STREAMLINE HEALTH SOLUTIONS INC. - Quarter Report: 2022 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 31, 2022

OR

For the transition period from __________ to ____________

Commission File Number: 000-28132

STREAMLINE HEALTH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

2400 Old Milton Pkwy., Box 1353

Alpharetta, GA 30009

(Address of principal executive offices) (Zip Code)

(888) 997-8732

(Registrant’s telephone number, including area code)

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

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value per share, as of December 12, 2022 was 57,416,372.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STREAMLINE HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(rounded to the nearest thousand dollars, except share and per share information)

See accompanying notes to condensed consolidated financial statements.

STREAMLINE HEALTH SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(rounded to the nearest thousand dollars, except share and per share information)

See accompanying notes to condensed consolidated financial statements.

STREAMLINE HEALTH SOLUTIONS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(rounded to the nearest thousand dollars, except share and per share information)

See accompanying notes to condensed consolidated financial statements.

STREAMLINE HEALTH SOLUTIONS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(rounded to the nearest thousand dollars, except share information)

See accompanying notes to condensed consolidated financial statements.

STREAMLINE HEALTH SOLUTIONS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(rounded to the nearest thousand dollars)

See accompanying notes to condensed consolidated financial statements.

STREAMLINE HEALTH SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2022

NOTE 1 — BASIS OF PRESENTATION

Streamline Health Solutions, Inc. and each of its wholly-owned subsidiaries, Streamline Health, LLC, Avelead Consulting, LLC, Streamline Consulting Solutions, LLC and Streamline Pay & Benefits, LLC, (collectively, unless the context requires otherwise, “we,” “us,” “our,” “Streamline,” or the “Company”), operate in one segment as a provider of healthcare information technology solutions and associated services. The Company provides these capabilities through the licensing of its Coding & CDI, eValuator coding analysis platform, RevID, and other workflow software applications and the use of such applications by software as a service (“SaaS”). The Company also provides audit and coding services to help customers optimize their internal clinical documentation and coding functions, as well as implementation and consulting services to complement its software solutions. The Company’s software and services enable hospitals and integrated healthcare delivery systems in the United States and Canada to capture, store, manage, route, retrieve and process patient clinical, financial and other healthcare provider information related to the patient revenue cycle.

The accompanying unaudited condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations applicable to quarterly reports on Form 10-Q of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. The condensed consolidated financial statements include the accounts of Streamline Health Solutions, Inc. and each of its wholly-owned subsidiaries. In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent annual report on Form 10-K. Operating results for the nine months ended October 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2023.

Two or more operating segments may be aggregated into a single operating segment if they are considered to be similar. Operating segments are considered to be similar if they can be expected to have essentially the same economic characteristics and future prospects. Using the aggregation guidance, the Company determined that it has one operating segment due to the similar economic characteristics of the Company’s products, product development, distribution, regulatory environment and customer base as a provider of computer software-based solutions and services for acute-care healthcare providers. The Company has two reporting units for evaluation of intangible assets. These two reporting units are the legacy Streamline products and Avelead Consulting, LLC. Refer to “Note 3 – Business Combination and Divestiture”.

All amounts in the condensed consolidated financial statements, notes and tables have been rounded to the nearest thousand dollars, except share and per share amounts, unless otherwise indicated. All references to a fiscal year refer to the fiscal year commencing February 1 in that calendar year and ending on January 31 of the following calendar year.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year 2021 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the notes to the consolidated financial statements contained in the Annual Report on Form 10-K when reviewing interim financial results.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to the recognition of revenue, share-based compensation, capitalization of software development costs, intangible assets, the allowance for doubtful accounts, contingent consideration, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Financial Accounting Standards Board’s (“FASB”) authoritative guidance on fair value measurements establishes a framework for measuring fair value. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. There were no transfers of assets or liabilities between Levels 1, 2, or 3 during the nine months ended October 31, 2022 and 2021.

The table below provides information on the fair value of our liabilities:

 SCHEDULE OF FAIR VALUE ASSETS AND LIABILITIES MEASURED ON RECURRING BASIS

The fair value of the Company’s term loan under its Second Amended and Restated Loan and Security Agreement was determined through an analysis of the interest rate spread from the date of closing the loan (August 2021) to the date of the most recent balance sheets, October 31, 2022 and January 31, 2022. The term loan bears interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The prime rate is variable and, thus accommodates changes in the market interest rate. However, the interest rate spread (the 1.5% added to the Prime Rate) is fixed. We estimated the impact of the changes in the interest rate spread by analogizing the effect of the change in the Corporate bond rates, reduced for any changes in the market interest rate. This provided us with an estimated change to the interest rate spread of approximately 0.5% from the date we entered the debt agreement to the end of the third quarter, October 31, 2022 and end of the fiscal year, January 31, 2022. The discount to the value of the debt as of October 31, 2022 and January 31, 2022 was estimated to be $9,674,000 and $9,798,000, or a discount to book value of $201,000 and $202,000, respectively. Long-term debt is classified as Level 2.

Revenue Recognition

We derive revenue from the sale of internally-developed software, either by licensing for local installation or by a SaaS delivery model, through the Company’s direct sales force or through third-party resellers. Licensed, locally-installed customers on a perpetual model utilize the Company’s support and maintenance services for a separate fee, whereas term-based locally installed license fees and SaaS fees include support and maintenance. We also derive revenue from professional services that support the implementation, configuration, training and optimization of the applications, as well as audit services and consulting services.

We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, under the core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We recognize revenue (Step 5 below) in accordance with that core principle after applying the following steps:

Contracts may contain more than one performance obligation. Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are promised to the customer. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

If we determine that we have not satisfied a performance obligation, we defer recognition of the revenue until the performance obligation is satisfied. Maintenance and support and SaaS agreements are generally non-cancelable or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or a right of refund terms exist, revenue may not be recognized until the satisfaction of such criteria.

The determined transaction price is allocated based on the standalone selling price of the performance obligations in the contract. Significant judgment is required to determine the standalone selling price (“SSP”) for each performance obligation, the amount allocated to each performance obligation and whether it depicts the amount that the Company expects to receive in exchange for the related product and/or service. The Company recognizes revenue for implementation for certain of its eValuator SaaS solution over the contract term, as it has been determined that those implementation services are not a distinct performance obligation. Services for other SaaS and Software solutions such as CDI, RevID and Compare, have been determined as a distinct performance obligation. For these agreements, the Company estimates SSP of its software licenses using the residual approach when the software license is sold with other services and observable SSPs exist for the other services. The Company estimates the SSP for maintenance, professional services, software as a service and audit services based on observable standalone sales.

Contract Combination

The Company may execute more than one contract or agreement with a single customer. The Company evaluates whether the agreements were negotiated as a package with a single objective, whether the amount of consideration to be paid in one agreement depends on the price and/or performance of another agreement, or whether the goods or services promised in the agreements represent a single performance obligation. The conclusions reached can impact the allocation of the transaction price to each performance obligation and the timing of revenue recognition related to those arrangements.

The Company has utilized the portfolio approach as the practical expedient. We have applied the revenue model to a portfolio of contracts with similar characteristics where we expected that the financial statements would not differ materially from applying it to the individual contracts within that portfolio.

Software Licenses

The Company’s software license arrangements provide the customer with the right to use functional intellectual property. Implementation, support, and other services are typically considered distinct performance obligations when sold with a software license unless these services are determined to significantly modify the software. Revenue is recognized at a point in time. Typically, this is upon shipment of components or electronic download of software.

Maintenance and Support Services

Our maintenance and support obligations include multiple discrete performance obligations, with the two largest being unspecified product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe that the multiple discrete performance obligations within our overall maintenance and support obligations can be viewed as a single performance obligation since both the unspecified upgrades and technical support are activities to fulfill the maintenance performance obligation and are rendered concurrently. Maintenance and support agreements entitle customers to technology support, version upgrades, bug fixes and service packs. We recognize maintenance and support revenue over the contract term.

Software-Based Solution Professional Services

The Company provides various professional services to customers with software licenses. These include project management, software implementation and software modification services. Revenues from arrangements to provide professional services are generally distinct from the other promises in the contract and are recognized as the related services are performed. Consideration payable under these arrangements is either fixed fee or on a time-and-materials basis and is recognized over time as the services are performed.

Software as a Service

SaaS-based contracts include a right to use of the Company’s platform and support which represent a single promise to provide continuous access to its software solutions. Implementation services for the Company’s eValuator product are included as part of the single promise for its respective contracts. The Company recognizes revenue for implementation of the eValuator product over the contract term as it is determined that the implementation on eValuator is not a distinct performance obligation. Implementation services for other SaaS products are deemed to be separate performance obligations.

Audit Services

The Company provides technology-enabled coding audit services to help customers review and optimize their internal clinical documentation and coding functions across the applicable segment of the client’s enterprise. Audit services are a separate performance obligation. We recognize revenue as the services are performed.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by type and nature of revenue stream:

 SCHEDULE OF DISAGGREGATION OF REVENUE

The Company includes revenue categories of (i) maintenance and support and (ii) software as a service as recurring revenue. The Company includes revenue categories of (i) software licenses, (ii) professional services, and (iii) audit services as non-recurring revenue.

Business Combinations

Acquisitions have been accounted for as business combinations, using the acquisition method and, accordingly, the results of operations of the acquired businesses have been included in the condensed consolidated financial statements since their dates of acquisition. The assets and liabilities assumed of these businesses were recorded in the financial statements at their respective estimated fair values as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair values of the assets acquired and the liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments are reflected in our consolidated statements of operations.

Contract Receivables and Deferred Revenues

The Company receives payments from customers based upon contractual billing schedules. Contract receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the contract. The Company’s contract receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Contract receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue. In the nine months ended October 31, 2022, the Company recognized approximately $4,918,000 in revenue from deferred revenues outstanding as of January 31, 2022. Revenue allocated to remaining performance obligations was $20,917,000 as of October 31, 2022, of which the Company expects to recognize approximately 63% over the next 12 months and the remainder thereafter.

Deferred costs (costs to fulfill a contract and contract acquisition costs)

The Company defers the direct costs, which include salaries and benefits, for professional services related to SaaS contracts as a cost to fulfill a contract. These deferred costs will be amortized on a straight-line basis over the period of expected benefit which is the contractual term. As of October 31, 2022 and January 31, 2022, the Company had deferred costs of $103,000 and $125,000, respectively, net of accumulated amortization of $155,000 and $93,000, respectively. Amortization expense of these costs was $22,000 for both the three months ended October 31, 2022 and 2021, and $62,000 and $90,000 for the nine months ended October 31, 2022 and 2021, respectively, and is included in various costs of revenue in the condensed consolidated statements of operations.

Contract acquisition costs, which consist of sales commissions paid or payable, is considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial and renewal contracts are deferred and then amortized on a straight-line basis over the contract term. As a practical expedient, the Company expenses sales commissions as incurred when the amortization period of related deferred commission costs is expected to be one year or less.

As of October 31, 2022 and January 31, 2022, deferred commission costs paid and payable, which are included on the consolidated balance sheets within other non-current assets totaled $1,092,000 and $806,000, respectively, net of accumulated amortization of $707,000 and $408,000, respectively. For the three months ended October 31, 2022 and 2021, $110,000 and $88,000, respectively, and for the nine months ended October 31, 2022 and 2021, $298,000 and $248,000, respectively, in amortization expense associated with deferred sales commissions was included in selling, general and administrative expenses in the condensed consolidated statements of operations. There were no impairment losses for these capitalized costs for these periods.

Equity Awards

The Company accounts for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as expense over the requisite service period, and forfeitures are recognized as incurred. For awards to non-employees, the Company recognizes compensation expense in the same manner as if the entity had paid cash for the goods or services. The Company incurred total compensation expense related to share-based awards of $555,000 and $537,000 for the three months ended October 31, 2022 and 2021, respectively, and $1,212,000 and $1,659,000 in the nine months ended October 31, 2022 and 2021, respectively.

The fair value of the stock options granted was estimated at the date of grant using a Black-Scholes option pricing model. Option pricing model input assumptions such as expected term, expected volatility and risk-free interest rate impact the fair value estimate. These assumptions are subjective and are generally derived from external (such as, risk-free rate of interest) and historical data (such as, volatility factor, expected term and forfeiture rates). Future grants of equity awards accounted for as share-based compensation could have a material impact on reported expenses depending upon the number, value and vesting period of future awards.

The Company issues restricted stock awards in the form of Company common stock. The fair value of these awards is based on the market close price per share on the grant date. The Company expenses the compensation cost of these awards as the restriction period lapses, which is typically a one- to four-year service period.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. Refer to Note 6 – Income Taxes for further details.

The Company provides for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. At October 31, 2022, the Company believes it has appropriately accounted for any uncertain tax positions.

Net Loss Per Common Share

The Company presents basic and diluted earnings per share (“EPS”) data for the Company’s common stock.

The Company’s unvested restricted stock awards are considered non-participating securities because holders are not entitled to non-forfeitable rights to dividends or dividend equivalents during the vesting term. Diluted EPS for the Company’s common stock is computed using the treasury stock method.

The following is the calculation of the basic and diluted net earnings (loss) per share of common stock for the three and nine months ended October 31, 2022 and 2021:

 SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK

Other Operating Costs

Acquisition-related Costs

 SCHEDULE OF ACQUISITION RELATED COSTS

For the three and nine months ended October 31, 2022 the Company incurred certain acquisition-related costs related to the acquisition of Avelead totaling $2,000 and $141,000, respectively, consisting primarily of professional service fees. For the three and nine months ended October 31, 2021, the Company incurred acquisition-related costs related to the acquisition of Avelead totaling $1,933,000 and $2,710,000, respectively. Of the total costs related to the acquisition of Avelead, $355,000 and $705,000 was from bonuses paid to certain executives in executing priorities, primarily the acquisition, for the three and nine months ended October 31, 2021, respectively.

Non-Cash Items

For the three and nine months ended October 31, 2021, the Company recorded the forgiveness of the PPP loan and accrued interest, totaling $2,327,000, as non-cash items related to the condensed consolidated statements of cash flow.

Accounting Pronouncements Recently Adopted

In July 2021, the FASB issued ASU 2021-05, Lessors - Certain Leases with Variable Lease Payments to ASC Topic 842, Leases (“ASC 842”) (“ASU 2021-05”). ASU 2021-05 provides additional ASC 842 classification guidance as it relates to a lessor’s accounting for certain leases with variable lease payments. ASU 2021-05 requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if either a sales-type lease or direct financing lease classification would trigger a day-one loss. ASU 2021-05 became effective for the Company on February 1, 2022. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements or disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In November 2019, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which improves guidance around accounting for financial losses on accounts receivable. For smaller reporting entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not anticipate that the adoption of this ASU will have a material impact on the Company’s consolidated financial statements.

NOTE 3 — BUSINESS COMBINATION AND DIVESTITURE

Avelead Acquisition

The Company acquired all of the equity interests of Avelead Consulting, LLC (“Avelead”) as part of the Company’s strategic expansion into the acute-care health care revenue cycle management industry on August 16, 2021 (the “Transaction”). The acquisition was completed on August 16, 2021.

The aggregate consideration for the purchase of Avelead was approximately $29.7 million (at fair value) consisting of (i) $12.4 million in cash, net of cash acquired, (ii) $0.1 million in holdback, which was paid to the sellers during the fourth quarter of fiscal 2021, (iii) $6.5 million in common stock, and (iv) approximately $10.7 million in contingent consideration (see below). The Company issued 5,021,972 shares of its restricted common stock (the “Acquisition Restricted Common Stock”) at closing. The Acquisition Restricted Common Stock has a fair value as of the closing date of the acquisition of $6.5 million. Additionally, the Company contracted two types of contingent consideration; the first is referred to herein as “SaaS Contingent Consideration” and the second is referred to herein as “Renewal Contingent Consideration.” The SaaS Contingent Consideration and Renewal Contingent Consideration had an aggregate value of approximately $10.7 million as of the date of closing. The owners of Avelead are also referred to herein as “Sellers” and are enumerated in the UPA (as defined below).

The Company acquired all of the equity interests of Avelead, effective August 16, 2021, pursuant to a Unit Purchase Agreement (hereafter referred to as the “UPA”). The UPA stated that the purchase price for Avelead at closing included a cash payment of $11.9 million. Additionally, the Company paid $285,000 of the Sellers’ closing costs, and $285,000 related to the working capital adjustment as defined in the UPA. Finally, at closing, the Company issued the Acquisition Restricted Common Stock with a fair value of approximately $6.5 million, based on a 30-day average of the closing price of the Company’s common stock prior to the closing date. The SaaS Contingent Consideration and the Renewal Contingent Consideration described in more detail below were included in the UPA as potential future consideration for the Transaction. These are reflected on the Company’s balance sheet as “Acquisition earnout liability.”

The Company acquired Avelead on a cash-free and debt-free basis. The Transaction was structured as a purchase of units (equity), however, Avelead was taxed as a partnership. Accordingly, the Company realized a step-up in the tax basis of the assets acquired and the goodwill is tax deductible. The gross deferred tax assets and liabilities will be consolidated, and the gross deferred tax assets have a full valuation allowance.

The contingent consideration is comprised of “SaaS Contingent Consideration” and “Renewal Contingent Consideration” which are described in more detail as follows:

See Note 11 – Subsequent Events for a description of the company’s cash payment and restricted common stock issued in conjunction with the first year earnout.

The components of the total consideration as of the acquisition date are as follows:

 SCHEDULE OF COMPONENTS OF TOTAL CONSIDERATION

The allocation of the total consideration to net tangible and intangible assets as of the date of the closing of Avelead was as follows:

SCHEDULE OF ALLOCATION OF THE TOTAL CONSIDERATION 

The intangible assets recorded as a result of the Avelead acquisition, and their related estimated useful lives are as follows:

 SCHEDULE OF INTANGIBLE ASSETS ESTIMATED USEFUL LIVES

The Company’s pro forma revenues and loss from continuing operations for the three and nine months ended October 31, 2021, assuming Avelead was acquired on February 1, 2021, are as follows. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the acquisition occurred at the beginning of these periods nor is it indicative of future results. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated costs savings from synergies or other operational improvements.

 SCHEDULE OF PRO FORMA REVENUE AND NET EARNINGS

Included in the accompanying unaudited pro forma statement of operations for the three months ended October 31, 2021 are $2,595,000 of Avelead revenue and $(1,359,000) of loss from continuing operations. For the nine months ended October 31, 2021, $7,297,000 of Avelead revenue and $(2,727,000) of loss from continuing operations were included in the unaudited pro forma statement of operations. For the three months ended October 31, 2022, Avelead contributed $2,788,000 to the Company’s consolidated revenue and $(553,000) to the Company’s consolidated loss from continuing operations. For the nine months ended October 31, 2022, Avelead contributed $7,827,000 to the Company’s consolidated revenue and $(1,847,000) to the Company’s consolidated loss from continuing operations.

The Company entered into one employment agreement and one separation agreement with the two Sellers. Included in the transaction costs related to the Avelead acquisition is the cost of a two-year separation agreement with one Seller, fully expensed at the closing of the transaction. See Note 2 – Summary of Significant Accounting Policies. The employment agreement is a two-year employment agreement that entitles the Seller to a six-month separation pay in the case of termination without cause. The expense for the employment agreement is recognized ratably over the service period customary with other employment agreements within selling, general, and administrative expense.

The Company granted options to purchase 583,333 shares of the Company’s common stock to the Sellers at the closing of the Transaction. These options have a strike price of $1.53 per share, the closing stock price on the trading date immediately preceding the closing. 500,000 options were awarded to one Seller that will vest, monthly, over a three (3) year service period. The remaining 83,333 options were awarded to another Seller and vested immediately upon issuance. The Company utilized the Black-Scholes method to determine the grant-date fair value of these options. The 83,333 options were not exercised prior to their expiration date of November 15, 2021. The 500,000 options have a grant-date fair value of approximately $395,000 and are expensed over the vesting period within selling, general, and administrative expense.

Additionally, the Company granted 100,000 restricted stock awards (RSAs) to certain Avelead employees as of the closing date.

ECM Assets Divestiture

On February 24, 2020, the Company sold a portion of its business (the “ECM Assets”). The Company is reporting the results of operations and cash flows, and related balance sheet items associated with the ECM Assets in discontinued operations in the accompanying condensed consolidated statements of operations, cash flows and balance sheets for the current and comparative prior periods. Refer to Note 9 – Discontinued Operations for details of the Company’s discontinued operations.

NOTE 4 — OPERATING LEASES

We determine whether an arrangement is a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our incremental borrowing rate for the expected remaining lease term at commencement date for new and existing leases in determining the present value of future lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.

Alpharetta Office Lease

On October 1, 2021, the Company entered into an agreement with a third-party to sublease its office space in Alpharetta, Georgia, (the “Sublease Agreement”). The sublease term is for 18 months which coincides with the Company’s underlying lease (see below). The Company expects to receive $292,000 from the sublessee over the term of the sublease. The sublease did not relieve the Company of its original obligation under the lease, and therefore the Company did not adjust the operating lease right-of-use asset and related liability. For the three and nine months ended October 31, 2022, the Company recorded $49,000 and $145,000, respectively, as other income related to the sublease.

The Company entered into a lease for office space in Alpharetta, Georgia, on March 1, 2020. The lease terminates on March 31, 2023. At inception, the Company recorded a right-of use asset of $540,000, and related current and long-term operating lease obligation in the accompanying consolidated balance sheet. As of October 31, 2022, operating lease right-of use assets totaled $80,000, and the associated lease liability is included in current liabilities of $87,000. The Company used a discount rate of 6.5% to the determine the lease liability. For the three and nine months ended October 31, 2022 and 2021, the Company had lease operating costs of approximately $48,000 and $145,000, respectively, for each period.

Maturities of operating lease liabilities associated with the Company’s operating lease as of October 31, 2022 are as follows for payments due based upon the Company’s fiscal year:

 SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES

Suwanee Office Lease

Upon acquiring Avelead on August 16, 2021 (refer to Note 3 – Business Combination and Divestiture), the Company assumed an operating lease agreement for the corporate office space of Avelead. The lessor is an entity controlled by one of the Sellers that is employed by the Company. The 36-month term lease commenced March 1, 2019 and expired on February 28, 2022. In February 2022, the Company renewed the lease for twelve months with monthly payments totaling $71,984 over the term of the lease. There is no renewal clause contained in the current lease. For the three and nine months ended October 31, 2022, the Company recorded rent expense of $18,000 and $55,000, respectively.

NOTE 5 — DEBT

Term Loan Agreement

On August 26, 2021, the Company and its subsidiaries entered into the Second Amended and Restated Loan and Security Agreement with Bridge Bank, a division of Western Alliance Bank (the “Second Amended and Restated Loan and Security Agreement”). Pursuant to the Second Amended and Restated Loan and Security Agreement, Bridge Bank agreed to provide the Company and its subsidiaries with a new term loan facility in the maximum principal amount of $10,000,000. Amounts outstanding under the term loan of the Second Amended and Restated Loan and Security Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. Pursuant to the Second Amended and Restated Loan and Security Agreement, the Company discontinued the existing $3,000,000 revolving credit facility with Bridge Bank. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility.

The Second Amended and Restated Loan and Security Agreement has a five-year term, and the maximum principal amount was advanced in a single-cash advance on or about the closing date. Interest accrued under the Second Amended Loan and Security Agreement is due monthly, and the Company shall make monthly interest-only payments through the one-year anniversary of the closing date. From the first anniversary of the closing date through the maturity date, the Company shall make monthly payments of principal and interest that increase over the term of the agreement. The Second Amended and Restated Loan and Security Agreement requires principal repayments on the anniversary date of the closing of the debt agreement of $500,000 in the second year, $1,000,000 in the third year, $2,000,000 in the fourth year, and $3,000,000 in the fifth year, respectively, with the remaining outstanding principal balance and all accrued but unpaid interest due in full on the maturity date. The Second Amended and Restated Loan and Security Agreement may also require early repayments if certain conditions are met. The Second Amended and Restated Loan and Security Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates.

The Company recorded $130,000 in deferred financing costs related to the Second Amended and Restated Loan and Security Agreement. These deferred financing costs are being amortized over the term of the loan. The Company will also incur $200,000 in financing costs at the earlier of the term date of the loan, or pre-payment. These costs are being accreted, through interest expense, to the full value of the $200,000 over the term of the loan.

The Second Amended and Restated Loan and Security Agreement includes customary financial covenants as follows:

 SCHEDULE OF MAXIMUM DEBT TO ARR RATIO

 SCHEDULE OF MAXIMUM DEBT TO ADJUSTED EBITDA RATIO

The Second Amended and Restated Loan and Security Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default. The line of credit also is subject to customary prepayment requirements. For the period ended October 31, 2022, the Company has a debt to ARR ratio of 0.55 to 1 and, therefore, was not in compliance with the maximum debt to ARR ratio covenant under the Second Amended and Restated Loan and Security Agreement. Subsequent to the period ended October 31, 2022, the Company entered into a Second Modification Debt Agreement whereby the existing debt to ARR ratio, among other covenants, was modified. As a result, the Company was in compliance with all modified debt covenants at October 31, 2022.

See Note 11 – Subsequent Events for a description of the Second Modification Debt Agreement. On November 29, 2022, the Company entered into a Second Modification Debt Agreement with Bridge Bank to add a $2,000,000 non-formula revolving line of credit and amend its existing covenants.

Term Loan and Revolving Credit Facility with Bridge Bank

On March 2, 2021, the Company entered into an Amended and Restated Loan and Security Agreement, which replaced and superseded the Loan and Security Agreement, consisting of a $3,000,000 revolving credit facility (the “Amended Loan and Security Agreement”). This revolving credit facility was replaced with the Second Amended and Restated Security Agreement (above) that was put in place on August 26, 2021. Accordingly, the Company wrote-off $43,000 of deferred financing costs from this loan as a loss on extinguishment of debt in the accompanying condensed consolidated statement of operations.

Outstanding principal balances on debt related to the new term loan agreement that the Company entered into on August 16, 2021 with Bridge Bank consisted of the following at:

 SCHEDULE OF OUTSTANDING DEBT, OTHER THAN PPP LOAN

NOTE 6 — INCOME TAXES

Income taxes consist of the following:

 SCHEDULE OF INCOME TAXES

At January 31, 2022, the Company had U.S. federal net operating loss carry forwards of $46,250,000. The Company also had state net operating loss carry forwards of $21,318,000 and Federal R&D credit carry forwards of $1,575,000 and Georgia R&D credit carry forwards of $94,000, all of which expire through fiscal 2041.

The effective income tax rate on continuing operations of approximately (0.24)% differs from our combined federal and state statutory rate of 25.15% primarily due to the full valuation allowance the Company currently maintains on its net deferred tax asset.

The Company has recorded $318,000 and $315,000 in reserves for uncertain tax positions as of October 31, 2022 and January 31, 2022, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income taxes in multiple state and local jurisdictions. The Company has concluded all U.S. federal tax matters for years through January 31, 2018. All material state and local income tax matters have been concluded for years through January 31, 2017. The Company is no longer subject to IRS examination for periods prior to the tax year ended January 31, 2018; however, carryforward losses that were generated prior to the tax year ended January 31, 2018 may still be adjusted by the IRS if they are used in a future period.

NOTE 7 — EQUITY

Capital Raise

On October 24, 2022, the Company entered into purchase agreements with certain investors pursuant to which the Company agreed to issue and sell in a registered direct offering (the “2022 Offering”) an aggregate of 6,299,989 shares of common stock, par value $0.01 per share, at a purchase price of $1.32 per share. The gross proceeds to the Company from the 2022 Offering were approximately $8,316,000. The Company intends to use the proceeds of the 2022 Offering for general corporate purposes. The 2022 Offering closed on October 26, 2022.

On February 25, 2021, the Company entered into an underwriting agreement with Craig-Hallum Capital Group LLC, as the sole managing underwriter, relating to the underwritten public offering of an aggregate of 10,062,500 shares of the Company’s common stock, par value $0.01 per share, which included 1,312,500 shares of common stock sold pursuant to the underwriter’s exercise of an option to purchase additional shares of common stock to cover over-allotments (the “2021 Offering”). The price to the public in the 2021 Offering was $1.60 per share of common stock. The gross proceeds to the Company from the 2021 Offering were approximately $16,100,000, before deducting underwriting discounts, commissions, and estimated offering expenses. The 2021 Offering closed on March 2, 2021.

Registration of Shares Issued to 180 Consulting

On May 3, 2021, the Company filed a Registration Statement on Form S-3 (Registration No. 333-255723), which was subsequently amended on June 23, 2021, for purposes of registering for resale 248,424 shares of common stock issued to 180 Consulting, LLC (“180 Consulting”). The Registration Statement was declared effective by the SEC on July 14, 2021.

On June 22, 2022, the Company filed a Registration Statement on Form S-3 (Registration No. 333-265773) for purposes of registering for resale 272,653 shares of common stock issued to 180 Consulting, LLC. The Registration Statement was declared effective by the SEC on July 1, 2022.

Authorized Shares Increase

On May 24, 2021, the Company amended its Certificate of Incorporation to increase the total number of authorized shares of the Company’s common stock from 45,000,000 shares to 65,000,000 shares (the “Charter Amendment”). The Charter Amendment was previously approved by the board of directors (the “Board”) of the Company, subsequently approved by the Company’s stockholders at the 2021 Annual Meeting of Stockholders of the Company, held on May 20, 2021 (the “2021 Annual Meeting”), and ratified by the Company’s stockholders on July 29, 2021 at the Special Meeting (as defined and described in further detail below).

At the 2021 Annual Meeting, the Company’s stockholders approved an amendment to the Streamline Health Solutions, Inc. Third Amended and Restated 2013 Stock Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 2,000,000 shares, from 6,223,246 shares to 8,223,246 shares (the “Third Amended 2013 Plan Amendment”).

As described in the Company’s definitive proxy statement on Schedule 14A filed with the SEC on July 6, 2021, because there may have been uncertainty regarding the validity or effectiveness of the prior approval of the Charter Amendment, the authorized shares increase effected thereby and the Third Amended 2013 Plan Amendment at the 2021 Annual Meeting, the board of directors of the Company asked the Company’s stockholders to ratify the approval, filing and effectiveness of the Charter Amendment and the approval and effectiveness of the Third Amended 2013 Plan Amendment at a special meeting of the stockholders held on July 29, 2021 (the “Special Meeting”) in order to eliminate such uncertainty . At the Special Meeting, the Company’s stockholders ratified the approval, filing and effectiveness of the Charter Amendment and the approval and effectiveness of the Third Amended 2013 Plan Amendment.

At the Annual Meeting of Stockholders held on June 7, 2022, the Company’s stockholders approved an amendment to the Streamline Health Solutions, Inc. Third Amended and Restated 2013 Stock Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 2,000,000 shares, from 8,223,246 shares to 10,223,246 shares. The Company’s stockholders also approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the total number of authorized shares of the Company’s common stock from 65,000,000 shares to 85,000,000 shares.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Consulting Agreement with 180 Consulting

On March 19, 2020, the Company entered into a Master Services Agreement (the “MSA”) with 180 Consulting, pursuant to which 180 Consulting has provided and will continue to provide a variety of consulting services in support of eValuator products including product management, operational consulting, staff augmentation, internal systems platform integration and software engineering services, among others, through separate executed statements of work (“SOWs”). On September 20, 2021, the Company entered into a separate MSA in support of Avelead products. The Company has entered into separate SOWs under the MSA. Some of the SOWs include the ability of 180 Consulting to earn stock at a conversion rate to be calculated 20 days after the execution of the related SOW. The MSA includes a termination clause upon a 90-day written notice. While no related party has a direct or indirect material interest in this MSA or the related SOWs, individuals providing services to us under the MSA and the SOWs may share workspace and administrative costs with 121G Consulting (as defined and further discussed in Note 14 – Related Party Transactions in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2022). 180 Consulting earned a cumulative number of shares through October 31, 2022 totaling 814,267. For the three and nine months ended October 31, 2022, 180 Consulting earned a total of 183,284 and 293,190 shares, respectively. The Company paid fees of $751,000 and $1,781,000, respectively, for services rendered by 180 Consulting during the three and nine months ended October 31, 2022. The Company paid fees of $376,000 and $1,092,000, respectively, for services rendered by 180 Consulting during the three and nine months ended October 31, 2021. On September 16, 2022, the Company issued 53,836 shares as compensation for services previously rendered during the three months ended July 31, 2022. Such shares were issued in a private placement in reliance on the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder. The MSA is terminable by the Company or 180 Consulting upon 90-days advanced written notice to the other party.

NOTE 9 – DISCONTINUED OPERATIONS

On February 24, 2020, the Company consummated the sale of the Company’s legacy Enterprise Content Management business (the “ECM Assets”).

For the three and nine months ended October 31, 2021, the Company recorded the following into discontinued operations in the accompanying condensed consolidated statements of operations:

 SCHEDULE OF DISCONTINUED OPERATIONS OF CONSOLIDATED STATEMENTS OF OPERATIONS

The Company entered into an agreement with the Purchaser of the ECM Assets to maintain the current data center through a transition period. The transition services did not have a finite ending date at the signing of the agreement. However, the transition services were completed in the third quarter of fiscal 2021.

NOTE 10 - RELATED PARTY TRANSACTIONS

Refer to Note 3 – Business Combination and Divestiture. The Company acquired Avelead on August 16, 2021. In addition, the Company assumed a consulting agreement with AscendTek, LLC (“AscendTek”), a software development and system design company. AscendTek is owned by one of the Sellers of Avelead. The Company entered into a separation agreement with this Seller of Avelead on closing of the Avelead acquisition. For the three and nine months ended October 31, 2022, the Company incurred approximately $0 and $32,000, respectively, in research and development services provided by AscendTek. Additionally, we assumed a lease for corporate office space from a Seller that is now employed by the Company. This lease term ended February 2022 but was renewed for a term of 12 months. For the three and nine months ended October 31, 2022, the Company recorded rent expense of $18,000 and $55,000, respectively (refer to Note 4 – Operating Leases).

NOTE 11 — SUBSEQUENT EVENTS

We have evaluated subsequent events occurring after October 31, 2022, and based on our evaluation, except as set forth below, we did not identify any events that would have required recognition or disclosure in these condensed consolidated financial statements.

Debt Modification

On November 29, 2022, the Company executed a Second Modification to the Second Amended and Restated Loan Agreement (the “Second Modification Debt Agreement”). The Second Modification Debt Agreement includes an expansion of the Company’s total borrowing to include a $2 million revolving line of credit. The revolving line of credit will be co-terminus with the term loan and matures on August 26, 2026. There are no requirements to draw on the line of credit. Amounts outstanding under the line of credit portion of the Second Amended and Restated Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The Company paid $20,000 in fees at the closing of the Second Modification Debt Agreement, and added an additional $50,000 to the deferred closing cost that is due upon the early repayment or term of the loan. The aggregate amount of the deferred costs due upon early repayment or term of the loan is $250,000. The Second Modification Debt Agreement is secured by substantially all of our assets. The covenants are amended as follows, including a change to our third quarter, 2022:

 SCHEDULE OF MAXIMUM DEBT MODIFICATION TO ARR RATIOS

 SCHEDULE OF MAXIMUM DEBT MODIFICATION TO ADJUSTED EBITDA RATIO

With the changes to the covenants through the Second Modification Debt Agreement, the Company was in compliance with all debt covenants as of October 31, 2022.

First Year Earnout Payment for Avelead

On November 22, 2022, the Company made the first year earnout payment and issued shares of common stock, par value $0.01 per share, subject to certain restrictions, to the selling shareholders of Avelead in accordance with the Unit Purchase Agreement See Item 1, Note 3 – Business Acquisition and Divestiture. In connection with the first year earnout payment, the Company made cash payments of $2,012,000 and issued 1,243,291 unregistered securities in the form of restricted common stock, par value $0.01 per share, for the SaaS Contingent Consideration and 627,746 unregistered securities in the form of restricted common stock, par value $0.01 per share, for the Renewal Contingent Consideration. The estimated aggregate value of the first year earnout payment is $4,000,000 for the SaaS Contingent Consideration and $1,000,000 for the Renewal Contingent Consideration. The Company has a second earnout under the Unit Purchase Agreement that will be payable on or about October 2023. These liabilities are reflected at the fair value of the future commitment on the Company’s balance sheet, as Acquisition Earnout Liability.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this Quarterly Report on Form 10-Q (this “Report”) and in other materials we file with the SEC or otherwise make public. This Report, therefore, contains statements about future events and expectations which are forward-looking statements within the meaning of Sections 27A of the Securities Act, as amended, and 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, our senior management makes forward-looking statements to analysts, investors, the media and others. Statements with respect to expected revenue, income, receivables, backlog, client attrition, acquisitions and other growth opportunities, sources of funding operations and acquisitions, the integration of our solutions, the performance of our channel partner relationships, the sufficiency of available liquidity, research and development, and other statements of our plans, beliefs or expectations are forward-looking statements. These and other statements using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions also are forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. The forward-looking statements we make are not guarantees of future performance, and we have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or historical earnings levels.

Among the factors that could cause actual future results to differ materially from our expectations are the risks and uncertainties described under “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 and in our subsequent filings with the SEC, and include among others, the following:

Some of these factors and risks have been, and may further be, exacerbated by the ongoing COVID-19 pandemic.

Most of these risk factors are beyond our ability to predict or control. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of our forward-looking statements. There also are other factors that we may not describe (generally because we currently do not perceive them to be material) that could cause actual results to differ materially from our expectations. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

On August 16, 2021, the Company entered into a Purchase Agreement to acquire Avelead, a recognized leader in providing solutions and services to improve Revenue Integrity for healthcare providers nationwide. The Company believes Avelead’s solutions will complement and extend the value the Company can deliver to its customers. Operations for Avelead are included in the Company’s consolidated financial information from the acquisition date. Refer to Note 3 – Business Combination and Divestiture in our unaudited condensed consolidated financial statements included in Part I, Item I, “Financial Statements” for further information on the Avelead acquisition.

During the third quarter ended October 31, 2022, the Company strengthened its balance sheet through a capital raise. On October 24, 2022, the Company entered into purchase agreements with certain investors (the “2022 Offering”). Under these purchase agreements, the Company agreed to issue and sell, in a registered direct offering, an aggregate of 6,299,989 shares of common stock, par value $0.01 per share, at a purchase price of $1.32 per share. The gross proceeds to the Company from the 2022 Offering were approximately $8.3 million. The Company intends to use the proceeds of the 2022 Offering for general corporate purposes. The 2022 Offering closed on October 26, 2022.

In addition, we expanded our relationship with Bridge Bank in the fourth quarter of 2022. On November 29, 2022, the Company executed a Second Modification to the Second Amended and Restated Loan Agreement (“Second Modification Debt Agreement”). The Second Modification Debt Agreement includes an expansion of the Company’s total borrowing to include a $2,000,000 non-formula revolving line of credit. The revolving line of credit will be co-terminus with the term loan, which matures on August 26, 2026. The Second Modification Debt Agreement also includes new covenants through the term of the Second Amended and Restated Loan and Security Agreement. See Item 1, Note 11 - Subsequent Events, for more discussion on the Second Modification Debt Agreement.

Results of Operations

Revenues

Software licenses —For the three and nine months ended October 31, 2022, revenue from software licenses decreased by $150,000 and $162,000, respectively, compared to the prior year periods. The Company has shifted its business from perpetual software licenses to a software as a service (SaaS) model. The software license sales come solely from our channel partners; therefore, the periodic amounts are less predictable and consistent than recurring revenues.

Professional services — For the three and nine months ended October 31, 2022, revenue from professional services increased by $326,000 and $2,500,000, respectively, compared to the prior year periods. The increase in professional services includes $314,000 and $2,228,000, respectively, of Avelead professional services revenue increases as compared to the prior year periods. The Company is primarily focused on SaaS growth, and, accordingly, is not expecting growth in professional services.

Audit services — For the three and nine months ended October 31, 2022, revenue from audit services increased $105,000 and $504,000, respectively, compared to the prior year periods. The increases for both comparable periods include revenue from new audit service agreements. The Company is primarily focused on utilizing audit services to support its technology, eValuator. Accordingly, the Company expects modest revenue growth in the future in audit services.

Maintenance and support — For the three and nine months ended October 31, 2022, revenue from maintenance and support increased $38,000 and $122,000, respectively, compared to the prior year periods. The increase is due to new maintenance subscriptions on previously licensed software. The Company does not anticipate maintenance and support growth due to the Company’s shift to its growth products that are classified as SaaS.

Software as a Service (SaaS) — For the three and nine months ended October 31, 2022, revenue from SaaS increased $384,000 and $3,847,000, respectively, compared to the prior year periods. The increases include $430,000 and $3,554,000, respectively, of SaaS revenue increases from Avelead. The remaining increase in SaaS revenue for the three month period ended October 31,2022 is due to new customers on the Company’s eValuator product offset by a customer termination. The remaining increase in SaaS revenue for the nine months ended October 31,2022 is due to new customers on the Company’s eValuator product. The Company expects continued growth in its SaaS business.

We have approximately $4.5 million in annualized contract value of contracts to be implemented as of November 30, 2022. The industry has been impacted post COVID by hospital personnel shortages and a backlog of hospital IT projects. This has resulted in slower contract to implementation timelines, which is delaying revenue recognition for such contracts. It is uncertain how long these headwinds will impact our implementation timelines. However, strong growth in SaaS is expected to continue as these contracts are implemented. The Company expects to see double-digit percentage growth, sequentially, and year-over-year, in Fiscal 2023 from its sales booking activity in Fiscal 2022.

Cost of Sales

The increase in overall cost of sales for the three and nine months ended October 31, 2022 from the comparable prior year periods are primarily due to Avelead, which represents $582,000 and $3,857,000 of the increase, respectively, as compared to prior year periods. The incremental increase in cost of goods sold for Avelead was driven by additional personnel and third-party content providers related to the Company’s SaaS solutions.

The cost of software licenses reflects amortization of capitalized software expenditures. The amounts for the three and nine months ended October 31, 2022 decreased compared to the respective prior year periods due to a reduction in research and development investments for the Company’s CDI/Abstracting products, resulting in lower capitalized software amortization expense.

The cost of professional services includes compensation and benefits for personnel and related expenses. For the three and nine months ended October 31, 2022, Avelead comprises $216,000 and $1,932,000 of the increase as compared to the respective prior year periods.

The cost of audit services includes compensation and benefits for audit services personnel, and related expenses. These costs for the three and nine months ended October 31, 2022 increased compared to the respective prior year periods due to an increase in employee related expenses that are tied to increased audit service fees.

The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third-party content provider contracts. The costs for the three and nine months ended October 31, 2022 remained consistent with the comparable prior year periods.

The cost of SaaS solutions is comprised of salaries, amortization of capitalized software development, and third-party content provider costs. For the three and nine months ended October 31, 2022, Avelead comprised $366,000 and $1,925,000 of the increase as compared to the respective prior year periods. The remaining increases were driven by personnel and third-party expenses driven by increased volume offset by a decrease in amortization of capitalized software.

Certain costs in SaaS solutions are tied to volumes, such as number of users. These costs include coding tools supporting eValuator and a third-party system that is intended to help move data from the hospital system to our systems. Included in cost of SaaS solutions are non-cash expenditures of $1,547,000 including the amortization of capitalized software which impacts margin by 17%. Excluding these non-cash items for the nine months ended October 31, 2022, the remaining cost of SaaS solutions was $3,224,000, or 35% of sales. Current margins are lower than we expect in the future for SaaS solutions as we are implementing a large number of new customers. Certain costs, such as labor and third-party content providers, impact the gross margin before a customer is fully implemented and revenue is recognized.

Selling, General and Administrative Expense

General and administrative expenses consist primarily of compensation and related benefits, reimbursable travel and entertainment expenses related to our executive and administrative staff, general corporate expenses, amortization of intangible assets, and occupancy costs. For the three and nine months ended October 31, 2022, Avelead comprised $59,000 and $1,282,000 of the increase as compared to the respective prior year periods. For the three and nine months ended October 31, 2022, increases of $436,000 and $1,127,000, respectively, were driven by employee related expenses, such as salaries, performance bonuses, and severance expense, as part of the Company’s strategic plan to simplify the Company’s business in order to drive sustainable growth and improved profitability and cash flows. The Company previously announced an “alignment” bringing the Avelead business together with its eValuator business. The resulting severance expense is included in each of General and administrative expenses and Sales and marketing expense.

Sales and marketing expenses consist primarily of compensation and related benefits and travel and entertainment expenses related to our sales and marketing staff, as well as advertising and marketing expenses, including trade shows. For the three and nine months ended October 31, 2022, Avelead comprised $240,000 and $1,181,000 of the increase as compared to the respective prior periods. For the three and nine months ended October 31, 2022, increases of $175,000 and $1,143,000, respectively, were primarily driven by an increase in salaries, benefits, and accrued severance associated with the Company’s previously announced alignment, and expansion and upgrade of its direct and indirect sales personnel. The Company has seen an increase in travel to customer sites, as well as industry trade shows, resulting in greater travel expense. The Company expects that face-to-face meetings with hospital systems will result in higher sales bookings.

Research and Development