Streamline Health Solutions Inc (STRM) 2011 Q3 法說會逐字稿

Greetings and welcome to the Streamline Health Solutions third-quarter earnings teleconference. At this time all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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.

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 statement. 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 including 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 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 US Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect Managements 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?

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 in the Company. First of all, I'd like to highlight the increasing momentum that we have gained. Over three full quarters it has become apparent that we have made meaningful achievements against our five key strategic initiatives, including the very important financial ones, 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's 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?

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

Total revenues for the three 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 nine 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 nine month period, primarily as a result of meeting milestones of systems implementations and services sold in prior quarters.

Recurring revenue from maintenance contracts increased $270,000 or 13% over the prior comparable third quarter, as a result of revenue recognized from backlog and from commencements of maintenance periods subsequent to the third quarter of 2010. For the nine months ended October 31, 2011, revenue from maintenance contracts increased 13% over the prior comparable nine-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 work flow 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 three 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 nine 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 cost.

The cost of system sales for the third quarter was $583,000, a 21% decrease over the prior comparable quarter. And our year-to-date basis cost of systems sales decreased 22% over the prior comparable period. The decline was primarily a result of the 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 a $1.086 million as compared to $1.347 million 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.

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 licenses 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 million as compared to $1.362 million for the prior comparable quarter. On a year-to-date basis, selling, general and administrative expenses were $4.742 million, 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 cost.

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 nine months ended October 31, 2011, research and development expenses were $1.064 million, 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 million for the nine months ended October 31, 2011 compared to $1.942 million 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 million for the prior comparable quarter and were $3.034 million, 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 from the prior comparable quarter. For the nine months ended October 31, 2011, the Company incurred an operating profit of $130,000 compared to an operating loss of $1.084 million for the comparable prior year-to-date period. The $1.214 million increase in operating profit is the 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 zero cents 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 million, 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 of $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 the result of the timing of the receipt of signed annual maintenance contracts or payment of renewal invoices where certain clients either pay to renew an invoice or signed a maintenance renewal contract at an earlier date. Third quarter and 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 interest expense, tax expense, depreciation and amortization expense of tangible and intangible assets and stock-based compensation expense. Given the relatively large amount of non cash charges, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash base earnings. For the nine months ended October 31, 2011, adjusted EBITDA was $2.625 million compared to a corresponding adjusted EBITDA of $1.910 million 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 million. 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 and 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?

Thanks, Steve. As it relates to quarter three, 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 rates 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 cost 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 went the contract is signed and implementation. This lag can be as much as nine 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 as 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 five strategic areas of focus, as we transform Streamline Health during 2011. I would like to take a moment and comment on our progress of 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 points and to continue to drive costs 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 three client webinars from a series of four 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, will 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 beta partner clients for our Epic integration suite co-hosted 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 to our 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 campaigns and trade show activities. 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 HIMSS and AHIMA, and will likely add one or two more such as HSMA 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 the standard register leadership on the terms of a revised relationship 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 competency 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, have 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 SaaS term for additional five 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 three clients to upgrade to AccessAnyWare 5.1, which will bring the total number of clients who have committed to migrating to our newest platform to five. We expect this trend to continue into 2012. Agreements with four clients, including those mentioned previously, to implement our Epic integration suite, which will increase our number of Epic integrations to six, with two 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 this 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 billable 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 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 are 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 two 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 roles.

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 realtime access to financial data and a robust reporting engine coupled with an agile work flow management system. The Interpoint Solutions are designed to help hospitals, employ physicians and large physician practices, optimize the 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 work flow engine and existing work flow 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 the long-term financial benefits of this transaction, there are three 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 patients 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 lead 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 contributions.

Third, there's virtually no overlap in our current client bases. This will allow us to maximize the cross-sell opportunities that we are developing based on the integration points between our products. The solutions about Streamline Health and Interpoint are generally used by the departments and the hospital that report up to the same executive, the hospitals' 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 on a EPS basis, excluding the impact of non cash 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 three quarters of this year in each of our five 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 team 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 in its 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, results and support of Managements' strategic and operating plan. 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 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.

(Operator Instructions) Joe Munda of Sidoti & Company.

Good morning, guys. Thank you for taking my call and my questions.

Hi, Joe. Nice to talk to you.

Real quick, just a couple of questions. By the way congratulations on a very good quarter.

Thank you.

The Interpoint acquisition, first off, how much do they do in revenue, ballpark?

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 services business that this is a business that for the current year is approximately in the $2 million revenue range.

And in the press release you guys had said $5 million split between debt and cash, how much cash are you guys laying out up front?

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

Okay, and that is due to close when?

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.

Okay. All right.

I don't mean to be vague, Joe, but I--

No, no, I understand. I understand. The other thing was in terms of R&D, you guys had mentioned R&D had come down to the $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?

Well it is in the capitalized piece is a little bit higher than that as Steve pointed out, so--

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

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 packs, for example, will naturally go down. So some of that R&D cost 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.

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.

Yes, we might see a little erosion in the near term but I mean frankly, let us--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, they have a very lean organization, it's 10 people, whatever, so we're not expecting a material impact at that line.

Okay, and then in terms of the backlog, you had $16.8 million. You said software as a service right now, I looked at 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 nine months?

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

Okay, so out of the total backlog, how much do you guys expect to work through in fiscal 2012?

Of that-- of the software as a service?

No, of the total, the total $16.8 million.

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

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

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

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.

Steve, do you want to answer that?

Sure. I mean we have significant NOLs. We're not really bringing anything over from the Interpoint acquisition, they were an LLC. So I mean I think 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.

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 looking-- I mean would it be safe to assume 5% or 10% just for modeling?

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

Okay, great. Thank you guys. I'll hop back in the queue.

Thanks, Joe.

(Operator Instructions) Sam Rebotsky of SER Asset Management.

Yes, good morning, Bob and Steve. 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?

The way I look at it, Sam, and by the way thanks for joining call as usual. So I appreciate your resiliency in joining us. One of the ways to look at it is 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 and 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 would hit fourth quarter. The-- as I said in my prepared remarks, any software service contract that's signed is going to be about a nine 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 nine 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 the build and the revenue stream.

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

No, no, Sam, their entire revenue is software as a service.

Okay.

I mean they'll 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.

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

Oh, no no no, they have a complete product set. Their primary product is called the Opportunity Explorer and beyond that is a secondary product called Opportunity Manager, those are the two primary products in their suite today. The users at the hospital end or the physician group end are people in the financial, billing and offices were using that to identify opportunities and once those opportunities, and 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, in Opportunity Manager, which is a series of workflows that allows our clients to standardize business process, not unlike what we do in the HEMS 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.

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

Absolutely.

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 two separate products?

No they will-- we will, I mentioned this in prepared remarks, I mean we will certainly integrate the products. It can be sold standalone. They have a certain number of customers today where they've successfully sold it and deployed it on a standalone basis. We have clients today where we believe, and it's part of our due diligence, that those clients are an opportunity for us to cross-sell this product in and integrate it with our core AccessAnyWare product. There are parts of the patient center 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 receivables process of our clients. The products will be very tightly linked.

Well that sounds very good and I guess you filed the 8-K which has a bunch of information relative to the transaction. The 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 or is there any way to look at that at this point?

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.

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

I am indeed.

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

Potentially, we're competitors. We're also potentially partners.

Partners, okay.

It can go either way.

Okay. Because 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?

Well, look, 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've 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 in each of the last two calls, this being-- or at least the last three 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 this year which positions us going into fiscal 2012 to be able to deliver on some growth opportunities.

Sounds good. Good luck.

Thank you, Sam.

(Operator Instructions) Alex Silverman of Special Situations Fund.

Good morning.

Hi, Alex.

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?

Sure. Matt Seefeld will be joining us in a role as Chief Strategy Officer for Revenue Cycle, so essentially sort of a cross-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 has 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 eight 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.

Okay, how have they historically-- it sounds like they're somewhat light on quota carrying sales folks, how have they historically gone to market?

Matt Seefeld was the sales person.

Got it. Understood.

And like a lot of small companies that are poorly or under capitalized, they struggled with that and I've run that myself in the past and I know how challenging it is and the CEO has to be the lead sales person. 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.

Okay. Transitioning, you said it's an asset purchase agreement; is that correct?

Yes, sir.

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?

There was a-- as you'd expect in any asset purchase agreement involving 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 days as we get this thing to closing.

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

No.

No and just to 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'll just be-- every month we'll have those added to our receivables and we'll collect them some time in the subsequent month.

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

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.

Okay, and then my last question, seasonally, historically, hasn't third quarter been a quarter where you have had stronger cash flow and therefore paid down debt relative to second quarter?

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 this particular quarter that some of those moved over into the fourth quarter.

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

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.

Got it. That's very helpful, thank you, folks.

Thanks, Alex.

(Operator Instructions) [Mark Cahill], a private investor.

Good morning or good afternoon, good quarter and good acquisition.

Thanks, Mark.

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

No, we are. We have ongoing conversations with, 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 its 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.

Okay. How long do you think it will take to integrate Interpoint, it would be three months, six months, longer?

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. So the reality is, these things are always a process. We always like to have them done faster, I think conceptually 180 days, six-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.

Right, in your remarks you had mentioned the RAC solution, the Recovery Audit Compliance solution, and I know prior to you joining the Company, Streamline had worked on that product it was introduced in webinars. And it sounds like Interpoint has something very similar or better, is that correct?

I knew somebody was going to ask me that question, Mark. Yes, Streamline had previously-- prior to arrival, 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.

Sounded like it was a very popular, there's a lot of interest from clients.

Well it's just more than just a-- frankly it's more than just the RAC audits. I mean it-- I mean that's a problem that I think appeared on the-- on a sort of landscape of healthcare CFOs probably six or seven or eight years ago and while the term is used, it's sort of almost like a generic term today. The fact of the matter is there 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 have built at Interpoint addresses that problem in a manner that I find personally having a lot of experience in revenue cycle space 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 I-- our belief going into this is that our clients and both current and future will benefit from that offering.

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

Our positioning on any of our partner relationships is those that 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 are also confident that we will have at least either another or a replacement for them.

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?

Yes, I think that's in the ballpark. I mean, I think our spend pattern-- I speak to this earlier when I was talking to Joe Munda from Sidoti, that I think our-- from building a model standpoint, or maybe it was Sam Rebotsky, 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-- we noted that our pipeline, 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 that we have the appropriate resources on Michael Brooks' team and 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 three 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 map that spend in our revenues in a format that's rational. And we're going to continue to do it. We've got to go through that same rationalization now with the Interpoint folks joining the team. And again, I sort of said it at the end of my prepared remarks today, is I want to remind everybody 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.

No, I understand that you're moving along very well too.

Thank you.

Last question. There was a question earlier about taxes. Going forward, I think any taxes that you're going to have to pay would be related to state and local taxes, it's certainly not Federal, you got NOLs, quite a few of NOLs. Am I right in that thinking?

Yes, that'd be correct.

All right, you've got a full plate, gentlemen. Thank you very much.

Thanks, Mark.

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

Again, my thanks to everyone for participating in today's call. In the past three 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.

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.