News Column

STREAMLINE HEALTH SOLUTIONS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

June 13, 2014


In fiscal 2013, management focused on implementing the strategic objectives of the Five-Year Plan adopted in April 2013. The plan contains four strategic objectives that we believe will strengthen our performance over the long term. These objectives were the outcomes of partnering with our clients to help them better navigate the increasingly complex confluence of clinical and financial data to empower profitable management of their organizations. First, offer Solutions Optimization advisory services to help maximize our clients' Return on Investment. We designed and deployed these new services in the first quarter of last year to help augment sales, retain clients and create upsell opportunities, as well as to generate incremental revenues. Our first client signed a Solutions Optimization agreement in February last year. Today more than 25 percent of our Financial Analytics client base uses these services and we are expanding this offering into our other solution suites. Second, as clients begin to look at the ability to link clinical decision-making and patient outcomes to financial results through analytics, we plan to broaden our suite to include Clinical Analytics. In October of 2013 we announced the exclusive 15


Index to Financial Statements

license of a clinical analytics platform from Montefiore Medical Center in the Bronx, NY. This capability enables us to offer meaningful and relevant solutions that place us squarely in the population health management trend that is of critical importance to healthcare providers. Our ability to empower clients with clinical and financial analytics has never been more important. According to Cowen and Company's 4Q 13 Hospital CIO Survey, "we won't see accelerating HCIT spending growth in 2014… However, HCIT vendors with robust analytics capabilities could experience a nice tail wind fueled by population health-related initiatives…" Third, we want to assist our clients as they begin to shift their focus to the front-end of patient engagement to be more proactive in managing their patient population. Specifically, clients want to lower their PFS expenses and to improve financial clearance and POS collection execution before a patient receives care. So on February 3, 2014, we acquired Unibased Systems Architecture, Inc., which has developed top-ranked solutions in both Patient Scheduling and Surgery Management. The offerings from Unibased have extended our solutions suite to enable us to deepen our front-end patient access offerings that are critically important to the process of assisting our clients in managing the risk inherent in their ACO relationships. Fourth, our clients are experiencing substantial reductions in revenue growth, which has placed greater importance on cost management. Many of the largest healthcare providers in the industry today cannot accurately demonstrate the impact of cost on their profit margins. We believe that by offering a complete financial analytics solution - including Financial Decision Support capabilities - we will have a unique and compelling selling proposition. On May 6, 2014, we agreed to acquire CentraMed, Inc. which has leading SaaS-based cost management solutions. We expect the CentraMed acquisition to close in the second quarter of 2014. We believe that the CentraMed acquisition will augment our financial management suite of solutions. The healthcare industry continues to face sweeping changes and new standards of care that are putting greater pressure on healthcare providers to be more efficient in every aspect of their operations. These changes represent on-going opportunities for the Company to partner with our current clients and prospects to help them meet and exceed these new standards. With the expansion of our solution suite we now offer specific workflows in four distinct areas of need for healthcare enterprises: Patient Engagement; Patient Access; HIM, Coding & CDI; and Financial Management.

Results of Operations

Statements of Operations for the fiscal years ended (in thousands):

Fiscal Year 2013 2012 Change % Change System sales $ 3,240$ 1,463$ 1,777 121 % Professional services 3,642 3,793 (151 ) (4 )% Maintenance and support 13,986 11,211 2,775 25 % Software as a service 7,627 7,300 327 4 % Total revenues 28,495 23,767 4,728 20 % Cost of sales 13,179 11,593 1,586 14 % Selling, general and administrative 14,546 10,061 4,485 45 % Product research and development 7,088 2,948 4,140 140 % Total operating expenses 34,813 24,602 10,211 42 % Operating loss (6,318 ) (835 ) (5,483 ) 657 % Other income (expense), net (5,499 ) (7,432 ) 1,933 (26 )% Income tax benefit 100 2,888 (2,788 ) (97 )% Net loss $ (11,717 )$ (5,379 )$ (6,338 ) 118 % Adjusted EBITDA(1) $ 1,770$ 6,560$ (4,790 ) (73 )% _______________

(1) Non-GAAP measure meaning earnings before interest, tax, depreciation,

amortization, stock-based compensation expense, transactional and one-time

costs. See "Use of Non-GAAP Financial Measures" below for additional information and reconciliation. 16


Index to Financial Statements

The following table sets forth, for each fiscal year indicated, certain operating data as percentages:

Statements of Operations(1) Fiscal Year 2013 2012 System sales 11.4 % 6.2 % Professional services 12.8 16.0 Maintenance and support 49.1 47.2 Software as a service 26.9 30.7 Total revenues 100.0 % 100.0 % Cost of sales 46.2 48.8

Selling, general and administrative 51.0 42.3 Product research and development

24.9 12.4 Total operating expenses 122.2 103.5 Operating loss (22.2 ) (3.5 ) Other expense, net (19.3 ) (31.3 ) Income tax benefit 0.5 12.2 Net loss (41.1 )% (22.6 )% Cost of systems sales 97.0 % 187.8 %

Cost of services, maintenance and support 42.6 % 42.2 % Cost of software as a service

33.1 % 34.4 %


(1) Because a significant percentage of the operating costs are incurred at

levels that are not necessarily correlated with revenue levels, a variation

in the timing of systems sales and installations and the resulting revenue

recognition can cause significant variations in operating results. As a result, period-to-period comparisons may not be meaningful with respect to the past operations nor are they necessarily indicative of the future

operations of the Company in the near or long-term. The data in the table is

presented solely for the purpose of reflecting the relationship of various

operating elements to revenues for the periods indicated.

Comparison of fiscal year 2013 with 2012 Revenues Fiscal Year (in thousands): 2013 2012 Change % Change System Sales: Proprietary software $ 3,154$ 1,001$ 2,153 215 % Hardware and third-party software 86 462 (376 ) (81 )% Professional services 3,642 3,793 (151 ) (4 )% Maintenance and support 13,986 11,211 2,775 25 % Software as a service 7,627 7,300 327 4 % Total Revenues (1) $ 28,495$ 23,767$ 4,728 20 % _______________

(1) Fiscal 2013 and 2012 includes $9,957,000 and $3,395,000, respectively, of

revenues earned from the acquired Meta operations subsequent to the acquisition in August 2012. Proprietary software - Revenues recognized from licensed software sales in fiscal 2013 were $3,154,000, as compared to $1,001,000 in fiscal 2012, an increase of $2,153,000, or 215%, from fiscal 2012. This increase is primarily attributable to an eCAC sale totaling $1,750,000 during fiscal 2013. Hardware and third party software - Revenues from hardware and third party software sales in fiscal 2013 were $86,000, a decrease of $376,000, or 81% from fiscal 2012. Fluctuations from year to year are a function of client demand. 17


Index to Financial Statements

Professional services - Revenues from professional services in fiscal 2013 were $3,642,000, a decrease of $151,000, or 4%, from fiscal 2012. The decrease is primarily attributable to the nature of recognizing professional services revenues once certain milestones are met, which can cause fluctuations over periods. Maintenance and support - Revenues from maintenance and support in fiscal 2013 were $13,986,000, an increase of $2,775,000, or 25%, from fiscal 2012. The increase in maintenance and support results primarily from recognizing a full 12 months of Meta revenue in fiscal 2013. In addition, maintenance renewals typically include a price increase based on the prevailing consumer price index, or increase in the product set purchased by the client. Software as a service (SaaS) - Revenues from SaaS in fiscal 2013 were $7,627,000, an increase of $327,000, or 4%, from fiscal 2012. This increase is attributable to go-lives that occurred during the fiscal year which initiated the start of revenue recognition. Revenues from remarketing partners - Total revenues from GE Healthcare was $767,000 in fiscal 2013 down from $3,033,000, or 13% of total revenues, in fiscal 2012. The Company previously relied on GE Healthcare for a significant amount of its revenues. The Company's remarketing agreement with GE Healthcare remains in effect, however, the Company has not obtained any net new clients from the relationship since fiscal 2010. Cost of Sales Fiscal Year (in thousands): 2013 2012 Change % Change Cost of system sales $ 3,143$ 2,747$ 396 14 %

Cost of professional services 4,052 3,088 964 31 % Cost of maintenance and support 3,461 3,246 215 7 % Cost of software as a service 2,523 2,512 11 - % Total cost of sales

$ 13,179$ 11,593$ 1,586 14 % Cost of systems sales includes amortization and impairment of capitalized software expenditures, royalties, and the cost of third-party hardware and software. Cost of systems sales, as a percentage of systems sales, varies from period-to-period depending on hardware and software configurations of the systems sold. The increase in expense is primarily due to additional costs associated with the Meta acquisition. We incurred 12 months and 5.5 months of expenses related to Meta's operations in fiscal 2013 and 2012, respectively. The overall increase in fiscal year 2013 cost of system sales is offset by the amortization of software acquired as part of the Meta acquisition. We incurred $0 and $467,000 of amortization expense in fiscal 2013 and 2012, respectively. The cost of professional services includes compensation and benefits for personnel, and related expenses. The increase in expense is primarily due to additional costs associated with the Meta acquisition. We incurred 12 months and 5.5 months of expenses related to Meta's operations in fiscal 2013 and 2012, respectively. The cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts. These increases are primarily due to additional maintenance and support costs as part of the Meta acquisition. We incurred 12 months and 5.5 months of expenses related to Meta's operations in fiscal 2013 and 2012, respectively. The cost of SaaS is relatively fixed, but subject to fluctuation for the goods and services it requires. The decrease is related to a move of the production data center during the fourth quarter of fiscal 2012. Selling, General and Administrative Expense Fiscal Year (in thousands): 2013 2012 Change % Change General and administrative expenses $ 11,152$ 7,702$ 3,450 45 % Sales and marketing expenses 3,394 2,359 1,035 44 % Total selling, general, and administrative $ 14,546$ 10,061$ 4,485

45 %

General and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company's executive and administrative staff, general corporate expenses, amortization of



Index to Financial Statements

intangible assets, and occupancy costs. The increase over the prior year is primarily driven by $1,400,000 in professional service fees incurred in fiscal 2013, as well as additional general and administrative expenses associated with the Meta operations. Amortization of intangible assets added incremental expense to fiscal 2013 due to the amortization of assets acquired as part of the acquisition of Meta. We also recognized $1,339,000 in amortization expense in fiscal 2013 for acquired intangible assets as compared to $584,000 in fiscal 2012, an increase of $755,000. Sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the Company's sales and marketing staff; advertising and marketing expenses, including trade shows and similar type sales and marketing expenses. The increase in sales and marketing expense reflects an increase in total compensation for sales staff. Product Research and Development Fiscal Year (in thousands): 2013 2012 Change %


Research and development expense $ 7,088$ 2,948$ 4,140 140 % Capitalized software development cost 614 2,000 (1,386 ) (69 )% Total R&D Cost $ 7,702$ 4,948$ 2,754 56 % Fiscal Year (in thousands): 2012 2011 Change % Change Research and development expense $ 2,948$ 1,409$ 1,539 109 % Capitalized software development cost 2,000 2,600 (600 ) (23 )% Total R&D Cost $ 4,948$ 4,009$ 939 23 % Product research and development expenses consist primarily of compensation and related benefits; the use of independent contractors for specific near-term development projects; and an allocated portion of general overhead costs, including occupancy. Research and development expense increased due to more time committed to enhancing current software versions, which also decreased the number of hours available to be capitalized, which is reflected in the capitalized research and development costs. Research and development expenses in fiscal 2013 and 2012, as a percentage of revenues, were 25% and 12%, respectively. Other Income (Expense) Interest expense in fiscal 2013 was $1,766,000, compared to $1,957,000 in fiscal 2012. Interest expense consists of interest and commitment fees on the line of credit, interest (including accruals for success fees) on the term loans, and interest on the 2012 convertible note and the 2013 note payable, and is inclusive of $315,000 in deferred financing cost amortization. Interest expense increased during 2013 primarily as a result of increases in the term loan interest and success fees, and deferred financing costs. The Company recorded losses in fiscal 2012 on the conversion of the convertible subordinated notes of $5,913,000 related to the Interpoint and private placement investment, which represented the difference between the aggregate fair value of the Company's preferred stock issued of $9,183,000, based on a $5.80 fair value per share, and the total of carrying value of the notes and unamortized deferred financing cost of $3,270,000. The Company recorded a loss in fiscal 2013 on early extinguishment of debt of $139,000 related to the repayment of the subordinated term loan. The Company also recorded valuation adjustments to its warrants liability, recorded as miscellaneous (expense) income of $141,000 and $489,000 in fiscal 2013 and 2012, respectively, using assumptions made by management to adjust to the current fair market value of the warrants at the end of each fiscal year. In fiscal 2013, the cumulative change in value of the earn-out totaling $3,580,000 was recorded to other expense. Provision for Income Taxes The Company recorded a tax benefit of $100,000 at January 31, 2014 that is comprised of current state and local taxes benefit of $149,000, a deferred tax expense of $21,000, and an uncertain tax position expense of $28,000. The Company recorded a tax benefit of $2,889,000 at January 31, 2013 that is comprised of current state and local taxes payable of $47,000 and a deferred tax benefit of $2,936,000. The deferred tax benefit is comprised of the tax benefit recorded for the release of the deferred tax asset valuation allowance and the related reduction in income tax expense of $3,000,000 as a result of deferred tax liabilities recorded related to the Meta acquisition, and the effect of temporary differences during fiscal 2012. 19


Index to Financial Statements


2013 2012 Company proprietary software $ 2,230,000$ 3,416,000 Hardware and third-party software 79,000 100,000 Professional services 7,255,000 4,527,000 Maintenance and support 25,936,000 22,504,000 Software as a service 21,073,000 20,439,000 Total $ 56,573,000$ 50,986,000 At January 31, 2014, the Company had master agreements and purchase orders from clients and remarketing partners for systems and related services that have not been delivered or installed, which if fully performed, would generate future revenues of $56,573,000 compared with $50,986,000 at January 31, 2013. The Company's proprietary software backlog consists of signed agreements to purchase software licenses and term licenses. Typically, this is software that is not yet generally available, or the software is generally available and the client has not taken possession of the software. Third-party hardware and software consists of signed agreements to purchase third-party hardware or third-party software licenses that have not been delivered to the client. These are products that the Company resells as components of the solution a client purchases. Professional services backlog consists of signed contracts for services that have yet to be performed. Typically, backlog is recognized within twelve months of the contract signing. The increase in backlog is due to several clients that signed contracts during fiscal 2013 for add-on solutions, upgrades, or expansion of services at additional locations for which contracted services have not yet been performed. Maintenance and support backlog consists of maintenance agreements for licenses of the Company's proprietary software and third-party hardware and software with clients and remarketing partners for which either an agreement has been signed or a purchase order under a master agreement has been received. The Company includes in backlog the signed agreements through their respective renewal dates. Typical maintenance contracts are for a one-year term and are renewed annually. Clients typically prepay maintenance and support which is billed 30-60 days prior to the beginning of the maintenance period. The Company does not expect any significant client attrition over the next 12 months. Maintenance and support backlog at January 31, 2014 was $25,936,000, as compared to $22,504,000 at January 31, 2013. The Company expects to recognize $13,371,000 out of January 31, 2014 backlog in fiscal 2014. A significant portion of this increase is due to new client sales and renewals in excess of revenue recognized from the January 31, 2013 backlog, as well as the backlog added by the Looking Glass maintenance contracts. Additionally, as part of renewals, contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics. At January 31, 2014, the Company had entered into SaaS agreements that are expected to generate revenues of $21,073,000 through their respective renewal dates in fiscal years 2014 through 2019. The Company expects to recognize $6,953,000 out of January 31, 2014 SaaS backlog in fiscal 2014. Typical SaaS terms are one to seven years in length. SaaS backlog and terms are as follows: Average SaaS Backlog at Remaining Months (in thousands): January 31, 2014 in Term 7-year term $ 1,322 57 6-year term 810 53 5-year term 13,960 33 4-year term 785 45 3-year term 3,527 21 Less than 3-year term 669 13 Total SaaS backlog $ 21,073

The commencement of revenue recognition for SaaS varies depending on the size and complexity of the system; the implementation schedule requested by the client and ultimately the official go-live on the system. Therefore, it is difficult for the Company to accurately predict the revenue it expects to achieve in any particular period.



Index to Financial Statements

All of the Company's master agreements are generally non-cancelable but provide that the client may terminate its agreement upon a material breach by the Company, or may delay certain aspects of the installation. There can be no assurance that a client will not cancel all or any portion of a master agreement or delay portions of the agreement. A termination or delay in one or more phases of an agreement, or the failure of the Company to procure additional agreements, could have a material adverse effect on the Company's financial condition, and results of operations. Use of Non-GAAP Financial Measures In order to provide investors with greater insight, and allow for a more comprehensive understanding of the information used by management and the board of directors in its financial and operational decision-making, the Company has supplemented the Consolidated Financial Statements presented on a GAAP basis in this annual report on Form 10-K with the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only as supplemental data. We also provide a reconciliation of non-GAAP to GAAP measures used. Investors are encouraged to carefully review this reconciliation. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by the Company, may differ from and may not be comparable to similarly titled measures used by other companies. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share The Company defines: (i) EBITDA, as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net earnings (loss) before net interest expense, income tax expense (benefit), depreciation, amortization, stock-based compensation expense, and transaction expenses and other one-time costs; (iii) Adjusted EBITDA Margin, as Adjusted EBITDA as a percentage of net revenue; and (iv) Adjusted EBITDA per diluted share as Adjusted EBITDA divided by adjusted diluted shares outstanding. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are used to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board and may be useful to investors in comparing the Company's operating performance consistently over time as they remove the impact of our capital structure (primarily interest charges), asset base (primarily depreciation and amortization), items outside the control of the management team (taxes), and costs that we do not believe relate to our core operations including: transaction related expenses (such as professional and advisory services), corporate restructuring expenses (such as severances), and other operating costs that are expected to be non-recurring. Adjusted EBITDA removes the impact of share-based compensation expense, which is another non-cash item. Adjusted EBITDA per diluted share includes incremental shares in the share count that are considered anti-dilutive in a GAAP net loss position. The board of directors and management also use these measures to (i) plan and forecast overall expectations and evaluate, on at least a quarterly and annual basis, actual results against such expectations; and, (ii) as performance evaluation metrics in determining achievement of certain executive and associate incentive compensation programs. The Company's lender uses Adjusted EBITDA to assess our operating performance. The Company's credit agreements with its lender require delivery of compliance reports certifying compliance with financial covenants certain of which are based on an Adjusted EBITDA measurement that is the same as the Adjusted EBITDA measurement reviewed by our management and board of directors. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per diluted share are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities, despite the advantages regarding the use and analysis of these measures as mentioned above. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share as disclosed in this annual report on Form 10-K, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of Company results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA, and its variations are: • EBITDA does not reflect our cash expenditures or future requirements for

capital expenditures or contractual commitments;

• EBITDA does not reflect changes in, or cash requirements for, our working

capital needs; 21


Index to Financial Statements

• EBITDA does not reflect the interest expense, or the cash requirements to

service interest or principal payments under our credit agreements;

• EBITDA does not reflect income tax payments we are required to make; and • Although depreciation and amortization are non-cash charges, the assets

being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, the Company encourages readers to review the GAAP financial statements included elsewhere in this annual report on Form 10-K, and not rely on any single financial measure to evaluate our business. The Company also strongly urges readers to review the reconciliation of GAAP net earnings (loss) to Adjusted EBITDA, and GAAP earnings (loss) per diluted share to Adjusted EBITDA per diluted share in this section, along with the Consolidated Financial Statements included elsewhere in this annual report on Form 10-K. The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net earnings (loss), a comparable GAAP-based measure, as well as earnings (loss) per diluted share to Adjusted EBITDA per diluted share. All of the items included in the reconciliation from net earnings (loss) to EBITDA to Adjusted EBITDA and the related per share calculations are either recurring non-cash items, or items that management does not consider in assessing the Company's on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess the Company's comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other expenses that do not relate to our core operations and more reflective of other factors that affect operating performance. In the case of items that do not relate to our core operations, management believes that investors may find it useful to assess the Company's operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance. The following table reconciles net earnings (loss) to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EBITDA per diluted share for the fiscal years ended January 31, 2014 and 2013 (amounts in thousands, except per share data): Fiscal


Adjusted EBITDA Reconciliation 2013 2012 Net loss $ (11,717 )$ (5,379 ) Interest expense 1,766 1,957 Tax expenses (1) (100 ) (2,888 ) Depreciation 718 726

Amortization of capitalized software development costs (2) 3,192


Amortization of intangible assets 1,342


Amortization of other costs 74 35 EBITDA (4,725 ) (2,306 ) Stock-based compensation expense 1,661


Loss on conversion of convertible notes -


Loss on early extinguishment of debt 161 -

Transaction related professional fees, advisory fees, and other internal direct costs



Associate severances and other costs relating to transactions or corporate restructuring 415


Other non-recurring operating expenses (3) 3,489


Adjusted EBITDA $ 1,770$ 6,560 Adjusted EBITDA Margin (4) 6 % 28 % Adjusted EBITDA per diluted share 2013


Loss per share - diluted $ (0.94 )$ (0.48 ) Adjusted EBITDA per adjusted diluted share (5) $ 0.10$ 0.46 Diluted weighted average shares 13,747,700


Includable incremental shares - adjusted EBITDA (6) 4,863,140 494,109 Adjusted diluted shares 18,610,840 12,128,649 _______________ 22


Index to Financial Statements

(1) Fiscal 2012 includes a non-cash income tax benefit recorded in 2012 of

$3,000,000 to reduce the Company's tax valuation allowance relating to deferred tax liabilities recorded in conjunction with the Company's acquisition of Meta Health Technology, Inc.

(2) Fiscal 2013 includes $2,172,000 relating to internally developed legacy

software, $423,000 relating to acquired internally developed software from

Interpoint, and $597,000 relating to internally developed software acquired

from Meta Health Technology, Inc.

(3) Fiscal 2013 includes valuation adjustment for contingent earn-out of


(4) Adjusted EBITDA as a percentage of GAAP revenues.

(5) Adjusted EBITDA per adjusted diluted share for the Company's common stock is

computed using the more dilutive of the two-class method or the if-converted


(6) The number of incremental shares that would be dilutive under profit

assumption, only applicable under a GAAP net loss. If GAAP profit is earned

in the current period, no additional incremental shares are assumed.

Application of Critical Accounting Policies The following is a summary of the Company's most critical accounting policies. See Note 2 of our Consolidated Financial Statements for a complete discussion of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. Revenue Recognition The Company recognizes revenue in accordance with ASC 985-605, Software-Revenue Recognition and ASC 605-25 Revenue Recognition - Multiple-element arrangements. The Company commences revenue recognition when the following criteria all have been met: • Persuasive evidence of an arrangement exists,

• Delivery has occurred or services have been rendered,

• The arrangement fees are fixed or determinable, and

• Collection is considered probable.

If the Company determines that any of the above criteria has not been met, the Company will defer recognition of the revenue until all the criteria have been met. If non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable. Multiple Element Arrangements We record revenue pursuant to Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), "Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"). The Company follows this accounting guidance for revenue recognition of multiple deliverable revenue arrangements (meaning the delivery or performance of multiple products, services and/or rights to use assets) to determine whether such arrangements contain more than one unit of accounting. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis (meaning the item can be sold separately by any vendor or the client could resell the item on a stand-alone basis). Additionally, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items must be considered probable and substantially in the control of the vendor. Allowance for Doubtful Accounts Accounts and contract receivables are comprised of amounts owed the Company for solutions and services provided. Contracts with individual clients and resellers determine when receivables are due and payable. In determining the allowance for doubtful accounts, the unpaid receivables are reviewed monthly to determine the payment status based upon the most currently available information as to the status of the receivables. During these monthly reviews, the Company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments. Capitalized Software Development Costs Software development costs are accounted for in accordance with ASC 985-20 Software - Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and designing phase of software development are classified as research 23


Index to Financial Statements

and development and are expensed as incurred. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing, and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is over the estimated economic life of the software. Amortization for our legacy software systems is provided on a solution-by-solution basis over the estimated economic life of the software, using the straight-line method. Amortization commences when a solution is available for general release to clients. Acquired internally developed software from acquisitions is amortized on the basis of undiscounted future cash flows. Unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at the date of such determination. The Company reviews, on an on-going basis, the carrying value of its capitalized software development expenditures, net of accumulated amortization. Goodwill and Intangible Assets Goodwill and other intangible assets were recognized in conjunction with the Interpoint, Meta, and Clinical Looking Glass acquisitions. Identifiable intangible assets include purchased intangible assets with finite lives, which primarily consist of internally-developed software, client relationships, supplier agreements, non-compete agreements, customer contracts, and license agreements. Finite-lived purchased intangible assets are amortized over their expected period of benefit, which generally ranges from one to 15 years, using the straight-line and undiscounted expected future cash flows methods. The indefinite-lived intangible asset relates to the Meta trade name; the indefinite-lived intangible asset is not amortized and is tested for impairment on at least an annual basis.

The Company assesses the useful lives and possible impairment of existing recognized goodwill and intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review include:

• significant under performance relative to historical or projected future

operating results; • significant changes in the manner of use of the acquired assets or the strategy for the overall business;

• identification of other impaired assets within a reporting unit;

• disposition of a significant portion of an operating segment;

• significant negative industry or economic trends;

• significant decline in the Company's stock price for a sustained period; and

• a decline in the market capitalization relative to the net book value.

Determining whether a triggering event has occurred involves significant judgment by the Company. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. See Note 8 to our consolidated financial statements included in Item 8 for further details. Common Stock Warrants The fair value of the common stock warrants are computed using the Black-Scholes option pricing model based on the following assumptions: annual volatility, risk-free rate, dividend yield and expected life. The model also includes assumptions to account for anti-dilutive provisions within the warrant agreement. Contractual Obligations

The Company has various contractual obligations and commitments to make future payments including debt agreements and operating lease obligations.



Index to Financial Statements

The following table summarizes significant contractual obligations and commitments of the Company as of January 31, 2014. Except as set forth in the following table, the Company does not have any material long-term purchase obligations or other long-term liabilities that are reflected on its consolidated balance sheet as of January 31, 2014:

Payments Due by Period One Year or More than 5 Less Years 2-3 Years 4-5 years Total Long-term debt obligations $ 1,676$ 3,130$ 4,655 $ - $ 9,461 Interest expense on long-term debt 574 816 420 - 1,810 Operating lease obligations 603 971

936 1,957 4,467 Total contractual obligations $ 2,853$ 4,917$ 6,011$ 1,957$ 15,738

The estimated interest expense payments on long-term debt reflected in the table above are based on both the amount outstanding and the respective interest rates in effect as of January 31, 2014. Interest expense on the $8,298,000 senior term loan, which is hedged under an interest rate swap, is computed based on the fixed hedged interest rate of 6.42%. Liquidity and Capital Resources The Company's liquidity is dependent upon numerous factors including: (i) the timing and amount of revenues and collection of contractual amounts from clients, (ii) amounts invested in research and development and capital expenditures, and (iii) the level of operating expenses, all of which can vary significantly from quarter-to-quarter. The Company's primary cash requirements include regular payment of payroll and other business expenses, interest payments on debt, and capital expenditures. Capital expenditures generally include computer hardware and computer software to support internal development efforts or infrastructure in the SaaS data center. Operations are funded by cash generated by operations and borrowings under credit facilities. The Company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for the next twelve months. Cash and cash equivalent balances at January 31, 2014 and 2013 were $17,925,000 and $7,500,000, respectively. Continued expansion may require the Company to take on additional debt, or raise capital through issuance of equities, or a combination of both. There can be no assurance the Company will be able to raise the capital required to fund further expansion. Significant cash obligations Fiscal Year (in thousands) 2013 2012 Term loans $ 8,298$ 13,688 Note payable 900 -

Contingent consideration for earn-out - 1,320 Capital lease

227 - Royalty liability 2,264 -

Please reference Note 3 - Acquisitions and Note 6 - Debt to our consolidated financial statements included in Item 8 for additional information. Operating cash flow activities

Fiscal Year (in thousands) 2013 2012 Net loss $ (11,717 )$ (5,379 ) Non-cash adjustments to net loss 11,159 7,978

Cash impact of changes in assets and liabilities 771 (2,714 ) Annual operating cash flow

$ 213$ (115 ) Net cash provided by operating activities in fiscal 2013 increased in the current year primarily due to a decrease in accounts receivables resulting from collections. In addition, there were non-cash increases in the valuation adjustment for the contingent earn-out and share-based compensation expense. The Company's clients typically have been well-established hospitals or medical facilities or major health information system companies that resell the Company's solutions, which have good credit histories and payments have been received 25


Index to Financial Statements

within normal time frames for the industry. However, some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities. Agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments. Adverse economic events, as well as uncertainty in the credit markets, may adversely affect the availability of financing for some of our clients. Investing cash flow activities Fiscal Year (in thousands) 2013 2012

Purchases of property and equipment $ (152 )$ (577 ) Capitalized software development costs (614 ) (2,000 ) Payment for acquisitions

(3,000 ) (12,162 ) Annual investing cash flow $ (3,766 )$ (14,739 ) In fiscal 2013, the primary investing activities were associated with acquisitions in the current and prior periods. The Company estimates that to replicate its existing internally-developed software would cost significantly more than the stated net book value of $10,238,000, including acquired internally developed software of Meta and Interpoint, at January 31, 2014. Many of the programs related to capitalized software development continue to have significant value to the Company's current solutions and those under development, as the concepts, ideas, and software code are readily transferable and are incorporated into new solutions. Financing cash flow activities Fiscal Year (in thousands) 2013 2012 Proceeds from term loans $ 4,958$ 9,880

Principal repayments on term loans (10,348 ) (313 ) Payment of deferred financing costs (116 ) (1,272 ) Proceeds from the sale of common stock 20,587

- Settlement of earn-out consideration (1,300 ) Proceeds from private placement - 12,000 Other 197 (185 ) Annual financing cash flow $ 13,978$ 20,110 The decrease in cash from financing in fiscal 2013 is primarily the result of the net proceeds received from the sale of common stock, offset by the repayments on term loans. The Company has a $5,000,000 revolving line of credit that it has not drawn upon as of January 31, 2014. 26


Index to Financial Statements

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Source: Edgar Glimpses

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