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Authentidate Holding Corporation (ADAT)

F2Q 2014 Earnings Conference Call

February 13, 2014 4:30 PM ET

Executives

Peter Seltzberg – Regional Vice President, Hayden IR

Ben Benjamin – Chief Executive Officer

Bill Marshall – Chief Financial Officer

Analysts

Bradley Donner – J.P. Turner

Jason Revland – Blueprint Capital

Chad Wilson – Westlin Capital

Presentation

Operator

Greetings and welcome to the Authentidate Holding’s Fiscal 2014 Second Quarter Results Conference Call. 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 will now like to turn the conference over to your host, Mr. Peter Seltzberg, Regional Vice President with Hayden Investor Relations. Thank you. You may begin.

Peter Seltzberg

Thank you. Welcome to everyone joining us. On the call with me today from Authentidate are Mr. Ben Benjamin, Chief Executive Officer and Mr. Bill Marshall, Chief Financial Officer.

Before we get started let me take a moment to read the forward-looking statement. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 (sic) [1933] and Section 21E of the Securities Act of 1934. When used in this release, the words believe, anticipate, think, intend, plan, will be, expect and similar expressions identify such forward-looking statements. Such statements regarding future events and/or the future financial performance of the company are subject to certain risks and uncertainties, which could cause actual events or the actual future results of the company to differ materially from any forward-looking statement. Such risks and uncertainties include, among other things, the availability of any needed financing, the company’s ability to implement its business plan for various applications of its technologies, the impact of competition, the management of growth, and the other risks and uncertainties that may be detailed from time to time in the company’s reports filed with the SEC. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by the company or any other person that the objectives and plans of the company will be achieved.

With that concluded and out of the way, let me turn the discussion over to Ben Benjamin, CEO of Authentidate Holding Corp. Ben, please proceed.

Ben Benjamin

Thank you, Peter. Good afternoon, everyone and thank you for joining us for today’s call. During the call, I will provide an update on Authentidate’s business, I will then turn the call over to Bill to review the financial results for the second quarter on six months ended December 31, 2013. Afterwards, I will make some closing remarks and we will open the call for questions.

We reported another strong quarter and have continued to make solid progress with our business since our last call. Revenues for the quarter increased 39% compared to the prior year period driven by 163% increase in revenues from our telehealth products and services. We also improved our operating margins and posted reductions in all operating and net losses compared to the prior year period demonstrating the leverage in our business model.

During the quarter, we strengthened our balance sheet with approximately $2.4 million in net proceed from our November private placement of stock and warrants and also received proceeds from the exercise of some of the warrants we issued in June 2013.

Given these positive metrics and momentum, we expected revenues for the second quarter to come in ahead of our first quarter results. However, as reported in our earnings release shortly before the November holidays in the Department of Veteran Affairs, we were required to implement the security system upgrade at its datacenter that required us to make some changes to our Electronic House Call device software. We developed the software changes quickly, but the required testing for the changes coupled with the holidays in November and December impacted patients’ activations and sales for our Electronic House Call solution for the rest of the quarter. Although we continued to add new patients during the period for our Interactive Voice Response Solution, this change impacted the revenues derived from the VA during the quarter.

The good news here is that these changes are behind us. We started enrolling new EHC patients in January and we’re moving forward with this important customer. We believe there is pent of demand for our EHC solution due to this delay and we expect to get back on track to achieve our goals for the year.

Moving to our core products and services in the telehealth area, our VA projects continues to be a significant contributor to our revenue growth, and we’re excited about the opportunities for future growth with the VA. While we were working through the changes I mentioned earlier, we also received approval for new disease management protocol, which continues to make our solutions available to a larger patient population at the VA. These new DMPs included post-traumatic stress disorder, substance abuse and a few other behavioural health conditions which we believe will help us to grow revenues.

The VA telehealth pilot program for HIV patients, we started in the first quarter, is not complete and we understand that the results of the pilot was good. As you may recall, the HIV program uses our IVR telehealth solutions, which we provide for recurrent monthly subscription fee on a per patient basis. Although we cannot predict how many patients will use this service, we expect that the HIV telehealth program will be made available for patients nationwide following the evaluation process.

We plan to continue our focus on supporting the VA in its efforts to provide quality care for our veterans and believe our efforts to increase our business with the VA are going well.

We have also made very good progress with our ongoing efforts to reduce the cost of producing our EHC devices and procuring our tablet-based solutions. We have seen increased interest in our telehealth products and services from other public and private sector organizations and we believe our experience with the VA and our cost reduction activities position us well to pursue these opportunities.

There is increasing recognition that healthcare information technology such as our EHC and IVR products and services is essential to controlling healthcare costs and improving the quality of care.

Telehealth solutions [have been helping] [ph] to reduce the cost of patient care. These solutions will also improve access to care for patients and offer the tools necessary to provide improved patient outcomes.

With respect to our hospital discharge solutions, we are continuing to pursue a number of opportunities and RFPs for this solution and we will update our shareholders as these opportunities develop. There is mounting evidence from successful deployment [of the powerful] [ph] return on investment for our customers and we expect to be able to share more data with you in the coming months that will detail the significant cost advantages that our customers are gaining from using our solutions.

Regarding our Referral and Order Management Solution, we remain primarily focused on increasing the use of our service by our existing customers and leveraging referrals and existing customers to add to our customer base. Revenue from this solution were down in the second quarter as several of our customers were impacted by market consolidation, the competitive bidding process for healthcare products and the [shift in] [ph] healthcare reform environment. We have been impacted by some of these industry trends in the past and have added new customers and transaction volume to recover these revenues. We believe the trends in the US healthcare industry to significantly reduce cost and automated healthcare records and processes are all catalyst for growth for our solution in the near and long term as our solution help customers to lower cost and increase efficiency.

Our hosted software services solution and telehealth products and services deliver the tools that healthcare organizations need to help reduce their growing administrative and patient care cost providing healthcare. Our solutions can also be used to help improve patient outcomes and can be used on a standalone basis or combined to provide continuum of care solutions to help our customers address these emergent market needs.

We believe we’re well positioned to benefit as the healthcare industry embraces technologies to help lower cost and provide quality care for patients, and healthcare providers and government recognize that these solutions and services are necessary to provide a more efficient healthcare environment.

I’d now like to turn the call over to Bill to briefly review our financial results for the period ended December 31, 2013. Bill, please proceed.

Bill Marshall

Thanks, Ben, and good afternoon everyone. I’ll start with the review of our consolidated results and offer additional comments as needed. As Ben mentioned, we recorded another solid quarter for revenue growth and we improved our operating margins and lowered our operating and net losses for the period. Our revenues increased and we transitioned to a cash flow positive business. We expect to see continued improvement in these areas since we benefit from the business model where many of our costs are fixed to a large extent.

Moving to the numbers. Revenues for the quarter ended December 31, 2013 increased approximately 39% to $1.5 million compared to $1.1 million for the prior year. These results reflect an increase in revenues from our telehealth products and services as we shipped more equipment during the quarter and increased our monthly services revenues. Compared to the first quarter of fiscal 2014 revenues were down approximately 19% as we shipped fewer EHC units during the quarter as a result of the changes Ben discussed earlier and our hosted software services revenues decreased due to market consolidation and regulatory reform initiatives that are still playing out in the marketplace.

Revenues for the six months ended December 31, 2013 increased 66% to $3.3 million compared to $2 million for the same period last year reflecting the same trend as the quarter. Cost of revenues was $942,000 for the quarter compared to $817,000 for the prior year reflecting the increase in telehealth equipment sales offset in part by lower datacenter maintenance expenses. Year to date cost of revenues increased to $2.2 million from $1.5 million in the prior year again reflecting the same trends as the quarter.

Selling, general and administrative expenses for the quarter were essentially flat at $1.6 million compared to the prior year quarter due primarily to the state payroll tax credit of approximately $102,000 which offset higher selling, investor relations and stock option expenses for the period.

Year to date SG&A expenses were $3.5 million compared to $3.4 million for the prior year reflecting higher selling, investor relations, legal and stock option expenses which were offset in part by the tax credit received in the second quarter. Product development expenses were $264,000 for the quarter compared to $313,000 for the prior year due primarily to lower personnel expenses. Year to date product development expensed decreased to $505,000 from $561,000 reflecting the same trends as the quarter.

Depreciation and amortization expenses were $192,000 for the quarter compared to $204,000 for the prior year quarter and $378,000 for the year to date period compared to $480,000 for the prior year. These decreases reflect lower spending for fixed assets and a decrease in amortization expense for capitalized software and acquired telehealth licenses.

Operating loss for the quarter was down by approximately $364,000 to $1.5 million compared to $1.9 million for the prior year. Year to date our operating loss decreased approximately $552,000 to $3.3 million compared to $3.9 million for the prior year. These improvements are due primarily to the increase in revenues for the periods which offset the increases in expenses that I discussed earlier and again demonstrates the leverage in our business model with respect to expenses.

Other expense was $32,000 for the quarter compared to $824,000 for the prior year and $127,000 compared to $1.4 million for the year to date period. Other expense consists primarily of the non-cash amortization of debt discount and deferred financing costs on the company’s senior secured notes payable. The majority of these notes were exchanged for Series [D] [ph] preferred stock and warrants in June 2013 and the remaining notes were repaid in accordance with their terms on October 31, 2013.

Net loss for the quarter was $1.6 million or $0.07 per share compared to $2.7 million or $0.11 per share for the prior year. Net loss for the six-month period was $3.5 million or $0.16 per share compared to $5.2 million or $0.22 per share for the prior year. The decrease in net loss for the current periods reflects the improvements in operating results and the decreases in other expense for the periods.

Moving to the balance sheet, as of December 31, 2013, cash and cash equivalents and marketable securities amounted to approximately $3.4 million and the company had working capital of approximately $4.7 million. For the quarter ended December 31, 2013, we used approximately $1 million to fund operations, changes in working capital and inventory, datacenter and other investments and prepayments, this amount includes inventory and related investments and datacenter infrastructure and other investments of approximately $225,000. During the quarter we also paid the $850,000 to retire all the outstanding senior secured notes.

For the second quarter, the average monthly cash used for operations after normalizing for prepayments was approximately $260,000 per month compared to approximately $275,000 per month for the quarter ended September 30, 2013, and approximately $390,000 per month for the year ended June 30, 2013. We expect our cash use to continue to trend downward as we grow our revenues in future periods. Our results for the second quarter continue to move in the right direction compared to the prior year and we expect these trends to continue.

That concludes my remarks. Let me turn the call over to Ben for some closing comments before we take your questions. Ben?

Ben Benjamin

Thanks, Bill. We remain very bullish about the future opportunities we see for our business as the fundamental value proposition of healthcare information technology remains strong. We believe healthcare information technology solutions will play an important role in meeting emerging healthcare industry needs to reduce cost and improve patient outcome while maintaining the quality of the healthcare services provided to patients. We also believe our best-in-class telehealth and web-based solutions will enable us to capitalize on these market needs and the regulatory reforms that are shaping the healthcare industry to drive [revenue] [ph] growth in 2014 and beyond.

That concludes our formal remarks. Bill and I will be happy to take any questions you may have. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from the line of Jonny Colin, a private investor. Your line is now open. You may proceed with your question.

Jonny Colin

Hi, Ben. How are you? If you remember me from LifeStar. I was the CEO of LifeStar. But I had a question for you guys. In the last conference call, you mentioned that by March you guys will be cash flow even and based upon the numbers today it doesn’t seem like that’s possible. The second part of the question is with the kind of burn rate you still have, don’t you think you’re going to have to go back to the market to raise more money because the burn rate at $1.5 million a quarter, if it continues will only give you six months of burn rate money before you run out of cash.

Bill Marshall

Well, Johnny. We - I guess you may have calculated the March quarter. I think we’ve said by the end of our fiscal year, which is June, so on the same basic neighborhood and we’re still sticking to that, by the end of our fiscal year. Regarding the cash burn, as I said, we used $1 million for this quarter and we’re seeing that trend down, so not a $1.5 million, and our forecast would indicate that we don’t need to go back to the market for cash.

Ben Benjamin

John, we do remember you and the fact of the matter is this, we’re still on target for getting there within the fiscal year. We’re pushing hard. Definitely, it was made a little more difficult for us because of the missteps with the VA, but we’re still very aggressively moving forward with the expectation that we’ll get there by the end of our fiscal year.

Jonny Colin

Okay.

Operator

Thank you. Our next question is coming from the line of Mr. Lawrence Bernard. Your line is now open. You may proceed with your question.

Unidentified Participant

I’m just curious, outside of VA, where are you looking - what are the hospitals and areas you’re looking to expand your business and contracts in?

Ben Benjamin

Well. Frankly, Lawrence, we’re looking at all opportunities in hospitals. We have a number of hospitals where we have deployed our telehealth services and in fact we’re also looking for hospitals for all our three products but largely the hospital discharge product. Those are products frankly that we’ve been working with the hospitals over the past year to validate. Being a small company you usually have to jump a little higher than would be normally expected. We have been conducting some case studies that we have just completed. The results are very significantly exceeded our expectations that we had set [procedures] [ph] for outcomes and for improved efficiencies. We would be publishing those data shortly and you would have a better sense of what I’m talking about. But to answer your question and how we’re going after the hospital business very aggressively it’s not one that is known to move very quickly, but we’re having some success and we’ll have some announcements in the next couple or three weeks.

Unidentified Participant

Okay. Thank you very much for your time.

Operator

(Operator Instructions) One moment please while we continue to pool for questions. Our next question is coming from the line of Mr. Jason Reveland with Blueprint Capital. Your line is now open. You may proceed with your question.

Jason Revland – Blueprint Capital

Thank you, guys. My question relates to the Inscrybe Referral. You talked about the ability to deepen the penetration from the existing customer base. I’m wondering how will you actually do that and are there any positive case study or examples you can share with us of how you’re able to do that?

Ben Benjamin

Yeah. Jason, thanks for the question. We’re looking at in fact the bigger customers who could realize greater savings from the efficiencies created. We believe that we have the base of customers that are needed to in fact increase the revenues in the quantities that we project and expect to accomplish. Now what’s happening is we’ve just gone through a period of competitive bidding for largely the DME services, provided services and the Medicare CMS has been very aggressive. As a result, a number of the smaller organizations have not decided to pursue any further and so there has been some consolidation in the industry and it has focused away attention that was previously being given to what we’re doing to acquire this new company.

We have done a number of case studies. We have some that are published on our website and we have others that we can provide white papers for but what they generally show is they can create a throughput efficiency gain of about 48% to 70%. You can complete the transaction. In other words, when a doctor places a referral or an order for a patient, that transaction can get completed within a 70% less time meaning you improve the cash flow conditions of the provider, and that is the benefit that providers derive.

Now the other benefit is a hidden benefit. As we move more and more into the electronic world as mandated by the Healthcare Act, we’re going to see doctors in fact having the need to have the electronic connectivity to both the payer and the supplier, the provider of these equipments and - so this is that they order for patient. We think that’s going to help Inscrybe quite a bit and you see our order referral management products grow. We’re beginning to see that on the electronics side, we’re beginning to see more doctors who’re using our system [inaudible]. So though the revenues were down a bit this quarter, we expect that to come back soon and we expect to accomplish what we set out to do, grow the existing base of customers especially the larger ones, very quickly. So we think we’ll do both those things, we think the case studies we have done which are on our website and we can provide in written documents validate our belief in this.

Jason Revland – Blueprint Capital

Great. I guess my question really relates to what can - is this something that you can do or is this something that you’re saying the industry will evolve and this will eventually happen, or are you taking proactive steps to try to encourage that?

Bill Marshall

We are making proactive steps with our existing customers to have them use more of our products and services. It’s basically getting them to increase the number of transactions they process to our system and we’re thinking proactive steps with a number of our larger customers, and as Ben was alluding to as the industry moves towards being all electronic, our product becomes more valuable. Right now, where things are still done by fax I mean you can accomplish that with the fax servers in some cases and you may or may not appreciate the value that you derive from a rules based workflow solution but the government is handling that part for us and so what we’re doing is working with our existing customers to drive more utilization and we’ve seen that, however, in the short term, it’s been offset by some of the smaller companies who have seen their businesses I guess get smaller.

Jason Revland – Blueprint Capital

Got it. It seems like easy lower hanging fruits, so I appreciate the added color. Thanks a lot.

Operator

Thank you. Our next question is coming from the line of Chad Wilson with Westlin Capital. Your line is now open. You may proceed with your question.

Chad Wilson – Westlin Capital

I may have missed it but can you talk a little bit about the private healthcare market, private hospitals outside the VA, are you setting up to sell into those customers as far as insurance reimbursement, you have all the reimbursement codes squared away?

Ben Benjamin

Yes, we said we do that; I addressed a little bit of that before but let me expand a little more on the question that you are asking. Look, one of the things that’s happening with the hospitals right now is the major change that is occurring in how Medicare and Medicaid pay the bills, that everyone recognizes that it costs a lot more money to keep a patient inside their hospital. And for many of the reasons that patients are kept inside the hospitals today those patients can - their needs can actually be addressed at home or on some kind of outpatient basis which is lot less costly. What we have done is we have built a system with this anticipated. We expected that in fact you would see more and more outpatient services being delivered to patients. So what’s important is having the same type of response, or nearly the same response as the patients would have in a hospital. Having that connectivity which our hospital discharge our Electronic House Call or telehealth services and our Inscrybe referral system provides it allows that continuous care to be applied to a patient, and have the hospital and primary care physicians be aware of what is going on with the patient.

Now, in addition to that, and to a part of your question, those codes have been there. What’s evolving are codes around telehealth, the telehealth codes are not as pervasive as other codes of medicines and other kinds of services. But that is beginning to happen and there is a major push in Washington to legislate that. So we think we are placed well and the timing is great. We also believe that if you look at what’s happening with hospitals the pressure’s on because of readmission and the cost around that and all these services are very important for hospitals to be able to manage their business going forward.

Now very important, how you [indiscernible] and hospitals buy so many things that they don’t necessarily want to buy three product from Authentidate. So you very often have to partner with GPOs, that’s group purchasing organizations. We are working with some of them, for example, Premier, and we are hoping that we have success in the very near future with that relationship, selling into very big hospital system.

But to this point we have sold one at a time into hospitals and that’s not the way we really want to do it or the way to succeed here, you have to sell it in the large hospital groups.

Operator

Our next question is coming from the line of Mr. David Levin with [Accredited Members] [ph].

Unidentified Analyst

Can you tell us the number of patients you added at the VA for the quarter or if that’s not something you can talk about, can you at least maybe provide a little bit of color on how you see – I know you have done this before but I am just trying to get an update on it, can you provide a little bit of color on how you see the product mix at the VA kind of evolving as you go forward? I mean I think that’s important you know – I just put it in, the update to [minding the letter] [ph] that there is an element of this, I think in terms of margins and revenue, did you kind of have to pay attention to because of that product – can you just kind of provide a little bit of color how you see that going forward and obviously anything you could say specifically about the quarter with respect to VA patient numbers would be great?

Bill Marshall

Well, I think what we’ve said David is that we think over time the relationship will be one device or EHC patient for two, every two to two and a half IVR patients. Obviously during the quarter we saw that relationship because we stopped enrolling some EHC patients toward the end of the quarter. We did continue to enrol IVR patients throughout the quarter as Ben said we started enrolling all patients again in January. So we think the mix, although it seems to be more one to one right now we still think for longer term you are going to see one to two, one to two and a half. Did I answer your question?

Unidentified Analyst

Yeah, but I mean is there – I guess I am trying to find out what over time means I guess?

Bill Marshall

I would say that you’ll get to that level probably over the next 12 months.

Unidentified Analyst

Yeah

Ben Benjamin

I would say that’s approximately right, David, and realize that we are not largely about conjecture here because of our interaction with the clinicians and VA. But it’s not something that the VA has committed to. What we see in fact is the VA looking to roll out newer services that use things like both IVR and the telehealth devices. But they are looking for them at lower cost point. And they are looking for lesser services to be rendered by those devices. So they are clearly pointing in the direction to lower cost on many more patients.

Unidentified Analyst

Will there be DMPs that are more cost effective, more conducive to a straight IVR kind of solution, or maybe I should just say a non-proprietary hardware solution?

Ben Benjamin

Yes, that’s correct. It’s not much non-hardware but not vendor provided hardware. So for example, they are looking in the direction of you using your smartphone, or you using your tablet, but using the back end provided by the VA vendor and using whatever other enter basis some app that might run on your smartphone or your tablet. The VA recognizes a lot of their beds do have these devices and that’s the way to cover a larger population of patients without having significant cost increases.

Operator

Our next question is coming from the line of Bradley Donner with J.P. Turner.

Bradley Donner – J.P. Turner

Bill, first question for you. Could you tell me if we had any warrants that were exercised during the quarter and if so, what cash flow was generated from the exercise of those warrants?

Bill Marshall

Yes, we had about 480,000 warrants exercised, so whatever that $0.95 times that – so something just under that, 4, 450 something like that.

Bradley Donner – J.P. Turner

So that added your cash flow for the quarter?

Bill Marshall

Right.

Bradley Donner – J.P. Turner

And we are still roughly about - what a little under 4 million warrants outstanding that have a strike price at $0.95?

Bill Marshall

Right, 4.2 million, right.

Bradley Donner – J.P. Turner

Obviously that would be a source of cash going forward provided the people indeed exercise those warrants and the price of your stock is higher than that level, right?

Bill Marshall

Correct.

Bradley Donner – J.P. Turner

We don’t have any call provision on those warrants, do we by chance?

Bill Marshall

No.

Bradley Donner – J.P. Turner

Ben you talked a little about the hiccup we had late in the quarter that created a little bit of a slowdown in the sales. Are you at liberty to discuss what the numbers could have been if we were on the same trajectory prior to that hiccup?

Bill Marshall

Obviously Brad, this is just an estimate but we - based on the momentum we were – we had in the orders we were taking, we think that it could be 600,000 to $700,000 of revenues that we would have been able to report. That’s primarily equipment revenues. So they are low margin revenues but that’s what we would estimate that we potentially lost in terms of what we might have been able to do.

Bradley Donner – J.P. Turner

And if we could extrapolate that out we’re back end course right now, you had said in your opening remarks that the long term effects on that will have – there won’t be any impact on that, we’re back to the normal. Can we continue to extrapolate out those numbers through Q3 and then into Q4 which should roll into April, May and June?

Bill Marshall

Not knowing how you would do that, I wouldn’t speak to that. I think we obviously lost that revenue, we think there is pent up demand, we’ve said and we are getting back on track and we think that our revenues will be accelerating in the second half of the period. But I don’t know that you could do one to one extrapolation of what we just said.

Bradley Donner – J.P. Turner

So it’s not necessarily a linear progression but you do see the potential of them expanding in the second half of your fiscal year, correct?

Bill Marshall

Correct.

Operator

Our next question is coming from the line of Marc Friedfertig.

Unidentified Participant

Two questions about the telehealth revenues. Can you break that down – just the approximation by percentages of what comes from IVR and then EHCs, services versus the products so we can get an idea of what the recurring revenues are and how that’s growing and how we can count on that going forward?

Bill Marshall

We wouldn’t provide that detail. What we can say though is as you saw the improvement in the margin this quarter...

Unidentified Participant

Now what I could really say is I am really disappointed that the number dropped from 1.166 million to 9.02 million – and I don’t want to be caught off-guard going forward. So I think it’s important that you do let us know what is, hey we sold the unit which is not a recurring revenue versus stuff that you are going to see each month; I think it’s information that you should provide everyone these statements because me, I am shocked that the number is down from September 30 from 1.166 million to 9.02, I understand the explanation, you didn’t ship EHC products. So, now I want to make sure that I understand going forward how much of an impact that can have in the quarters going forward?

Bill Marshall

We are – we saw like services revenues increase and the mix of that is as we said probably one to one and half units versus or EHC services versus IVR as we move towards that 1 to 2 relationship but the lion’s share of the shortfall as I said was the units that we should have shipped, we wouldn’t have seen a lot of services revenues from that because once they ship them, then they have to put them on the patient soon; that lagged a little bit. So in this quarter the revenue shortfall that you are referring to is primarily because we shipped fewer units, not because we have lower service revenue.

Unidentified Participant

To me it’s all about recurring earnings, I want to urge you going forward to think about disclosing the breakdown from IVR, EHC services versus EHC product. I mean the product you guys there is a very small margin business and it’s not necessarily recurring and I think it’s important that you guys break that out and you guys could talk about and think about it going forward.

I do have several other questions. Now with the hosted software services, that revenue number was down also from the first quarter. And I understand that there has been some consolidation and you are losing some of your customers when they consolidate with the other entities that use a different service. But all along I thought we were expecting that people that were only using – doing like 10 or 15% to our product to increase that number significantly over time. And it looks like that’s not coming to fruition, is that accurate or why - that number should be going up because people that weren’t putting a 100% through you should be adding every quarter as they see the benefits?

Ben Benjamin

No. Well, our assumption was accurate; we know exactly what percentage of the utilization of our services is relative to their total volume. We know what that is, that is accurate. What has happened in the market is as I have told you we focussed on our biggest users, our the biggest companies that we presently serve. What has happened, these are the guys who are acquiring the companies that have given up, that are not pursuing the business anymore because of the aggressive pricing that CMS has mandated. So folks have just been totally consumed by that. Technically we should get back that volume because many of those small companies were acquired by bigger companies that we worked with, it’s a matter of them being focused elsewhere right now, we think that this is coming to an end, we think there will be another surge of it later but we are working with them very actively to give us some of their bandwidth so that we can get this work done, because it’s very important to them.

What has happened though is that they sell - the Healthcare Act allow some period of time when people can still continuously use fax transactions. And that has allowed them a way out. But we think that we are going to get the attention that we need in order to get these things implemented and we will pick up, we’ll regain those small vendors, those small suppliers who we were vendor too, with the big vendors that we use. And we will in fact capture the increased volume of the transactions that they presently do now largely through fax service.

Unidentified Participant

My understanding all along was that there was a - Medicare and Medicaid won’t reimburse if they didn’t submit their records electronically by certain timeframe, has that been pushed back significantly or what’s happening there?

Ben Benjamin

They haven’t been pushed back, it’s phased in. What’s happening the [force of purpose] [ph] has been on doctors. So they spent a whole lot of funds subsidizing physicians to put in EMR systems. And then the next step is for those doctors to do something with the electronic system and that is the next step that goes into effect later in 2014. So it’s been phased in; the front-end the last two years have largely been focused around doctors and hospitals.

Unidentified Participant

So you think there is still potential for significant increase in revenue for these hosted software services this year?

Ben Benjamin

Yes.

Unidentified Participant

You mentioned that they were coming to the completion of the IVR testing with the HIV disease protocol management. When do you think they would start aggressively rolling that out nationwide? Is that something that we are starting to see already or is that still out in the future?

Ben Benjamin

No, they concluded the pilot. We still support patients who continue to use the service. But the VA goes through a process insight where they actually have a review of such results, a peer review process, and that is on the way, it will also end when they publish the data. That has not happened, we expect that the data would have been published in January, it did not happen in January, we keep enquiring that on a weekly basis – we expect that it will happen sometime very soon but they have to go through an internal review process around the data that the pilot is yielded.

Unidentified Participant

You are expecting them to publish something, any, it could be anytime now, and then once that’s published then the nationwide rollout would begin, is that accurate?

Ben Benjamin

I can’t speak to how the VA will roll out, what I was describing is the process they follow. I may expect that but I have not been promised that, the VA usually handles it that way. They go through a review process where they look at the data collected on whether they accomplished or achieved the goals that were set for the program. When that is done to their satisfaction they usually will begin the ramp.

Unidentified Participant

Okay. Based on your judgement is there any way that they wouldn’t find this a worthwhile project to pursue, I mean you obviously are familiar with the results of this – and are we familiar with their concluding but you can make your own conclusion, I am wondering if there is...

Ben Benjamin

In the support that we provide we anecdotally speak to clinicians who are involved, what we have been told is that the results were achieved. Again that has to be reviewed, they go through a peer review process internally and they decide that. But what I can tell you the folks, the clinicians that we work with told us that their results were achieved.

Unidentified Participant

Okay, and then thinking about your projection of being cash flow positive in the next 6 months, I think that we would have to assume, to get there you’d have to have – I am just looking at the telehealth revenue number and I would have to think that that would have to go up over 100% in the next 6 months maybe a 150%, and mostly in the recurring revenue because we know that the product is a low margin for us to get there – that’s got to be the case, right?

Bill Marshall

If we do it only because of the telehealth we would probably need to do something enough to maybe double but we would expect to get contribution from our other products as well.

Unidentified Participant

Okay, all right thanks guys, I appreciate you answering the questions and I urge you to break out that revenue number going forward.

Ben Benjamin

We’ll give it [inaudible].

Operator

Our next question is coming from the line of Lawrence Bernard.

Unidentified Participant

I believe the gentleman just in front of me just answered my question on projected breakeven point, and so forth and what it would take to get to that point so I will yield at this point but thank you very much.

Operator

Thank you very much. Ladies and gentlemen at this time we have reached the end of our question and answer session. I would now like to turn the floor back to management for any closing remarks.

Ben Benjamin

Thank you. Thank you all for participating in today’s conference call. As always, should you have any additional questions, please feel free to call Peter Seltzberg of Hayden IR, Bill or myself. We thank you for your interest and support and look forward to speaking with all of you again in the near future. Have a great day.

Operator

Ladies and gentlemen this does end today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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