SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies are presented in “Note 2 – Significant Accounting Policies” in the fiscal year 2015 Annual Report on Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the consolidated financial statements contained in the Annual Report on Form 10-K when reviewing interim financial results. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value of Financial Instruments The Financial Accounting Standards Board’s (“FASB”) authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Cash and cash equivalents are classified as Level 1. The carrying amount of our long-term debt approximates fair value since the variable interest rates being paid on the amounts approximate the market interest rate. Long-term debt is classified as Level 2. The table below provides information on our liabilities that are measured at fair value on a recurring basis: Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) At October 31, 2016 Warrants liability (1) $ 168,000 $ — $ — $ 168,000 Royalty liability (2) 2,385,000 — — 2,385,000 At January 31, 2016 Warrants liability (1) $ 205,000 $ — $ — $ 205,000 Royalty liability (2) 2,292,000 — — 2,292,000 _______________ (1) The initial fair value of warrants liability was determined by management with the assistance of an independent third-party valuation specialist, and by management thereafter. Changes in fair value of the warrants are recognized within miscellaneous income in the condensed consolidated statements of operations. (2) The initial fair value of royalty liability was determined by management with the assistance of an independent third-party valuation specialist, and by management thereafter. The fair value of the royalty liability is determined based on the probability-weighted revenue scenarios for the Looking Glass® Clinical Analytics solution licensed from Montefiore Medical Center (discussed in Note 3 - Acquisitions and Strategic Agreements). Fair value adjustments are included within miscellaneous income in the condensed consolidated statements of operations. Revenue Recognition We derive revenue from the sale of internally-developed software, either by licensing or by software as a service (“SaaS”), through the direct sales force or through third-party resellers. Licensed, locally-installed clients utilize our support and maintenance services for a separate fee, whereas SaaS fees include support and maintenance. We also derive revenue from professional services that support the implementation, configuration, training, and optimization of the applications. Additional revenues are also derived from reselling third-party software and hardware components. We recognize revenue in accordance with Accounting Standards Codification (ASC) 985-605, Software-Revenue Recognition, ASC 605-25, Revenue Recognition — Multiple-element arrangements , and ASC 605-10-S99. We commence revenue recognition when all of the following criteria have been met: • Persuasive evidence of an arrangement exists, • Delivery has occurred or services have been rendered, • The arrangement fees are fixed or determinable, and • Collectibility is reasonably assured. If we determine that any of the above criteria have not been met, we will defer recognition of the revenue until all the criteria have been met. Maintenance and support and SaaS agreements are generally non-cancelable or contain significant penalties for early cancellation, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations. However, if non-standard acceptance periods, non-standard performance criteria, or cancellation or right of refund terms are required, revenue is recognized upon the satisfaction of such criteria, as applicable. Multiple Element Arrangements We follow the accounting revenue guidance under Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force . Terms used in evaluation are as follows: • VSOE — the price at which an element is sold as a separate stand-alone transaction • TPE — the price of an element, charged by another company that is largely interchangeable in any particular transaction • ESP — our best estimate of the selling price of an element of the transaction We follow accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple solutions, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the client on a stand-alone basis. An item has stand-alone value to a client when it can be sold separately by any vendor or the client could resell the item on a stand-alone basis. Additionally, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items must be considered probable and substantially in the control of the vendor. We have a defined pricing methodology for all elements of the arrangement and proper review of pricing to ensure adherence to our policies. Pricing decisions include cross-functional teams of senior management, which use market conditions, expected contribution margin, size of the client’s organization, and pricing history for similar solutions when establishing the selling price. Software as a Service We use ESP to determine the value for a software-as-a-service arrangement as we cannot establish VSOE, and TPE is not a practical alternative due to differences in functionality from our competitors. Similar to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution and include calculating the equivalent value of maintenance and support on a present value basis over the term of the initial agreement period. Typically, revenue recognition commences once the client goes live on the system and is recognized ratably over the contract term. Systems Sales We use the residual method to determine fair value for proprietary perpetual software licenses sold in a multi-element arrangement. Under the residual method, we allocate the total value of the arrangement first to the undelivered elements based on their VSOE and allocate the remainder to the proprietary perpetual software license fees. Typically, pricing decisions for proprietary software rely on the relative size and complexity of the client purchasing the solution. Third-party components are resold at prices based on a cost-plus margin analysis. The proprietary software and third-party components do not need any significant modification to achieve their intended use. When these revenues meet all criteria for revenue recognition, and are determined to be separate units of accounting, revenue is recognized. Typically, this is upon shipment of components or electronic download of software. Proprietary licenses are perpetual in nature, and license fees do not include rights to version upgrades, bug fixes or service packs. Maintenance and Support Services The maintenance and support components are not essential to the functionality of the software, and clients renew maintenance contracts separately from software purchases at renewal rates materially similar to the initial rate charged for maintenance on the initial purchase of software. We use VSOE of fair value to determine fair value of maintenance and support services. Rates are set based on market rates for these types of services, and our rates are comparable to rates charged by our competitors, which are based on the knowledge of the marketplace by senior management. Generally, maintenance and support is calculated as a percentage of the list price of the proprietary license being purchased by a client. Clients have the option of purchasing additional annual maintenance service renewals each year for which rates are not materially different from the initial rate but typically include a nominal rate increase based on the consumer price index. Annual maintenance and support agreements entitle clients to technology support, version upgrades, bug fixes and service packs. Term Licenses We cannot establish VSOE fair value of the undelivered element in term license arrangements. However, as the only undelivered element is post-contract customer support, the entire fee is recognized ratably over the contract term. Typically, revenue recognition commences once the client goes live on the system. Similar to proprietary license sales, pricing decisions rely on the relative size of the client purchasing the solution. The software portion of our Looking Glass® Coding & CDI products generally does not require material modification to achieve its contracted function. Professional Services Professional services components that are not essential to the functionality of the software, from time to time, are sold separately by us. Similar services are sold by other vendors, and clients can elect to perform similar services in-house. When professional services revenues are a separate unit of accounting, revenues are recognized as the services are performed. Professional services related to coding compliance, recovery audit contractor consulting, and ICD-10 readiness are considered a single unit of accounting where we recognize revenue using proportional performance over the service period when all applicable revenue recognition criteria have been met. Professional services components related to SaaS and Term Licenses that are essential to the functionality of the software and are not considered a separate unit of accounting are recognized in revenue ratably over the life of the client, which approximates the duration of the initial contract term. We defer the associated direct costs for salaries and benefits expense for professional services contracts. These deferred costs will be amortized over the identical term as the associated revenues. As of October 31, 2016 and January 31, 2016 , we had deferred costs of $608,000 and $571,000 , respectively, net of accumulated amortization of $405,000 and $265,000 , respectively. Amortization expense of these costs was $60,000 and $41,000 for the three months ended October 31, 2016 and 2015 , respectively, and $140,000 and $90,000 for the nine months ended October 31, 2016 and 2015 , respectively. Professional service components that are essential to the functionality of perpetually licensed software and are not considered a separate unit of accounting are recognized using the percentage-of-completion method over the professional service period. If services are sold with perpetually licensed software, we use VSOE of fair value based on the hourly rate charged when services are sold separately, to determine fair value of professional services. We typically sell professional services on an hourly or fixed fee basis. We monitor projects to assure that the expected and historical rate earned remains within a reasonable range to the established selling price. Severances From time to time, we enter into termination agreements with associates that may include supplemental cash payments, as well as contributions to health and other benefits for a specific time period subsequent to termination. For the three months ended October 31, 2016 and 2015 , we incurred $110,000 and $4,000 in severance expenses, respectively, and $337,000 and $13,000 for the nine months ended October 31, 2016 and 2015 , respectively. At October 31, 2016 and January 31, 2016 , we had accrued severances of $112,000 and $26,000 , respectively. Equity Awards We account for share-based payments based on the grant-date fair value of the awards with compensation cost recognized as expense over the requisite vesting period. We incurred total compensation expense related to stock-based awards of $433,000 and $575,000 for the three months ended October 31, 2016 and 2015 , respectively, and $1,343,000 and $1,859,000 for the nine months ended October 31, 2016 and 2015 , respectively. The fair value of the stock options granted is estimated at the date of grant using a Black-Scholes option pricing model. The option pricing model inputs (such as expected term, expected volatility, and risk-free interest rate) impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and are generally derived from external (such as risk-free rate of interest) and historical (such as volatility factor, expected term, and forfeiture rates) data. Future grants of equity awards accounted for as stock-based compensation could have a material impact on reported expenses depending upon the number, value, and vesting period of future awards. We issue restricted stock awards in the form of our common stock. The fair value of these awards is based on the market closing price per share on the date of grant. We expense the compensation cost of these awards as the restriction period lapses, which is typically a one -year service period to the Company. During the first quarter of fiscal 2016 , 8,241 shares of common stock were surrendered to the Company to satisfy tax withholding obligations totaling $12,000 in connection with the vesting of restricted stock awards. Shares surrendered by the restricted stock award recipients in accordance with the applicable plan are deemed canceled, and therefore are not available to be reissued. During fiscal 2016 , the Company awarded 828,225 shares of restricted stock to officers and directors of the Company. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for tax credit and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. We establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. We provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether certain tax positions are more likely than not to be sustained upon examination by tax authorities. We believe we have appropriately accounted for any uncertain tax positions. The Company has recorded zero reserves for uncertain tax positions and corresponding interest and penalties as of both October 31, 2016 and January 31, 2016 . Net Loss Per Common Share We present basic and diluted earnings per share (“EPS”) data for our common stock. Basic EPS is calculated by dividing the net loss attributable to common stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated based on the profit or loss attributable to common stockholders and the weighted average number of shares of common stock outstanding, adjusted for the effects of all potential dilutive common stock issuances related to options, unvested restricted stock, warrants and convertible preferred stock. Potential common stock dilution related to outstanding stock options, unvested restricted stock and warrants is determined using the treasury stock method, while potential common stock dilution related to Series A Convertible Preferred Stock is determined using the “if converted” method. Our unvested restricted stock awards and Series A Convertible Preferred Stock are considered participating securities under ASC 260, Earnings Per Share , which means the security may participate in undistributed earnings with common stock. Our unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. The holders of the Series A Convertible Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Diluted EPS for our common stock is computed using the more dilutive of the two-class method or the if-converted method. In accordance with ASC 260, securities are deemed not to be participating in losses if there is no obligation to fund such losses. For the three and nine months ended October 31, 2016 and 2015 , the unvested restricted stock awards and the Series A Convertible Preferred Stock were deemed not to be participating since there was a net loss from operations. As of October 31, 2016 , there were 2,949,995 shares of preferred stock outstanding, each of which is convertible into one share of our common stock. For the three and nine months ended October 31, 2016 and 2015 , the Series A Convertible Preferred Stock would have an anti-dilutive effect if included in diluted EPS and therefore, was not included in the calculation. For the three and nine months ended October 31, 2016 , 390,395 and 372,715 , respectively, unvested restricted shares of common stock were excluded from the diluted EPS calculation as their effect would have been anti-dilutive. For the three and nine months ended October 31, 2015 , 39,576 and 31,023 , respectively, unvested restricted shares of common stock were excluded from the diluted EPS calculation as their effect would have been anti-dilutive. The following is the calculation of the basic and diluted net loss per share of common stock: Three Months Ended October 31, 2016 October 31, 2015 Net loss $ (1,930,472 ) $ (456,661 ) Less: deemed dividends on Series A Preferred Stock (72,710 ) (346,339 ) Net loss attributable to common stockholders $ (2,003,182 ) $ (803,000 ) Weighted average shares outstanding used in basic per common share computations 19,645,521 18,746,632 Stock options and restricted stock — — Number of shares used in diluted per common share computation 19,645,521 18,746,632 Basic net loss per share of common stock $ (0.10 ) $ (0.04 ) Diluted net loss per share of common stock $ (0.10 ) $ (0.04 ) Nine Months Ended October 31, 2016 October 31, 2015 Net loss $ (4,142,381 ) $ (2,886,873 ) Less: deemed dividends on Series A Preferred Stock (875,935 ) (967,014 ) Net loss attributable to common shareholders $ (5,018,316 ) $ (3,853,887 ) Weighted average shares outstanding used in basic per common share computations 19,477,538 18,658,626 Stock options and restricted stock — — Number of shares used in diluted per common share computation 19,477,538 18,658,626 Basic net loss per share of common stock $ (0.26 ) $ (0.21 ) Diluted net loss per share of common stock $ (0.26 ) $ (0.21 ) Diluted net loss per share excludes the effect of outstanding stock options that relate to 2,146,547 and 2,370,161 shares of common stock for the nine months ended October 31, 2016 and 2015 , respectively. The inclusion of these stock options would have been anti-dilutive. For the three and nine months ended October 31, 2016 and 2015 , the warrants to purchase 1,400,000 shares of common stock would have an anti-dilutive effect if included in diluted net loss per share, and therefore were not included in the calculation. Recent Accounting Pronouncements In August 2014, the FASB issued an accounting standard update relating to disclosures of uncertainties about an entity’s ability to continue as a going concern. The update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in the event that there is such substantial doubt. The update will be effective for us on February 1, 2017. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB delayed the effective date by one year and the guidance will now be effective for us on February 1, 2018. Early adoption is permitted. The guidance is to be applied using one of two retrospective application methods. We are currently evaluating the impact of the adoption of this accounting standard update on our internal processes, operating results, and financial reporting. In April 2015, the FASB issued an accounting standard update relating to simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update became effective for us on February 1, 2016. As of October 31, 2016 , the reported term loan balance includes deferred financing costs totaling $217,000 , net of accumulated amortization of $138,000 . In September 2015, the FASB issued an accounting standard update relating to the accounting for business combinations. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The update became effective for us on February 1, 2016. For the periods included in this report, there was no impact on our financial position or results of operations as a result of the adoption of this update. In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes , to simplify the presentation of the deferred income taxes. The ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance did not change the existing requirement that only permits offsetting within a tax-paying component of an entity. The Company elected to early adopt ASU 2015-17 prospectively in the fourth quarter of fiscal 2015. As a result, all deferred tax assets and liabilities are presented as noncurrent on the condensed consolidated balance sheets. For the periods included in this report, there was no impact on our results of operations as a result of the adoption of ASU 2015-17. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The update will be effective for us on February 1, 2019. Early adoption of the update is permitted. The Company is evaluating the impact of the adoption of this update on our consolidated financial statements and related disclosures. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), to improve the accounting for employee share-based payments. The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted. The update will be effective for us on February 1, 2017. We are currently assessing the impact of adopting this guidance on our financial statements. |