Streamline Health Solutions, Inc.

Greetings. Welcome to the Streamline Health Solutions second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the prepared remarks. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Jacob Goldberger, Director of Investor Relations. Thank you. You may begin.

Thank you for joining us for the corporate update and financial results review of Streamlined Health Solutions for the second quarter of 2023, which ended July 31st, 2023. As the conference call operator indicated, my name is Jacob Goldberger. Joining me on the call today are T. Green, Chief Executive Officer and Chairman of the Board, Ben Stilwell, President, and Tom Gibson, Chief Financial Officer. At the conclusion of today's prepared 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 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 these 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 and booked SAS ACB. 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, Chief Executive Officer and Chairman of the Board.

T. Thank you, Jacob, and thank you all for joining us this morning. Following my opening remarks, our President, Ben Stilwell, will provide an operations and sales review, followed by a financial update from our CFO, Tom Gibson. During 2022, we began reporting a new metric, Book SAS ACV, which is the annualized contract value for all agreements that are being recognized into revenue, as well as bookings that have not been implemented. As of July 31st, 2023, Book SAS ACV was $17.6 million as compared to $17.2 million as of January 31st, 2023. We successfully closed new bookings totaling $300,000 of ACV. This was offset by an evaluated client which notified us of their non-renewal during the quarter whose ACV was approximately $500,000. Ben will discuss these events in more detail. $14.8 million of our book SAS ACV is implemented and contributing to recognized revenues. We continue to make progress towards our goal of having approximately $17 million of book SAS ACV implemented by the end of the third quarter of fiscal 2023. As of July 31st, 2023, we had $4.1 million of cash on our balance sheet and the balance on our term loan was $9.5 million. We believe our cash on hand is sufficient to achieve positive adjusted EBITDA less capitalized software development. We have access to an incremental $2 million of liquidity through our non-formula line of credit. We combined Avalit and Evaluator operations on November 1st, 2022. Under Ben's leadership, the integration process was smooth and we continue to achieve significant cost savings and operational improvements. We are working towards four corporate objectives in fiscal 2023. One, a client utilizing both of our flagship solutions, RevID and Evaluator. An Epic-based facility utilizing RevID. Improved performance from our partner channel. And the achievement of break-even adjusted EBITDA. We are in discussions with existing clients and remain confident we will close this fiscal year with one or more clients utilizing both RevID and Evaluator. Similarly, we're in late stage discussions about Rev ID with multiple Epic-based prospects. Within our partner channel, we are focusing only on channel partners that can deliver strong results without unduly diverting the energy of our overall growth team. Since our alignment in November 2022, we have seen significant cost savings and expect that trend will continue and expect that this approach in combination with top line growth will deliver our profitability and cash flow goals. The HCIT industry has experienced significant challenges in fiscal 2023, and we are no different. The administrative arms of our nation's health systems are overwhelmed, slowing their decision making and their ability to execute. We have seen our sales and client success operations become increasingly consultative and more difficult to forecast as a result. Increased bureaucracy and understaffed IT departments have significantly slowed our bookings, and we now anticipate closing fiscal 2023 with $24 million of booked SAS ACV. To be clear, this change in guidance as a result of macro conditions, I believe that under the leadership of Amy Severo, our growth team is doing the right things and that our solution's ability to ensure complete and accurate billing prior to the first bill drop is invaluable for our target market. Our solutions offer a fundamentally better way of processing claims in the front of the revenue cycle. We are improving at identifying impact we can have on net revenue, billing volumes, denial rates, and increase in available cash for our prospects. We have seen continued strong demand for our solutions And our sales team rarely hears the word no. Our implementation timelines for Rev ID are accelerating, which will result in a shorter lag between booking and revenue generation. We maintain our expectation of having $17 million of SAS ARR implemented during the third quarter of fiscal 2023. With that, I'd like to turn the call over to our president, Mr. Ben Stilwell.

Thank you, Tee. The Integrated Streamline team is evolving and is making significant progress towards our annual priorities, which are scaling the RevID and Compare technology for growth, increasing client effectiveness through evaluator usability, enhancing delivery for RevID and Compare, doubling the evaluator client outcomes through enhanced roles, and expanding our reach to new logo clients. These priorities have allowed our innovation and service teams to become fully integrated, and they are close to using one seamless process on all our products. Our clients will soon be able to rely on the same world-class service set and delivery regardless of solution. Let me expand some on the progress and innovation. Our innovation team completed the architecture scaling work on Rev ID and Compare ahead of schedule. As Tee mentioned, this will translate not only into a more efficient implementation process but also a better client experience. These solutions are now truly scalable. We will continue to make improvements in system integrations, which can further enhance the improvements we've already made. The team that was focused on the architectural work is now pivoting to more traditional feature functionality development following our roadmap. Another result of the re-architecture is a significant cost savings as the RevID solution has moved to a serverless architecture. I am also thrilled to announce that we've introduced our first AI-based tool for Evaluator. This internal solution is being leveraged by our Evaluator rules management team. It is actively reviewing the coding changes flowing through Evaluator that were and were not suggested by our solution and finds patterns that are easily overlooked by humans. The tool has already identified rules that could represent more than $20 million of annualized financial impact across our client base. This could translate into a three to five times incremental ROI for evaluator clients. The team is excited about the potential impact of these AI techniques on our revenue cycle solutions, and this is just our first step. We plan to continue to research how and where to implement these new technologies within our solutions, and we'll certainly keep you updated on our progress. Now looking at client service, as T mentioned, one of our evaluator clients notified us during the second quarter that they do not plan to renew their contract. This client had undergone significant management turnover and had trouble keeping enough coding and auditing staff on hand over the past year. This client was still seeing a 10 times annualized return, but as they lost staff, we saw their audits drop to less than a sixth of the rate they were auditing at in 2021. We learned quite a bit from this relationship. This client joined us prior to the formation of our client success team. which we've made significant investment in over the recent years. Today, that team meets with our clients on a monthly basis to ensure they have fully optimized the solutions, understand the value of the tools we provide, and nurture the client relationships. We do not expect to see non-renewals on a regular basis, but it would be arrogant to expect that we do not have some churn. Moving to growth, we expect that our bookings will continue to be lumpy, but I'm very pleased that our solutions continue to be adopted by some of the largest healthcare providers in the country. The growth team is leveraging new tools like our ideal client profile, our business impact analysis, which uses quantifiable values of future clients to rank their likelihood to buy and be a successful client for our solutions. Overall, the growth team has three pathways to success for fiscal 2023. The direct channel, which we have made continued investments in, Our partner channel, where we leverage larger sales forces to influence or resell our solutions. And lastly, cross-selling within our existing client base. I believe we have the right strategy for each of these pathways. As T-State, we're disappointed that the healthcare market has not recovered from post-COVID impacts as quickly as we had anticipated, but feel strongly about our growth prospects in fiscal 2023 and beyond. Before I turn the call over to Tom, I would like to thank all of our hardworking team members who are supporting our mission to ensure our healthcare provider clients are paid for all the care they provide. I'm very excited to lead our talented team and believe strongly that our innovation plus service equals growth formula will yield tremendous results for all of us as we continue to execute and expand. With that, I'll hand the call over to our CFO, Tom Gibson.

Thank you, Ben. At the end of fiscal 2022, the company changed its categories for reporting revenue. SAS revenue is now the headline of our income statement. For the quarter ended July 31, 2023, total revenue was $5.8 million compared to $6 million during the prior year period. And for the six months ended July 31, 2023, Total revenue was $11.1 million compared to $11.9 million for the first six months of 2022. As previously reported, the company had a large professional services contract that did not renew at the end of its 2022 fiscal year. These professional services contracts are not part of the company's core business going forward. SAS revenue grew 13% in the second quarter and first half of 2023 compared to the prior year period. We expect to see growth on the SAS revenue line in the coming quarters as the company has successfully implemented its solution. We maintain our expectation of 30% SAS revenue growth in fiscal 2023 compared to fiscal 2022. The company has approximately $3.4 million of unimplemented book SAS ACV as of July 31, 2023. Total operating expense was $8.4 million during the second quarter of 2023, down 3% compared to $8.6 million for the second quarter of 2022. For the first half of fiscal 2023, operating expense totaled $16.7 million, down 6%, compared to $17.8 million during the first half of fiscal 2022. The lower operating expense was attributable to lower headcount associated with the non-renewal of the large professional services contract as well as the cost savings achieved through the integration of Avalieve and Evaluator businesses discussed by T earlier in this call. Second quarter 2023 net loss totaled $2.5 million compared to a loss of $3.3 million in fiscal 2022. For the first six months of 2023, Net loss totaled $5.4 million compared to a loss of $6.1 million during the first six months of 2022. The smaller net loss on lower revenues demonstrates the value of growing our high-margin SAS revenue as compared to the professional services contract that was not renewed. Second quarter 2023 adjusted EBITDA was a loss of $0.9 million compared to a loss of $1.1 million during the second quarter of fiscal 2022. For the first six months of 2023, adjusted EBITDA was a loss of $2.2 million compared to a loss of $2.4 million for the year-ago period. The company expects that its adjusted EBITDA loss will continue to narrow and anticipates reaching near break-even adjusted EBITDA in the third quarter of fiscal 2023. Moving to the balance sheet, as of July 31, 2023, we had $4.1 million of cash on hand compared to $6.6 million at January 31, 2023. Under the Avalit Acquisition Agreement, the company is contracted to provide additional consideration on each of the first two 12-monthly anniversaries of the closing date. The first of these payments were paid in the fourth quarter of fiscal 2022. The second payment will be paid in cash and stock and is valued on the balance sheet at approximately $3 million. Of this amount, it is estimated that we will pay $1.2 million in cash in November 2023. The liability is referred to as acquisition earn-out liability on the company's balance sheet. The company's accounts receivable was $2.8 million at July 31, 2023, substantially lower than January 31, 2023. The lower accounts receivable is partially attributable to recently implemented evaluator contracts with performance guarantees that are not invoiced until the guarantee is met. The company has historically met these guarantees within two to three months of implementation. The balance of our term loan as of July 31, 2023 was $9.5 million. As of September 1, 2023, we're in the third 12-month period of the loan and will make $1 million of principal payments over the course of the next 12 months. We have access to a $2 million line of credit, which we can draw if necessary. Based on our current forecast, we may need additional financing to fund our ongoing operations without sacrificing future growth. Our current bank debt of $9.5 million is approximately 0.5 times our annual recurring revenue, or ARR. We believe the industry average debt to ARR ratio for companies similarly situated to ours is 1 to 1.25. This gives us some $10 million in debt capacity if refinanced. We believe that the venture capital backed credit markets are improving and we could successfully refinance our bank debt with a credit facility in the range of 1.0 to 1.25 times ARR. On its current cost structure, we believe our overall business will achieve adjusted breakeven at a SAS revenue rate of $17 million. We achieved this level of bookings in Q4 of 2022 and expect to have this revenue fully implemented during the third quarter of 2023. The company is realizing incremental SAS gross margins above 80%. I am proud of the progress this company continues to make and want to commend our staff. That concludes my comments. I will now turn the call back to T. Green for his closing remarks.

T? Thank you, Tom. We continue to enable healthcare providers to proactively address revenue leakage and improve financial performance and have taken major steps forward to drive reoccurring revenue streams that better position our company for growth and to deliver significant shareholder value over the long term. While the macro environment remains more challenging than previously expected, We see strong demand for our pre-bill revenue cycle methodology and our solutions. We believe our ability to be self-sustaining and generate cash from operations is a significant next step in our life cycle. I am proud of our team for making the necessary changes and executing on this milestone for our business. Before we begin our Q&A session, I'd like to thank the entire Streamline team. Once again, for all the hard work and dedication. Their contributions are essential for us to support our healthcare providing clients and ensure they have the necessary tools to free up time and resources to provide quality care for the communities they serve. Thank you all for your support of Streamlined Health and our vision. Now I'd like to open the call up to your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Matt Hewitt with Craig Hallam. Please proceed with your questions.

Good morning and thank you for taking the questions. Maybe first up, I'd like to dig in a little bit more on the current selling environment. Obviously, you commented a little bit on some of the challenges that you're seeing. I know you had a two-and-a-half-year period with COVID weighing on hospitals' decision-making process. We started to see this spring, we started to see some of the procedure volumes improving, which I think expectations were that you would see some of that increased revenue flowing to software and equipment purchases and whatnot. But where are we right now? I mean, if hospitals are seeing a little bit of improvement there, what's kind of the gating factor to kind of the liftoff that I think many are expecting as we get through this fiscal year for you guys?

Yeah, Matt. Thanks. This, uh, T here. Um, yeah, it's, can you hear me? Okay.

Absolutely.

Okay, good. Um, yeah, you know, I mean the, the, the first half of, of 23 has been fairly slow, I think industry wide, you know, the, the coming out of the administration's office when I mean the CFO and legal, you know, the, the, those seem to have been starting to, to fall or, or, or make its way through the pipeline. I think IT, we still have some real struggles, you know, getting the priority in the IT departments, but that's even beginning to thaw as well. If you look at Q2, you know, we did four transactions, which is really, really encouraging. They were smaller. They weren't, you know, maybe average like 130 ACV. One of them was with Oracle, though, which is super encouraging because, you know, we had this Relationship with Cerner, and then we all know what happened, and it's taken four or five months for all of the management and the strategy to shut itself out. So we're really encouraged. In fact, we have like 34 book meetings with Oracle clients, and we're their pre-built technology solution. So that's really encouraging. We didn't close it. We've got seven other deals that are in this kind of targeted quarter and the ACV 600. So we didn't get the big ones, but it looks like they're coming through the system. And then you look at Q4 and the ACV jumps to 900. So all the things that we've been working towards, it feels like these things are starting to open up. Like I said, four already on the smaller side, but again, one of them Oracle. So these are good deals. green lights for us, we're still cautious. We do think it's been mentioned that the bookings is going to be lumpy because when we sell, you know, when we close a million dollar ACV deal versus a $250,000 ACV deal, obviously that's, that's vastly different. But if you look at where the deals in our pipeline that are red lines, I mean, that are the contracts are red line going back and forth between our team and their team. you look at the back half of the quarter and going into Q4, really, really, really impressive transactions in front of us. So not a lot of great press releases from us in the last quarter or two, but I think those are coming again. So we're excited about that.

That's very encouraging. Thank you. And then maybe a separate question. So congratulations on the new AI or jumping into the AI fray. Was this a product that was requested by customers? Was this something that you guys have been working on and realized that now is the time? What has the feedback been? I realize it's just launched, but what has the initial feedback been from customers? Any additional color on that would be helpful. Thank you.

Yeah. Thanks, Matt. This is T again. I'm going to let Ben opine as well. You can't go into a customer or client prospect meeting without the word AI being asked about, even if the questioner doesn't really understand what they're asking, right? It's in every conversation if you're in technology. We started working on the AIML technology here at Stream well over a year and a half ago, defining what we could do, how we could use it. And so what we've done is we've rolled it out internally in our rules division. So where most of the rules in the healthcare world or in the RCM world are being written by humans, right? And so now we're able to introduce technology that's able to find things that were wrong with rules, but also find things that weren't even written by humans. And we've just started this process. And as Ben mentioned, we've already found $20 million of additional revenue capture for our clients. And we just wrote this out in the last month. And so clients haven't seen it yet. They're not touching it yet. It's only our internal team. So we're kind of eating our own dog food, if you will. Ben, you want to make any further comments on that?

Yeah, we've hyped it up a little bit with our clients already. And so they knew it was coming. And it's somewhat intuitive. The process that we go through today is having individuals do a lot of this research on their own, a lot of reporting, a lot of data mining on their own, and it just cuts out that whole initial research step and gives very intelligent findings right off the bat. And I think the users themselves, our internal users, are excited about it, but then our technologists are just thinking and very excited about how that's going to expand into a variety of areas and eventually be client-facing and do all sorts of things, but we're already talking about it with current clients, already hyping it up with our prospects as well.

That's great. All right. Thank you very much.

Thank you. Our next question has come from the line of Aaron Wuchmier with Lake Street Capital. Please proceed with your questions.

Hey, good morning, guys. This is Aaron. I'm on the line for Brooks this morning. So just, you know, last quarter you mentioned a couple of goals towards making progress towards sort of your annual priorities, you know, are you comfortable with where you're at in terms of sort of scaling the Rev ID and maybe increasing client effectiveness through the evaluated usability? And, you know, if we could just get a bit more color on progress there and if there's sort of a higher priority that you guys are focusing on going into the back half of the year here.

Yeah, thanks, Aaron. This is T, and I'll start and let Ben opine as well. But RevID, you know, major, major progress. We knew going into it there was a re-architecture that was going to have to be done on the platform. And I don't like any innovation projects. It was probably a little larger than we envisioned. But that tech has been – It is wrapping up, and it has wrapped up. It's up to the cloud, and so it's now a true cloud-based platform. We have, I don't know, don't hold me to the exact numbers, Ben, but what is, I think we've lowered our infrastructure cost almost like $40,000 a month, something like that. I mean, just major. And now it can scale to the enterprise because everything we've talked about, it has to be enterprise. class, it has to be enterprise class. And so that's been really cool. It's going to increase our velocity and how we tackle future projects on the platform now. We've actually, for the first time, we have a project-based roadmap for RebID, so we know what we're building in every sprint. You know, you couldn't do that until you had the architecture ready. So the architecture is ready to go. On Evaluator, it is enterprise class. I mean, it's an exciting tool that is continuing to grow and create opportunities for streamlines. So, you know, technology-wise, the biggest things right now on, like, evaluators really getting the epic, I mean, not the epic, but getting the defined roadmap for evaluator is it's really making sure that that two year roadmap that we have in front of us is just continually being evaluated with our clients. We can go really, really fast on the evaluator side. So, you know, that, that's exciting. I don't see anything other than the introduction of AI and ML on that platform. That's, that's obviously the biggest thing we've done. And clients are going to receive the benefit of that in the next several quarters. So that'll be cool. But, Ben, anything specific about these two platforms?

No, I think you were right on the cost decline on going to serverless, but I think, like you said, the most important part is prospects and current clients don't find the architecture stuff too exciting other than it's more reliable. What they find exciting is that now we're going to start rolling out a lot more features that will affect them. And then, yeah, I agree with your comments evaluator as well.

Great, yeah, that is super helpful and encouraging. I'm excited to see the progress there. Thanks for taking the question. Thank you.

Thank you. We have reached the end of our question and answer session. I'm going to turn the floor back over to Jacob Goldberger for any 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 with you all again when we discuss our third quarter financial performance. Good day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.