Streamline Health Solutions, Inc.

Hello, and welcome to the Streamlined Health Solutions first quarter 2021 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jacob Goldberger, Director of Investor Relations and SDMA. Please go ahead, sir.

Thank you for joining us to review the financial results of Streamlined Health Solutions for the first quarter of 2021, which ended April 30th, 2021. As the conference call operator indicated, my name is Jacob Goldberger, and I'm responsible for our company's investor relations activities. Joining me on the call today are T. Green, President and Chief Executive Officer and Chairman of the Board, Tom Gibson, Chief Financial Officer, and Randy Salisbury, Chief Sales and Marketing Officer. At the conclusion of today's private remarks, we will open the call for a question and answer session. If anyone participating on today's call does not have a full-text copy of our press release announcing these results, you can retrieve it from the company's website at www.streamlinehealth.net or from numerous financial websites. Before we begin with our prepared remarks, we want to be sure we are clear for everyone on the record how certain information which may be provided today, as with all of our earnings calls, should be viewed. We therefore submit for the record the following statement. Statements made on this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These are subject to risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those we may discuss. Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K Annual Report, which is on file with the SEC for more information about these risks, uncertainties, and assumptions and other factors. As always, we are presenting management's current analysis of these items as of today. Participants on this call should take into account these risks when evaluating the topics we will discuss. Please note, Streamline Health is not undertaking any commitment or obligation to publicly revise any such forward-looking statements made today. On today's call, we will discuss non-GAAP financial measures such as adjusted EBITDA. Management uses these measures to help provide better insight into our financial performance. However, certain items of income and expense are not included in these measures, so these calculations may differ from those which another entity may utilize in calculating their own non-GAAP measures. To help you compare these amounts on consistent terms, please refer to our website at www.streamlinehealth.net and our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. I would now like to turn the call over to T. Green, President and Chief Executive. Officer, thank you.

Thank you, Jacob, and thank you all for joining us this morning. As I'm sure most of you are experiencing, our country is beginning to return to more normal procedures. The prevalence of vaccines has slowed the spread of the virus, which is proving beneficial to all of us. Not only are Americans able to return to a sense of normalcy, including gathering with friends and dining out, but our healthcare providers are experiencing the same, returning to more normal operations as the number of COVID patients decreases, allowing for more elective procedures which is a primary source of top line revenue for them. I stated in our previous earnings call that we anticipated a change in the buying patterns of hospitals as they return to more usual decentralized planning and budgeting. And we are in fact seeing this among our many evaluator prospects. But the demand to fund and implement all of the individual department initiatives that have been on the shelf since last March are creating a bottleneck that each healthcare provider is working through in their own way. Most hospitals need to ensure new contracts have approved funds in the macro budget before proceeding to the next step, which is committing internal IT resources so that new initiatives will be implemented on a timely basis. The final step in most instances is legal review and to finalize sales contracts. Every legal department we deal with today is inundated with these new requests and new contracts. I mention this because while we are seeing a fall in our prospects linear planning centered around caring for COVID patients, we are not yet back to normal. As Randy will detail in a few minutes, our pipeline remains strong with more opportunities moving into the last stage of the sales process. We are forced to be patient while we get through the backlog of new technology approvals and signatures. We know the moves necessary to advance our technology to the top of the list, and I believe we are doing a good job of this given the powerful return on investment our evaluator technology has proven to deliver. The end result from my chair is that contract signatures will be lumpy over the near term while we wait for final approvals on a number of contracts. There are reasons for my enthusiasm around our evaluator technology besides the strength of our sales pipeline created by our direct selling efforts. I mentioned last quarter that we are signing new reseller agreements with meaningful players in the healthcare provider industry. During the quarter, we signed a referral agreement with a large consulting firm. And just recently, we signed a referral agreement with R1 RCM, a public company I'm sure many of you are familiar with. R1, NASDAQ symbol RCM, is a leading provider of technology-driven solutions that transform the patient experience and financial performance of hospitals, health systems, and medical groups. We are very excited about the potential for growth from these new agreements and others we are currently negotiating. We will keep you posted as these relationships grow in the coming quarters. Moving now to our financial results. Total revenue for the first quarter of 2021 was $3 million compared to $2.8 million during the first quarter of 2020. Notably, our SAS revenue grew 32% from the first quarter of 2020 to 2021. Recurring revenue accounted for 76% of total revenue this quarter which was the same as the first quarter of 2020. First quarter of 2021 adjusted EBITDA was a loss of $700,000 compared to an adjusted EBITDA loss of $600,000 during the fiscal quarter of 2020. As of April 30, 2021, we had $16.7 million of cash on hand with no bank debt. As we announced late in February, we successfully closed a public offering during the quarter resulting in gross proceeds to the company of $16.1 million. Our cap table remains clean with approximately 43 million fully diluted shares outstanding. As of today, all of which is common stock. Our finance team has completed the paperwork to apply for conversion of our PVP loan secured in April 2020 into a grant. Tom Gibson, our CFO, will provide additional details about our financials hearing his prepared remarks. The Stringline team has built a strong operational foundation that will enable us to support accelerated revenue growth. We are using the new capital we raised in February to make vital investments in sales, marketing, and key software enhancements that will enable us to continue to provide world-class service to our clients and lead an industry movement to improve the financial performance of every healthcare provider through our evaluator pre-bill coding analysis technology. I will now turn the call over to our Chief Sales and Marketing Officer, Randy Salisbury, for an update on sales activities and the state of our pipeline. Randy?

Thank you, T. As T mentioned, we're seeing more activity in the purchase decision-making process among our many prospects, but that process is by no means moving quickly. During the quarter, we signed two new evaluator customers, amounting to $1.8 million in new bookings for the quarter. And as we move into our second fiscal quarter, we have approximately four new contracts that are in what we would call the final stages of our sales process. Our pipeline remains very strong with prospects that have been generated primarily through our direct selling efforts. But as T stated, with the growth in the number of reseller partners, we anticipate seeing growth in the top of the funnel in the quarters ahead, as we work together with these partners to target their best clients for our evaluator technology. Today we have six prospects in the pipeline from partners. That number should grow substantially over time. Our customer success team continues to meet monthly with customers to document the results evaluators delivered, specifically in terms of ROI. As a result, we're growing a stable of happy customers willing to provide testimonials to the power of evaluator. These references are a valuable selling tool for a product like Evaluator. Our potential clients want to know that, A, they can achieve a significant ROI, and, B, that their team can add this new tool into their workflow without disruption. We completed analysis last month looking back and comparing the ROI we projected for our customers based upon an initial Evaluator data analysis to actual results months or years later. In every case where we projected an ROI, the actual results exceed the projected results. My final comments this morning relate to the excitement we have regarding the growth in our sales and marketing efforts. As mentioned in April, we're expanding our sales team from four regional vice presidents to six. I'm pleased to report we have met with a number of very qualified sales executives and believe we will fill both of these new regions by the end of this second quarter. were interviewing to fill the two new business development resource positions we created at the end of last quarter. These actions will have a positive impact on sales later in this fiscal year and into 22 and beyond. I'll now turn the call over to Tom Gibson, our CFO, to review the first quarter's financial results in more detail. Tom?

Thank you, Randy. Total revenues for the first quarter of fiscal 2021 were $3 million. compared to $2.8 million in the prior year period. SAS revenue increased $287,000, or approximately 32%, compared to the same quarter a year ago. The revenue growth during the quarter was driven by higher revenue from SAS and software licenses offset by lower revenue from professional services, audit services, and maintenance and support. Net loss for the first quarter of fiscal 2021 was $2.1 million as compared to net income of $3.7 million during the first quarter of fiscal 2020. First quarter fiscal 2021 net loss included $320,000 of income from discontinued operations of the company's legacy ECM business, which closed February 24, 2020. This compared to $4.7 million of gain on sale and income from discontinued operations during the first quarter of fiscal 2020. Income from discontinued operations was offset by a loss from continuing operations for the three months ended April 30, 2021 and 2020 of $2.5 million and $1 million, respectively. A large portion of the increased loss from continuing operations in the first quarter of 2021 compared with 2020 was derived from higher amortization of software development costs, incremental stock-based compensation, and certain non-routine or transaction costs. Accordingly, adjusted EBITDA was relatively flat on consistent revenue. Adjusted EBITDA for the first quarter of fiscal 2021 was a loss of $700,000 compared to an adjusted EBITDA loss of $600,000 in the first quarter of fiscal 2020. Moving to the balance sheet, we finished the first quarter with approximately $16.7 million of cash on hand, compared to $2.4 million at the end of fiscal year 2020. In February, the company completed a successful capital raise with gross proceeds of $16.1 million. In March, we replaced our asset-based revolving credit facility with a $3 million capacity recurring revenue line facility. We plan to leverage the proceeds of our capital raise and additional debt capacity to make investments into sales and marketing and continued investments in the development of our flagship evaluator solution. Our mission remains to take full advantage of our position as first to market in the pre-bill coding analysis technology. The company received the PPP loan of $2.3 million in April last year. The company has applied for but not been granted forgiveness of the PPP loan at this time. No accounting for the forgiveness will be reported in the company's financial statements unless or until it is granted by the SBA. Outside of the PPP loan, the company has no debt outstanding. The company is not in a position to provide guidance for fiscal 2021 due to the continued uncertainty around the effects of the novel coronavirus. As we have previously discussed, the company is targeting 18 new evaluator bookings for its fiscal 2021. The company remains focused on continued growth of SAS revenue. We are targeting a gross margin for SAS revenue of 80% in fiscal 2023. Currently, our SAS GAAP gross margins include amortization of historical development expense. Given our evaluator SAS revenue volumes and the high levels of historical software development amortization, we have not yet reached our targeted gross margins. In addition to potential operational improvements, we will achieve this gross margin goal as the aforementioned development spend amortizes and we increase our evaluator unit volumes. In the fiscal year ended 2020, the company used approximately a million dollars of cash per quarter from operations. Based on the company's current forecast, it will begin generating cash from operations in Q2 or Q3 of 2022. That concludes my remarks. I will now turn the call back to T. Green for his closing comments. T?

Thank you, Tom. Within our executive team as managers and leaders, we maintain our focus on controlling what we can and winning at that every day. We are pleased that many of the difficulties of the past year are fading, and we look forward to benefiting from significant improvements to our organization, including our teams and our products made during the past year that we believe will create a foundation for rapid growth of our evaluator solution. Our vision to lead an industry-wide movement to improve the financial performance of every healthcare provider through our evaluator pre-bill coding analysis technology is being validated as our customer base and the results they realize continues to grow. Before we begin our Q&A session, I want to reiterate that I am pleased with the strength and talent of our people. I thank them for their commitment and hard work on behalf of our customers, ensuring they have the tools they need to free up time and resources to provide quality care for the communities they serve. Thank you all for your support of Streamline Health and for your support of our vision. Now I'd like to open the call up to your questions.

Operator? Thank you, and I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Matt Hewitt from Craig Hallam. Your line is now live.

Good morning and thank you for taking the questions. I've got a handful here. First up, maybe if you could walk us through the typical sales process. I think it was helpful to hear kind of where the potential log jams or where those log jams are popping up. But could you walk through the typical sales process? And then I think you mentioned kind of the budgeting and on the legal side is where you're seeing those log jams right now. Maybe walk through how those log jams are coming about, and more importantly, what do you think it's going to take to kind of get through or break through those items?

Yeah, Matt, thanks. This is T. I'll opine and then let Randy chime in. But obviously coming out of COVID in healthcare systems, we're beginning to see the clinical financial administrative decisions, you know, going back to their respective departments rather than what we spoke about during the pandemic was that linear decision that was COVID and everything else kind of had to fall in line. We're seeing health systems go back to where departments are beginning to prioritize their needs and which, you know, that translates into new contracts with new companies and new vendors. And so that's the positive, right? You're beginning to see that happen. The negative is that most health systems have that one legal department where now there's a backlog of contracts that need to be reviewed. And so we're beginning to see those contracts come back to us in redline, which is fantastic. That means they're working through the system, not just sitting there. And so that's phase one. Phase two then is once we get through the redlines, which we haven't had real issues doing that with any of the other contracts. It's fairly straightforward. But the second thing is having IT resources assigned to the streamlined evaluator project. And so that's another backlog. So, you know, very similar to the supply chain you're seeing in other, you know, goods around the country where in L.A. you've got 42 ships that are backed up in the port. You know, it's got to come through the system. That's no different than what we're seeing in the health systems. They're getting back to businesses. I think the thing that we're encouraged by, we'll see in the next, you know, call it next, certainly this next quarter, is will our contracts get to the top of the list? We think they will because, one, it's an ROI, and it's not – it's new. It's not a replacement because if you're in the replacement business with technology, you're probably – You know, we can do what we're doing. We'll get to it. But if it's a new technology or service that has a tremendous ROI, like Evaluator does, we believe those. And it's a fairly light implementation because we're not converting off anything, right? We're not having to migrate data from one system to another. You know, it's kind of a net new install with great ROI. So we'll see. But, you know, I'm encouraged that the dialogues we're having with CEOs and CFOs you know, they're getting that. If there's 10 contracts on the desk, why wouldn't you pick the one that's going to give you the biggest bang for the buck with the easiest implementation? So I'll pause there and let Randy chime in.

I can't add a thing to that. All right. More questions.

Yeah, no, that's really helpful, and thank you. I guess kind of staying on the pipeline side of the equation, Dave, As you've had some success, are you seeing the size of the contracts or the size of the customers grow? And I guess as we enter June 30th, that's fiscal year end for over half of the health systems in the U.S., are you seeing an opportunity to get into the new budgets for the upcoming fiscal year?

Randy, why don't you take that one?

Okay, the answer to that, Matt, is absolutely, and that's a lot of what Tia is speaking of. As we approach this next fiscal year, a July 1 start, and by the way, we're working on a couple that are October 1 start. That's where we're seeing this return to more normalcy. It doesn't mean they'll get funded, but what we're finding is the efforts we put in last year are now coming to fruition as a number of the prospects that have their hands tied are saying, this is great, we're really excited about this, in the month of May mostly. We put it into the budget, we expect it here in June. With approval, we'll move ahead, you know, starting the new fiscal. And I imagine, looking back real quickly at the bottom of the funnel, we probably have three or four of those, Matt, that are awaiting budget approval. They may not get it. I think they will in many instances. But as T mentioned, every department's now clamoring for money because they've had their initiatives put on hold for so long. But we've done a pretty good job of showing that this pays for itself pretty quickly. So even though they have to, quote, be budgeted, unquote, it makes it a little easier to swallow. So we'll see, but that's part of what we're doing this month. Okay, that's good. The other side of the question is, the other side was, yes, we are calling on larger and larger institutions, and we leverage, relationships we have with our current large ones, you know, in health, Memorial Hermann, some of those guys come to mind as, you know, 2,500 beds and up, and we're seeing great progress with the number that are in the 4,000 bed and 5,000 bed range.

That's great. Thank you. And then kind of shifting gears to the partnership side of the equation, congratulations on the new agreement with R1. Maybe talk a little bit about how that came about. And whether or not this is something that they could, you know, I think about their business being, you know, throwing people at the problem trying to get the audits done. Is this something that they'll be using internally? I mean, are you selling them a license or is this as they sign either new contracts or ones with existing customers, they'll be kind of bringing you or recommending you to that customer?

Yeah, Matt, I'll take the first part and let Randy answer. fill in the blanks, but, you know, in general, you have a number of health systems or outsourced organizations that are very labor-intensive, right, and that worked when your labor force was there. But with this, with obviously what's happened, you're seeing, and I don't know the percentage yet, we'll certainly see that over the next several months, or maybe the next two quarters, a lot of these programs auditors, coders, billers, whatever, you know, people that work in that RCM service world, they're not coming back into the workforce. And so I think a number of companies and health systems are saying, wait, we have to have technology that's going to make us more efficient and be able to perform at a higher level. So I think it's, you know, the evaluator had such a demand going into it. I think the demand coming out of it, those that, We might not necessarily have been looking for technology to replace the human capital or absolutely looking at it now. So, Randy, I'll let you take the rest of that one.

Sure, thanks, Steve. Matt, just like the resale arrangement from a couple months, a couple, three months ago with a large accounting slash consulting firm which remained unnamed, R1 is not licensing it and using it themselves. I think even better, they're referring us to their customer base. They're finding that this is a much more efficient and smarter use of new technology. It has a halo effect in that it makes them look good as the trusted advisor, so it extends the strength of their relationship. and it brings to their user base technology with which they're probably not familiar and where they can see the benefit and return on investment pretty quickly. So both the previous large big four accounting firm and R1 are approaching the market in similar ways.

Got it. All right. And then maybe a couple for Tom on the expense side of the equation. The $440,000 of non-recurring expenses that hit in the first quarter, what were those tied to? And, you know, is there going to be any tail to that here in the second quarter?

Hey, Matt, how are you doing this morning? Yeah, so there's going to be a little tail on some of those non-routine costs. A lot of that is associated with some strategic transactions. that are underway, as well as there was a one-time bonus to certain executives for successfully coming out of COVID and completing the capital raise.

Got it. And then on the gross margin front, and thanks for giving us that full guidance on SAS gross margin, What is the ramp? I mean, how should we be thinking about the ramp to get to 80%? Is that going to happen over a couple years? You know, where do you see that kind of shaking out over the course of fiscal 21?

Yeah, I think it's a gradual improvement from where we are now to fiscal 2023 and achieving that 80%. So, you know, we have in our models, you know, 60, 70 evaluator clients in fiscal year 2023. So as you add that volume and you have that amortization becoming a smaller portion of your overall cost, you're going to achieve that margin.

Great. Thank you. That's all I've got. Thanks a lot.

Thank you, Matt. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Jacob for any further closing comments.

Thank you all again for your interest and support of Streamlined Health.

If you have any additional questions or need more information, please contact me at jacob.goldberger at streamlinedhealth.net. We look forward to speaking to you all again in September when we will discuss our second quarter financial performance.

Good day. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.