Executive Overview
The Company has determined it can best assist healthcare providers in improving
their revenue cycle management by providing solutions and services in the middle
portion of the revenue cycle, that is, the revenue cycle operations from initial
charge capture to bill drop. We continue to make decisions supporting our focus
in the middle of the revenue cycle. Our healthcare provider clients are
acute-care hospitals and related clinics.
The Company has introduced two flagship software solutions for the middle of the
revenue cycle: RevID and eValuator.
With the focus on the middle of the revenue cycle, the Company is committed to
leading an industry movement to improve hospitals’ financial performance by
moving billing interventions upstream to improve coding accuracy before billing,
enabling our clients to reduce revenue leakage, mitigate under-billing and
over-billing risk, reduce both denials and limit days in accounts receivable.
By narrowing our focus to the middle of the revenue cycle, we believe there is a
distinct and compelling value proposition that can help us attract more clients.
By innovating and acquiring new technologies, we have been able to expand our
target markets beyond just hospitals and into outpatient centers, clinics and
physician practices. Our revenue cycle solutions like eValuator, RevID, and
Compare are competitive in the market and enabled us to engage thirteen
significant new clients in fiscal 2022. These new clients are some of the most
recognizable names in healthcare as we have focused our salesforce on
industry-leading clients whose processes are often duplicated by smaller
facilities.
Acquisitions and Divestitures:
The Company divested its ECM Assets on
such divestiture is consistent with the Company’s efforts to focus on the middle
of the revenue cycle and its pre-bill technology, eValuator. Management believes
that the revenue cycle technology platforms have higher growth opportunities
than its legacy products, including the ECM Assets. The Company accounted for
the disposal of the ECM Assets as a sale of assets. See Note 13 – Discontinued
Operations to our consolidated financial statements included in Part II, Item 8,
“Financial Statements and Supplementary Data”.
On
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
clients. Refer to Note 3 – Business Combination and Divestiture in our
consolidated financial statements included in Part I, Item I, “Financial
Statements” for further information on the Avelead acquisition.
Macro-Economic Conditions:
Regardless of the state of the Affordable Care Act, the healthcare industry
continues to face sweeping changes and new standards of care that are putting
greater pressure on healthcare providers to be more efficient in every aspect of
their operations. We believe these changes represent ongoing opportunities for
our Company to work with our direct clients and various resellers to provide
information technology solutions to help providers meet these new requirements.
The COVID-19 pandemic, and its attendant economic damage, has had an adverse
impact on our revenue.
The Company believes the lingering effects of the COVID-19 pandemic may continue
to impact our acute care healthcare clients including (i) lower margins in
hospitals primarily due to increased cost of personnel and materials, (ii)
higher than normal personnel turnover in clinical and administrative departments
as the labor force looks outside the acute care healthcare space, and (iii) a
backlog of IT projects that were deferred during COVID-19 that places pressure
on the hospital system to manage new projects. As events continue to change, the
Company is unable to accurately predict the ultimate impact that the COVID-19
pandemic will have on the results of operations due to uncertainties including,
but not limited to, the severity of the disease, the impact of new subvariants
and the public’s response to the outbreak; however, the Company is actively
managing the business to respond to the impact.
25
In addition, the
which we operate, have imposed severe sanctions and export controls against
The impact of these measures, as well as potential responses to them by
is currently unknown and they could adversely affect our business, partners or
clients.
Results of Operations
Statements of Operations for the fiscal years ended
2023 2022 (2) $ Change % Change
Software as a Service $ 12,326 $ 8,077 $ 4,249 53 %
Maintenance and Support 4,483 4,323 160 4 %
Professional fees and licenses 8,080 4,979 3,101 62 %
Total revenues 24,889 17,379 7,510 43 %
Cost of sales 13,395 8,577 4,818 56 %
Selling, general and administrative 16,134 11,931 4,203 35 %
Research and development 6,042 4,782 1,260 26 %
Acquisition-related costs 149 2,856 (2,707 ) (95 )%
Total operating expenses 35,720 28,146 7,574 27 %
Operating loss (10,831 ) (10,767 ) (64 ) (1 )%
Other (expense) income, net (477 ) 3,959 (4,436 ) (112 )%
Income tax expense (71 ) (109 ) 38 (35 )%
Loss from continuing operations
Adjusted EBITDA(1)
$ (3,757 ) $ (2,037 ) $ (1,720 ) (84 )%
(1) Non-GAAP measure meaning net earnings (loss) before net interest expense, tax
expense (benefit), depreciation, amortization, stock-based compensation
expense, transactional and other expenses that do not relate to our core
operations. See "Use of Non-GAAP Financial Measures" below for additional
information and reconciliation.
(2) We acquired all of the equity interests of Avelead on
the revenue and expenses associated with Avelead are included from that date
to the end of the Company's fiscal year ended January 31, 2023 .
26
The following table sets forth, for each fiscal year indicated, certain
operating data as percentages of total revenues:
Statements of Operations (1)
Fiscal Year
2022 2021
Software as a service 49.5 % 46.5 %
Maintenance and support 18.0 24.9
Professional fees and licenses 32.5 28.6
Total revenues 100.0 % 100.0 %
Cost of sales 53.8 % 49.4 %
Selling, general and administrative 64.8 68.7
Research and development 24.3 27.5
Acquisition-related costs 0.6 16.4
Total operating expenses 143.5 % 162.0 %
Operating loss (43.5 )% (62.0 )%
Other (expense) income, net (1.9 ) 22.8
Income tax expense (0.3 ) (0.6 )
Loss from continuing operations (45.7 )% (39.8 )%
Cost of Sales to Revenues ratio, by revenue stream:
Software as a service
51.6 % 42.3 % Maintenance and support 9.5 % 7.7 % Professional fees and licenses 81.8 % 96.9 %
(1) Because a significant percentage of the operating costs are incurred at
levels that are not necessarily correlated with revenue levels, a variation
in the timing of software licenses and installations and the resulting
revenue recognition can cause significant variations in operating results. As
a result, period-to-period comparisons may not be meaningful with respect to
the past results nor are they necessarily indicative of the future results of
the Company in the near or long-term. The data in the table is presented
solely for the purpose of reflecting the relationship of various operating
elements to revenues for the periods indicated.
Comparison of Fiscal 2022 with 2021
Revenues
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
Software as a service $ 12,326 $ 8,077 $ 4,249 53 %
Maintenance and support 4,483 4,323 160 4 %
Professional fees and licenses 8,080 4,979 3,101 62 %
Total Revenues $ 24,889 $ 17,379 $ 7,510 43 %
Software as a service (SaaS) – Revenues from SaaS are primarily comprised of the
Company’s flagship products; eValuator, RevID and Compare. Revenues from SaaS in
fiscal 2022 were
increase in SaaS revenue in fiscal 2022 includes
products, primarily due to a full twelve months of revenue recognition compared
to partial year revenue in fiscal 2021. Avelead was acquired on
resulting in a partial year of revenue in fiscal 2021 and a full year of revenue
in fiscal 2022. The remaining increase in fiscal 2022 revenue was attributable
to growth associated with the Company’s eValuator product. The Company expects
substantial growth in its SaaS business, year-over-year, and sequentially, in
each quarter of fiscal 2023. At
implemented.
27
Maintenance and support – Revenues from maintenance and support are derived from
our legacy CDI and Abstracting products. Revenues from maintenance and support
in fiscal 2022 remained consistent as compared to fiscal 2021. The Company
expects a slight decrease for the maintenance and support revenue for fiscal
2023 from pricing pressure and terminations offset with minimal new sales as the
Company’s focus continues to be on its SaaS products.
Professional fees and licenses – Revenues from professional fees and licenses
include proprietary software, term license, professional services and audit and
coding services revenues. Total professional fees and licenses revenues in
fiscal 2022 were
increase of
Software license revenues recognized in fiscal 2022 were
to
channel partners. The Company has the ability to influence sales of these
products; however, the timing is difficult to manage as sales are essentially
the result of these channel partners. Term license revenue for fiscal 2022
increased
license renewed during fiscal 2022. Professional services revenues in fiscal
2022 were
professional services included
from Avelead. Avelead was acquired on
year of results for fiscal 2021 as compared to a full year of results for fiscal
2022. We anticipate a decrease in professional services revenue in fiscal 2023
as a result of the termination of a large client’s consulting contract effective
contract had low margins compared to our SaaS solutions and the Company does not
intend to pursue such professional services contracts in the future.
Audit and coding services revenues recognized in fiscal 2022 were
compared to
continues to see demand for on-shore, technically proficient coders and auditors
in the marketplace. The Company believes it has a competitive advantage
utilizing eValuator for these audit and coding services. The Company expects the
audit and coding services business to remain stable during fiscal 2023 as it may
be sold with our eValuator solution as a technology enabled service.
Cost of Revenue
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
Cost of software as a service $ 6,358 $ 3,417 $ 2,941 86 %
Cost of maintenance and support 427 334 93 28 %
Cost of professional fees and licenses 6,610 4,826 1,784 37 %
Total cost of sales $ 13,395 $ 8,577 $ 4,818 56 %
Cost of software as a service (SaaS) – The cost of SaaS solutions consists of
costs associated with (i) amortization of capitalized software, (ii) royalties
payable to third-parties for use of their coding related content, and (iii)
personnel and network related expenses to provision the application for each
client. The increase in cost of SaaS included
Avelead was acquired on
in fiscal 2021 compared to a full year of results in fiscal 2022. The royalty
and network related agreements are becoming variable as the cost is derived by
attributes of the client’s accessing the system. The remaining year-over-year
increase was driven by personnel expenses. The Company continued to invest in
additional personnel to support SaaS solutions as the client base has been
expanding. The Company expects the costs in these categories will continue to
rise, in line with revenue, in fiscal 2023 as the Company continues to invest in
RevID, Compare and eValuator.
Certain costs in SaaS solutions are tied to volumes. 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 the cost of SaaS
solutions are non-cash amounts of
capitalized software, which impacts margin by 17%. Current margins are lower
than we expect in the future for SaaS solutions as we are implementing several
new clients. Certain costs, such as labor and third-party content providers,
negatively impact gross margin before a client is fully implemented and revenue
is recognized.
28
Cost of maintenance and support – The cost of maintenance and support includes
compensation and benefits for client support personnel. The cost of maintenance
in fiscal 2022, compared to fiscal 2021, remained flat and in line with the
change in maintenance and support revenue. We expect to see the cost of
maintenance and support for fiscal 2023 to remain relatively consistent as our
maintenance and support teams focus on serving our SaaS solutions.
Cost of professional fees and licenses – Cost of revenue, professional fees and
licenses, includes cost of software licenses, cost of professional services and
cost of audit and coding services. The total cost of sales, professional fees
and licenses was
2021 respectively. The increase in cost of professional fees and licenses
includes
a full twelve months of expenses compared to a partial year of expenses in
fiscal 2021. Avelead was acquired on
year of results for fiscal 2021 as compared to a full year of results in fiscal
2022. The implied gross margin on professional fees and licenses revenue
increased in fiscal year 2022 as compared to fiscal year 2021 primarily due to
(i) higher revenue from software licenses and (ii) improved margin on a large
professional services contract as we lowered the cost of personnel used on the
project. The large professional services contract that was cancelled by the
client, with a cancellation effective date of
employees and contract labor. The employees and contract labor servicing the
large contract were terminated consistent with the end of the revenue. There are
no operating losses expected to wind down the labor associated with this
contract.
Selling, General and Administrative Expense
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
General and administrative
expenses $ 10,569 $ 7,896 $ 2,673 34 %
Sales and marketing expenses 5,565 4,035 1,530 38 %
Total selling, general, and
administrative expense $ 16,134 $ 11,931 $ 4,203 35 %
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. Avelead was acquired on
resulting in a partial year of operations for fiscal 2021 as compared to a full
year of operations for fiscal 2022, comprising
general and administrative expenses for fiscal 2022. For fiscal 2022, increases
of
salaries, and with increases for performance bonuses and severance expense,
accounting for
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 fiscal 2022, Avelead comprised
and marketing expenses as compared to fiscal 2021, as Avelead was acquired on
compared to a full year of operations for fiscal 2022. The Company has also seen
an increase in travel to client sites, as well as industry trade shows,
resulting in greater travel expenses. The Company expects that face-to-face
meetings with hospital systems will result in higher sales bookings.
Research and Development
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
Research and development expense $ 6,042 $ 4,782 $ 1,260 26 %
Capitalized research and development cost 2,019 1,431 588 41 %
29
Research and development expenses consist primarily of compensation and related
benefits, the use of independent contractors for specific near-term development
projects and an allocated portion of general overhead costs, including occupancy
costs, if material. Total costs in each of research and development expense and
capitalized research and development cost for fiscal 2022 include
related to Avelead compared to fiscal 2021 which included
Avelead. Avelead was acquired on
results for fiscal 2021 as compared with a full year of results for fiscal 2022.
The remaining fiscal 2022 increased spend was with our development partner (see
Commitments and Contingencies). The Company continues to focus on research and
development activities on those products with its highest growth prospects,
primarily eValuator, RevID and Compare. The Company expects fiscal 2023 total
research and development spend to continue at approximately the same level as
fiscal 2022. For fiscal 2022, as a percentage of revenue, total research and
development costs were 32%. In fiscal 2022, the Company was awarded
the
end of fiscal 2022, the cumulative balance of unused research and development
credits was
to current
Acquisition-related Costs
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
Acquisition-related costs
Refer to Note 2 – Summary of Significant Accounting Policies – Other Operating
Costs – Acquisition-related costs – in the consolidated financial statements
included in Part II, Item 8, “Financial Statements and Supplementary Data” for
further details with respect to acquisition-related costs. For fiscal 2022, the
Company incurred certain acquisition-related costs related to the acquisition of
Avelead totaling
services. For fiscal 2021, the Company incurred acquisition-related costs
related to the acquisition of Avelead totaling
related to the acquisition of Avelead in fiscal 2021,
bonuses paid to certain executives in executing priorities, primarily the
acquisition.
Other (Expense) income
Fiscal Year 2022 to 2021 Change
(in thousands): 2022 2021 $ %
Interest expense $ (749 ) $ (236 ) $ (513 ) 217 %
Loss on early extinguishment of debt - (43 ) 43 (100 )%
Acquisition earnout valuation adjustments 71 1,851 (1,780 ) (96 )%
Miscellaneous income 201 60 141 235 %
PPP Loan Forgiveness - 2,327 (2,327 ) (100 )%
Total other (expense) income $ (477 ) $ 3,959 $ (4,436 ) (112 )%
Interest expense consists of interest associated with the term loan, deferred
financing costs, less interest related to capitalization of software. Interest
expense increased for fiscal 2022 from the prior year period primarily due to
the
interest rates. Further, interest rates have increased at an accelerated pace in
fiscal 2022.
rate increases. Recent interest rate increases are expected to continue at a
slower pace than that experienced in fiscal 2022. The interest rate increases
that have been put into effect to date, are expected to continue to increase
interest expense (year-over-year) into fiscal 2023.
Acquisition earnout valuation adjustments for fiscal 2022 include a valuation
adjustment of
The valuation adjustment is related to the acquisition earnout liabilities
associated with the Avelead acquisition (Refer to Note 3 – Business Combination
and Divestiture of the consolidated financial statements included in Part II,
Item 8, “Financial Statements and Supplementary Data”).
Miscellaneous income for fiscal 2022 and fiscal 2021 primarily includes income
related to the sublease of the
Leases).
PPP loan forgiveness for fiscal 2021 reflects the financial impact of the
forgiveness of the Company’s
of
30 Provision for Income Taxes
For continuing operations fiscal 2022 and fiscal 2021, we recorded income tax
expense of
federal, state, and local income tax provisions. The Company has a substantial
amount of net operating losses for federal and state income tax purposes. The
Company recorded an increase to the federal income tax valuation allowance in
each of fiscal 2022 and 2021 of approximately
tax benefits for operating losses.
Use of Non-GAAP Financial Measures
In order to provide investors with greater insight and allow for a more
comprehensive understanding of the information used by management and the Board
of Directors in its financial and operational decision-making, the Company has
supplemented the Consolidated Financial Statements presented on a GAAP basis in
this Report with the following non-GAAP financial measures: EBITDA, Adjusted
EBITDA, and Adjusted EBITDA Margin.
These non-GAAP financial measures have limitations as analytical tools and
should not be considered in isolation or as a substitute for analysis of Company
results as reported under GAAP. The Company compensates for such limitations by
relying primarily on our GAAP results and using non-GAAP financial measures only
as supplemental data. We also provide a reconciliation of non-GAAP to GAAP
measures used. Investors are encouraged to carefully review this reconciliation.
In addition, because these non-GAAP measures are not measures of financial
performance under GAAP and are susceptible to varying calculations, these
measures, as defined us, may differ from and may not be comparable to similarly
titled measures used by other companies.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
We define: (i) EBITDA as net earnings (loss) before net interest expense, income
tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA as
net earnings (loss) before net interest expense, income tax expense (benefit),
depreciation, amortization, share-based compensation expense, transaction
related expenses, and other expenses or benefits that do not relate to our core
operations such as severance and impairment charges and debt forgiveness; and
(iii) Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of GAAP net
revenue. EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are used to
facilitate a comparison of our operating performance on a consistent basis from
period to period and provide for a more complete understanding of factors and
trends affecting our business than GAAP measures alone. These measures assist
management and the board and may be useful to investors in comparing our
operating performance consistently over time as they remove the impact of our
capital structure (primarily interest charges), asset base (primarily
depreciation and amortization), items outside the control of the management team
(taxes) and expenses that do not relate to our core operations including:
transaction-related expenses (such as professional and advisory services),
corporate restructuring expenses (such as severances) and other operating costs
that are expected to be non-recurring in nature. Adjusted EBITDA removes the
impact of share-based compensation expense, which is another non-cash item.
The Board of Directors and management also use these measures (i) as one of the
primary methods for planning and forecasting overall expectations and for
evaluating, on at least a quarterly and annual basis, actual results against
such expectations; and (ii) as a performance evaluation metric in determining
achievement of certain executive and associate incentive compensation programs.
Our lender uses a measurement that is similar to the Adjusted EBITDA measurement
described herein to assess our operating performance. The lender under our
Second Amended and Restated Loan and Security Agreement requires delivery of
compliance reports certifying compliance with financial covenants, certain of
which are based on a measurement that is similar to the Adjusted EBITDA
measurement reviewed by our management and Board of Directors.
31
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity
under GAAP or otherwise and are not alternatives to cash flow from continuing
operating activities, despite the advantages regarding the use and analysis of
these measures as mentioned above. EBITDA, Adjusted EBITDA, and Adjusted EBITDA
Margin, as disclosed in this Report have limitations as analytical tools, and
you should not consider these measures in isolation or as a substitute for
analysis of our results as reported under GAAP; nor are these measures intended
to be measures of liquidity or free cash flow for our discretionary use. Some of
the limitations of EBITDA and its variations are:
? EBITDA does not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments;
? EBITDA does not reflect changes in, or cash requirements for, our working
capital needs;
? EBITDA does not reflect the interest expense, or the cash requirements to
service interest or principal payments under our Second Amended and Restated
Loan and Security Agreement;
? EBITDA does not reflect income tax payments that we may be required to make;
and
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and
EBITDA does not reflect any cash requirements for such replacements.
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and
prudently evaluate our business, the Company encourages readers to review the
GAAP financial statements included elsewhere in this Report, and not rely on any
single financial measure to evaluate our business. We also strongly urge readers
to review the reconciliation of these non-GAAP financial measures to the most
comparable GAAP measure in this section, along with the consolidated financial
statements included in Part II, Item 8, “Financial Statements and Supplementary
Data”.
The following table reconciles EBITDA and Adjusted EBITDA to net loss from
continuing operations for the fiscal years ended
(amounts in thousands). All of the items included in the reconciliation from
EBITDA and Adjusted EBITDA to net loss from continuing operations are either
recurring non-cash items, or items that management does not consider in
assessing our on-going operating performance. In the case of the non-cash items,
management believes that investors may find it useful to assess the Company’s
comparative operating performance because the measures without such items are
less susceptible to variances in actual performance resulting from depreciation,
amortization and other expenses that do not relate to our core operations and
are more reflective of other factors that affect operating performance. In the
case of items that do not relate to our core operations, management believes
that investors may find it useful to assess our operating performance if the
measures are presented without these items because their financial impact does
not reflect ongoing operating performance.
32
Fiscal Year
(in thousands) 2022 2021
Adjusted EBITDA Reconciliation
Loss from continuing operations $ (11,379 ) $ (6,917 )
Interest expense 749 236
Income tax expense 71 109
Depreciation and amortization 4,233 3,646
EBITDA (6,326 ) (2,926 )
Share-based compensation expense 1,680 2,216
Non-cash valuation adjustments (71 ) (1,851 )
Acquisition-related costs, severance, and
transaction-related bonuses 1,149 2,856
Forgiveness of PPP Loan and accrued interest - (2,327 )
Other non-recurring expenses (189 ) (48 )
Loss on early extinguishment of debt - 43
Adjusted EBITDA $ (3,757 ) $ (2,037 )
Adjusted EBITDA margin (1) (15 )% (12 )%
(1) Adjusted EBITDA as a percentage of GAAP net revenues.
Application of Critical Accounting Policies
The following is a summary of the Company’s most critical accounting policies.
Refer to Note 2 – Significant Accounting Policies to our consolidated financial
statements included in Part II, Item 8, “Financial Statements and Supplementary
Data” for a complete discussion of the significant accounting policies and
methods used in the preparation of our consolidated financial statements.
Revenue Recognition
The Company derives revenue from the sale of internally developed software,
either by licensing for local installation or by a SaaS delivery model, through
our direct sales force or through third-party resellers. Licensed, locally
installed clients on a perpetual model utilize our support and maintenance
services for a separate fee, whereas term-based locally installed license fees
and SaaS fees include support and maintenance. The Company also derives revenue
from professional services that support the implementation, configuration,
training and optimization of the applications, as well as audit and consulting
services The Company recognizes revenue to depict the transfer of promised goods
or services to clients in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
33
Performance obligations are the unit of accounting for revenue recognition and
generally represent the distinct goods or services that are promised to the
client. If we determine that we have not satisfied a performance obligation, we
will defer recognition of the revenue until the performance obligation is deemed
to be satisfied. Maintenance and support and SaaS agreements are generally
non-cancellable or contain significant penalties for early cancellation,
although clients 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 right of refund
terms are required, revenue is recognized upon the satisfaction of such
criteria. 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.
Refer to Note 2 – Significant Accounting Policies to our consolidated financial
statements included in Part II, Item 8, “Financial Statements and Supplementary
Data” for additional information regarding our revenue recognition policies.
Allowance for Doubtful Accounts
Accounts and contract receivables are comprised of amounts owed the Company for
solutions and services provided. Contracts with individual clients and resellers
determine when receivables are due and payable. In determining the allowances
for doubtful accounts, the unpaid receivables are reviewed periodically to
determine the payment status based upon the most currently available
information. During these periodic reviews, the Company determines the required
allowances for doubtful accounts for estimated losses to reduce total
receivables reported to reflect only the amounts expected to be paid.
Capitalized Software Development Costs
Software development costs for software to be sold, leased, or marketed are
accounted for in accordance with Accounting Standards Codification (“ASC”)
985-20, Software – Costs of Software to be Sold, Leased or Marketed. Costs
associated with the planning and design phase of software development are
classified as research and development costs and are expensed as incurred. Once
technological feasibility has been established, a portion of the costs incurred
in development, including coding, testing and quality assurance, are capitalized
until available for general release to clients, and subsequently reported at the
lower of unamortized cost or net realizable value. Amortization is calculated on
a solution-by-solution basis and is included in cost of professional fees and
licenses on the consolidated statements of operations. Annual amortization is
measured at the greater of a) the ratio of the software product’s current gross
revenues to the total of current and expected gross revenues or b) straight-line
over the remaining economic life of the software (typically two years).
Unamortized capitalized costs determined to be in excess of the net realizable
value of a solution are expensed at the date of such determination.
Internal-use software development costs are accounted for in accordance with ASC
350-40,
development are expensed as research and development costs as incurred. Once an
application has reached the development stage, internal and external costs
incurred to develop internal-use software are capitalized and amortized on a
straight-line basis over the estimated useful life of the software (typically
three to four years). Maintenance and enhancement costs, including those costs
in the post-implementation stages, are typically expensed as incurred, unless
such costs relate to substantial upgrades and enhancements to the software that
result in added functionality, in which case the costs are capitalized and
amortized on a straight-line basis over the estimated useful life of the
software. The Company reviews the carrying value for impairment whenever facts
and circumstances exist that would suggest that assets might be impaired or that
the useful lives should be modified. Amortization expense related to capitalized
internal-use software development costs is included in Cost of software as a
service on the consolidated statements of operations.
34
acquisitions of
Inc.
Architecture, Inc.
include purchased intangible assets with finite lives, which primarily consist
of internally-developed software, client relationships, non-compete agreements
and license agreements. Finite-lived purchased intangible assets are amortized
over their expected period of benefit, which generally ranges from one month to
15 years, using the straight-line method.
We assess the useful lives and possible impairment of existing recognized
goodwill on at least an annual basis, and goodwill and intangible assets when an
event occurs that may trigger such a review. Factors considered important which
could trigger a review include:
? significant under-performance relative to historical or projected future
operating results;
? significant changes in the manner of use of the acquired assets or the
strategy for the overall business;
? identification of other impaired assets within a reporting unit;
? disposition of a significant portion of an operating segment;
? significant negative industry or economic trends;
? significant decline in the Company's stock price for a sustained period; and
? a decline in the market capitalization relative to the net book value.
Determining whether a triggering event has occurred involves significant
judgment by the Company. Upon its most recent annual review, the Company
concluded that the fair value of its goodwill substantially exceeded the
carrying value of its goodwill.
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
credits 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, we consider whether it is more
likely than not that some or all of the deferred tax assets will not be
realized. We establish 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
7 – Income Taxes to our consolidated financial statements included in Part II,
Item 8, “Financial Statements and Supplementary Data” for further details.
Liquidity and Capital Resources
The Company’s liquidity is dependent upon numerous factors including: (i) the
timing and amount of revenues and collection of contractual amounts from
clients, (ii) amounts invested in research and development and capital
expenditures, and (iii) the level of operating expenses, all of which can vary
significantly from quarter-to-quarter. The Company’s primary cash requirements
include regular payment of payroll and other business expenses, principal and
interest payments on debt and minor amounts of capital expenditures. Capital
expenditures generally include computer hardware and computer software to
support internal development efforts or SaaS data center infrastructure.
Operations are funded with cash generated by operations and borrowings under the
bank credit facilities. The Company believes that cash flows from operations and
available credit facilities are adequate to fund current obligations for twelve
months from the date of issuance of the audit report on the Company’s
consolidated financial statements. Cash and cash equivalent balances at
31, 2023
35 Capital Raise
On
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
gross proceeds to the Company from the 2022 Offering were approximately
general corporate purposes. The 2022 Offering closed on
On
the underwritten public offering of an aggregate of 10,062,500 shares of the
Company’s common stock, par value
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
share of common stock. The gross proceeds to the Company from the 2021 Offering
were approximately
commissions, and estimated offering expenses. The 2021 Offering closed on
2, 2021
The Company believes that cash flows from operations, the cash from the 2022
Offering and available credit facilities are adequate to fund current
obligations for the next twelve months from issuance of the financial statements
included in this report. Continued expansion may require the Company to take on
additional debt or raise capital through issuance of equities, or a combination
of both. There can be no assurance the Company will be able to raise the capital
required to fund further expansion.
Authorized Shares Amendment
On
amended, 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 initially approved by the board of
directors of the Company, subject to stockholder approval, approved by the
Company’s stockholders at the 2021 Annual Meeting of Stockholders of the
Company, held on
Company’s stockholders at a special meeting of stockholders held on
2021
Also, at the 2021 Annual Meeting, the Company’s stockholders approved an
amendment to the
2013 Stock Incentive Plan (the “2013 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”). The Company’s stockholders ratified the approval and effectiveness
of the Third Amended 2023 Plan Amendment at the 2021 Special Meeting.
At the 2022 Annual Meeting of Stockholders (the “2022 Annual Meeting”) held on
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.
36 Credit Facility
The Company has liquidity through the Second Modification to the Second Amended
and Restated Loan Agreement (the “Second Modification Debt Agreement”). On
The Second Modification Debt Agreement includes an expansion of the Company’s
total borrowing to include a
line of credit will be co-terminus with the term loan and matures on
2026
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
3.25%. The Second Modification Debt Agreement amended the covenants of the
Second Amended and Restated Loan and Security Agreement. Refer to Note 5 – Debt
for information regarding the Second Modification Debt Agreement. At
2023
Under the Second Modification Debt Agreement, the Company has a term loan
facility with an initial, maximum, principal amount of
outstanding under the Second Modification Debt Agreement bear interest at a per
annum rate equal to the Prime Rate (as published in
plus 1.5%, with a Prime “floor” rate of 3.25%.
The Second Modification Debt Agreement includes customary financial covenants as
follows:
a. Minimum Cash. Borrowers shall, at all times, maintain unrestricted cash in an
amount not less than Two Million Dollars ($2,000,000 ).
b. Maximum Debt to ARR Ratio. Borrowers' Maximum Debt to ARR Ratio, measured on
a quarterly basis as of the last day of each fiscal quarter, shall not be
greater than the amount set forth under the heading "Maximum Debt to ARR
Ratio" as of, and for each of the dates appearing adjacent to such "Maximum
Debt to ARR Ratio".
Maximum Debt to
Quarter Ending ARR Ratio
October 31, 2022 0.80 to 1.00
January 31, 2023 0.70 to 1.00
April 30, 2023 0.65 to 1.00
July 31, 2023 0.60 to 1.00
October 31, 2023 0.55 to 1.00
January 31, 2024 0.50 to 1.00
c. Maximum Debt to Adjusted EBITDA Ratio. Commencing with the quarter ending
April 30, 2024 , Borrowers' Maximum Debt to Adjusted EBITDA Ratio, measured on
a quarterly basis as of the last day of each fiscal quarter for the trailing
four (4) quarter period then ended, shall not be greater than the amount set
forth under the heading "Maximum Debt to Adjusted EBITDA Ratio" as of, and
for each of the dates appearing adjacent to such "Maximum Debt to Adjusted
EBITDA Ratio".
Maximum
Debt to
Adjusted
EBITDA
Quarter Ending Ratio
3.50 to
April 30, 2024 1.00
2.00 to
July 31, 2024 , and on the last day of each quarter, thereafter 1.00
d. Fixed Charge Coverage Ratio. Commencing with the quarter ending April 30,
2024 , Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than
1.20 to 1.00, measured on a quarterly basis as of the last day of each fiscal
quarter for the trailing four (4) quarter period then ended.
37
The Second Modification Debt 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
Modification Debt Agreement covenants.
PPP Loan
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES
Act, was signed into law on
provided for a business loan program known as the Paycheck Protection Program
(“PPP”). Qualifying companies were able to borrow, through the
Business Administration
21, 2020
the PPP. These funds were utilized by the Company to fund payroll expenses and
avoid staffing reductions during the slowdown resulting from COVID-19. The loan
required principal payments, beginning after the seventh monthly anniversary,
and was required to be paid in two years. The PPP loan bore an interest rate of
1.0% per annum. In
loan principal amount of
forgiven in full.
Significant cash obligations
As of January, 31
(in thousands) 2023 2022
Term loan (1) $ 9,714 $ 9,904
(1) Term loan balance is reported net of deferred financing costs of
$96,000 as ofJanuary 31, 2023 and 2022, respectively. Refer to Note 5 - Debt to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information. The term loan balance as ofJanuary 31, 2023 andJanuary 31, 2022 was bank term debt.
Operating cash flow activities
Fiscal Year
(in thousands) 2022 2021
Loss from continuing operations $ (11,379 ) $ (6,917 )
Non-cash adjustments to net loss 6,120 1,884
Cash impact of changes in assets and liabilities (1,884 ) 1,149
Net cash used in operating activities
$ (7,143 ) $ (3,884 )
The higher use of cash from operating activities for fiscal 2022 is due to the
higher net loss from operations compared to fiscal 2021. The Company had a
higher net loss from operations and higher non-cash adjustments to net loss
primarily due to higher rates of amortization and lower gains than fiscal 2022
on the PPP loan forgiveness and acquisition earnouts associated with the Avelead
acquisition. The Company’s accounts receivable was significantly higher in
fiscal 2022 as compared with that of fiscal 2021 due to (i) timing of collection
on certain annual invoices, (ii) higher term license due to a multi-year term
renewal, and (iii) the timing of software license sales. Within non-cash
adjustments to net loss for fiscal 2021, the Company reported forgiveness of the
PPP loan of
38
Investing cash flow activities
Fiscal Year
(in thousands) 2022 2021
Investment in Avelead, net of cash $ –
Purchases of property and equipment
(10 ) (41 ) Proceeds from sale of ECM Assets - 800
Capitalized software development costs (1,924 ) (1,458 )
Net cash used in investing activities
The cash used in investing activities for fiscal 2022 and fiscal 2021 includes
capitalized software development costs. The Company expects continued
capitalizable projects associated with the Company’s flagship products. The
increase in capitalized software development costs is primarily from the
acquisition of Avelead in fiscal 2021. The Company experienced a full year of
capitalization in fiscal 2022 compared with a partial year in fiscal 2021. Refer
to Note 3 – Business Combination and Divestiture for more information on the
acquisition of Avelead. The cash used in investing activities for fiscal 2021
included the cash used to acquire Avelead and capitalized software development
costs, offset by the release of escrowed funds in fiscal 2021 from the sale of
the ECM Assets. Refer to Note 13- Discontinued Operations for more information
on the sale of the ECM Assets.
Financing cash flow activities
Fiscal Year
(in thousands) 2022 2021
Proceeds from issuance of common stock $ 8,316 $ 16,100
Payments of acquisition earnout liabilities (2,012 ) -
Payments for costs directly attributable to the
issuance of common stock (52 ) (1,313 )
Repayment of bank term loan (250 ) -
Proceeds from term loan payable - 10,000
Payments related to settlement of employee
shared-based awards (197 ) (464 )
Payment of deferred financing costs (20 ) (168 )
Other 6 (6 )
Net cash provided by financing activities $ 5,791 $ 24,149
The cash provided by financing activities for fiscal 2022 was primarily
attributable to the 2022 Offering of the Company’s common stock, which closed on
Refer to Note 8 – Equity for additional information. The cash provided by
financing activities for fiscal 2021 was primarily from the public Offering of
the Company’s common stock, which closed on
Company received proceeds of
Restated Loan and Security Agreement entered into on
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