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STREAMLINE HEALTH SOLUTIONS INC. - Quarter Report: 2013 July (Form 10-Q)

Index to Financial Statements

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 0-28132
 
STREAMLINE HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware

31-1455414
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1230 Peachtree Street, NE, Suite 1000,
Atlanta, GA 30309
(Address of principal executive offices) (Zip Code)
(404) 446-0050
(Registrant’s telephone number, including area code)

 

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

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x
                                                      (Do not check if a smaller reporting company)
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 number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of September 10, 2013: 13,118,069
 


Index to Financial Statements

TABLE OF CONTENTS
 
 
Page
Part I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
Condensed Consolidated Balance Sheets at July 31, 2013 and January 31, 2013
 
Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2013 and 2012
 
Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2013 and 2012
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 6.
Exhibits
 
Signatures




Index to Financial Statements

PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS

STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
 
 
 
July 31, 2013
 
January 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,355,673

 
$
7,500,256

Accounts receivable, net of allowance for doubtful accounts of $134,000 and $134,000, respectively
10,773,182

 
8,685,017

Contract receivables
1,769,738

 
1,481,819

Prepaid hardware and third party software for future delivery
22,777

 
22,777

Prepaid client maintenance contracts
1,176,432

 
1,080,330

Other prepaid assets
924,512

 
997,024

Other current assets

 
110,555

Total current assets
20,022,314

 
19,877,778

Non-current assets:
 
 
 
Property and equipment:
 
 
 
Computer equipment
3,481,679

 
3,420,452

Computer software
2,202,444

 
2,196,236

Office furniture, fixtures and equipment
870,079

 
843,274

Leasehold improvements
697,570

 
697,570

 
7,251,772

 
7,157,532

Accumulated depreciation and amortization
(6,296,766
)
 
(5,958,727
)
Property and equipment, net
955,006

 
1,198,805

Contract receivables, less current portion
95,816

 
126,626

Capitalized software development costs, net of accumulated amortization of $18,861,000 and $17,465,000, respectively
12,218,230

 
12,816,486

Intangible assets, net
7,559,154

 
8,188,131

Deferred financing costs, net
331,955

 
541,740

Goodwill
12,166,959

 
12,133,304

Other
459,823

 
383,708

Total non-current assets
33,786,943

 
35,388,800

 
$
53,809,257

 
$
55,266,578


See accompanying notes.


2

Index to Financial Statements

 

 
 

July 31, 2013
 
January 31, 2013
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,605,745

 
$
1,495,913

Accrued compensation
1,021,515

 
2,088,850

Accrued other expenses
1,318,947

 
1,325,039

Current portion of long-term debt
1,250,000

 
1,250,000

Deferred revenues
10,040,005

 
9,810,442

Contingent consideration for earn-out
1,358,722

 
1,319,559

Current portion of deferred tax liability
35,619

 
35,619

Total current liabilities
16,630,553

 
17,325,422

Non-current liabilities:
 
 
 
Term loans
11,812,500

 
12,437,501

Warrants liability
5,981,000

 
3,649,349

Lease incentive liability, less current portion
79,603

 
99,579

Deferred income tax liability, less current portion
663,033

 
529,709

Total non-current liabilities
18,536,136

 
16,716,138

Total liabilities
35,166,689

 
34,041,560

Series A 0% Convertible Redeemable Preferred Stock, $.01 par value per share, $11,999,985 redemption value, 4,000,000 shares authorized, 3,999,995 shares issued and outstanding, net of unamortized preferred stock discount of $4,034,470 and $4,234,269, respectively
7,965,515

 
7,765,716

Stockholders’ equity:
 
 
 
Common stock, $.01 par value per share, 25,000,000 shares authorized; 13,039,619 and 12,643,620 shares issued and outstanding, respectively
130,396

 
126,436

Convertible redeemable preferred stock, $.01 par value per share, 1,000,000 shares authorized, no shares issued

 

Additional paid in capital
49,930,230

 
49,178,389

Accumulated deficit
(39,383,573
)
 
(35,845,523
)
Total stockholders’ equity
10,677,053

 
13,459,302

 
$
53,809,257

 
$
55,266,578


See accompanying notes.


3

Index to Financial Statements

STREAMLINE HEALTH SOLUTIONS, INC.
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)

 
Three Months
 
Six Months
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Systems sales
$
2,233,668

 
$
75,670

 
$
2,558,314

 
$
429,200

Professional services
1,039,240

 
941,419

 
1,958,591

 
2,063,858

Maintenance and support
3,620,446

 
2,297,246

 
7,001,046

 
4,648,821

Software as a service
1,880,007

 
1,734,719

 
3,728,748

 
3,352,308

Total revenues
8,773,361

 
5,049,054

 
15,246,699

 
10,494,187

Operating expenses:
 
 
 
 
 
 
 
Cost of systems sales
661,124

 
532,332

 
1,299,722

 
1,218,859

Cost of professional services
1,266,744

 
503,474

 
2,241,206

 
1,055,956

Cost of maintenance and support
795,476

 
705,713

 
1,780,065

 
1,430,995

Cost of software as a service
514,075

 
616,781

 
1,093,154

 
1,299,087

Selling, general and administrative
3,408,153

 
2,204,205

 
6,989,020

 
3,873,965

Research and development
1,160,147

 
510,842

 
2,257,157

 
967,205

Total operating expenses
7,805,719

 
5,073,347

 
15,660,324

 
9,846,067

Operating income (loss)
967,642

 
(24,293
)
 
(413,625
)
 
648,120

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(587,808
)
 
(391,188
)
 
(1,154,373
)
 
(599,018
)
Miscellaneous income (expenses)
(1,064,163
)
 
(23,788
)
 
(1,806,428
)
 
12,257

Earnings (loss) before income taxes
(684,329
)
 
(439,269
)
 
(3,374,426
)
 
61,359

Income tax expense
(143,874
)
 
(24,000
)
 
(163,624
)
 
(33,000
)
Net earnings (loss)
$
(828,203
)
 
$
(463,269
)
 
$
(3,538,050
)
 
$
28,359

Less: deemed dividends on Series A Preferred Shares
(15,510
)
 

 
(357,146
)
 

Net earnings (loss) attributable to common shareholders
$
(843,713
)
 
$
(463,269
)
 
$
(3,895,196
)
 
$
28,359

Basic net earnings (loss) per common share
$
(0.07
)
 
$
(0.04
)
 
$
(0.31
)
 
$
0.00

Number of shares used in basic per common share computation
12,861,715

 
11,316,083

 
12,698,094

 
10,817,214

Diluted net earnings (loss) per common share
$
(0.07
)
 
$
(0.04
)
 
$
(0.31
)
 
$
0.00

Number of shares used in diluted per common share computation
12,861,715

 
11,316,083

 
12,698,094

 
10,936,752

 

 
 
 
 
 
 

See accompanying notes.


4

Index to Financial Statements

STREAMLINE HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(Unaudited)
 
 
 
2013
 
2012
Operating activities:
 
 
 
Net earnings (loss)
$
(3,538,050
)
 
$
28,359

Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation
338,039

 
362,631

Amortization of capitalized software development costs
1,396,050

 
1,222,394

Amortization of intangible assets
628,977

 
25,318

Amortization of other deferred costs
186,018

 
39,375

Valuation adjustment for warrants liability
1,670,354

 

Deferred tax expense
133,324

 

Valuation adjustment for contingent earn-out
39,163

 

Share-based compensation expense
825,531

 
399,961

Changes in assets and liabilities, net of assets acquired:
 
 
 
Accounts and contract receivables
(2,092,868
)
 
2,438,948

Other assets
(227,263
)
 
(649,612
)
Accounts payable
89,856

 
(167,998
)
Accrued expenses
(1,045,618
)
 
597,038

Deferred revenues
229,563

 
(1,128,200
)
Net cash (used in) provided by operating activities
(1,366,924
)
 
3,168,214

Investing activities:
 
 
 
Purchases of property and equipment
(94,240
)
 
(448,768
)
Capitalization of software development costs
(797,794
)
 
(970,000
)
Net cash used in investing activities
(892,034
)
 
(1,418,768
)
Financing activities:
 
 
 
Principal repayments on term loans
(625,001
)
 

Proceeds from exercise of stock options and stock purchase plan
739,376

 
79,022

Net cash provided by financing activities
114,375

 
79,022

(Decrease) increase in cash and cash equivalents
(2,144,583
)
 
1,828,468

Cash and cash equivalents at beginning of period
7,500,256

 
2,243,054

Cash and cash equivalents at end of period
$
5,355,673

 
$
4,071,522



See accompanying notes.

5

Index to Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
(Unaudited)

NOTE A — BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Streamline Health Solutions, Inc. (the "Company"), pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the U. S. Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in our most recent annual report on Form 10-K, Commission File Number 0-28132. Operating results for the three and six months ended July 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2014.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are presented in “Note B – Significant Accounting Policies” in the fiscal year 2012 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes contained in the Annual Report on Form 10-K when reviewing interim financial results.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The FASB’s authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount of the Company’s long-term debt approximates fair value since the interest rates being paid on the amounts approximate the market interest rate. Long-term debt is classified as Level 2. The fair value of contingent consideration for earn-out and warrants liability is determined by management with the assistance of an independent third party valuation specialist. The Company used a Black-Scholes option pricing model to estimate the fair value of the contingent consideration for earn-out and warrants liability. The contingent consideration for earn-out and warrants liability are classified as Level 3.
Revenue Recognition
The Company derives revenue from the sale of internally developed software either by licensing or by software as a service ("SaaS"), through the direct sales force or through third-party resellers. Licensed, locally-installed, clients utilize the Company’s support and maintenance services for a separate fee, whereas SaaS fees include support and maintenance. The Company also derives revenue from professional services that support the implementation, configuration, training, and optimization of the applications. Additional revenues are also derived from reselling third-party software and hardware components.
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:
Persuasive evidence of an arrangement exists,

6

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Delivery has occurred or services have been rendered,
The arrangement fees are fixed or determinable, and
Collection is considered probable
If the Company determines that any of the above criteria have not been met, the Company will defer recognition of the revenue until all the criteria have been met. Maintenance and support and SaaS agreements entered into are generally non-cancelable, or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if the Company fails to perform material obligations. However, 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.
Revenues from resellers are recognized gross of royalty payments to resellers.
Multiple Element Arrangements
On February 1, 2011, the Company 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. ASU 2009-13 amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:
Provide updated guidance on how deliverables of an arrangement are separated, and how consideration is allocated;
Eliminate the residual method and require entities to allocate revenue using the relative selling price method and;
Require entities to allocate revenue to an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor specific objective evidence (“VSOE”) or third party evidence (“TPE”) of selling price.

Terms used in evaluation are as follows:
VSOE — the price at which an element is sold as a separate stand-alone transaction
TPE — the price of an element, charged by another company that is largely interchangeable in any particular transaction
ESP — the Company’s best estimate of the selling price of an element of the transaction
The Company follows accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple solutions, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis. Stand-alone value to a client is defined in the guidance as those that 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 item or items must be considered probable and substantially in the control of the vendor.
The Company has a defined pricing methodology for all elements of the arrangement and proper review of pricing to ensure adherence to Company policies. Pricing decisions include cross-functional teams of senior management, which uses market conditions, expected contribution margin, size of the client’s organization, and pricing history for similar solutions when establishing the selling price.
Software as a service
The Company uses ESP to determine the value for a software as a service arrangement as the Company cannot establish VSOE and TPE is not a practical alternative due to differences in functionality from the Company's competitors. Similar to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution, and include calculating the equivalent value of maintenance and support on a present value basis over the term of the initial agreement period. Typically revenue recognition commences upon client go-live on the system, and is recognized ratably over the contract term. The software portion of SaaS for Health Information Management ("HIM") products does not need material modification to achieve its contracted function. The software portion of SaaS for the Company's Patient Financial Services ("PFS") products require material customization and setup processes to achieve their contracted function.
System Sales
The Company uses the residual method to determine fair value for proprietary software licenses sold in a multi-element arrangement. Under the residual method, the Company allocates the total value of the arrangement first to the undelivered elements based on their VSOE and allocates the remainder to the proprietary software license fees.

7

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Typically pricing decisions for proprietary software rely on the relative size and complexity of the client purchasing the solution. Third party components are resold at prices based on a cost plus margin analysis. The proprietary software and third party components do not need any significant modification to achieve its intended use. When these revenues meet all criteria for revenue recognition, and are determined to be separate units of accounting, revenue is recognized. Typically this is upon shipment of components or electronic download of software. Proprietary licenses are perpetual in nature, and license fees do not include rights to version upgrades, fixes or service packs.
Maintenance and Support Services
The maintenance and support components are not essential to the functionality of the software and clients renew maintenance contracts separately from software purchases at renewal rates materially similar to the initial rate charged for maintenance on the initial purchase of software. The Company uses VSOE of fair value to determine fair value of maintenance and support services. Rates are set based on market rates for these types of services, and the Company’s rates are comparable to rates charged by its competitors, which is based on the knowledge of the marketplace by senior management. Generally, maintenance and support is calculated as a percentage of the list price of the proprietary license being purchased by a client. Clients have the option of purchasing additional annual maintenance service renewals each year for which rates are not materially different from the initial rate, but typically include a nominal rate increase based on the consumer price index. Annual maintenance and support agreements entitle clients to technology support, upgrades, bug fixes and service packs.
Term Licenses
The Company cannot establish VSOE fair value of the undelivered element in term license arrangements.  However, as the only undelivered element is post-contract customer support, the entire fee is recognized ratably over the contract term.  Typically revenue recognition commences once the client goes live on the system.  Similar to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution. The software portion of the Company's Collabra (“Coding”) products generally do not require material modification to achieve their contracted function.
Professional Services
Professional services components that are not essential to the functionality of the software, from time to time, are sold separately by the Company. Similar services are sold by other vendors, and clients can elect to perform similar services in-house. When professional services revenues are a separate unit of accounting, revenues are recognized as the services are performed.
Professional services components that are essential to the functionality of the software, and are not considered a separate unit of accounting, are recognized in revenue ratably over the life of the client, which approximates the duration of the initial contract term. The Company defers the associated direct costs for salaries and benefits expense for professional services contracts. As of July 31, 2013 and January 31, 2013, the Company had deferred costs of approximately $308,000 and $201,000, respectively. These deferred costs will be amortized over the identical term as the associated SaaS revenues. Accumulated amortization of these costs was approximately $63,000 and $35,000 as of July 31, 2013 and January 31, 2013, respectively.
The Company uses VSOE of fair value based on the hourly rate charged when services are sold separately, to determine fair value of professional services. The Company typically sells professional services on a fixed fee basis. The Company monitors projects to assure that the expected and historical rate earned remains within a reasonable range to the established selling price.
Severances
From time to time, the Company will enter into termination agreements with associates that may include supplemental cash payments, as well as contributions to health and other benefits for a specific time period subsequent to termination. For the three months ended July 31, 2013 and 2012 , the Company incurred approximately $2,000 and zero in severance expenses, respectively, and $385,000 and $70,000 for the six months ended July 31, 2013 and 2012, respectively. At July 31, 2013 and January 31, 2013, the Company had accrued for $72,000 and $548,000 in severances, respectively. The severances accrued at July 31, 2013 were paid out in full by August 31, 2013.
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 vesting period. The Company incurred total compensation expense related to stock-based awards of $359,000 and $222,000 for the three months ended July 31, 2013 and 2012, respectively, and $826,000 and $400,000 for the six months ended July 31, 2013 and 2012, respectively.

8

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of the stock options granted have been estimated at the date of grant using a Black-Scholes option pricing model. Option pricing model input assumptions such as expected term, expected volatility, and risk-free interest rate impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and are generally derived from external (such as, risk free rate of interest) and historical data (such as, volatility factor, expected term, and forfeiture rates). Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon the number, value and vesting period of future awards.
The Company issues restricted stock awards in the form of Company common stock. The fair value of these awards is based on the market close price per share on the day of grant. The Company expenses the compensation cost of these awards as the restriction period lapses, which is typically a one year service period to the Company.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis 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.
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. As of July 31, 2013, the Company believes it has appropriately accounted for any uncertain tax positions. As part of the Meta acquisition, the Company assumed a current liability for an uncertain tax position, and expects to settle this amount in fiscal 2013. The Company has a $152,000 reserve for uncertain tax positions and corresponding interest and penalties as of both July 31, 2013 and January 31, 2013, respectively.
Net Earnings (Loss) Per Common Share
The Company presents basic and diluted earnings per share (“EPS”) data for its common stock. Basic EPS is calculated by dividing the net income (loss) attributable to shareholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the weighted average number of shares of common stock outstanding adjusted for the effects of all dilutive potential common shares comprised of options granted, unvested restricted stocks, warrants and convertible preferred stock. Potential common stock equivalents that have been issued by the Company related to outstanding stock options, unvested restricted stock and warrants are determined using the treasury stock method, while potential common shares related to Series A Convertible Preferred Stock are determined using the “if converted” method.

The Company's unvested restricted stock awards and Series A Convertible Preferred stock are considered participating securities under ASC 260, “Earnings Per Share”, which means the security may participate in undistributed earnings with common stock. The Company's unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. The holders of the Series A Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stock holders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the if-converted method.

In accordance with ASC 260, securities are deemed to not be participating in losses if there is no obligation to fund such losses. For the three and six months ended July 31, 2013, the unvested restricted stock awards and the Series A Preferred Stock were not deemed to be participating since there was a net loss from operations. For the three and six months ended July 31, 2013, the effect of unvested restricted stock to the earnings per share calculation was immaterial. As of July 31, 2013, there were 3,999,995 shares of preferred stock outstanding, each share is convertible into one share of the Company's common stock. For the three and six months ended July 31, 2013, the Series A Convertible Preferred Stock would have an anti-dilutive effect if included in diluted EPS and therefore, was not included in the calculation. As of July 31, 2013 and January 31, 2013, there were

9

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

29,698 and 137,327, respectively, unvested restricted shares of common stock outstanding. The unvested restricted shares at July 31, 2013 and January 31, 2013 were excluded from the calculation as their effect would have been antidilutive.
The following is the calculation of the basic and diluted net earnings (loss) per share of common stock:
 
Three Months Ended
 
July 31, 2013
 
July 31, 2012
Net loss
$
(828,203
)
 
$
(463,269
)
Less: deemed dividends on Series A Preferred Stock
(15,510
)
 

Net loss attributable to common shareholders
$
(843,713
)
 
$
(463,269
)
Weighted average shares outstanding used in basic per common share computations
12,861,715

 
11,316,083

Stock options and restricted stock

 

Number of shares used in diluted per common share computation
12,861,715

 
11,316,083

Basic net loss per share of common stock
$
(0.07
)
 
$
(0.04
)
Diluted net loss per share of common stock
$
(0.07
)
 
$
(0.04
)
 
Six Months Ended
 
July 31, 2013
 
July 31, 2012
Net earnings (loss)
$
(3,538,050
)
 
$
28,359

Less: deemed dividends on Series A Preferred Stock
(357,146
)
 

Net earnings (loss) attributable to common shareholders
$
(3,895,196
)
 
$
28,359

Weighted average shares outstanding used in basic per common share computations
12,698,094

 
10,817,214

Stock options and restricted stock

 
119,538

Number of shares used in diluted per common share computation
12,698,094

 
10,936,752

Basic net earnings (loss) per share of common stock
$
(0.31
)
 
$
0.00

Diluted net earnings (loss) per share of common stock
$
(0.31
)
 
$
0.00


Diluted net earnings (loss) per share exclude the effect of 2,549,178 and 2,310,218 outstanding stock options for the three and six months ended July 31, 2013 and 2012, respectively. The inclusion of these shares would be anti-dilutive. For the six months ended July 31, 2013, the outstanding common stock warrants of 1,400,000 would have an anti-dilutive effect if included in diluted EPS and therefore, were not included in the calculation. There were no outstanding warrants as of July 31, 2012.
Recent Accounting Pronouncements

In February 2013, the FASB issued an accounting standard update relating to improving the reporting of reclassifications out of accumulated other comprehensive income. The update would require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The update is effective for reporting periods beginning after December 15, 2012. This standard did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows.


NOTE C — ACQUISITIONS
On December 7, 2011, the Company completed the acquisition of substantially all of the assets of Interpoint Partners, LLC (“Interpoint”). This acquisition expanded the Company’s product offering into business intelligence and revenue cycle performance management. The purchase agreement also includes a contingent earn-out provision, which had an estimated value of approximately $1,359,000 and $1,320,000 at July 31, 2013 and January 31, 2013, respectively. The contingent earn-

10

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

out is to be paid in cash or an additional convertible subordinated note based on the acquired Interpoint operations financial performance for the 12-month period beginning July 1, 2012 and ending June 30, 2013.
The Company delivered its calculation of the earn-out amount due to Interpoint in July 2013. In August 2013, Interpoint requested additional information underlying the Company's calculation of the amount due and owing under the purchase agreement and Interpoint notified the Company that it disagreed with the Company's calculation of the earn-out consideration due. The Company has provided the additional information requested by Interpoint, and the parties are engaged in discussions with respect to the outstanding differences in the calculation of the amount due under the purchase agreement. The Company believes that its calculation of the amount due and owing is correct and no adjustment has been made to the $1,359,000 accrued on its condensed consolidated balance sheet at July 31, 2013. The Company is unable at this time to assess whether the ongoing discussions with Interpoint may lead to a change in the accrued amount in the future.
On August 16, 2012, the Company acquired substantially all of the outstanding stock of Meta Health Technology, Inc., a New York corporation (“Meta”). The Company paid a total purchase price of approximately $14,790,000, consisting of cash payment of $13,288,000 and the issuance of 393,086 shares of the Company's common stock at an agreed upon price of $4.07 per share. The fair value of the common stock at the date of issuance was $3.82.
The acquisition of Meta represents the Company's on-going growth strategy, and is reflective of the solutions development process, which is led by the needs and requirements of clients and the marketplace in general. The Meta suite of solutions, when bundled with the Company's existing solutions, will help current and prospective clients better prepare for compliance with the ICD-10 transition. The Company believes that the integration of business analytics solutions with the coding solutions acquired in this transaction will position the Company to address the complicated issues of clinical analytics as clients prepare for the proposed changes in commercial and governmental payment models.
The purchase price is subject to certain adjustments related principally to the delivered working capital level, which will be settled in the third quarter of fiscal 2013, and/or indemnification provisions. Under the acquisition method of accounting, 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 as follows:

 
August 16, 2012
Assets purchased:
 
Cash
$
1,126,000

Accounts receivable
2,300,000

Fixed assets
133,000

Other assets
513,000

Client relationships
4,464,000

Internally developed software
3,646,000

Trade name
1,588,000

Supplier agreements
1,582,000

Covenants not to compete
720,000

Goodwill(1)
8,073,000

Total assets purchased
$
24,145,000

Liabilities assumed:
 
Accounts payable and Accrued liabilities
1,259,000

Deferred revenue obligation, net
3,494,000

Deferred tax liability
4,602,000

Net assets acquired
$
14,790,000

Consideration:
 
Company common stock
1,502,000

Cash paid
13,288,000

Total consideration
$
14,790,000

 _______________
(1)
Goodwill represents the excess of purchase price over the estimated fair value of net tangible and intangible assets acquired, which is not deductible for tax purposes.

11

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



NOTE D — DERIVATIVE LIABILITIES

In conjunction with the private placement investment, the Company issued common stock warrants exercisable for up to 1,200,000 shares of common stock at an exercise price of $3.99 per share. The warrants were initially classified in stockholders' equity as additional paid in capital at the allocated amount, net of allocated transaction costs, of approximately $1,425,000. Effective October 31, 2012, upon shareholder approval of anti-dilution provisions that reset the warrants' exercise price if a dilutive issuance occurs, the warrants were reclassified as non-current derivative liabilities. The fair value of the warrants was approximately $4,139,000 at October 31, 2012, with the difference between the fair value and carrying value recorded to additional paid in capital. Effective as of the reclassification as derivative liabilities, the warrants are re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period as a credit or charge to miscellaneous income (expense). The fair value of the warrants at July 31, 2013 was approximately $5,981,000, with the increase in fair value since January 31, 2013 of approximately $1,670,000 recognized as miscellaneous expense in the condensed consolidated statements of operations. The estimated fair value of the warrant liabilities as of July 31, 2013 was computed using a Black-Scholes option pricing model simulations based on the following assumptions: annual volatility of 65%; risk-free rate of 1.2%, dividend yield of 0.0% and expected life of approximately 4.55 years. The model also included assumptions to account for anti-dilutive provisions within the warrant agreement.

During the three months ended April 30 2013, the Company recorded an immaterial correction of an error regarding the valuation of its common stock warrants originated during the third quarter of fiscal 2012 in conjunction with its private placement investment. The Company concluded there was a cumulative $19,000 overstatement of the loss before income taxes on its condensed consolidated statement of operations for the fiscal year ended January 31, 2013, as previously reported. The aforementioned cumulative $19,000 overstatement has been recorded in the condensed consolidated statement of operations for the three months ended April 30, 2013. The January 31, 2013 condensed consolidated balance sheet, as previously reported, reflects a $51,000 overstatement of deferred financing costs, a cumulative $150,000 understatement of deemed dividends on Series A Preferred Stock, a $7,000 overstatement of the Series A preferred stock, and a $602,000 overstatement of additional paid in capital. These aforementioned condensed consolidated balance sheet adjustments have been recorded on the April 30. 2013 and July 31, 2013 condensed consolidated balance sheets. The Company concluded that the impact of the corrections were not quantitatively and qualitatively material to the prior fiscal year and the respective quarters ended in 2012 and 2013.

NOTE E — LEASES
The Company rents office and data center space and equipment under non-cancelable operating leases that expire at various times through fiscal year 2018. Future minimum lease payments under non-cancelable operating leases for the next five fiscal years are as follows:

 
Facilities
 
Equipment
 
Fiscal Year Totals
2013 (six months remaining)
$
466,000

 
$
56,000

 
$
522,000

2014
717,000

 
158,000

 
875,000

2015
322,000

 
102,000

 
424,000

2016
162,000

 
2,000

 
164,000

2017
167,000

 

 
167,000

2018
85,000

 

 
85,000

Total
$
1,919,000

 
$
318,000

 
$
2,237,000


Rent and leasing expense for facilities and equipment was approximately $317,000 and $250,000 for the three months ended July 31, 2013 and 2012, respectively, and $553,000 and $446,000 for the six months ended July 31, 2013 and 2012, respectively.

NOTE F — DEBT
Term Loan and Line of Credit
On December 7, 2011, 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 term loan, which was scheduled to mature on December 7, 2013, and a revolving line of credit, which was scheduled to mature on October 1, 2013.

12

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


In conjunction with the Meta acquisition, on August 16, 2012, the Company amended the subordinated term loan and line of credit agreements with Fifth Third Bank, whereby Fifth Third Bank provided the Company with a $5,000,000 revolving line of credit, a $5,000,000 senior term loan and a $9,000,000 subordinated term loan, a portion of which was used to refinance the previously outstanding $4,120,000 subordinated term loan. Additionally, as part of the refinancing in August 2012, the Company mutually agreed to settle the success fee included in the previous subordinated term loan for $700,000. The difference between the $233,000 success fee accrued through the date of the amendment and the amount paid was recorded to deferred financing costs and is being amortized over the term of the amended loan. The Company paid a commitment fee in connection with the senior term loan of $75,000, which is included in deferred financing costs.

The Company will be required to pay a success fee in accordance with the amended subordinated term loan, which is recorded in interest expense as accrued over the term of the loan. The success fee is due on the date the entire principal balance of the loan becomes due. The success fee is accrued in accordance with the terms of the loan in an amount necessary to provide the lender a 17% internal rate of return through the date the success fee becomes due.

These new term loans and revolving line of credit mature on August 16, 2014. The loans are secured by substantially all of the Company's assets. The senior term loan principal balance is payable in monthly installments of approximately $104,000 which commenced in November 2012, and and will continue through the maturity date, with the full remaining unpaid principal balance due at maturity. The entire unpaid principal balance of the subordinated term loan is due at maturity. Borrowings under the senior term loan bear interest at a rate of LIBOR (0.20% at July 31, 2013) plus 5.50%, and borrowings under the subordinated term loan bear interest at 10% from August 16, 2012 and thereafter. Accrued and unpaid interest on the senior and subordinated term loans is due monthly through maturity. Borrowings under the revolving loan bear interest at a rate equal to LIBOR plus 3.00%. A commitment fee of 0.40% will be incurred on the unused revolving line of credit balance, and is payable quarterly. As of July 31, 2013, the Company had no outstanding borrowings under the line of credit, and had accrued approximately $3,000 in unused balance commitment fees. The proceeds of these loans were used to finance the cash portion of the acquisition purchase price and to cover any additional operating costs as a result of the Meta acquisition.

The Company evaluated the subordinated term loan and revolving line of credit for modification accounting. The Company evaluated the debt restructuring to determine if it was either a modification or extinguishment. The Company concluded that the restructuring qualifed as a modification. As such, fees paid to or received from the creditor were capitalized and are being amortized to interest expense over the remaining term of the restructured debt using the effective interest method.
The significant covenants as set forth in the term loans and line of credit are as follows: (i) maintain adjusted EBITDA as of the end of the fiscal quarter on a trailing four fiscal quarter basis beginning July 31, 2013 greater than: $5,000,000, (after consideration of certain acquisition and transaction costs), $6,000,000 on October 31, 2013, $6,500,000 on January 31, 2014 and $7,000,000 on April 30, 2014 and thereafter; (ii) maintain a fixed charge coverage ratio for the fiscal quarter ending January 31, 2013 and each April 30, July 31, October 31, and January 31 of not less than 1.50:1 calculated quarterly for the period from October 31, 2012 to the date of measurement for the quarters ending January 31, 2013, April 30, 2013 and July 31, 2013 and on a trailing four quarter basis thereafter; (iii) on a consolidated basis, maintain ratio of funded debt to adjusted EBITDA as of the end of any fiscal quarter less than 3:1, calculated quarterly on a trailing four fiscal quarter basis beginning October 31, 2012. The Company was in compliance with all loan covenants at July 31, 2013.
Outstanding principal balances on long-term debt consisted of the following at:
 
 
July 31, 2013
 
January 31, 2013
Senior term loan
 
$
4,063,000

 
$
4,688,000

Subordinated term loan
 
9,000,000

 
9,000,000

Line of credit
 

 

Total
 
13,063,000

 
13,688,000

Less: Current portion
 
1,250,000

 
1,250,000

Non-current portion of long-term debt
 
$
11,813,000

 
$
12,438,000

Future principal repayments of long-term debt consisted of the following at July 31, 2013:

13

Index to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
Payments Due by Period
 
 
2013
 
2014
Senior term loan
 
$
625,000

 
$
3,438,000

Subordinated term loan
 

 
9,000,000

Line of credit
 

 

Total principal repayments
 
$
625,000

 
$
12,438,000

Contingent Earn-Out Provision
As part of the asset purchase, Interpoint is entitled to receive additional consideration contingent upon certain financial performance measurements during a one year earn-out period commencing July 1, 2012 and ending on June 30, 2013. The earn-out consideration is calculated as twice the recurring revenue for the earn-out period recognized by the acquired Interpoint operations from specific contracts defined in the asset purchase agreement, plus one times Interpoint revenue derived from the Company's customers, less $3,500,000. The earn-out consideration, if any, was due no later than July 31, 2013 in cash or through the issuance of a note with terms identical to the terms of the Convertible Note (which was converted on June 15, 2012, please see "Note F - Debt" in the Notes to the Consolidated Financial Statements as part of the annual report on Form 10-K for the year ended January 31, 2013), except with respect to issue date, conversion date and prepayment date. The earn-out note restricts conversion or prepayment at any time prior to the one year anniversary of the issue date.
The Company delivered its calculation of the earn-out amount due to Interpoint in July 2013 of $1,359,000. In August 2013, Interpoint requested additional information underlying the Company's calculation of the amount due and owing under the purchase agreement and Interpoint notified the Company that it disagreed with the Company's calculation of the earn-out consideration due. The Company has provided the additional information requested by Interpoint, and the parties are engaged in discussions with respect to the outstanding differences in the calculation of the amount due under the purchase agreement. The Company believes that its calculation of the amount due and owing is correct and no adjustment has been made to the $1,359,000 accrued on its condensed consolidated balance sheet at July 31, 2013. The Company is unable at this time to assess whether the ongoing discussions with Interpoint may lead to a change in the accrued amount in the future.
As of July 31, 2013, the Company calculated the payment obligation in connection with the earn-out to be $1,359,000. As of January 31, 2013, the Company estimated the payment obligation to be $1,320,000. A change in value of the earn-out of $39,000 was recorded for the six months ended July 31, 2013.

NOTE G — INCOME TAXES
Income tax expense consists of federal, state and local tax provisions. For the six months ended July 31, 2013 and 2012, the Company recorded federal tax provisions of $110,000 and $15,000, respectively. For the six months ended July 31, 2013 and 2012, the Company recorded state and local tax provisions of $54,000 and $18,000, respectively. Included in the second fiscal quarter 2013 tax expense is an expense of approximately $100,000 related to an immaterial error correction to the Company's January 31, 2013 net deferred tax liability related to the Interpoint acquisition. The Company concluded that the impact of the correction was not quantitatively and qualitatively material to the prior fiscal year end and the respective quarters ended in 2012 and 2013.


14

Index to Financial Statements

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements relating to plans, strategies, expectations, intentions, etc. of Streamline Health Solutions, Inc. (“we”, “us”, “our”, or the "Company") 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 our products, our ability 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 system 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 generally and the markets in which we operate and nationally, and our ability to maintain compliance with the terms of our 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. Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. We undertake 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 we file from time to time with the Securities and Exchange Commission, including the annual report on Form 10-K, quarterly reports on Form 10-Q and any current reports on Form 8-K.

The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on From 10-Q.


15

Index to Financial Statements

Results of Operations
Acquisition of Meta Health Technology, Inc.
On August 16, 2012, the Company acquired substantially all of the outstanding stock of Meta Health Technology, Inc., a New York corporation (“Meta”). The Company paid a total purchase price of approximately $14,790,000, consisting of a cash payment of $13,288,000 and the issuance of 393,086 shares of our common stock at an agreed upon price of $4.07 per share. The fair value of the common stock at the date of issuance was $3.82. As of October 31, 2012, the Company had acquired 100% of Meta’s outstanding shares. The purchase price is subject to certain adjustments related principally to the delivered working capital level, which will be settled in the third quarter of fiscal 2013, and/or indemnification provisions. Under the acquisition method of accounting, 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 Meta are consolidated with the results of the Company from August 16, 2012.
Statement of Operations for the three and six months ended July 31, 2013 and 2012 (amounts in thousands):


Three Months Ended
 

 


July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Systems sales
$
2,234

 
$
76

 
$
2,158

 
> 100%

Professional services
1,039

 
941

 
98

 
10
%
Maintenance and support
3,620

 
2,297

 
1,323

 
58
%
Software as a service
1,880

 
1,735

 
145

 
8
%
Total revenues
8,773

 
5,049

 
3,724

 
74
%
Cost of sales
3,238

 
2,358

 
880

 
37
%
Selling, general and administrative
3,408

 
2,204

 
1,204

 
55
%
Product research and development
1,160

 
511

 
649

 
> 100%

Total operating expenses
7,806

 
5,073

 
2,733

 
54
%
Operating profit (loss)
967

 
(24
)
 
991

 
> 100%

Other income (expense), net
(1,651
)
 
(415
)
 
(1,236
)
 
> 100%

Income tax expense
(144
)
 
(24
)
 
(120
)
 
> 100%

Net earnings (loss)
$
(828
)
 
$
(463
)
 
$
(365
)
 
79
%
Adjusted EBITDA(1)
$
2,682

 
$
1,482

 
$
1,200

 
81
%

 
Six Months Ended
 
 
 
 
 
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Systems sales
$
2,558

 
$
429

 
$
2,129

 
> 100%

Professional services
1,959

 
2,064

 
(105
)
 
(5
)%
Maintenance and support
7,001

 
4,649

 
2,352

 
51
 %
Software as a service
3,729

 
3,352

 
377

 
11
 %
Total revenues
15,247

 
10,494

 
4,753

 
45
 %
Cost of sales
6,414

 
5,005

 
1,409

 
28
 %
Selling, general and administrative
6,989

 
3,874

 
3,115

 
80
 %
Product research and development
2,257

 
967

 
1,290

 
> 100%

Total operating expenses
15,660

 
9,846

 
5,814

 
59
 %
Operating profit (loss)
(414
)
 
648

 
(1,062
)
 
> 100%

Other income (expense), net
(2,960
)
 
(587
)
 
(2,373
)
 
> 100%

Income tax expense
(164
)
 
(33
)
 
(131
)
 
> 100%

Net earnings (loss)
$
(3,538
)
 
$
28

 
$
(3,566
)
 
> 100%
Adjusted EBITDA(1)
$
3,368

 
$
3,221

 
$
147

 
5
 %

_______________

16

Index to Financial Statements

(1)
Non-GAAP measure meaning earnings before interest, tax, depreciation, amortization, stock-based compensation expense, transactional and one-time costs. See “Use of Non-GAAP Financial Measures” below for additional information and reconciliation.
System Sales Revenues
System sales revenues consisted of the following (in thousands):

Three Months Ended
 

 


July 31, 2013
 
July 31, 2012
 
Change
 
% Change
System Sales (1):
 
 
 
 
 
 
 
Proprietary software
$
1,894

 
$
14

 
$
1,880

 
> 100%

Term licenses
287

 

 
287

 
100
 %
Hardware & third party software
53

 
62

 
(9
)
 
(15
)%
Total System Sales Revenues
$
2,234

 
$
76

 
$
2,158

 
> 100%


 
Six Months Ended
 
 
 
 
 
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
System Sales (1):
 
 
 
 
 
 
 
Proprietary software
$
1,973

 
$
134

 
$
1,839

 
> 100%

Term licenses
512

 

 
512

 
100
 %
Hardware & third party software
73

 
295

 
(222
)
 
(75
)%
Total System Sales Revenues
$
2,558

 
$
429

 
$
2,129

 
> 100%


_______________
(1)
Proprietary software, hardware, and term licenses are the components of the system sales line item. Term licenses are comprised of Meta software only.

Proprietary software and term licenses — Proprietary software revenues recognized for the three and six months ended July 31, 2013 increased by $1,880,000, or over 100%, and $1,839,000, or over 100%, respectively, over the the prior comparable periods. These increases are attributable to a significant new sales in the Collabra suite during the second fiscal quarter. Recurring Collabra term license sales of $287,000 and $512,000 during the three and six month periods ended July 31, 2013, respectively, are incremental revenues provided by the acquired Meta operations.
Hardware and third party software — Revenues from hardware and third party software sales for the three and six months ended July 31, 2013 were $53,000, a decrease of $9,000, or 15%, and $73,000, a decrease of $222,000, or 75%, respectively, over the the prior comparable periods. These decreases are primarily attributable to a reduction in customer demand for third party peripheral devices as compared to the prior year comparable period.
Professional services — Revenues from professional services for the three and six months ended July 31, 2013 were $1,039,000, an increase of $98,000, or 10%, and $1,959,000, a decrease of $105,000, or 5%, respectively, from the prior comparable periods. Professional services provided by the acquired Meta operations for the three and six months ended July 31, 2013 were $507,000, and $885,000, respectively, and were offset by a decrease in legacy services due to the timing of which revenue could be recognized based on services performed.
Maintenance and support — Revenues from maintenance and support for the three and six months ended July 31, 2013 were $3,620,000, an increase of $1,323,000, or 58%, and $7,001,000, an increase of $2,352,000, or 51%, respectively, from the prior comparable periods. These increases result from revenue provided by the acquired Meta operations of $1,380,000 and $2,627,000 for the three and six months ended July 31, 2013, respectively, and were partially offset by planned attrition of certain perpetual license customers. 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 for the three and six months ended July 31, 2013 were $1,880,000, an increase of $145,000, or 8%, and $3,729,000, an increase of $377,000, or 11%, respectively, from the prior comparable periods. These increases are attributable to the recognition of add-on SaaS contracts signed, primarily in our PFS-SaaS product line.


17

Index to Financial Statements

Cost of Sales
Cost of sales consisted of the following (in thousands):

  
Three Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Cost of systems sales
$
661

 
$
532

 
$
129

 
24
 %
Cost of professional services
1,267

 
503

 
764

 
> 100%

Cost of maintenance and support
795

 
706

 
89

 
13
 %
Cost of software as a service
515

 
617

 
(102
)
 
(17
)%
Total cost of sales
$
3,238

 
$
2,358

 
$
880

 
37
 %

  
Six Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Cost of systems sales
$
1,300

 
$
1,219

 
$
81

 
7
 %
Cost of professional services
2,241

 
1,056

 
1,185

 
> 100%

Cost of maintenance and support
1,780

 
1,431

 
349

 
24
 %
Cost of software as a service
1,093

 
1,299

 
(206
)
 
(16
)%
Total cost of sales
$
6,414

 
$
5,005

 
$
1,409

 
28
 %

The increases in cost of sales for the three and six months ended July 31, 2013 from the comparable periods are primarily the result of incremental operational costs incurred for the acquired Meta operations as well as the amortization of the internally-developed software acquired as part of the Meta acquisition.
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 cost of professional services includes compensation and benefits for personnel and related expenses. The increase in expense is primarily due to incremental operational costs associated with the acquired Meta operations, as well as increases in staffing for our PFS-SaaS services line.
The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts. The increase in expense is primarily due to incremental operational costs associated with the acquired Meta operations.
The cost of software as a service is relatively fixed, but subject to inflation for the goods and services it requires. The decreases are related to incremental data center costs that were incurred in the prior comparable periods that had no comparable expense for the three and six months ended July 31, 2013.
Selling, General and Administrative Expense

  
Three Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
General and administrative expenses
$
2,633

 
$
1,658

 
$
975

 
59
%
Sales and marketing expenses
775

 
546

 
229

 
42
%
Total selling, general, and administrative
$
3,408

 
$
2,204

 
$
1,204

 
55
%


18

Index to Financial Statements

  
Six Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
General and administrative expenses
$
5,476

 
$
2,852

 
$
2,624

 
92
%
Sales and marketing expenses
1,513

 
1,022

 
491

 
48
%
Total selling, general, and administrative
$
6,989

 
$
3,874

 
$
3,115

 
80
%

General and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and entertainment expenses related to the Company’s executive and administrative staff, general corporate expenses, amortization of intangible assets, and occupancy costs. The increases over the prior year are primarily due to the incremental increase for general and administrative expenses associated with the acquired Meta operations. Amortization of intangible assets added incremental expense to the three and six months ended July 31, 2013 due to the amortization of assets acquired as part of the acquisition of Interpoint and Meta. The Company recognized approximately $315,000 and $629,000, respectively, in amortization expense for the three and six months ended July 31, 2013 for acquired intangible assets as compared to $22,000 and $25,000, respectively, in the prior comparable periods. The Company also incurred increased expense due to investor relations and acquisition search activities, as well as additional costs from executive severances and other costs associated with our corporate office move to Atlanta, Georgia.
Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and entertainment expenses related to the Company’s sales and marketing staff; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses. The increase in sales and marketing expense reflects an increase in costs associated with increased trade show activity and other marketing programs.
Product Research and Development

  
Three Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Research and development expense
$
1,160

 
$
511

 
$
649

 
127
 %
Plus: Capitalized research and development cost
338

 
463

 
(125
)
 
(27
)%
Total R&D cost
$
1,498

 
$
974

 
$
524

 
54
 %

  
Six Months Ended
 
 
 
 
(in thousands):
July 31, 2013
 
July 31, 2012
 
Change
 
% Change
Research and development expense
$
2,257

 
$
967

 
$
1,290

 
133
 %
Plus: Capitalized research and development cost
798

 
970

 
(172
)
 
(18
)%
Total R&D cost
$
3,055

 
$
1,937

 
$
1,118

 
58
 %

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 increased due to higher support for newly released software versions, which also decreased the number of hours available to be capitalized, which is reflected in the capitalized research and development costs. The acquired Meta operations contributed an incremental $383,000 and $768,000, respectively, in research and development expenses for the three and six months ended July 31, 2013. The hours available for capitalization decreased for the HIM product line, and costs not eligible for capitalization increased compared to the prior comparable periods. Research and development expenses for the six months ended July 31, 2013 and 2012, as a percentage of revenues, were 15% and 9%, respectively.
Other Income (Expense)
Interest expense for the three months ended July 31, 2013 and 2012 were $588,000 and $391,000, respectively, and $1,154,000 and $599,000, respectively, for the six months ended July 31, 2013 and 2012. Interest expense consists of interest and commitment fees on the line of credit, interest (including accruals for success fees) on the term loans entered into in conjunction with the Interpoint and Meta acquisitions, interest on the convertible note entered into in conjunction with the Interpoint acquisition, and is inclusive of deferred financing cost amortization expense. Interest expense increased for the three and six months ended July 31, 2013 over the prior comparable periods primarily because of the increases from the term loan

19

Index to Financial Statements

interest and success fees, and amortization of deferred financing costs related to the Meta acquisition. The Company also recorded a valuation adjustment to its warrants liability, recorded as miscellaneous expense, of $1,025,000 and $1,670,000, respectively, for the three and six months ended July 31, 2013, using assumptions made by management to adjust to the current fair market value of the warrants at July 31, 2013.
Provision for Income Taxes
The Company recorded tax expense of $144,000 and $24,000, respectively, for the three months ended July 31, 2013 and 2012 and $164,000 and $33,000, respectively, for the six months ended July 31, 2013 and 2012, which is comprised of estimated federal, state and local tax provisions. Included in the second fiscal quarter 2013 tax expense is an expense of approximately $100,000 related to an immaterial error correction to the Company's January 31, 2013 net deferred tax liability related to the Interpoint acquisition. The Company concluded that the impact of the correction was not quantitatively and qualitatively material to the prior fiscal year end and the respective quarters ended in 2012 and 2013.
Backlog

 
July 31, 2013
 
July 31, 2012
Company proprietary software
$
2,873,000

 
$
120,000

Hardware and third-party software
25,000

 
119,000

Professional services
7,765,000

 
4,678,000

Maintenance and support
24,094,000

 
17,332,000

Software as a service
17,123,000

 
9,937,000

Total
$
51,880,000

 
$
32,186,000


At July 31, 2013, 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 $51,880,000 compared with $32,186,000 at July 31, 2012.
The Company’s proprietary software backlog consists of signed agreements to purchase software licenses and term 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 decrease in backlog is primarily due to a reduction in the volume of third-party sales as opposed to the prior comparable period. These items are expected to be delivered in the next twelve months as implementations commence.
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 2012 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 or a purchase order under a master agreement 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. Maintenance and support backlog at July 31, 2013 was $24,094,000 as compared to $17,332,000 at July 31, 2012. A significant portion of this increase is due to backlog added by Meta maintenance contracts. Additionally, as part of renewals contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics.
At July 31, 2013, the Company had entered into software as a service agreements, which are expected to generate revenues of $17,123,000 through their respective renewal dates in fiscal years 2013 through 2018. Typical SaaS terms are one to seven years in length. 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.

20

Index to Financial Statements

All of the Company’s master agreements are generally non-cancelable but 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 Company may supplement the Consolidated Financial Statements presented on a GAAP basis in this quarterly report on Form 10-Q with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share.
These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by the Company, may differ from and may not be comparable to similarly titled measures used by other companies.
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share
The Company defines: (i) EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, and transaction expenses and other one-time costs; (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), items outside the control of the management team (taxes), and costs that we expect to be non-recurring including: transaction related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. 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 quarterly report on Form 10-Q, 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:
EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

21

Index to Financial Statements

EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement;
EBITDA does not reflect income tax payments we are required to make; and
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers to review the GAAP financial statements included elsewhere in this quarterly report on Form 10-Q, 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 quarterly report on Form 10-Q.
The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net earnings (loss), 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-recurring expenses 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.
The following table reconciles net earnings (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share for the three and six months ended July 31, 2013 and 2012 (amounts in thousands, except per share data):

 
Three Months Ended
 
Six Months Ended
Adjusted EBITDA Reconciliation
July 31, 2013
 
July 31, 2012
 
July 31, 2013
 
July 31, 2012
Net earnings (loss)
$
(828
)
 
$
(463
)
 
$
(3,538
)
 
$
28

Interest expense
588

 
391

 
1,154

 
599

Income tax expense
144

 
24

 
164

 
33

Depreciation
167

 
183

 
338

 
363

Amortization of capitalized software development costs
701

 
580

 
1,396

 
1,223

Amortization of intangible assets
315

 
22

 
629

 
25

     Amortization of other costs
17

 

 
28

 

EBITDA
1,104

 
737

 
171

 
2,271

Stock-based compensation expense
358

 
221

 
826

 
400

Associate severances and other costs relating to transactions or corporate restructuring

 

 
383

 

Non-cash valuation adjustments to assets and liabilities
1,025

 

 
1,670

 

Transaction related professional fees, advisory fees, and other internal direct costs
152

 
524

 
226

 
550

Other non-recurring operating expenses
43

 

 
92

 

Adjusted EBITDA
$
2,682

 
$
1,482

 
$
3,368

 
$
3,221

Adjusted EBITDA margin(1)
31
%
 
29
%
 
22
%
 
16
%
 
 
 
 
 
 
 
 
Earnings (loss) per share — diluted
$
(0.07
)
 
$
(0.04
)
 
$
(0.31
)
 
$
0.00

Adjusted EBITDA per adjusted diluted share (2)
$
0.15

 
$
0.13

 
$
0.19

 
$
0.29

Diluted weighted average shares
12,861,715

 
11,316,083

 
12,698,094

 
10,936,752

Includable incremental shares — adjusted EBITDA(3)
5,122,243

 
321,857

 
5,167,025

 

Adjusted diluted shares
17,983,958

 
11,637,940

 
17,865,119

 
10,936,752

_______________

22

Index to Financial Statements

(1)
Adjusted EBITDA as a percentage of GAAP revenues
(2)
Adjusted EBITDA per adjusted diluted share for the Company's common stock is computed using the more dilutive of the two-class method or the if-converted method
(3)
The number of incremental shares that would be dilutive under profit assumption, only applicable under a GAAP net loss. If GAAP profit is earned in the current period, no additional incremental shares are assumed
Application of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in ITEM 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations, of Part II, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2013. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
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 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 and cash equivalents balances at July 31, 2013 and January 31, 2013 were $5,356,000 and $7,500,000 , 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 thousands)
As of July 31,
 
As of January 31,
2013
 
2013
Term loans
$
13,063

 
$
13,688

Contingent consideration for earn-out (1)
1,359

 
1,320

Capital leases (2)

 

_______________
(1)
Estimated for financial disclosure purposes only. Please reference “Note F – Debt” in the Notes to the Condensed Consolidated Financial Statements for additional information.
(2)
We entered into a capital lease for computer equipment that will commence in the third quarter of fiscal 2013. The lease is for a 24-month period and we will be obligated to pay approximately $298,000 over that period.
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 the Notes to the Condensed Consolidated Financial Statements for additional information.
In conjunction with the Meta acquisition, on August 16, 2012, we amended our previous term loan and line of credit agreements with Fifth Third Bank, whereby Fifth Third Bank provided us with a $5,000,000 revolving line of credit, a $5,000,000 senior term loan and a $9,000,000 subordinated term loan, a portion of which was used to refinance the previously outstanding $4,120,000 subordinated term loan. Please reference a Note F—Debt” in the Notes to the Condensed Consolidated Financial Statements for additional information.

23

Index to Financial Statements

Operating cash flow activities

(in thousands)
Six Month Ended
July 31, 2013
 
July 31, 2012
Net earnings (loss)
$
(3,538
)
 
$
28

Non-cash adjustments to net earnings (loss)
5,217

 
2,050

Cash impact of changes in assets and liabilities
(3,046
)
 
1,090

Operating cash flow
$
(1,367
)
 
$
3,168


Net cash (used in) provided by operating activities in fiscal 2013 decreased in the current year primarily due to a decrease in profitability and an increase in accounts receivables. This was offset primarily by non-cash increases from increases in amortization expenses from capitalized software development costs and intangible assets, increased share based compensation expense, and an increase to the warrant liability.
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 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

(in thousands)
Six Months Ended
July 31, 2013
 
July 31, 2012
Purchases of property and equipment
$
(94
)
 
$
(449
)
Capitalized software development costs
(798
)
 
(970
)
Investing cash flow
$
(892
)
 
$
(1,419
)

The decrease in cash used for investing activities is primarily a result of a reduction in the hours available for capitalization, as well as a decrease in capital expenditures as compared to the prior comparable fiscal quarter. The Company estimates that to replicate its existing internally developed software would cost significantly more than the stated net book value of $12,218,000, including acquired internally developed software of Meta and Interpoint, at July 31, 2013. 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

(in thousands)
Six Months Ended
July 31, 2013
 
July 31, 2012
Principal repayments on term loans
$
(625
)
 
$

Other
739

 
79

Financing cash flow
$
114

 
$
79


The increase in cash from financing activities was primarily the result of proceeds from the exercise of stock options, partially offset by repayments on the term loans.


24

Index to Financial Statements

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives of the disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this quarterly report on Form 10-Q.

Previously Reported Material Weakness in Internal Control over Financial Reporting
In connection with management's assessment of our internal control over financial reporting for the April 30, 2013 reporting period, we identified a material weakness in our internal control over financial reporting. The Company's policies and procedures did not provide for a sufficiently detailed review of contract terms. As a result, a few instances were identified during the first fiscal quarter related to the inaccurate application of U.S. generally accepted accounting principles (GAAP) with respect to certain contract terms. Following completion of the first fiscal quarter, we strengthened the depth of our internal financial team with the addition of a Chief Accounting Officer with significant industry and accounting experience. In addition, we performed additional analysis and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with GAAP. Accordingly, we concluded that the material weakness was remediated.

Changes in Internal Control over Financial Reporting
Except as described above, there were no material changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.



25

Index to Financial Statements



PART II. OTHER INFORMATION

Item 1.
LEGAL PROCEEDINGS
We are, from time to time, a party to various legal proceedings and claims, which arise, in the ordinary course of business. We are not aware of any legal matters that will have a material adverse effect on our consolidated results of operations or consolidated financial position and cash flows.
Item 6.
EXHIBITS
See Index to Exhibits.



26

Index to Financial Statements

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
STREAMLINE HEALTH SOLUTIONS, INC.
DATE: September 13, 2013
By:
/S/    Robert E. Watson
 

Robert E. Watson
Chief Executive Officer
DATE: September 13, 2013
By:
/S/    Nicholas A. Meeks
 
 
Nicholas A. Meeks
Chief Financial Officer



27

Index to Financial Statements

INDEX TO EXHIBITS
EXHIBITS

Exhibit No.
Description of Exhibit
3.1(a)
Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a/ LanVision Systems, Inc. (Incorporated herein by reference to Exhibit 3.1 of the Registration Statement on Form S-1, File Number 333-01494, as filed with the Commission on April 15, 1996.)
3.1(b)
Certificate of Incorporation of Streamline Health Solutions, Inc. f/k/a LanVision Systems, Inc., Amendment No. 1. (Incorporated herein by reference to Exhibit 3.1(b) of the Quarterly Report on Form 10-Q, as filed with the Commission on September 8, 2006.)
3.1(c)
Streamline Health Solutions, Inc. Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock (Incorporated herein by reference to Exhibit 10.8 of the Current Report on Form 8-K, as filed with the Commission on August 21, 2012.)
3.2
Bylaws of Streamline Health Solutions, Inc., as amended and restated on July 22, 2010 (Incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q, as filed with the Commission on September 9, 2010.)
10.1#
Separation Agreement dated May 22, 2013 between Streamline Health Solutions, Inc. and Stephen H. Murdock (Incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed with the Commission on May 20, 2013.)
10.2#
Employment Agreement effective May 22, 2013 between Streamline Health Solutions, Inc. and Nicholas A. Meeks (Incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K, as filed with the Commission on May 20, 2013.)
10.3*#
Employment Agreement as of February 3, 2012 between Streamline Health Solutions, Inc. and Michael A. Schiller
10.4*#
Amendment to Employment Agreement dated July 22, 2013 between Streamline Health Solutions, Inc. and Michael A. Schiller
10.5*#
Amendment to Employment Agreement dated July 22, 2013 between Streamline Health Solutions, Inc. and Matt S. Seefeld
31.1*
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial information from Streamline Health Solutions, Inc.'s Quarterly Report on Form 10-Q for the three month period ended July 31, 2013 filed with the SEC on September 13, 2013, formatted in XBRL includes: (i) Condensed Consolidated Balance Sheets at July 31, 2013 and January 31, 2013, (ii) Condensed Consolidated Statements of Operations for three and six month periods ended July 31, 2013 and 2012, (iii) Condensed Consolidated Statements of Cash Flows for the six month periods ended July 31, 2013 and 2012, and (iv) Notes to the Condensed Consolidated Financial Statements.


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Included herein
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Management Contracts and Compensatory Arrangements.

Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1943, as amended, is 0-281


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