Authentidate Holding's (ADAT) CEO Ben Benjamin on Q3 2014 Results - Earnings Call Transcript

| About: Authentidate Holding (ADAT)

Authentidate Holding Corp. (NASDAQ:ADAT)

Q3 2014 Results Earnings Conference Call

May 15, 2014 04:30 PM ET

Executives

Peter Seltzberg - Regional VP for Hayden IR

Ben Benjamin - Chief Executive Officer

Bill Marshall - Chief Financial Officer

Analysts

Bradley Donner - J.P. Turner

Chad Wilson - Westlin Capital

Operator

Greetings and welcome to the Authentidate [Holdings] Corp Fiscal 2014 Third Quarter Results Conference Call. At this time all participants are in 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 for Hayden IR. Thank you Mr. Seltzberg. 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 Securities Act of 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 significant risks and uncertainties inherent in the forward-looking statements included herein, 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, 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 third quarter and nine months ended March 31, 2014. Afterwards, I will make some closing remarks and we will open the call for questions.

Although our revenues were down for the quarter, we believe we have continued to make solid progress with our business and we’re increasingly optimistic about the opportunities that lie ahead of our company. Since our last call we’ve added commercial market customers for our products and services. We’ve been rated one of the top 10 telehealth vendors worldwide by IHS in the IHS World Market for Telehealth 2014 addiction study. A strong statement about the capabilities of our products and services, increased our market reach with our new Yankee Alliance contract and had our contract with the Department of Veteran Affairs extended for another year. We also improved our operating margins and reduced our operating and net losses compared to the prior year period.

All of these developments reflect positively on our business, demonstrate the leverage in our business model and indicate that we have the right products and services to meet the emerging healthcare market needs.

With respect to revenues, the decrease for the quarter reflects lower transaction volumes for our referral and order management solutions, as customers continued to be impacted by market consolidation and the competitive bidding process for healthcare products. Also fewer telehealth units sold to the VA as the recovery in revenues from this project was slower than we had expected. As reported in our earnings release, we are starting to see a pickup in transaction volumes from our referral and order management customers and we believe we are back on track with our VA project.

We expect the pace of our revenue growth to accelerate for the remainder of our fiscal year and beyond. And we believe we are well positioned for growth and profitability as healthcare reforms and industry trends take hold.

Moving to our core products and services, our pipeline remains solid as the need for products and services continues to be driven by ongoing regulatory reforms and healthcare industry trends to lower costs, reduce hospital readmissions and improve patients outcome. In the telehealth area, we are continuing to focus on increasing the amount of products and services we provide to the web-base.

We believe the extension of our contract reflects positively on our progress with this important customer and we expect the opportunity for revenue growth from this project to increase significantly moving forward. The VA has continued to expand the size the scope of the telehealth program to cover more diseases, behavioral health conditions and wellness programs, and we expect this trend to continue.

Additionally, the number of [customers served] by the VA is growing. [Funding for the] telehealth program has increased each year and we understand that a significant number of new patients will be added to the program over the next 12 to 18 months. Although we have not realized our revenue growth from this project today, we believe we are well positioned to benefit from this trend and we believe we will have meaningful for revenue traction from this project as we move forward. We are proud to provide services to our veterans and we are continuing to work with the VA to provide innovative products and services to meet their needs.

We are also seeing increasing interest in our telehealth products and services from the commercial market. Since our last call we have added several hospital customers including Florida Hospital Memorial Medical Center and Canton-Potsdam Hospital. These organizations are using our to telehealth solutions to help their patients with a post-acute follow-up care that need to manage chronic diseases and other conditions which in turn help the organizations to drive improved outcome, reduced readmission and maintain better care coordination for their patients.

New customers like these are helping us to expand our footprint in the commercial market developed by our customer base. We believe the commercial market opportunity for our products and services will increase significantly as ongoing regulatory reforms regarding readmissions and patient care implemented and organizations look for ways to control cost.

We also expanded our commercial market reach by working with organizations like Yankee Alliance, a group purchasing organization with several hundred hospitals and other healthcare companies included in their membership. Yankee Alliance contracted with us to provide our telehealth products and services and our hospital discharge solutions to their members. We believe this relationship could result in significant revenue growth for the company and the potential for this contract has not been fully appreciated by the market. We understand that Yankee Alliance carefully chooses the vendors they work with and have [guided] their members to buy from these approved vendors.

We have already started to promote our products and services to their members and we are confident that our solutions will help their members reduce cost, reduce readmission and improve patient care. We believe that strategic relationships like this will help us to grow our revenues and further diversify our customer base.

Regarding our hospital discharge solution, in addition to the Yankee Alliance contract, we provide our solutions to their number of hospitals. We are continuing to pursue a number of opportunities and we'll update shareholders as they develop.

As I mentioned before, we believe that Yankee Alliance relationship could results in significant revenue growth for this solution and conservative model for additional strategic relationships like this in the future. We have also completed a case study for this solution with Central State Medical Center in New Jersey that demonstrates the compelling recurring on investment that customers can achieve by using our solution. Central State realized an 85% plus improvement in creation and spend time roll ahead. They further have 54% plus improvement in patient placement time and 93% plus reduction impacts costs.

These labels have been able to start first note to focus more time on the right patient care another important fact. We believe these results and relationships with groups like Yankee Alliance will help us to further penetrate this emerging market. With respect to our referral and auto management solution, we are continuing to focus on increasing the use of our services by our existing customers and leveraging referrals to add for customers.

As I mentioned earlier, although revenues for test solution decreased for the quarter and year-to-date period, we probably are going to see a turnaround in transaction volumes and related revenues. We believe ongoing regulatory reforms and healthcare industry trends focused on [lowering] cost and augmenting records and processes will drive revenue growth for this solution in the future. And we believe we’re well positioned to help customers address these needs. We are in broad consensus among industry experts, politicians and the users of our healthcare services that growing the cost of the U.S. healthcare system is unsustainable.

At this time, it is why we agreed the intelligence used of healthcare information technology services will help to drive down cost and aid in shifting patient cares towards wellness and preventative care programs and will ultimately improve healthcare accounts for patients. These fundamentals will lead the drive in industry change and we believe our company is uniquely positioned to capitalize on these trends with products and services that support improved patient outcomes, provide significant values for insurers and healthcare providers and ultimately our shareholders.

I’d now like to turn the call over to Bill to briefly review our financial results for the period ended March 31, 2014. Bill?

Bill Marshall

Thanks Ben and good afternoon everyone. I’ll start with a review of our consolidated results and offer additional comments as needed. As Ben mentioned, we improved our operating margins and reduced our operating and net loss as compared to the prior year periods and we believe the factors impacting our revenues for the quarter have started to improve.

Moving to the numbers, revenues for the quarter ended March 31, 2014 were $1.2 million compared to $1.4 million for the prior year. This decrease is due primarily to lower transaction volumes for our Referral and Order Management Solution resulting from the market conditions Ben earlier. Although these conditions are impacting us in the short-term, we believe they are catalyst for growth moving forward as organizations look to lower cost and improve efficiencies.

Telehealth revenues for the quarter were down slightly due to lower equipment sales. Compared to the second quarter of fiscal 2014, revenues were down approximately 16% due primarily to lower revenues for our telehealth products and services. Revenues for the nine months ended March 31, 2014 increased approximately 33% to $4.5 million compared to $3.4 million for the same period last year. This increase reflects higher telehealth revenues from product sales and services, which offset lower hosted software services revenues.

Cost of revenues for the quarter decreased to $835,000 compared to $1 million for the prior year due to lower telehealth revenues and lower data center maintenance expenses. Year-to-date cost of revenues increased to $3.1 million from $2.5 million due to higher telehealth revenues which offset lower data center maintenance expenses.

SG&A expenses for the quarter decreased to $1.6 million compared to $1.8 million for the prior year due primarily to lower legal and investor relations expenses and state payroll tax credit of approximately $73,000 which offset higher selling expenses and stock compensation expenses. Year-to-date SG&A expenses were essentially flat at approximately $5.1 million, excuse me as lower legal expenses and state payroll tax credit offset higher selling and stock compensation expenses.

Product development expenses were also basically flat at approximately $275,000 for the quarter and year-to-date product development expenses decreased to $780,000 from $834,000 reflecting lower personnel expenses from period.

Depreciation and amortization expense was $191,000 for the quarter compared to $213,000 for the prior year and $569,000 for our year-to-date period compared to $625,000 for the prior year. These decreases reflect lower spending for fixed assets and a decrease in amortization of capitalized software offset impart by the amortization of acquired licenses.

Operating loss for the quarter decreased by approximately $176,000 to $1.7 million compared to $1.9 million for the prior year. Year-to-date operating loss decreased approximately $728,000 or $5 million compared to $5.7 million for the prior year. These improvements reflect improved gross margins and lower operating costs for both periods and the increase in revenues for the year-to-date period.

Other income was $101,000 for the quarter compared to other expense of $812,000 for the prior year reflecting a gain of a $110,000 on the sale of non-core assets and a decrease in non-cash amortization of debt discount for the current period.

Year-to-date, other expense decreased $26,000 compared to $2.2 million for the prior year. Other expense consist primarily of the non-cash amortization of debt discount on the company's senior secured notes payable that were exchange for Series B preferred stock in June 2013 or repaid in October of 2013.

Net loss for the quarter was $1.6 million or $0.04 per share compared to $2.7 million or $0.11 per share for the prior year. The decrease in net loss for the quarter reflects the improvements in operating results, the decrease in other expense and the gain on the sale of non-core assets. Year-to-date net loss was $5 million or $0.20 per share compared to $7.9 million or $0.33 per share for the prior year, reflecting the same trends as the quarter and a higher revenues for the year-to-date period.

Now moving to the balance sheet, as of March 31, 2014, cash, cash equivalents and marketable securities amounted to approximately $2.6 million and the company had working capital of approximately $4.1 million. For the quarter ended March 31, 2014, we used approximately $1.7 million to fund operations, changes in working capital and datacenter and other investments and prepayments. This amount includes inventory datacenter and related investments in prepayments of approximately $425,000.

For the third quarter, the average monthly cash used for operations after normalizing for prepayments was approximately $400,000 compared to approximately $260,000 for the quarter ended December 31, 2013.

The increase in average cash used for the quarter is due primarily to an increase in accounts receivable and a decrease in accounts payable. If we adjust these items to the prior quarter levels, average cash used drops to approximately $320,000 per month. We expect our cash used to trend down in the future as we grow revenues and move towards profitability.

Although revenues were down for the quarter, our operating results continued to move in the right direction, demonstrating the leverage we get from our business model where many of our costs are fixed to a large extent. We expect these trends to continue as we grow our revenues moving forward.

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 optimistic about the opportunities we see for our business given the ongoing regulatory reforms and cost pressures affecting the healthcare industry. We believe we have best in class products and services to address these emerging market needs and that we are well positioned to drive revenue growth in 2014 and beyond as healthcare providers seek [permissions] to improve patient outcome, write down care [delivery] and administrative costs and improve regulatory compliance.

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

Question-and-Answer Session

Operator

At this time, we will be conducting a question-and-answer session. (Operator Instructions). The first question today comes from [Dan Cromie], private investor. Please go ahead.

Unidentified Analyst

Hi Bill, hi Ben. I just wanted to talk about the VA little bit. I know it’s a touchy subject, you can’t go into great detail, but it’s good news, last week’s announcement that you’ve been re-up for another year. So, I was just wondering if I can give you a broad-based question, and is there any possibility you can give us, any feedback and what they’ve provided you in terms of our products and services that they are using in their marketplace?

Ben Benjamin

What we’ve generally heard Dan, and thanks for your question, is that we have a back-end in all products that provides clinicians with the great ease of use and in fact provide the services they need really very efficiently as compared to other vendors. But bottom-line, the way we really look at our rate and as to look at what the VA’s helped us on annually basis is every March, the VA gives each vendor who provides services to the VA a rating. And they rated us being very good. So, we see that as positive reinforcement of the quality of products that we’re delivering to their patients. So we’re encouraged by this rating of very good.

Unidentified Analyst

Okay. If I could just ask one other quick question before I let others in queue. Going to current events, the media has been pretty hard on the VA over the last week here or so; and do you see any other events that have been played out in the media affecting us long-term both positively, negatively or does it not matter?

Ben Benjamin

I am unaware of any possible impact to our business but please allow me to say I do believe the type of solutions that we offer in the telehealth arena to go a long way to solve them some of the problems being talked about. What we have is a situation where in fact we’ve had so many wars in recent time that the Veteran population is growing significantly and further downsizing of the army is going to lead to additional growth of the VA covered life. To-date, there are approximately 9 million covered lives. And our sense in working with them over the past few months is that there is greater urgency to provide some kind of interconnect to all of their covered lives and frankly we will be working with them to develop low cost solutions that will make that possible for all of the VA personnel.

So I think the message might be a negative message but it’s a story that has been well understood for quite some time, the VA does have a large population of covered lives and they have very few facilities, in fact just about 152 hospitals. So, it’s not possible to bring everyone to brick and mortar facility. So we think we operate right at the center of what could possibly be a good solution for this situation.

Unidentified Analyst

Okay, thanks Ben. I appreciate that.

Operator

The next question comes from (inaudible) of Taglich Brothers. Please go ahead.

Unidentified Analyst

Hi. I apologize if this has already been covered; I was a little late to the conference call. But can you provide any additional color on the Yankee Alliance group contract with respect to potential revenues and time to revenues? Thanks.

Ben Benjamin

Sure. I will be glad to do that, because we see going forward that Yankee Alliance is the key opportunity for us, in fact diversify our base of customers. This is a focus of ours as we move forward. The VA is a good partner but they represent a significant peak of the revenue opportunity we are presently speaking to have. So we welcome the Yankee Alliance. And what’s unique about the Yankee Alliance is they are not just typical GPO and that very aggressively market to their member organization.

So we signed that contract in that contract a couple of weeks ago, and already we have been actively marketed to the 162 or so hospitals that are part of this member group. I would be very, very surprised if we weren’t able to sell to 40 or so of those member hospitals. So we are excited about this. And we believe we will be able to demonstrate the effectiveness of our products through contracts with the individual hospitals in the very near term.

Unidentified Analyst

Okay, thank you.

Operator

The next question comes from [Khalid Vivian] private investor. Please go ahead.

Unidentified Analyst

Yes, a couple of questions. The first one if I can, and also a reference to Yankee Alliance; I was just looking at on the website briefly at their affiliate members. And they have, it looks to seem to be about 15,000 and 16,000 institutions. I think you touched on maybe 150 hospitals, they are out there about 32,000 homecare institutions et cetera, et cetera. I was wondering if you ever had a chance to market your products to any of those other thousands of other institutions that they have members out.

Ben Benjamin

No, that's a very good observation you've made. What we have done [Khalid] we have a very small salesforce, what we have done is we have focused on a project on the big advantage for the box. So we've gone after the hospital groups. Both our products will be sold into the hospital member organization. As far as it go, with respect to the other organizations, the other member organizations. Lastly the telehealth products will be the products that we would market for those people.

So, what we've done is we've done for the big advantage order box, what we have thought to do is identify the target hospitals that have been looking to the solutions. And since we are the only qualified vendor that provides this powerful product will be very aggressive with those hospitals.

So, having a small workforce we have set the priority around the hospitals and we have immediately target some 20 or so hospitals.

Unidentified Analyst

Okay. Thank you. One last question, just I'm sure you saw on the news today that I think it’s [Kinder] just trying to get to buy (inaudible) for some reason they won't sale. And it seems like 60% premium in the healthcare company like that, what would this say to you, or do you have some type of insight into what's happening in the industry that these type of things happening even they referenced to the trouble that the VA is having, just around so much news around the services that you provide.

Ben Benjamin

A very different situation and what's going on in the commercial home health agencies market, but (inaudible) has also hospice capability they service about 327,000 patients on a daily basis. The problem that we're seeing and we're experiencing it with our order and referral management product is that the Affordable Care Act has put a lot of pressure on home health services, they have put a lot of pressure on hospitals. What happen is people are reacting to that in various ways, you are seeing a consolidation of those companies and you're seeing some people who are choosing just completely exit the business.

So we think that was going on there with the KinderCare move, fairly KinderCare is a more profitable company and they are connecting their muscle to do what they see as being right for their company. We service (inaudible) today and we don't expect that they are getting in fact we would expect that the impact would likely be positive.

Unidentified Analyst

Right. Thank you.

Operator

The next question comes from Bradley Donner of J.P. Turner. Please go ahead.

Bradley Donner - J.P. Turner

Hey guys. Hey Ben in the opening remarks, you'd mentioned about the central state contract there would be hospital patient to discharge. You started citing different numbers in terms of the benefits for that contract, I started to write some of them down, but I missed some of those points. Could you go over those again for me please?

Ben Benjamin

No, I would badly do so. What we found in studies that we did with central state was that in a test the numbers that they were able to realize exceeded our expectations. What we saw was in terms of their ability to play stations they were able to do so 54% more effectively than they would have done without the tools.

Bill Marshall

Hey Brad I’ll go slow for you. Basically they were looking to measure three different areas, and one they talked about if the time is so to create and send out the referrals. And they reduced that by 85% plus over what it used to take them to do that when they weren’t using our solution. So, that obviously frees up a lot of time for them and reduces their costs. So with 85% improvement and creation and spend time overheads then they saw a 54% plus improvement in the actual patient placement time and obviously that’s the time for them to locate the facility and actually get a confirmation that that facility can accept the patient or that care provider can provide the outpatient services that that patient might require if they’re just sending them home. And then they also as you would expect saw a 93% plus reduction in their fax costs because as we’ve said on prior calls, most of the activity that goes on now is phone calls and faxes and that kind of stuff which makes it very inefficient process. So we were not surprised to see 93% plus reduction. That case study is actually up on our website now. Where would they find that stuff?

Peter Seltzberg

Case studies?

Bill Marshall

Yes.

Peter Seltzberg

Under case studies which is [on website].

Bill Marshall

So it’s under if you go to our website there is a section that has the case studies in it.

Peter Seltzberg

Under media room, case studies.

Bill Marshall

Media room, case studies. So if you want to read the full study you can do that.

Bradley Donner - J.P. Turner

Okay I appreciate that. In terms of the aggregate dollar amount and what these guys or maybe some other group might be saving with this obviously would probably vary from group to group but as far as center state is concerned has there been feedback on the actual dollar amount that you saved, you are talking about 85% reduction in the time of sending our referrals, 54% improvement in the patient placement time and 93% reduction in the fax costs in terms of the aggregate what would be the percentage in savings that this group realizes by incorporating your product?

Bill Marshall

They haven’t given us a number, what they told us is what they have done is they have redeployed those resources to do all the other things that they couldn’t get done before. And so they are doing a lot more with less but we have not heard a dollar amount. What we do know is that and I think we have mentioned this before, they initially signed up for a much lower level of service than what they actually started using and they are now exceeding the top level service. I mean we have said before we price our hospital discharge at $5,000 a month for a 1,000 discharges and then you pay $5 a month per discharge over that and they are exceeding their top level there. And they are not having any problem paying the bill.

Bradley Donner - J.P. Turner

Now the only product that we have sold them so far is the hospital discharge product correct?

Ben Benjamin

Correct.

Bradley Donner - J.P. Turner

Have we used this product as a lever to maybe sell other products to them like the Inscrybe products or telehealth or anything like that?

Ben Benjamin

We have, Brian. They are very interested in our telehealth product and in fact they discharged to a group of wholly-owned agency called [Central Utility]. And we have been in conversations with them about using our telehealth product. So we have the ability to outsell the telehealth product. I don’t know about the likelihood. The Referral and Auto Management product will become part of what the -- in fact we have tried in Center State season with respect to internal telecommunications between the outpatient services and hospitals itself.

So we think we will have the ability to up sell all of our products to hospitals that use the discharge product.

Bradley Donner - J.P. Turner

I got believe with that data coming out and that’s case study, obviously that’s pretty important data that you could show other potential customers. I got to believe you’re using that as a tool to try to market that product to other hospitals. Where do we stand, do we have other potential customers in queue that are looking at this and where do we stand with that?

Ben Benjamin

Well, we do. We’re talking about number of hospitals and Center State has also been exist reference customer for us. So one of the things we are doing with the Yankee Alliance contract is in fact we use in Center State as a reference customer and they think very worried about that.

So we are looking to pursue the hospitals that come to us through the Yankee Alliance, but there are other hospitals that we are actively working with at the present time.

And they have been very good in terms of given us the time to talk with potential target customers; we expect that will result in a number of new contracts for us in the coming weeks and months.

Bradley Donner - J.P. Turner

And right now that's the only contract we have with the hospital discharge, patient discharge is this center stay correct?

Ben Benjamin

Yes, it's correct.

Bradley Donner - J.P. Turner

Now it seems to me like, I got to believe what those types of savings and given the pressure that a lot of these hospitals are feeling in terms of cutting costs. I'm surprised people aren't just coming and knocking your door and I'm trying to streamline their operations. What negative feedback are you getting from these hospitals or resistancy you're getting from these people, but saying hey we don't want to do this, not here not now.

Ben Benjamin

We aren't getting any of that. But let me point out that this really became law last October. I have to look at a lot of priorities they work in. So what we are finding is there are lots of interest, we are working with very, very big hospital groups in a Metropolitan New York City area.

And although they see the value and this tell us their advice, they just can't find a bandwidth to actively give us high priority and we're working through that, we're getting closer. We have some things in Metropolitan New York area that we are close to upcoming with some agreements around.

So, I think the reaction has been very positive not only to our experience, but in fact the market and the products that we have chosen as we have gone for out hospitals. Because hospital is a place where they purchase so many things that they don't generally like to talk about individual items or negotiate on individual items.

And that's why it’s so important to work with the GPOs because they want to buy hundreds of things at a time.

However, this product is so critical, the liability that they have with respect to readmissions that frankly speaking, we had access a lot of big hospital in proper country, but we've been focus here in the Northeast largely in the New York City area. So we think, we've been received really well. We haven’t any push back and we expect that we're going to have additional hospitals very soon that we could use as direct wins customers.

Bradley Donner - J.P. Turner

All right, thanks for the info.

Operator

The next question comes from Chad Wilson of Westlin Capital. Please go ahead.

Chad Wilson - Westlin Capital

Hi there. My question is a specific here, the cash cycle on the equipment sales. I'm just sort of curious how that gets financed because my understanding is hospital tend to be, they picked them they move all to warp to pay their vendors. So how do finance, if you're selling these equipment into the hospital market. How do you finance, how would you finance a sharp uptake in equipment sales as far as if those will create large receivables?

Ben Benjamin

Well Chad, we have some relationships, where if we have a firm order from hospital, we would be able to offer lease plans into those hospitals. So we would pay upfront and the leasing company would quite from hospital overtime. So the, that issue, it’s not going to be an issue, when we start getting firm orders for equipment. Now most a lot of the hospitals that we're talking to very interested in IVR product which doesn't require a big investment and equipment.

And up to now what we’ve done is we’ve obviously funded the inventory and funded the builds with our own capital. And we have invested as you saw in my remarks I mean we have invested, continue to invest in keeping inventory on hand so we can continue to build units ahead of demand.

And the other thing we think we talked about on the last call, as we’ve continued actively reduce the cost of the product. So our cash needs around the product to going down, but we’re obviously continuing to buy the components necessary to build the inventory we need. And if the economy improves we’re also seeing the lead time shorter a little bit. So we think that that is -- that problem is not going to keep us from addressing the market demand and we hope that it’s that we end up situation where we have to and provide financing these folks.

Bill Marshall

And then one thing I may also add that that is in conflict with what we believe is. As we service today more than six hospitals with all the telehealth products and they say their monthly bills that we charge to them every month for maintaining the patients and the example in a time we went, and so we’ve not seen what you’ve characterized as a typical to hospital.

Chad Wilson - Westlin Capital

Okay, all right. Well thanks very much. I appreciate the answer.

Operator

The next question comes from Dan [Brownstein], private investor. Please go ahead.

Unidentified Analyst

Hi, guys. How are you?

Ben Benjamin

Good.

Bill Marshall

Very good, Dan.

Unidentified Analyst

So, I’ve been on the call maybe for a year or two just listening it seems like the outlook is consistently positive. But I know I asked Bill this question a few quarters ago around the breakeven quarter the big mystery to us all and I still come up with like a 5 plus million dollar revenue figure for the quarter which is about more than what we have year-to-date in this fiscal year. So, do you guys have a roadmap as far as time lines or is there a vision? I mean I am hoping to see that before I am gray but I want to hear from you guys?

Bill Marshall

Well yes Dan, there is. And I think you are calculating -- your number based on the current gross margins and things like that. Our numbers is smaller than that. And we have actually pushed our breakeven target out to the second quarter of fiscal 2015 just to make sure that we can get there. We think we could do it sooner. And when you are looking at what we need to do is we really need to generate another using the higher number that I said. We really need to generate another $400,000 a month in services revenues. And that could come from our hospital discharge, our referral and order management which are all service revenue businesses or the services component of our telehealth product.

So depending on the mix of revenues, that number could shrink quite a bit. And right now we are burning even without adjusting for the working capital gyrations and in the last quarter we burned about $400,000 and that was a reflection of the decline in revenue for the quarter.

Unidentified Analyst

Yes, I mean I also see the year-on-year increase in the margins which looks great, 6%. Should that be a -- where do you see that gross margin level off as far as like longevity with the services versus telehealth?

Bill Marshall

Well, we expect that to continue to grow and I think we’ve said this before. I mean when we do our forecasting, we flat-line our gross margins at a mix of about 70%. And we think we can get there within the next 6 months to 12 months as we add services revenues. Now, in reality the service components of our business can contribute a much higher margin than that but we hold it to about 70%, just to be conservative.

Unidentified Analyst

Okay, thanks.

Operator

(Operator Instructions). The next question comes from [John Colin], private investor. Please go ahead.

Unidentified Analyst

Hey Ben, how are you doing? Couple of questions, guys. The question one is we are noticing that we are having lower revenue versus higher revenue and higher growth revenue. So, I want to know where the sustainability is in your revenue growth that hasn’t been happening over last six months.

The second part of the question was, I thought that next quarter was going to be the quarter where we were going to have a cash flow breakeven. And I guess the third part of my question is based upon what you know today, I am concerned you are going to need more money and another capital raise and that will be very dilutive to the current shareholders.

So I guess those three questions you know, we talked the great thing about the year-over-year and quarter-over-quarter but our revenue has gone down the last two quarters is very disappointing. Maybe someone could -- it's great stuff to talk about all these great things, but the revenue seems to be going down.

Bill Marshall

John, we saw the revenue decline quarter over quarter and even year-over-year primarily in our hosted software services business. And we have explained that. And what we're seeing is that that's market consolidation and the competitive bidding process for healthcare products is impacting some of our customers. And what we've seen is that's kind of bottomed out and we've actually seen transaction volumes start to turn around in the March and April and so far into the May timeframe.

So, we think that the decline in those revenues is over, we've been through this before and we'll see an increase in those revenues moving forward. And to add to what I just said, I mean those are software revenues, we don't have to add to any process to get those revenues.

Now, in terms of our cash flow breakeven goal, that was predicated on the -- both we were seeing at the VA and we talked about obviously the security update last quarter that we had to make. And obviously that slowed our revenue growth and we talk about the fact that the revenues were pretty much in line with where they were last year, but they were down from the second quarter, a couple of hundred thousand dollars. And that's obviously caused us to move our cash flow breakeven target out for the second quarter of fiscal 2015, which in essence is the quarter ended December 31.

With respect to capital, obviously that's really driven by how the revenue ramps, but we think that if we need any money, we can use that and not to lose the shareholders.

Unidentified Analyst

And I guess the only…

Bill Marshall

Does that answer your question?

Unidentified Analyst

Yes, it does, but I'm still very concerned with the reduction of sales quarter-quarter-over-quarter I think we are all very excited it's been a long time, I know Ben a long time, when you did the 1.9 million or so that we're going to see two and two and a quarter even if wasn't a lot. And it's been very disappointing in the last two quarters and I understand the last one but with the security and with getting in with the VA. But this one really shocked me that you guys have really, really disappointed in terms of the revenue growth, it’s going down not up. And the first gentleman -- last gentleman asked a great question; it's been a couple of years. And we need, I figured the same thing, you need like $3 million, $4 million a quarter in revenue just to breakeven and the burn rate at -- you’re burn [6 and change] million for the year in losses, doesn't mean you have much, much slack after December, if you haven't turned the corner, you’re going to need a substantial capital raise in the first quarter of first quarter of '15?

Bill Marshall

Well, I can follow your analysis, but I think that it doesn't really take into consideration the nature of where we think our revenue is going to come from. As I mentioned to the last questioner, we really need to close a gap of about $400,000 a month in services revenues. We think that things like the Yankee Alliance relationship, they’re focused on selling the services that are primarily software services as well as our telehealth products and services going forward and we think that’s going to help us to grow our revenues more quickly moving forward. So, we share your frustration with the pace of the revenue growth and the decline in the revenue in the last two quarters. But we think we’ve turned that corner and we can start moving in the right direction again.

Operator

The next question is a follow-up from [Khalid Vivian], private investor. Please go ahead.

Unidentified Analyst

Yes. I had a question, but first if I can just make a comment on the last person’s comment. I think you did a good job to try be really, really negative, but one thing most investors know that when you compare revenue you don’t compare them quarter-to-quarter you compare them year-over-year. And in that rate you are 30% ahead of last year, we don’t expect small company like yours not to have incremental hiccups and whatever the market is dictating. So I just kind of want to balance out that no one in the investment community really expects or really measures quarter-to-quarter what you did this quarter compared to what you did last quarter, it’s always year to year. And the last quarter which is a second quarter for you, you beat the previous year just like you did the first quarter. So I just want to kind of balance that out a little bit. And then the question is should the CEO I guess most small companies like this they may be jump to have disruptive technologies they always get to a point where the market and their technology converge or they meet so cause some sort of extraordinary growth the last time they call it an inflection point and last time the management sees it before anyone else. If this is something we could even consider in there not too distant future how close do you think you are to using a term or terms like inflection point for your industry and more specifically your company?

Ben Benjamin

I think Khalid it’s a good question and it’s one that we believe the answer to your question is no, the time is now. What has happened in this industry it’s more than just a disruptive technology being applied what we have there really a set of forces come in together to create a tremendously great opportunity and that is the Affordable Care Act has driven certain performance requirements of healthcare providers and those achievements to keeping performance level is not going to be possible without further instrumentation of IT and devices the work to bring about these efficiencies. And we believe we have the right assortment of products the other thing is around the [peers], everything in healthcare is driven by the [peers] of course Medicare and Medicaid being the biggest of the [peers]. And what we have seen is people are recognizing the benefit of our product and the technology that underlies those products and they are realizing the efficiencies that they create. So now we are seeing the reimbursement that we have been waiting for beginning to happen. So the results -- we will focus largely in the VA as far as our telehealth products are concerned. And in this quarter, we have seen more and more opportunity in the commercial marketplace especially as it pertains to hospitals. So the time is now, we think the inflection point is now and we think our company is well positioned. We actively believe that we’ll accomplish what we are saying here with respect to breakeven and in fact rising I believe north of where you’d like to see that.

Unidentified Analyst

Thank you very much. I was kind of thinking that you know that you’d be thinking that but thank you for your conformation. One more just last quick question, I recognize, I am pretty good at recognizing asking to the [many] quite few places but I don’t recognize yours, can say where are you from?

Ben Benjamin

I am from Brooklyn. Actually I am from the Caribbean, went to school in Brooklyn, but I am from the Caribbean.

Unidentified Analyst

Okay. It was the Caribbean that I heard again, okay. Thank you very much, sir.

Ben Benjamin

You are welcome.

Operator

The next question comes from [Mark Frederick], private investor. Please go ahead.

Unidentified Analyst

Hey, guys. I am very pleased to see some positive developments, particularly the Yankee contract and the extension by the VA, terrific news. I also was pleasantly surprised by the balance sheet. It looks to me now based on the efficiency that you guys have been able to create that we’ve got cash for at least about four quarters, not taking into consideration any growth revenue at all. So I think that is probably one of the better positions you’ve been in a while. Am I looking at that correctly? I think that was pretty positive.

Bill Marshall

I think there are scenarios where we think that’s true. I think we believe we can get the breakeven and it depends on how aggressive we get.

Unidentified Analyst

And that looks to me now that we are going through about a $1 million a quarter, we've got over [$4] million of working capital and we’re funded for about a year, is that accurate assuming there is no extraordinary items or exceptional opportunities that come up?

Bill Marshall

We think that's a reasonable analysis, yes.

Ben Benjamin

Mark, one thing you have to be careful about and Bill has been careful in responding to you. We have front end cost that can be different depending on what the product mix is? And as you know we can have some high cost of inventory. It impacts most of those sales of the EHC, the Electronic House Call.

Now what we are seeing especially in recent announcements we've made with regard to hospitals is they are using more and more of our tablet products. And so these products fulfillment is simplified and less costly.

So, if the mix is concentrated in that area, we don't have a problem. If the mix is such that most of the products being sold, the high inventory cost items are heavily front end loaded, then we can run out of breath and we’ll have to do some kinds of things that Bill alluded to earlier, might resemble something with some debt.

So, that is the planning that we're on going right now and exactly how far we go will depend on what the mix is of products we sell at the outset.

Unidentified Analyst

And just to follow up, I understand that there has been a big trend towards IVR and in addition we should only have that problem that we're [costly] running out of inventory and we're also near this quarter as that you guys are now using a leasing company to be able to realize or bring that cash back on to balance sheet quickly. So to me that sounds all very good if I’m looking at it correctly?

Ben Benjamin

We have leasing companies lined up, but we can't use that as a VA for example, because they don't give as firm orders. When we get to the commercial market and they give us firm orders that will be something we can do.

Unidentified Analyst

Yes, but if they’re taking that much more product and running out of inventory then our revenue is going to go up [until offset] some of the potential additional expenses associated with that product?

Ben Benjamin

Yes.

Unidentified Analyst

Very good, guys. Thank you.

Operator

The next question is a follow-up question from Bradley Donner of J.P. Turner. Please go ahead.

Bradley Donner - J.P. Turner

Hey guys, I wanted to go back to the revenue issue that somebody, prior caller had brought up. Obviously, the trend in the last couple of quarters has been coming down a little bit. And obviously you'd stated the reasons for that. Given that we’re about halfway through the quarter that we're in right now, I got to believe that you guys have a pretty good sense on what the horizon looks like, certainly what's transpired in the last six weeks and also what it looks like in that horizon over the next two, three, four, five months and beyond at least with existing business that you have. I’m also guessing that Bill you a pretty good handle on that reoccurring revenue that's already embedded in there and that's for you coming up with $400,000 makeup number that you're talking about. Is that correct?

Bill Marshall

Well, the $400,000 number is historical. So, but I would expect that the trends would -- and I said, we would expect to see that trend downward.

Bradley Donner - J.P. Turner

Right. As far as the trends go on the revenue given the fact that you already have some sort of vision and what's transpired in the last six weeks and also looking forward you have a pretty good idea of what’s coming at us now. Is it safe to say, are you comfortable saying that downward trend in revenue we’ve experienced in the last two quarters will indeed be reversed or starting to move back up again?

Bill Marshall

Well I think we’ve said that in our comments, but I’ll shy away from giving any forecasts.

Ben Benjamin

What we can say Brad is one of the things we’ve seen and like it is [Colin’s] earlier question about the successive quarters and the revenues is that in fact the VA, the issue we had in December, we expected based on our [fallen] customers in the VA, the various regions, we had expected that they would have ramped up much more quickly in the previous quarter than they did. So they moved up a bit slower than we expected.

What we have seen that is very encouraging and we think we will move the numbers forward going forward from this point is that we have brought on some large regions into the use of our products. For example, we’ve signed up [Westerly] in the region which is the biggest region in the country. So they are now beginning to use our product. We’ve signed up Columbia, South Carolina, which is a very big population of patients and they’ve just begun to use our product. We’ve signed up the [folks] in Brockton, Massachusetts and we have even done so in our neighborhood in East Orange, New Jersey, we’re beginning new VA patients on. So, we’re encouraged by what we see the future likelihood is with respect to the new regions in VA that we’ve brought in to our product list. So that’s the reason why we’re very optimistic about this quarter and beyond.

Bradley Donner - J.P. Turner

So are these new signups have all been within the last 30, 60, 90 days?

Ben Benjamin

Yes that happened since February.

Bradley Donner - J.P. Turner

Great and okay, no further questions. Thanks.

Operator

(Operator Instructions). The next question is a follow-up question from Chad Wilson of Westlin Capital. Please go ahead.

Chad Wilson - Westlin Capital

Yes, had a follow-up, you mentioned that the VA, you can’t use the leasing for the VA because its day out from orders, what’s your cash strategy vis-à-vis the VA, is there any way of managing the cash cycle there?

Bill Marshall

Well yes as I said earlier, we have made an investment in inventory and we have component finished goods and/or component parts on hand to stay ahead of the curve even if the pace of our, as we would expect the pace of our sales moves up and the VA is a very, very quick payer. So we don’t have to carry that investment very long once we’ve build and sold the products for them.

Chad Wilson - Westlin Capital

Okay. So they are quick payer, alright okay, just wanted to clarify that point. Thank you very much.

Operator

The next question is a follow-up from Dan (inaudible) private investor. Please go ahead.

Unidentified Analyst

Ben, I just want to follow-up on the comments you just made about the VA regions, you talked about the new regions coming onboard, so how many regions are there within the VA throughout the country?

Ben Benjamin

There are 21 regions and they range all the way from Puerto Rico and the Virgin Islands to Guam. So it may and all the way to Guam.

Unidentified Analyst

Okay. And from a business perspective how many regions are we doing business in?

Ben Benjamin

We are present in approximately 15 to 17 of the regions.

Unidentified Analyst

Okay, that’s good.

Ben Benjamin

However, there are about eight major regions where the population is focused in and that’s where the vendors who are suppliers to the VA really compete for patients, and we have been very competitive [Westerly] is a very good example of that Columbia, South Carolina, very good example of our ability to compete in those areas.

Unidentified Analyst

Great, all right, thanks, Ben.

Operator

There are no further questions at this time. I will now hand the call back over to management to close the call.

Ben Benjamin

Thank you very much, operator. Thank you for participating in today’s conference call. We appreciate your interest in our company. Looking at the IR calendar, we will be presenting at the B. Riley conference in Santa Monica on May 19th and the Newport Coast Securities conference in the New York on June of 13.

We’ll also be planning some investor of market interest during the next few months. Should you have any additional questions please feel free to call Peter Seltzberg; or 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

This concludes today’s conference call. Thank you for your participation. You may disconnect your lines now.

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