Greetings and welcome to the Streamline Health Solutions Third Quarter Fiscal Year 2018 Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Randy Salisbury, Senior Vice President and Chief Marketing Officer for Streamline Health Solutions. Thank you. You may begin..

Thank you for joining us to review the financial results of Streamline Health Solutions for the third quarter of fiscal year 2018, which ended October 31, 2018. As the conference call operator indicated, my name is Randy Salisbury, a Senior Vice President and Chief Marketing Officer here at Streamline Health.

I manage all communications, including Investor Relations. Joining me on the call today is David Sides, President and Chief Executive Officer; and Tom Gibson, Senior Vice President and Chief Financial Officer. At the conclusion of today’s prepared remarks, we’ll open the call for our question-and-answer session.

If anyone participating on today’s call, does not have a full-text copy of our press release announcing these results. You can retrieve it from the company’s website at www.streamlinehealth.net or at numerous other financial websites.

Before we begin with prepared remarks, we want to be sure we are clear for everyone on the record have certain information, which may be provided today, as with all of our earnings calls, should be viewed. We therefore submit for the record the following statement.

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 discuss.

Please refer to the company’s press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent 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. 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 financial performance. However, certain items of income and expense are not included in these measures, so these calculations may differ from those, which another entity may reach using their own non-GAAP measures.

To help you compare these amounts on consistent terms, please refer to our website at streamlinehealth.net and our earnings release for a 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?.

Thanks Randy. First, I want to comment on our third quarter 2018 performance, then I want to comment on what we anticipate seeing for the remainder of our fiscal year. I also want to provide some insights into our planning for our next fiscal year 2019.

With regard to the third quarter, I believe that the quarter of solid performance with the number of achievements that will contribute to building a solid foundation for sustained growth and improving profitability.

Specifically, as released yesterday afternoon, for the third quarter of fiscal 2018, we generated revenues of approximately $5.4 million, a modest increase sequentially from the second quarter of this fiscal year, and down approximately 16% as compared to the same period a year ago.

The decline is attributable to churn in pricing pressure on some of our legacy solutions that we expect to be offset going forward as our eValuator clients come online. More on that in a few minutes.

Recurring revenues were approximately 82% of total revenue for the third quarter, up from 79% in Q3 a year ago and about the same as the previous quarter of 83%. Our bookings for the fiscal quarter of 2018 were $1.8 million.

To the first nine months of this fiscal year, our bookings are $7.1 million, which is doubled that at the same period a year ago. We are generating quality bookings and we'll continue to target between $2 million to $3 million per quarter going forward.

When we combined bookings growth for quarterly sequential growth in our backlog at 13%, I believe these leading indicators point to our company turning from lower revenue to a period of revenue growth in 2019 and beyond.

The bookings in Q3 consisted primarily of two new eValuator clients, a meaningful expansion of our CDI solution with the current long-term client and the new sale of our business analytics and financial management solution suite. The two new eValuator client contracts in the quarter were Peak Health Solutions and Citizens Healthcare in the Texas.

Pipeline activity in the fourth quarter has been more pronounced in at any point in our fiscal year. We have numerous and larger contract opportunities for evaluating the pipeline and we continue to have CDI and Abstracting prospects as well.

In fact, there are several individual pipeline opportunities that are four or five times what we have previously disclosed as an average deal size for eValuator. We are now in conversations with larger hospital groups and IDNs in addition to the regional and community hospital systems.

During our last earnings call, I mentioned the signing Pete Health Solutions early in our third quarter as our first reseller partner of the eValuator. Our sales pipeline today is multiple reseller partner opportunities that we are exploring, but we want to be very selective in choosing our go-to-market partners.

We anticipate having more news on this subject in the coming quarters. Moving now to the adjusted EBITDA, we generated approximately $810,000 in Q3 of this year, down from $1,514 million in the third quarter of 2017.

The lower revenues have not impacted our adjusted EBITDA on a dollar-for-dollar basis, specifically because of our cost containment discipline. I’ve asked our CFO, Tom Gibson, to cover this and another financial metrics in more detail in his prepared remarks coming up shortly.

In GAAP terms, our net loss for the third quarter was approximately $679,000, which after adjusting for the onetime cost from the previously disclosed Atlanta move of $562,000 results in a net loss of $117,000. The net loss for the quarter substantial improvement from Q2 of this year, but down slightly from essentially breakeven in Q3 of last year.

At the end of the third quarter of this year, our cash on hand was approximately $1.1 million as compared to approximately $1.9 million at the end of Q3 of last year.

As a reminder, there is a seasonality to the use of cash throughout the year in which we build our largest cash on hand amounts at the end of our fourth quarter in January from the bulk of our annual client renewals repay.

We’ve taken the necessary steps to improve our fix cost and balance sheet to provide us with the ability to invest in sales and marketing efforts to grow eValuator. I’m proud of our 100 plus associates that are right around our cost containment initiatives and make sacrifices for our company.

These sacrifices will pay-off as we now begin to grow our business around eValuator. As our company turns to sales growth, we are pursuing several different streamlines that are in parallel.

These streamlines include but are not limited to, investing in our key customer influencers in our early adaptors, building a network of healthcare executives to be our evangelists, building on our next sales channel and our distributor partner channels. These are the next logical steps behind completion introduction of the eValuator to the market.

I will now turn our call over to Tom Gibson, who will provide greater detail on our financial results for the third quarter of fiscal year 2018.

Tom?.

Thank you, David, and good morning, everyone. We continue to execute on certain cost savings initiatives. In the third quarter, as previously disclosed, the company assigned all its future obligations under its Atlanta office leased to a third party.

The Atlanta office move will provide $600,000 in cash and cost savings for our adjusted EBITDA in fiscal year 2019. Combined with our New York City subleased, the company will have $1.4 million in cost savings for adjusted EBITDA and over $800,000 in cash savings in fiscal 2019.

The company recognized $562,000 in expenses associated with the Atlanta Office move consisting of $262,000 in transactional costs, $500,000 in non-cash write-off of lease hold improvements, furniture and equipment all net of $200,000 in deferred rent liability that was avoided with the assignment.

The write-off of the lease hold improvements, furniture and equipment will lower future amortization and depreciation expense for the next three to four years. I will now move on to the financial performance for the third quarter and the first nine months of 2018.

In the quarter, we generated $5.4 million of revenue and $810,000 in adjusted EBITDA compared with the same period in 2017 where we generated $6.4 million of revenue and $1,514,000 in adjusted EBITDA. The higher revenues in 2017 came from recurring content management software and professional services.

The content management software has experienced some pricing pressure, which we have reviewed in previous earnings call and we repositioned some of the auditing professional services staff to expand and support the eValuator product.

The eValuator has a much better margin being a pure SaaS-based technology, longer contracts, lighter implementation and consists almost entirely a recurring revenue. Operating expenses, net of the onetime Atlanta move -- office move costs were approximately $5.4 million in the third quarter of 2018, down $700,000 from the same quarter of 2017.

There was no benefit recorded in operating costs for the third quarter of 2018 for the Atlanta office move as it was effective November 1, 2018, the first day of our fiscal fourth quarter. The primary factors in the lower operating costs from 2017 were cost of sales and G&A.

They were each lowered by $400,000, and was offset slightly by $100,000 in additional R&D investment. The reduction of cost of sales is primarily attributable to the improved proportionate of development personnel to enhancements for eValuator and G&A was primarily depreciation and amortization.

For the nine months ended October 31, 2018, the company reported $17.8 million in operating costs, adjusted for the real estate exit costs compared with $20.8 million in the same period last year, a reduction of $3 million in operating costs in a 9-month period.

Of that $3 million reduction, the non-cash portion of the savings were approximately $1.2 million, leaving $1.8 million of true cash related cost savings. I want to reiterate and emphasize this point in the first nine months of 2018 as compared to 2017, the company saves some $1.8 million of cash-related operating costs.

The savings that have been executed, including real estate, are not fully realized in the 2018 numbers, meaning the cost savings will continue to show up in quarters ahead and throughout 2019. We want to redeploy certain amounts of these savings to grow our business, primarily around eValuator.

In addition to the adjustment for the onetime cost of Atlanta office move in Q3, 2018 to nearly $700,000 net loss includes $700,000 non cash depreciation and amortization and $125,000 in share base compensation. Moving to the balance sheet, we finished the quarter with approximately $1.1 million of cash on hand.

That includes the use of cash during the quarter from normal operations. As David mentioned a few minutes ago, we have an established seasonality to the leveled of cash we have on hand at the end of the each quarter. The company generates a material amount of its cash from annual invoices.

A substantial number of these invoices are issued in November and collected the following January. The company anticipates it will generate cash in Q4 of 2018 in a similar manner to prior years, and will end the year with a healthy cash balance.

Beyond our operations, for the second straight quarter, we invested $800,000 in new functionality for our key client solutions, primarily eValuator. We proceed continuing to invest in the solutions that have the most potential for revenue growth.

The company is expected to spin it a total $2.8 million to $3 million on capitalized software development for the full fiscal year 2018 as compared to a $1.8 million spin on capitalized software development for fiscal 2017.

The company anticipates a lower spin in fiscal 2019 at the heavy lifting required to introduce eValuator and to the market is behind us. On the financing side, we continue to make a regular $150,000 quarterly payments on our term loan, the balance of which was $4.1 million net of financing costs at the end of the quarter.

We issued a press release in November 2018 that the company amended and extended its credit facility that includes both the term loan and the line of credit. The company extended the termination days of the loan agreement until 2020 and amended certain covenants to the account for the investment made in eValuator, in 2018.

The company views the amendment and extension and our banking partner having confidence in the company’s vision on the investments and eValuator. Turning our attention to future trends and non-GAAP measures, backlog increased for the first time in many quarters by 13% sequentially to $26 million.

A reminder here that due to the variable nature of some of the audit service engagements, we only record end backlog those agreements, which had clear, fixed revenue commitments.

The backlog measure, as reported, includes only contracts through their natural original term or through the end of the next succeeding auto renewal term and are not extended for future our renewal periods.

The timing of the contract to their natural terminations, compared with the end of the quarter, could materially impact the reported value of the backlog measure. The company is evaluating this measure both this definition and reforming. That concludes my remarks.

But before I turn the call back to David, I wanted to add that my first full quarter with the company has been both rewarding and pleasant. I feel that I fit very well with the other members of the executive team and our Board. I’ve seen this executive team execute and that execution has been realized in our financial statements.

I look forward to playing my part to help bring our vision of growth to live and to continue to build upon this positive momentum in the quarters ahead.

David?.

Thank you, Tom. Last quarter, I shared some recent headlines from various industry publications to communicate the difficulties that American healthcare providers facing in today’s economic environment.

Just last week, Fitch, the credit rating agency, stated that credit downgrades outweighed upgrades in 2018 and the trend is expected to continue its growth, plus the healthcare business models boil down to an attack on pricing power.

And not surprisingly, Moody’s published a negative outlook for the non-profit hospital sector, more reasons than ever for healthcare providers to focus on getting full and fair compensation for the care they provide to their patients.

Our eValuator solution, a 100% cloud-based automated pre-bill coding analysis platform, is designed to help every healthcare provider to just that.

In fact, one of our long-term clients and user of our eValuator, Teresa Michael, Director of HIM at Sarasota Memorial in Florida, stated in a testimonial we filmed last month, how eValuator is fit right into their workflow and helping them improve their revenue integrity, "we were looking at a number of different tools to be more pre-bill auditing and we spoke to Streamline, they have to do a data analysis of our current coding to be found very valuable that helps us to make our decision".

In that analysis, we showed Sarasota where improvements can be made to help them catch and correct most of the under-billing their experiencing and rectify some of the overbilling as well, helping them to reduce the risk of an audit. Months after implementation using eValuator every day, Teresa said "It's been working very well for us.

We’ve been reviewing all the cases that have gone through eValuator and we’ve consistently been making improvements.

We’ve been working the Streamline to help us make it even better and they’ve been very cooperative in expanding the product even more" When we look at just the bottom of our current sales funnel for this quarter, we believe we have the potential to close between four and eight new eValuator contracts by January 31, 2019.

Our goal of 16 new deals this fiscal year still in reach, and we envision accelerating the pace of closings ahead of fiscal 2019 as we have more referenceable accounts and as we continue to formalize our prospecting and selling process.

We have normally commented on guidance during our third quarter call, we usually do this when we report our fiscal year-end results.

Given the impact of the many operational improvements we've made over the past couple of years, including the many cost containment measures we've implemented, we are confident projecting substantial adjusted EBITDA growth next year to nearly $5 million.

That is predicated on the same revenue basis this year although we expect that to grow in 2019 as well. At this point in our fiscal year, we have very good visibility into client renewals on our legacy solution and most of our larger clients have renewed their contracts for next year.

With existing revenue attrition more manageable today than in years past, we foresee our new revenue generation exceeding this attrition, leading to the modest revenue growth, I just mentioned. We will provide more specific guidance as usual during our Q4 and fiscal year-end call.

My enthusiasm for next year is based on key strengths we can leverage going forward. First, as I mentioned both our near-term and mid-range sales pipeline remains full of qualified prospects, primarily for eValuator, but also for our abstracting and CDI solutions through our direct sales efforts and through key resellers.

Second, by rolling out our outpatient appropriate and Profee eValuator solutions, we're increasing the breadth of our pipeline of prospects. Third, the impact of adding eValuator resellers for our marketing mix.

As mentioned earlier, we're just now entering into conversations with resellers about enabling them to sell by our groups to their clients and prospects. And lastly, our improving EBITDA gives us additional leverage to invest as I've described to accelerate sales.

There are many benefits of our cloud-based automated pre-billing technology that are easily measured in all three phases of use. Our eValuator solution will enable hospitals, outpatient facilities and physician practices to greatly improve their coding practices.

Seeing potential benefits like cutting their days of accounts receivable, improving their cash on hand, reducing the number in dollar amounts of patient bills being denied by payers and reducing the need for post-bill audits. 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 a Q&A session.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed with your questions..

Yes. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Regarding eValuator, you've previously commented on how you're building up referenceable client base for Epic, Cerner and MEDITECH EMR customers.

So maybe you could give us an update on how that initiative is progressing?.

Thanks Lucas. This is David Sides. So the -- we've got really good referenceable clients on Medtech and Allscripts. Multiples there, we have a couple of Epic clients. And we're close to signing our third Epic client, so we have a couple of Epic clients live.

The third will be a big metric for us that because that's when people have a kind of knock out question of how many do you have and they want to hear the word three. Those clients are going really well. They’re larger clients and one or two center clients. So we’re moving through the major ones.

This quarter we think we’ll get our third, maybe even the fourth Epic, but important thing that we’ll have three Epic's live we think by the end of Q4..

Yes. That sounds great. And then I'd kind of turning to the pipeline, it sounds like you’ve got a pretty nice pipeline of deals there and potentially some larger ones.

So maybe you could just give a little color on how some of those larger deals that are in the pipeline kind of came about and whether there are more impatient versus outpatient?.

So some of the -- good question. Larger deals are ones that have been going on for some time. So when you get to larger clients greater than five or 10 hospitals, they tend to move more slowly and build consensus with a lot of people.

So these are deals we’ve been working on for some time for two or three quarters that are starting to come to fruition there anywhere greater than $300,000 for our average size is in the $100,000 range. And we’re in the final negotiations with those. So they take a while because they have more committee approvals and things like that.

But it’s primarily inpatient, some outpatient. And our Profee is also differentiating us in that we can give them a view across their health system.

So we can show our clients everything that’s happening in their system where they have risk reward and how to manage that across a broader kind of just view that maybe some of our competitors that can’t really get through a health system wide view.

So the -- our expansion in the Profee and outpatient is also helping with these larger clients because there aren't other alternatives that we see in the market..

Okay. That’s great color.

And then kind of given the early success you’ve seen to be having there with the eValuator, have you noticed anything from a competitive standpoint that indicates others might be trying to provide something similar?.

It’s pretty much the same set that we’ve seen so far. We have seen some of the competitors discount their offering just recently, which we take as a good sign in that lease recognize that were out here. But we’re written on functionality.

So one of the things that we win on that I talked about before is having that system-wide view in our reporting capabilities.

So some of our competitors that have less modern solutions, let's say, they have a hard time reporting across outpatient, inpatient and Profee, and some competitors may not have answers for all of those or they may have bought different companies or different solutions.

So you have one solution that did inpatient, one that did outpatient, maybe don’t even have Profee. Well to show a report across the two is really difficult because you have different databases, they weren’t made to be put together, they’re not built together.

And so that reporting comes really a strong selling point for us and that you have a unified view of where should I put my resources to improve my coding accuracy or my revenue integrity problems in this hospital or this clinic or this position. And we can show the math more quickly in kind of an aggregate view.

And I think we’re ahead there for sometime because those are more difficult architecture problems for people to correct from a software perspective..

Okay. Great. And then you talked a bit about cost saving measures. And looking at the $5 million in adjusted EBITDA, I mean, that would suggest that a lot of like cost savings is going to be flowing to the bottom-line.

But are there also maybe some areas that you’re looking to invest for growth in fiscal '19? And if so, what would those be?.

Yes. Good question.

So we’re going to work on our sell side investing in sales from our beta clients, continuing to expand, so we may expand past outpatient and Profee into pediatrics, oncology some more in niche areas to further our lead, setting up resellers for the solution, so that $5 million is kind of including the investments that we’re thinking of making.

We’ve got such cost savings coming through just from the offices that are real that I think it’s hard for people to see in the run rate, and as we put together the budget for next year that shows some revenue growth and EBITDA growth. The EBITDA growth just comes through so much from the last two quarters of changes from a real estate perspective.

And we just wanted to be sure and highlight that’s what we see happening for next year. Sales accelerate in this quarter, Q1 and Q2, we could certainly even go above that. But we'll have a better view and real guidance once we finish this quarter from a sales perspective and project forward with a more complete view in our next earnings call..

Yes. And then, I guess going off of that, the growth that you’re expecting for next year, I mean, you touched on a lot of things there, some sales, investments, resellers, expanding into new customer segments.

I guess, so which of those factors do you currently see is being kind of a most important to achieving that growth?.

I’d say I still -- at this stage, I still see that client testimonials in the number of breadth of clients we have and their experience is most important. So we’re putting a lot of time to be sure our client success program works really well because those reference clients are just a key to evangelizing the next set.

So one way we’ve been approaching sales is those clients are helping us in a region to fill out other clients in that region by hosting lunches or just get together and talking to the people that they know who could benefit from the solution.

So as you get really great results for the clients, they become passionate around how they can help you expand. And why other people that they know need to have the same benefit and could use the solution in the similar away. That’s some of your absolute best ways to meet your next clients..

Our next question comes from line of Frank Sparacino with First Analysis. Please proceed with your question..

Maybe just first on attrition, for the current fiscal year, what is the estimated attrition?.

For 2018 or what do we think for 2019? For 2018, 1.5 million..

And is that a good number for next year, David?.

I think it’s going to be a little bit smaller. So Frank, we’ve gotten through a lot of the renewals, and we’re on another good positive note. We're starting to see multi-year renewals for the first time in some of the legacies, which has helped because it gives us visibility not just for '19, but for '20..

And if you looked at '18 that 1.5, how does that roughly breakdown by product category?.

Mainly ECM, but also some -- probably business analytics..

A small dollar amount of business analytics.

So we sold some business analytics this year too. So somewhat offset..

Okay. And then Tom, as I look at the balance sheet, I just was hoping you could clarify the contract AR number keeps going up and it's a sizable numbers.

So just curious what's driving that?.

Yes, I think that's mainly from our change to ASC 606. And I think you're probably seeing the peak of that number based on where our volume is today. It is because of course under ASC 606, you have to take some of those future revenues and recognize them earlier than we did under our old revenue rate policy..

Okay, good. And just on '19, and in terms of the investments, I know talked a little bit about sales and R&D side as well, I guess, but maybe that's a little bit more modest given this has been a bigger year with eValuator.

But in terms of maybe sales capacity, David, can you just give me a sense of where we are today and where you think you'd like to be in 12 months from now?.

Yes. So just to clarify on the R&D, so we see that kind of moderating next year somewhat. So sales up R&D somewhat less as we move from new feature to more support as we get more clients live.

On the sales side, we start to working with people on how do we get into new relationships to us, larger relationships? It's a new initiative we've started just really recently. And just when you get to really large places, it's complicated to navigate the politics. I'm talking about greater than $5 million organizations.

Our functionality works in that level of organization now. We feel comfortable with its performance, scalability, its ability to deliver value, where we just started to recently look at how do you sell into that kind of client. And that's why you see -- even though we've been selling some for a few quarters.

We're working on more of those larger ones going forward. So on the sales capacity side. I think you could see us add maybe somewhat who works on large national accounts, like the megas, greater than $10 billion or $20 billion of revenue kind of accounts.

And we know that those are large long-term sales, but when you get a client like that there's enormous potential within that base. So I think we may add someone of that caliber to the team at some point, just the national sales person, and we've talked about that internally what they need to do. But otherwise rest of the team feels pretty good.

I think if we see some reseller activity from -- we have one reseller now, we've talked to one or two others that could be a nice addition to our -- to what our own team is doing that would kind of accelerate our plans for our budget purposes next year. We're always conservative.

And then if things speed up on the sales front we'll kind of add as we go. And then, obviously, we'd adjust all the metrics up from there. But we want to be sure give an early view that with the changes we’ve already made there is a lot of earnings power in the business even in that after the investments..

Thank you. Mr. Salisbury, there are no further questions at this time. I’ll turn the floor back to you for any final comments..

Thank you, Melissa. And thank you all again for your interest in and supporting Streamline Health. If you have any additional questions or need more information, please don’t hesitate to contact me at randy.salisbury@streamlinehealth.net.

We look forward to speaking with you again in the spring when we will discuss our fourth quarter and fiscal year end 2018 financial performance. Good day..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..