Randy Salisbury - SVP & Chief Marketing Officer David Sides - President & CEO Nick Meeks - SVP & CFO.

Matt Hewitt - Craig-Hallum Capital Group Frank Sparacino - First Analysis.

Good day and welcome to the Streamline Health Report Second Quarter 2016 Financial Performance Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Randy Salisbury, Chief Marketing Officer. Please go ahead..

Thank you for joining us to review the financial results of Streamline Health Solutions for the second quarter and first half of fiscal year 2016, which ended July 31, 2016.

As the conference call operator indicated, my name is Randy Salisbury, Senior Vice President and Chief Marketing Officer here at Streamline Health, I manage all communications, including Investor Relations.

Joining me on the call today are David Sides, President and Chief Executive Officer and Nick Meeks, Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for question-and-answer session.

If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's Web site at streamlinehealth.net or at numerous other financial Web sites. Before we begin with prepared remarks, we submit for the record the following statement.

Statements made by the management team at Streamline Health Solutions during the course of 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 and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein.

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 reports for more information about these risks, uncertainties, assumptions and other factors.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements that reflect management's analysis only as the date hereof. The company undertakes no obligation to publicly revise these forward-looking statements. On this call, the company will discuss non-GAAP financial measures such as adjusted EBITDA.

Please refer to our Web site at streamlinehealth.net and our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations.

These non-GAAP measures do not include certain items of income and expense that affect operations and other companies may calculate these non-GAAP measures differently. With that said, let me turn the call over to David Sides, President and Chief Executive Officer.

David?.

Thank you, Randy, and good afternoon everyone. Today, I want to comment on our second quarter performance, an update on our investment and sales, and spend a few minutes on the markets reaction on our Looking Glass Solutions and MACRA.

As released earlier today, for the second quarter of fiscal 2016, we generated revenues of approximately $7.4 million, 10% increase over the first quarter of this year including approximately $1 million in perpetual revenue as expected. Recurring revenues were 77% of total revenue for the second quarter.

Professional services revenues in the quarter were $548,000, a decline from Q1 of this year which at $691,000 was the high-water mark of my tenure as CEO so far. In Q2, we are working on several large projects that will start amortizing upon go-live in the second half of this year.

In addition, in the quarter, we signed a relatively large perpetual license contract, implementation of which will be meaningful to professional services revenue again in the second half of the year.

Revenues for the second quarter were down about 14% over the same quarter a year ago with approximately half of the difference attributable to the perpetual license revenue realized in Q2 last year of $1.6 million versus the $1 million in perpetual license revenue in Q2 of this year I just mentioned.

The other half of the difference is attributable primarily to a one-time release of revenue in Q2 last year after satisfying some client revenue recognition criteria.

Revenues for the first half of fiscal 2016 were $14 million, approximately 5% lower than the same period last year, and again primarily attributable for the difference in perpetual revenue booked in the second quarter of each year respectively.

Turning our attention now to adjusted EBITDA, we generated approximately $1.6 million of adjusted EBITDA in the second quarter, more than 2.5x greater than the $600,000 generated in Q1 of this year. Adjusted EBITDA was down approximately 16% as compared to second quarter a year ago.

And again, the difference is primarily attributable to the difference in amount of perpetual revenue booked in the quarters. For the first half of fiscal year 2016, we’ve generated approximately $2.2 million in adjusted EBITDA, more than 3x greater than the $600,000 of adjusted EBITDA generated in the first half of last year.

In GAAP terms, our net loss for the second quarter was $700,000, a substantial improvement over the $1.5 million net loss in the first quarter of this fiscal year. Our balance sheet continues to improve, and Nick Meeks will provide greater detail on that in a few moments.

I'm encouraged with the strengthening of our financial performance as it gives us greater ability to be more active in the marketplace regarding strategic acquisition.

We have stated consistently throughout this fiscal year that when we find the right asset or assets, augment our core mission of assisting healthcare providers to secure accurate reimbursement in a timely fashion, we will acquire them.

Our thinking at this time would be to use a combination of cash on the balance sheet and debt, but there will be no shareholder dilution. As of this date, we continue to pursue the strategy more of course announcing a deal should one come to fruition. Now, let's turn our attention to our investment in sales and marketing.

Last quarter, I stated that the biggest area of opportunity for our company remained sales and our quarterly bookings performance. Although the $1.7 million in bookings for the second quarter was an improvement over Q1, it is still not up to our expectation.

However, as stated in previous earnings calls, I believe that our investment in sales and marketing should deliver a growing quarterly bookings in the quarters to come as the moves that Shaun Priest has made in his short tenure as our Chief Growth Officer begins to bear fruit.

I continue to feel positive about our potential and increase our quarterly bookings performance in the second half of this year based on the internal progress I'm seeing. Let me take a moment to share with you what some of these moves and improvements in sales are not getting too far on the leads for competitive reasons.

Shaun's initial focus primarily during the second quarter of this year was the increased activity in the top of our sales funnel. To that end, we engage with two nationally recognized lead generation firms, [indiscernible] secure one-on-one meetings with [these suite] [ph] level executives.

Both companies have delivered numerous high level meetings and part of our current pipeline includes these new established leads. In each area and with each resource, we have instituted this one-in [ph] focus that we believe will improve the likelihood of success.

Our inside sales team numbers three people today, and their focus is also to create additional pipeline specifically for the Looking Glass Solutions that are in greatest demand today such as CDI and Coding along with Clinical Analytics. More about those solutions in a minute.

Hal Walsh, our Vice President and Channel Partner, has added a junior channel partner manager on the West Coast to continue to build the top of the funnel to reseller partners that have their own sales resources and prospects.

Hal has done a nice job of expanding our list of reseller partners to include more consulting firms, expansion of an existing relationship with a large national partner, and he has opened up conversations with numerous other potential channel partners. Hal also works directly with our strategic partners like Optum360 and NantHealth.

Recently NantHealth announced a signing of a new client [indiscernible] Health in Arizona. Our Looking Glass Clinical Analytics Solution was part of that sale.

[Indiscernible], a note I mentioned in the Q&A session in April during our Q4 and fiscal 2015 year end call that we are working on another reseller agreement with a large healthcare IT supplier that would be a really good channel partner for us that we believe we would be able to publicize the agreement in the not too distant future.

We are still working on this new channel partner arrangement, and one these large national partners did sign an important expansion of their reseller partnership with us.

NTT DATA who has been reselling our Looking Glass Surgery Scheduling Solution for a few years expanded their relationship with us, and has signed to resell our Looking Glass Clinical documentation improvement technology with [PhysicianQuery] [ph]. NTT DATA is a leading business and IT services provider.

Their solutions are installed in hundreds of hospitals and thousands of post-acute care facilities in the United States and over 40 countries worldwide. They are part of the $100 billion NTT Group.

Reseller partners of this size can, many times do take a long time to select solutions to resell to their clients and prospects, longer than we would like and there is a very little we can do about it. We are better off not talking about any potential new partners until a deal such as this one we are announcing today with NTT is officially completed.

Both the second quarter primary sales and the marketing efforts focused on growing a top end of the sales funnel, reference in Q3 we focused on the middle of the funnel with more onsite visits and solutions administration.

Middle of our pipeline today leans heavily on coding, CDI and clinical analytics, which is inline with our focus on revenue cycle as an area in which we believe we are especially well-suited to win.

So far the level of demos we are getting at the end of last quarter is continuing at a similar pace which should augur well for closing more details in the second half of this fiscal year. It's worth noting here that certain macro trends in the market should have a positive impact on the demand for our Looking Glass Solutions.

For instance, when congress passed the Medicare Access and CHIP Reauthorization Act known as MACRA last year, a major step was made towards more consolidated value-based Medicare reimbursement structure. In effect MACRA made significant changes for the way Medicare pays physicians, filtering Medicare shift to a value based payment.

The measurers are focused on quality 50%, advance and care information and technology 25%, practice improvement at 15% and resource used 10% and provider payment rates at a near zero growth rate until 2025.

MACRA supersedes existing quality and value programs for Medicare Part B and consolidates them under the Merit-based Incentive Payment System known as MIPS.

What MACRA means for healthcare IT provider such as Streamline Health, is in our healthcare provider clients will no longer be compensated for the use of technology and previous meaningful used regulations on the outcomes they achieve for their patients.

After implementation of VHRs data seem to be everywhere, but the ability to quickly understand and analyze it and turning it into actionable information is difficult. It is critical for providers to understand and analyze the changes in quality in order to manage risk and remain financially successful in value based care.

Not only most providers report quality measures but they must demonstrate improvement in outcomes for quality measures.

Add to this, shift to higher deductible plans where patients spare more of their financial burdens for their own wellness and we will start to see an increase in patient that shop around and educate themselves on the cost and value of the care being provided.

Both patients and insurers will be judging and paying by outcomes after the delivery of care to make that really important accurately document the severity of cases providers handle.

With revenue pressure on both sides documentation becomes much more important than it was before to make sure providers are getting the credit they deserve for the work they do on severely ill patients. Acute care facilities have been concerned with this for a while, but outpatient settings are also going to have to pay more attention.

In fact, a recent industry white paper publicized a case study that found one-third coding accuracy in physician practices, two-thirds being inaccurate is a huge number and a great opportunity for our Looking Glass Coding and CDI Solutions to make meaningful contribution.

In addition, clinicians need to think about how they are acquiring and aggregating the data they need to get the full view of the patient to better manage their care. And the CMS estimates that approximately 836,000 clinicians will be impacted by MACRA starting in 2017.

In order to be successful and evaluate environment, the focus must shift to lower cost and increase quality rather than revenue increases alone.

Our Looking Glass Clinical Analytics Solutions enable providers to establish inline clinical best practice or actively identify financial and readmission risks across population and conduct comparative effectiveness analysis.

Clinical Analytics allow providers to measure clinical quality outcomes and proactively identify patients who at risk for not meeting the measures given them the solution to be successful in value-based care.

The changes in the regulatory environment, long-term investment in sales are some of the reasons why we believe, we will generate proven performance in our quarterly bookings going forward. I will now turn the call over Nick Meeks, our CFO for additional insight into our second quarter performance.

Nick?.

Thanks David and afternoon everyone. Allow me to begin by thanking my own team, the whole of Streamline and our auditors for a smooth reporting effort this period. Turning now the results for the fiscal second quarter of 2016, David has already covered revenue and adjusted EBITDA.

I would add to his comments that in addition to stock-based compensation expense, we adjusted EBITDA by further $346,000 related to severances and non-recurring professional services.

More broadly on the income statement, I would note that expense controls continue to be effective with overall operating expenses down by more than $2.5 million of the fiscal year-to-date across almost all years of the organization. This while continuing to make targeted investments in sales of products.

I would also highlight for the second consecutive quarter, the professional services team generated positive contribution. Moving on the balance sheet, we ended with no change in our cash position from the end of our fiscal first quarter with $6.5 million of cash on hand.

That said, we generated approximately $2.6 million in cash from operations in the quarter returning the company to cash generation for the year-to-date period.

During the quarter, Streamline had $487,000 of capital expenditure primarily software development and as I mentioned during our last earnings call, we also made a mandatory pre-payment on our term loan with Wells Fargo, thus we had a total use of cash in the financing activities of $2.1 million during the quarter, the excess cash flows, we visit annual event that shortly follows our 10-K filing.

Given this prepayment along with normal amortization, our term loan with Wells Fargo now stands at $6.2 million. Lastly, I wanted to note the change in backlog in the period. During the quarter, we were able to liberate a long delayed implementation and subsequently recognize the associated perpetual license revenue in the quarter.

In addition to recognizing a large block of revenue from the backlog, we also rationalized the backlog value for the shorter remaining period on the new agreement and a smaller overall scope. All in all beginning to recognize the revenue on this agreement is a positive for Streamline.

There were no material renewals executed in the quarter as they were no material contracts up for renewal. And then an impact of all of these factors was an approximately $9 million reduction in overall backlog reported compared with last quarter leaving the backlog at the end of the fiscal second quarter at $53.6 million.

Having said that, I would also note that this has no negative impact on our revenue expectations of the remainder of this fiscal year nor next fiscal year. That concludes my remarks. And I will now turn the call back to David Sides..

Thank you, Nick. Looking ahead, we have a very busy autumn with many activities that support the three strategic objectives we established for our company this year. First, in the era of being more client-centric, we will be holding our annual client user conference next week in New York City.

We choose Manhattan this year because we have such a heavy concentration clients in the greater metropolitan area. In addition, we are hosting the first day of the meeting at the NASDAQ Exchange in Times Square, and on day two, in our offices at Madison. We are excited to have many of our long-term clients participate in this conference.

They don't know yet, they will all be invited to be part of the closing bell ceremony at the exchange next Monday afternoon September 12. Look for us on your favorite cable financial news channel.

Next month there is elastic national trade show of the year for our industry, AHIMA is being held in October, Baltimore, we will have a booth there and we will invite our clients to spend time with us and to see firsthand demonstration of some of our solutions. They can help them improve their revenue cycle management.

Our second strategic objective is sales growth. I think I have covered how we plan to generate more bookings in organic revenue growth when I reviewed some of the specifics of our investment in sales and marketing.

In addition, I covered how our strengthening balance sheet can be levered to enable us and also grow revenue via smart acquisition that augment our solutions, current client mix without diluting our shareholders. Our third strategic objective is to be more innovative.

We are excited about our new user interface that's been designed for our Looking Glass Clinical Analytic Solution. In this new design, it will serve go-forward template for many not all of our other Looking Glass Solution. We will unveil the new design at our user conference next week, and again, in our booths at AHIMA in October.

In addition, we are looking at ways to leverage new technologies such as Alexa, Amazon's voice interaction system and prior users of our Looking Glass Solutions simply ask questions relative to their key daily metrics have Alexa answer them on the spot. Finally, today I want to comment on our guidance for fiscal year 2016.

We announced at the beginning of the year that our revenue model is built on three primary pillars; recurring revenue stream of approximately $25 million; professional services revenue of approximately $2 million; and perpetual license revenue of approximately $2 million.

First, you will all notice that our revenue models are tracking well that is the case every year with perpetual license revenue, a bigger client to perpetual license contracts and more of a CapEx model are much harder to predict quarter-by-quarter as to when they will be realized.

At this point, our financial forecast continues to include an additional $1 million in perpetual license revenue and to remain hopeful, we will realize in the next two quarters. With this in mind, we are maintaining our financial guidance for the year of $29 million in revenue and approximately $3.6 million in adjusted EBITDA.

That concludes my prepared remarks. But, before turning the call over to the operator, I want to thank our Streamline Health associates for their continued hard work, dedication to our clients, for our shareholders and to each other. I will now turn the call over to the operator for a Q&A session.

Operator?.

Thank you. [Operator Instructions] We will take our first question from Matt Hewitt with Craig-Hallum Capital Group..

Good afternoon, gentlemen, and congratulations on the progress..

Thanks Matt..

Thanks Matt..

Handful of questions here. First, thank you for the details on the pipeline and how you are kind of attacking the different areas of the funnel.

But as you look at the back half of the year, given where you are with Shaun, with some of the changes that you have made, do you think that could really maybe blossom as you get more into Q4 and then how should we be thinking about 2017 from a growth perspective, and I realize that's still all the way, is out, but I would assume that you are envisioning that we will see some nice growth next year?.

Yes. I think we will see good growth next year, Matt. I think in Q3 and Q4 combined, we will exceed -- in one of those quarters, we could even exceed all the bookings we have done so far this year-to-date in the previous two quarters.

So, we are setting up pretty well in the back of the year the top of the funnel we filled things up and now they are starting to come through -- may come through in Q3, Q4, and may be some in Q1.

But, there is such larger a funnel coming through that we are confident that we’ll in the second half of the year probably more than double the first half of the year..

Okay.

And then, in regards to some of your partnerships, you mentioned Nant, was that deal booked in the quarter or is that here in Q3, the one that you mentioned?.

That was for the original contract.

Nick go ahead?.

Yes. Matt that’s actually the nature of the Nant agreement, they buy blocks of licenses and this will use up materially all of the current blocks that they are in. So, there is no incremental booking, but with that said, there is probably some professional services dollars to come..

And do you anticipate at least with Nant that you will I guess sell some additional licenses or some additional seats, now that they are kind of used up the initial allotment?.

It's up over time, that's the goal..

Okay. All right.

I guess shifting to partner number two Optum, over the last couple of years, you have had one large deal, I think even in the first year, there might have been two, but you have had this pattern of one large deal a year, those obviously are significant in size, maybe an update on how that relationship is growing?.

Now the relationship is good. So Optum is a great partner of ours as we -- they have -- probably three or four deals in their pipeline, obviously we are not in control of that pipeline, but we would expect or hopefully they would expect that some time in the next two or three quarters they would see another pick up there.

Their goal is to sign at least one or two of these a year. And we are important because we helped to displace other major competitors, so that's still to come in the next couple of quarters..

Okay. And then the last one on this topic, the partnership that's taking a little longer to close, maybe what is the hang-up or hold up on signing that and is it -- are you able to maybe target, I think last call you have talked about, they -- that partner has several customers that need to do something sooner rather than later.

Are you able to participate in RFPs for those end customers even without the signed contract with your partner?.

That's a yes. We can participate without the signed contract and we can also go direct. So, until there is a signed contract, we’re free to compete for that business directly. And we are -- this quarter, we have signed an expansion on -- to sell CDI with NTT Data.

They have a couple of clients in their pipeline that we thought were reasonable and more jointly going to market with them and excited about the possibility there as well..

Okay. And thank you for that color. You spent a fair amount of time on MACRA. Something that we have done a fair amount of work on here recently with this new law.

What are you hearing from customers, has this -- is this something I mean, what we are finding is that, it's a hit or miss, some customers are well aware of it and they are trying to get ready for this law that takes effect January 1. Others it's -- they have been on vacation or have missed the news, but now are scrambling.

What are you hearing from customers and where do see the greatest potential within your portfolio?.

We see the same hit or miss you do, so if you talk to a county safety net hospital, they are not too worried. You talk to rural critical access hospital, not as worried. You talk to large academic in a competitive town; they are on top of it.

And so, we think it very somewhat by hospital type, perhaps it's their reaction and their capability to do more in depth analysis to really understand the law and try to be prepared for it.

I think you go forward six or 12 months, there will be more that are prepared or there will be more consolidation for the unprepared being acquired by the prepared, if they -- which is the -- amount of money are enough but you could swing a 3% operating margin hospital into a loss, that then has to be acquired. So, we think it's important.

For us it helps on the coding. The coding suite side, so that -- you are sure that you have the quality metrics codified. You’ve got things exactly as it should be, and also on the analytics side. So the clinical analytics space, we think becomes more important.

So you can model things out and understand what your risk looks like for the different pieces. So it is kind of -- that piece you heard more about it from clients lately as we get close to that date, it's only a quarter away for us.

And we thought it was worth mentioning this time some of those conversations and how we are prepared and why we think the portfolio lines up well with the client and -- with the clients and the law..

Great. Thank you very much here. Help guys..

You bet, Matt..

We will take our next question from Frank Sparacino with First Analysis..

Hi, guys. Just wanted to go back and sort of talk through that the backlog and get a little bit more detail.

I'm not sure I followed entirely all the elements and the actual kind of impact from each of those?.

Sure. So, the perpetual license that was signed was a reshaping of an agreement that dates back to 2014 -- late 2014 that had installed an implementation I think it was signed with the best of intentions and it took a while to get all the necessary courses marshaled and organized and marching forward.

And instead of doing, we were able to recognize a large chunk of revenue that we otherwise wouldn't have been able to recognize when that started marching forward. But, it also shortened the overall length of the contract and it decreased the skills a little bit from the broad as possible so what we can action right now.

And so all of those things brought it down a little bit. That said, so that one piece of the overall decrease. The other piece being -- we recognized the revenue that we recognized normally in the quarter and there really weren't any renewals to put back into the backlog. So it's a reduction of backlog with very little going in.

But, it's not that -- it doesn't change anything in the near-term because there were no contracts that were up for renewal. We have no expectation that those that will come up for renewal won't in, in any meaningful fashion. So the showcasing was well into the future. The shortening of the contract also effects out year.

So this year and next year, I expect to draw down from the backlog to be roughly exactly to the point..

Okay. And just following up on that Nick, on the maintenance support side of things sequentially it was down fairly materially.

How would you explain that?.

Maintenance and support or --.

Yes..

That was past..

Well, both are down but I mean the maintenance support was down a larger percentage amount?.

I'm sorry, quarter-over-quarter not year-over-year..

Correct..

I'm sorry. Maintenance and support had a catch up contribution last quarter.

There was a client that we had deferred recognition on for a number of reasons but that we managed to clear all of those concerns as well as our auditors and so they have used the number that as the maintenance line item is actually building right now, in fact, the contract that we just signed will had $250,000 or so of annual maintenance.

So, that one is building. I think that was just a blip in the numbers, higher last quarter and I guess it would be on a run rate basis..

Okay. And maybe just lastly from me on sort of the coding and CDI side of things.

Can you just talk about activity and what sort of driving things or what the conversations like with the providers?.

We are having a lot of conversations -- conversations are good. So we have some unique integration into the EMRs with some of the providers, so that when you as a clinical documentation improvement specialist.

Did you really mean the document desk or something else, then, the answer either today is printed out in paper and put on a paper chart or in our system, you get an electronic query that shows in the physicians' inbox in the EMR or whatever that metaphor is.

So that workflow is substantially better and that people can be on the phone or something else.

And we see that as a differentiator that people are saying, look this paper process isn't working for me anymore, I'm doing substantially everything electronically now other than this interaction to be sure that my documentation is appropriate and correct to support the codes that I'm going to submit.

And we have a unique way to improve that workflow. And so that's helping us from the market because a lot of our competitors are still printing out pieces of paper and trying to hunt down the physician to sign the piece of paper. And now that they are not going to medical records any more because they don't physically sign charts.

Therefore, they also want to see that information in electronic record sign it, make any changes and have it part of the medical record rather than sign a piece of paper and then scan in..

Okay, great. Thank you guys..

You bet..

[Operator Instructions] We will take a follow up with Matt Hewitt with Craig-Hallum Capital Group..

Just two follow ups for me. First on the OpEx, Nick, you had mentioned that you guys have continued to make some progress there I think during the quarter, there was one departure, should we use the Q2 SG&A line is that kind of a good run rate.

Or are you expecting some growth off of that as we look to the next couple of quarters?.

No, Matt. I think it's a solid run rate number. The only thing that I would tell you, it's cyclically higher in Q1 to pick up the cost of the audit. But, the cost of the audits now substantially lower with [indiscernible]. I think $300,000 it's not $1 million. I think it's a pretty good one.

I don't see a lot of -- G&A expenditure and I think for now, I think Shaun is happy with the level of investments in the sales organization. That said we can refine positive ROI opportunities to invest in that team, will continue in the future..

Okay. And then, the last follow-up for me on the M&A. I mean you mentioned that you are continuing to kind of discover the universe for opportunities from a valuation perspective.

What are you seeing, do you think that if you had a place or percentage -- on the opportunity before the end of the year, I mean do you think that you will be able to get something done and what kind of evaluation do you anticipate that going off at?.

I think we will be able to get something done and maybe just smaller deal at first just to be sure that we prove out -- we thought at some ways that we think are strategic that add to our portfolio that would be interesting, I think we will be kind of under -- in between 1 and 1.5x revenue certainly not more than that. So it's not dilutive.

We either do it with all cash or combination of cash and debt. But, I think it's fairly likely that it will something done before the end of the year..

Great. All right. Thank you..

Thanks Matt..

End of Q&:.

[Operator Instructions] And with no further questions in the queue at this time, I would like to turn the call back over to Randy Salisbury for any additional or closing remarks..

Thank you, Noah. And thank you all for your interest in and support of Streamline Health. If you have any additional questions or need more information, please contact me at randy.salisbury@streamlinehealth.net. We look forward to speaking with you all again in December when we will discuss our third quarter 2016 financial performance. Good day..

And that does conclude today's conference. Thank you for your participation and you may now disconnect..