TRUBRIDGE, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified generally by the use of forward-looking terminology and words such as "expects," "anticipates," "estimates," "believes," "predicts," "intends," "plans," "potential," "may," "continue," "should," "will" and words of comparable meaning. Without limiting the generality of the preceding statement, all statements in this report relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking statements. We caution investors that any such forward-looking statements are only predictions and are not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include: Risks Related to Our Industry •the ongoing COVID-19 pandemic and related economic disruption; •saturation of our target market and hospital consolidations; •unfavorable economic or market conditions that may cause a decline in spending for information technology and services; •significant legislative and regulatory uncertainty in the healthcare industry; •exposure to liability for failure to comply with regulatory requirements; Risks Related to Our Business •competition with companies that have greater financial, technical and marketing resources than we have; •potential future acquisitions that may be expensive, time consuming, and subject to other inherent risks; •our ability to attract and retain qualified client service and support personnel; •disruption from periodic restructuring of our sales force; •our potential inability to manage our growth in the new markets we may enter; •exposure to numerous and often conflicting laws, regulations, policies, standards or other requirements through our international business activities; •potential litigation against us; •our use of offshore third-party resources; Risks Related to Our Products and Services •potential failure to develop new products or enhance current products that keep pace with market demands; •exposure to claims if our products fail to provide accurate and timely information for clinical decision-making; •exposure to claims for breaches of security and viruses in our systems; •undetected errors or problems in new products or enhancements; •our potential inability to convince customers to migrate to current or future releases of our products; •failure to maintain our margins and service rates; •increase in the percentage of total revenues represented by service revenues, which have lower gross margins; •exposure to liability in the event we provide inaccurate claims data to payors; •exposure to liability claims arising out of the licensing of our software and provision of services; •dependence on licenses of rights, products and services from third parties; •a failure to protect our intellectual property rights; •exposure to significant license fees or damages for intellectual property infringement; •service interruptions resulting from loss of power and/or telecommunications capabilities; Risks Related to Our Indebtedness •our potential inability to secure additional financing on favorable terms to meet our future capital needs; •substantial indebtedness that may adversely affect our business operations; •our ability to incur substantially more debt; •pressures on cash flow to service our outstanding debt; •restrictive terms of our credit agreement on our current and future operations;
Risks Related to Our Common Stock and Other General Risks •changes in and interpretations of financial accounting matters that govern the measurement of our performance;
27
--------------------------------------------------------------------------------•the potential for our goodwill or intangible assets to become impaired; •quarterly fluctuations in our financial results due to various factors; •volatility in our stock price; •failure to maintain effective internal control over financial reporting; •lack of employment or non-competition agreements with most of our key personnel; •inherent limitations in our internal control over financial reporting; •vulnerability to significant damage from natural disasters; and •exposure to market risk related to interest rate changes.
Additional information concerning these and other factors that could cause
differences between forward-looking statements and future actual results is
discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for
the year ended
Background
CPSI is a leading provider of healthcare solutions and services for community hospitals and other healthcare systems and post-acute care facilities. Founded in 1979, CPSI offers its products and services through six companies -TruBridge, LLC ("TruBridge"),Evident, LLC ("Evident"),American HealthTech, Inc. ("AHT"), iNetXperts, Corp. d/b/aGet Real Health ("Get Real Health "),TruCode LLC ("TruCode"), andHealthcare Resource Group, Inc. ("HRG"). These combined companies are focused on improving the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our clients. The individual contributions of each of these companies towards this combined focus are as follows: •TruBridge provides business management, consulting, and managed IT services along with its complete revenue cycle management ("RCM") solution for all care settings, regardless of their primary healthcare information solutions provider.
•Evident, which makes up our Acute Care EHR reporting segment, provides
comprehensive acute care electronic health record ("EHR") solutions, Thrive and
•AHT, which makes up our Post-acute Care EHR reporting segment, provides a comprehensive post-acute care EHR solution and related services for skilled nursing and assisted living facilities.
•Get Real Health, included within our
•TruCode, included within our
•HRG, included within ourTruBridge segment, provides customized RCM solutions and consulting services that enable hospitals and clinics to improve efficiency, profitability, and patient satisfaction. Our companies currently support acute care facilities and post-acute care facilities with a geographically diverse customer mix within the domestic community healthcare market. Our target market for ourTruBridge services includes community hospitals with fewer than 600 acute care beds. Our target market for our acute care solutions includes community hospitals with fewer than 200 acute care beds. Our primary focus within this defined target market is on hospitals with fewer than 100 beds, which comprise approximately 98% of our acute care hospital EHR client base. The target market for our post-acute care solutions consists of approximately 15,500 skilled nursing facilities that are either independently owned or part of a larger management group with multiple facilities.
See Note 17 to the condensed consolidated financial statements included herein for additional information on our three reportable segments.
Management Overview
Strategy
Our core strategy is to achieve meaningful long-term revenue growth by cross-sellingTruBridge services into our existing EHR customer base, expandingTruBridge market share with sales to new community hospitals and larger health systems, and pursuing competitive EHR takeaway opportunities in the acute and post-acute markets. We may also seek to grow through acquisitions of businesses, technologies or products if we determine that such acquisitions are likely to help us meet our strategic goals. 28 --------------------------------------------------------------------------------
The opportunity to cross-sellTruBridge services is greatest within our Acute Care EHR customer base. As such, retention of existing Acute Care EHR customers is a key component of our long-term growth strategy by protecting this base of potentialTruBridge customers, while at the same time serving as a leading indicator of our market position and stability of revenues and cash flows. We determine retention rates by reference to the amount of beginning-of-period Acute Care EHR recurring revenues that have not been lost due to customer attrition from our production environment customer base. Production environment customers are those that are using our applications to document live patient encounters, as opposed to legacy environment customers that have view-only access to historical patient records. Historically, these retention rates had consistently remained in the mid-to-high 90th percentile ranges and have not materially deviated from this range during 2021 or the first three months of 2022. As we pursue meaningful long-term revenue growth by leveragingTruBridge as a growth agent, we are placing ever-increasing value in further developing our already significant recurring revenue base to further stabilize our revenues and cash flows. As such, maintaining and growing recurring revenues are key components of our long-term growth strategy, aided by the aforementioned focus on customer retention. This includes a renewed focus on driving demand for subscriptions for our existing technology solutions and expanding the footprint forTruBridge services beyond our EHR customer base.
While the combination of revenue growth and operating leverage results in increased margin realization, we also look to increase margins through specific cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies. However, in the immediate future, we anticipate incremental margin pressure from the continued client transition from perpetual license arrangements to "Software as a Service" arrangements as described below.
Industry Dynamics
Turbulence in theU.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected byU.S. regulatory and national health initiatives. In recent years, there have been significant changes to provider reimbursement by theU.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing the fee-for-service reimbursement model in part by enrolling in an advanced payment model that incentivizes high-quality, cost effective-care via value-based reimbursement. This pressure could further encourage adoption of healthcare IT and increase demand for business management, consulting, and managed IT services, as the future success of these healthcare providers is greatly dependent upon their ability to engage patient populations and to coordinate patient care across a multitude of settings, while optimizing operating efficiency along the way. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology while those with the necessary capital have become more selective in their investments. Despite these challenges, we believe healthcare IT will be an area of continued investment due to its unique potential to improve safety and efficiency and reduce costs while meeting current and future regulatory, compliance and government reimbursement requirements.
License Model Preferences
Much of the variability in our periodic revenues and profitability has been and
will continue to be due to changing demand for different license models for our
technology solutions, with variability in operating cash flows further impacted
by the financing decisions within those license models. Our technology solutions
are generally deployed in one of two license models: (1) perpetual licenses, for
which the related revenue is recognized effectively upon installation, and (2)
"Software as a Service" or "SaaS" arrangements, including our Cloud Electronic
Health Record ("Cloud EHR") offering, which generally result in revenue being
recognized monthly as the services are provided over the term of the
arrangement.
The overwhelming majority of our historical installations have been under a
perpetual license model, but new customer demand has dramatically shifted
towards a SaaS license model in the past several years. SaaS license models made
up 12% of annual new acute care EHR installations in 2018, increasing to 63%
during 2021 and 100% for the first three months of 2022. These SaaS offerings
are becoming increasingly attractive to our clients because this configuration
allows them to obtain access to advanced software products without a significant
initial capital outlay. We expect this trend to continue for the foreseeable
future, with the resulting impact on the Company's financial statements being
reduced system sales revenues in the period of installation in exchange for
increased recurring periodic revenues (reflected in system sales and support
revenues) over the term of the SaaS arrangement. This naturally places downward
pressure on short-term revenue growth and profitability metrics, but benefits
long-term revenue growth and profitability which, in our view, is consistent
with our goal of delivering long-term shareholder value.
29
--------------------------------------------------------------------------------For customers electing to purchase our technology solutions under a perpetual license, we have historically made financing arrangements available on a case-by-case basis, depending on the various aspects of the proposed contract and customer attributes. These financing arrangements continue to comprise the majority of our perpetual license installations, and include short-term payment plans and longer-term lease financing through us or third-party financing companies. The aforementioned shift in customer preference towards SaaS arrangements has significantly reduced the frequency of new financing arrangements for customer purchases under a perpetual license. When combined with scheduled payments on existing financing arrangements, the reduced frequency of new financing arrangements has resulted in a substantial reduction in financing receivables during 2021 and the first three months of 2022. For those perpetual license clients not seeking a financing arrangement, the payment schedule of the typical contract is structured to provide for a scheduling deposit due at contract signing, with the remainder of the contracted fees due at various stages of the installation process (delivery of hardware, installation of software and commencement of training, and satisfactory completion of a monthly accounting cycle or end-of-month operation by each respective application, as applicable).
Margin Optimization Efforts
Our core growth strategy includes an element geared towards margin optimization by identifying opportunities to further improve our cost structure by executing against initiatives related to organizational realignment, expanded use of offshore partnerships and the use of automation to increase the efficiency and value of our associates' efforts. Regarding the organizational realignment, onFebruary 1, 2021 , we committed to a reduction in force that resulted in the termination of approximately 1.0% of our workforce (21 employees). The reduction in force was a component of a broader strategic review of the Company's operations that was intended to more effectively align our resources with business priorities. Substantially all of the employees impacted by the reduction in force exited the Company in the first quarter of 2021, with the last of the impacted employees exiting in the third quarter of 2021. The Company incurred expenses of approximately$2.7 million related to the reduction in force. These expenses consisted of one-time termination benefits to the affected employees, including but not limited to severance payments, healthcare benefits, and payments for accrued vacation time. As a result of the reduction in force, the Company expects to realize approximately$3.9 million in annual savings compared to prior expense levels. The remaining margin optimization initiatives of enhanced leveraging of offshore partnerships and automation have commenced and, to date, have provided meaningful efficiencies to our operations, particularly withinTruBridge . As a service organization,TruBridge's cost structure is heavily dependent upon human capital, subjectingTruBridge to the complexities and risks associated with this resource. Chief among these complexities and risks is the ever-present pressure of wage inflation, which has recently become a reality as national and international economies recover from the economic downturn caused by the COVID-19 pandemic. We believe that our efforts towards margin optimization are well-timed, enabling a rapid response to actual or expected wage inflation in order to preserveTruBridge gross margins, but we cannot guarantee that these efforts will fully eliminate any related margin deterioration.
In addition to wage inflation, we are a party to contracts with certain third-party suppliers and vendors that allow for annual price adjustments indexed to inflation. While we continually seek to proactively manage controllable expenses, inflationary pressure on costs could lead to erosion of margins.
Labor Capitalization During the second quarter of 2021, our ongoing monitoring activities associated with the capitalization of software development costs and the related correlation between capitalization rates and operational metrics designed to reflect the distribution of work revealed that our then-current labor capitalization methodology did not fully reflect all of the critical activities necessary to develop software assets. Consequently, during the second quarter of 2021, we elected to change our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use of Software. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change in accounting for software development costs is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. In connection with this change, we capitalized$8.8 million of software development costs during 2021. We estimate that the effect of this change was to increase capitalized amounts by approximately$4.6 million during 2021 with a corresponding decrease to product development costs. The additional capitalized amounts will be amortized over an average of 5 years, leading to increased amortization expense in future years. 30 --------------------------------------------------------------------------------
COVID-19 The continuing impacts of COVID-19 and related economic conditions on the Company's results are highly uncertain and outside the Company's control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. At the outset of the COVID-19 pandemic, community hospital patient volumes inthe United States and other countries around the world rapidly deteriorated, negatively impacting the revenues, gross margins, and income of ourTruBridge service offerings. Although these patient volumes have since largely recovered, the persistence of the pandemic and the unprecedented nature of the resulting challenges it has imposed on national and global healthcare and economic systems make the path to complete recovery uncertain for community hospitals and may negatively impact the future financial performance of ourTruBridge services. Additionally, new EHR system installations have been negatively impacted by restrictive travel and social distancing protocols, and such negative impact could materialize again if comparable mitigation efforts are recommended by public health agencies in response to future outbreaks. The Company began to experience these impacts inMarch 2020 , which increased in significance during the second quarter of 2020 before gradually improving over the remainder of 2020 and 2021. However, uncertainty remains with respect to the pace of economic recovery, as well as the potential for resurgence in transmission of COVID-19 and related business closures due to the emergence of virus variants and vaccine hesitancy and refusal among various populations. The Company expects the potential for negative impacts of the pandemic to continue for the foreseeable future, but the degree of the impact will depend on the ability of our community hospital clients to return to normal operations and patient volume. We believe that COVID-19 has impacted, and may continue to impact, our business results in the following additional areas: •Bookings - A decline in new business and add-on bookings as certain client purchasing decisions and projects are delayed to focus on treating patients, procuring necessary medical supplies, and managing their organization through this crisis. This decline in bookings eventually results in reduced backlog and lower subsequent revenue. •TruBridge revenues - Decreased levels of patient volume within our community hospital client base negatively impact our revenues for ourTruBridge service offerings as the overwhelming majority ofTruBridge revenues are directly or indirectly correlated with client patient volumes. This decline in revenues has a negative impact on gross margins and income. AlthoughTruBridge revenues have improved significantly from their pandemic-caused lows, we cannot predict the potential negative impacts any COVID-19 resurgence will have on patient volumes and the resulting revenues. •Associate productivity - A decline in associate productivity, primarily for our implementation personnel, as a large amount of work is typically done at client sites, which is being impacted by travel restrictions and our clients' focus on the pandemic. Our clients' focus on the pandemic has also led to pauses on existing projects and postponed start dates for others, which translates into lower implementation revenues, gross margin and income. We are mitigating this by doing more work remotely than we have in the past, but we cannot fully offset the negative impact. •Travel - Associate travel restrictions reduce client-related travel, which reduces reimbursed travel revenues and lowers our costs of sales as a percent of revenues. Such restrictions also reduce non-reimbursable travel, which lowers operating expenses. While travel has begun to rebound with the easing of certain COVID-19 travel restrictions, any COVID-19 resurgence may result in the re-imposition of travel restrictions. •Cash collections - A delay in client cash collections due to COVID-19's impact on national reimbursement processes, and client focus on managing their own organizations' liquidity during this time, impact our cash collections. The federal government has allocated unprecedented resources specifically designed to assist healthcare providers with their operating and capital needs during the pandemic, allocating a total of$175 billion through the Coronavirus Aid, Relief, andEconomic Security (CARES) Act Provider Relief Fund . While these funds certainly helped mitigate the financial pressures our clients faced, the clinical and operational challenges remain immense and are likely to cause certain of our customers to continue to aggressively manage cash resources in order to preserve liquidity, resulting in uncharacteristic aging of our trade accounts receivable. Additionally, the aforementioned decrease in community hospital patient volumes has had, and will continue to have, a negative impact onTruBridge billings for services and resulting revenues. These factors translate to lower cash flows from operating activities, which may impact how we execute under our capital allocation strategy and may adversely affect our financial condition.
Results of Operations
During the first three months of 2022, we generated revenues of$77.9 million from the sale of our products and services, compared to$68.0 million during the first three months of 2021, an increase of 15% that is due to the combination of inorganic 31
--------------------------------------------------------------------------------
growth through our recent acquisitions of TruCode and HRG and organic growth forTruBridge as revenue cycle solutions continue to gain traction in the domestic healthcare landscape. This increase in revenues is the primary driver behind the corresponding increase in net income, which increased by$4.0 million to$8.1 million for the first three months of 2022 from the prior-year period. Net cash provided by operating activities decreased by$1.9 million , from$13.7 million during the first three months of 2021 to$11.8 million during the first three months of 2022, primarily due to less cash-advantageous changes in working capital, most notably as it relates to accrued liabilities for incentive compensation.
The following table sets forth certain items included in our results of
operations for the three months ended
Three Months Ended
2022 2021
(In thousands) Amount % Sales Amount % Sales
INCOME DATA:
Sales revenues:
TruBridge $ 43,108 55.4 % $ 31,639 46.5 %
System sales and support:
Acute Care EHR 30,392 39.0 % 31,890 46.9 %
Post-acute Care EHR 4,371 5.6 % 4,476 6.6 %
Total System sales and support 34,763 44.6 % 36,366 53.5 %
Total sales revenues 77,871 100 % 68,005 100 %
Costs of sales:
TruBridge 21,373 27.4 % 15,779 23.2 %
System sales and support:
Acute Care EHR 15,346 19.7 % 16,212 23.8 %
Post-acute Care EHR 1,337 1.7 % 1,164 1.7 %
Total System sales and support 16,683 21.4 % 17,376 25.6 %
Total costs of sales 38,056 48.9 % 33,155 48.8 %
Gross profit 39,815 51.1 % 34,850 51.2 %
Operating expenses:
Product development 7,101 9.1 % 8,429 12.4 %
Sales and marketing 7,042 9.0 % 5,301 7.8 %
General and administrative 13,014 16.7 % 13,149 19.3 %
Amortization of acquisition-related intangibles 3,672 4.7 % 3,057 4.5 %
Total operating expenses 30,829 39.6 % 29,936 44.0 %
Operating income 8,986 11.5 % 4,914 7.2 %
Other income (expense):
Other income 157 0.2 % 814 1.2 %
Gain on contingent consideration 1,250 1.6 % - - %
Interest expense (917) (1.2) % (627) (0.9) %
Total other income (expense) 490 0.6 % 187 0.3 %
Income before taxes 9,476 12.2 % 5,101 7.5 %
Provision for income taxes 1,363 1.8 % 957 1.4 %
Net income $ 8,113 10.4 % $ 4,144 6.1 %
Three Months Ended
Revenues
Total revenues for the three months ended
32
--------------------------------------------------------------------------------TruBridge revenues increased by$11.5 million , or 36%, compared to the first quarter of 2021. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the positive impact of improving hospital patient volumes onTruBridge revenues, resulted in revenue increases of$2.1 million , or 17%, for our accounts receivable management services;$0.6 million , or 7%, for our insurance services division; and$0.4 million , or 15%, for our medical coding services. Other sources of organic revenue growth included GRH, where escalating demand for patient engagement solutions caused related revenues to more than double from the first quarter of 2021, an increase of$1.4 million . Lastly, the acquisitions of TruCode inMay 2021 and HRG inMarch 2022 resulted in additional revenues of$3.4 million and$3.8 million , respectively, during the first quarter of 2022. System sales and support revenues decreased by$1.6 million , or 4%, compared to the first quarter of 2021. System sales and support revenues were comprised of the following during the respective periods: Three Months Ended March 31, (In thousands) 2022 2021 Recurring system sales and support revenues (1) Acute Care EHR$ 27,364 $ 27,210 Post-acute Care EHR 3,895 4,222 Total recurring system sales and support revenues 31,259 31,432
Non-recurring system sales and support revenues (2) Acute Care EHR
3,028 4,680
Post-acute Care EHR 476 254
Total non-recurring system sales and support revenues 3,504 4,934
Total system sales and support revenue $
34,763
(1) Mostly comprised of support and maintenance, third-party subscriptions, and SaaS revenues.
(2) Mostly comprised of installation revenues from the sale of our acute care and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model.
Recurring system sales and support revenues decreased by$0.2 million , or less than 1%, compared to the first quarter of 2021. Acute Care EHR recurring revenues increased by$0.2 million , as our SaaS customer base has continued to grow. Post-acute Care EHR recurring revenues decreased$0.3 million , or 8%, due to the combined effects of customer attrition over the prior twelve months combined with poor bookings performance for new customer arrangements over the same timeframe. Non-recurring system sales and support revenues decreased by$1.4 million , or 29%, compared to the first quarter of 2021. Acute Care EHR non-recurring revenues decreased by$1.7 million compared to the first quarter of 2021, due mostly to a decrease in the number of perpetual license installations of our Acute Care EHR solutions. We installed our Acute Care EHR solutions at three new hospital clients during the first quarter of 2022 (all of which are under SaaS arrangements, resulting in revenue being recognized ratably over the contract term) compared to five new hospital clients during the first quarter of 2021 (two under a SaaS arrangement). Post-acute Care EHR nonrecurring revenues increased by$0.2 million , or 87%, compared to the first quarter of 2021 due to a temporarily beneficial shift in license mix.
Costs of Sales
Total costs of sales increased by$4.9 million , or 15%, compared to the first quarter of 2021. As a percentage of total revenues, costs of sales remained unchanged at 49% of revenues in both the first quarter of 2022 and the first quarter of 2021. Our costs associated withTruBridge sales and support increased by$5.6 million , or 35%, compared to the first quarter of 2021, primarily driven by our recent acquisitions of TruCode and HRG, which contributed total expenses of$0.8 million and$2.6 million , respectively, to the first quarter of 2022. The remaining cost increases forTruBridge are organic in nature, caused by resource expansion necessitated by the growing customer base and improved patient volumes. The gross margin on these services remained unchanged at 50% in the first quarter of 2022 compared to the first quarter of 2021. Costs of Acute Care EHR system sales and support decreased by$0.9 million , or 5%, compared to the first quarter of 2021, as the continuing shift in customer preferences towards a SaaS license model resulted in increased capitalization of contract fulfillment costs. The gross margin on Acute Care EHR system sales and support increased slightly to 50% in the first quarter of 2022, compared to 49% in the first quarter of 2021, as the decrease in costs of sales outpaced the related decrease in revenues. 33 --------------------------------------------------------------------------------
Costs of Post-acute Care EHR system sales and support increased by$0.2 million , or 15%, compared to the first quarter of 2021, with increased labor and travel costs comprising nearly all of the increase. The gross margin on Post-acute Care EHR system sales and support decreased to 69% in the first quarter of 2022, compared to 74% in the first quarter of 2021, as slight decreases in revenues worked in tandem with slight cost increases to decrease margins.
Product Development
Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs decreased by$1.3 million , or 16%, compared to the first quarter of 2021, with the primary driver being a$2.5 million , or 285%, increase in product development labor capitalization pursuant to the aforementioned change in our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40,Internal Use Software . This increased capitalization rate was partially offset by increased amortization of the related assets and increased contract development costs associated with expanding resources. The acquisition of TruCode inMay 2021 resulted in$0.3 million of additional product development expenses during the first quarter of 2022, while the acquisition of HRG inMarch 2022 contributed a negligible amount of such expenses.
Sales and Marketing
Sales and marketing costs increased by$1.7 million , or 33%, compared to the first quarter of 2021, as resource expansion resulted in a$0.3 million increase in payroll costs and an improved sales environment resulted in a$0.5 million increase in commission expenses. The acquisition of TruCode inMay 2021 resulted in$0.2 million of additional sales and marketing expenses during the first quarter of 2022, while the acquisition of HRG inMarch 2022 added$0.3 million of such expenses. General and Administrative General and administrative expenses decreased by$0.1 million , or 1%, compared to the first quarter of 2021. Severance costs decreased$1.9 million as the aforementioned margin optimization efforts resulted in a significant reduction-in-force during the first quarter of 2021, with no initiatives of such scale during the first quarter of 2022. This decrease in severance costs was mostly offset by a combined$1.3 million increase in payroll expenses, benefits costs, and non-recurring expenses associated with expanding resources and our acquisition of HRG inMarch 2022 . The acquisition of TruCode inMay 2021 resulted in$0.2 million of additional general and administrative expenses during the first quarter of 2022, with HRG operations contributing an additional$0.4 million of such expenses.
Amortization of Acquisition-Related Intangibles
Amortization expense associated with acquisition-related intangible assets
increased by
Total Operating Expenses
Total operating expenses increased by$0.9 million , or 3%, compared to the first quarter of 2021. As a percentage of total revenues, total operating expenses decreased to 40% of revenues in the first quarter of 2022, compared to 44% in the first quarter of 2021. Total Other Income (Expense) Total other income (expense) increased to income of$0.5 million during the first quarter of 2022 compared to income of$0.2 million during the first quarter of 2021. Our acquisition of TruCode inMay 2021 included a contingent earnout payment of up to$15 million tied to TruCode's earnings before interest, tax, depreciation, and amortization ("EBITDA") (subject to certain pro-forma adjustments) for the twelve month period concluding on the anniversary date of the acquisition (the "earnout period"). During the first quarter of 2022,$1.3 million of the original$2.5 million contingent consideration estimated in determining the purchase price was reversed as our estimates of TruCode's earnings over the remaining earnout period have declined since the date of acquisition. This gain on contingent consideration was partially offset by increased interest expense, caused by a rising interest rate environment and a higher level of funded debt, and decreased other income as interest income on our portfolio of financing receivables has decreased with the corresponding decrease in the asset class balances.
Income Before Taxes
As a result of the foregoing factors, income before taxes increased by
34
--------------------------------------------------------------------------------Provision for Income Taxes Our effective tax rate for the three months endedMarch 31, 2022 decreased to an expense of 14.4% from an expense of 18.8% for the three months endedMarch 31, 2021 . A non-taxable gain of$1.25 million resulting from a partial reversal of the TruCode earnout benefited our effective tax rate by 2.8% for the three months endedMarch 31, 2022 , while the net effective tax rate impact of state income tax items decreased by 2.4% for the three months endedMarch 31, 2022 , as the first quarter of 2021 was significantly impacted by changes in estimated state tax rates and amendments to previously-filed state returns.
Net Income
Net income for the first quarter of 2022 increased by$4.0 million to$8.1 million , or$0.55 per basic and diluted share, compared with net income of$4.1 million , or$0.29 per basic and$0.28 per diluted share, for the first quarter of 2021. Net income represented 10% of revenue for the first quarter of 2022, compared to 6% of revenue for the first quarter of 2021.
Supplemental Segment Information
Our reportable segments have been determined in accordance with ASC 280 -
Segment Reporting. We have three reportable operating segments:
Adjusted EBITDA consists of GAAP net income as reported and adjusts for (i)
deferred revenue purchase accounting adjustments arising from purchase
allocation adjustments related to business acquisitions; (ii) depreciation
expense; (iii) amortization of software development costs; (iv) amortization of
acquisition-related intangible assets; (v) stock-based compensation; (vi)
severance and other non-recurring charges; (vii) interest expense and other,
net; (viii) gain on contingent consideration; and (ix) the provision for income
taxes. The segment measurements provided to and evaluated by the chief operating
decision makers ("CODM") are described in Note 17. These results should be
considered in addition to, and not as a substitute for, results reported in
accordance with GAAP.
The following table presents a summary of the revenues and adjusted EBITDA of
our three operating segments for the three months ended March 31, 2022 and 2021:
Three Months Ended
March 31, Change
2022 2021 $ %
(In thousands)
Revenues by segment:
TruBridge $ 43,108 $ 31,639 $ 11,469 36 %
Acute Care EHR 30,392 31,890 (1,498) (5) %
Post-acute Care EHR 4,371 4,476 (105) (2) %
Adjusted EBITDA by segment:
TruBridge $ 10,789 $ 6,520 $ 4,269 65 %
Acute Care EHR 5,032 4,684 348 7 %
Post-acute Care EHR 332 620 (288) (46) %
Segment Revenues
Refer to the corresponding discussion of revenues for each of our reportable
segments previously provided under the Revenues heading of this Management's
Discussion and Analysis. There are no intersegment revenues to be eliminated in
computing segment revenue.
Segment Adjusted EBITDA
TruBridge adjusted EBITDA increased by $4.3 million , or 65%, compared to the
first quarter of 2021. With costs of sales increasing in proportion with the
increase in revenues, adjusted EBITDA expansion was driven by operating leverage
that allowed for a more efficient use of operating expense functions in the
first quarter of 2022 compared to the first quarter of 2021.
Acute Care EHR adjusted EBITDA experienced a modest increase of $0.3 million , or
7%, compared to the first quarter of 2021, as gross margins improved only 41
basis points but moderate operating leverage allowed for further expansion of
adjusted EBITDA.
35--------------------------------------------------------------------------------
Post-acute Care EHR adjusted EBITDA decreased by$0.3 million , or 46%, compared to the first quarter of 2021. Despite only a slight decrease in related revenues, the aformentioned gross margin compression of our post-acute care EHR business, discussed on page 34, negated any operating leverage and exerted negative pressure on adjusted EBITDA..
Liquidity and Capital Resources
The Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the three months endedMarch 31, 2022 . For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see "COVID-19" in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Sources of Liquidity
As ofMarch 31, 2022 , our principal sources of liquidity consisted of cash and cash equivalents of$16.0 million and our remaining borrowing capacity under the revolving credit facility of$36.0 million , compared to$11.4 million of cash and cash equivalents and$79.0 million of remaining borrowing capacity under the revolving credit facility as ofDecember 31, 2021 . In conjunction with our acquisition of HHI inJanuary 2016 , we entered into a syndicated credit agreement which provided for a$125 million term loan facility and a$50 million revolving credit facility. OnJune 16, 2020 , we entered into an Amended and Restated Credit Agreement that increased the aggregate principal amount of our credit facilities to$185 million , which includes a$75 million term loan facility and a$110 million revolving credit facility. As ofMarch 31, 2022 , we had$142.4 million in principal amount of indebtedness outstanding under the credit facilities. In addition, we had operating lease liabilities totaling approximately$9.0 million payable over the next five years. We believe that our cash and cash equivalents of$16.0 million as ofMarch 31, 2022 , the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of$36.0 million as ofMarch 31, 2022 , taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months and beyond. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Form 10-Q. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.
Operating Cash Flow Activities
Net cash provided by operating activities decreased by$1.9 million from$13.7 million provided by operations for the three months endedMarch 31, 2021 to$11.8 million provided by operations for the three months endedMarch 31, 2022 . The decrease in cash flows provided by operations is primarily due to disadvantageous changes in working capital, most notably as it relates to accrued liabilities for incentive compensation. The Company distributes cash bonuses during the first quarter of each year, to the degree such bonuses have been earned. The pandemic's impact on our 2020 financial performance resulted in minimal bonus payments during the first quarter of 2021 while successful execution during 2021 resulted in above-target bonus payments during the first quarter of 2022. Cash outflows related to bonus payments increased to$4.7 million during the first three months of 2022, compared to only$0.2 million during the first three months of 2021.
Investing Cash Flow Activities
Net cash used in investing activities increased by$46.3 million , with$47.7 million used in the three months endedMarch 31, 2022 compared to$1.4 million used during the three months endedMarch 31, 2021 . We completed our$43.6 million acquisition of HRG during the first quarter of 2022. The HRG acquisition was funded through a draw of$48.0 million on our credit facilities. In addition, cash outflows for the investment in software development increased from$0.9 million during the first three months of 2021 to$4.3 million during the first three months of 2022 due to the aforementioned change in methodology for estimating labor costs eligible for capitalization.
Financing Cash Flow Activities
During the three months endedMarch 31, 2022 , our financing activities were a net source of cash in the amount of$40.4 million , as$48.0 million in borrowings from our revolving line of credit were offset by long-term debt principal payments of$5.9 million and$1.7 million used to repurchase shares of our common stock in order to fund required tax withholding related to the vesting of shares of restricted stock, which are treated as treasury stock. Financing activities used$7.0 million during the three months endedMarch 31, 2021 , primarily due to$5.9 million net paid in long-term debt principal and$1.1 million used to repurchase shares of our common stock. 36 --------------------------------------------------------------------------------
OnSeptember 4, 2020 , our Board of Directors approved a stock repurchase program to repurchase up to$30.0 million in aggregate amount of the Company's outstanding shares of common stock through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. These shares may be purchased from time to time over a two-year period depending upon market conditions. Our ability to repurchase shares is subject to compliance with the terms of our Amended and Restated Credit Agreement. Concurrent with the authorization of this stock repurchase program, the Board of Directors opted to indefinitely suspend all quarterly dividends. We did not purchase any shares under the stock repurchase program during the three months endedMarch 31, 2022 .
Credit Agreement
As ofMarch 31, 2022 , we had$68.4 million in principal amount outstanding under the term loan facility and$74.0 million in principal amount outstanding under the revolving credit facility. Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted LIBOR rate for the relevant interest period, subject to a floor of 0.50%, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month LIBOR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for LIBOR loans and the letter of credit fee ranges from 1.8% to 3.0%. The applicable margin range for base rate loans ranges from 0.8% to 2.0%, in each case based on the Company's consolidated net leverage ratio. Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginningSeptember 30, 2020 , with quarterly principal payments of approximately$0.9 million throughJune 30, 2022 , approximately$1.4 million throughJune 30, 2024 and approximately$1.9 million throughMarch 31, 2025 , with maturity onJune 16, 2025 or such earlier date as the obligations under the Amended and Restated Credit Agreement become due and payable pursuant to the terms of such agreement. Any principal outstanding under the revolving credit facility is due and payable on the maturity date. Our credit facilities are secured pursuant to an Amended and Restated Pledge and Security Agreement, datedJune 16, 2020 , among the parties identified as obligors therein and Regions, as collateral agent, on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the "Subsidiary Guarantors"), including certain registered intellectual property and the capital stock of certain of the Company's direct and indirect subsidiaries. Our obligations under the Amended and Restated Credit Agreement are also guaranteed by the Subsidiary Guarantors. The Amended and Restated Credit Agreement provides incremental facility capacity of$50 million , subject to certain conditions. The Amended and Restated Credit Agreement includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated net leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. The Amended and Restated Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the Amended and Restated Credit Agreement, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in such agreement as ofMarch 31, 2022 . The Amended and Restated Credit Agreement requires the Company to mandatorily prepay the credit facilities with 50% of excess cash flow (minus certain specified other payments). This mandatory prepayment requirement is applicable only if the Company's consolidated net leverage ratio exceeds 2.50:1.00. The Company is permitted to voluntarily prepay the credit facilities at any time without penalty, subject to customary "breakage" costs with respect to prepayments of LIBOR rate loans made on a day other than the last day of any applicable interest period. An excess cash flow prepayment related to excess cash flow generated during 2021 was not required during the first quarter of 2022. OnMay 2, 2022 , the Amended and Restated Credit Agreement was amended further to increase the revolving credit facility to$160 million and provide additional borrowing of$1.6 million under the term loan. After the new amendment, as ofMay 2, 2022 , we have approximately$74 million of outstanding indebtedness and approximately$86 million of available credit under the revolving credit facility. 37 --------------------------------------------------------------------------------
Backlog Backlog consists of revenues we reasonably expect to recognize over the next twelve months under all existing contracts, including those with remaining performance obligations that have original expected durations of one year or less and those with fees that are variable in which we estimate future revenues. The revenues to be recognized may relate to a combination of one-time fees for system sales and recurring fees for support and maintenance andTruBridge services. As ofMarch 31, 2022 , we had a twelve-month backlog of approximately$6 million in connection with non-recurring system purchases and approximately$324 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, andTruBridge services,$31 million of which was attributable to HRG. As ofMarch 31, 2021 , we had a twelve-month backlog of approximately$9 million in connection with non-recurring system purchases and approximately$249 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, andTruBridge services.
Bookings
Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the three and three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (In thousands) 2022 2021 TruBridge (1)$ 10,151 $ 2,687 System sales and support (2) Acute Care EHR 9,086 5,442 Post-acute Care EHR 1,160 648 Total system sales and support 10,246 6,090 Total bookings$ 20,397 $ 8,777 (1) Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts). (2) Generally calculated as the total contract price (for system sales) and annualized contract value (for support). Sales activities during the first three months of 2021 suffered from a number of incremental headwinds, chief among them being (a) COVID-19 related distractions, including increased infection rates for certain geographies and widespread focus on eventual vaccine rollouts, (b) reorganization transitions related to ourFebruary 2021 reduction-in-force, and (c) lower-value regulatory purchases required by theCenters for Medicare and Medicaid Services' Hospital Price Transparency mandate requiring hospitals to provide clear, accessible pricing information online. These topics disproportionately dominated sales discussions and resources. Such headwinds began dissipating during the third quarter of 2021, resulting in overall bookings growth during the first quarter of 2022 of$11.5 million , or 131%, over the first quarter of 2021.TruBridge bookings increased by$7.4 million , improving nearly four-fold over the first quarter of 2021. The recently-acquired HRG contributed$2.8 million of bookings to the first quarter of 2022, while the aforementioned improvement in the sales environment drove bookings from hospitals outside of our EHR customer base to an organic increase of$1.1 million , or 239%. Bookings generated from our existing EHR customer base increased by$3.5 million , or 156%, from the prior period.
Acute Care EHR bookings increased
Post-acute Care EHR bookings increased by$0.5 million , or 79%, as the improved sales environment worked in tandem with recent product innovations designed to improve the competitive position of our AHT products. 38 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our Management Discussion and Analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported values of assets, liabilities, revenues, expenses and other financial amounts that are not readily apparent from other sources. Actual results may differ from these estimates and these estimates may differ under different assumptions or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes.
In our Annual Report on Form 10-K for the year ended
39--------------------------------------------------------------------------------
© Edgar Online, source
