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Edited Transcript of STRM.OQ earnings conference call or presentation 11-Jun-20 1:00pm GMT

Q1 2020 Streamline Health Solutions Inc Earnings Call

Cincinnati Jul 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Streamline Health Solutions Inc earnings conference call or presentation Thursday, June 11, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Randolph W. Salisbury

Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer

* Thomas J. Gibson

Streamline Health Solutions, Inc. - Senior VP, CFO & Principal Accounting Officer

* Wyche T. Green

Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to Streamline Health Solutions First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Randy Salisbury, Senior Vice President and Chief Sales and Marketing Officer. Randy, you may proceed.

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [2]

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Thank you for joining us to review the financial results of Streamline Health Solutions for the first quarter of 2020, which ended April 30, 2020. As the conference call operator indicated, my name is Randy Salisbury. As Senior Vice President and Chief Sales and Marketing Officer here at Streamline Health, I manage all communications, including Investor Relations. Joining me on the call today are Tee Green, President and Chief Executive Officer and Chairman of the Board; and Tom Gibson, Chief Financial Officer.

At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of our press release, announcing these results, you can retrieve it from the company's website at streamlinehealth.net or at numerous other financial websites. Before we begin with prepared remarks, we want to be sure we are clear for everyone on the record how certain information, which may be provided today, as with all of our earnings calls, should be viewed.

We, therefore, submit for the record the following statement: First, statements made on this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those we may discuss. Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K annual report, which is on file with the SEC for more information about these risks, uncertainties and assumptions and other factors. As always, we are presenting management's current analysis of these items as of today. Our participants on this call should take into account these risks when evaluating the topics we will discuss. Please note, Streamline Health is not undertaking any commitment or obligation to publicly revise any such forward-looking statements made today.

Second, we will discuss non-GAAP financial measures, such as adjusted EBITDA. Management uses these measures to help provide better insight into our financial performance. However, certain items of income and expense are not included in these measures, so these calculations may differ from those which another entity may utilize in calculating their own non-GAAP measures. To help compare these amounts on consistent terms, please refer to our website at streamlinehealth.net, and our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.

I would now like to turn the call over to Tee Green, President and Chief Executive Officer. Tee?

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [3]

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Thank you, Randy, and thank you all for joining us this morning. During the first quarter, Streamline completed the sale of its legacy ECM business. A key strategic move, we believe, will enable the transformation of our company into a more nimble, efficient one with a laser focus on bringing value to the middle of the revenue cycle from charge capture to bill drop for our customers.

Before I review our first quarter financial performance, I'd like to comment on the COVID-19 pandemic and the effects we have seen in our industry. All of us at Streamline Health are keenly aware of the incredibly difficult and dangerous situation, our health care provider customers have been facing and continue to face. Our frontline health care professionals are the best in the world, and the job they have done is just incredible. We remain thankful to the selfless services to our communities. Our thoughts and prayers continue to be with all of them.

As I mentioned in our fourth quarter earnings call in April, our hospital system customers have been deeply impacted by this ongoing crisis and they have seen their high-margin elective procedure business replaced by low-margin critical care patients. From mid-March through most of May, our customers and prospects, primary focus was on the treatment of those patients suffering from COVID-19 symptoms, as it should have been. But the fact of this pandemic, over the past few months, has clearly created a revenue shortfall for almost every health care provider in the country. As I said in April, we believe when we see the beginning of a return to more normal times, we will see high demand for all forms of health care that have been delayed due to this pandemic. And with it, the need to generate accurate billing quickly and efficiently.

Looking back on our first quarter, all of us were very encouraged at the many signs of vitality we were seeing in our sales pipeline. We began the quarter with a very nice 3-year contract for eValuator with University of Louisville Health in February. U of L Health is a 1,200-bed teaching hospital located in Louisville, Kentucky, with over 46,000 patient discharges per year. And we're in the final stages with a number of other key prospects as we entered the month of March, when our prospects focus shifted away from technology purchases, as I just mentioned. This pause in decision-making lasted throughout March and into May, mid-May. And I'm happy to report that as of today, our selling activities are once more proceeding at an exciting pace, just as we anticipated back in April.

Last month, we closed a 3-year eValuator contract with another academic health care facility. This time with Cooper University Health Care in Camden, New Jersey. Cooper is an academic medical center with 574 beds and more than 28,000-patient discharges annually. The pipeline remains healthy with numerous opportunities for more sales this quarter.

One of the many metrics we use in sales to help lead us to the most fertile opportunities is a tracking of CARES funding to hospitals throughout the country. The CARES Act provided $12 billion to hospitals that provide an inpatient care for 100 or more individual COVID-19 patients through April 10 of this year. The receipt of these funds help these providers there some serious cash shortages and can help make the decision to implement important technology like ours a little easier. Currently, 16 of our active eValuator prospects in the pipeline received an aggregate $422 million of funding through this program. I'll let Randy provide more specifics on our sales efforts in just a few minutes.

Now I'd like to review some financial highlights from the quarter. As a reminder, we closed the sale of our legacy ECM business on February 24 of this year, and these figures are representative of our continuing business units. Total revenue for the quarter was $2.8 million compared to $3.2 million in the first quarter of last year. Our revenue was negatively impacted by the COVID-19 pandemic, which not only resulted in delayed customer purchase decisions, but impacted our professional services and perpetual license revenue as well. Tom Gibson will provide more specifics in his remarks later in this call.

Recurring revenue for the quarter was 75% of total revenue compared to 66% during the first quarter of 2019. Adjusted EBITDA for the first quarter of 2020 was a loss of $638,000 compared to a loss of $262,000 during the same period of 2019. As of April 30, 2020, we had $6.6 million of cash and cash equivalents on our balance sheet and no bank debt.

Over the long term, we believe that COVID-19 pandemic has strengthened awareness of the need for improved revenue integrity tools. Health care providers experienced a dramatic drop in their revenues as many, if not all, high-value elective procedures were halted. It's important to remember that ICD-10 protocol exponentially increased the amount of complexity involved in medical coding. Our evaluator pre bill coding analysis technology can help health care providers manage this complexity by improving the efficacy of hospital coders before bill goes out the door. And we have already added new COVID-19 billing codes into the evaluator platform to help our customers improve the accuracy of the billing for these never-seen-before COVID-19 cases.

Behind the scenes, I'm pleased with the progress we made in the first quarter to improve the critical internal functions necessary to be the nimble, fast-growing company we are focused on becoming. I view the pause in purchase decision-making I just mentioned as a great opportunity for us to focus on improving our eValuator platform. Slowdown in activity enabled our R&D team to improve some of the foundation elements of eValuator, and it gave our product management team the chance to write input additional rule sets, including more than 30 new rules revolving around the new COVID-19 coding.

In addition, we have expanded the reporting functionality for both the inpatient and outpatient versions of evaluator and improved their dashboard functionality as well. Additionally, in the first quarter, we launched our new customer success organization, when we combined several separate departments into 1 and named a new leader of this important function. I am committed to developing world class R&D, product management and customer success teams to support our company's selling efforts. I believe we have made great progress to that end in the first quarter of this fiscal year.

I will now turn the call over to Randy for additional comments on our sales efforts. Randy?

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [4]

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Thank you, Tee. Looking back at our first quarter selling efforts. I was pleased that our team remained fully engaged and effectively leverage digital communication tools to maintain as much contact and collaboration as possible with our targeted prospects. The discussions we've been having with our prospects mirror what Tee just outlined. Hospital administrators seem to be much more focused on finding solutions that can improve the efficiency of their mid-revenue cycle systems, especially something like eValuator that can improve their revenue integrity and help improve their organization's cash flow.

Capitalizing on this momentum, we've developed a tech-enabled services offering, coupling eValuator with our world-class auditing services professionals. We've positioned this as the eValuator Revenue Integrity Program. Going forward, new eValuator customers will not only get the power of our cloud-based prebill coding analysis technology, they'll also get a certain number of patient record reviews by our audit staff every month to help them manage the auditing of flagged accounts that eValuator generates. This way, our customers get the traditional professional services functions they know while adding the power of new technology like eValuator.

As Tee mentioned, our sales team has seen a return to more productive purchase decision-making, resulting in the nice win we've already received in the month of May for the second quarter.

During the quarter, despite the impact of COVID-19, we closed about $1.3 million of new bookings, which is short of our ongoing quarterly goal of $2 million to $3 million in new bookings every quarter. But given the effects of the pandemic, this bookings amount is not concerning to me, especially when I look at the quick start we had in May, and the improved pace of negotiations we are experiencing so far in our second quarter. I believe the target of $2 million to $3 million in bookings is attainable going forward. Specifically, our pipeline metrics today stand at $62 million in eValuator pipeline opportunities among 89 prospects, which is up in terms of both dollars and prospects from our Q4 report.

I will be available for questions and answers following our prepared remarks. But for now, I'd like to turn the call over to CFO, Tom Gibson, who will review the financial results for Q1 and in greater detail. Tom?

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Thomas J. Gibson, Streamline Health Solutions, Inc. - Senior VP, CFO & Principal Accounting Officer [5]

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Thank you, Randy, and good morning to everyone on the call. The company has built on the initiatives reported to you in our previous call. The initiatives will be highlighted first as is critical to the overall financial results for the first quarter ended April 30, 2020. The initiatives include the company's sale of the ECM assets and the closing of a PPP loan in support of operations during the novel coronavirus pandemic. As Tee stated earlier, the company sold the ECM assets effective February 24, 2020, and that put in place the accounting requirements for discontinued operations.

Discontinued operations effectively separate the ECM assets from the remaining or continuing business. As a result of this separation, we will report on continuing operations for the current period as well as all previously filed periods. This will set a basis for the guidance of revenue, earnings and cash flows of the continuing operations once these are released. I will address guidance in more detail at the conclusion of my remarks.

Now let me turn to the company's operating performance for the first quarter ended April 30, 2020. As announced in yesterday's press release regarding our performance for the first quarter, we generated revenues of approximately $2.8 million, down 10% from the fourth quarter of last fiscal year. The shortfall to last year is derived from perpetual sales and professional services. Each were directly impacted by the coronavirus. The company had no perpetual revenue for the first quarter and a shortfall of over 50% of the expected professional services revenue. Perpetual sales were delayed based on health care organizations, putting larger system changes on hold. Additionally, certain professional services are being delayed as hospitals deemed them a distraction relative to the coronavirus pandemic. Our company has given substantial insight to you regarding our legacy versus growth businesses. There are only 2 legacy revenue streams that continue for the company. One is clinical analytics, and it represented approximately $200,000 in the first quarter ended April 30, 2020. This is a patient care system measuring outcomes of certain procedures. It is not in the company's core business and has a different buyer. Primarily in the research or educational segment of health care.

We have previously announced the clinical analytics platform was sunset in fiscal year 2019. The company wrote off all of the intangible assets related to clinical analytics in fiscal year 2018. The revenue stream expires in our second quarter of this fiscal year. Complementing our selling of the ECM assets, the company has made strong business decisions to exit areas that do not offer future growth, and we continue to make strides in removing obstacles that have kept us from generating top line revenue growth.

Turning now to bookings. As Randy mentioned earlier, the company achieved $1.3 million of bookings in the first quarter of fiscal 2020, which was lower than our target. Clearly, the onset of the coronavirus slowed the pace of our eValuator bookings, but we are now seeing traction and remain enthusiastic about future bookings performance.

Recurring revenues were approximately 75% of total revenue for the first quarter, lower than the 79% from the fourth quarter of fiscal 2019, but higher than Q1 of last fiscal year. All of the revenues that were impacted by coronavirus in our first quarter of 2020, perpetual and professional services revenue were nonrecurring in nature.

Moving now to adjusted EBITDA. We reported a deficit of $638,000 in Q1 of 2020 as compared to a deficit of $262,000 in the same comparative period of fiscal 2019. The higher deficit and adjusted EBITDA is a direct result of lower revenues in Q1 2020 as compared with the same period in 2019 as well as some onetime costs for the exit of an operating lease.

The company incurred $105,000 in a nonrecurring loss on the exit of an operating lease during the first quarter of fiscal 2020. As reported, the company moved its corporate office space to Alpharetta, Georgia and took a charge of $105,000 upon exiting its previous shared office space. The company reported $14,000 and $78,000 of interest expense for the first quarter of fiscal 2020 and 2019, respectively.

The company paid the entirety of its term loan on the day we closed the sale of the ECM assets, February 24, 2020. The company qualified and received a PPP loan in April of 2020 with a 1% interest rate. As long as the company has recognized any interest expense, it may be capitalized to software development. Accordingly, there was interest capitalized into software development in both the first 3 months of fiscal year 2020 and 2019.

Turning now to other areas. The company recognized depreciation and amortization of $501,000 and $343,000 in Q1 2020 and 2019, respectively. The company has accelerated completion of projects that are in inventory under the agile method of development, and that is leading to higher amortization. The company has added tighter discipline to its development procedures by limiting the starting and completion of projects to then 1- or 2-, 3-week sprints to speed the development work to completion and will result in higher amortization in future periods for capitalized software development.

The company also recognized $263,000 and $269,000 of share-based compensation for the first quarter of fiscal 2020 and 2019, respectively. The company is expecting that share-based compensation will trend higher in fiscal 2020 as compared with last year. The Board has continued to favor equity compensation for executives as opposed to the company's cash. The company reported income from discontinued operations net of tax for the first quarter of 2020 and 2019, of $4,650,000 and $955,000, respectively. The discontinued operations for the first quarter of fiscal year 2020 and includes a onetime gain on the sale of the ECM assets of $6,009,000.

Finally, the company recognized income tax expense between continuing and discontinued operations of $935,000 and $2,000 for the first 3 months of fiscal 2020 and 2019, respectively. The company has substantial federal and state income tax net operating loss carryforwards that may be used for the gain on sale of the ECM assets. We do not expect to pay any income tax for the full year fiscal 2020. For GAAP purposes, the income tax is established in the quarter that discontinued operations is first reported and then reversed out during the remaining quarters of the fiscal year.

Moving to the balance sheet. We finished the quarter with approximately $6.6 million of cash on hand compared to $1.6 million at the end of the fourth quarter. The company generated $5.4 million in the sale of the ECM assets net of the term loan repayment. Additionally, the company applied for and received a PPP loan of $2.3 million in April 2020.

Beyond operations, for the fiscal year 2020, we invested $479,000 into the capitalized software development asset, primarily new functionality for our key client solution, eValuator. This is comparable to $790,000 in the first quarter of fiscal year 2019. The continuation of this spend and development of the eValuator platform was deemed essential to expand our sales velocity through extended capabilities for inpatient and outpatient modules. We are also continuing to develop the product with improved dashboards to increase our functionality and client satisfaction. The company continues to have flexibility with the investments we make into our software, both the timing, nature and type of spend. It's worth noting that in the company's MD&A disclosures, total research and development costs have come down substantially from prior years. This is the result of our ability to focus development attention on the company's growth engine, eValuator. The company has reduced head count from last year and refocused its R&D efforts around the company's go-forward solutions that have the greatest growth opportunities.

During the first quarter ended April 30, 2020, the company made no payment on the term loan as it was principal-free for the first 12 months. The term loan balance was $4 million when we closed with Bridge Bank on December 12, 2019. The term loan was repaid upon the closing of the sale of the ECM assets. The company did not draw on the revolving credit facility during the first quarter. The PPP loan has no repayment requirements for the first 7 months. Additionally, based on certain criteria, the company may not be required to repay a portion of the PPP loan at all. The criteria is still being finalized by federal regulations, so we will not attempt to establish or estimate any amounts that may be forgiven under this loan at this time.

The company is not offering guidance due to the continued uncertainty around the effects of the novel coronavirus. However, we did want to provide measures to help our investors understand the size and shape of the go-forward streamline health. The company will continue to report ECM revenue as a discontinued operation in fiscal 2020, and it will impact all prior periods. The company reported $2.8 million in revenue in the first quarter ended April 30, 2020. This was the higher end of where we indicated during our earnings call at the end of fiscal 2019. We believe that revenues will step back to approximately $2.1 million to $2.5 million in the second quarter of 2020 and begin a solid growth quarter-over-quarter thereafter, depending, of course, upon the macro market conditions.

For fiscal year 2020, as previously reported, the company projects to have a deficit-adjusted EBITDA. The effects of the coronavirus have increased our estimate of the shortfall in adjusted EBITDA for the year. The company is running the business such that it will meet no other operating cash through the end of next fiscal year 2021. We are attempting to solve for that through operating cost controls in our back office function. We have no intention of decreasing our investment in the company's growth engine, eValuator. Once again, we are not intending for these comments to be considered guidance, but rather, they are an effort to help our investors understand the way we are thinking about management of the business through this critical growth stage. The company will provide guidance as soon as there is more certainty around the timing of the return of our economy as it relates to COVID-19.

That concludes my remarks. But before I turn the call back to Tee, I wanted to reiterate that I'm very proud of our team's accomplishments over the last few months. We are realizing a new culture of velocity and execution. I am confident you will continue to hear that in future releases about our company. Tee?

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [6]

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Thank you, Tom. It would appear that our industry's economy is starting to come back online, and I see significant opportunity for our company in the remainder of our fiscal year 2020 and beyond. Our focus on helping health care providers with the many issues they face with the middle of their revenue cycle is right for the market and provides our newco with excellent growth opportunities.

According to a report from Research and Markets, the mid-revenue cycle management and clinical documentation improvement market is expected to grow to $4.5 billion by 2023 from the baseline of $3.1 billion in 2018. The report specifically stated and I quote, "The market growth is largely driven by the increasing utilization of mid-revenue cycle management solutions to reduce health care costs, take the loss of revenue due to medical billing and coding areas, resolve issues raised by the decline in reimbursement rates, manage ever-increasing amounts of unstructured data and maintain regulatory compliance." The growth in the mid-revenue cycle management solutions market for health care providers can be attributed to the significant demand for these solutions from health care providers for improving data accuracy and clinical documentation, maximizing hospital revenues by minimizing coding errors and shortening the claims reimbursement cycle. Revenue losses due to medical billing and coding errors, declining reimbursement rates and the need to reduce the rising health care costs or other key factors supporting the growth in the demand for these solutions." Our eValuator Revenue Integrity Program, along with our abstracting and CDI technologies are specifically designed to meet these needs.

Before we begin our Q&A session, I'd like to extend my heartfelt thanks to the team members to Streamline for their hard work and perseverance during an enormously challenging time. Your contributions enable us to support our hospital system customers and ensure they have the tools they need to free up time and resources for clinical time. Thank you for your support of Streamline Health and for your support of our vision.

Now I'd like to open the call up to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Matt Hewitt with Craig-Hallum.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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The first one, the new Revenue Integrity Program that you announced this morning, maybe if you could provide a little bit more detail. Is that going to be included in kind of the base product? Or is that an incremental opportunity or an upsell, if you will? Just a little bit more detail would be helpful.

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [3]

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Yes, sure. This is Tee. Thanks, Matt. I'll start and then let Randy finish the question. But our whole goal with seeing the power behind eValuator with the technology, and you recognize the staffing issues that these customers are facing, especially coming out of COVID-19, and we have a professional audit services component of our business. And so coupling the technology with the services, so you truly have a tech-enabled service with perfect stance. It also gives us the ability to, obviously, augment our customers, but also it gives us ability where we have opportunities to provide audit services to customers and our audit services team uses eValuator. It also can be kind of a reverse Trojan in getting the technology into the enterprise. So we think it kind of goes both ways. And Randy, I'll let you kind of talk about are we including it in every deal? Or are we using it opportunistically?

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [4]

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Yes. Thanks, Tee. Matt, we -- in fact, we have adjusted the pricing to allow for this. And so we actually have tiered pricing based on the number of beds in a hospital system, but we've adjusted the pricing up to cover this so that it's automatic. Kind of in the base, like buying a car, Matt, you would get certain things in the base model. At the end of the day, Matt, if someone really said, "Man, we got plenty. We don't need it. We can figure out a way to strip it out to lower it a little bit," but we've built it all in.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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That's great. And I appreciate the color. Randy, since I got you here, could we talk a little bit about the pipeline? Obviously, your Q1 was at the peak of the pandemic here in the States, and I'm sure you were having frequent dialogue with potential customers. How have those discussions kind of evolved from February to March to April and now May and June? And maybe talk a little bit about, I don't know if quality's the word, but talk about the size of the various hospitals and health systems that you're in discussions with and when you think that those deals could be signed.

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [6]

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Thanks, Matt. Yes, I think as we talked in April, the good news inside all of this is that those prospects that asked us to sort of table the conversations while they confronted the never-seen-before issue of the pandemic that we are still suffering through, I think we were really encouraged that even though our team stayed in touch with them gently, almost to a person, they came back as they said they would. So a few said, "Can you wait until the fall," and we will, but most of them said, "Let's just table this for a month and let us get our feet under us." And sure enough, within a month to 6 weeks, they were back on the phone. We're back doing virtual now, but we were picking up right where we left off. So that leads then to your next point, which is I think what Tee clearly inferred was, boy, we thought starting in March -- February with the deal with Cooper, we thought, well, boy, in March and April, we're going to get 2 or 3 more of these. They got delayed. Now I think we're very close, I believe, to signing a couple more here in the not-too-distant future, the same guys that we're sort of maturing in the pipeline and moving into what we'd call stage 4 and stage 5 are back in those various stages. We are actually looking at some contract red linings. And to your point, Matt, the size of a couple of them right now that we're looking at are some of the largest ones we've seen so far. So I think our sales team has done a good job of really trying to target the sizable systems and IDNs because the power of the numbers are there, right? We're not necessarily targeting the rural and smaller hospital system. We're kind of -- 250-bed and up is our focus. And in some instances, we're looking at some systems at 2,000 beds and up. So that's part of our encouragement as well.

And lastly, as I mentioned, real quickly, the numbers of the pipeline are both up from Q4 in terms of dollars and number of prospects.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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That's great. And maybe one last one for Tom. How should we be thinking about gross margins? Obviously, Q1, and I would suspect even Q2, there will be impact with professional services, not being fully utilized, some of the delays that we've heard regarding new contract signings with eValuator. How should we think about gross margins first half, maybe even versus second half?

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Thomas J. Gibson, Streamline Health Solutions, Inc. - Senior VP, CFO & Principal Accounting Officer [8]

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Yes. Thank you, Matt. Appreciate it, and I hope you're doing well. So Q1 and Q2 are going to have a little bit of compressed gross margin. Primarily because of volumes on the revenue side. For the most part, a lot of our cost of sales, as you know, is kind of fixed. It's a lot of depreciation, amortization and people. So we need to get the expansion of the revenue piece in order to start expanding that gross margin. And absent ECM and with the slowdown in perpetual and professional services, you're definitely going to see a lower gross margin in the first half. As we grow revenue, you're going to see that expand. Again, for the most part, because our cost of sales is rather fixed. So that's kind of the way to think about it without giving you specific numbers.

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Operator [9]

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Our next question comes from the line of Brooks O'Neil with Lake Street Capital.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [10]

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So I have a couple of questions, too. I was hoping maybe Tee or Randy, you could talk about the product enhancements and improvements you guys had identified and have been working on, I think Tee commented on some of those. But I'm curious, a, if you feel the work you need to do on the core product is complete; b, recognize that we haven't gotten a lot of these contracts over the goal line yet, but can you give us any anecdotal information or feedback regarding the customer response to the work you've done? Do you get a sense people are excited about it? Are they are they just satisfied you've done what they felt needed to be done? Or what's the reaction out there in the marketplace?

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [11]

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Yes. I'll take the first part of that, and then I'll let Randy talk about the contracts and getting them over the goal line, but one, thanks for the question, Brooks. Yes, the R&D team and the product management team have done an incredible job over the last quarter. And the product management team was new at the end of the year, last year, and we restructured the entire R&D organization, and it allows us to laser focus on improving the core of eValuator, which was a pretty big lift, but obviously, it had to be done if we were going to scale the business. So a lot of that had to do with getting the foundation right, making sure that all of our reporting was accurate across the multiple ways you can report out of eValuator. And then getting the inpatient and outpatient dashboards into what I'd call a scalable platform for an enterprise. And so if you think about the core and you think about the reports and the 2 dashboard platforms, the core of it, we have already demoed the improvements to a couple of customers, and there's great excitement there. They're excited about improvements, more stability, more speed. And then the -- and those should be really hitting customer sites in June or end of June. And then the dashboards will be coming, as we said, later in the summer.

So I think -- would we like it to go a lot faster? Sometimes we do in R&D, but you also have to make sure you poured solid concrete and letting it set so you can build off of, and that's what we've done. The team has been incredibly disciplined, and that's what I'm probably most excited about. I can say that prior years. I don't think we had the discipline in R&D and product management. And now, it's there. You're going to see continued progress. And once you have the solid foundation, it allows you to increase velocity. And so that's where we are.

And then, Randy, I'll let you talk about where we are in some of these maybe contracts and pipeline.

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [12]

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Absolutely. One thing I would add, Brooks, is we've actually used the current customer experience to help guide us in some of this. So here's a tidbit for you. Early on, we had about 34 different reports you could use with eValuator inpatient. And our users were telling us, that's all well and good, but if I want to get a couple of things together, I got to go from 1 report to another. So part of Tee's guidance and work was we consolidated the number of reports you can get from 32-ish to 20. And in that 20 now you have some reports that give you a little bit more -- you get a lot more data at one glance, yet you still have the capability of customizing those reports. So that's how we're taking customer experience and making the product better going forward.

To Tee's point, when we present to prospects, besides the nature and effectiveness of what prebuilt coating does for a firm, which is where we get the most residents, right? They look at it and they go, "Boy, that -- yes, we need to do this to have our coding accuracy go up and our revenue integrity go up."

I think what they're finding is that the ability through these dashboards, and our inpatient dashboard is up and running and is great. It's the outpatient dashboard that we need to bring into the market here in the next couple of months. It's fabulous. You can put your finger on any kind of piece of data you want at any time, 24 hours a day. And unlike a report, and that tells you exactly what you need to know to better manage your resources. And that, I think, towards the middle of a demonstration, Brooks, really gets the attention of prospects.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [13]

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Great. Great. So let me ask one other question. I think I heard either Tom or Randy say, I think it was a pipeline of $62 million with 89 prospects. Is it -- I mean, obviously, the basic math is divide $62 million by 89 to get some average number. Is there a pretty good uniformity like that across the pipeline? Or are there a few that are bigger, maybe a lot bigger and then some that are smaller? Kind of help us get a feel for how that pipeline actually looks sort of 1 level below the surface.

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [14]

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Yes. Randy, I'll let you take that, and you might want to break it down as real fast in the total, but also maybe the top 16 or the top 20.

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [15]

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Yes, absolutely. Thanks, Brooks. I think as you can imagine, there's a variety. But I would say that a year ago, 1.5 years ago, everything we looked at was between $100,000 to, say, $200,000 a year for 3 years, SaaS fees. The average, as you can tell from the math, is up. Currently, in the top 16, there are a handful of opportunities that are in the $400,000 to $500,000 a year range. So we've had that opportunity, as I mentioned earlier, to kind of move up in the hospital system ranking. And I've said this before, Brooks, but one of the things I'm most pleased with is that the eValuator technology is so unique in the market that it's given our company an opportunity to speak with almost any hospital system or health care provider you could name. And heretofore, we could do that, and that's because of the utility of the solution. So I think as each day dawns, you look at us moving up. But we've been talking, in general terms, that an average contract is at least $300,000 a year for 3 years. Some are a little bit smaller and some are much larger. So that's not a bad average to work off of.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [16]

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Absolutely. That's great. I may just ask you one more question. So obviously, you've talked quite a little about the impact of COVID and the environment you have out there. My sense personally is hospitals aren't exactly fast-moving animals, they're more like the elephants out there in the jungle. And what do you think -- what's your sense? Are these guys ready to take action? Or are they still at a point where, a, COVID is distracting them; or b, they're just -- they're budget-constrained and they say, rather than put something new into the system, we're going to wait a while and make sure we're -- I'm level ground or something? How do you evaluate -- kind of what's your just sort of the pulse of the marketplace out there right now?

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [17]

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Yes. Thanks, Brooks. This is Tee. I'll start and Randy may add more to this. But the health systems that one, as we pointed out in our remarks, with the CARES Act, 16 of our top prospects have received funding, so that helps decision-making. And obviously, we're targeting some of these larger health systems, which are more sophisticated and much more analytical about kind of where they are coming out of this and revenues that top of the -- the list for any health system right now. And so revenue integrity's at the top of the list, and the digital transformation of where they are coming out of this. So many of these hospitals, I think, recognize their lack of digital transformation. And so we're seeing health systems. Maybe it's in -- it's pretty early, obviously, coming out. So I don't -- it is our -- more of a -- other than our top 16 prospects that have received CARES funding, that's a data point outside of that. This is our gut and having conversations with many health systems.

I think there's the leaders, maybe 1/3 of these guys are leaning into this as quickly as possible because they know they have to do something. They have to ride the ship. Then you have these guys in the middle that maybe aren't quite as prepared and a bit slower with their executive teams and their boards. And then you have this third group that may not be around anymore. But they were just so woefully underprepared going into this. But for the elite, Brooks, look at our top -- I'm not talking about the whole pipeline because I'm sure we have a group in each segment, but if you look at where we're focused in this pipeline, call it, the top 20, they're leaning back into this pretty quickly. And if you look at the claims and you let the scripts and you look at things that are starting to come back online with elective surgeries and the like, there's a lot of optimism. And now, I think everybody is pretty cautious thinking about the fall, what kind of rebound does COVID have or not have, but nobody knows. But fortunately, we're seeing, at least the CEO and the CFO, I think they recognize they have to do something different, and that bodes well for us.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [18]

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That's great.

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Wyche T. Green, Streamline Health Solutions, Inc. - President, CEO & Chairman of the Board [19]

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Randy, you may have some other things to add, but...

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [20]

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Excellent answer of the tiers, especially. We've got some that are aggressive and smart and looking for new things and others, to your point, Brooks, that are more moving like elephants. The last thing I would add to it, though, is it has helped us in the story to talk about the fact that eValuator contains COVID-19 coding analysis. They've never done this before. They've never had COVID.

And so we've done some analyses. One of the ways we market is we say, "Hey, look, give us your data, Brooks, and we can look back over the last 90 days and see how you've done at coding your COVID cases." And I won't name names, but on the few that I've seen most recently, it's pretty impressive as to how much revenue they've missed, revenue they've left on the table because of the uncertainty as to how to go about this. And it's just another plank in our platform to say, with eValuator, you have this capability as well, because to Tee's point, we don't know to what level, but this is going to come back again. Well, frankly, it's still around. But if COVID remains part of the mix going forward, any progressive health care provider is going to want to be able to code that as efficiently as they can.

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Operator [21]

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At this time, we have reached the end of the question-and-answer session. And I will now turn the call over to Randy Salisbury for closing remarks.

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Randolph W. Salisbury, Streamline Health Solutions, Inc. - Senior VP and Chief Marketing & Sales Officer [22]

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Thank you, all again, for your interest and support of Streamline Health. If you have any additional questions or need more information, please contact me at randy.salisbury@streamlinehealth.net. We look forward to speaking with you all again in September when we'll discuss our second quarter 2020 financial performance. Good day.

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Operator [23]

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This will conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.