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 reports Third Quarter 2016 Financial Performance Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Salisbury. Please go ahead..

Thank you for joining us to review the financial results of Streamline Health Solutions for the third quarter of fiscal year 2016, which ended October 31, 2016.

As the conference call operator indicated, my name is Randy Salisbury, I'm 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 a 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 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 call should be viewed.

We therefore submit for the record of the following statement, first, statements made on this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995; these are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those we may discuss.

Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K annual report 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.

Our participants on this call should take into account these risks when evaluating the topics we will discuss. And please note, Streamline Health is not undertaking any commitment or obligation to publicly revise any such forward-looking statements made today. Second, we will discuss non-GAAP financial measures such as adjusted EBITDA.

Management uses these measures to help provide better insight into our potential 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 reach using their own non-GAAP measures.

To help you compare these amounts on consistent terms, please refer to our Web site at streamlinehealth.net and our earnings release for reconciliation of such non-GAAP measures to the most comparable GAAP measures. 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. My comment this afternoon will center on our third quarter performance.

We will also cover some of the key events and accomplishments that took place during the quarter and more recently, such as the acquisition of Opportune IT in early September and the disposition of our Looking Glass patient scheduling solutions announced last week. So again, with the look at our revenue performance.

As released earlier today, we generated revenues with slightly more than $6.6 million, down approximately 11% from the previous quarter which included $1 million of perpetual license revenue.

Excluding this, revenue for the third quarter would have up approximately 3% over Q2 of this year but down approximately 8% versus same quarter last year, primarily due to a $0.5 million of catch-up recognition in last years Q3.

Recurring revenues of 84% of total revenues for the third quarter, up 77% in Q2, primarily due to the absence of perpetual license revenue in the quarter. Professional services revenues in the quarter were $865,000, an increase of approximately 58% over Q2 of this year and an increase of approximately 39% over the same quarter a year ago.

As mentioned last quarter, we expected to start amortizing the revenue for work we were doing on several large projects upon Go Live! As well as the implementation of a relatively large perpetual license contract we signed. We expected this activity to contribute to our pro-services revenue in the second half of this year.

The addition of Opportune IT in early September also contributed to this increase in professional services revenue in the quarter. I stated last quarter that we believed our bookings for the second half of this year would accelerate and the bookings in the third quarter would exceed our bookings total for the first two quarters.

I'm happy to report the bookings for the quarter are approximately $3.1 million as compared to $2.4 million for the first two quarters of this year combined. Looking ahead, we believe that our bookings performance in Q4 will be strong as well. We are gaining traction from investments we've been making in sales and marketing.

We are very pleased to announce that we recently signed an agreement with our existing clients, University Hospitals, representing a significant enterprise-wide expansion for our Looking Glass clinical documentation improvement solution which they currently licensed from us.

This contract represents a very solid start to another quarter of bookings growth for our company that demonstrates our capabilities with this solution and supporting hospital systems who have complex multi-vendor EMR structures within their enterprise.

Turning our attention now to adjusted EBITDA, we generated approximately $200,000 of adjusted EBITDA in the third quarter, this is down from Q2 as expected, primarily due to the acquisition of Opportune IT during the quarter and the many attended one-time cost that were associated with the transaction.

In addition during the quarter, we continue to make meaningful investments in our sales organization. In GAAP terms, our net loss for the third quarter was $1.9 million. Nick Meeks, our CFO, will address these items more specifically in his prepared remarks coming up in a few minutes.

Turning now to our balance sheet, we believe we will continue to be able to drive our strategic initiatives both internally and externally going forward. I stated last quarter that I was encouraged with the strengthening of our financial performance as it gives us greater ability to be more active in the marketplace regarding strategic acquisition.

Further, we've said all year that when we find the right asset or assets to augment our vision of assisting healthcare providers to secure accurate reimbursement in a timely fashion, we will explore opportunities to add those solutions to our offer.

As a prime example, last quarter we acquired Opportune IT, quoting onto services company for $1.4 million in cash. This acquisition not only enables us to provide coding audit services to our current and perspective clients but it also provides us new coding technologies that we believe had meaningful upside potential.

As a company, we've evaluated all of our solutions as to how they assist healthcare providers improve their revenue cycle management and believe that narrowing our focus for the middle portion of the revenue cycle or healthcare providers will enable us to more efficiently invest in – in market technologies and capabilities that will meet or exceed provider needs.

In other words, win more sales. We see the middle of the revenue cycle encompassing everything from initial cart [ph] charge capture to bill drop, and that is our sweet spot.

Our Looking Glass HIM coding and clinical documentation improvement and our business analytics and clinical analytics all fits clearly into the middle of the revenue cycle process.

As this list of technology enabled services we acquired with Opportune IT and their coding audit services, they are also a perfect fit for our overall value proposition to clients. We can have the Opportune IT acquisition and we originally investigated the purchase of Opportune IT, we were mostly interested in their coding audit services.

Opportune IT at 10 clients used them for routine audits by their highly credential coding and clinical documentation improvement specialist. The audits they conducted usually resulted in revenue and compliance improvement.

We believe that many of our current clients could use these services and our sales team and account executives have been successful in securing numerous introductory meetings. We are actively building a sales pipeline with these new services and have signed three new clients and closing the deal in September.

In addition, we have been very pleased with the technology we required in this transition. Many times in acquiring a company, it's hard to really know how good their software technology is until you own it and can dig into it.

In the case of Opportune IT, we were aware of their technology and knew it like we needed some work, specifically additional rules content and systems integration work. However, we believe there is greater potential under the technology than we originally assumed.

We are very excited about our prospects with both the services and technologies moving forward. Enhanced capabilities we acquired with Opportune IT are two-fold.

First, their core technology which stands for coding opportunity report engine, now called Looking Glass core is software that provide clients and auditors with a cloud-based workflow enabled platform.

The platform can be accessed by auditors, coders, CDI specialist and HIM management bringing an integrated system that captures all audit workflow and reporting capabilities in real-time and in one location. Historically, Opportune IT uses as an internal tool.

We are looking at using it as both debt capacity and as a potential product offering as well, competing with solutions like 3M's Audit Expert Software. The second quarter acquired technology is our pre and post-bill audit optimization and analytics engine which we plan to brand as Looking Glass evaluator.

Our evaluator solution basically provides automated pre and post-bill auditing for all charts competing with solutions like PwC's systematic monitoring and review technique smart. It optimizes revenue for clients from the first submission of a bill and decreases compliance risk and potential penalties.

By running every bill submitted by coders to the Looking Glass evaluator, a healthcare provider can add an entirely new level of automated coding review, identify many commoners. And with the speed and accuracy of automated software versus human eye [ph].

From a functionality standpoint, evaluator applies analytics rules and capabilities to the providers building practices. Lagging potential coding errors for review. If evaluator determines the record requires an audit it provides a detailed narrative and recommended corrections with audit staff in order to the expedite coding changes in resubmittal.

This can help clients be assured that the chart its team are coding are indeed accurately coded and the record is complete and can be final build. And the analytics can be updated overtime offering continued improvement in quality and intelligence of the system. We think this is a real differentiator for us in the marketplace.

Improving efficiency in the middle of the revenue cycle resulting in improved cash flow to reduce reworks, pure denials, write-offs and reduction in loss reimbursement.

It also allows providers to better utilize their coding personnel resources, with faster bill release comes a lower DNFB or days not final billed, which is the leading indicator for financial efficiency. As I mentioned, we've invested heavily to improve these technologies in the third quarter which impacted our adjusted EBITDA performance.

We think we can – we think we set up the development of these technologies by 90 days and can bring them to market in the next couple of months. We anticipate that our investment in development of these technologies will decrease in this current quarter. I've asked Nick to speak to this issue in his prepared remarks.

Our vision is to provide Looking Glass core technology to clients in the base coding audit services package, and to upgrade them the Looking Glass evaluator as an additional solution. Hospital systems today have ten to thousands of patient bills annually, often with a highly manual review process.

We can help them improve the handling of every one of them. To summarize, we now have very good breadth of software solutions. We believe its broad enough to compete with the primary competitors in the marketplace and narrow enough to be our focus in the middle of the revenue cycle.

We're not there yet in services but we will continue to look for the right opportunities to add incremental services focusing on the middle of the revenue cycle from charge capture to bill drop. Now let's talk about the sales of our patient engagement solution that our company had acquired from Unibased systems architecture back in February of 2014.

We view these two transactions, the purchase of Opportune IT and the sales of patient scheduling which took place approximately three months apart is basically swapping one product in a very mature – very competitive marketplace with your new products and growing less crowded markets and we did so for a net gain of approximately $600,000.

We consider that we bought one for $1.4 million and sold the other for $2 million. When looking at patient scheduling, we realized it didn't fit in our more focused go-forward approach to the market for two main reasons; first, from a solution standpoint, it touches the revenue cycle but at the very beginning.

Very early in the patient experience and not really adjacent to what we focus on in the middle of the revenue cycle. In addition, the patient scheduling and surgery management solutions added different set of purchase decision makers. Outside of CFOs and HIM Directors that we have been calling on for years.

Second, beyond the solutions functionality, we also were not seeing the revenue growth opportunities for our company that we expect. Our sales pipeline had very little activity and scheduling.

In fact, over the past couple of years, we've experienced some client erosion when a few clients change EMR providers and received a patients scheduling solution as part of these EMR based packages. It was announced last week, we have sold this portion of our business to Document Storage Systems Inc.

This is the company that handles all the software integration with Vista, the homegrown EMR solution that the VA Hospitals use. We've known this company for a long time and in fact we've been on the veteran's administration, our fee together two years ago.

DSS has always been impressed with our technology and their technical folks have seen it in action at the VA Center in Minneapolis for nearly 20 years. We think this was a positive strategic transaction for both Streamline Health and DSS suffices to say we're happy for the associates that made the move to DSS, we wish them nothing but the best.

I also wanted to spend a quick moment updating you on our sales transformation strategy. As we've discussed before, our bookings performance late last year led the decision to change sales leadership in November. A thorough executive search resulting in hiring a new sales leader this past April with additional higher sense [ph].

We're seeing improved performance from our sales team and we believe this transition is gaining momentum. I believe our sales leaders continue to grow and doing a better job of executing on our pipeline.

To summarize, we believe narrowing our focus in selling efforts more to the middle of the revenue cycle will be both, more productive unless costly for us in the long-term and provide greater opportunities for strategic growth.

I will now turn the call over Nick Meeks, who will provide greater detail on the impact of the sale on our go-forward financials from both the revenue and adjusted EBITDA point of view, as well as the impact on our balance sheet.

Nick?.

Thanks, David and good afternoon everyone. As always, allow me to begin by thanking my own team, the whole of Streamline and our auditors for a smooth reporting effort. Turning now to the results for the fiscal third 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 $254,000 of expense related to severances and non-recurring professional services.

More broadly on the income statement, I would note that expense controls continue to be an emphasis for Streamline with the majority of year-over-year expense growth being related to the staff hired as part of the Opportune IT transaction and incremental investments in our sales infrastructure.

Moving on the balance sheet, we had two major cash outlays in the quarter. First, the acquisition of Opportune IT for $1.4 million. We also retired the outstanding capital lease on our data center equipment by purchasing all of the covered equipment.

The other factor depressing [ph] cash in the quarter was the temporary disconnect that came with the acquisition and that we immediately acquired the associated expense base while it took us sometime working with the acquired clients to redirect funds to Streamline.

As I speak today, cash is recovered nicely to this point in the fourth quarter and I expect it to continue building through the balance of the fiscal year. With respect to future visibility, backlog increased over the end of the second fiscal quarter by approximately 2% of $1.3 million to $54.9 million.

Transitioning, I will add a little more financial color to last week's announcement of the sale of our scheduling assets though it is early days. Streamline received from DSS, the buyer, $2 million in cash consideration. $500,000 of the proceeds will be immediately remitted to Wells Fargo to prepay our existing term loan.

Six months after the transaction date an additional $500,000 will be prepaid towards our term loan unless we complete an incremental acquisition in that six month window and the remaining $1 million will accrue to Streamline's balance sheet.

I'm also anticipating a non-cash write-off of intangible assets as a result of the transaction with the final magnitude being dependent on the disposition of a deferred tax asset we acquired during the original Unibased Systems architecture transaction in early 2014.

Additionally, we will reduce backlog appropriately to reflect the sale of our scheduling clients, those assets have been generating approximately $400,000 per quarter in revenues for Streamline which along with the associated contribution margin will now accrue to DSS.

Lastly, on an administrative note, Streamline engaged Grant Thornton [ph] during the quarter to assist us in transitioning from our existing internal controlled structure to one governed by the COSO 2013 framework. We have received, reviewed, and are in the process of implementing the grand findings through the balance of the year.

That concludes my remarks. And I will now turn the call back to David Sides.

David?.

Thank you, Nick. We all know that bookings growth was the precursor to revenue growth. As I mentioned earlier, we're still working through the sales transformation efforts, which are well underway.

But frankly, the combination of two little bookings over the four consecutive quarters preceding this one combined with normal revenue attrition and averages a moderate 46% has resulted in no meaningful revenue growth, absent large perpetual license deals.

But as projected and as I mentioned before, we are beginning to see a turnaround in our bookings performance. The most recent being the highest of last five quarters which served percentage revenue growth moving forward.

While we did not generate any perpetual license revenue in Q3, we continue to work with our clients and partners to secure an additional $1 million in perpetual license revenue by the end of our fiscal year. Our pipeline indicates this could be achieved by January 31, end of our fiscal year.

But given the nature of this type of agreement and the fact that we don't control the selling process of our biggest reseller partners, it's very difficult for us to know when these contracts will be approved and closed.

Given the negative revenue impact of the sale of our patient scheduling solution that Nick just articulated, even though the revenue ops is mitigated somewhat by the incremental revenue with Opportune IT, and the lack of certainty we have regarding the timing of additional perpetual license revenue deals, we feel that it's prudent at this time to revise our guidance for the remainder of this fiscal year.

As we speak with you today, we foresee our Q4 revenue translating to overall annual revenue of approximately $27.3 million, give or take, $200,000 either way. Again, assuming we do not close a perpetual license revenue deal in the next two months. Further, we anticipate that our adjusted EBITDA for the year will be between $2.5 million and $3 million.

Looking ahead, with our improved focus on the middle of the revenue cycle, the addition of new Looking Glass technology-enabled coding audit services, and the improvement in our quarterly bookings performance, we believe our revenue growth will return to the 10% or greater range in 2017.

We will provide more formal guidance on revenue and adjusted EBITDA during our Q4 and fiscal year-end earnings call in April.

One final note, last month while attending a financial conference in New York City, I mean a current and perspective institutional investors asked us about the healthcare landscape going forward now that the election is behind us and President-Elect Trump has been declared the winner.

We acknowledge there is uncertainty surrounding the Affordable Care Act given some of the comments, Mr.

Trump and other leaders in Congress have made, but we would remind everyone that the Affordable Care Act was never really a boon or hindrance to our business when it was being enacted but stands to reason that should Obamacare more often do something less comprehensive, it shouldn't have a negative effect on our business.

The Medicare Access and Chip Reauthorization Act, known as MACRA, that Congress passed, is really the only go-forward program that should have a positive effect on our industry and our business.

I discussed MACRA in detail last quarter but to summarize MACRA represents a major step towards a more consolidated value based Medicare reimbursement structure. In effect, MACRA changes the way Medicare pays doctors by timely reimbursement to quality.

What MACRA means for healthcare IT providers, such as Streamline Health, is that our healthcare provider clients will no longer be compensated for the use of technology like previously meaningful used regulations, but on the outcomes they achieved for their patients.

MACRA was passed with the bipartisan support and we agree with most pundits and writers to suggest it will remain in effect. Even if they are wrong, the one thing we can count on is the need for coding is not going away and likely we will not get any less complex. This is a key area of strength for us and it fits well within our strategic positioning.

I personally that the move towards value-based healthcare will not change under the new administration and that means that our mission to revenue cycle optimization will remain compelling for the long-term. Healthcare providers, big and small, need to improve their efficiency from charge capture to bill drop and that's where we add the most value.

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 and dedication to our clients, to our shareholders and to each other. I will now turn the call over to the operator for our Q&A session.

Operator?.

[Operator Instructions] And we'll take our first question from Matt Hewitt with Craig-Hallum Capital Group..

Good afternoon, gentlemen. Thanks for taking the questions. A few different areas that I'd like to hit on. First, regarding that this offer that you came through the Opportune acquisition, it sounds like it's going to be a couple of months till you will be able to sell that independent of the auditing services.

Have you thought about pricing; how will it compare to some of your other current Looking Glass offerings from a price perspective?.

It will be priced similarly Matt, so we think some of them offer the similar value levels to clients. So for example, the evaluator solution competes well with others in the marketplace.

We might be a little less expensive to get market share and because we're cloud-based, so we don't have a big footprint from that perspective but it should be in line with our existing solutions from a pricing perspective..

Okay. And then shifting over this maybe more in-line for Nick but shifting over to the balance sheet a little bit.

I think that what you're saying is that because of the timing of the Opportune acquisition, you immediately took on the expenses but you weren't able to capture some of the revenues; what was – do you have a magnitude how much cash should we anticipate coming on here in the fourth quarter just from that timing shift?.

Matt, I would say the catch-up is probably to the tune of $0.5 million..

Okay, all right. And then as far as the pipeline itself, you don't know, and obviously you're hopeful that you can get a perpetual deal here in the fourth quarter but it's hard to say when those will close. As you look at the rest of the pipeline, how should we be thinking.

I mean is it – should we anticipate a similar number from a bookings perspective to Q3? I'm just trying to figure out magnitude of how the pipeline is shaping up for the quarter? Thanks..

I think it will be similar – if we sign our perpetual, it could be better but we're not sure of the timing of those but we're having a good start to the quarter so far..

All right. Thank you..

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

Hi guys, maybe first question for me is, on the coating audits services, what is a typical engagement look like there in terms of duration, and maybe kind of the mix of services versus software? Trying to get a sense for an average hospital that you're working with today, how much incremental revenue that is?.

Well, the largest agreements we have are up to – or have the potential to be up to $1 million a year. And that larger arrangement we usually put in the software, the core audit management software as well because that – it makes our people more efficient. So we like that model, we try to get those to be longer term recurring routine audits.

But that said, we can start with clients for 50 -- $25,000 to $50,000 to do a spot check, make recommendations for improvements in their process, kind of a consulting arrangement, and then use that as a way to say – just like you do a financial audit, you want to be sure that you have good coding integrity in your process, and we'll externally audit that for you every month.

And the reason we do that monthly is that if you do it even quarterly, the Medicare 61 day roll means you can't rebuild for anything that you might have missed. And so we've had good conversations with clients around – okay, we'll do this monthly.

So you kind of get a recurring services and revenue stream with the software to keep things stickier than we would be if we were services only. And if they don't want to continue our services but want to continue the software, they can pay us maintenance at the end of the year agreement.

So I'd say, a typical hospital, to answer your question maybe a lot more directly, probably $200,000 to $250,000 a year for a monthly audit, the return on investment for our hospital is several times that you could see just 10 cases in a year having been under-build or sequenced then correctly from a DRG perspective, making that up.

So we have a good revenue return on investment when we speak with clients about that..

That's helpful, David.

And maybe just following up on that, when you look at the services that you provide there, maybe talk about and kind of the cycles -- is there much change in that business depending on kind of the economic cycle for hospitals and I would assume from a regulatory standpoint to the extent we get back to more audit or getting at end of the new Medicare contracts, that's a positive but just trying to get an overall sense of kind of the cyclicality of that business..

I think it's – to your point we have two sales path into a client. One is through the CFO or Director, VP of Revenue Cycle Management, who is looking at how do I get more from my existing revenue cycle assets.

Being sure that things are coded correctly, both – both directions and I'm at complete accuracy is – seldom [ph] them that has the revenue return on investment. The other path is through the compliance department as part of their compliance program.

So its part of a hospitals robust compliance program, they would want to see external audits to help their coders, be sure the coders are accurate. But they are at least 95% accurate which is the – kind of the industry standard or above.

So a client who has accuracy that's less than that would be well served to get to take our services into account and then to use our software to maintain that level.

So I think that the larger deals come through the revenue cycle management piece which is our normal focus working with HIM Directors and CFOs but that other method is the – is a good new one that we found because there are clear standards and milestones that people are trying to meet but to the extent that they have seen an uptick in rack audits or others, then that drives more business through that channel..

Good.

And lastly for me, just going back; can you give a little bit more color just on the University contract in terms of how it expanded there and I assume they are obviously are happy and well extended client but just a little bit more detail on the – on that sale?.

So it's a CDI sale, they are existing client of ours, happy client. We ran a competitive process against our largest competitor, it also makes a tape. We won that process. We are going to expand across their facilities.

We have a really nice revenue return on investment that we've demonstrated with them as part of their clinical documentation improvement program over the years. As they've acquired additional hospitals, they wanted to see how could they get the same level of revenue integrity across the newly acquired hospitals as well as the system.

Some additional color would be that they have a plethora of EMRs, you could name almost every EMR provider. The good news that also differentiates us is we've done the hard work to integrate to those and make the workflow one that integrates to the physician query negatively in that EMR.

So if you're a physician who is electronic now, you could do things like set up a centralized clinical documentation improvement program as a provider and send that to a physician who then – an EMR, and made to see it, they could respond to it right there because physicians aren't going to the medical records departments now and looking at paper.

So that electronic access is important and it also allows the hospital to be more efficient with the resources because they're not having to be on premise to find out physician and get her to sign-off on documents or make changes. You can do that electronically from anywhere.

And so we're talking about audit and other things with some of these clients as well because it's a strong next step from CDI is what other things and services could we provide..

And for that contract, from a bookings perspective, I know, you're probably not going to give out the size of it but just – what line item will that appear in Q4?.

System sales, it's a term license agreement, Frank..

Okay. Thank you, Nick. Thanks guys..

They will be professional services in it as well..

It has both..

I'm seeing no further questions at this time. I'd like to turn the call back over to Randy for closing comments..

Thanks again for your interest in and support in Streamline Health. If you have any additional questions or need more information, please feel free to contact me at randy.salisbury@streamlinehealth.net. We look forward to speaking with you all again next April when we'll discuss our fourth quarter and fiscal year 2016 financial performance. Good day..

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