiscal 2023, the cumulative balance of unused research and development credits was $149,000. These research and development tax credits can be applied to current Georgia payroll taxes due.
Impairment of Goodwill
In the third quarter of fiscal 2023, the Company tested the reporting unit’s goodwill for possible impairment as of October 31, 2023. Refer to Note 6 - Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information on the goodwill impairment testing.
The Company concluded that goodwill was impaired based on the weighted combination of the discounted debt-free net cash flow and the market capitalization method value estimates which resulted in a calculated fair value lower than its carrying value. The Company recorded an impairment of goodwill in the amount of $9,813,000 for fiscal 2023, with no goodwill impairments reported in fiscal 2022.
Impairment of long-lived assets
Intangible assets consist of the following:
January 31, 2024
Estimated Useful Life Gross Assets Accumulated Amortization Net Assets
Finite-lived assets:
Client relationships 10 years $ 8,370,000 $ 2,058,000 $ 6,312,000
Internally developed software 9 years 6,380,000 1,742,000 $ 4,638,000
Trademarks and tradenames 15 years 1,340,000 219,000 $ 1,121,000
Total
$ 16,090,000 $ 4,019,000 $ 12,071,000
As mentioned above, in the third quarter of fiscal 2023, the Company tested long-lived assets, including intangible assets, for recoverability that, if failed, would indicate impairment as of October 31, 2023. The Company, in reviewing long-lived assets to define asset group(s), identified an abandoned asset. A separate long-lived asset for “client relationships” related to the Avelead acquisition was no longer going to be used following the Company’s determination that these services were not part of its core offerings going forward and was classified as abandoned (the “Abandoned Asset”). The Company adjusted the Abandoned Asset’s carrying value to its salvage value which would be zero given no future cash flows. In fiscal 2023, the Company recorded $963,000 for the impairment of the Abandoned Asset with no other long-lived impairments reported in fiscal 2022. The Company wrote-off the Abandoned Asset during fiscal 2023 with a gross asset value of $1,330,000. There was no impact to the consolidated statements of operations as this eliminated the asset and accumulated amortization of the fully amortized intangible assets.
Refer to Note 6 - Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information on the long-lived asset impairment testing.
Other (Expense) income
Fiscal Year 2023 to 2022 Change
(in thousands): $ %
Interest expense $ (1,071 ) $ (749 ) $ (322 ) 43 %
Acquisition earnout valuation adjustments 1,944 1,873 2638 %
Other (170 ) (85 )%
Total other (expense) income $ 904 $ (477 ) $ 1,381 (290 )%
Interest expense consists of interest associated with the term loan and the revolving line of credit, deferred financing costs, less interest related to capitalization of software. Interest expense increased in fiscal 2023 from the prior year period primarily due to the $10,000,000 term loan with Western Alliance Bank (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 higher interest rates. Further, interest rates increased at an accelerated pace in fiscal 2023. The Board of Governors of the Federal Reserve (the “Federal Reserve”) has been reacting to inflation through interest rate increases. Recent interest rate increases are expected to continue at a slower pace than that experienced in fiscal 2023. Until such time as the Federal Reserve begins to decrease interest rates, the Company expects increased interest expense (year-over-year) for fiscal 2024.
Acquisition earnout valuation adjustments for fiscal 2023 include a valuation adjustment of $1,944,000 compared to an adjustment of $71,000 for fiscal 2022. The valuation adjustment is related to the acquisition earnout liabilities associated with the Avelead acquisition (Refer to Note 3 - Business Combination of the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”).
Other income for fiscal 2023 and fiscal 2022 primarily includes income related to the sublease of the Alpharetta location (Refer to Note 4 - Operating Leases).
Provision for Income Taxes
For fiscal 2023 and fiscal 2022, we recorded income tax benefit of $46,000 and tax expense of $71,000, respectively, which is comprised of estimated federal, state, and local income tax provisions. The Company has a substantial amount of net operating losses for federal and state income tax purposes. The Company recorded an increase to the federal income tax valuation allowance in each of fiscal 2023 and fiscal 2022 of approximately $4.0 and $2.0 million, respectively, which offset related tax benefits for operating losses.
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, and Adjusted EBITDA Margin.
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 us, may differ from and may not be comparable to similarly titled measures used by other companies.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
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, share-based compensation expense, transaction related expenses, and other expenses or benefits that do not relate to our core operations such as severance and impairment charges and debt forgiveness; and (iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net revenue. EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin 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.
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 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, and Adjusted EBITDA Margin, 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 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 for the fiscal years ended January 31, 2024 and 2023 (amounts in thousands). All of the items included in the reconciliation from EBITDA and Adjusted EBITDA to net loss 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)
Adjusted EBITDA Reconciliation
Net loss
$ (18,697 ) $ (11,379 )
Interest expense 1,071
Income tax expense (benefit) (46 )
Depreciation and amortization 4,229 4,233
EBITDA (13,443 ) (6,326 )
Share-based compensation expense 2,102 1,680
Impairment of goodwill 9,813 -
Impairment of long-lived assets -
Non-cash valuation adjustments (1,944 ) (71 )
Acquisition-related costs, severance, and transaction-related bonuses 1,149
Other non-recurring expenses (33 ) (189 )
Restructuring charges -
Adjusted EBITDA $ (1,386 ) $ (3,757 )
Adjusted EBITDA margin (1) (6 )% (15 )%
(1) Adjusted EBITDA as a percentage of GAAP net revenues.
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 clients on a perpetual model utilize our support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees include support and maintenance. The Company also derives revenue from professional services that support the implementation, configuration, training and optimization of the applications, as well as audit and consulting services The Company recognizes revenue to depict the transfer of promised goods or services to clients 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 client. 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 clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria. Certain contracts may include aspects of variable consideration as it relates to performance guarantees and service level agreements. Significant judgment is required to determine the standalone selling price (“SSP”) for each performance obligation, impact of variable consideration on total contract price, 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. The Company recognizes revenue for implementation for certain of its eValuator SaaS solution over the contract term, as it has been determined that those implementation services are not a distinct performance obligation. Services for other SaaS and Software solutions such as CDI, RevID and Compare, have been determined as a distinct performance obligation. For these agreements, 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, software as a service 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.
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 clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is included in cost of professional fees and licenses 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 four 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, Unibased Systems Architecture, Inc. (“Unibased”), and Avelead. Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally-developed software, client 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 15 years, using the straight-line method.
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.
The Company completed its annual goodwill assessment for fiscal 2023 as of October 31, 2023. We used a weighted sum of income and market approaches to determine the fair value of the Company’s goodwill. Under the income approach, the fair value was based on the present value of the estimated debt-free, discounted cash flows that the reporting unit is expected to generate. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate was based on the weighted average cost of capital appropriate for the Company.
In the third quarter of fiscal 2023, the Company received a notice from a significant SaaS client of its intent not to renew its contract following the expiration of the current term on December 31, 2023. The Company also announced it was accelerating the Strategic Restructuring to reduce costs while continuing the Company’s focus on expanding its SaaS operations. These announcements triggered a significant decrease in the Company’s share price. Based on these factors, we determined there were indicators that the goodwill may be impaired, and accordingly, performed an interim goodwill impairment test as of October 31, 2023. The results of the impairment test showed the fair value of the reporting unit was lower than the carrying value, resulting in a $9.8 million goodwill impairment charge. As of January 31, 2024, no further impairment was required for goodwill. The remaining goodwill balance of the Company after recording the goodwill impairment charge is $13.3 million.
Also, during the third quarter of fiscal 2023, due to the factors discussed above, we assessed whether the carrying amounts of the Company’s long-lived assets may not be recoverable and, therefore, impaired. Our assessment resulted in an impairment charge of $1.0 million, primarily attributable to client relationships related to a subset of consulting related services the Company expects will not be a core part of its business going forward. The impairment charge was calculated using the asset’s salvage value as it was considered no longer held for use.
The fair value of our reporting unit and intangible assets is subjective in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions. If we do not achieve our forecasts or the Company’s share price declines further, it is possible the goodwill of the Company could be deemed to be impaired again in a future period.
The risks and potential impacts on the fair value of our goodwill and long-lived assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors”.
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
Overview
The Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company’s primary cash requirements include regular payment of payroll and other business expenses, principal and interest payments on debt and 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, 2024 and 2023 were $3,190,000 and $6,598,000, respectively.
Capital Raise
Registered Direct Offering
On October 24, 2022, the Company entered into purchase agreements with certain investors pursuant to which the Company agreed to issue and sell in a registered direct offering (the “2022 Offering”) an aggregate of 6,299,989 shares of common stock, par value $0.01 per share, at a purchase price of $1.32 per share. The gross proceeds to the Company from the 2022 Offering were approximately $8,316,000. The Company intends to use the proceeds of the 2022 Offering for general corporate purposes. The 2022 Offering closed on October 26, 2022.
Debt Private Placement
On February 1, 2024, the Company entered into a securities purchase agreement with certain accredited investors, including certain directors and officers of the Company, pursuant to which the Company agreed to sell to the investors unsecured subordinated promissory notes in the aggregate principal amount of $4.4 million and warrants to purchase up to an aggregate of 4,052,631 shares of the Company’s common stock in a private placement (the “Debt Private Placement”). The closing of the Debt Private Placement occurred on February 7, 2024. Refer to Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Debt Private Placement.
Common Stock Private Placement
On February 6, 2024, the Company completed the sale of 263,158 shares of the Company’s common stock to an accredited investor at a purchase price of $0.38 per share for an aggregate purchase price of $100,000 (the “Common Stock Private Placement”). Refer to Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Common Stock Private Placement.
Authorized Shares Amendment
At the 2022 Annual Meeting of Stockholders (the “2022 Annual Meeting”) held on June 7, 2022, the Company’s stockholders approved an amendment to the Streamline Health Solutions, Inc. Third Amended and Restated 2013 Plan (the “2013 Plan”) to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 2,000,000 shares, from 8,223,246 shares to 10,223,246 shares. The Company’s stockholders also approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the total number of authorized shares of the Company’s common stock from 65,000,000 shares to 85,000,000 shares.
At the 2023 Annual Meeting of Stockholders (the “2023 Annual Meeting”) held on June 15, 2023, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 1,000,000 shares, from 10,223,246 shares to 11,223,246 shares.
Credit Facility
The Company has liquidity through the Loan Agreement with Western Alliance Bank (“WAB”). On November 29, 2022, the Company executed the Second Modification (the “Second Modification”) to the Loan Agreement which expanded the Company’s total borrowing to include a $2,000,000 revolving line of credit. The revolving line of credit is co-terminus with the term loan portion of the Loan Agreement and matures on August 26, 2026. There are no requirements to draw on the line of credit. Amounts outstanding under the line of credit portion of the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The Second Modification also amended certain financial covenants under the Loan Agreement. Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Loan Agreement and the Second Modification. At January 31, 2024, there was a $1,500,000 outstanding balance on the revolving line of credit.
Under the Loan Agreement, the Company has a term loan facility with an initial, maximum, principal amount of $10,000,000. Amounts outstanding under the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%.
The Second Modification includes customary financial covenants as follows:
a. Minimum Cash. Borrowers shall, at all times, maintain unrestricted cash in an amount not less than Two Million Dollars ($2,000,000).
b. Maximum Debt to ARR Ratio. Borrowers’ Maximum Debt to ARR Ratio, measured on a quarterly basis as of the last day of each fiscal quarter, shall not be greater than the amount set forth under the heading “Maximum Debt to ARR Ratio” as of, and for each of the dates appearing adjacent to such “Maximum Debt to ARR Ratio”.
Quarter Ending
Maximum Debt to
ARR Ratio
October 31, 2022
0.80 to 1.00
January 31, 2023
0.70 to 1.00
April 30, 2023
0.65 to 1.00
July 31, 2023
0.60 to 1.00
October 31, 2023
0.55 to 1.00
January 31, 2024
0.55 to 1.00
c. Maximum Debt to Adjusted EBITDA Ratio. Commencing with the quarter ending April 30, 2024, Borrowers’ Maximum Debt to Adjusted EBITDA Ratio, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended, shall not be greater than the amount set forth under the heading “Maximum Debt to Adjusted EBITDA Ratio” as of, and for each of the dates appearing adjacent to such “Maximum Debt to Adjusted EBITDA Ratio”.
Quarter Ending
Maximum Debt to Adjusted EBITDA Ratio
April 30, 2024
3.50 to 1.00
July 31, 2024, and on the last day of each quarter, thereafter
2.00 to 1.00
d. Fixed Charge Coverage Ratio. Commencing with the quarter ending April 30, 2024, Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended.
The Loan Agreement includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments, and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default. The line of credit is also subject to customary prepayment requirements. For the period ended January 31, 2024, the Company was not in compliance with the Maximum Debt to ARR Ratio covenant under the Loan Agreement; however, on February 7, 2024, the Company received a waiver from WAB in connection with the execution of the Third Modification (as defined below). Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information.
On February 7, 2024, the Company executed the Third Modification and Waiver (the “Third Modification”) to the Loan Agreement. Refer to Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Third Modification.
Significant cash obligations
As of January, 31
(in thousands)
Term loan (1) $ 9,066 $ 9,714
(1) Term loan balance is reported net of unamortized deferred financing costs of $69,000 and $105,000 plus accrued financing costs payable of $135,000 and $69,000 each as of January 31, 2024 and 2023, 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. The term loan balance as of January 31, 2024 and January 31, 2023 was bank term debt.
Operating cash flow activities
Fiscal Year
(in thousands)
Net loss $ (18,697 ) $ (11,379 )
Non-cash adjustments to net loss 15,151 6,120
Cash impact of changes in assets and liabilities 1,331 (1,884 )
Net cash used in operating activities $ (2,215 ) $ (7,143 )
The Company had a higher net loss from operations and higher non-cash adjustments to net loss primarily due to higher rates of amortization and goodwill and intangible impairments than fiscal 2023. The Company’s accounts receivable was significantly lower in fiscal 2023 as compared to fiscal 2022 primarily due to the timing of collection on certain annual invoices.
Investing cash flow activities
Fiscal Year
(in thousands)
Purchases of property and equipment (54 ) (10 )
Capitalized software development costs (1,567 ) (1,924 )
Net cash used in investing activities $ (1,621 ) $ (1,934 )
The cash used in investing activities for fiscal 2023 and fiscal 2022 includes capitalized software development costs. The Company expects continued capitalizable projects associated with the Company’s flagship products; however, the rate of capitalization may temporarily remain constant or decrease as a result of the 2023 Restructuring.
Financing cash flow activities
Fiscal Year
(in thousands)
Proceeds from issuance of common stock $ - $ 8,316
Proceeds from line of credit 1,500 -
Payments of acquisition earnout liabilities - (2,012 )
Payments for costs directly attributable to the issuance of common stock - (52 )
Repayment of bank term loan (750 ) (250 )
Proceeds from term loan payable - -
Payments related to settlement of employee shared-based awards (280 ) (197 )
Payment of deferred financing costs (44 ) (20 )
Other
Net cash provided by financing activities $ 428 $ 5,791
The cash provided by financing activities for fiscal 2023 was primarily attributable to draws on the line of credit offset by the principal payments on the term loan. Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information. The $44,000 of deferred financing costs payments are related to the debt private financing as further described in Note 14 - Subsequent to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
The cash provided by financing activities for fiscal 2022 was primarily attributable to the 2022 Offering of the Company’s common stock, which closed on October 26, 2022, offset by earnout payments related to the Avelead acquisition. Refer to Note 8 - Equity to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information on the 2022 Offering.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at January 31, 2024 and 2023
Consolidated Statements of Operations for the two years ended January 31, 2024
Consolidated Statements of Changes in Stockholders’ Equity for the two years ended January 31, 2024
Consolidated Statements of Cash Flows for the two years ended January 31, 2024
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
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 of
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 subsidiaries (the “Company”) as of January 31, 2024 and 2023, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended January 31, 2024, and the related notes and financial statement schedule II (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2024 and 2023, and the results of their operations and their cash flows for each of the years in the two-year period ended January 31, 2024, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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 include 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.
Critical Audit Matter - Capitalized Software Development Costs
As described in Note 2 to the financial statements, the Company develops internal-use software within the scope of ASC 350-40, Internal-Use Software (“Topic 350”). Costs associated with the preliminary stages of development are classified as research and development costs and expensed as incurred. Costs associated with the application development stage are capitalized. Maintenance and enhancement costs, including costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements that result in added functionality, in which case the costs are capitalized. Capitalized amounts are amortized on a straight-line basis over the estimated useful life of the software.
We identified capitalized internal-use 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.
The primary procedures we performed to address this critical audit matter included:
● Obtained an understanding of the Company’s process for determining the activities and costs that qualify for capitalization.
● 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:
○ Assessed the eligibility of costs for capitalization, in accordance with applicable guidance, and whether such costs were incurred during the application development stage.
○ Recalculated the capitalized amount based on hours incurred for direct payroll related costs or associated vendor contracts and invoices for work performed by third parties.
○ Evaluated the software implementation timelines supporting the capitalization periods for implementation and development as well as the dates software was placed in service.
○ Inquired of product managers and software engineers for significant projects to assess the nature of the costs and the time devoted to capitalizable activities.
Critical Audit Matter - Goodwill Impairment Assessment
As described in Notes 2 and 6 to the financial statements, based on triggering events, the Company identified indicators of possible impairment and initiated testing using a valuation date of October 31, 2023. The testing for impairment was performed under the guidance of ASC 350, Intangibles - Goodwill and Other (“Topic 350”). The Company recorded an impairment of goodwill in the amount of $9,813,000.
In analyzing goodwill for potential impairment in the quantitative impairment test, the Company uses a combination of the income and market approaches to estimate the fair value of the Company’s equity. Under the income approach, the Company calculates the fair value based on discounted estimated future cash flows. Under the market approach, the Company estimates the fair value based on the total number of shares outstanding and the current market price of the shares as of the valuation date with a control premium applied.
We identified the quantitative impairment test of goodwill as a critical audit matter. Our principal considerations for that determination included the judgment involved in assessing management’s impairment test of goodwill due to the measurement uncertainty involved in determining the fair value of equity of the reporting unit. In particular, the fair value estimate under the income approach is sensitive to changes in assumptions such as discount rates and expected future cash flows.
The primary procedures we performed to address this critical audit matter included:
● Obtained an understanding of management’s process for assessing goodwill impairment and performing the quantitative goodwill impairment test, including management’s process for developing assumptions used in the income and market approaches to estimate the fair value of equity.
● Evaluated management’s revenue growth rates, margins, and cash flows against current industry and economic trends, while also considering the current and future business, customer base, and product mix.
● Assessed revenue growth and margins by comparing past projections to actual performance.
● With the assistance of our valuation professionals with specialized skills and knowledge, we evaluated the (1) valuation methodology, (2) discount rate, and (3) long-term revenue growth rate used in the income approach to estimate the fair value.
● Tested management’s reconciliation of the fair value of equity to the market capitalization of the Company.
● Evaluated developments in the Company’s business from the third quarter of fiscal 2023, the period in which the impairment charge was recorded, through January 31, 2024 to determine if events or circumstances have occurred that would more likely than not further reduce the fair value of the business.
/s/ FORVIS, LLP
We have served as the Company’s auditor since 2019.
Atlanta, Georgia
April 30, 2024
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(rounded to the nearest thousand dollars, except share and per share information)
January 31,
ASSETS
Current assets:
Cash and cash equivalents $ 3,190,000 $ 6,598,000
Accounts receivable, net of allowance for credit losses of $86,000 and $132,000, respectively 4,237,000 7,719,000
Contract receivables 780,000 960,000
Prepaid and other current assets 629,000 710,000
Total current assets 8,836,000 15,987,000
Non-current assets:
Property and equipment, net of accumulated amortization of $291,000 and $246,000 respectively 88,000 79,000
Right-of use asset for operating lease - 32,000
Capitalized software development costs, net of accumulated amortization of $7,960,000 and $6,224,000, respectively 5,798,000 5,846,000
Intangible assets, net of accumulated amortization of $4,019,000 and $2,627,000, respectively 12,071,000 14,793,000
Goodwill 13,276,000 23,089,000
Other 1,666,000 1,695,000
Total non-current assets 32,899,000 45,534,000
Total assets $ 41,735,000 $ 61,521,000
See accompanying notes to consolidated financial statements.
January 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 1,253,000 $ 626,000
Accrued expenses 2,023,000 3,265,000
Current portion of term loan 1,500,000 750,000
Deferred revenues 7,112,000 8,361,000
Operating lease obligations - 35,000
Acquisition earnout liability 1,794,000 3,738,000
Total current liabilities 13,682,000 16,775,000
Non-current liabilities:
Term loan, net of deferred financing costs 7,566,000 8,964,000
Line of credit 1,500,000 -
Deferred revenues, less current portion 173,000 167,000
Other non-current liabilities - 104,000
Total non-current liabilities 9,239,000 9,235,000
Total liabilities 22,921,000 26,010,000
Commitments and contingencies - Note 12 -
Stockholders’ equity
Common stock, $0.01 par value per share, 85,000,000 shares authorized; 58,945,498 and 57,567,210 shares issued and outstanding, respectively 590,000 576,000
Additional paid in capital 133,923,000 131,973,000
Accumulated deficit (115,699,000 ) (97,038,000 )
Total stockholders’ equity 18,814,000 35,511,000
Total liabilities and stockholders’ equity $ 41,735,000 $ 61,521,000
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(rounded to the nearest thousand dollars, except share and per share information)
Fiscal Year
Revenues:
Software as a service $ 14,075,000 $ 12,326,000
Maintenance and support 4,318,000 4,483,000
Professional fees and licenses 4,203,000 8,080,000
Total revenues 22,596,000 24,889,000
Operating expenses:
Cost of software as a service 6,573,000 6,358,000
Cost of maintenance and support 315,000 427,000
Cost of professional fees and licenses 4,165,000 6,610,000
Selling, general and administrative expense 14,710,000 16,283,000
Research and development 5,704,000 6,042,000
Impairment of goodwill 9,813,000 -
Impairment of long-lived assets 963,000 -
Total operating expenses 42,243,000 35,720,000
Operating loss (19,647,000 ) (10,831,000 )
Other income (expense):
Interest expense (1,071,000 ) (749,000 )
Acquisition earnout valuation adjustments 1,944,000 71,000
Other 31,000 201,000
Loss before income taxes (18,743,000 ) (11,308,000 )
Income tax benefit (expense) 46,000 (71,000 )
Net loss $ (18,697,000 ) $ (11,379,000 )
Basic and Diluted Earnings Per Share $ (0.33 ) $ (0.23 )
Weighted average number of common shares - basic and diluted 56,510,419 49,324,858
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(rounded to the nearest thousand dollars, except share information)
Common
stock
Common Additional
paid in
Accumulated Total
stockholders’
shares stock capital deficit equity
Balance at January 31, 2022 47,840,950 478,000 119,225,000 (85,659,000 ) 34,044,000
Exercise of stock options 5,000 - 6,000 - 6,000
Restricted stock issued 1,876,962 19,000 (19,000 ) - -
Issuance of common stock 8,171,027 82,000 11,246,000 - 11,328,000
Offering expenses - - (52,000 ) - (52,000 )
Restricted stock forfeited (199,300 ) (2,000 ) 2,000 - -
Surrender of stock (127,429 ) (1,000 ) (196,000 ) - (197,000 )
Share-based compensation expense - - 1,761,000 - 1,761,000
Net loss - - - (11,379,000 ) (11,379,000 )
Balance at January 31, 2023 57,567,210 $ 576,000 $ 131,973,000 $ (97,038,000 ) $ 35,511,000
Balance 57,567,210 $ 576,000 $ 131,973,000 $ (97,038,000 ) $ 35,511,000
Restricted stock issued 1,947,738 20,000 (20,000 ) - -
Restricted stock forfeited (378,500 ) (4,000 ) 4,000 - -
Surrender of stock (190,950 ) (2,000 ) (278,000 ) - (280,000 )
Adoption of ASU 2016-13 - - - 36,000 36,000
Share-based compensation expense - - 2,244,000 - 2,244,000
Net loss - - - (18,697,000 ) (18,697,000 )
Balance at January 31, 2024 58,945,498 $ 590,000 $ 133,923,000 $ (115,699,000 ) $ 18,814,000
Balance 58,945,498 $ 590,000 $ 133,923,000 $ (115,699,000 ) $ 18,814,000
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(rounded to the nearest thousand dollars)
Fiscal Year
Cash flows from operating activities:
Net loss $ (18,697,000 ) $ (11,379,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,331,000 4,313,000
Acquisition earnout valuation adjustments (1,944,000 ) (71,000 )
Provision for deferred income taxes (104,000 ) 9,000
Share-based compensation expense 2,102,000 1,680,000
Impairment of goodwill 9,813,000 -
Impairment of long-lived assets 963,000 -
Provision for credit losses (10,000 ) 189,000
Changes in assets and liabilities:
Accounts and contract receivables 3,708,000 (4,202,000 )
Other assets (401,000 ) (1,197,000 )
Accounts payable 544,000 (152,000 )
Accrued expenses and other liabilities (1,277,000 ) 1,069,000
Deferred revenues (1,243,000 ) 2,598,000
Net cash used in operating activities (2,215,000 ) (7,143,000 )
Cash flows from investing activities:
Purchases of property and equipment (54,000 ) (10,000 )
Capitalization of software development costs (1,567,000 ) (1,925,000 )
Net cash used in investing activities (1,621,000 ) (1,935,000 )
Cash flows from financing activities:
Proceeds from issuance of common stock - 8,316,000
Payment of acquisition earnout liabilities - (2,012,000 )
Payments for costs directly attributable to the issuance of common stock - (52,000 )
Repayment of bank term loan (750,000 ) (250,000 )
Proceeds from line of credit 1,500,000 -
Payments related to settlement of employee shared-based awards (280,000 ) (197,000 )
Payment of deferred financing costs (44,000 ) (20,000 )
Other 2,000 6,000
Net cash provided by financing activities 428,000 5,791,000
Net decrease in cash and cash equivalents (3,408,000 ) (3,287,000 )
Cash and cash equivalents at beginning of period 6,598,000 9,885,000
Cash and cash equivalents at end of period $ 3,190,000 $ 6,598,000
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized $ 989,000 $ 651,000
Income taxes paid $ 66,000 $ 23,000
See accompanying notes to consolidated financial statements.
STREAMLINE HEALTH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2024 and 2023
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Streamline Health Solutions, Inc. and each of its wholly-owned subsidiaries, Streamline Health, LLC, Avelead Consulting, LLC, Streamline Consulting Solutions, LLC and Streamline Pay & Benefits, LLC, (collectively, unless the context requires otherwise, “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, RevID, 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 clients optimize their internal clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions. The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and Canada to capture, store, manage, route, retrieve and process patient clinical, financial and other healthcare provider information related to the patient revenue cycle.
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 subsidiaries, Streamline Health, LLC, Avelead Consulting, LLC, Streamline Consulting Solutions, LLC and Streamline Pay & Benefits, LLC. 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 has determined it has only one operating segment based on the guidance of ASC 280-10-50 paragraphs 1 through 8, The Company has a sole chief operating decision maker who reviews a single set of financials, information, has accountability for the performance of the organization, and allocates resources to drive success.
For fiscal 2022, the Company had two reporting units for evaluation of goodwill: Streamline Solutions and Avelead Solutions. The Company determined that, effective January 1, 2023, it has one reporting unit for purposes of evaluation of goodwill, which was used for evaluation of goodwill for fiscal 2023. At the end of fiscal 2022, the Company consolidated and combined its operations for Streamline Solutions and Avelead Solutions. For total assets at January 31, 2024 and 2023 and total revenue and net loss for the fiscal years ended January 31, 2024 and 2023, see our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” herein.
Going Concern
The Company’s financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business.
In the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2023, the Company raised substantial doubt about its ability to continue as a going concern. It cited the “ability to achieve cash from operations and raise additional debt or equity capital to fund its ongoing operations” as requirements to mitigate the substantial doubt. As of this filing, the Company has been able to successfully implement a cost reduction plan, obtain additional capital, and restructure the covenants for its existing credit facility. Collectively, these initiatives alleviated the substantial doubt about the Company’s ability to continue as a going concern. Refer to the “Restructuring” subtopic of this Note 1 (Organization and Description of Business) and Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information.
Reclassification
Certain amounts for fiscal 2022 were reclassified to conform to the current period classification. The Company incurred certain acquisition-related costs related to the acquisition of Avelead totaling $149,000 consisting primarily of professional service fees. The aforementioned acquisition-related costs for fiscal 2022 were previously presented in a separate, single caption and are now included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations, which is consistent with the presentation for the current period.
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 credit losses, contingent consideration and income taxes. Actual results could differ from those estimates.
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:
SCHEDULE OF NON-CASH ITEMS RELATED TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year
Payment of acquisition earnout liabilities in restricted common stock - 3,012,000
Capitalized software purchased with stock (See Note 12) 140,000 81,000
Deferred financing costs 83,000 -
Receivables
Accounts and contract receivables are comprised of amounts owed to the Company for licensed software, professional services, including coding audit services, consulting services, maintenance services, and software as a service and are presented net of the allowance for credit losses. The timing of revenue recognition may not coincide with the billing terms of the client contract, resulting in unbilled receivables or deferred revenues; therefore, certain contract receivables represent revenues recognized prior to client billings. Individual contract terms with clients 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 Credit Losses
The Company adjusts accounts receivable down to net realizable value. Effective February 1, 2023, the Company implemented ASC 326-10, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). CECL provides the framework for the Company to evaluate its allowance for credit losses. In determining the allowance for credit losses, the Company established a historical credit loss rate adjusted for a premium, addressing any prospective changes to the risk of credit loss, that is applied against current sales. The Company evaluates individual receivables based upon the most recent information available and the status of any open or unresolved issues with the client 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, significant judgement is required for the Company to determine the appropriate allowances for doubtful accounts for estimated losses resulting from the unwillingness of its clients or resellers to make required payments. The Company believes its reserve is adequate, however, results may differ in future periods.
The following table summarizes the changes to the allowance account with the adoption of CECL:
SCHEDULE OF RESERVE RESULTS IN FUTURE PERIODS
January 31, 2023 CECL Adoption Provision adjustments
Write-offs & Recoveries January 31, 2024
Allowance for credit losses $ 132,000 $ (36,000 ) $ (10,000 ) $ - $ 86,000
Accrued Expenses
Accrued expenses consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
January 31,
Employee benefits and related compensation $ 1,071,000 $ 2,079,000
Professional fees and services 389,000 294,000
Third party licenses 43,000 285,000
Customer concessions 233,000 226,000
State income and sales taxes payable 226,000 331,000
Interest, primarily on term loan 61,000 50,000
Total accrued expenses $ 2,023,000 $ 3,265,000
Concessions Accrual
The Company offers certain service level agreements within its client contracts such as uptime, support hours, and levels of support. Our contracts may include, and we may offer, credits to clients when these service line agreements are not met. The service level agreements are accounted for as variable consideration using a portfolio approach. As a result, we record an estimate of these concessions against our recorded revenue. In determining the concessions accrual, the Company evaluates historical concessions granted relative to revenue as well as future potential risk that these service level agreements will not be met. The Company records a provision, reducing revenue, for the estimated amount of concessions incurred on the revenue recorded. The Company evaluates the amount of the concession accrual each period for adequacy. Historically, concessions have not been significant. The concession accrual included in accrued expenses on the Company’s consolidated balance sheet was $233,000 and $226,000 as of January 31, 2024 and 2023, 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:
SCHEDULE OF ESTIMATED USEFUL LIFE OF PROPERTY AND EQUIPMENT
Computer equipment and software
3-4 years
Office equipment
years
Office furniture and fixtures
5-7 years
Leasehold improvements
Term of lease or estimated useful life, whichever is shorter
Depreciation expense for property and equipment in fiscal 2023 and 2022 was $45,000 and $54,000, 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 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. 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. Since our lease arrangements do not provide an implicit rate, we use our estimated incremental borrowing rate for the expected remaining lease term at commencement date in determining the present value of future lease payments. 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. Sublease income is recognized as other income over the period of the lease, as the sublease is outside of the Company’s normal business operations. See Note 4 - Operating Leases for further details.
Debt Issuance Costs
Cost related to the Second Amended and Restated Loan and Security Agreement (as amended and modified, the “Loan Agreement”) with Western Alliance Bank (“WAB”) was 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, and 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. For fiscal 2023, an impairment of long-lived assets in the amount of $963,000 was recorded. Refer to Note 6 - Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information.
Capitalized Software Development Costs
Software development costs for software to be sold, leased, or marketed are accounted for in accordance with ASC 985-20, Software - Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and design phase of software development are classified as research and development costs and are expensed as incurred. Once technological feasibility has been established, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is included in cost of professional fees and licenses on the consolidated statements of operations. Annual amortization is measured at the greater of (i) the ratio of the software product’s current gross revenues to the total of current and expected gross revenues or (ii) 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. Capitalized software development costs for software to be sold, leased, or marketed, net of accumulated amortization, totaled $287,000 and $522,000 as of January 31, 2024 and 2023, 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 four 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, totaled $5,511,000 and $5,324,000 as of January 31, 2024 and 2023, 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 was $2,463,000 and $2,423,000 in fiscal 2023 and 2022, respectively. Further, the Company recognized an impairment of approximately $18,000 and $0 in fiscal 2023 and fiscal 2022, respectively, related to cancelled or abandoned enhancement projects during fiscal 2023 and fiscal 2022 that have been recognized within amortization expense. Additionally, in fiscal 2023, entries of approximately $18,000 for fully amortized and abandoned assets were offset 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.
SCHEDULE OF AMORTIZATION EXPENSE FOR INTERNALLY DEVELOPED SOFTWARE
Fiscal Year
Amortization expense on internally-developed software included in:
Cost of software as a service $ 2,229,000 $ 2,068,000
Cost of professional fees and licenses 234,000 355,000
Total amortization expense on internally-developed software $ 2,463,000 $ 2,423,000
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 $5,704,000 and $6,042,000 in fiscal 2023 and 2022, 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 2023 and 2022, there were no transfers of assets or liabilities between Levels 1, 2, or 3.
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
SCHEDULE OF FAIR VALUE ASSETS AND LIABILITIES MEASURED ON RECURRING BASIS
Total Fair Quoted Prices in
Active Markets
Significant Other
Observable Inputs
Significant
Unobservable Inputs
Value (Level 1) (Level 2) (Level 3)
At January 31, 2024
Acquisition earnout liability (1) $ 1,794,000 $ - $ - $ 1,794,000
At January 31, 2023
Acquisition earnout liability (1) $ 3,738,000 $ - $ - $ 3,738,000
(1) The fair value of the acquisition earnout liability is based upon a probability-weighted discounted cash flow that was completed at the date of acquisition and updated as of January 31, 2024. The change in the fair value of the acquisition earnout liability decreased $1,944,000 for the year ended January 31, 2024, which is entirely recognized in “Acquisition earnout valuation adjustments” in the accompanying consolidated statement of operations.
The probability-weighted discounted cash flow is calculated using a Monte Carlo valuation method. The valuation model provides numerous outcomes. The outcomes are averaged and discounted to present value, which provides the current value point estimate. The significant inputs include our forecast of Avelead SaaS revenue, the probabilities associated with each of (i) a change in control or (ii) a certain client termination, as well as other normal and customary inputs to financial models, including but not limited to, risk factors and interest rates.
The fair value of the Company’s term loan under its Loan Agreement was determined through an analysis of the interest rate spread from the date of closing the loan (August 2021) to the date of the most recent balance sheets, January 31, 2024 and January 31, 2023. The term loan bears interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The prime rate is variable and, thus accommodates changes in the market interest rate. However, the interest rate spread (the 1.5% added to the Prime Rate) is fixed. We estimated the impact of the changes in the interest rate spread by analogizing the effect of the change in the Corporate bond rates, reduced for any changes in the market interest rate. This provided us with an estimated change to the interest rate spread of approximately 0.5% from the date we entered the debt agreement to January 31, 2024 and January 31, 2023. The fair value of the debt as of January 31, 2024 and January 31, 2023 was estimated to be $8,807,000 and $9,550,000, respectively, or a discount to book value of $193,000 and $200,000, respectively. The fair value of the line of credit as of January 31, 2024 was estimated to be $1,463,000, or a discount to book value of $37,000. The fair value of long-term debt was estimated using Level 2 inputs.
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 clients on a perpetual model utilize our support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees include support and maintenance. We also derive revenue from professional services that support the implementation, configuration, training and optimization of the applications, as well as audit services and consulting services.
We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Clients (“ASC 606”), under the core principle of recognizing revenue to depict the transfer of promised goods or services to clients 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 client
● 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 client. Revenue is recognized net of any taxes collected from clients and subsequently remitted to governmental authorities.
If we determine that we have not satisfied a performance obligation, we defer recognition of the revenue until the performance obligation is satisfied. Maintenance and support and SaaS agreements are generally non-cancellable or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria.
The transaction price is determined by summing all the consideration the Company expects to receive from the client under the contract. At times, a contract may have variable attributes (i.e., performance guarantees, service level agreements, optional terms) that the Company must consider when establishing the transaction price to mitigate significant revenue reversals for the contract. The determined transaction price is allocated based on the standalone selling price (“SSP”) of the performance obligations in contract. Significant judgment is required to determine the SSP for each performance obligation, inclusion of variable consideration, 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. The Company recognizes revenue for implementation of its eValuator SaaS solution over the contract term, as it has been determined that those implementation services are not a distinct performance obligation. Services for other SaaS and Software solutions such as CDI, RevID and Compare, have been determined as a distinct performance obligation. For these agreements, 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, software as a service and audit services based on observable standalone sales.
Contract Combination
The Company may execute more than one contract or agreement with a single client. 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.
Software Licenses
The Company’s software license arrangements provide the client with the right to use functional intellectual property. Implementation, support, and other services are typically considered distinct performance obligations when sold with a software license unless these services are determined to significantly modify the software. Revenue is recognized at a point in time. Typically, this is upon shipment of components or electronic download of software.
Maintenance and Support Services
Our maintenance and support obligations include multiple discrete performance obligations, with the two largest being unspecified product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe that the multiple discrete performance obligations within our overall maintenance and support obligations can be viewed as a single performance obligation since both the unspecified upgrades and technical support are activities to fulfill the maintenance performance obligation and are rendered concurrently. Maintenance and support agreements entitle clients to technology support, version upgrades, bug fixes and service packs. We recognize maintenance and support revenue over the contract term.
Software-Based Solution Professional Services
The Company provides various professional services to clients 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 a right to use of the Company’s platform and support which represent a single promise to provide continuous access to its software solutions. Implementation services for the Company’s eValuator product are included as part of the single promise for its respective contracts. The Company recognizes revenue for implementation of the eValuator product over the contract term as it is determined that the implementation on eValuator is not a distinct performance obligation. Implementation services for other SaaS products are deemed to be separate performance obligations that are recognized over time as the services are performed.
Audit Services
The Company provides technology-enabled coding audit services to help clients review and optimize their internal clinical documentation and coding functions across the applicable segment of the client’s enterprise. Audit services are a separate performance obligation. We recognize revenue 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:
SCHEDULE OF DISAGGREGATON OF REVENUE
Fiscal Year
Over time revenue $ 22,358,000 $ 23,670,000
Point in time revenue 238,000 1,219,000
Total revenue $ 22,596,000 $ 24,889,000
The Company includes revenue categories of (i) over time and (ii) point in time revenue. The Company includes revenue categories of (i) SaaS, (ii) maintenance and support, (iii) professional services, and (iv) audit services as over time revenue. For point in time revenue, the performance obligation is recognized as the point in time when the obligation is fully satisfied. The Company includes software licenses as point in time revenue.
Contract Assets and Deferred Revenues
The Company receives payments from clients 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 client. 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, 2024, we recognized approximately $7,642,000 in revenue from deferred revenues outstanding as of January 31, 2023. Revenue allocated to remaining performance obligations was $31,414,000 as of January 31, 2024, of which the Company expects to recognize approximately 46% 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, 2024, and 2023, we had deferred costs of $77,000 and $94,000, respectively, net of accumulated amortization of $102,000 and $176,000, respectively. Amortization expense of these costs was $82,000 and $83,000 in fiscal 2023 and 2022, respectively. There were no impairment losses for these capitalized costs for the fiscal 2023 and 2022. Additionally, in fiscal 2023, approximately $155,000 of fully amortized contracts were cleared from their corresponding capitalization and accumulated amortization balance sheet accounts, while no such adjustments were made in fiscal 2022.
Contract acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining a contract with a client. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line basis over the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been one year or less.
Deferred commissions costs paid and payable, which are included on the consolidated balance sheets within other non-current assets totaled $1,461,000 and $1,534,000, respectively, as of January 31, 2024 and 2023. In fiscal 2023 and 2022, amortization expense associated with deferred sales commissions was $588,000 and $411,000, respectively, and was included in selling, general and administrative expenses on the consolidated statements of operations. There were $35,000 and no impairment losses for these capitalized costs that was included with the amortization expense for fiscal 2023 and 2022.
Concentrations
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of accounts receivable. The Company’s accounts receivables are concentrated in the healthcare industry. However, the Company’s clients 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 clients 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 clients 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 clients and its remarketing partners.
Goodwill and Intangible Assets
Goodwill and other intangible assets were recognized in conjunction with the Avelead acquisition, and certain other acquisitions from fiscal 2013 and prior (prior to divestiture of such assets). Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally-developed software and client relationships. Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one to 15 years, using the straight-line method.
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. 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.
During the year ended January 31, 2023, the Company did not note any of the above qualitative factors, which would be considered a triggering event for goodwill impairment. During the year ended January 31, 2024, the Company identified one or more factors that triggered goodwill impairment as of October 31, 2023, as described below.
In the third quarter of fiscal 2023, the Company received a notice from a significant SaaS client of its intent not to renew its contract following the expiration of the current term on December 31, 2023. At that time, the Company elected to accelerate the execution of the 2023 Restructuring that was designed to reduce costs while maintaining the Company’s ability to expand its SaaS business. Both the client termination and the execution of the Strategic Restructuring were announced on October 16, 2023. Following these announcements, the Company’s share price declined significantly. Based on these events (collectively, the “Triggering Events”), the Company identified indicators of possible impairment and initiated testing using a valuation date of October 31, 2023. The impairment tests were conducted under guidance of ASC Topic 360, Impairment and Disposal of Long-Lived Assets (“ASC 360”) for certain long-lived assets, including capitalized contract costs, developed technology, client relationships and trade names, and in accordance with ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”) with respect to the reporting unit’s goodwill.
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 client for the products and services and the methods used to distribute the products and services). The Company determined that for fiscal 2023 it has one operating segment and one reporting unit, while for fiscal 2022 it had one operating segment and two reporting units.
The Company estimates the fair value of its reporting unit using a combination of the market approach and 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 units and goodwill includes significant judgment by management, and different judgments could yield different results.
The Company performed its annual goodwill assessment for fiscal 2023 as of October 31, 2023 using the approaches described above. The assessment identified a goodwill impairment of $9,813,000 that was recorded. Based on the analysis performed for fiscal 2022, the fair value of the reporting units exceeded the carrying amount of the reporting unit, including goodwill, and, therefore, a goodwill impairment loss was not recognized. Refer to Note 6 - Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information.
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 $2,102,000 in fiscal 2023, net of $140,000 of capitalized non-employee stock compensation, and $1,680,000 net of $81,000 of capitalized non-employee stock compensation, in fiscal 2022.
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. The Company recognizes forfeitures as they occur. 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 2023 and 2022, 190,950 and 127,429 shares of common stock were surrendered to the Company to satisfy tax withholding obligations totaling $280,000 and $197,000, 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 1,203,621 and 890,731 shares of restricted stock to its executive officers and directors of the Company in fiscal 2023 and 2022, 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. 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.
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, 2024, the Company believes it has appropriately accounted for any uncertain tax positions.
Net Earnings (Loss) Per Common Share
The Company presents basic and diluted earnings per share (“EPS”) data for our common stock.
Our 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. Diluted EPS for our common stock is computed using the treasury stock method.
The following is the calculation of the basic and diluted net loss per share of common stock:
SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK
Fiscal Year
Basic earnings (loss) per share:
Loss, net of tax $ (18,697,000 ) $ (11,379,000 )
Basic net loss per share of common stock $ (0.33 ) $ (0.23 )
Diluted earnings (loss) per share (1):
Loss available to common stockholders $ (18,697,000 ) $ (11,379,000 )
Diluted net loss per share of common stock $ (0.33 ) $ (0.23 )
Net loss $ (18,697,000 ) $ (11,379,000 )
Weighted average shares outstanding - Basic (1)(1) 56,510,419 49,324,858
Effect of dilutive securities - Stock options and Restricted stock (2)(2) - -
Weighted average shares outstanding - Diluted 56,510,419 49,324,858
Basic and diluted net loss per share of common stock $ (0.33 ) $ (0.23 )
(1) Excludes the effect of unvested restricted shares of common stock, which are considered non-participating securities. As of January 31, 2024 and 2023, there were 1,970,521 and 1,848,031 unvested restricted shares of common stock, respectively.
(2) Diluted net loss per share excludes the effect of shares that are anti-dilutive. As of January 31, 2024, there were 67,500 outstanding stock options and 1,970,521 unvested restricted shares of common stock. As of January 31, 2023, there were 628,598 outstanding stock options and 1,848,031 unvested restricted shares of common stock.
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.
Restructuring
On October 16, 2023, the Company announced it was executing a Strategic Restructuring designed to reduce expenses while maintaining the Company’s ability to expand its SaaS business. The Strategic Restructuring initiatives included a reduction in force, resulting in the termination of 26 employees, or approximately 24% of the Company’s workforce. To execute the Strategic Restructuring, the Company incurred one-time restructuring costs associated with the workforce reduction of approximately $759,000, and the Company has recognized all expenses associated with the Strategic Restructuring as of the end of fiscal 2023. The costs pertain to severance and other employee termination-related costs and various professional fees the Company required to assist with execution of the Strategic Restructuring. The following is a reconciliation of the Strategic Restructuring liability reflected on the Company’s condensed consolidated balance sheet under “Accrued expenses”.
SCHEDULE OF RECONCILIATION OF THE RESTRUCTURING LIABILITY
(in thousands)
Accrued
Accrued As of January 31, 2024
Balance as of January 31, 2023 2023 Expenses to Date 2023 Cash Payments Balance as of January 31, 2024 Total Costs Incurred to Date Total Expected Costs
Severance expense
Cost of sales $ - $ 154 $ 154 $ - $ 154 $ 154
Selling, general, and administrative - 350
Research and development - -
Total severance expense $ - $ 731 $ 657 $ 74 $ 731 $ 731
Professional fees - - $ 28
Total $ - $ 759 $ 685 $ 74 $ 759
Accounting Pronouncements Recently Adopted
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. The Company’s adoption of ASU 2016-13 was effective February 1, 2023. An analysis of contract receivables, including credit losses, was conducted during the first quarter of fiscal 2024. The adoption of this ASU did not have a material impact on our consolidated financial statements or disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves guidance around the disclosures about a public entity’s reportable segments and additional details about a reportable segment’s expenses. ASU 2023-07 is effective for all public entities for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company’s adoption of ASU 2023-07 will be effective in the annual report for the fiscal year ending January 31, 2025. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhance the transparency and decision usefulness of income tax disclosures. For public entities, ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements or disclosures.
NOTE 3 - BUSINESS COMBINATION
Avelead Acquisition
The Company acquired all of the equity interests of Avelead as part of the Company’s strategic expansion into the revenue cycle management, acute-care healthcare space (the “Transaction”). The Transaction was completed on August 16, 2021.
The aggregate consideration for the purchase of Avelead was approximately $29.7 million (at fair value) consisting of (i) $12.5 million in cash, net of cash acquired, (ii) $6.5 million in common stock, and (iii) approximately $10.7 million in contingent consideration (see below). The Company issued 5,021,972 shares of its restricted common stock (the “Acquisition Restricted Common Stock”). The Acquisition Restricted Common Stock had a fair value as of the closing date of the acquisition of $6.5 million. Additionally, the Transaction included two types of contingent consideration; the first is referred to herein as “SaaS Contingent Consideration” and the second is referred to herein as “Renewal Contingent Consideration.” The SaaS Contingent Consideration and Renewal Contingent Consideration had an aggregate value of approximately $10.7 million as of the date of closing. The owners of Avelead are also referred to herein as “Sellers” and are enumerated in the UPA (as defined below).
The Unit Purchase Agreement (hereafter referred to as the “UPA”), stated that the purchase price for Avelead at closing included a cash payment of $11.9 million. Additionally, the Company paid $285,000 of the Sellers’ closing costs, $285,000 related to the working capital adjustment as defined in the UPA. Finally, at closing, the Company issued the Acquisition Restricted Common Stock with a fair value of approximately $6.5 million, based on a 30-day average of the closing price of the Company’s common stock prior to the closing date. The SaaS Contingent Consideration and the Renewal Contingent Consideration described in more detail below were included in the UPA as potential future consideration for the Transaction. These are reflected on the Company’s consolidated balance sheet as “Acquisition earnout liability.”
The contingent consideration is comprised of “SaaS Contingent Consideration” and “Renewal Contingent Consideration” which are described in more detail as follows:
● The SaaS Contingent Consideration is calculated based upon Avelead’s recurring SaaS revenue recognized during the first and second year following the closing of the Transaction. The Company will pay the SaaS Contingent Consideration as follows: (i) 50% in cash and (ii) 50% in shares of Company common stock valued at the time the earnout is paid subject to a collar, as described below.
● The first year SaaS Contingent Consideration was calculated as 75% of Avelead’s recognized SaaS revenue from September 1, 2021 to August 31, 2022. The first-year payment was subject to a deduction of $665,000 spread equally between the cash and common stock portion of the earnout consideration. Assuming that Avelead was within 80% of its forecasted SaaS revenue in the first year earnout, the Company agreed to a floor and ceiling on the value of the Company’s restricted common stock issued as consideration for the earnout. That collar had a floor of $3.50 per share and a ceiling of $5.50 per share for the first year earnout. The first year SaaS Contingent Consideration was paid on November 21, 2022, as discussed in more detail below.
● The second year SaaS Contingent Consideration was calculated as 40% of Avelead’s recognized SaaS revenue from September 1, 2022 to August 31, 2023. Assuming that Avelead was within 80% of its forecasted SaaS revenue in the second year earnout, the Company agreed to a floor and ceiling on the Company’s restricted common stock issued as consideration for the earnout. That collar had a floor of $4.50 per share and a ceiling of $6.50 per share for the second year earnout. The second year SaaS Contingent Consideration remained outstanding as of January 31, 2024, as the Company and the Sellers work towards a resolution regarding the payment of the second year SaaS Contingent Consideration.
If Avelead does not achieve 80% of its forecasted revenue, the price per share will revert back to the Company’s market price based upon a 30-day average.
● The Renewal Contingent Consideration was tied directly to a successful renewal of a specific client of Avelead. To meet the definition of a renewal, Avelead was required to achieve a minimum threshold of contracted revenue in an updated, annual, renewed contract with the specified client. The renewal occurred on or about June 1, 2022 and June 1, 2023. The Renewal Contingent Consideration was payable in shares of Company restricted common stock valued as of the date of closing. The Renewal Contingent Consideration is either earned or not earned based upon the renewal of the specified client at the minimum amount of contracted revenue. There is no pro-ration of the underlying Renewal Contingent Consideration. On November 21, 2022, the Company issued 627,746 shares of restricted common stock to the Sellers in connection with the first year Renewal Contingent Consideration. The second year Renewal Contingent Consideration remained outstanding as of January 31, 2024, as the Company and the Sellers work towards a resolution regarding the payment of the second year Renewal Contingent Consideration.
On November 21, 2022, the Company made the first year earnout payments and issued shares of restricted common stock to the Sellers in accordance with the UPA. In connection with the first year earnout payment, the Company made an aggregate cash payment of $2,012,000 and issued 1,243,292 unregistered securities in the form of restricted common stock, par value $0.01 per share (“restricted common stock”), for the SaaS Contingent Consideration and issued 627,746 shares of restricted common stock for the Renewal Contingent Consideration. The estimated aggregate value of the first year earnout payment was $4,000,000 with respect to the SaaS Contingent Consideration and $1,000,000 with respect to the Renewal Contingent Consideration.
As of January 31, 2024, the Company has not made the second year earnout payments to the Sellers or issued shares of common stock in connection therewith. In connection with the second year earnout payment, the Company has estimated cash payments of $1,214,000 and will issue 961,640 shares of restricted common stock for the SaaS Contingent Consideration and 627,746 shares of restricted common stock for the Renewal Contingent Consideration. The estimated aggregate value of the second year earnout payment is $1,550,000 for the SaaS Contingent Consideration and $244,000 for the Renewal Contingent Consideration. The Company and the Sellers reached an agreement to defer the cash portion of the SaaS Contingent Consideration and Renewal Contingent Consideration payments over time through October 31, 2024. On March 27, 2024, the Company issued 961,640 shares of restricted common stock to the Sellers for the SaaS Contingent Consideration and 627,746 shares of restricted common stock for the Renewal Contingent Consideration. These liabilities are reflected at the fair value of the future commitment on the Company’s consolidated balance sheet, as Acquisition Earnout Liability.
The Company entered into an employment agreement and a separation agreement with each of the two Sellers. Acquisition-related costs include the cost of a two-year separation agreement with one of the Sellers. The separation agreement was expensed at the closing of the transaction as there were no material future obligations of the Seller to the Company within acquisition-related costs. The employment agreement with the other Seller had a two-year term and entitled the Seller to six-months separation pay in the event of termination without cause. The expense for the employment agreement is recognized ratably over the service period customary with other employment agreements within selling, general, and administrative expense. On September 1, 2023, the Company terminated the employment agreement. In exchange for a general release from the Seller, the Company agreed to accelerate the vesting of 150,000 outstanding and unvested shares of restricted common stock of the Company previously granted to the Seller, subject to such Seller’s non-revocation of a general release of claims against the Company.
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 and existing leases in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. The Company has moved to a virtual office model and does not have a physical office space. Membership agreements and daily space rentals are leveraged by the Company when groups need to meet in person with the costs expensed as incurred. As of January 31, 2024, the Company recorded $30,000 related to such space rentals.
Alpharetta Office Lease
The Company entered into a lease for office space in Alpharetta, Georgia, on March 1, 2020. The lease expired 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, 2023, operating lease right-of use assets totaled $32,000, and the associated lease liability of $35,000 is included in current liabilities. The Company used a discount rate of 6.5% to determine the lease liability. As of January 31, 2024 and 2023, the Company had lease operating costs of approximately $32,000 and $194,000, respectively. The Company paid cash of approximately $36,000 and $210,000 for the lease in fiscal 2023 and fiscal 2022, respectively.
On October 1, 2021, the Company entered into an agreement with a third-party to sublease its office space in Alpharetta, Georgia, (the “Sublease Agreement”). The sublease term is for 18 months which coincides with the Company’s underlying lease (see below). The Company received $292,000 from the sublessee over the term of the sublease. The sublease did not relieve the Company of its original obligation under the lease, and therefore the Company did not adjust the operating lease right-of-use asset and related liability. The Company incurred an amount of fees and expenses to enter into the Sublease Agreement that were recorded as “acquisition-related costs” for fiscal 2021. As of January 31, 2024, the Company recorded $33,000 as other income related to the sublease.
Suwanee Office Lease
Upon acquiring Avelead on August 16, 2021 (refer to Note 3 - Business Combination), the Company assumed an operating lease agreement for the corporate office space of Avelead. The 36-month term lease commenced March 1, 2019, and initially expired on February 28, 2022. As of January 31, 2024, the Company recorded $6,000 in rent expense. The lessor is an entity controlled by one of the Sellers that was employed by the Company until August 2023. In February 2022, the Company renewed the lease for twelve months. The Company made monthly lease payments of $5,999 for a total of $71,984 over the term of the lease. The lease expired on February 28, 2023, and was not renewed.
NOTE 5 - DEBT
Outstanding principal balances on debt consisted of the following at:
SCHEDULE OF OUTSTANDING PRINCIPAL BALANCES
January 31, 2024 January 31, 2023
Term loan $ 9,000,000 $ 9,750,000
Financing cost payable
135,000
69,000
Less: Deferred financing cost (69,000 ) (105,000 )
Total 9,066,000 9,714,000
Less: Current portion (1,500,000 ) (750,000 )
Non-current portion of debt $ 7,566,000 $ 8,964,000
Term Loan Agreement
On August 26, 2021, the Company and its subsidiaries entered into the Loan Agreement with WAB. Pursuant to the Loan Agreement, WAB agreed to provide the Company and its subsidiaries with a term loan facility in the maximum principal amount of $10,000,000. Amounts outstanding under the term loan portion of the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%.
The Loan Agreement has a five-year term, and the maximum principal amount was advanced in a single-cash advance on or about the closing date. Interest accrued under the Loan Agreement is due monthly, and the Company is required to make monthly interest-only payments through the one-year anniversary of the closing date. From the first anniversary of the closing date through the maturity date, the Company is required to make monthly payments of principal and interest that increase over the term of the agreement. The Loan Agreement requires principal repayments on the anniversary date of the closing of the debt agreement of $500,000 in the second year, $1,000,000 in the third year, $2,000,000 in the fourth year, and $3,000,000 in the fifth year, respectively, with the remaining outstanding principal balance and all accrued but unpaid interest due in full on the maturity date. The Loan Agreement may also require early repayments if certain conditions are met.
The Company recorded $130,000 in deferred financing costs related to the Loan Agreement. These deferred financing costs are being amortized over the term of the loan. The Company will also incur $200,000 in financing costs at the earlier of the term date of the loan, or pre-payment. These costs are being accreted, through interest expense, to the full value of the $200,000 over the term of the loan.
Debt Modification and Revolving Line of Credit
On November 29, 2022, the Company executed the Second Modification (the “Second Modification”) to the Second Amended and Restated Loan and Security Agreement (as amended and modified, the “Loan Agreement”). The Second Modification expanded the Company’s total borrowing to include a $2,000,000 revolving line of credit. The revolving line of credit is co-terminus with the term loan and matures on August 26, 2026. There are no requirements to draw on the line of credit. Amounts outstanding under the line of credit portion of the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The Second Modification also amended the covenants of the Company under the Loan Agreement. At January 31, 2024, there was a $1,500,000 balance outstanding on the revolving line of credit.
The Second Modification includes customary financial covenants as follows:
a. Minimum Cash. Borrowers shall, at all times, maintain unrestricted cash in an amount not less than Two Million Dollars ($2,000,000).
b. Maximum Debt to ARR Ratio. Borrowers’ Maximum Debt to ARR Ratio, measured on a quarterly basis as of the last day of each fiscal quarter, shall not be greater than the amount set forth under the heading “Maximum Debt to ARR Ratio” as of, and for each of the dates appearing adjacent to such “Maximum Debt to ARR Ratio”.
SCHEDULE OF MAXIMUM DEBT TO ARR RATIO
Quarter Ending Maximum Debt to
ARR Ratio
October 31, 2022 0.80 to 1.00
January 31, 2023 0.70 to 1.00
April 30, 2023 0.65 to 1.00
July 31, 2023 0.60 to 1.00
October 31, 2023 0.55 to 1.00
January 31, 2024 0.50 to 1.00
c. Maximum Debt to Adjusted EBITDA Ratio. Commencing with the quarter ending April 30, 2024, Borrowers’ Maximum Debt to Adjusted EBITDA Ratio, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended, shall not be greater than the amount set forth under the heading “Maximum Debt to Adjusted EBITDA Ratio” as of, and for each of the dates appearing adjacent to such “Maximum Debt to Adjusted EBITDA Ratio”.
SCHEDULE OF MAXIMUM DEBT TO ADJUSTED EBITDA RATIO
Quarter Ending Maximum Debt to
Adjusted EBITDA
Ratio
April 30, 2024 3.50 to 1.00
July 31, 2024 and on the last day of each quarter, thereafter 2.00 to 1.00
d. Fixed Charge Coverage Ratio. Commencing with the quarter ending April 30, 2024, Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended.
The Loan Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments, and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default. The line of credit also is subject to customary prepayment requirements. For the period ended January 31, 2024, the Company was not in compliance with the Maximum Debt to ARR Ratio covenant pursuant to the Second Modification; however, on February 7, 2024, the Company was provided a waiver exception for being non-compliant. (Refer to Note 14 - Subsequent to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information.). Substantially all the assets of the Company are collateralized by the Loan Agreement.
The Company recorded $20,000 in deferred financing costs related to the Second Modification. These deferred financing costs are being amortized over the remaining term of the loan. The Company also incurred $50,000 in financing costs at the earlier of the term date of the loan, or pre-payment. These costs are being accreted, through interest expense, to the full value of the $250,000 over the remaining term of the loan. The full value of $250,000 includes the $200,000 costs incurred in connection with the Loan Agreement (see below).
On February 7, 2024, the Company executed the Third Modification and Waiver (the “Third Modification”) to the Loan Agreement. Refer to Note 14 - Subsequent Events to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional information regarding the Third Modification.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill were as follows:
SCHEDULE OF CARRYING AMOUNT OF GOODWILL
Balance
Balance as of January 31, 2023 $ 23,089,000
Impairment (9,813,000 )
Balance as of January 31, 2024 $ 13,276,000
In October 2023, the Company was notified by a legacy client of its intent to not renew its contract as of its expiration on December 31, 2023. At that time, the Company elected to accelerate the execution of a planned strategic restructuring that was designed to reduce costs while maintaining the Company’s ability to expand its SaaS business. Both the client termination and the execution of the strategic restructuring were announced on October 16, 2023. Following these announcements, the Company’s share price declined significantly. Based on these events (collectively, the “Triggering Events”), the Company identified indicators of possible impairment and initiated testing using a valuation date of October 31, 2023. The impairment tests were conducted under guidance of ASC Topic 360, Impairment and Disposal of Long-Lived Assets (“ASC 360”) for certain long-lived assets, including capitalized contract costs, developed technology, client relationships and trade names, and in accordance with ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”) with respect to the reporting unit’s goodwill.
The Company determined that, effective January 31, 2023, it had one reporting unit for purposes of evaluation of goodwill. Based on the Triggering Events and in conjunction with the preparation of the Company’s financial statements for the three and nine months ended October 31, 2023, the Company tested the reporting unit’s goodwill for possible impairment as of October 31, 2023. The testing for impairment was performed under the guidance of ASC 350. The testing utilized a discounted debt-free net cash flow (“DCF”) method under the income approach and the market capitalization method (“MCM”) under the market approach. The sum of the weighted values of each method was used to derive the fair value of the Company’s equity.
The MCM calculates the aggregate market value of the Company based on the total number of shares outstanding and the current market price of the shares as of the valuation date. Data on similar mergers and acquisitions within the healthcare technology sector are observed to determine control premium that represents a stock premium percentage offered by an acquirer to a public company. The control premium applied to the aggregate market value represents MCM calculated fair value.
The DCF incorporates the use of projected financial information and a discount rate using a weighted average cost of capital with cost of equity estimated based on the capital asset pricing model. The cash-flow projections are based on financial forecasts developed by management that include forecasts of future operating results based on internal budgets and strategic plans to invest in working capital to support anticipated revenue growth. External factors and business conditions are considered by management when setting the long-term growth rates. The selected discount rate considers the risk and nature of the reporting unit’s cash flows and the rates of return market participants would require to invest their capital in the Company.
The Company concluded that its goodwill was impaired based on the weighted combination of the DCF and MCM value estimates which resulted in a calculated fair value lower than the equity carrying value. The Company recorded an impairment of goodwill in the amount of $9,813,000 reported as “Goodwill Impairment” on its condensed consolidated statement of operations.
Intangible assets consist of the following:
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS
January 31, 2024
Estimated
Useful Life
Gross
Assets
Accumulated
Amortization
Net Assets
Finite-lived assets:
Client relationships years $ 8,370,000 $ 2,058,000 $ 6,312,000
Internally developed software 9 years 6,380,000 1,742,000 $ 4,638,000
Trademarks and tradenames 15 years 1,340,000 219,000 $ 1,121,000
Total
$ 16,090,000 $ 4,019,000 $ 12,071,000
January 31, 2023
Estimated Gross Accumulated
Useful Life Assets Amortization Net Assets
Finite-lived assets:
Client relationships 8-10 years $ 9,700,000 $ 1,463,000 $ 8,237,000
Internally Developed Software 9 years 6,380,000 1,034,000 5,346,000
Trademarks and Tradenames 15 years 1,340,000 130,000 1,210,000
Total
$ 17,420,000 $ 2,627,000 $ 14,793,000
ASC 360 defines a multi-step process to test long-lived assets, including intangible assets, for recoverability that if failed would indicate impairment. First, the Company must consider whether indicators of impairment of long-lived assets are present, which the Company determined the Triggering Events provided such indication.
Next, the Company must review the long-lived assets to define asset group(s) that would reflect the lowest level of assets to which discrete cash flows are identifiable. In performing this review, the Company identified that the long-lived asset “client relationships” related to Avelead should be classified as abandoned (the “Abandoned Asset”) with the Company determining that it no longer has plans to provide the corresponding consulting service. The Abandoned Asset’s carrying value would need to be set to its salvage value which would be zero given no future cash flows.
The Company determined the lowest level of discrete cash flows is at the reporting unit level, and all remaining long-lived assets (excluding the Abandoned Asset) and goodwill would represent its only asset group. Recoverability is assessed by comparing that the sum of the discrete undiscounted cash flows exceeds the carrying value of the asset group. The undiscounted cash flow projections are based on 8-year (representing the useful life of the primary asset in the asset group) financial forecasts developed by management that include forecasts of future operating results based on internal budgets and strategic plans to investment in working capital to support anticipated revenue growth.
The undiscounted cash flows for the long-lived assets were above the carrying amounts indicating that the long-lived asset group is recoverable and no further impairment to long-lived assets exists as of October 31, 2023. In fiscal 2023, the Company recorded $963,000 as “Impairment of long-lived assets” on its condensed consolidated statement of operations to adjust the Abandoned Asset to its salvage value of zero.
The Company recognized amortization expense on intangible assets of $1,760,000 and $1,971,000 for fiscal 2023 and 2022, respectively.
Amortization over the next five fiscal years for intangible assets is estimated as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE FOR INTANGIBLE ASSETS
Annual
Amortization Expense
$ 1,635,000
1,635,000
1,635,000
1,635,000
1,635,000
Thereafter 3,896,000
Total $ 12,071,000
The Company wrote-off the Abandoned Asset during fiscal 2023 with a gross asset value of $1,330,000. There was no impact to the consolidated statements of operations as this eliminated the asset and accumulated amortization of the fully amortized intangible assets.
NOTE 7 - INCOME TAXES
For fiscal 2023 and 2022, income taxes consist of the following:
SCHEDULE OF INCOME TAXES FOR CONTINUING OPERATION
Fiscal Year
Current tax expense:
Federal $ - $ -
State (58,000 ) (62,000 )
Total current tax benefit (expense) $ (58,000 ) $ (62,000 )
Deferred tax expense:
Federal $ 86,000 $ (6,000 )
State 18,000 (3,000 )
Total deferred tax benefit (expense) $ 104,000 $ (9,000 )
Income tax benefit (expense) $ 46,000 $ (71,000 )
The income tax expense differs from the amount computed using the federal statutory income tax rate of 21% for fiscal 2023 and 2022 as follows:
SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION
Fiscal Year
Federal tax benefit at statutory rate $ 3,887,000 $ 2,348,000
State and local tax expense, net of federal (28,000 ) (52,000 )
Increase in valuation allowance (3,994,000 ) (2,128,000 )
Permanent items:
Other (36,000 ) (20,000 )
Reserve for uncertain tax position (7,000 ) (18,000 )
Federal research and development (R&D) tax credit 33,000 91,000
Stock-based compensation 135,000 (289,000 )
Other 56,000 (3,000 )
Income tax benefit (expense) $ 46,000 $ (71,000 )
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:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
January 31,
Deferred tax assets:
Allowance for credit losses $ 26,000 $ 39,000
Deferred revenue 209,000 122,000
Accruals 67,000 232,000
Net operating loss carryforwards 15,748,000 11,242,000
Stock-based compensation 427,000 342,000
Finite-lived intangible assets 1,739,000 1,344,000
R&D tax credit 1,434,000 1,407,000
Other 1,000 2,000
Total deferred tax assets 19,651,000 14,730,000
Valuation allowance (19,646,000 ) (14,347,000 )
Net deferred tax assets 5,000 383,000
Deferred tax liabilities:
Property and equipment (5,000 ) (5,000 )
Finite-lived intangible liabilities - (482,000 )
Total deferred tax liabilities (5,000 ) (487,000 )
Net deferred tax liabilities $ - $ (104,000 )
At January 31, 2024, the Company had U.S. federal net operating loss carry forwards of $65,107,000 and $29,083,000 of these net operating losses expire at various dates through fiscal 2038. The remaining $36,024,000 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 carry back net operating losses. The Company also had state net operating loss carry forwards of $37,650,000 and Federal R&D credit carry forwards of $1,699,000 and Georgia R&D credit carry forwards of $94,000, all of which expire at various dates through fiscal 2042.
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 $19,646,000 and $14,347,000 at January 31, 2024 and 2023, respectively. The increase in the valuation allowance of $3,994,000 was driven primarily by the Company’s federal net operating losses.
The Company and its subsidiaries 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, 2020. All material state and local income tax matters have been concluded for years through January 31, 2019. The Company is no longer subject to IRS examination for periods prior to the tax year ended January 31, 2020; however, carry forward losses that were generated prior to the tax year ended January 31, 2020 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 $340,000 and $333,000 as of January 31, 2024 and 2023, respectively. As of January 31, 2024 and 2023, 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:
SCHEDULE OF GROSS UNRECOGNIZED TAX BENEFITS
Beginning of fiscal year $ 333,000 $ 315,000
Additions for tax positions for the current year 9,000 11,000
Additions for tax positions of prior years - 7,000
Subtractions for tax positions of prior years (2,000 ) -
End of fiscal year $ 340,000 $ 333,000
NOTE 8 - EQUITY
Capital Raise
On October 24, 2022, the Company entered into purchase agreements with certain investors pursuant to which the Company agreed to issue and sell in a registered direct offering (the “2022 Offering”) an aggregate of 6,299,989 shares of common stock, par value $0.01 per share, at a purchase price of $1.32 per share. The gross proceeds to the Company from the 2022 Offering were approximately $8,316,000. The Company used the proceeds of the 2022 Offering for general corporate purposes. The 2022 Offering closed on October 26, 2022.
Registration of Shares Issued to 180 Consulting
On June 22, 2022, the Company filed a Registration Statement on Form S-3 (Registration No. 333-265773) for purposes of registering for resale 272,653 shares of common stock issued to 180 Consulting, LLC (“180 Consulting”). The Registration Statement was declared effective by the SEC on July 1, 2022.
On June 28, 2023, the Company filed a Registration Statement on Form S-3 (Registration No. 333-272993) for purposes of registering for resale 394,127 shares of common stock issued to 180 Consulting, LLC (“180 Consulting”). The Registration Statement was declared effective by the SEC on July 10, 2023.
Authorized Shares Increase
At the 2022 Annual Meeting, the Company’s stockholders approved an amendment to the Streamline Health Solutions, Inc. Third Amended and Restated 2013 Stock Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 2,000,000 shares, from 8,223,246 shares to 10,223,246 shares. The Company’s stockholders also approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the total number of authorized shares of the Company’s common stock from 65,000,000 shares to 85,000,000 shares.
At the 2023 Annual Meeting, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 1,000,000 shares, from 10,223,246 shares to 11,223,246 shares.
NOTE 9 - MAJOR CLIENTS
During fiscal 2023, one individual client accounted for 10% or more of our revenue. This client accounted for 23% of total revenue for fiscal 2023. In the third quarter of fiscal 2023, the Company received a notice from this client of its intent not to renew its contract following the expiration of the current term on December 31, 2023. During fiscal 2022, two individual clients accounted for 10% or more of our revenue. These clients accounted for 20% and 12%, respectively, of total revenue for fiscal 2022. Four clients represented 14%, 12%, 12%, and 11%, respectively, of accounts receivable as of January 31, 2024, and four clients represented 13%, 12%, 12% and 10%, respectively, of accounts receivable as of January 31, 2023. Many of our clients are invoiced on an annual basis.
NOTE 10 - 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. 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 $242,000 and $258,000 in fiscal 2023 and 2022, respectively.
NOTE 11 - STOCK-BASED COMPENSATION
Stock Option Plans
The 2013 Plan replaced the Company’s 2005 Incentive Compensation Plan (the “2005 Plan”). The 2005 Plan expired based upon its terms. Accordingly, all the outstanding awards and any unallocated pool of un-issued options under the 2005 Plan were re-characterized to the 2013 Plan. Under these plans, the Company is authorized to issue equity awards (stock options, stock appreciation rights or “SARs”, and restricted stock) to directors and associates of the Company. Under the 2013 Plan, as amended, the Company is authorized to issue a number of shares not to exceed 11,223,246. The options granted under the 2013 Plan have terms of ten years or less, and typically vest and become fully exercisable ratably over three years of continuous service to the Company from the date of grant. At January 31, 2024 and 2023, options to purchase 67,500 and 628,958 shares of the Company’s common stock, respectively, had been granted and were outstanding under these plans. At January 31, 2024, there were no SARs outstanding.
A summary of stock option activity in fiscal 2023 follows:
SCHEDULE OF STOCK OPTION ACTIVITY
Weighted
Average Remaining Aggregate
Options Exercise
Price Life in
Years intrinsic
value
Outstanding as of January 31, 2023 628,958 $ 1.95 7.31 $ 360,000
Granted - -
Exercised - -
Expired (39,250 ) 7.14
Forfeited (522,208 ) 1.55
Outstanding as of January 31, 2024 67,500 $ 1.73 2.37 $ -
Exercisable as of January 31, 2024 67,500 $ 1.73 2.37 $ -
Vested as of January 31, 2024 67,500 $ 1.73 2.37 $ -
No options were granted in fiscal 2023 or fiscal 2022.
At January 31, 2024, there was no unrecognized compensation cost related to non-vested stock-option awards. The expense associated with stock option awards was $71,000 and $132,000, respectively, for fiscal 2023 and 2022. No options were exercised during fiscal 2023 or 2022.
The 2013 Plan contains change in control provisions whereby any outstanding equity awards under the plans subject to vesting, which have not fully vested as of the date of the change in control, shall automatically vest and become immediately exercisable. One of the change in control provisions is deemed to occur if there is a change in beneficial ownership, or authority to vote, directly or indirectly, of securities representing 20% or more of the total of all of the Company’s then-outstanding voting securities, unless through a transaction arranged by or consummated with the prior approval of the Board of Directors. Other change in control provisions relate to mergers and acquisitions or a determination of change in control by the Board of Directors.
Restricted Stock
The Company is authorized to grant restricted stock awards to associates and directors under the 2013 Plan. The Company has also issued restricted stock as inducement grants to certain new employees. The restrictions on the shares granted generally lapse over a one- to four-year term of continuous employment from the date of grant. On November 1, 2022, our then-serving CEO, Wyche T. Green, III, was awarded 50,000 shares of restricted common stock that will vest in three substantially equal annual installments commencing on the first anniversary of the date of grant. On May 20, 2022, Mr. Green was awarded 150,000 shares of restricted common stock that will vest in three substantially equal annual installments commencing on the first anniversary of the date of grant. On April 1, 2023, Mr. Green was awarded 200,000 shares of restricted common stock that will vest in three substantially equal annual installments commencing on the first anniversary of the date of grant. Prior to his appointment as CEO of the Company, Mr. Stilwill was awarded 170,000 shares of restricted common stock on April 1, 2023, that will vest in three substantially equal annual installments commencing on the first anniversary of the date of grant. The grant date fair value per share of restricted stock, which is based on the closing price of our common stock on the grant date, is expensed on a straight-line basis as the restriction period lapses. The shares represented by restricted stock awards are considered outstanding at the grant date, as the recipients are entitled to voting rights. A summary of restricted stock award activity for fiscal 2023 and 2022 is presented below:
SCHEDULE OF RESTRICTED STOCK AWARD ACTIVITY
Weighted
Non-vested Average
Number of Grant Date
Shares Fair Value
Non-vested balance at January 31, 2022 1,043,350 $ 1.57
Granted 1,505,731 1.47
Vested (501,750 ) 1.63
Forfeited (199,300 ) 1.49
Non-vested balance at January 31, 2023 1,848,031 $ 1.48
Granted 1,488,621 1.57
Vested (982,631 ) 1.48
Forfeited (383,500 ) 1.67
Non-vested balance at January 31, 2024 1,970,521 $ 1.51
At January 31, 2024, there was $1,938,000 of unrecognized compensation cost related to restricted stock awards. That cost is expected to be recognized over a remaining period of 1.80 years.
The expense associated with restricted stock awards for associates and directors was $1,590,000 and $983,000, for fiscal 2023 and 2022, respectively.
NOTE 12- COMMITMENTS AND CONTINGENCIES
Consulting Agreement with 180 Consulting
On March 19, 2020, the Company entered into a Master Services Agreement (the “MSA”) with 180 Consulting, pursuant to which 180 Consulting has provided and will continue to provide a variety of consulting services in support of eValuator products including product management, operational consulting, staff augmentation, internal systems platform integration and software engineering services, among others, through separate executed statements of work (“SOWs”). On September 20, 2021, the Company entered into a separate MSA in support of Avelead products. As of December 2023, all outstanding SOWs under both MSAs were effectively replaced by two new SOWs. As of the end of fiscal 2023, there were two active SOWs under the eValuator MSA, and no active SOWS under the Avelead MSA. One of the active SOWs include the ability to earn stock at a conversion rate to be calculated 20 days after the execution of the related SOW. The MSA includes a termination clause upon a 90-day written notice. While no related party has a direct or indirect material interest in this MSA or the related SOWs, individuals providing services to us under the MSA, and the related SOWs may share workspace and administrative costs with 121G Consulting LLC (“121G”). 180 Consulting earned 564,707 shares for the year ended January 31, 2024 and has earned an aggregate of 1,479,911 shares through January 31, 2024. For services rendered by 180 Consulting, the Company recorded total cash fees of $2,580,000 and non-employee stock compensation of $582,000 for fiscal 2023 as compared to $1,281,000 and $640,000, respectively, for fiscal 2022. In addition, as of the date of this report, the Company has not issued to 180 Consulting an aggregate of 206,517 shares as compensation for services previously rendered during the three-months ended January 31, 2024. Such 564,707 shares will be issued in reliance on an exemption from registration available under Section 4(a)(2) of the Securities Act.
Inclusive of the MSA executed with 180 Consulting are SOWs that provide for the Company to sublicense a software through 180 Consulting that is owned by 121G. This is a services agreement for access to software that assists the Company in implementing and integrating with our clients’ technology. The license agreement is designed such that there is no material financial benefit that accrues to 121G. 180 Consulting licenses the software from 121G at cost. The Company paid approximately $563,000 and $301,000 for the SOWs that include the sublicense agreement in each of the fiscal years ended January 31, 2024 and 2023, respectively, which are included in the aforementioned totals above.
Litigation
We are, from time to time, a party to various legal proceedings and claims, which arise in the ordinary course of business. We are not aware of any legal matters that are reasonably possible to have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
NOTE 13 - RELATED PARTY TRANSACTIONS
Refer to Note 3 - Business Combination. The Company acquired Avelead on August 16, 2021. We assumed a lease for corporate office space from one of the selling shareholders of Avelead who was employed by the Company through August 2023. This lease term ended February 2022 but was renewed for a term of 12 months through February 2023. For the year ended January 31, 2024, the Company recorded rent expense of $6,000. Refer to Note 4 - Operating Leases to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information.
NOTE 14 - SUBSEQUENT EVENTS
Debt Private Placement
On February 1, 2024, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain accredited investors, including certain directors and officers of the Company (collectively, the “Investors”), pursuant to which the Company agreed to sell to the Investors unsecured subordinated promissory notes (the “Notes”) in the aggregate principal amount of $4.4 million and warrants (the “Warrants”) to purchase up to an aggregate of 4,052,631 shares of the Company’s common stock (the “Common Stock”) in a private placement (the “Debt Private Placement”). The closing of the Debt Private Placement occurred on February 7, 2024 (the “Closing Date”).
In connection with the Debt Private Placement, the Investors and each of the Company’s directors and officers agreed, subject to certain exceptions set forth in the lock-up agreements, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of Common Stock, or any options or warrants to purchase any shares of Common Stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of Common Stock, for a period commencing on the date of the lock-up agreement and ending 90 days from the Closing Date.
Notes
The Notes bear interest at a rate of 15% per annum and mature on August 7, 2026 (the “Maturity Date”). All accrued and unpaid interest on the Notes will be capitalized and added to the outstanding principal balance of the Notes and will be payable in cash on the Maturity Date. The Company may redeem the Notes, in whole or in part, prior to the Maturity Date without any premium or penalty. In the event the Company prepays any portion of the then outstanding principal balance of the Notes on or before the twelve (12) month anniversary of the Closing Date, in addition to such prepayment of the principal balance, the Company must pay to the Investors a prepayment fee (in accordance with the each Investor’s pro-rata share of the Notes) in an amount equal to the amount of interest that would have accrued but for the prepayment from the date of such prepayment through such twelve (12) month anniversary of the Closing Date.
The rights of each Investor to receive payments under the Notes are subordinate to the rights of Western Alliance Bank (“WAB”), pursuant to a subordination agreement which the Investors entered into with WAB concurrently with the Debt Private Placement.
Warrants
The Warrants have an exercise price of $0.38 (except for Warrants issued to the Company’s directors and officers which have an exercise price of $0.39), are immediately exercisable, and will expire on the fourth anniversary of the Closing Date. The Warrants are subject to customary adjustments for certain transactions affecting the Company’s capitalization. The terms of the Warrants preclude a holder thereof from exercising such holder’s Warrants, and the Company from giving effect to such exercise, if after giving effect to the issuance of Common Stock upon such exercise, the holder (together with the holder’s affiliates and any other persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock upon such exercise.
The Notes and the Warrants described above were offered in a private placement under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation D promulgated thereunder and, along with the Common Stock underlying the Warrants, have not been registered under the Securities Act or applicable state securities laws. Accordingly, the Notes, the Warrants and the Common Stock underlying the Warrants may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements and in accordance with applicable state securities laws. The securities were offered and sold to “accredited investors” as that term is defined in Rule 501(a) under the Securities Act.
Common Stock Private Placement
On February 6, 2024, the Company completed the sale of 263,158 shares of the Company’s common stock to an accredited investor at a purchase price of $0.38 per share for an aggregate purchase price of $100,000 (the “Common Stock Private Placement”).
The common stock described above was offered in a private placement under Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and has not been registered under the Securities Act or applicable state securities laws. Accordingly, such common stock may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements and in accordance with applicable state securities laws. The Common Stock was offered and sold to an “accredited investor” as that term is defined in Rule 501(a) under the Securities Act.
Loan Modification
On February 7, 2024, the Company and certain of its subsidiaries entered into a Third Modification and Waiver (the “Third Modification”) to the Loan Agreement with Western Alliance Bank.
The Third Modification waived the Company’s non-compliance with the Maximum Debt to ARR Ratio under the Loan Agreement and amended certain financial covenants as follows:
a. Maximum ARR Net Leverage Ratio. Borrowers’ ARR Net Leverage Ratio, measured on a quarterly basis as of the last day of each fiscal quarter, shall not be greater than the amount set forth under the heading “Maximum ARR Net Leverage Ratio” as of, and for each of the dates appearing adjacent to such “Maximum ARR Net Leverage Ratio.
SCHEDULE OF MAXIMUM ARR NET LEVERAGE RATIO
Quarter Ending Maximum ARR Net Leverage Ratio
April 30, 2024 0.50 to 1.00
July 31, 2024 0.45 to 1.00
October 31, 2024 0.40 to 1.00
January 31, 2025 0.35 to 1.00
c. Maximum Debt to Adjusted EBITDA Ratio. Commencing with the quarter ending April 30, 2025, Borrowers’ Maximum Debt to Adjusted EBITDA Ratio, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended, shall not be greater than the amount set forth under the heading “Maximum Debt to Adjusted EBITDA Ratio” as of, and for each of the dates appearing adjacent to such “Maximum Debt to Adjusted EBITDA Ratio”.
SCHEDULE OF MAXIMUM DEBT TO ADJUSTMENTS EBITDA RATIO
Quarter Ending Maximum Debt to Adjusted EBITDA Ratio
April 30, 2025 3.50 to 1.00
July 31, 2025 3.00 to 1.00
October 31, 2025 2.50 to 1.00
January 31, 2026 and on the last day of each quarter thereafter 2.00 to 1.00
d. Fixed Charge Coverage Ratio. Commencing with the quarter ending April 30, 2025, Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00, measured on a quarterly basis as of the last day of each fiscal quarter for the trailing four (4) quarter period then ended.
e. Minimum Adjusted EBITDA. Commencing with the quarter ending January 31, 2024, Borrowers shall maintain Adjusted EBITDA, measured on a quarterly basis as of the last day of each fiscal quarter, in an amount not less than the amounts (or, in the case of amounts set forth in parentheses, no worse than the amounts) set forth under the heading “Minimum Adjusted EBITDA” as of, and for each of the dates appearing adjacent to such “Minimum Adjusted EBITDA.
SCHEDULE OF MINIMUM ADJUSTED EBITDA
Quarter Ending Minimum Adjusted EBITDA
January 31, 2024 $ (5,750,000 )
April 30, 2024 $ (4,560,000 )
July 31, 2024 $ (2,960,000 )
October 31, 2024 $ (1,500,000 )
January 31, 2025 $ 430,000
Schedule II
Valuation and Qualifying Accounts and Reserves
Streamline Health Solutions, Inc and Subsidiaries.
For the two years ended January 31, 2024
(in thousands of dollars)
Description Balance at Beginning
of Period
Charged to Costs and
Expenses
(1)
Deductions - Other Accounts
(2)
Deductions
Balance at
End of
Period
Year ended January 31, 2024:
Allowance for doubtful accounts $ 132 $ (10 ) $ (36 )
$ - $ 86
Year ended January 31, 2023:
Allowance for doubtful accounts $ 76 $ 189 $ -
$ (133 ) $ 132
(1) Adjustments to retained earnings for adoption of ASC 326-10, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Refer to the subtopic of Accounting Pronouncements Recently Adopted in Note 2 - Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for more information.)
(2) Uncollectible accounts written off, net of recoveries.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (who serves as our principal executive officer) and our Chief Financial Officer (who serves as our principal financial officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(c)) as of the end of the period covered by this Report (January 31, 2024). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2024.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed by, and under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our management and our Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the consolidated financial statements will not be prevented or detected.
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2024, and concluded that our internal control over financial reporting was effective as of January 31, 2024. In making the assessment of internal control over financial reporting, management used the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the year ended January 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have performed additional analyses and other procedures to enable management to conclude that our consolidated financial statements included in this report fairly, in all material respects, our financial condition and results of operations as of the year ended January 31, 2024.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding directors, executive officers and corporate governance will be set forth in the proxy statement for our 2024 Annual Meeting, which will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information regarding executive compensation will be set forth in the proxy statement for our 2024 Annual Meeting, which will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and related stockholder matters will be set forth in the proxy statement for our 2024 Annual Meeting, which will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Directors Independence
Information regarding certain relationships and related transactions and director independence will be set forth in the proxy statement for our 2024 Annual Meeting, which will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The Independent Registered Public Accounting Firm is FORVIS, LLP (PCAOB Firm ID No. 686) located in Atlanta, Georgia. Information regarding principal accountant fees and services will be set forth in the proxy statement for our 2024 Annual Meeting, which will be filed with the SEC within 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.
PART IV
(32)

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules) See Index to Consolidated Financial Statements and Schedule Covered by Reports of Registered Public Accounting Firms included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Report. See Index to Exhibits contained in this Report.
(b) Exhibits
See Index to Exhibits contained in this Report.