Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Streamline Health Solutions (NASDAQ:STRM)

Q3 2012 Earnings Call

December 07, 2011 11:00 am ET

Executives

Landon Barretto -

Stephen H. Murdock - Chief Financial Officer

Robert Watson - Chief Executive Officer, President and Director

Analysts

Joseph Mondillo - Sidoti & Company, LLC

Alex Silverman

Sam Rebotsky

Operator

Greetings and welcome to the Streamline Health Solutions Third Quarter Earnings Teleconference. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Landon Barretto. Thank you, sir. You may begin.

Landon Barretto

Good morning. Thank you for joining us to review the financial results of Streamline Health Solutions for the third quarter of fiscal year 2011, which ended October 31, 2011. As the conference call operator indicated, my name is Landon Barretto, of Barretto Pacific Corporation. We're the Investor Relations agency for Streamline Health.

With us on the call representing the company today are Bob Watson, President and Chief Executive Officer; Steve Murdock, Chief Financial Officer; Gary Winzenread, Senior Vice President and Chief Operating Officer; and Rick Leach, Senior Vice President and Chief Marketing Officer.

At the conclusion of today’s prepared remarks, we'll open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it from the company’s website at www.streamlinehealth.net or numerous financial websites.

Before we begin with the prepared remarks, we submit for the record the following statements: Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements. The forward-looking statements contained herein are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein.

These risks and uncertainties include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with the vendors that resell the company's products, the ability of the company to control costs, availability of products produced from third-party vendors, the healthcare regulatory environment, healthcare IT system budgets, availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results and other risks detailed from time to time in the Streamline Health Solutions' filings with the U.S. Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that said, let me turn the call over to Bob Watson, President and Chief Executive Officer. Bob?

Robert Watson

Thank you, Landon, and good morning to all of you participating on today's call. We thank you for your time today and for your continued interest and support of the company.

First of all, I'd like to highlight the increasing momentum that we have gained. Over 3 full quarters, it has become apparent that we have made meaningful achievements against our 5 key strategic initiatives, including the very important financial one, which we outlined earlier this year. I will go into more detail on this later in the call.

Before I turn the call over to Steve Murdock to review our Q3 financial performance, I'd like to briefly comment on the announcement we made earlier today related to the acquisition of Interpoint Partners. As outlined in the press release this morning, we have signed a definitive asset purchase agreement with Interpoint, which is scheduled to close shortly, subject to the satisfaction of standard closing conditions. Interpoint delivers information technology solutions that have been shown to positively impact their clients' ability to accelerate cash flow, improve accounts receivable levels and manage payment denials and audits. The acquisition will deepen our product offering in the business intelligence and revenue cycle space. This acquisition also advances Streamline Health forward in its goal of becoming a world-class healthcare information technology company. I will provide more detail about this transaction later in the call.

At this point, I'd like to turn the call over to Steve Murdock, our Chief Financial Officer, for a summary of our financial results for the quarter. At the conclusion of Steve's remarks, I'll provide additional perspective on the results of the quarter, and then we'll open the call for your questions. Steve?

Stephen H. Murdock

Thanks, Bob. I'd like to highlight the more significant aspects of the financial results for the third quarter ended October 31, 2011.

Total revenues for the 3 months ended October 31, 2011 were $4.3 million compared to $4.5 million in the comparable quarter of 2010, a decrease of 4%. On a year-to-date basis, total revenues for the 9 months ended October 31, 2011 were $12.6 million compared to $12.7 million for the comparable prior year period. Professional services revenue decreased 15% over the comparable third quarter, while on a year-to-date basis, professional services revenue increased 6% over the prior year comparable 9-month period, primarily as a result of meeting milestones on systems implementations and services sold in prior quarters. Recurring revenue for maintenance contracts increased $270,000 or 13% over the prior comparable third quarter as a result of revenue recognized from backlog and from commencement of maintenance period subsequent to the third quarter of 2010.

For the 9 months ended October 31, 2011, revenue for maintenance contracts increased 13% over the prior comparable 9-month period. Additionally, recurring revenue from software-as-a-service increased $64,000 or 7% over the prior comparable period, and year-to-date software-as-a-service revenues increased 6% over the prior year-to-date period as a result of achieving go-live status for one large subscription customer sold in 2010; a large add-on workflow solution, which reached go-live status in October 2011; contractual increases in storage fees for several clients; client conversions to software-as-a-service from traditional licensed products; as well as revenue recognition of software-as-a-service backlog.

Total operating expenses for the 3 months ended October 31, 2011 were $3.9 million compared to $4.3 million in the comparable quarter of 2010, a decrease of 9%. For the 9 months ended October 31, 2011, operating expenses were $12.5 million compared to $13.8 million for the comparable prior-year period, a decrease of 9%. The decrease is primarily a result of a decrease in capitalized software amortization, as older components of previously capitalized software became fully amortized in 2011. The overall decrease was somewhat offset by increases in stock-based compensation and accruals for severance costs. The cost of system sales for the third quarter was $583,000, a 21% decrease over the prior comparable quarter. In our year-to-date basis, cost of system sales decreased 22% over the prior comparable period. The decline was primarily a result of a decrease in amortization of capitalized software as previously mentioned, as well as a decline in proprietary software sales over the prior comparable periods. The cost of services, maintenance and support was $1,086,000 as compared to $1,347,000 for the prior comparable quarter, a 19% decrease. And year-to-date, the cost of services, maintenance and support decreased 13%. The quarterly and year-to-date decreases were primarily a result of staff reductions, as well as a reduction in cost of third-party provider maintenance contracts over the prior comparable periods.

The cost of software-as-a-service was $480,000 for both the third quarter of 2011 and 2010. And on a year-to-date basis, cost of software-as-a-service decreased 5% over the comparable prior period. The cost of software-as-a-service is relatively fixed but is generally subject to annual increases for the goods and services required. The year-to-date decrease is a result of renegotiation of third-party license and maintenance agreements, as well as other cost saving initiatives implemented by management.

Selling, general and administrative expenses for the third quarter were $1,495,000 as compared to $1,362,000 for the prior comparable quarter. On a year-to-date basis, selling, general and administrative expenses were $4,742,000, a 4% increase over the prior comparable year-to-date period. The increases over the respective comparable periods are a result of increases in equity awards, performance bonus accruals, investor relations expenses, trade show expenses and severance costs.

Product, research and development expenses for the third quarter were $304,000 compared to $400,000 for the prior comparable quarter, a decrease of 24%. For the 9 months ended October 31, 2011, research and development expenses were $1,064,000, a decrease of 26% over the comparable prior year-to-date period. When examining total research and development expenditures, capitalized software development costs should be considered. The company capitalized $579,000 in software development costs for the third quarter as compared to $668,000 for the prior comparable quarter, and capitalized software development costs of $1,970,000 for the 9 months ended October 31, 2011 compared to $1,942,000 for the comparable prior year-to-date period. Therefore, total research and development costs for the third quarter were $883,000 or a 17% decrease over research and development costs of $1,068,000 for the prior comparable quarter and with $3,034,000 or a 10% decrease over the prior year-to-date period. The decreases in research and development costs are primarily due to an increase in costs eligible for capitalization, decreased product support costs and reductions in development staffing as we reached the commercialization of our 5.1 release.

The company incurred an operating profit for the quarter ended October 31, 2011 of $364,000 as compared to an operating profit of $144,000 for the prior comparable quarter. For the 9 months ended October 31, 2011, the company incurred an operating profit of $130,000 compared to an operating loss of $1,084,000 for the comparable prior year-to-date period. The $1,214,000 increase in operating profit is a result of items previously discussed. As a result, the company incurred a net profit for the third quarter ended October 31, 2011 of $296,000 and a net profit of $8,100 on a year-to-date basis or $0.03 and $0.00 per share, respectively, compared to a net profit of $95,000 or $0.01 per share in the third quarter of 2010 and a net loss of $1,158,000 or $0.12 per share on a year-to-date basis for the prior year.

New bookings for the third quarter, primarily consisting of professional services and third-party hardware and software, were $1.5 million. Maintenance renewals for the quarter were also $1.5 million. Total backlog at the end of the quarter ended October 31, 2011 was $16.8 million compared to $19.5 million at October 31, 2010 and $17.6 million at January 31, 2011. The majority of the backlog is related to software-as-a-service and maintenance contracts versus software licensing sales. The decrease over the prior comparable quarter is primarily a result of the timing of the receipt of signed annual maintenance contracts or payment of renewal invoices, where certain clients either paid their renewal invoice or signed the maintenance renewal contract at an earlier date. Third quarter year-to-date software-as-a-service revenues are primarily generated from previously reported backlog.

In our earnings release, we've included a table reconciling our net loss to the non-GAAP financial measure of adjusted EBITDA. We define adjusted EBITDA as earnings or loss plus the interest expense, tax expense, depreciation and amortization expense of tangible and intangible assets and stock-based compensation expense. Given the relatively large amount of noncash charges, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings. For the 9 months ended October 31, 2011, adjusted EBITDA was $2,625,000 compared to a corresponding adjusted EBITDA of $1,910,000 for the prior comparable year-to-date period. We will continue to provide this non-GAAP financial measure in future earnings releases.

Cash balance at October 31, 2011 was approximately $300,000 with $1.75 million drawn on our line of credit, with an excess availability on our line of credit of $1,195,000. Our cash cycles are still very dependent on seasonal patterns of prepaid annual maintenance fees from our customers, and we will continue to use our availability on our line of credit to supplement our cash needs in those quarters where prepaid maintenance fees are not as substantial as other quarters. We continue to monitor our expenses, cash balances and collections carefully to ensure that we remain on plan. We believe we have the appropriate capital resources available to operate our business going forward.

That concludes my review of the financial results for the third quarter. Let me now turn the call back over to Bob Watson. Bob?

Robert Watson

Thanks, Steve. As it relates to quarter 3, we are pleased with the net income for the quarter of almost $300,000 and the $1.2 million improvement in year-to-date net income over last year on basically flat revenue for the period. As we have stated previously, we believe that 2011 is the year to position Streamline Health for significant annual growth rate consistent with other high-growth healthcare information technology companies.

Our revenue forecast for the full 2011 fiscal year remains flat to down slightly. However, as we postulated earlier in the year, we are beginning to see meaningful improvements in adjusted EBITDA despite the burden of high severance costs as noted earlier in this call and the costs of on-boarding new executives and associates. I also want to remind you that as we shift our focus to software-as-a-service transactions, revenue recognition will be delayed due to the lag between the time when the contract is signed and implementation. This lag can be as much as 9 months. That being said, we believe sacrificing near-term license revenue for the long-term predictability of software-as-a-service revenue is the correct business model. Finally, Steve noted year-to-date adjusted EBITDA is up 37% from the corresponding period in 2010. We consider this material and meaningful progress.

During our prior calls, we introduced the 5 strategic areas of focus as we transform Streamline Health during 2011. I would like to take a moment and comment on our progress in each of those points. For purposes of level setting what those points were, I will summarize them. First, becoming a market-facing organization; second, building a sales and distribution network to assure that Streamline Health is aware of and is actively working to secure every new healthcare information technology opportunity that falls within the scope of the capabilities of our product set; third, leveraging our core competency to broaden the scope of our product portfolio and expanding our recurring revenue stream within our current client base; building the human capital required to accomplish the previous point; and to continue to drive cost out of our infrastructure.

As we did in previous quarters, we continue to build a complete understanding of the needs of our current clients specifically and of the overall marketplace in general. During the last quarter, we have accomplished several important client-facing projects. We have conducted 3 client webinars from a series of 4 that have been scheduled. These are designed to share product information with our clients and solicit their feedback on those products. Despite directional information exchange, we'll result in faster adoption of new products among our client base and assist our product team with important feedback to help them in the development of those products.

In addition, one of our data partner clients for our Epic Integration Suite cohosted a webinar with us to explain to our other Epic clients how those important integrations work. Our executive team and other senior managers continue to meet with clients on a regular basis at their sites and at industry events like the annual AHIMA conference that was held in October.

We continue to actively work to secure every new opportunity that falls within the scope of the capabilities of our solution set. We reported last quarter that we added $6 million for a sales pipeline. And in the third quarter, we continue to add well-qualified new business opportunities to the pipeline at a similar pace. These opportunities have come primarily from our e-mail marketing campaign and trade show activity, but one significant opportunity came to us as a result of work we have done in partnership with GE Healthcare and another came as a result of the successful integration work we have done with Epic. As you likely know, our Epic Integration Suite was recently announced as commercially available. Additionally, we will continue to be active in conference and trade shows in which we have participated in the past, such as HIM and AHIMA, and will likely add 1 or 2 more, such as HFMA, as our product mix expands more into the business intelligence and revenue cycle space. We also continue to recruit additional seasoned sales executives and are on track to add new resources to our team in Q4.

I'd also like to comment on the status of our important partner channels. We have seen some strong progress in this area this quarter. As I just mentioned, we have been selected as a vendor of choice by a current client of GE Healthcare and are actively working to secure that agreement with the GE sales team. We continue to work with a Standard Registered leadership on the terms of revised relationships that will give both parties greater financial upside and improved processes. We continue to focus on other opportunities that we have been advancing through the complex process of due diligence and negotiation and expect, as I noted in our Q2 call, to have one or more such arrangements complete during the fourth quarter of this year.

Third, we continue to leverage our core competencies to broaden the scope of our product portfolio and expand our recurring revenue stream among our current client base. Since our last earnings call, we have made significant progress in this area. Specifically, we've secured a number of new agreements from existing clients during and subsequent to the end of the third quarter, including an agreement with Nationwide Children's Hospital in Columbus, Ohio that extended their staff term for an additional 5 years while adding FolderAnyWare, that is our non-patient-centered document management system, and our CharityWare workforce solution and our Epic Integration Suite; an agreement from Oakwood Healthcare that transitions them from an indirect agreement through a channel partner to a direct agreement with us as we did with the University of Virginia earlier this year. This agreement also included our Epic Integration Suite and FolderAnyWare. Agreements with 3 clients to upgrade the accessANYware 5.1, which will bring the total number of clients who have committed to migrating to our newest platform to 5. We expect this trend to continue into 2012. Agreements with 4 clients, including those mentioned previously, to implement our Epic Integration Suite, which will increase our number of Epic Integrations to 6 with 2 more in the contracting process. On December 5, accessANYware 5.1, which was built on an entirely new technology architecture, became commercially available. This is not only an important milestone in the transition of our core solution to the technology advanced architecture and suite of functionality, it also opens the door for us to accelerate the planning we have been doing with our clients to migrate them to the 5.1 platform. As we transition our clients to this version, the company will not only generate available professional services revenue, but we will have the opportunity to sell additional software solutions to those clients to help them improve their operational efficiency and financial results or to migrate maintenance clients to the software-as-a-service model. Finally, our accessANYware 1.9 version is currently in the certification process for meaningful use certification. We expect that certification in Q4 2011. This means that clients who use either 5.1, which we previously announced had been certified, or 1.9 can use our solutions for modular certification.

By certifying Streamline Health products for meaningful use, we enable our clients to use our software to qualify for incentive funding. As part of the HITECH Act passed in 2009, hospitals and providers are required to use certified software products in order to demonstrate meaningful use of health information data, and they're then eligible for incentive payments from Medicare and Medicaid based on the respective programs.

We also continue to bring together the human capital that is required to accomplish the other areas of strategic focus as we transform to a world-class healthcare information technology company. We recently announced that we added to our leadership team in 2 ways. First, we hired Tom Dean, a seasoned healthcare information technology engineering and development professional, to fill the role of Vice President of Product Engineering and bring his experience to Streamline Health.

Second, we promoted Michael Brooks to the role of Vice President of Client Services. Michael has been instrumental in the evolution of our client-facing services teams into high-performing units that regularly get positive reviews from our clients. We will continue to seek new associates who have had successful demonstrable careers in growth-oriented healthcare information technology companies, as well as recognize current associates who have stepped up and demonstrated leadership and success in their role.

Fifth, we have driven costs out of our infrastructure. Operating expenses for third quarter were $177,000 less than the second quarter and $378,000 or 9% less than the third quarter of last year. On a year-to-date basis, operating expenses were $1.3 million or 9.5% less than operating expenses for the same period of the last year.

I'd now like to take a moment to comment on the Interpoint announcement. Interpoint delivers healthcare information-technology-driven solutions that simplify, facilitate and optimize a healthcare provider's operating and financial performance with real-time access to financial data and a robust reporting engine, coupled with an agile workflow management system. The Interpoint solutions are designed to help hospitals, employed physicians and large physician practices optimize their revenue cycle by accelerating cash flow, improving accounts receivable levels and increasing patient and employee satisfaction. In our diligence on Interpoint solutions, we have determined that their highly customizable workflow engine and existing workflow solutions, such as the one they have created for managing audits, including recovery audit contractor or RAC audits, could immediately be used to address the needs and requirements of our clients and the marketplace in general.

In addition to long-term financial benefits of this transaction, there are 3 important reasons that management believes that this is a solid opportunity. First, Interpoint solutions are complementary to ours, and they will extend our reach deeper into the revenue cycle and finance area of the healthcare systems we work with. There is a natural linkage between the documents related to a patient's care that are captured by our accessANYware product to the billing and collection of charges that Interpoint solutions impact. Second, Interpoint has a strong team led by Matt Seefeld and James Skrinska, which will transition into the Streamline Health organization. I'm happy that Matt and James will continue to serve key roles in the combined entity and look forward to their ongoing contribution.

Third, there's virtually no overlap in our current client basis. This will allow us to maximize the cross-sell opportunities that we are developing based on the integration points between our products. The solutions of both Streamline Health and Interpoint are generally used by the departments in the hospital that report up to the same executive, the hospital's chief financial officer. And our solutions are very visible and important to the financial well-being of our clients. We do expect the acquisition to be accretive on an EBITDA basis in 2012 and neutral to slightly cash positive EPS basis, excluding the impact of noncash deal-related amortization. However, as is true with any software-as-a-service enterprise, the pathway to significant and material profitability plays out over the length of the long-term contracts signed with our clients.

In summary, we are pleased with the progress we have made during each of the first 3 quarters of this year in each of our 5 strategic areas. However, as I did during the prior calls, I do want to remind everyone that this is a process. The steps are clear, we are executing on them. And the results are borne out by our improving financial performance. The addition of the Interpoint portfolio of products and their teams to Streamline Health is a very important step in the process of transformation of this company to a world-class healthcare information technology company. This will hopefully send a message to you, our shareholders, our associates, our clients and our sales prospects, that Streamline Health will achieve its goals both financially and operationally by continuing to deliver market-leading products and services, bundled with a first-class services organization. This team will execute and plan to grow this business in a profitable and orderly fashion.

As I did last quarter, I want to thank our entire team of associates for their hard work, result and support of management, strategic and operating plans. This progress has been demonstrated by our improved financial results, sales into our current client base and the growth of our sales pipeline. The Interpoint product portfolio, once integrated into our core accessANYware product line, will be a significant driver of our continued growth. While there is much left to do, not only with the obvious integration of the acquisition but internally as well, as I noted in earlier and in prior calls, we will reach our goal of becoming a world-class healthcare information technology company.

This concludes my prepared remarks. We will now open the call for your questions. In addition to Steve Murdock and myself, we will be joined for this Q&A session by Gary Winzenread, our Senior VP and Chief Operating Officer; and Rick Leach, our Senior VP and Chief Marketing Officer. Operator, please instruct our listeners on how to queue up.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Joe Mondillo of Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

Real quick, just a couple of questions. The Interpoint acquisition, first off, how much did they do in revenue, ballpark?

Robert Watson

We haven't reported that. I mean, it would not be an unreasonable assumption. We did disclose the purchase price. Based on the purchase price, the trading multiples of software-as-a-service business that this is a business that for the current year is approximately in the $2 million revenue range.

Joseph Mondillo - Sidoti & Company, LLC

And in the press release, you guys have said $5 million split between debt and cash. How much cash are you guys laying out upfront?

Robert Watson

When -- I'm actually going to not take that question. We will release the financial terms of the transaction when the transaction closes.

Joseph Mondillo - Sidoti & Company, LLC

Right. And that is due to close when?

Robert Watson

As soon as possible. I mean, it's subject to the normal closing conditions you'd expect in a situation like this. But clearly, we're in full press mode to get this done as soon as possible. I don't mean to be vague, Joe. But...

Joseph Mondillo - Sidoti & Company, LLC

Okay. All right. No, no, no, I understand, I understand. The other thing was, in terms of R&D, you guys have mentioned R&D had come down to $300,000 level this quarter. Is that a safe assumption going forward that we're going to see R&D at that $300,000 range going forward?

Robert Watson

Well, with the addition of the capitalized piece, it's a little bit higher than that, as Steve pointed out, so...

Joseph Mondillo - Sidoti & Company, LLC

Yes. No, but I mean running through the P&L.

Robert Watson

Yes. The reality is when -- now that 5.1 is commercially available, our allocation of our R&D personnel to pure R&D versus service acts, for example, will naturally go down. So some of that R&D costs will appear in the cost of goods sold, and you'll see some decline. But I think as a go-forward number, it's in the ballpark of a reasonable go-forward number.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And you mentioned cost of goods sold. Are we going to look at gross margin coming down because of this acquisition of Interpoint? Or are we going to stay in this upper 40, 50 range? I'm just looking for a little clarity there.

Robert Watson

Yes. We might see a little erosion in the near term. But I mean, frankly, that is reflecting the time it's going to take us to get it integrated, right? So you can expect a little bit of erosion, but I don't think that it's significant over the long term. I mean, as I said, we have a very lean organization. It’s [indiscernible], whatever. So we're not expecting a material impact at that line.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then in terms of the backlog, you have $16.8 million. You said software-as-a-service right now looks -- the backlog is $6.2 million. So is it safe to assume that you're going to work through that $6.2 million current backlog within the next 9 months?

Robert Watson

Not all of it. And there's some things -- we have a large transaction subsequent to the close of the quarter that actually increases that backlog significantly. So we have a couple of contracts coming up for renewal in that area over the next year.

Joseph Mondillo - Sidoti & Company, LLC

Okay. So out of the total backlog, how much do you guys expect to work through in fiscal '12?

Robert Watson

Of the software-as-a-service?

Joseph Mondillo - Sidoti & Company, LLC

No, of the total, let's say the total $16.8 million.

Robert Watson

Well, again, keep in mind, Joe, that every quarter, we’re signing new maintenance agreements which -- they tend to be -- this is an historical Streamline way in which they've done business historically. The maintenance agreements are renewed annually.

Joseph Mondillo - Sidoti & Company, LLC

No, no, I understand. So if we were taking a photo, a shot right now of this $16.8 million, how much of this would you expect to work through in 2012?

Robert Watson

We will work through a significant portion of it. I think that -- again, we have a bunch of renewals coming in, in the fourth quarter, so that number’s going to go back up, which really -- I think the total number of that pool that's in there presently is probably about 2/3 of it.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then lastly on tax rate. What kind of rate should we look at going forward? I mean, it seems to be jumping around here.

Robert Watson

Steve, do you want to answer that?

Stephen H. Murdock

Sure. I mean, we have significant NOLs. We're not really bringing anything over from the Interpoint acquisition. They were an LC. So maybe in the near term, it is going to jump around some just because of the NOLs that we have. So on a pure cash basis, that number is going to be insignificant, I think.

Joseph Mondillo - Sidoti & Company, LLC

Okay. But I'm saying from a modeling purpose, I mean, you had 1.7% in this quarter. You've been as low as 0.8%. And just look -- I mean, would it be safe to assume 5% or 10%, just for modeling?

Stephen H. Murdock

Yes. I think, probably, it's going to be in that 5% to 10% range, Joe.

Operator

[Operator Instructions] Our next question is coming from Sam Rebotsky of SER Asset Management.

Sam Rebotsky

It's very nice to see a profit. Hopefully, this will be the beginning. Although, is there a way to look at the fourth quarter as profitable too? Or is that unusual quarter? Do you book any sales in this fourth quarter that you wouldn't in other quarters?

Robert Watson

Yes. The way I look at it, Sam -- one of the ways to look at it, if you look at our spend in the third quarter is -- the third quarter spend should be pretty representative. We had maybe $100,000 or so in severance in that quarter, but for the most part, that should be representative of our spend going forward. We know that our maintenance in software-as-a-service revenue is increasing somewhat each quarter. So that's quite predictable. There is some variability in our professional services revenue component based upon timing the projects and the deployment of our personnel. But again, for the most part, I think we're dialed into a base revenue number today. So it should give you a pretty good look going forward, if you look at it that way. Anything we sell in the fourth quarter that’s a licensed sale, we would hit fourth quarter. As I said in my prepared remarks, any software-as-a-service contract that’s signed, there's going to be even a 9-month lag before we recognize any software-as-a-service revenue. So if you think about projects that were signed in Q1 of this year, they're going to start to hit ideally our revenue in Q4. Those signed in Q2 hit 9 months after, and that's sort of the rolling plan. So if you think about the opportunities where we've announced signed projects, that gives you sort of a view into building the revenue stream.

Sam Rebotsky

Okay. Okay. Now is this announced merger, Interpoint Partners, do they function basically as a management consultant and not selling products? Or do they also sell products?

Robert Watson

No, Sam. Their entire revenue is software-as-a-service. And they don’t have implementation fees like we do, but their core business is a software-as-a-service model. It fits consistent with my earlier messaging that I believe we need to put a stake in the ground when it comes to software-as-a-service as the preferred business model.

Sam Rebotsky

But their product -- is it fair to understand that software-as-a-service is other -- they don't have a specific product. That's what I'm driving at or do they...

Robert Watson

Oh no, no. They have a complete product set. Their primary product is called the Opportunity Explorer. Beyond that is a secondary product called Opportunity Manager. Those are the 2 primary products in their suite today. The users at the hospital end or the physician group end are people in the financial [indiscernible] and offices were using that to identify opportunities. And once those opportunities -- what I mean by an opportunity is where they've been able to identify an opportunity to improve collections, overturn a denial or an opportunity to manage an audit process. And once those opportunities are identified through Opportunity Explorer, they then become managed, if you will. And Opportunity Manager, which is a series of workflows that allows our clients to standardize business process, not unlike what we do in the HIM space today, standardize business process and improve the financial results of the organization by providing the users with a consistent, repeatable, demonstrable pathway to overturning the denial, managing an audit or addressing a receivables problem.

Sam Rebotsky

So their product will be able to be sold in addition to your product to the same customer?

Robert Watson

Absolutely.

Sam Rebotsky

And will they -- is it necessary for them to be interfaced that they are coordinated? Or is there any added value to that? Or are they just 2 separate products?

Robert Watson

No. They -- we will -- I mentioned this in the prepared remarks. I mean, we will certainly integrate the product. It can be sold stand-alone. They have a certain number of customers today where they've successfully sold it and deployed it on a stand-alone basis. We have clients today where we believe, in spite of our due diligence, that those clients are at an opportunity for us to cross-sell this product in and integrate it with our core accessANYware product. There are parts of the patient-centered record data that we collect as part of our process that’s stored in accessANYware that’s very, very important to the billing and collections and receivable process of our clients. Products will be very tightly linked.

Sam Rebotsky

Well, that sounds very good. And I guess you filed the 8-K, which has a bunch of information relative to the transaction, but one thing, I guess. When is the decision relative to the convertibility of the price of the convertibility into stock, et cetera? When will that be established? Is there any way to look at that at this point?

Robert Watson

It has been established. And when we announce the closing of the transaction, we'll provide additional details on the structure of the financial transaction.

Sam Rebotsky

Okay. I've got one more comment that as far as I can see seems to be kind of significant. Does this -- are you familiar with Greenway Medical Technology?

Robert Watson

I am indeed.

Sam Rebotsky

Okay. And so presumably, you've looked at their filings. And as far as I could see, you compete against Greenway.

Robert Watson

Potentially, we're competitors. We're also potentially partners. It can go either way.

Sam Rebotsky

Partners. Okay, okay. Plus the market has created a very high valuation for this potential public offering and -- do you see yourself possibly growing more so that there may be more similarities to achieve a higher valuation?

Robert Watson

Well, I mean, look, we're going to grow -- Sam, we're going to grow the business, right? And we're going to go about it in an orderly, methodical and logical fashion. It will be, as we demonstrated, when appropriate, we'll address growth via inorganic or acquisitions. We are very diligently and methodically working our way through the correct way to not only build a direct sales team but also to build an account management team to service our current clients. And also, we've had a lot of focus. We've talked about it in each of the last 2 calls, at least the last 3 calls, the development of our -- the appropriate strategic partner relationships to help us scale the business faster from a new sales standpoint. And as I just noted in prepared remarks, we expect that to address those in the fourth quarter of this year, which positions us going into fiscal 2012 to be able to deliver on some growth opportunities.

Operator

[Operator Instructions] Our next question is coming from Alex Silverman of Special Situations Fund.

Alex Silverman

So most of my questions have already been asked, but those that remain are, can you give us a rough sense of what the -- you said Interpoint is coming over with 10 employees. Roughly, what those roles are?

Robert Watson

Sure. Matt Seefeld will be joining us in a role as Chief Strategy Officer for Revenue Cycle. So essentially, sort of a cost matrix kind of role reporting to me, but a matrix role that involves sales and working with Rick Leach and the product management team as we look at how we build out our product portfolio across the Revenue Cycle. Matt had a very successful track record in the consulting field prior to starting Interpoint. His co-founder, James, will be joining us as our Chief Technical Officer -- Chief Technology Officer, reporting to Tom Dean, our VP of Engineering. The other 8 individuals are in the -- would fall for the most part in -- either in Tom Dean's organization as engineering resources or in Michael Brooks' organization as client services on the implementation side, data integration. They have a very strong team of folks in the Atlanta office that address those client services functions quite well. We're happy to have them on the team.

Alex Silverman

Okay. How are they historically -- it sounds like they're somewhat light on quota-sharing sales folks. How have they historically gone to market?

Robert Watson

Matt Seefeld was the salesperson. Like a lot of small companies that are poorly or undercapitalized, they struggle with that. And I've run them myself in the past. I know how challenging it is. And the CEO has to be the lead salesperson. And Matt will be very, very actively involved with our sales team, and with our account management team that's run by Trish Wharton, and a very key part of our growth strategy.

Alex Silverman

Okay. Transitioning, you said an asset purchase agreement. Is that correct?

Robert Watson

Yes, sir.

Alex Silverman

How from a working capital standpoint is SaaS, payment SaaS revenue considered from a cash standpoint? In other words, those that have paid in advance remain with the original partners or that working capital transitions?

Robert Watson

There was a -- as you’d expect in any asset purchase agreement involved in these kinds of transactions, there is a working capital adjustment that's part of the closing process that we're going through over the next couple of days as we get this thing to closing.

Alex Silverman

But they're not going to dividend out the cash prior to closing?

Robert Watson

No.

Stephen H. Murdock

I would just add to that, Alex, they bill, basically for the most part, one month in advance. And there's not a number of prepaid contracts out there to go out. So it will just be -- every month we’ll have those added to our receivables and we’ll collect them sometime in the subsequent month.

Alex Silverman

Got you. I was concerned more about annual contracts or something like that.

Stephen H. Murdock

No, we don't have any prepaid contracts like that out there that are getting carried over or that their partners are taking that cash with them.

Alex Silverman

Okay. And then my last question. Seasonally, historically, has the third quarter been a quarter where you have had stronger cash flow and therefore paid down debt relative to second quarter?

Stephen H. Murdock

Sometimes, that has happened relative to the second quarter. I think as I mentioned in my remarks, it's really a timing issue of when some of our large maintenance contracts get renewed and/or those invoices get paid. And it just so happened that in this particular quarter, that some of those moved over into the fourth quarter.

Alex Silverman

Are any of those -- are you concerned about any of those?

Stephen H. Murdock

No. Absolutely not. We've been in communication, and some of those contracts have subsequently been signed. And some of those invoices have been paid in the fourth quarter already. So, again, it was just a matter of transferring over at the end of October into November. So we're not concerned about those at all.

Operator

[Operator Instructions] Our next question is coming from Mark Cahill [ph], a private investor.

Unknown Shareholder

Is this the partner that you referred to back in the second quarter, Interpoint? Or are you still talking to a partner for sales purposes?

Robert Watson

We are. We are still -- we have ongoing conversations with them. As I mentioned in my prepared remarks today, that we've been going through the arduous and frequently irritating due diligence process with potential partners and it’s, in some cases, dragged on a little longer than I'd like, but that's just the nature of the world we live in. But Interpoint was not in that list of potential sales partners.

Unknown Shareholder

Okay. How long do you think it will take to integrate Interpoint? Will it be 3 months, 6 months, longer?

Robert Watson

Well, I tried to suggest that Gary's team could do it in a week, but he didn't seem to think that was a good idea. The reality is, it's -- these things are always a process. We always like to have them done faster. I think, conceptually, 180 days, 6-month kind of window to get things completely humming along correctly is not unreasonable for us. Again, it’s a small enough transaction that I'm hoping we perform better than that. But to set your expectations appropriately, I'd set them there.

Unknown Shareholder

Right. In your remarks, you had mentioned the RAC solution, your Recovery Audit Compliance solution. And I know prior to you joining the company, Streamline had worked on that product. It was introducing webinars. And it sounds like Interpoint has something very similar or better. Is that correct?

Robert Watson

I knew somebody was going to ask me that question. Yes, that Streamline had previously, prior to arrival of this management team, announced a RAC audit product that had indeed been sold and installed. The current plan is that product will be sunset and replaced with the Interpoint software.

Unknown Shareholder

It sounds like it was very popular. There's a lot of interest from clients.

Robert Watson

It's more than just -- frankly, it's more than just the RAC audits. I mean, C&S [ph] is a problem that, I think, appeared on the screen -- on the sort of landscape of healthcare CFOs, probably 6 or 7, 8 years ago. But while the term is used, it's sort of almost like a generic term today, the fact of the matter is, they are audits on a regular basis. And from any number of payers, not just the governmental payers, and the solution set that Matt and James had built at Interpoint addresses that problem in a manner that I find personally having a lot of experience in revenue cycles per se as being very elegant and intuitive for the users. And they've proven in their client sites that it is a huge step towards generating positive financial results for their clients. And our belief going into this is that our clients in both current and future will benefit from that offer.

Unknown Shareholder

Right. Well, it certainly sounds like a more robust product. With respect to Standard Register, do you expect to conclude those talks by end of the calendar year or end of the fourth quarter?

Robert Watson

Our position in any of our partner relationships is that those in which we are in negotiations, and Standard Register being one, to have them completed by the end of our fourth quarter, not the calendar fourth quarter. I would say that we remain hopeful that we'll renegotiate our arrangement with Standard Register, but we're also confident that we will have at least either another or a replacement for them.

Unknown Shareholder

Right. With respect to the operating expenses, going forward and putting aside the Interpoint acquisition for now, have you -- is $4 million a good ballpark number that you've got to cover to make a profit?

Robert Watson

Yes, it is in the ballpark. I mean, I think our spend path [indiscernible] talking to Joe Mondillo from Sidoti that I think our -- from building a model standpoint, if you -- I made a sample [indiscernible]. But if you look at our spend in Q3, I think that spend is indicative of our go-forward spend without taking into consideration Interpoint. I do believe that as we see -- and we noted that our sales pipeline continues to grow, as those sales prospects move up into the higher probability of closing range, we will spend some in advance of those contracts to make sure we have the appropriate resources on Michael Brooks' team or in Gary's organization to really address those implementations. So we will spend in advance to some extent. But I think the message that hopefully folks have gotten over the last 3 quarters is that Steve, Gary, Rick, and I, when we look at how we're going to run this business, we are going to be very methodical and deliberate about how we spend on our human capital. And we're going to [indiscernible] that spend to our revenues in a format that's rational. And we're going to continue to do it. We've got to go through the same rationalization now with the Interpoint folks joining the team. And again, what I said at the end of my prepared remarks today is I want to remind everybody that this is a process. But we are going to continue to be deliberate and thoughtful and organized about how we go about what we do here.

Unknown Shareholder

I understand. You're moving along very well, too. Last question. There was a question earlier about taxes. Going forward, I think any tax that you're going to have to pay would be related to state and local taxes. They're certainly not [indiscernible]. You've got NOLs, quite a few of NOLs. Am I right in that thinking?

Stephen H. Murdock

Yes, that would be correct.

Operator

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

Robert Watson

Again, my thanks to everyone for participating in today's call. In the past 3 quarters, we have taken demonstrable steps in implementing our strategic plan, and we believe our progress is meaningful. We are focused on delivering results for our clients and our shareholders. As each day passes, we make progress towards our goal of becoming a world-class healthcare information technology company. We have a lot to look forward to. We look forward to talking with you all again at the conclusion of the current quarter. Have a good day, and thank you for joining us.

Operator

Ladies and gentlemen, thank you for your participation in today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Streamline Health Solutions' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts