STREAMLINE HEALTH SOLUTIONS INC. - Annual Report: 2012 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

OR

Commission File Number: 0-28132

STREAMLINE HEALTH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

10200 Alliance Road, Suite 200

Cincinnati, OH 45242-4716

(Address of principal executive offices) (Zip Code)

(513) 794-7100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

Common Stock, $.01 par value

(Title of Class)

The NASDAQ Stock Market, Inc.

(Name of exchange on which listed)

Securities registered pursuant to Section 12 (g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨         No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x        No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x         No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12h-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed using the closing price as reported by The NASDAQ Stock Market, Inc. for the Registrant’s Common Stock on July 31, 2011, was $18,616,426.

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of April 12, 2012: 10,433,717

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DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Streamline Health Solutions, Inc.’s (the “Company”) proxy statement for the annual meeting of stockholders to be held on May 24, 2012 are incorporated by reference into Part III of this annual report on Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this annual report on Form 10-K, the proxy statement for the annual meeting of stockholders to be held on May 24, 2012 is not deemed to be filed as a part hereof.

FORWARD-LOOKING STATEMENTS

In addition to historical information contained herein, this annual report on Form 10-K contains forward-looking statements relating to the Company’s plans, strategies, expectations, intentions, etc. and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are no guarantee of future performance and are subject to certain risks and uncertainties that are difficult to predict and actual results could differ materially from those reflected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with vendors that resell the Company products, the ability of the Company to control costs, availability of products produced from third party vendors, the healthcare regulatory environment, potential changes in legislation, regulation and government funding affecting the healthcare industry, healthcare information systems budgets, availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results, effects of critical accounting policies and judgments, changes in accounting policies or procedures as may be required by the Financial Accountings Standards Board or other similar entities, changes in economic, business and market conditions impacting the healthcare industry, the markets in which the Company operates and nationally, and the Company’s ability to maintain compliance with the terms of its credit facilities, and other risk factors that might cause such differences including those discussed herein, including, but not limited to, discussions in the sections entitled Part I, “Item 1 Business”, Part II, “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 Financial Statements and Supplemental Data.” In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. The Company undertakes no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this and other documents the Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q and any current reports on Form 8-K.

PART I

ITEM 1.    Business

Company Overview

Founded in 1989, the Company is a leading provider of enterprise content management and business analytics solutions for healthcare organizations. The Company provides computer software-based solutions that help hospitals and physician groups improve efficiencies and business processes across the enterprise to enhance and protect revenues. The Company’s enterprise content management solutions transform unstructured data into digital assets that seamlessly integrate with disparate clinical, administrative, and financial information systems. The Company’s business analytics solutions provide real-time access to key performance metrics that enable healthcare organizations to identify and manage opportunities to maximize financial performance. Additionally,

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the Company’s integrated workflow systems automate and manage critical business activities to improve organizational accountability and drive both operational and financial performance. Across the revenue cycle, these solutions offer a flexible way to optimize the clinical and financial performance of any healthcare organization.

The Company’s software solutions are delivered to clients either by purchased perpetual license, where such software is installed locally in the client’s data center, or by access to the Company’s data center systems through a secure connection, which is a delivery method commonly referred to as software as a service (SaaS).

The Company operates primarily in one segment as a provider of health information technology solutions 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, including physician practices, through its direct sales force and its reseller partnerships.

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 year.

Solutions

The Company offers solutions relating to enterprise content management, business analytics, and workflow. Each such solution is designed to improve the flow of critical patient information across the revenue cycle. Each of the Company’s solutions help to transform and structure information between disparate information technology systems into actionable data, giving the end-user comprehensive access to clinical, financial, and administrative information. All solutions can be delivered either by perpetual license installed locally or accessed securely through SaaS.

Enterprise Content Management Solutions — These solutions assist clients in the completion of electronic patient records by capturing, storing, and intelligently distributing the unstructured data that exists at all touch points across the patient care continuum. They create a permanent, document-based repository of historical health information that integrates seamlessly with existing clinical, financial, and administrative information systems.

Business Analytics Solutions — These solutions allow staff across the healthcare enterprise to drill down quickly and deeply into actionable and real-time financial data and key performance indicators to improve revenue realization and staff efficiency. These solutions include dashboards, data mining tools, and prescriptive reporting, which help to simplify, facilitate, and optimize overall revenue cycle operating performance of the healthcare enterprise. The Company’s integrated workflow solutions automate and drive the ownership and accountability required to effectively manage revenue cycle activities within virtually any department. As integral parts of our enterprise solutions, they are used to improve the quality and accuracy of data captured during patient admission, registration and scheduling. They are also used to increase the completion and accuracy of patient charts and related coding, improve accounts receivable collections, reduce and manage denials, and improve audit outcomes.

Integrated Workflow Solutions — These solutions automate and drive the ownership and accountability required to effectively manage revenue cycle activities within virtually any department of the healthcare enterprise. As integral parts of our enterprise solutions, they are used to improve the quality and accuracy of data captured during patient admission, registration and scheduling. These solutions are also used to increase the completion and accuracy of patient charts and related coding, improve accounts receivable collections, reduce and manage denials, and improve audit outcomes.

Services

Custom Integration Services — The Company’s professional services team works with clients to design custom integrations that integrate data to or from virtually any clinical, financial, or administrative system. By

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taking data and documents from multiple, disparate systems and bringing them into one streamlined system, clients are able to maximize efficiencies and increase operational performance. The Company’s professional services team also creates custom integrations that pull data from the Company’s solutions into the client’s external or internal systems.

Training Services — Training courses are offered to help clients quickly learn to use their solutions in the most efficient manner possible. Training sessions are available on-site or off for as few as one person or multiple staff members.

Electronic Image Conversion — The Company’s electronic image conversion service allows organizations to protect their repository of images while taking advantage of our content management technology. Electronic image conversion creates one repository that integrates directly with AccessAnyWare, our clinical content management system. This service is available via the SaaS model or for locally-installed solutions.

Database Monitoring Services — The Company’s advanced database monitoring services for locally-installed clients help lighten the burden of ongoing system monitoring by the client’s information technology staff and ensure a continual, stable production environment. The Company’s database administrators ensure the client’s system is running optimally with weekly, manual checks of the database environment to identify system issues that may require further attention. Monitoring is done through protected connections, so data is safe and secure.

Clients and Strategic Partners

As of January 31, 2012, the Company had a client base that included 60 hospital and health system clients representing over 200 contracted locations. The Company’s clients are among the most prestigious healthcare providers in the United States and the province of Quebec, Canada.

In 2002, the Company entered into a five year Remarketing Agreement with IDX Information Systems Corporation, which was subsequently acquired by GE Healthcare, a unit of the General Electric Company, in January 2006. Under the terms of the Remarketing Agreement, IDX/GE was granted a non-exclusive worldwide license to distribute the Company’s solutions to its clients and prospective clients, as defined in the Remarketing Agreement. The Agreement has an automatic annual renewal provision and, after the initial five year term, which ended January 30, 2007, can be cancelled by IDX/GE upon 90 days’ written notice to the Company. This automatic annual renewal provision now extends the agreement through January 30, 2013. As reported in the prior year, during the fourth quarter of fiscal 2010 GE Healthcare shifted its organizational focus to upgrading its current clients to GE’s latest version software. While the remarketing agreement with GE Healthcare remains in effect; the ongoing impact on the Company will most likely be a decline in net new sales opportunities from GE Healthcare.

In December 2007, the Company entered into an agreement with Telus Health (formerly Emergis, Inc.), a large international telecommunications corporation based in Canada, in which Telus Health is integrating the Company’s AccessAnyWare document management repository and document workflow applications into its Oacis (Open Architecture Clinical Information System) Electronic Health Record solution.

In June 2010, the Company announced a referral marketing agreement with MRO Corp. of King of Prussia, PA, a leading provider of disclosure management applications and services for healthcare organizations. Through the agreement, MRO Corp. will refer the Company’s document workflow and management solutions to its hospital and healthcare clients seeking to bridge the productivity gap between paper-based processes and transaction-based healthcare information systems. The Company will refer MRO Corp. to its hospital and healthcare clients looking for disclosure management applications and services, such as ROI Online^tm . Overall, this agreement expands penetration into new and existing markets for both organizations, and offers healthcare providers an opportunity to advance their facility’s technology and processes with integrated solutions.

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In February 2012 the Company entered into a joint marketing agreement with FTI Consulting, a global business advisory firm which helps organizations protect and enhance their enterprise value. As part of the agreement, which has an initial term of three years, FTI Consulting will promote the benefits of the the Company’s business intelligence and analytic software solutions, and the Company will promote FTI Consulting’s consulting services to their respective clients and prospects in consideration for a share of revenues in case of successful placements.

Competition

Several companies historically have dominated the clinical information system software market and several of these companies have either acquired, developed or are developing their own document management and workflow technologies. The industry is undergoing consolidation and realignment as companies position themselves to compete more effectively. Strategic alliances between vendors offering health information management workflow and document management technologies and 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, 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 believes that these barriers taken together represent a moderate to high-level barrier to entry. The Company has many competitors including clinical information system vendors that are larger and more established and have substantially more resources than the Company.

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.

The U.S. Healthcare System, U.S. Government Policy and Legislative Initiatives

The American Recovery and Reinvestment Act of 2009 (“Stimulus Bill” or “ARRA”) was enacted by the United States Congress and signed into law by President Barack Obama on February 17, 2009. ARRA allocated approximately $19 billion for health information technology investment to reduce direct spending for health benefits and improve overall efficiency and safety. The provision of the legislation that addresses health information technology specifically is known as the HITECH Act. The Company has not yet been able to measure substantial direct benefit from ARRA since its passage, and cannot be certain that it will be a direct financial beneficiary of any of its provisions. However, significant funds appear to remain unallocated, and full implementation remains in its infancy. Some highlights of the HITECH Act that may directly or indirectly impact the Company are noted below:

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A January 2012 report from SK&A shows that 46% of physician offices use electronic healthcare records software, and in February 2012 the U.S. Department of Health and Human Services’ Secretary Kathleen Sebelius announced that a new survey conducted by the American Hospital Association and reported by the HHS Office of the National Coordinator for Health IT found that the percentage of U.S. hospitals that had adopted EHRs has more than doubled from 16 to 35 percent between 2009 and 2011.

The most recent data as of February 2012 from the Centers for Medicare & Medicaid Services (CMS) shows that the agency has thus far provided $3.12 billion in incentive payments to physicians, hospitals, and other health care providers who have started to meaningfully use EHRs to improve the quality of patient care. The Company believes that the HIPAA (Health Insurance Portability and Accountability Act) regulations are an additional impetus for healthcare to embrace the Company’s solutions as a means of ensuring compliance with federal regulations. Additionally, the healthcare industry is being strongly encouraged by many professional medical organizations to make greater use of information technology.

In 2007 the U.S. government required providers to move from the ICD-9 (International Statistical Classification of Diseases and Related Health Problems) scheme to the significantly more complex ICD-10 scheme. This change, along with the addition of 745 new diagnosis groups, increases the need for more efficient and accurate medical coding to reduce reimbursement risk. In February 2012, the U.S. Department of Health and Human Services announced that HHS would postpone the original date of October 1, 2013 for ICD-10 compliance for certain healthcare entities, but has yet to announce which entities or a new compliance date. This will give providers more time to prepare for the new scheme, and work with vendors to address the updated scheme in current software.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010 (collectively the “Affordable Care Act”) was signed into law by President Obama on March 23, 2010. The Affordable Care Act places substantial emphasis on the expansion of healthcare coverage to a significant amount of the currently uninsured, and introduces significant new rules and regulations affecting the complete continuum of care. Provisions within the bill take effect at various dates from 2010 through 2014. Specifically, the implementation of the provisions in the Affordable Care Act may create new requirements for healthcare information technology, such as those offered by the Company, such as audit compliance to combat waste, fraud, and abuse. The Affordable Care Act, as passed, remains under congressional debate, and has had several legal suits brought against it in the federal courts, challenging its constitutionality. The Company has not yet been able to measure any direct benefit from the Affordable Care Act since its passage, and cannot be certain that we will be a direct financial beneficiary of any of its provisions in the future.

Section 302 of the Tax Relief and Health Care Act of 2006 created the Medicare Recovery Audit Contractor (RAC) program to identify improper Medicare payments, and the permanent RAC program is now implemented in all 50 states. Any provider that submits claims to Medicare can be reviewed, and providers are now seeing a growing number of RAC audits. Providers are implementing audit programs to proactively address their organization’s coding, billing, and documentation processes and increasingly utilizing software specifically designed to address RAC audits. By utilizing analytics and reports from such software, providers can ensure submitted claims are as accurate as possible and ultimately decrease the number of denied claims. The Company believes its audit software, along with its business analytics software, can assist healthcare organizations in addressing RAC audits specifically, as well as other types of payer audits.

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Contracts

The Company enters into master 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 aggregate price and the timetable for services. Typically these are multi-element arrangements which include a perpetual license which is installed locally at the client site (or the right to use the Company’s solutions as a part of SaaS services), and an initial maintenance term and third party components including hardware and software (included with SaaS services), and professional services for implementation, integration, process engineering, optimization and training. If the client purchases solutions via software as a service, the client is billed monthly for a specified term from one to seven years in length depending on the solution. The SaaS fee includes all maintenance and support services. SaaS clients also will utilize professional services for implementation, integration, process engineering, optimization and training, which is billed separately from the SaaS fees. Professional services are typically fixed fee arrangements billable to clients based on agreed-to milestones.

The commencement of revenue recognition varies depending on the size and complexity of the system, the implementation schedule requested by the client and usage by clients of software as a service. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period. The Company’s master agreements generally provide that the client may terminate its agreement upon a material breach by the Company, or may delay certain aspects of the installation. There can be no assurance that a client will not cancel all or any portion of a master agreement or delay installations. 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. The Company does not have a history of contract cancellations; however delays are sometimes experienced in the course of the contract and are accounted for accordingly.

See also ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

License fees

The Company incorporates software licensed from various vendors into its proprietary software. In addition, third-party, stand-alone software is required to operate the Company’s proprietary software. The Company licenses these software products, and pays the required license fees when such software is delivered to clients.

Employees

As of January 31, 2012, the Company had 76 full-time employees, a net decrease of 16 during the fiscal year. The Company utilizes independent contractors to supplement its staff, as needed. None of the Company’s employees 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.

Requests for Documents

Copies of documents filed by the Company with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, etc., and all amendments to those reports, if any, can be found at the web site http://investor.streamlinehealth.net as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Copies can be downloaded free of charge from the Company web site or directly from the Securities and Exchange Commission web site, http://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, 10200 Alliance Road, Suite 200, Cincinnati, Ohio 45242.

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Materials that the Company files with the Securities and Exchange Commission may also be read and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission at http://www.sec.gov.

ITEM 2.    Properties

The Company’s principal offices are located at 10200 Alliance Road, Suite 200, Cincinnati, OH 45242-4716. The Company leases all of its properties. The current rental expense for all of these facilities approximated $444,000 for the year ended January 31, 2012. The following table references each property leased by the Company, such property’s general character, approximate size, lease term and any renewal option contained in such property’s lease.

The Company believes that its facilities are adequate for its current needs and that suitable alternative space is available to accommodate expansion of the Company’s operations.

ITEM 3.    Legal Proceedings

The Company is, from time to time, a party to various legal proceedings and claims, which arise, in the ordinary course of business. The Company is not aware of any legal matters that will have a material adverse effect on the Company’s consolidated results of operations, consolidated financial position, or consolidated cash flow.

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PART II

The Company’s common stock trades on the Capital Market tier of The NASDAQ Stock Market under the symbol STRM. The table below sets forth the high and low sales prices for the Company’s common stock for each of the quarters in fiscal years 2011 and 2010, as reported by The NASDAQ Stock Market, Inc. The closing price of the Company’s common stock on April 12, 2012 was $1.68 per share as reported by The NASDAQ Stock Market, Inc.

According to the stock transfer agent’s records, the Company had 149 stockholders of record as of April 12, 2012. 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 2,200 stockholders, based on information provided by the Company’s stock transfer agent from their search of individual participants in security position listings.

The Company has not paid any cash dividends on its common stock since its inception and does not intend to pay any cash dividends in the foreseeable future.

Securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K are as follows:

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Sales of Unregistered Securities

In connection with Gabriel S. Waters’ appointment as Vice President of Business Development, the Company and Mr. Waters entered into an employment agreement dated March 28, 2011. Pursuant to that agreement the Company granted Mr. Waters the right to purchase 5,000 newly issued shares of common stock of the Company for $50 (i.e. their par value), and Mr. Waters completed such purchase as of that date. The issuance of such 5,000 shares constituted an inducement grant pursuant to NASDAQ Marketplace Rule 5635(c)(4). The sale and issuance of those shares were deemed by the Company to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), by virtue of Section 4(2) thereunder, as transactions by an issuer not involving any public offering. In October of 2011, the Company and Mr. Waters agreed to a mutual separation and as a result, Mr. Waters is no longer with the Company.

On December 7, 2011, as part of the purchase of the assets of Interpoint Partners, LLC (“Interpoint”), the Company issued a convertible promissory note (the “Convertible Note”) for $3,000,000, as part of the total initial purchase price of $5,000,000. Under the terms of the note, Interpoint may convert the outstanding principal balance and accrued interest into shares of the Company’s common stock at a conversion price of $2.00 per share at any time after December 31, 2012. No fractional shares can be issued upon conversion of the note. The sale and issuance of the note was deemed by the Company to be exempt from registration under the Securities Act by virtue of Section 4(2) thereunder, as transactions by an issuer not involving any public offering.

Additionally, the Company granted restricted stock on December 30, 2011 to certain members of the Company’s senior management team in lieu of annual cash bonuses. Robert E. Watson, president and chief executive officer, received 45,454 shares of restricted stock; Gary M. Winzenread, senior vice president and chief operating officer, received 18,181 shares of restricted stock; Richard D. Leach, senior vice president and chief marketing officer, received 15,151 shares of restricted stock; and Stephen H. Murdock, senior vice president and chief financial officer, received 13,636 shares of restricted stock. Two additional senior managers received a combined total of 20,605 restricted shares in lieu of cash.

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ITEM 7.    Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

EXECUTIVE OVERVIEW

In fiscal 2011, management outlined five strategic areas of focus that would facilitate improving the performance of the Company. Those points included: become a market-facing organization; build a sales and distribution network to assure that the Company is aware of and is actively working to secure every new healthcare information technology opportunity that falls within the scope of the capabilities of the solutions set; leverage core competencies to broaden the scope of the solutions portfolio to expand the recurring revenue stream within the existing client base; build the human capital required to accomplish the foregoing; and most importantly, continuing to drive costs out of our infrastructure.

First, the Company developed an understanding of the needs of current clients specifically, and of the overall market place, in general. Using this data, the Company has rapidly transformed into an externally facing organization by aligning all externally facing functions: business development, sales, account management, marketing and product management. One of the top priorities for our Company is to personally connect with each of our clients. Through that basic concept of connection and community, the Company improved our relationships with our clients and enhanced those that were already strong. Direct client feedback and insights into the solution and services portfolio have been invaluable. Through this feedback, our clients have communicated that they believe the Company offers a strong value proposition that provides significant cost efficiencies, given our deep and meaningful integration with EMR vendors such as GE, Cerner, Allscripts, MEDITECH and Epic.

Second, the Company is actively working to secure more opportunities that fall within the scope of the capabilities of the solutions set. An indicator of the positive movement in this area is the recruitment of experienced sales executives and the realignment of responsibilities across the entire sales organization. For the fiscal year ended January 31, 2012 the Company closed $7.2 million in new bookings. These opportunities have come primarily from e-mail marketing campaigns, work the Company has done with partners such as GE Healthcare and FTI Consulting, and completion of the successful integration work with Epic. Additionally, the Company continues to be active in conference and trade shows, such as HIMSS and AHIMA. As the Company previously announced, the acquisition of Interpoint Partners, LLC was completed in December. The Company has successfully integrated the Interpoint solutions, which are complementary to the current solution set, and have extended the Company’s reach deeper into the revenue cycle and finance area of current clients, as well as opened up new opportunities. The Company added $237,000 in bookings directly related to Interpoint’s solutions (which the Company now refers to as Patient Financial Services) since the close of the Interpoint acquisition on December 7, 2011.

Third, the Company is leveraging core competencies to broaden the scope of the product portfolio and expand the recurring revenue stream within the client base. The Company believes that there is a significant opportunity to migrate more current licensed clients to the software as a service model, which will result in a more stable and predictable recurring revenue streams for the Company. On December 5, AccessAnyWare, our clinical content management system, version 5.1 became commercially available. This is not only an important milestone in the transition of the Company’s core solution, but it also opens the door to accelerate the planning with clients to migrate them to the updated version 5.2 platform. As clients transition to version 5.2, the Company will not only generate available professional services revenue, but we will have the opportunity to sell additional software solutions to those clients to help them improve their operational efficiency and financial results. Finally, the AccessAnyWare versions 1.9 and 5.1 are certified for meaningful use, meaning that clients are able use these versions to qualify for incentive funding under the HITECH Act passed in 2009.

Fourth, the Company has recruited and retained the human capital that is required to accomplish the other areas of strategic focus. The Company continues to be very selective when adding new associates, and will continue to recruit and retain associates that have had a successful, demonstrable career in a growth-oriented health care information technology environment. One key part of our culture change at the Company is to

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recognize the value of all of our associates by extending our stock option program to include every single associate. Management believes that this will ensure that they feel and, most importantly, act, like owners and stakeholders in the Company’s success.

Lastly, the Company has driven a significant amount of costs out of the infrastructure, while improving our efficiency and productivity, and making investments for the future of the Company.

From a solutions positioning standpoint, the Company believes it has an advantage in the marketplace, and clients highly value the operational and technical support that the Company’s associates provide.

Results of Operations

Acquisition of Interpoint Partners, LLC

On December 7, 2011, the Company completed the acquisition of substantially all of the assets of Interpoint Partners, LLC (“Interpoint”). The Company believes that the acquisition of Interpoint’s operations will provide clients with the advanced technology solutions that they need to improve key operational and financial performance metrics of their businesses. The Company paid a total initial purchase price for the Interpoint acquisition of $5,000,000, consisting of cash of $2,000,000 and issuance of a convertible subordinated note for $3,000,000, subject to certain adjustments related principally to the delivered working capital level and/or indemnification provisions. Additionally, the agreement provides for a contingent earn out payment in cash or an additional convertible subordinated note based on Interpoint’s financial performance for the 12 month period beginning 6 months after closing and ending 12 months thereafter. The Company also assumed certain current operating liabilities of Interpoint. The Company granted Interpoint registration rights relating to any common stock of the Company issued upon conversion of the convertible note. The acquisition of Interpoint has been accounted for as a purchase business combination. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The operations of Interpoint are consolidated with the results of the Company from December 7, 2011. Please refer to the audited financial statements and related footnotes for further details.

Statement of Operations for the fiscal years ended (amounts in thousands):

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The following table sets forth, for each fiscal year indicated, certain operating data as percentages:

Statement of Operations(1)

Comparison of fiscal year 2011 with 2010

Revenues

Revenues consisted of the following (in thousands):

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Proprietary software — Revenues recognized from licensed software sales in fiscal 2011 were $227,000, as compared to $1,674,000 in fiscal 2010, a decrease of $1,447,000, or 86% from fiscal 2010. This decrease is attributable to the market demand shift towards SaaS, as well as the previously announced decrease in net new client opportunities from GE Healthcare.

Hardware and third party software — Revenues from hardware and third party software sales in fiscal 2011 were $495,000, a decrease of $389,000, or 44% from fiscal 2010. The decrease in hardware and third party software revenue in fiscal 2011 is primarily attributable to a decrease in hardware and third-party upgrades from the existing client base as well as the decrease in new licensed sales, as compared to fiscal 2010.

Professional services — Revenues from professional services in fiscal year 2011 were $3,370,000, a decrease of $271,000, or 7%, from fiscal 2010. The decrease is primarily attributable to the timing of which revenue could be recognized based on services performed.

Maintenance and support — Revenues from maintenance and support in fiscal year 2011 were $8,868,000, an increase of $1,011,000, or 13%, from fiscal 2010. The increase in maintenance and support results from the addition of new or renewed maintenance contracts signed with clients in fiscal 2011, as well as those signed in late fiscal 2010 as part of perpetual proprietary license sales. Typically maintenance renewals include a price increase based on the prevailing consumer price index, or increase in the product set purchased by the client.

Software as a service (SaaS) — Revenues from SaaS in fiscal 2011 were $4,156,000, an increase of $606,000, or 17%, from fiscal 2010. This increase is attributable to the recognition of add-on SaaS contracts and upgrade contracts signed by current clients, conversions of clients from licensed locally-installed systems to SaaS, and incremental revenues from operations acquired from Interpoint of approximately $287,000.

Revenues from remarketing partners — Total revenues from GE Healthcare or GE Healthcare source clients in fiscal year 2011 was $5,197,000, or 30% of total revenue; as compared to $5,873,000, or 33% of total revenue in fiscal 2010. Revenue by type and source is as follows (in thousands):

In fiscal 2011, two clients ended their direct relationship with GE Healthcare, however these clients were retained as direct clients to the Company. The Company no longer shares revenue or pays any royalties on these revenues to GE Healthcare. Revenues from these clients are as follows (in thousands):

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Index to Financial Statements

The Company relies on GE Healthcare for a significant amount of its revenues, the loss of which would have a material adverse effect on future results of operations. During the fourth quarter of fiscal 2010, the Company learned that GE Healthcare was shifting its organizational focus to upgrading its current clients to their latest version software to assist its clients in meeting meaningful use criteria under the HITECH act. This understanding continues through January 31, 2012. The Company’s remarketing agreement with GE Healthcare remains in effect, however the Company did not obtain any net new clients from the relationship in fiscal 2011. The opportunity to sell into GE Healthcare’s current client base that does not have the Company’s products remains, as well as the continuing ability to sell additional products and services into the existing jointly owned client base through the remarketing agreement. All signed contracts or purchase orders with GE Healthcare to purchase proprietary software, SaaS, professional services, and maintenance, are expected to be fully honored.

Total revenues from Telus Health were $1,151,000 in fiscal year 2011, or 7% of total revenues as compared to $1,073,000 in fiscal year 2010, or 6% of total revenues. Revenue by type and source is as follows (in thousands):

Cost of Sales

Cost of systems sales includes amortization and impairment of capitalized software expenditures, royalties, and the cost of third-party hardware and software. Cost of systems sales, as a percentage of systems sales, varies from period-to-period depending on hardware and software configurations of the systems sold. The relatively fixed cost of the capitalized software amortization, without the addition of any impairment charges, compared to the variable nature of system sales causes these percentages to vary dramatically. The decrease in fiscal 2011 cost of sales is primarily the result of the fiscal 2010 impairment charge of $755,000 on capitalized software development costs on certain workflows. The remaining decrease is the result of a $506,000 decrease in amortization expense, as well as reduced hardware and third party software sales, which reduces the associated direct costs.

The cost of professional services includes compensation and benefits for personnel, and related expenses. The decrease in expense is primarily due to a significant reduction in staffing which took place in the second

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Index to Financial Statements

quarter of fiscal 2011, and significant other cost cutting measures implemented by management. This was partially offset by an incremental increase in expense of $126,000 attributable to the inclusion of Interpoint operations.

The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts. These decreases are primarily due to a significant reduction in staffing which took place in the second quarter of fiscal 2011, and consolidation or renegotiation of third party maintenance contract associated with supporting the client base. This was partially offset by incremental increase in expense of $9,000 attributable to the inclusion of Interpoint operations.

The cost of software as a service is relatively fixed, but subject to inflation for the goods and services it requires. The decrease is primarily attributable to decreased depreciation due to older assets becoming fully depreciated and a decrease in third party license and maintenance expenses due to consolidation and renegotiation of contracts with vendors. These decreases are partially offset by depreciation of new equipment and new third party maintenance contracts from infrastructure spending as the Company added new or add-on SaaS contracts in the third and fourth quarters of fiscal 2011. This decrease was partially offset by incremental increase in expense of $40,000 attributable to the inclusion of Interpoint operations.

Selling, General and Administrative Expense

General and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company’s executive and administrative staff, general corporate expenses, amortization of intangible assets, and occupancy costs. The increase over the prior year is primarily due to increases in professional fees, equity awards expense, accrued vacation expense, and is partially offset by reductions in severance costs, and reductions in use of third party contractors. Amortization of intangible assets added incremental expense to fiscal 2011 due to the amortization of assets acquired as part of the acquisition of Interpoint. Excluding the impact of the Interpoint acquisition, general and administrative expenses would be $4,095,000 or 24% of total revenue for fiscal 2011.

Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company’s sales and marketing staff; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses. Sales and marketing expense decreased due to reduced commissions expense, reduced severance costs, and was offset by increased equity awards expense, and performance and inducement bonus expenses. Excluding the impact of the Interpoint acquisition, sales and marketing expenses would be $2,197,000 or 13% of total revenue for fiscal 2011.

Product Research and Development

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Index to Financial Statements

Product research and development expenses consist primarily of compensation and related benefits; the use of independent contractors for specific near-term development projects; and an allocated portion of general overhead costs, including occupancy. Research and development expense decreased due to a reduction in staffing, and an increase to the number of hours available to be capitalized which is reflected in the capitalized research and development costs. Research and development expenses in fiscal 2011 and 2010, as a percentage of revenues, were 8% and 10%, respectively. Excluding the impact of the Interpoint acquisition, research and development expense would be $1,315,000 or 8% of total fiscal 2011 revenue.

Other Income (Expense)

Interest expense in fiscal 2011 was $179,000 compared to $116,000 in fiscal 2010. Interest expense consists of interest and commitment fees on the line of credit, interest on the term loan entered into in conjuction with the Interpoint acquisition, interest on the convertible note entered into in conjuction with the Interpoint acquisition, and remaining interest on a capital lease for computer equipment which expired in January 2012. Interest expense increased during 2011 primarily because of the increase from the term loan and convertible note. Losses on foreign currency recognized on Canadian receivables were $9,000, as compared to $34,000 in gains in fiscal 2010.

Provision for Income Taxes

The Company recorded a tax provision of $24,000 at January 31, 2012 which is comprised of state and local taxes and alternative minimum tax. The tax provision of $1,017,000 for fiscal 2010 consists of state and local taxes, alternative minimum tax, and an increase to the valuation allowance on deferred tax assets in the amount of $997,000. The Company determined it was more likely than not that the deferred tax amount will be realized. At January 31, 2012 and 2010 the net realizable value of deferred tax assets was $878,000.

Backlog

At January 31, 2012 the Company had master agreements and purchase orders from clients and remarketing partners for systems and related services which have not been delivered or installed which, if fully performed, would generate future revenues of approximately $27,366,000 compared with $17,604,000 at January 31, 2011.

The Company’s proprietary software backlog consists of signed agreements to purchase software licenses. Typically, this is software that is not yet generally available, or the software is generally available and the client has not taken possession of the software.

Third party hardware and software consists of signed agreements to purchase third party hardware or third party software licenses that have not been delivered to the client. These are products that the Company resells as components of the solution a client purchases. The increase in backlog is primarily due to three clients which have made purchases for future systems implementations. These items are expected to be delivered in the next twelve months as implementations commence.

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Index to Financial Statements

Professional services backlog consists of signed contracts for services that have yet to be performed. Typically backlog is recognized within twelve months of the contract signing. The increase in backlog is due to several clients that signed contracts during fiscal 2011 for add-on solutions, upgrades, or expansion of services at additional locations for which contracted services have not yet been performed.

Maintenance and support backlog consists of maintenance agreements for licenses of the Company’s proprietary software and third party hardware and software with clients and remarketing partners for which either an agreement has been signed, a purchase order under a master agreement has been received, or payment has been received. The Company includes in backlog the signed agreements through their respective renewal dates. Typical maintenance contracts are for a one year term and are renewed annually. Clients typically prepay maintenance and support which is billed 30-60 days prior to the beginning of the maintenance period. The Company does not expect any significant client attrition over the next 12 months. Maintenance and support backlog at January 31, 2012 was $10,504,000 as compared to $5,384,000 at January 31, 2011. The Company expects to recognize approximately $6,600,000 out of January 31, 2012 backlog in fiscal 2012. A significant portion of the increase in maintenance and support backlog is due to one client which signed an extended maintenance contract for five years. This five year agreement added approximately $4,600,000 to backlog at January 31, 2012, for which the Company expects to recognize approximately $1,100,000 in fiscal 2012, and the remaining $3,500,000 in fiscal 2013 through fiscal 2016. Other factors which increased backlog are add-on solutions sold in fiscal 2011 and those sold in late fiscal 2010 for which maintenance revenue was recognized for a full year in fiscal 2011. Additionally, as part of renewals contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics.

At January 31, 2012, the Company had entered into software as a service agreements, which are expected to generate revenues of $10,542,000 through their respective renewal dates in fiscal years 2012 through 2018. Typical SaaS terms are one to seven years in length. SaaS backlog and terms are as follows (in thousands):

The commencement of revenue recognition for SaaS varies depending on the size and complexity of the system; the implementation schedule requested by the client and ultimately the official go-live on the system. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period.

All of the Company’s master agreements generally provide that the client may terminate its agreement upon a material breach by the Company, or may delay certain aspects of the installation. There can be no assurance that a client will not cancel all or any portion of a master agreement or delay portions of the agreement. A termination or delay in 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 financial condition, and results of operations.

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

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Index to Financial Statements

Company may supplement the Consolidated Financial Statements presented on a GAAP basis in this annual report on Form 10-K 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 by the Company, may differ from and may not be comparable to similarly titled measures used by other companies.

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share

The Company defines: (i) EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, and stock-based compensation expense; (iii) Adjusted EBITDA Margin, as Adjusted EBITDA as a percentage of net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing the Company’s operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization) and items outside the control of the management team (taxes). Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item outside of management control. Adjusted EBITDA per diluted share will include incremental shares in the share count that would be considered anti-dilutive in a GAAP net loss position.

The board of directors and management also use these measures as (i) 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.

The Company’s lenders use Adjusted EBITDA to assess our operating performance. The Company’s credit agreements with its lender require delivery of compliance reports certifying compliance with financial covenants certain of which are based on an adjusted EBITDA measurement that is the same as the Adjusted EBITDA measurement reviewed by our management and board of directors.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities; despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share as disclosed in this annual report on Form 10-K, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of Company 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:

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Index to Financial Statements

Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers to review the GAAP financial statements included elsewhere in this annual report on Form 10-K, and not rely on any single financial measure to evaluate our business. The Company also strongly urges readers to review the reconciliation of GAAP net earnings (loss) to Adjusted EBITDA, and GAAP earnings (loss) per diluted share to Adjusted EBITDA per diluted share in this section, along with the Consolidated Financial Statements included elsewhere in this annual report on Form 10-K.

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income, a comparable GAAP-based measure, as well as earnings (loss) per diluted share to Adjusted EBITDA per diluted share. All of the items included in the reconciliation from net earnings (loss) to EBITDA to Adjusted EBITDA and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing the Company’s 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 non-cash charges and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess the Company’s operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

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Index to Financial Statements

The following table reconciles net earnings (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share for the fiscal years ended January 31, 2012 and 2011 (amounts in thousands, except per share data):

Application of Critical Accounting Policies

The following is a summary of the Company’s most critical accounting policies. See Note B of our Consolidated Financial Statements for a complete discussion of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 985-605, Software-Revenue Recognition and ASC 605-25 Revenue Recognition — Multiple-element arrangements. The Company commences revenue recognition when the following criteria all have been met:

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Index to Financial Statements

If the Company determines that any of the above criteria has not been met, the Company will defer recognition of the revenue until all the criteria have been met. If non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable.

Multiple Element Arrangements

On February 1, 2011, we adopted Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”) on a prospective basis. The Company follows accounting guidance for revenue recognition of multiple deliverable revenue arrangements (meaning the delivery or performance of multiple products, services and/or rights to use assets) to determine whether such arrangements contain more than one unit of accounting. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis (meaning the item can be sold separately by any vendor or the client could resell the item on a stand-alone basis). Additionally, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items must be considered probable and substantially in the control of the vendor.

Allowance for Doubtful Accounts

Accounts and contract receivables are comprised of amounts owed the Company for solutions and services provided. Contracts with individual clients and resellers determine when receivables are due and payable. In determining the allowance for doubtful accounts, the unpaid receivables are reviewed monthly to determine the payment status based upon the most currently available information as to the status of the receivables. During these monthly reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments.

Capitalized Software Development Costs

Software development costs 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 designing phase of software development are classified as research and development and are expensed as incurred. Once technological feasibility has been determined, 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 over the estimated economic life of the software, using the straight-line method. Amortization commences immediately following when a solution is available for general release to clients. Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at the date of such determination. The Company reviews, on an on-going basis, the carrying value of its capitalized software development expenditures, net of accumulated amortization.

Liquidity and Capital Resources

The Company’s liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development, 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, interest payments on debt, and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS

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Index to Financial Statements

data center. Operations are funded by cash generated by operations and borrowings under credit facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for the next twelve months. Cash balances at January 31, 2012 and 2011 were $2,243,000 and $1,404,000, respectively. Continued expansion may require the Company to take on additional debt, or raise capital through issuance of equities, or a combination of both. There can be no assurance the Company will be able to raise the capital required to fund further expansion.

Significant cash obligations

In December 2011, the Company signed a definitive asset purchase agreement to purchase substantially all of Interpoint’s assets for a combination of cash and a convertible subordinated note totaling $5,000,000. Additionally, the Agreement provided for a contingent earn out payment in cash or convertible subordinated notes based on Interpoint’s financial performance for the twelve month period beginning six months after closing and ending 12 months thereafter. Please reference “Note F—Debt” in Item 8 for additional information.

In conjunction with the Interpoint acquisition, the Company entered into a subordinated credit agreement with Fifth Third Bank in which the bank provided the Company with a $4,120,000 two-year term loan, the proceeds of which were used to finance the cash portion of the acquisition purchase price, as well as pay down the outstanding balance of the Company’s revolving line of credit with the bank. The Company also entered into a Senior Credit Agreement with Fifth Third Bank, whereby the bank provided the Company with a $3,000,000 revolving line of credit that replaces the existing revolving line of credit with Fifth Third Bank. Please reference a Note F—Debt” in Item 8 for additional information.

Operating cash flow activities

Net cash provided by operating activities in fiscal 2011 decreased in the current year primarily due to an increase in profitability. Prior year non-cash adjustments were significantly higher due to an impairment loss on capitalized software development costs of $755,000, the incremental increase to the valuation allowance for deferred tax assets of $997,000, and higher amortization expense of capitalized software development costs. The Company’s implementation of cost reduction plans significantly reduced the use of operating cash for personnel costs and other operating expenses. This decrease was partially offset by an increased use of operating cash for the Interpoint acquisition.

The Company’s clients typically have been well-established hospitals or medical facilities or major health information system companies that resell the Company’s solutions, which have good credit histories and

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Index to Financial Statements

payments have been received within normal time frames for the industry. However, some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the availability of financing for some of our clients.

Investing cash flow activities

The acquisition of Interpoint accounts for the majority of the increase in cash flows used in investing activities.

The Company estimates that to replicate its existing software would cost significantly more than the stated net book value of $9,830,000 at January 31, 2012. Many of the programs related to capitalized software development continue to have significant value to the Company’s current solutions and those under development, as the concepts, ideas, and software code are readily transferable and are incorporated into new solutions.

Financing cash flow activities

The increase in cash from financing activities was primarily the result of proceeds from the term loan financing entered into as part of the Interpoint acquisition. The remaining change primarily consists of $404,000 of cash flow provided by the stock subscription sale in the fourth quarter, and offset by decreases in cash of $157,000 for deferred financing costs, and $184,000 for the remaining payments on the capital lease which expired in January 2012.

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Index to Financial Statements

ITEM 8.    Financial Statements And Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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.

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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Streamline Health Solutions, Inc.

Cincinnati, Ohio

We have audited the accompanying consolidated balance sheets of Streamline Health Solutions, Inc. and subsidiaries (the “Company”) as of January 31, 2012 and 2011 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Streamline Health Solutions, Inc. and subsidiaries at January 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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Index to Financial Statements

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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Index to Financial Statements

CONSOLIDATED BALANCE SHEETS — (Continued)