Q1 2023 Streamline Health Solutions Inc Earnings Call

Participants

Benjamin L. Stilwill; President; Streamline Health Solutions, Inc.

Jacob Goldberger; Director of IR and FP&A; Streamline Health Solutions, Inc.

Thomas J. Gibson; Senior VP, CFO & Principal Accounting Officer; Streamline Health Solutions, Inc.

Wyche T. Green; Chairman of the Board & CEO; Streamline Health Solutions, Inc.

Brooks Gregory O'Neil; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division

Matthew Gregory Hewitt; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division

Presentation

Operator

Greetings. Welcome to Streamline Health Solutions First Quarter Fiscal 2023 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. At this time, I'll turn the conference over to Jacob Goldberger. Jacob, you may now begin.

Jacob Goldberger

Thank you for joining us for the corporate update and financial results review of Streamline Health Solutions for the first quarter of fiscal 2023, which ended April 30, 2023. As the conference call operator indicated, my name is Jacob Goldberger. Joining me on the call today are Tee Green, Chief Executive Officer and Chairman of the Board; Ben Stilwill, President; 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 from the company's website at www.streamlinehealth.net or from numerous 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. 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. 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.
On today's call, we will discuss non-GAAP financial measures, such as adjusted EBITDA and Booked SaaS ACV. 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 you compare these amounts on consistent terms, please refer to our website at www.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, Chief Executive Officer.

Wyche T. Green

Thank you, Jacob, and thank you all for joining us this morning. Following my opening remarks, Ben Stilwill, President, will provide an operations and sales update, followed by a financial update from our CFO, Tom Gibson. Beginning with the financial overview. During 2022, we began reporting a new metric, Booked SaaS ACV, which is the annualized contract value for all agreements that are being recognized into revenue as well as bookings that have not been implemented.
As of April 30, 2023, Booked SaaS ACV was $17.8 million as compared to $17.2 million as of January 31, 2023. $12.7 million of our Booked SaaS ACV is implemented and contributing to recognized revenue. Our growth team is negotiating with large IDNs and hospital networks. And as a result, we expect some lumpiness in our reported bookings. That said, our first quarter was below our expectations.
As of April 30, 2023, we had $6 million of cash on our balance sheet, and the balance on our term loan was $9.6 million. We believe our cash on hand is sufficient to achieve positive adjusted EBITDA less capitalized software development in fiscal 2023. We have access to a $2 million of liquidity through our non-formula line of credit.
We combined Avelead and eValuator operations on November 1, 2023. Under Ben's leadership, the integration process was executed smoothly, and we continue to achieve significant cost savings and operational improvements. We are working towards four corporate objectives in fiscal 2023. To have a client leveraging both our flagship solutions, RevID and eValuator. An Epic-based facility utilizing RevID improved performance from our partner channel and the achievement of breakeven adjusted EBITDA less capitalized software.
Our flagship solutions are gaining a foothold in the industry. Our prebuilt solutions allow our clients to build accurately the first time. We believe this has a significant financial impact for our hospital system clients and offer a fundamentally better way of doing business. Our nation's healthcare providers continue to emerge from COVID, solutions like ours are critical to their financial recovery. Our solutions yield higher net patient revenue margins for our clients, increasing their available cash to better pay for higher cost of personnel and supplies.
We have often commented about the backlog of potential high-priority projects that we are competing with inside our hospital clients in some cases, even after successful bookings. That macro environment is easing, and we expect implementations to accelerate meaningfully over the quarters to come and maintain our expectation of having $17 million of SaaS ARR implemented during the third quarter of this fiscal year, and that run rate will translate to breakeven adjusted EBITDA.
We also continue to expect we will exit fiscal 2023 with $30 million of Booked SaaS ACV. With that, I'd like to turn the call over to our President, Mr. Ben Stilwill.

Benjamin L. Stilwill

Thank you, Tee. The integrated Streamline team is growing closer each day and is making significant progress towards our annual priorities, which are: one, scaling the RevID and compare technology for growth; two, increasing client effectiveness through eValuator usability; three, enhancing delivery for RevID and compare clients; four, doubling eValuator client outcomes through our enhanced rules; and five, expanding our reach to new logo clients.
Our innovation team has been hard at work retooling the architecture of our RevID and compare solutions. Currently, we expect that work will be completed during the third quarter of this year. In addition, our services team has developed an improved repeatable implementation plan for those solutions, which will translate to faster, more dependable implementation timelines.
We saw a 20% increase in eValuator's DRG change rate during the first quarter, which I attribute to the rules team we established in November 2022. Our eValuator rules teams has been expanding the rule's library, largely focused on clinical indicator-driven rules, a deeper level of specificity than the tool previously achieved.
Within our growth function, we are finding novel ways to replicate the success we've seen in the Southeast region across our other three regions. In addition, we are getting smarter about who we target through our ideal client profile, which uses quantifiable attributes of potential clients to rank their likelihood to buy and be a successful client for our solutions.
The first quarter was slower than expected for growth wins, but we are excited for the team to execute, especially in the back half of this year. The growth team has three pathways to success for fiscal 2023: The direct channel, where we have made continued investments; our partner channel, where we leverage larger sales forces to influence or resell our solutions; and our existing client base.
Our growth in services functions must continue to execute for each pathway to perform. The integrated team is up to speed and generating momentum daily. As Tee stated, we are disappointed in our first quarter results, but still feel strongly about our growth prospects in fiscal 2023 from our ongoing investments and the strong team we have assembled.
Before I turn the call over to Tom, I would like to thank all of our hard-working team members, who are supporting our mission to ensure our healthcare provider clients are paid for all the care they provide. I'm very excited to lead our talented team and believe strongly that our innovation plus service equals growth formula will yield tremendous results for all of us as we continue to execute and expand. With that, I'll hand the call over to our CFO, Tom Gibson.

Thomas J. Gibson

Thank you, Ben. Please note, the company has moved past all previous periods that include discontinued operations from the sale of the ECM business in fiscal 2020 or pro forma information for the acquisition of Avelead in fiscal 2021. At the end of fiscal 2022, the company changed its categories for reporting revenue. SaaS revenue is now the headline of our income statement.
For the quarter ended April 30, 2023, total revenue was $5.3 million compared to $5.9 million during the prior year period. As previously reported, the company had a large professional services contract that did not renew at the end of its 2022 fiscal year. These professional services contracts are not part of the company's core business going forward.
SaaS revenue grew 12% in the first quarter of 2023 compared to the first quarter of 2022. You will see growth on the SaaS revenue line in the coming quarters as the company has successfully implemented its solutions. We currently anticipate 30% SaaS revenue growth in fiscal 2023 compared to fiscal 2022. The company has approximately $5.1 million of unimplemented Booked SaaS ACV as of April 30, 2023.
While we had a number of successful go-lives during the first quarter, they finalized during the middle of April, and as a result, little or no revenue was recognized from those agreements. However, we expect second quarter 2023 revenue to include a full quarter of revenue recognition from these first quarter go-lives in addition to partial revenue from contracts implemented during the second quarter of 2023.
Total operating expense was $8.3 million during the first quarter of 2023, down 9% compared to $9.1 million for the first quarter of 2022, respectively. The lower operating expense was attributable to the lower headcount associated with the nonrenewal of the large professional services contract as well as the cost savings achieved through the integration of Avelead and eValuator businesses discussed earlier.
Historically, the company's first quarter operating expense is its highest, due to expenditures associated with its annual audit and shareholder meeting. First quarter 2023 net loss totaled $2.9 million compared to a loss of $2.8 million in fiscal 2022. The static net loss on lower revenues demonstrates the value of growing our high-margin SaaS revenue as compared with the professional services contract that was not renewed.
First quarter 2023 adjusted EBITDA was a loss of $1.3 million, unchanged compared to the first quarter of fiscal 2022. The company expects this adjusted EBITDA loss will narrow rapidly and anticipates reaching breakeven adjusted EBITDA in the third quarter of fiscal 2023. The company believes it needs to implement approximately $4 million of its unimplemented Booked SaaS ACV to achieve this goal.
Moving to the balance sheet. As of April 30, 2023, we had $6 million of cash on hand compared to $6.6 million at January 31, 2023. Under the Avelead acquisition agreement, the company has contracted to provide an additional consideration on each of the first two 12-monthly anniversaries of the closing date. The first of these payments was paid in the fourth quarter of fiscal 2022, using approximately $2 million of cash and $3 million of restricted common stock.
The second payment will also be paid in cash and stock and is valued on the balance sheet at approximately $3.4 million. Of this amount, it is estimated that we will pay approximately $1.4 million in cash. The liability is referred to as acquisition earn-out liability on the company's balance sheet.
Subsequent to the closing of the Avelead acquisition in 2021, we entered into a 5-year $10 million term loan with Bridge Bank. There was no repayment of the term loan required in the first year following the close. $500,000 or $41,667 monthly are required in the second 12-month period following the close. The balance of our term loan as of April 30, 2023, was $9.6 million.
We also have access to a $2 million line of credit, which we could draw if necessary. We believe that our cash on hand is sufficient to achieve positive adjusted EBITDA less capitalized software development, but are pleased to have access to additional liquidity if necessary. As Tee mentioned, we have introduced a new metric that we call Booked SaaS ACV, where ACV stands for annual contract value.
We believe that Booked SaaS ACV is a proxy for our annual recognized revenue as if all executed contracts are live and recognizing revenue. Please note that the recognition of revenue from our signed contracts is subject to the timing of implementations. Implementations may sometimes be delayed by clients due to competing projects or be timed after a larger implementation of another system.
Our Booked SaaS ACV as of April 30, 2023, totaled $17.6 million, and $5.1 million of that Booked SaaS ACV was not implemented. On its current cost structure, we believe our overall business will achieve breakeven at a SaaS revenue run rate of $17 million. We achieved this level of bookings in Q4 of 2022 and expect to have the majority of this revenue fully implemented during the third quarter of 2023.
The company is realizing incremental SaaS gross margins above 80%. I am proud of the progress this company continues to make and want to commend all of our staff. That concludes my review. I will now turn the call back to Tee Green for his closing remarks. Tee?

Wyche T. Green

Thank you, Tom. We continue to enable healthcare providers to proactively address revenue leakage and improve financial performance and have taken major steps forward to drive recurring revenue streams that better position our company for growth and to deliver significant shareholder value over the long term. The alignment has enabled us near-term visibility to cash flow without losing momentum in growth or innovation.
We believe that, given the macroeconomic conditions facing all companies today, our ability to be self-sustaining and generate cash from operations is a significant next step in our life cycle. I am proud of our team for making the necessary changes in executing on this milestone for our business. Before we begin our Q&A session, I'd like to thank the entire Streamline team once again for all their hard work and dedication.
Their contributions are essential for us to support our healthcare providing clients and ensure they have the necessary tools to free up time and resources to provide quality care for the communities they serve. Thank you all for your support of Streamline Health and our vision. Now I'd like to open the call up to your questions. Operator?

Question and Answer Session

Operator

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

Matthew Gregory Hewitt

Maybe first up, if we could talk a little bit about the macro environment, it sounds like you're seeing some improvement. Hospitals are making decisions a little bit faster. You're allowed to get in to get the implementations done a little bit faster. But what are you hearing and seeing from customers today? And is that what is giving you confidence that you can hit your targets for the year?

Wyche T. Green

Yes, Matt, Tee here. Thanks for the question. Clearly, we were disappointed in the bookings in the quarter. But as you know, anybody that's been around healthcare, at least in the large health system, that's always lumpy. And so that's going to be normal and as continue to move forward. But what we have seen is, yes, there are decisions being made, which is exciting because that's when we know that contracts are being negotiated. So that's why we're confident in this back half.
And I guess one other thing that we're really pleased with, in some areas of the country, the legal departments aren't as backed up as they were. So that's a plus. And some areas of the country the IT staff are not as backed up. And so we're able to move forward with things we've already booked, we're actually able to get them installed. So yes -- are we seeing an improvement? Yes. Is it improving fast enough. We would like it to go faster because we have capacity. But it's -- these health systems, some areas of the country are just doing a lot better than others.

Matthew Gregory Hewitt

Understood. That's helpful. And then maybe a little bit different question. So you're working on the integration of Avelead -- Avelead's RevID and the eValuator platform. What other types of innovation are you working on for the software to stay ahead of the market?

Wyche T. Green

Yes, great question. Obviously, we've done a lot of work over the years on eValuator and that platform is incredibly solid, enterprise class. And then the RevID product, obviously, it's approaching that status as well. And then I think over the next couple of quarters, you'll be able to hear from us and see from us what we're doing on the AI front and what that's going to mean to the revenue cycle platforms is going to be amazing.

Operator

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

Brooks Gregory O'Neil

Tee, I just heard you say the magic words that seem to resonate with all investors. Right now, AI, obviously, see some indications that people I heard Dr. [Got] Lee talk about concerns about AI and healthcare, but it seems to me that the kind of rev cycle work you guys do is a totally natural application for AI in an area where it could really help these health systems with staffing, with technology solutions and whatnot. Can you just give us a little color on some of the things you might be thinking about working on for the future?

Wyche T. Green

Yes. I mean if you just think about the revenue cycle, especially in the prebuild, we were the front runners, we believe. When you're dealing with the hundreds and hundreds of thousands of different scenarios, if you can train your AI platforms correctly, those are going to enhance what your teams can do, and it's going to enhance what our clients can do. And so we're not talking about AI in a way that's going to help a physician diagnose.
We're on the other side of that, right? We're using technology to be able to process hundreds and hundreds of thousands of different scenarios and provide our teams with things that we as humans may miss.

Brooks Gregory O'Neil

That makes sense to me. So just following up on Matt's question on the disappointment. Would you guys say that the confidence you have in the outlook is more based on work you're doing to simplify in Streamline implementations? Or is it more based on your expectation that the external environment is it going to improve in the back half of the year?

Wyche T. Green

So I think a bit of both. Our growth teams are engaged in just some really exciting opportunities on the booking side. And then from the implementation side, our teams have -- one, innovation has gotten so much stronger, obviously, on the eValuator and RevID, which enables our service teams to be able to implement these systems much more efficiently.

Brooks Gregory O'Neil

Cool. That makes sense. And then the last question I had was, I think I understand your thinking about dialing back on the service part of the business to favor the SaaS side of the business. But can you just confirm that the nonrenewal of the contract you called out in the press release is consistent with your planning, your expectations and that a move that maybe the client made to your dismay?

Wyche T. Green

Yes, Tom, go ahead.

Thomas J. Gibson

Thank you, Tee. I had to get off of mute. So we had put no investment in the professional services side of our business. And so we knew that contract would come to an end, and we have not been pursuing new contracts. So I think the answer to your question, Brooks, and thank you for the question, is that we had -- that was part of our plan.

Operator

At this time, we have reached the end of our question-and-answer session. We also thank you for joining our conference today, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.