NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April
30, 2023
NOTE
1 — BASIS OF PRESENTATION
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”), operate 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 & Clinical Documentation Improvement (CDI) solutions, 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.
The
accompanying unaudited condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations applicable
to quarterly reports on Form 10-Q of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and note
disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures
made are adequate to make the information not misleading. The condensed consolidated financial statements include the accounts of Streamline
Health Solutions, Inc. and each of its wholly-owned subsidiaries. In the opinion of the Company’s management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements have been
included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s most recent annual report on Form 10-K. Operating results for the three months ended
April 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2024.
The Company has one operating
segment and one reporting unit due to the singular nature of our products, product development and distribution process, and client base
as a provider of computer software-based solutions and services for healthcare providers.
All
amounts in the condensed consolidated financial statements, notes and tables have been rounded to the nearest thousand dollars, except
share and per share amounts, unless otherwise indicated. All references to a fiscal year refer to the fiscal year commencing February
1 in that calendar year and ending on January 31 of the following calendar year.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our
significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year 2022
Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the notes to the consolidated
financial statements contained in the Annual Report on Form 10-K when reviewing interim financial results.
Use
of Estimates
The
preparation of financial statements in conformity with 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, share-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.
Fair
Value of Financial Instruments
The
Financial Accounting Standards Board’s (“FASB”) authoritative guidance on fair value measurements establishes a framework
for measuring fair value. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements
by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance,
assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs that are not corroborated by market data.
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. There were no transfers of assets
or liabilities between Levels 1, 2, or 3 during the three months ended April 30, 2023 and 2022.
The
table below provides information on the fair value of our liabilities:
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, 2023 | |
| | | |
| | | |
| | | |
| | |
Acquisition earnout liability (1) | |
$ | 3,738,000 | | |
$ | — | | |
$ | — | | |
$ | 3,738,000 | |
At April 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Acquisition earnout liability (1) | |
$ | 3,374,000 | | |
$ | — | | |
$ | — | | |
$ | 3,374,000 | |
(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 April 30, 2023. The change in the fair value of the acquisition earnout liability decreased
$364,000 for the three months ended April 30, 2023. The change in the fair value is recognized in “Acquisition earnout valuation
adjustments” in the accompanying condensed consolidated statement of operations. |
The
fair value of the Company’s term loan under its Second Amended and Restated Loan and Security Agreement (as amended and
modified, the “Second Amended and Restated 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, April 30, 2023 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 the end of the first quarter, April 30, 2023 and end of the fiscal year, January 31,
2023. The fair value of the debt as of April 30, 2023 and January 31, 2023 was estimated to be $9,425,000
and $9,550,000,
respectively, or a discount to book value of $200,000, respectively.
Long-term debt is classified as Level 2.
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 the Company’s direct sales force or through third-party resellers. Licensed, locally-installed customers on a perpetual
model utilize the Company’s 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 Customers, under
the core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services.
Disaggregation
of Revenue
The
following table provides information about disaggregated revenue by type and nature of revenue stream:
SCHEDULE
OF DISAGGREGATION OF REVENUE
| |
April 30, 2023 | | |
April 30, 2022 | |
| |
Three Months Ended | |
| |
April 30, 2023 | | |
April 30, 2022 | |
Over time revenue | |
$ | 4,332,000 | | |
$ | 3,941,000 | |
Point in time revenue | |
| 1,000,000 | | |
| 1,994,000 | |
Total revenue | |
$ | 5,332,000 | | |
$ | 5,935,000 | |
The
Company includes revenue categories of (i) over time and (ii) point in time revenue. The Company includes revenue categories of (i) SaaS
and (ii) maintenance and support 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 (i) software licenses, (ii) professional services, and (iii) audit
services as point in time revenue.
Contract
Receivables and Deferred Revenues
The
Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related to the
Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes
payments received in advance of performance under the contract. The Company’s contract receivables and deferred revenue are reported
on an individual contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent based
on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of
when we expect to recognize revenue. In the three months ended April 30, 2023, the Company recognized approximately $3,161,000 in revenue
from deferred revenues outstanding as of January 31, 2023. Revenue allocated to remaining performance obligations was $27,668,000 as
of April 30, 2023, of which the Company expects to recognize approximately 68% over the next 12 months and the remainder thereafter.
Deferred
costs (costs to fulfill a contract and contract acquisition costs)
The
Company defers 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 period of expected benefit which is
the contractual term. As of April 30, 2023 and January 31, 2023, the Company had deferred costs of $94,000
and $94,000,
respectively, net of accumulated amortization of $194,000
and $176,000,
respectively. Amortization expense of these costs was $18,000
and $19,000
for the three months ended Apri1 30, 2023 and 2022, respectively, and is included in various costs of revenue in the condensed
consolidated statements of operations.
Contract
acquisition costs, which consist of sales commissions paid or payable, are considered incremental and recoverable costs of obtaining
a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line basis
over the contract term. As a practical expedient, the Company expenses sales commissions as incurred when the amortization period of
related deferred commission costs is expected to be one year or less.
As
of April 30, 2023 and January 31, 2023, deferred commission costs paid and payable, which are included on the consolidated balance sheets
within other non-current assets totaled $1,483,000 and $1,534,000, respectively, net of accumulated amortization of $949,000 and $820,000,
respectively. For the three months ended April 30, 2023 and 2022, $129,000 and $93,000, respectively, in amortization expense associated
with deferred sales commissions was included in selling, general and administrative expenses in the condensed consolidated statements
of operations. There were no impairment losses for these capitalized costs for these periods.
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, and forfeitures are recognized as incurred. 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. For the three months
ended April 30, 2023, the Company incurred total compensation expense related to share-based awards of $572,000,
which includes $23,000
of capitalized non-employee stock compensation, compared to $326,000
for the three months ended April 30, 2022.
The fair value of 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. These assumptions are subjective and are
generally derived from external (such as, risk-free rate of interest) and historical data (such as, volatility factor and expected term).
Future grants of equity awards accounted for as share-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 closing price per
share on the grant date. For the three months ended April 30, 2023, the Company issued 1,085,000
shares of restricted common stock to employees, compared to 330,000
shares of restricted common stock for the three months ended April 30, 2022.The Company expenses the compensation cost of these
awards as the restriction period lapses, which is typically a one- to four-year service period.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net
deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be
realized. The Company establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets
will not be realized. Refer to Note 6 – Income Taxes for further details.
The
Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether
certain tax positions are more likely than not to be sustained upon examination by tax authorities. At April 30, 2023, the Company believes
it has appropriately accounted for any uncertain tax positions.
Net
Loss Per Common Share
The
Company presents basic and diluted earnings per share (“EPS”) data for the Company’s common stock.
The
Company’s 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. Diluted EPS for the Company’s 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 for the three months ended April 30, 2023 and
2022:
SCHEDULE
OF BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK
| |
April 30, 2023 | | |
April 30, 2022 | |
| |
Three Months Ended | |
| |
April 30, 2023 | | |
April 30, 2022 | |
Basic and diluted loss per share: | |
| | | |
| | |
Net loss | |
$ | (2,901,000 | ) | |
$ | (2,787,000 | ) |
Basic and diluted net loss per share of common stock from operations | |
$ | (0.05 | ) | |
$ | (0.06 | ) |
Weighted average shares outstanding – Basic (1) | |
| 55,970,880 | | |
| 47,028,463 | |
Effect of dilutive securities – Stock options and Restricted stock (2) | |
| — | | |
| — | |
Weighted average shares outstanding – Diluted | |
| 55,970,880 | | |
| 47,028,463 | |
(1) |
Includes
the effect of vested and excludes the effect of unvested restricted shares of common stock, which are considered non-participating
securities. As of April 30, 2023 and 2022, there were 2,655,831 and 1,025,800 unvested restricted shares of common stock outstanding,
respectively. |
|
|
(2) |
Diluted
net loss per share excludes the effect of shares that are anti-dilutive. For the three months ended April 30, 2023, diluted earnings
per share excludes 628,958 outstanding stock options and 2,655,831 unvested restricted shares of common stock. For the three months
ended April 30, 2022, diluted earnings per share excludes 1,062,130 outstanding stock options and 1,025,800 unvested restricted shares
of common stock. |
Other
Operating Costs
Acquisition-related
Costs
For
the three months ended April 30, 2023 and 2022, the Company incurred certain acquisition-related costs related to the acquisition of
Avelead totaling $35,000 and $90,000, respectively, consisting primarily of professional service fees.
Non-Cash
Items
For
the three months ended April 30, 2023, the Company recorded capitalized software purchased with stock, totaling $23,000, as non-cash
items related to the condensed consolidated statements of cash flow.
Accounting
Pronouncements Recently Adopted
On
February 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”), as amended. ASU 2016-13 requires an allowance for expected credit losses
to be applied to financial assets at inception and reflect the risk of credit loss over the life of the asset. The Company estimated
current expected credit losses based on historical credit loss rates and applied an increase to account for future economic conditions.
The Company’s allowance for doubtful accounts as of January 31, 2023, prior to the adoption of ASU 216-13, was $132,000. The Company
estimated the current expected credit loss related to accounts receivable as of the adoption date of February 1, 2023 to be $96,000.
The Company recorded the adjustment in accounting policy change of $36,000 to the opening retained earnings balance for the year of adoption.
SCHEDULE OF ACCOUNTING
PRONOUNCEMENTS RECENTLY ADOPTED
| |
January 31, 2023 | | |
CECL Adoption | | |
Provision adjustments | | |
Write-offs & Recoveries | | |
April 30, 2023 | |
Allowance for credit losses | |
$ | (132,000 | ) | |
$ | 36,000 | | |
| - | | |
| - | | |
$ | (96,000 | ) |
For
the period ended April 30, 2023, the Company estimated the current expected credit loss related to accounts receivable using historical
credit loss rates and applied an increase to account for future economic conditions in accordance with ASU 2016-13. The Company had no
further impact on the allowance for credit losses during the three month period ended April 30, 2023.
Recent
Accounting Pronouncements Not Yet Adopted
The
Company does not believe there are any other new accounting pronouncements that have been issued that might have a material impact
on its financial position or results of operations.
NOTE
3 — BUSINESS COMBINATION AND DIVESTITURE
Avelead
Acquisition
The
Company acquired all of the equity interests of Avelead Consulting, LLC (“Avelead”) as part of the Company’s strategic
expansion into the acute-care health care revenue cycle management industry on August 16, 2021 (the “Transaction”). The acquisition
was completed on August 16, 2021.
On
November 21, 2022, the Company made cash payments of $2,012,000
and issued 1,871,037
unregistered securities in the form of restricted
common stock, par value $0.01
per share, with respect to the first year earnout
consideration. The estimated aggregate value of the first year earnout payment is $5,000,000.
The second (and final) year earnout payment, if
any, will be payable on or about October 15,2023. These liabilities are reflected at the estimated fair value of the future commitment
on the Company’s condensed consolidated balance sheet as Acquisition Earnout Liability.
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.
Alpharetta
Office Lease
On
October 1, 2021, the Company entered into an agreement with a third-party to sublease its office space in Alpharetta, Georgia. The sublease term was for 18 months, which coincided 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 sublease
terminated on March 31, 2023. For the three months ended April 30, 2023, the Company recorded $32,000 as other income related to the
sublease.
The
Company entered into a lease for office space in Alpharetta, Georgia, on March 1, 2020. The lease terminated 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. The Company used a discount rate of 6.5% to determine the lease liability. For the three months ended April
30, 2023 and 2022, the Company had lease operating costs of approximately $32,000 and $48,000, respectively.
Suwanee
Office Lease
Upon
acquiring Avelead on August 16, 2021 (refer to Note 3 – Business Combination and Divestiture), the Company assumed an
operating lease agreement for the corporate office space of Avelead. The lessor is an entity controlled by one of the Sellers of
Avelead and that Seller is employed by the Company. The initial 36-month term lease commenced March 1, 2019 and expired on February
28, 2022. The Company previously renewed the lease for an additional 12-month term which expired February 28, 2023
and was not renewed. For the three months ended April 30, 2023, the Company recorded rent expense of $6,000.
NOTE
5 — DEBT
Outstanding
principal balances consisted of the following at:
SCHEDULE OF OUTSTANDING DEBT
| |
April 30, 2023 | | |
January 31, 2023 | |
Term loan | |
$ | 9,625,000 | | |
$ | 9,750,000 | |
Financing cost payable | |
| 88,000 | | |
| 69,000 | |
Deferred financing cost | |
| (96,000 | ) | |
| (105,000 | ) |
Total | |
| 9,617,000 | | |
| 9,714,000 | |
Less: Current portion | |
| (875,000 | ) | |
| (750,000 | ) |
Non-current portion of debt | |
$ | 8,742,000 | | |
$ | 8,964,000 | |
Term
Loan
On
November 29, 2022, the Company executed a Second Modification to Second Amended and Restated Loan Agreement (the “Second
Modification”). The Second Modification includes an expansion of the Company’s total borrowing to include a $2,000,000
non-formula revolving line of credit. The revolving line of credit will be 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 Second
Amended and Restated 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 amended certain financial covenants in the Second Amended and Restated Loan Agreement. At April 30, 2023, there was no
outstanding balance on the revolving line of credit.
Under
the Second Amended and Restated Loan Agreement, the Company has a term loan facility with an initial maximum principal amount of
$10,000,000.
Amounts outstanding under the Second Amended and Restated 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 Amended and Restated Loan Agreement has a five-year term, and the maximum principal amount was advanced in a single-cash
advance on or about the original closing date (August 2021). Interest is due monthly, and the Company shall make monthly
interest-only payments through the one-year anniversary of the original closing date. Under the Second Amended and Restated Loan
Agreement, principal repayments are required 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 Second Amended and Restated Loan Agreement may also require early repayments if certain conditions are
met.
The Second Amended and Restated
Loan Agreement includes customary financial covenants as follows:
|
● |
Minimum
Cash. Borrowers shall, at all times, maintain unrestricted cash of Borrowers at Bank in an amount not less than Two Million
Dollars ($2,000,000). |
|
|
|
|
● |
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 | |
|
● |
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 | |
|
● |
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 Second Amended and Restated 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 April 30, 2023, the Company was in compliance
with the Second Amended and Restated Loan Agreement covenants. Substantially all the assets of the Company are collateralized by the Second
Amended and Restated Loan Agreement.
Forecasting
our business has certain assumptions and inputs on sales volumes, implementation timing, and estimation of expenses that inherently
vary as to timing and amounts. The Company utilizes scenarios in its forecasting that include a base case, management case and best
case to understand a range of possible outcomes in association with the forecasting process. Our forecast has the Company not
achieving the “maximum debt to Adjusted EBITDA ratio” and “Fixed Charge Coverage Ratio” covenants, as
described herein, at April 30, 2024, and for several quarters, thereafter. The Company’s inputs and assumptions underlying the
forecast may change in the coming periods based on the market environment and the performance of our business. The Company has a
good working relationship with its current banking partner, Western Alliance Bank. The Company has successfully modified the terms,
including covenants, of the Second Amended and Restated Loan Agreement with Western Alliance Bank in the past and is currently in
the process of modifying such covenants currently. The Company has received an indication of interest from Western Alliance Bank to
modify all the existing covenants to be consistent with the Company’s forecasting.
The
Company records costs related to the maintenance of the Second Amended and Restated Loan Agreement as deferred financing costs, net
of the term loan. These deferred financing costs are being amortized over the remaining term of the loan. The Company has incurred
$250,000
in financing costs which becomes payable 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.
NOTE
6 — INCOME TAXES
Income
tax expense increased to $53,000 for the three months ended April 31, 2023 compared to $11,000 in the prior year comparable period. The
effective income tax rate on continuing operations of approximately (2)% differs from our combined federal and state statutory rate of
25% primarily due to the full valuation allowance the Company currently maintains on its net deferred tax asset.
At
January 31, 2023, the Company had U.S. federal net operating loss carry forwards of $49,884,000. The Company also had state net operating
loss carry forwards of $24,095,000, Federal R&D tax credit carry forwards of $1,666,000 and Georgia R&D tax credit carry forwards
of $94,000, all of which expire through fiscal 2042.
The
Company has recorded $344,000 and $333,000 in reserves for uncertain tax positions as of April 30, 2023 and January 31, 2023, respectively.
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, 2019. All material state and local income tax matters
have been concluded for years through January 31, 2018. The Company is no longer subject to IRS examination for periods prior to the
tax year ended January 31, 2019; however, carryforward losses that were generated prior to the tax year ended January 31, 2019 may still
be adjusted by the IRS if they are used in a future period.
NOTE
7 — 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 intends to use 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.
Authorized
Shares Increase
At
the Annual Meeting of Stockholders held on June 7, 2022, 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.
NOTE
8 — COMMITMENTS AND CONTINGENCIES
Consulting
Agreement with 180 Consulting, LLC
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. Certain of the SOWs include the ability of 180 Consulting 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 the Company under the MSA and the SOWs may share workspace and administrative costs with 121G
Consulting, LLC (“121G”). 180 Consulting earned 127,099 and 56,070 shares
for the three months ended April 30, 2023 and April 30, 2022, respectively, and has earned an aggregate of 1,042,303 shares
through April 30, 2023. For services rendered by 180 Consulting during the three months ended April 30, 2023, the Company incurred
fees of $953,000,
and capitalized non-employee stock compensation of $23,000. The Company paid fees of $452,000 for
services rendered by 180 Consulting during the three months ended April 30, 2022.
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 $117,000 and $83,000 for the SOWs that include the
sublicense agreement in for the three months ended April 30, 2023 and 2022, respectively, which are included in the aforementioned totals
above.
NOTE
9 - RELATED PARTY TRANSACTIONS
Refer
to Note 3 – Business Combination and Divestiture. The Company acquired Avelead on August 16, 2021. In addition, the Company
assumed a lease for corporate office space from a selling equityholder of Avelead that is now employed by the Company. This lease
term ended February 2023. For the three months ended April 30, 2023 and April 30, 2022, the Company recorded rent expense of $6,000
and $19,000, respectively
(refer to Note 4 – Operating Leases).
NOTE
10 — SUBSEQUENT EVENTS
We
have evaluated subsequent events occurring after April 30, 2023, and based on our evaluation, we did not identify any events that would
have required recognition or disclosure in these condensed consolidated financial statements.