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:
•the impact of COVID-19 and related economic disruptions, which have materially
affected our revenue and could materially affect our gross margin and income, as
well as our financial position and/or liquidity;
•saturation of our target market and hospital consolidations;
•changes in customer purchasing priorities, capital expenditures and demand for
information technology systems;
•overall business and economic conditions affecting the healthcare industry,
including the effects of the federal healthcare reform legislation enacted in
2010, and implementing regulations, on the businesses of our hospital customers;
•government regulation of our products and services and the healthcare and
health insurance industries, including changes in healthcare policy affecting
Medicare and Medicaid reimbursement rates and qualifying technological
standards;
•competition with companies that have greater financial, technical and marketing
resources than we have;
•future acquisitions that may be expensive, time consuming, and subject to other
inherent risks which may jeopardize our ability to realize anticipated benefits;
•our ability to attract and retain qualified client service and support
personnel;
•failure to properly manage growth in new markets we may enter;
•exposure to numerous and often conflicting laws, regulations or other
requirements through our international business activities and processes;
•failure to develop new technology and products in response to market demands;
•failure of our products to function properly resulting in claims for medical
and other losses;
•breaches of security and viruses in our systems resulting in customer claims
against us and harm to our reputation;
•failure to maintain customer satisfaction through new product releases free of
undetected errors or problems;
•failure to convince customers to migrate to current or future releases of our
products;
•failure to maintain our margins and service rates for implementation services;
•potential liability arising out of the licensing of our software and provision
of services and our dependency on our licenses of rights, products and services
from third parties;
•misappropriation of our intellectual property rights and potential intellectual
property claims and litigation against us;
•interruptions in our power supply and/or telecommunications capabilities,
including those caused by natural disaster;
24
--------------------------------------------------------------------------------
•general economic conditions, including changes in the financial and credit
markets that may affect the availability and cost of credit to us or our
customers;
•our substantial indebtedness, and our ability to incur additional indebtedness
in the future;
•our potential inability to generate sufficient cash in order to meet our debt
service obligations;
•restrictions on our current and future operations because of the terms of our
senior secured credit facilities;
•market risks related to interest rate changes;
•changes in accounting principles generally accepted in the United States of
America ;
•significant charges to earnings if our goodwill or intangible assets become
impaired; and
•fluctuations in quarterly financial performance due to, among other factors,
timing of customer installations.
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 December 31, 2019 , our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2020 , and this Quarterly Report on Form 10-Q.
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 four companies - Evident,
LLC ("Evident"), TruBridge, LLC ("TruBridge"), American HealthTech, Inc.
("AHT"), and iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health "). 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:
•Evident, which makes up our Acute Care EHR reporting segment, provides
comprehensive acute care electronic health record ("EHR") solutions, Thrive and
Centriq , and related services for community hospitals and their physician
clinics.
•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.
•TruBridge, our third reporting segment, focuses on providing 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.
•Get Real Health, included within our TruBridge segment, delivers technology
solutions to improve patient outcomes and engagement strategies with care
providers.
Our companies currently support approximately 800 acute care facilities and
approximately 3,100 post-acute care facilities with a geographically diverse
customer mix within the domestic community healthcare market. Our clients
primarily consist of community hospitals with fewer than 200 acute care beds,
with hospitals having fewer than 100 beds comprising approximately 98% of our
acute care EHR client base.
See Note 17 to the condensed consolidated financial statements included herein
for additional information on our three reportable segments.
Management Overview
Through much of our history, our strategy has been to achieve meaningful
long-term revenue growth through sales of healthcare IT systems and related
services to existing and new clients within our target market. Prospectively,
our ability to continue to realize long-term revenue growth is largely dependent
on our ability to sell new and additional products and services to our existing
customer base, including cross-selling opportunities presented between our
operating segments, Acute Care EHR, Post-acute Care EHR, and TruBridge .
Chief among these cross-selling opportunities is the ability to continue to sell
TruBridge services into our Acute Care EHR customer base. As a result, retention
of existing Acute Care EHR customers is a key component of our long-term growth
strategy by protecting this base of potential TruBridge customers, while at the
same time serving as a leading indicator of our
25
--------------------------------------------------------------------------------
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 been lost due to customer attrition from our production
environment customer base. Historically, these retention rates had consistently
remained in the mid-to-high 90th percentile ranges. However, fiscal years 2017
through 2019 saw retention rates decrease to the low 90th percentile ranges due
to, among other factors, (i) post-acquisition customer concerns regarding our
long-term commitment to the Centriq platform, acquired in January 2016 , (ii) an
intensified competitive market, primarily due to aggressive pricing and
marketing by a highly disruptive new entrant into the Acute Care EHR
marketplace, and (iii) the announced sunset of the Classic platform, also
acquired in January 2016 . During the first nine months of 2020, retention rates
are trending back towards the mid-90th percentile ranges, as (i) the lingering
effects of the Centriq acquisition continue to abate, (ii) the competitive
environment continues to normalize as the aforementioned disruptive new entrant
into this market has since departed the market altogether, and (iii) the Classic
platform was sunset in the fourth quarter of 2019.
Additionally, as we consider the long-term growth prospects of our business, we
are seeking to further stabilize our revenues and cash flows and leverage
TruBridge services as a growth agent in light of a relatively mature EHR
marketplace. As a result, we are placing ever-increasing value in further
developing our already significant recurring revenue base. As such, maintaining
and growing recurring revenues are additional key components of our long-term
growth strategy, aided by the aforementioned focus on customer retention, and
includes a renewed focus on driving demand for subscriptions for our existing
technology solutions and expanding the footprint for TruBridge services beyond
our EHR customer base.
Our business model is designed such that, as revenue growth materializes,
earnings and profitability growth are naturally bolstered through the increased
margin realization afforded us by operating leverage. Once a hospital has
installed our solutions, we continue to provide support services to the customer
on a continuing basis and make available to the customer our broad portfolio of
business management, consulting, and managed IT services, all of which
contribute to recurring revenue growth. The provision of these recurring revenue
services typically requires fewer resources than the initial system
installation, resulting in increased overall gross margins and operating
margins. We also look to increase margins through cost containment measures
where appropriate as we continue to leverage opportunities for greater operating
efficiencies of the combined entity.
Turbulence in the U.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 by U.S. regulatory and
national health initiatives than by the economic cycles of our economy.
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. Additionally, in response to these challenges, hospitals
have become more selective regarding where they invest capital, resulting in a
focus on strategic spending that generates a return on their investment. Despite
these challenges, we believe healthcare information technology is often viewed
as more strategically beneficial to hospitals than other possible purchases
because the technology also plays an important role in healthcare by improving
safety and efficiency and reducing costs. Additionally, we believe most
hospitals recognize that they must invest in healthcare information technology
to meet current and future regulatory, compliance and government reimbursement
requirements.
In recent years, there have been significant changes to provider reimbursement
by the U.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 fee-for-service in part by enrolling
in an advanced payment model. 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.
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.
Although the overwhelming majority of our historical installations have been
under a perpetual license model, 2019 marked a dramatic shift in customer
preferences in license model, with 43% of the year's new acute care EHR
installations being performed in a SaaS model, compared to only 12% in 2018.
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
26
--------------------------------------------------------------------------------
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.
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. During 2018, total financing receivables increased dramatically and
had a significant impact on operating cash flows. This increase in financing
arrangements was primarily due to two reasons. First, meaningful use stage 3
("MU3") installations are primarily financed through short-term payment plans
and demand for such installations increased significantly in late 2017. Second,
competitor financing options, primarily through accounts receivable management
collections and Cloud EHR arrangements, have applied pressure to reduce initial
customer capital investment requirements for new EHR installations, leading to
the offering of long-term lease options. In 2019, we experienced a modest
reduction in total financing receivables due to the natural exhaustion of the
MU3 opportunity and the aforementioned dramatic shift in license preferences
towards SaaS arrangements, the former of which also resulted in a positive
impact to operating cash flows. Financing receivables have decreased during
2020, and we expect them to continue to decrease during the remainder of 2020
and 2021, with a corresponding beneficial impact to operating cash flows, as the
trends related to MU3 purchases and SaaS arrangements continue.
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).
In May 2019 , the Company closed its acquisition of Get Real Health . Based in
Rockville, Maryland , Get Real Health delivers technology solutions to improve
patient outcomes and engagement strategies with care providers. Through this
acquisition, the Company strengthened its position in community healthcare by
offering three new comprehensive patient engagement and empowerment solutions
that are offered by Get Real Health .
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 are
evolving rapidly in ways that are difficult or impossible to anticipate. In
addition, because COVID-19 did not begin to affect the Company's financial
results until late in the first quarter of 2020 and the highly uncertain nature
of this challenge, its impact on the Company's results in the first nine months
of 2020 may not be indicative of its impact on the Company's results for the
remainder of 2020.
As a result of COVID-19, community hospital patient volume in the United States
and other countries around the world have rapidly deteriorated. Although recent
operational metrics indicate promising signs that these patient volumes are
improving, the persistence of the pandemic and the unprecedented nature of the
resulting challenges it has imposed on national and global healthcare and
economic systems are likely to continue to negatively impact patient volumes and
make uncertain the exact path to recovery for community hospitals. These
decreased levels of our hospital clients' patient volumes have negatively
impacted, and will continue to negatively impact, our revenues, gross margins,
and income for our TruBridge service offerings. Additionally, new EHR system
installations have been, and will continue to be, negatively impacted by
restrictive travel and social distancing protocols. The Company began to
experience this impact in March 2020 , which increased in significance during the
second quarter of 2020 and showed gradual signs of improvement during the third
quarter of 2020. The Company expects these impacts to continue for the remainder
of 2020 and beyond, 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 will 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 will negatively impact our revenues for our TruBridge
service offerings as the overwhelming majority of TruBridge revenues are
directly or indirectly correlated with client patient volumes. This decline in
revenues will have a negative impact on gross margins and income.
27
--------------------------------------------------------------------------------
•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.
•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, could 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, and Economic Security (CARES) Act Provider Relief Fund . Further,
$10 billion has been specifically targeted for rural providers, which is of
particular interest to our client base, which is comprised mostly of non-urban
community hospitals. Of this $10 billion , the average rural hospital was
expected to receive a total of approximately $3.6 million in direct financial
relief. While these funds certainly help mitigate the financial pressures our
clients face, the clinical and operational challenges remain immense and are
likely to cause certain of our customers to more 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 on TruBridge billings for services and resulting revenues. These
factors would translate to lower cash flows from operating activities. Lower
cash flows from operating activities may impact how we execute under our capital
allocation strategy and may adversely affect our financial condition.
Results of Operations
During the nine months ended September 30, 2020 , we generated revenues of $197.6
million from the sale of our products and services, compared to $204.0 million
during the nine months ended September 30, 2019 , a decrease of 3% that is
primarily attributed to reduced MU3 revenue opportunities as the related October
1, 2019 compliance deadline has passed and the impact of COVID-19 on client
purchasing and implementation plans. Our net income for the nine months ended
September 30, 2020 increased by $1.9 million to $11.1 million from the nine
months ended September 30, 2019 , primarily as the aforementioned revenue
declines have been offset by corresponding decreases in operating expenses and
decreased interest expense arising from our long-term debt obligations. Net cash
provided by operating activities increased by $7.5 million to $33.0 million
during the nine months ended September 30, 2020 , primarily due to changes in
working capital and the aforementioned increase in net income.
28
--------------------------------------------------------------------------------
The following table sets forth certain items included in our results of
operations for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands) Amount % Sales Amount % Sales Amount % Sales Amount % Sales
INCOME DATA:
Sales revenues:
System sales and support:
Acute Care EHR $ 35,923 52.6 % $ 35,965 52.4 % $ 102,799 52.0 % $ 107,461 52.7 %
Post-acute Care EHR 4,465 6.5 % 5,025 7.3 % 13,498 6.8 % 16,416 8.0 %
Total System sales and support 40,388 59.1 % 40,990 59.7 % 116,297 58.8 % 123,877 60.7 %
TruBridge 27,945 40.9 % 27,709 40.3 % 81,342 41.2 % 80,119 39.3 %
Total sales revenues 68,333 100.0 % 68,699 100.0 % 197,639 100.0 % 203,996 100.0 %
Costs of sales:
System sales and support:
Acute Care EHR 16,488 24.1 % 17,382 25.3 % 48,288 24.4 % 50,798 24.9 %
Post-acute Care EHR 1,140 1.7 % 1,379 2.0 % 3,613 1.8 % 3,978 2.0 %
Total System sales and support 17,628 25.8 % 18,761 27.3 % 51,901 26.3 % 54,776 26.9 %
TruBridge 15,287 22.4 % 14,023 20.4 % 44,100 22.3 % 41,660 20.4 %
Total costs of sales 32,915 48.2 % 32,784 47.7 % 96,001 48.6 % 96,436 47.3 %
Gross profit 35,418 51.8 % 35,915 52.3 % 101,638 51.4 % 107,560 52.7 %
Operating expenses:
Product development 8,549 12.5 % 9,158 13.3 % 25,190 12.7 % 27,684 13.6 %
Sales and marketing 6,359 9.3 % 6,654 9.7 % 18,526 9.4 % 21,158 10.4 %
General and administrative 11,440 16.7 % 10,996 16.0 % 34,242 17.3 % 34,909 17.1 %
Amortization of
acquisition-related intangibles 2,866 4.2 % 3,100 4.5 % 8,599 4.4 % 8,139 4.0 %
Total operating expenses 29,214 42.8 % 29,908 43.5 % 86,557 43.8 % 91,890 45.0 %
Operating income 6,204 9.1 % 6,007 8.7 % 15,081 7.6 % 15,670 7.7 %
Other income (expense):
Other income 916 1.3 % 4 - % 1,241 0.6 % 535 0.3 %
Loss on extinguishment of debt - - % - - % (202) (0.1) % - - %
Interest expense (850) (1.2) % (1,702) (2.5) % (2,832) (1.4) % (5,269) (2.6) %
Total other income (expense) 66 0.1 % (1,698) (2.5) % (1,793) (0.9) % (4,734) (2.3) %
Income before taxes 6,270 9.2 % 4,309 6.3 % 13,288 6.7 % 10,936 5.4 %
Provision for income taxes 1,002 1.5 % 174 0.3 % 2,165 1.1 % 1,695 0.8 %
Net income $ 5,268 7.7 % $ 4,135 6.0 % $ 11,123 5.6 % $ 9,241 4.5 %
Three Months Ended September 30, 2020 Compared with Three Months Ended September
30, 2019
Revenues
Total revenues for the three months ended September 30, 2020 decreased by $0.4
million , or less than 1%, compared to the three months ended September 30, 2019 .
29
--------------------------------------------------------------------------------
System sales and support revenues decreased by $0.6 million , or 1%, compared to
the third quarter of 2019. System sales and support revenues were comprised of
the following during the respective periods:
Three Months Ended September 30,
(In thousands) 2020 2019
Recurring system sales and support revenues (1)
Acute Care EHR $ 26,421 $ 26,982
Post-acute Care EHR 4,026 4,312
Total recurring system sales and support revenues 30,447 31,294
Non-recurring system sales and support revenues (2) Acute Care EHR
9,502 8,983
Post-acute Care EHR 439 713
Total non-recurring system sales and support revenues 9,941 9,696
Total system sales and support revenue $
40,388
(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$0.8 million , or 3%, compared to the third quarter of 2019. Acute Care EHR recurring revenues decreased by$0.6 million , or 2%, as attrition from the Thrive andCentriq customer base outweighed new Thrive customer growth and additional support and SaaS fees. Post-acute Care EHR recurring revenues decreased by$0.3 million , or 7%, due to attrition attributed to an aggressive competitive environment as we make technological improvements to the AHT product line. Non-recurring system sales and support revenues increased by$0.2 million , or 3%. Acute Care EHR non-recurring revenues increased by$0.5 million , or 6%. We installed our Acute Care EHR solutions at eight new hospital clients during the third quarter of 2020 (three of which were under a SaaS arrangement, resulting in revenue being recognized ratably over the contract term) compared to five new hospital clients during the third quarter of 2019 (one under a SaaS arrangement). Acute Care EHR revenues from new system implementations increased by$3.1 million , an increase that was mostly offset by a$2.4 million decrease in add-on sales to existing customers, nearly three-quarters of which is attributable to the aforementioned reduced revenue opportunity for MU3 applications.Non-recurring Post -acute Care EHR revenues decreased by$0.3 million , or 38%, as compliance catalysts in place during 2019 have largely abated as Patient Driven Payment Model ("PDMP"), as required by CMS, became effective for post-acute care facilities beginningOctober 1, 2019 .TruBridge revenues increased by$0.2 million , or 1%, compared to the third quarter of 2019, mostly due to a$0.3 million , or 9%, increase in managed IT services revenues as demand for our cloud hosting services continues to strengthen. The revenue contributions from recent client wins for our accounts receivable management, private pay, and medical coding service offerings have largely been offset by the impact of COVID-19 on the patient volumes of our community hospital customers, as the overwhelming majority of the related revenues are based on such volumes. These three revenue streams combined for a net$0.1 million , or less than 1%, reduction in revenues from the third quarter of 2019. Costs of Sales Total costs of sales increased by less than 1%, or$0.1 million , compared to the third quarter of 2019. As a percentage of total revenues, costs of sales remained flat at 48% of revenues in both the third quarter of 2020 and the third quarter of 2019. Costs of Acute Care EHR system sales and support decreased by$0.9 million , or 5%, compared to the third quarter of 2019, primarily due to travel costs savings of approximately$0.7 million due to the impact of COVID-19 on associate travel. The gross margin on Acute Care EHR system sales and support increased to 54% in the third quarter of 2020, compared to 52% in the third quarter of 2019. Costs of Post-acute Care EHR system sales and support decreased by$0.2 million , or 17%, compared to the third quarter of 2019, primarily due to reduced third party software costs and improved personnel efficiency. The gross margin on Post-acute Care EHR system sales and support increased to 74% in the third quarter of 2020, compared to 73% in the third quarter of 2019. 30 -------------------------------------------------------------------------------- Our costs associated withTruBridge sales and support increased by 9%, or$1.3 million , compared to the third quarter of 2019, primarily due to a combined$1.2 million , or 12%, increase in payroll and temporary labor costs. At the onset of the COVID-19 pandemic, we notified our employees, including those whose roles were negatively impacted by the declining patient volumes at our community hospital clients, that we would not execute any payroll cost mitigation efforts in response to COVID-19 throughJuly 31, 2020 and have not, to-date, executed any such efforts. As a result, we have not executed any reduction-in-force or furlough action plans as a result of the pandemic, which severely limited our ability to offset revenue declines with cost savings. This decision, while socially responsible in providing much needed job security to our employees and their families during a period of unprecedented economic hardship, also serves the long-term interests of our shareholders by strengthening our team, improving customer satisfaction, and better positioning us to capture opportunities as our markets recover. The gross margin on these services decreased to 45% in the third quarter of 2020, compared to 49% during the third quarter of 2019. 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$0.6 million , or 7%, compared to the third quarter of 2019, as$0.9 million of costs were capitalized for software development during the third quarter of 2020 with none in the third quarter of 2019. The incremental benefit from the increased capitalization of software development costs was partially offset by a$0.3 million increase in development costs associated withGet Real Health , which was acquired inMay 2019 . Sales and Marketing Sales and marketing costs decreased by$0.3 million , or 4%, compared to the third quarter of 2019. Commission expense increased by$0.7 million , or 39%, largely due to the aforementioned increase in Acute Care EHR non-recurring revenues from new system implementations. More than offsetting this increase in commission expense was a$0.5 million decrease in travel costs as travel restrictions and social distancing guidelines pose challenges to in-person sales efforts and a$0.4 million decrease in marketing program spend. General and Administrative General and administrative expenses increased by$0.4 million , mostly due to a$1.0 million increase in bad debt expense as collection efforts related to a recently closed community hospital customer have been exhausted, requiring a substantial increase in the related allowance for uncollectible financing receivables. This increase in bad debt expense was partially offset by improved health claims experience, resulting in a$0.7 million decrease in costs associated with health benefits we offer to our employees through our self-insured health plans. Amortization of Acquisition-Related Intangibles Amortization expense associated with acquisition-related intangible assets decreased by$0.2 million , compared to the third quarter of 2019, due to miscellaneous adjustments to amortization expense associated withGet Real Health intangibles recorded during the third quarter of 2019. Total Operating Expenses As a percentage of total revenues, total operating expenses decreased to 43% of revenues in the third quarter of 2020, compared to 44% in the third quarter of 2019. Total Other Income (Expense) Total other income (expense) improved to income of$0.1 million during the third quarter of 2020 compared to expense of$1.7 million during the third quarter of 2019. The achievement of shared savings related to ourRural Accountable Care Organization (ACO) Program resulted in a$0.6 million increase in related income, and the combined effects of a decreasing interest rate environment and lowered amounts outstanding under our long-term debt facilities resulted in a$0.9 million decrease in related interest expense. Income Before Taxes As a result of the foregoing factors, income before taxes increased by$2.0 million , compared to the third quarter of 2019. Provision for Income Taxes Our effective tax rate for the three months endedSeptember 30, 2020 increased to 16% from 4% for the three months endedSeptember 30, 2019 , mostly as increased income before taxes during the third quarter of 2020 had the effect of reducing the 31 -------------------------------------------------------------------------------- effective tax rate impact related to research and development ("R&D") tax credits compared to the third quarter of 2019. R&D tax credits, inclusive of provision-to-return adjustments, benefited our effective tax rate by 11% during the third quarter of 2020 compared to a 20% benefit during the third quarter of 2019. Net Income Net income for the three months endedSeptember 30, 2020 increased by$1.1 million to$5.3 million , or$0.36 per basic and diluted share, compared with net income of$4.1 million , or$0.29 per basic and diluted share, for the three months endedSeptember 30, 2019 . Net income represented 8% of revenue for the three months endedSeptember 30, 2020 , compared to 6% of revenue for the three months endedSeptember 30, 2019 . Nine Months EndedSeptember 30, 2020 Compared with Nine Months EndedSeptember 30, 2019 Revenues Total revenues for the nine months endedSeptember 30, 2020 decreased by$6.4 million , or 3%, compared to the nine months endedSeptember 30, 2019 . System sales and support revenues decreased by$7.6 million , or 6%, compared to the nine months endedSeptember 30, 2019 . System sales and support revenues were comprised of the following during the respective periods: Nine Months Ended September 30, (In thousands) 2020 2019 Recurring system sales and support revenues (1) Acute Care EHR$ 78,586 $ 81,462 Post-acute Care EHR 12,157 13,214 Total recurring system sales and support revenues 90,743 94,676
Non-recurring system sales and support revenues (2) Acute Care EHR
24,213 25,999
Post-acute Care EHR 1,341 3,202
Total non-recurring system sales and support revenues 25,554 29,201
Total system sales and support revenue $
116,297
(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$3.9 million , or 4%, compared to the nine months endedSeptember 30, 2019 . Acute Care EHR recurring revenues decreased by$2.9 million , or 4%, as attrition from the Thrive andCentriq customer base outweighed new Thrive customer growth and additional support and SaaS fees. Post-acute Care EHR recurring revenues decreased$1.1 million , or 8%, due to attrition attributed to an aggressive competitive environment as we make technological improvements to the AHT product line. Non-recurring system sales and support revenues decreased by$3.6 million , or 12%. Acute Care EHR non-recurring revenues decreased by$1.8 million , or 7%, mostly due to a$3.5 million decrease in revenues for MU3 applications due to the aforementioned reduced revenue opportunities that was partially offset by a$1.1 million increase in special project-related revenues. We installed our Acute Care EHR solutions at 22 new hospital clients during the first nine months of 2020 (14 of which were under a SaaS arrangement, resulting in revenue being recognized ratably over the contract term) compared to 16 new hospital clients during the first nine months of 2019 (five of which were under a SaaS arrangement). Acute Care EHR revenues from new system implementations and add-on sales to existing customers increased$0.5 million from the first nine months of 2019.Non-recurring Post -acute Care EHR revenues decreased by$1.9 million , or 58%, as compliance catalysts in place during 2019 have largely abated. 32 --------------------------------------------------------------------------------TruBridge revenues increased by$1.2 million , or 2%, compared to the nine months endedSeptember 30, 2019 .Get Real Health , which was acquired during the second quarter of 2019, contributed$2.2 million of revenues during the first nine months of 2020 compared to only$0.7 million during the first nine months of 2019. This$1.5 million increase inGet Real Health revenues was largely offset by combined declining revenues in our remaining revenue sources, as the COVID-19 pandemic and the resulting impact on patient volumes for our community hospital customers offset the revenue gains from recent new client wins. Most notably, revenues from our private pay services offering decreased by$1.3 million , or 13%. Costs of Sales Total costs of sales decreased by less than 1%, or$0.4 million , compared to the nine months endedSeptember 30, 2019 . As a percentage of total revenues, costs of sales were 49% of revenues in the nine months endedSeptember 30, 2020 compared to 47% of revenues in the nine months endedSeptember 30, 2019 . Costs of Acute Care EHR system sales and support decreased by$2.5 million , or 5%, compared to the first nine months of 2019, as hardware costs decreased by$0.6 million due to a decline in related revenues. Additionally, the impact of COVID-19 on associate travel resulted in reduced travel costs of$1.4 million while improved personnel efficiency combined with natural employee turnover and lowered incentive compensation expense resulted in an$0.8 million decrease in payroll-related costs. The gross margin on Acute Care EHR system sales and support remained flat at 53% during both the first nine months of 2020 and the first nine months of 2019. Costs of Post-acute Care EHR system sales and support decreased by$0.4 million , or 9%, compared to the first nine months of 2019, primarily due to improved personnel efficiency and travel costs savings due to the impact of COVID-19 on associate travel. The gross margin on Post-acute Care EHR system sales and support decreased to 73% for the first nine months of 2020, compared to 76% for the first nine months of 2019. Our costs associated withTruBridge sales and support increased by 6%, or$2.4 million , compared to the first nine months of 2019, despite overall declining revenues for non-Get Real Health revenue sources. The primary driver was a payroll increase of$2.6 million , propelled by increasing demand in the second half of 2019 and early 2020 for our accounts receivable management services. At the onset of the pandemic, we notified our employees, including those whose roles were negatively impacted by the declining patient volumes at our community hospital clients, that we would not execute any payroll cost mitigation efforts in response to COVID-19 throughJuly 31, 2020 and have not, to-date, executed any such efforts. As a result, we have not executed any reduction-in-force or furlough action plans as a result of the pandemic, which severely limited our ability to offset revenue declines with cost savings. This decision, while socially responsible in providing much needed job security to our employees and their families during a period of unprecedented economic hardship, also serves the long-term interests of our shareholders by strengthening our team, improving customer satisfaction, and better positioning us to capture opportunities as our markets recover. The gross margin on these services decreased to 46% in the first nine months of 2020, compared to 48% in the first nine months of 2019. 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$2.5 million , or 9%, compared to the first nine months of 2019, primarily due to$2.4 million of payroll capitalized for software development during the first nine months of 2020 with no such costs capitalized during the first nine months of 2019. Sales and Marketing Sales and marketing expenses decreased by$2.6 million , or 12%, compared to the first nine months of 2019, mostly due to the varying impacts of COVID-19 on our sales execution. Specifically, stock-based compensation expense decreased by$0.7 million as the expected impact of the pandemic on our operations has resulted in a reduced near-term outlook, resulting in reduced expected achievement levels for performance share awards granted to executives and certain key employees in 2018 through 2020. Travel costs decreased by$1.1 million as travel restrictions and social distancing guidelines pose challenges to in-person sales efforts and general marketing program spend decreased by$0.9 million . General and Administrative General and administrative expenses decreased by$0.7 million , as the$1.3 million increase in employee health claims related to our self-insured health benefits plan for our employees has been offset by decreases in nonrecurring severance and transaction-related expenses and decreased costs associated with our annual client conference. Severance and transaction-related expenses decreased by$1.2 million , due in part to the closing of our acquisition ofGet Real Health in the first nine 33 -------------------------------------------------------------------------------- months of 2019. Costs associated with our annual client conference decreased by$1.1 million . This conference, typically held during the second quarter of each year, was originally scheduled forMay 2020 . In response to the COVID-19 pandemic, we initially postponed the conference untilAugust 2020 , subsequently cancelling the 2020 event altogether. Amortization of Acquisition-Related Intangibles Amortization expense associated with acquisition-related intangible assets increased by$0.5 million , compared to the first nine months of 2019, due to the inclusion ofGet Real Health intangibles. Total Operating Expenses As a percentage of total revenues, total operating expenses decreased to 44% of revenues in the first nine months of 2020, compared to 45% in the first nine months of 2019. Total Other Income (Expense) Total other income (expense) decreased by$2.9 million to an expense of$1.8 million during the first nine months of 2020 compared to expense of$4.7 million during the first nine months of 2019, primarily as our long-term debt and accompanying interest rate have both decreased from the first nine months of 2019. Income Before Taxes As a result of the foregoing factors, income before taxes increased by$2.4 million , compared to the first nine months of 2019. Provision for Income Taxes Our effective tax rate for the nine months endedSeptember 30, 2020 increased to 16% from 15% for the nine months endedSeptember 30, 2019 , mostly as increased income before taxes during the first nine months of 2020 had the effect of reducing the effective tax rate impact related to R&D tax credits compared to the first nine months of 2019. R&D tax credits, inclusive of provision-to-return adjustments, benefited our effective tax rate by 12% during the first nine months of 2020 compared to a 13% benefit during the first nine months of 2019. Net Income Net income for the nine months endedSeptember 30, 2020 increased by$1.9 million to$11.1 million , or$0.77 per basic and diluted share, compared with net income of$9.2 million , or$0.65 million per basic and diluted share, for the nine months endedSeptember 30, 2019 . Net income represented 6% of revenue for the nine months endedSeptember 30, 2020 , compared to 5% of revenue for the nine months endedSeptember 30, 2019 . Liquidity and Capital Resources The Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the nine months endedSeptember 30, 2020 . 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 II, "Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 . Sources of Liquidity As ofSeptember 30, 2020 , our principal sources of liquidity consisted of cash and cash equivalents of$11.8 million and our remaining borrowing capacity under the revolving credit facility of$91.0 million , compared to$7.4 million of cash and cash equivalents and$30.0 million of remaining borrowing capacity under the revolving credit facility as ofDecember 31, 2019 . 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 ofSeptember 30, 2020 , we had$91.1 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of$11.8 million as ofSeptember 30, 2020 , the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of$91.0 million as ofSeptember 30, 2020 , taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months. 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. 34 -------------------------------------------------------------------------------- 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 increased by$7.5 million from$25.5 million provided by operations for the nine months endedSeptember 30, 2019 to$33.0 million provided by operations for the nine months endedSeptember 30, 2020 . The increase in cash flows provided by operations is primarily due to increased net income and advantageous changes in working capital, which was a net use of cash during the first nine months of 2019 in the amount of$2.9 million , compared to a net inflow of cash during the first nine months of 2020 of$2.5 million . Investing Cash Flow Activities Net cash used in investing activities decreased by$6.8 million , with$5.6 million used in the nine months endedSeptember 30, 2020 compared to$12.4 million used during the nine months endedSeptember 30, 2019 . Most notably, we used$10.7 million of cash during the first nine months of 2019 to fund our acquisition ofGet Real Health . The first nine months of 2020 included$2.4 million in capitalized software development costs compared to none during the first nine months of 2019. Cash outflows for purchases of property and equipment increased from$1.7 million in the first nine months of 2019 to$3.2 million during the first nine months of 2020, mostly due to the addition of aWest Coast data center to enhance our remote hosting capabilities. We do not anticipate the need for significant capital expenditures during the remainder of 2020. Financing Cash Flow Activities During the nine months endedSeptember 30, 2020 , our financing activities used net cash of$23.0 million , as we paid a net$18.6 million in long-term debt principal and declared and paid dividends in the amount of$4.3 million . During the nine months endedJune 30, 2019 , we made a$7.0 million prepayment on the term loan facility in accordance with the excess cash flow mandatory prepayment requirements of the credit agreement. Financing cash flow activities used$14.9 million during the nine months endedSeptember 30, 2019 , primarily due to$10.4 million net paid in long-term debt principal and$4.3 million cash paid in dividends. OnSeptember 4, 2020 , our Board of Directors approved a stock repurchase program to repurchase up to$30 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. Credit Agreement As ofSeptember 30, 2020 , we had$74.1 million in principal amount outstanding under the term loan facility and$17.0 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. 35 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2020 . 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 2019 was not required during the first quarter of 2020. 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 ofSeptember 30, 2020 , we had a twelve-month backlog of approximately$9 million in connection with non-recurring system purchases and approximately$233 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, andTruBridge services. As ofSeptember 30, 2019 , we had a twelve-month backlog of approximately$14 million in connection with non-recurring system purchases and approximately$231 million in connection with recurring payments under support and maintenance andTruBridge services. 36 --------------------------------------------------------------------------------
Bookings
Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2020 2019 2020 2019 System sales and support (1) Acute Care EHR$ 11,535 $ 12,299 $ 32,387 $ 30,436 Post-acute Care EHR 2,180 1,066 5,259 4,232 Total system sales and support 13,715 13,365 37,646 34,668 TruBridge (2) 7,760 10,248 23,176 17,572 Total bookings$ 21,475 $ 23,613 $ 60,822 $ 52,240 (1) Generally calculated as the total contract price (for system sales) and annualized contract value (for support). (2) Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts). Acute Care EHR bookings in the third quarter of 2020 decreased by$0.8 million , or 6%, from the third quarter of 2019 as increased strength in demand for new EHR installations was more than offset by a decline in bookings for add-on applications to existing customers. Year-to-date, this increased strength in demand for new EHR installations has propelled Acute Care EHR bookings to a$2.0 million , or 6%, increase over the first nine months of 2019. Bookings for our Post-acute Care EHR segment more than doubled in the third quarter of 2020 from the third quarter of 2019 and have increased 24% in the first nine months of 2020 from the first nine months of 2019, primarily as recent investments in AHT's technology solutions are driving demand within the existing AHT customer base for additional applications and upgrades.TruBridge bookings in the third quarter of 2020 decreased$2.5 million , or 24%, from the third quarter of 2019, primarily as the third quarter of 2019 marked the second-highest bookings period inTruBridge history due to extraordinary strength in bookings from outside of our Acute Care and Post-acute Care EHR customer bases. Year-to-date,TruBridge bookings have increased$5.6 million , or 32%, mostly due to the combined impacts of (1) our recently-introduced initiative to expand ourTruBridge footprint outside of our traditional EHR customers base, resulting in significant client wins, and (2) a poor sales environment during the first half of 2019 driven by a lack of urgency on the part of prospective customers, impacting the timing of customer decisions for purchasingTruBridge services. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements, as defined by Item 303(a)(4) ofSEC Regulation S-K, as ofSeptember 30, 2020 . 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 endedDecember 31, 2019 , we identified our critical accounting polices related to revenue recognition, allowance for doubtful accounts, allowance for credit losses, estimates, and business combinations, including purchased intangible assets. There have been no significant changes to these critical accounting policies during the nine months endedSeptember 30, 2020 . 37
--------------------------------------------------------------------------------
© Edgar Online, source
