NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.
Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated balance sheet at that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of Computer Programs and Systems, Inc. ("CPSI" or the "Company") for the year ended December 31, 2022 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Commencing with the fourth quarter of 2022, the Company realigned its reporting structure due to certain organizational changes. As a result, the Company changed its three reportable segments from (i) TruBridge, (ii) Acute Care Electronic Health Record ("EHR"), and (iii) Post-acute Care EHR to (i) Revenue Cycle Management ("RCM"), (ii) EHR, and (iii) Patient Engagement. All prior segment information has been recast to reflect the Company's new segment structure and current period presentation. Refer to Note 17 - Segment Reporting for more information.
Additional changes to the presentation of amounts within our condensed consolidated statements of income are as follows:
•During the first quarter of 2023, we identified certain costs related to the implementation of our cloud strategy and our security operations center that were recorded within the caption "Costs of revenue (exclusive of amortization and depreciation) - EHR" on our condensed consolidated statements of income, that we determined do not solely contribute to the production of EHR products and services, but support the overall business. Consequently, effective January 1, 2023, certain costs related to the implementation of our cloud strategy, which were formerly included within the caption "Costs of revenue (exclusive of amortization and depreciation) - EHR," have been recorded as components of "Product development" expenses. In addition, certain costs related to the Company's security operations center, which were formerly included within the caption "Costs of revenue (exclusive of amortization and depreciation) - EHR," have been recorded as components of "General and administrative" expenses. Additionally, immaterial travel costs were reclassified from within the caption "Costs of revenue (exclusive of amortization and depreciation) - RCM" to "Product development" expenses. Amounts presented for the three and nine months ended September 30, 2022 have been reclassified to conform to the current presentation.
•In addition, during the first quarter of 2023, we refined our operating expense allocation methodology to more accurately distribute the appropriate share of costs among operating segments. Amounts presented for the three and nine months ended September 30, 2022 have been reclassified and are reflective of the current operating expense methodology in order to conform to the current presentation.
•During the third quarter of 2023, we changed the presentation of certain costs previously recorded within the expense captions of "Product development" and "General and administrative" to better comply with the disclosure requirements of Staff Accounting Bulletin Topic 11.B., Miscellaneous Disclosure: Depreciation and Depletion Excluded from Cost of Sales. These changes are summarized as follows:
◦Amortization expense associated with capitalized software development costs, previously recorded within the expense caption of "Product development," have been combined with amounts previously recorded within the expense caption "Amortization of acquisition-related intangibles" and reflected in a newly-presented expense caption of "Amortization."
◦Depreciation expense previously recorded within the expense caption of "General and administrative" have been reclassified within the newly-presented expense caption of "Depreciation."
◦The expense caption previously labelled as "Costs of sales" has been renamed "Costs of revenue (exclusive of amortization and depreciation)," with the previously reported reference to "Gross profit" removed from the current presentation.
The following table provides the amounts reclassified and the impact of applying the current operating expense allocation methodology for the three and nine months ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| (in thousands) | As previously reported | | Re-classifications | | As reclassified | | Impact of operating expense allocations | | As currently reported |
| Costs of revenue (exclusive of amortization and depreciation) | | | | | | | | | |
| RCM | $ | 25,289 | | | $ | — | | | $ | 25,289 | | | $ | — | | | $ | 25,289 | |
| EHR | 18,619 | | | (874) | | | 17,745 | | | (642) | | | 17,103 | |
| Other expenses | | | | | | | | | |
| Product development | 7,822 | | | (477) | | | 7,345 | | | 642 | | | 7,987 | |
| General and administrative | 13,458 | | | (295) | | | 13,163 | | | — | | | 13,163 | |
| Amortization of acquisition-related intangibles | 4,486 | | | (4,486) | | | — | | | — | | | — | |
| Amortization | — | | | 5,510 | | | 5,510 | | | — | | | 5,510 | |
| Depreciation | — | | | 622 | | | 622 | | | — | | | 622 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| (in thousands) | As previously reported | | Re-classifications | | As reclassified | | Impact of operating expense allocations | | As currently reported |
| Costs of revenue (exclusive of amortization and depreciation) | | | | | | | | | |
| RCM | $ | 71,068 | | | $ | — | | | $ | 71,068 | | | $ | — | | | $ | 71,068 | |
| EHR | 52,278 | | | (2,169) | | | 50,109 | | | (1,945) | | | 48,164 | |
| Other expenses | | | | | | | | | |
| Product development | 22,036 | | | (1,084) | | | 20,952 | | | 1,945 | | | 22,897 | |
| General and administrative | 41,235 | | | (920) | | | 40,315 | | | — | | | 40,315 | |
| Amortization of acquisition-related intangibles | 12,917 | | | (12,917) | | | — | | | — | | | — | |
| Amortization | — | | | 15,200 | | | 15,200 | | | — | | | 15,200 | |
| Depreciation | — | | | 1,890 | | | 1,890 | | | — | | | 1,890 | |
Principles of Consolidation
The condensed consolidated financial statements of CPSI include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted in 2023
There were no new accounting standards required to be adopted in 2023 that would have a material impact on our consolidated financial statements.
New Accounting Standards Yet to be Adopted
We do not believe that any other recently issued but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
3. REVENUE RECOGNITION
Revenue is recognized upon transfer of control of promised products or services to clients in an amount that reflects the consideration we expect to receive in exchange for those products and services. We enter into contracts that can include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations. The Company employs the 5-step revenue recognition model under ASC 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized net of shipping charges and any taxes collected from clients, which are subsequently remitted to governmental authorities.
•Revenue Cycle Management
Our RCM business unit provides an array of business processing services ("BPS") consisting of accounts receivable management, private pay services, insurance services, medical coding, electronic billing, statement processing, payroll processing, and contract management. Fees are recognized over the period of the client contractual relationship as the services are performed based on the stand-alone selling price ("SSP"), net of discounts. SSP for BPS services is determined based on observable stand-alone selling prices. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.
Our RCM business unit also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP, which is determined by observable stand-alone selling prices. Payment is due monthly as services are performed.
Lastly, our RCM business unit also provides certain software solutions and related support under Software as a Service ("SaaS") arrangements and time-based software licenses. Revenue from SaaS arrangements is recognized in a manner consistent with SaaS arrangements for EHR software, as discussed below. Revenue from time-based software licenses is recognized upon delivery to the client (“point in time”) and revenue from non-license components (i.e., support) is recognized ratably over the respective contract term (“over time”). SSP for time-based licenses is determined using the residual approach, while the non-license component is based on cost plus reasonable margin.
•Electronic Health Records
The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, and related training services, software application support, hardware, and hardware maintenance services to acute care community hospitals and post-acute providers.
•Non-recurring Revenues
•Perpetual software licenses and installation, conversion, and related training services are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's SSP, net of discounts. We determine each module's SSP using the residual method. Fees for licenses and installation, conversion, and related training services are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 11 - Financing Receivables for further
information. EHR implementations include a system warranty that terminates thirty days from the software go-live date, the date which the client begins using the system in a live environment.
•Hardware revenue is recognized separately from software licenses at the point in time it is delivered to the client. The SSP of hardware is cost plus a reasonable margin and revenue is recognized on a gross basis. Payment is generally due upon delivery of the hardware to the client. Standard manufacturer warranties apply to hardware.
•Recurring Revenues
•Software application support and hardware maintenance services sold with software licenses and hardware are separate and distinct performance obligations. Revenue for support and maintenance services is recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally three to five years. Payment is due monthly for support and maintenance services provided.
•Subscriptions to third-party content revenue is recognized as a separate performance obligation ratably over the subscription term based on SSP, which is cost plus a reasonable margin, and revenue is recognized on a gross basis. Payment is due monthly for subscriptions to third party content.
•SaaS arrangements for EHR software and related conversion and training services are considered a single performance obligation. Revenue is recognized on a monthly basis as the SaaS service is provided to the client over the contract term. Payment is due monthly for SaaS services provided.
Refer to Note 17 of the consolidated financial statements for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
•Patient Engagement
The Company enters into contractual obligations to sell perpetual and term-based software licenses, implementation and customization professional services, and software application support services to a variety of healthcare organizations including hospital systems, health ministries, and government and non-profit organizations.
•Non-recurring Revenues
•Perpetual software licenses are sold only to one re-seller client and are considered a separate and distinct performance obligation. Revenue is recognized at the point in time perpetual licenses are delivered to the client, which occurs at the time of sale. The SSP of perpetual licenses is directly observable. Payment is generally due upon delivery of licenses.
•Implementation and customization services are considered a separate and distinct performance obligation. Revenue is recognized over time based on SSP, which is generally directly observable. Payment for professional services is typically due in two installments: (1) upon signature of the agreement and (2) upon customer acceptance of the delivered services.
•Recurring Revenues
•Term-based software licenses are considered a separate and distinct performance obligation. Revenue is recognized based on SSP, which is directly observable, at the point in time the term-based licenses are delivered to the client or upon annual renewal. Payment is generally due upon delivery of licenses or upon annual renewal.
•Software application support services sold with software licenses are separate and distinct performance obligations. The related revenues are recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally three to five years. Payment is generally due for the full amount of annual support fees at the beginning of an annual license term.
Refer to Note 17 of the condensed consolidated financial statements for further information.
Deferred Revenue
Deferred revenue represents amounts invoiced to clients for which the services under contract have not been completed and revenue has not been recognized, including annual renewals of certain software subscriptions and customer deposits for implementations to be performed at a later date. Revenue is recognized ratably over the life of the software subscriptions as services are provided and at the point-in-time when implementations have been completed.
The following table details deferred revenue for the nine months ended September 30, 2023 and 2022, included in the condensed consolidated balance sheets: | | | | | | | | | | | | | |
| (In thousands) | | | Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 |
| Beginning balance | | | $ | 11,590 | | | $ | 11,529 | |
| Deferred revenue recorded | | | 13,417 | | | 19,474 | |
| | | | | |
| Less deferred revenue recognized as revenue | | | (16,201) | | | (18,748) | |
| Ending balance | | | $ | 8,806 | | | $ | 12,255 | |
The deferred revenue recorded during the nine months ended September 30, 2023 and 2022 is comprised primarily of the annual renewals of certain software subscriptions billed during the first quarter of each year and deposits collected for future EHR installations. The deferred revenue recognized as revenue during the nine months ended September 30, 2023 and 2022 is comprised primarily of the periodic recognition of annual renewals that were deferred until earned and deposits for future EHR installations that were deferred until earned.
Costs to Obtain and Fulfill a Contract with a Customer
Costs to obtain a contract include the commission costs related to SaaS and RCM arrangements, which are capitalized and amortized ratably over the expected life of the customer. As a practical expedient, we generally recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less. Costs to obtain a contract are expensed within the caption "Expenses - Sales and marketing" in the accompanying condensed consolidated statements of income.
Contract fulfillment costs related to the implementation of SaaS arrangements are capitalized and amortized ratably over the expected life of the customer. Costs to fulfill contracts consist of the payroll costs for the implementation of SaaS arrangements, including time for training, conversions, and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption "Costs of revenue (exclusive of amortiztion and depreciation) - EHR" in the accompanying condensed consolidated statements of income.
Costs to obtain and fulfill contracts related to SaaS and RCM arrangements are included within the "Prepaid expenses and other" and "Other assets, net of current portion" line items on our condensed consolidated balance sheets.
The following table details costs to obtain and fulfill contracts with customers for the nine months ended September 30, 2023 and 2022, included in the condensed consolidated balance sheets: | | | | | | | | | | | | | |
| (In thousands) | Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 | | |
| Beginning balance | $ | 11,577 | | | $ | 7,312 | | | |
| Costs to obtain and fulfill contracts capitalized | 5,221 | | | 7,460 | | | |
| Less costs to obtain and fulfill contracts recognized as expense | (4,214) | | | (5,440) | | | |
| Ending balance | $ | 12,584 | | | $ | 9,332 | | | |
Remaining Performance Obligations
Disclosures regarding remaining performance obligations are not considered material as the overwhelming majority of the Company's remaining performance obligations either (a) are related to contracts with an expected duration of one year or less, or (b) exhibit revenue recognition in the amount to which the Company has the right to invoice.
4. BUSINESS COMBINATION
Acquisition of Healthcare Resource Group
On March 1, 2022, we acquired all of the assets and liabilities of Healthcare Resource Group, Inc., a Washington corporation ("HRG"), pursuant to a Stock Purchase Agreement dated March 1, 2022. Based in Spokane, Washington, HRG is a leading provider of customized RCM solutions and consulting services that enable hospitals and clinics to improve efficiency, profitability, and patient satisfaction.
Consideration for the acquisition included cash (net of cash of the acquired entity) of $43.6 million (inclusive of seller's transaction expenses). During 2022, we incurred approximately $1.2 million of pre-tax acquisition costs in connection with the acquisition of HRG. Acquisition costs are included in general and administrative expenses in our consolidated statements of income.
Our acquisition of HRG was treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. Our allocation of the purchase price was based on management's judgment after evaluating several factors, including a valuation assessment.
The allocation of the purchase price paid for HRG was as follows:
| | | | | |
| (In thousands) | Purchase Price Allocation |
| Acquired cash | $ | 3,989 | |
| Accounts receivable | 5,655 |
| Prepaid expenses | 398 |
| Property and equipment | 467 |
| Other assets | 73 |
| Intangible assets | 24,200 |
| Operating lease assets | 1,315 |
| Goodwill | 20,750 |
| Accounts payable and accrued liabilities | (2,403) |
| Deferred taxes, net | (5,565) |
| Operating lease liability | (1,315) |
| |
| |
| Net assets acquired | $ | 47,564 | |
The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives, which range from four to nine years. The amortization is included in the caption "amortization" in our condensed consolidated statements of income.
The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy (see Note 16 - Fair Value). Level 3 inputs included, among others, discount rates that we estimated would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, client attrition rates and market comparables.
5. PROPERTY AND EQUIPMENT
Property and equipment, net was comprised of the following at September 30, 2023 and December 31, 2022: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Land | $ | 2,848 | | | $ | 2,848 | |
| Buildings and improvements | 8,481 | | | 8,320 | |
| | | |
| Computer equipment | 8,383 | | | 8,228 | |
| Leasehold improvements | 606 | | | 783 | |
| Office furniture and fixtures | 1,025 | | | 1,008 | |
| Automobiles | 18 | | | 18 | |
| Property and equipment, gross | 21,361 | | | 21,205 | |
| Less: accumulated depreciation | (12,654) | | | (11,321) | |
| Property and equipment, net | $ | 8,707 | | | $ | 9,884 | |
6. SOFTWARE DEVELOPMENT
Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. We capitalize incurred labor costs for software development from the time the preliminary project phase is completed until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We estimate the useful life of our capitalized software and amortize its value on a straight-line basis over that estimated life, which is estimated to be five years. If the actual useful life of the asset is determined to be shorter than our estimated useful life, we will amortize the remaining book value over the remaining actual useful life, or the asset may be deemed to be impaired and, accordingly, a write-down of the value of the asset may be recorded as a charge to earnings. Amortization begins when the related software features are placed in service.
Software development costs, net was comprised of the following at September 30, 2023 and December 31, 2022: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Software development costs | $ | 49,770 | | | $ | 31,789 | |
| Less: accumulated amortization | (10,038) | | | (4,532) | |
| Software development costs, net | $ | 39,732 | | | $ | 27,257 | |
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at September 30, 2023 and December 31, 2022: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Salaries and benefits | $ | 7,253 | | | $ | 8,430 | |
| Severance | 7,783 | | | 2,504 | |
| Commissions | 740 | | | 1,280 | |
| Self-insurance reserves | — | | | 1,358 | |
| Interest | 1,919 | | | — | |
| Operating lease liabilities, current portion | 1,880 | | | 2,063 | |
| Other | 3,546 | | | 840 | |
| Other accrued liabilities | $ | 23,121 | | | $ | 16,475 | |
Prior to 2023, our employee health benefits plan was administered as a self-insured plan, with the Company bearing the risk of claims (partially limited by related stop-loss insurance, as is industry norm). Under a self-insured plan, we maintained reserves for an estimate of the liability from claims that have been incurred but were not yet reported at the end of the period. Effective January 1, 2023, our employee health benefits plan is now administered as a fully-insured plan, with full risk of claims exposure transferred to the health insurance carrier, thus ceasing the need for self-insurance reserves.
8. NET INCOME (LOSS) PER SHARE
The Company presents basic and diluted earnings per share ("EPS") data for its common stock. Basic EPS is calculated by dividing the net income attributable to stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to stockholders of the Company and the weighted average number of shares of common stock outstanding during the period for the effects of all dilutive potential common shares, including awards under stock-based compensation arrangements.
The Company's unvested restricted stock awards (see Note 10) are considered participating securities under ASC 260, Earnings Per Share, because they entitle holders to non-forfeitable rights to dividends until the awards vest or are forfeited. When a company has a security that qualifies as a "participating security," the Codification requires the use of the two-class method when computing basic EPS. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net income to allocate to common stockholders, income is allocated to both common stock and participating securities based on their respective weighted average shares outstanding for the period, with net income attributable to common stockholders ultimately equaling net income less net income attributable to participating securities. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method.
The following is a calculation of the basic and diluted EPS for the Company's common stock, including a reconciliation between net income and net income attributable to common stockholders: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | $ | (3,562) | | | $ | 2,161 | | | $ | (3,315) | | | $ | 13,350 | |
| Less: Net (income) loss attributable to participating securities | 82 | | | (42) | | | 73 | | | (261) | |
| Net income (loss) attributable to common stockholders | $ | (3,480) | | | $ | 2,119 | | | $ | (3,242) | | | $ | 13,089 | |
| | | | | | | |
| Weighted average shares outstanding used in basic per common share computations | 14,205 | | | 14,365 | | | 14,181 | | | 14,405 | |
| Add: Dilutive potential common shares | — | | | — | | | — | | | — | |
| Weighted average shares outstanding used in diluted per common share computations | 14,205 | | | 14,365 | | | 14,181 | | | 14,405 | |
| | | | | | | |
| Basic EPS | $ | (0.24) | | | $ | 0.15 | | | $ | (0.23) | | | $ | 0.91 | |
| Diluted EPS | $ | (0.24) | | | $ | 0.15 | | | $ | (0.23) | | | $ | 0.91 | |
During 2021, 2022, and 2023, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of common stock if the predefined performance criteria are met. The awards provide for an aggregate target of 273,791 shares, of which none have been included in the calculation of diluted EPS for the three or nine months ended September 30, 2023 because the related threshold award performance levels have not been achieved as of September 30, 2023. See Note 10 - Stock-Based Compensation and Equity for more information.
9. INCOME TAXES
The Company determines the tax provision for interim periods using an estimate of our annual effective tax rate ("ETR"), adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual ETR, and if our estimated tax rate changes, we make a cumulative adjustment. If a reliable estimate of the annual ETR cannot be made, the actual ETR for the year to date may be the best estimate of the annual ETR.
Our effective tax rate for the three months ended September 30, 2023 increased to 55.8% from 26.4% for the three months ended September 30, 2022, with the largest contributing factor being the impact of the research and development ("R&D") tax credit. This credit, which is not correlated with taxable income, resulted in an incremental benefit of 24.2% over the corresponding benefit during the third quarter of 2022. In periods with taxable income, the benefit from the R&D tax credit serves to reduce income tax expense, thereby lowering the effective tax rate. However, in periods with taxable loss, the benefit from the R&D tax credit serves to increase the income tax benefit, thereby increasing the effective tax rate.
Similarly, our effective tax rate for the nine months ended September 30, 2023 increased to 61.7% from 17.9% for the nine months ended September 30, 2022, as the R&D tax credit resulted in an incremental benefit of 26.5% over the corresponding benefit during the first nine months of 2022. Additionally, our effective state income tax rate increased to 12.3% during the first nine months of 2023 from 1.7% during the first nine months of 2022, as the allocation of net income (loss) to individual subsidiaries and those subsidiaries' relative state income tax exposure caused the related effective tax rate to deviate significantly from historical norms. Lastly, the impact of provision-to-return adjustments on our effective tax rate increased to 11.3% during the first nine months of 2023 compared to only 1.3% during the first nine months of 2022 due to a change in method for calculating the 2022 tax benefit related to the R&D tax credit, which was previously estimated assuming we would continue to apply the ASC 730 Safe Harbor Directive in determining credit amounts. The results of our 2022 R&D tax credit study, completed during the third quarter of 2023, indicated a more beneficial R&D tax credit utilizing the standard, pre-Safe Harbor method for determining qualified research expenditures. As such, we have elected to forego applying the ASC 730 Safe Harbor Directive for tax year 2022.
10. STOCK-BASED COMPENSATION AND EQUITY
Stock-based compensation expense is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employee's or non-employee director's requisite service period.
The following table details total stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022, included in the condensed consolidated statements of income: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Costs of revenue (exclusive of amortization and depreciation) | $ | 237 | | | $ | 274 | | | $ | 558 | | | $ | 851 | |
| Other expenses | 801 | | | 1,590 | | | 1,604 | | | 4,433 | |
| Pre-tax stock-based compensation expense | 1,038 | | | 1,864 | | | 2,162 | | | 5,284 | |
| Less: income tax effect | (228) | | | (410) | | | (476) | | | (1,162) | |
| Net stock-based compensation expense | $ | 810 | | | $ | 1,454 | | | $ | 1,686 | | | $ | 4,122 | |
The Company's stock-based compensation awards are in the form of restricted stock and performance share awards granted pursuant to the Company's Amended and Restated 2019 Incentive Plan (the "Plan"). As of September 30, 2023, there was $7.6 million of unrecognized compensation expense related to unvested and unearned, as applicable, stock-based compensation arrangements granted under the Plan, which is expected to be recognized over a weighted-average period of 2.0 years.
Restricted Stock
The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plan with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. During the vesting period, recipients of restricted stock are entitled to dividends and possess voting rights. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from one to three years. The Company records expenses for these grants on a straight-line basis over the applicable vesting periods.
A summary of restricted stock activity under the Plan during the nine months ended September 30, 2023 and 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 | | |
| Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | | | |
| Unvested restricted stock outstanding at beginning of period | 281,161 | | | $ | 32.24 | | | 314,883 | | | $ | 29.79 | | | | | |
| Granted | 210,351 | | | 26.44 | | | 161,375 | | | 34.22 | | | | | |
| | | | | | | | | | | |
| Vested | (145,529) | | | 31.35 | | | (181,405) | | | 29.79 | | | | | |
| Forfeited | (2,668) | | | 29.23 | | | (8,936) | | | 31.60 | | | | | |
| Unvested restricted stock outstanding at end of period | 343,315 | | | $ | 29.08 | | | 285,917 | | | $ | 32.23 | | | | | |
Performance Share Awards
The Company grants performance share awards to executive officers and certain key employees under the Plan, with the number of shares of common stock earned and issuable under each award determined at the end of a three-year performance period, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. These performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR") compared to a small-cap stock market index. If certain levels of the performance objective are met, the award results in the issuance of shares of common stock corresponding to such level. Performance share awards that result in the issuance of shares of common stock are not subject to time-based vesting at the conclusion of the three-year performance period.
In the event that the Company's financial performance meets the predetermined targets for the performance objectives of the performance share awards, the Company will issue each award recipient the number of shares of common stock equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined targets, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined targets, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance levels, no shares may be issued. The total number of shares issued for the performance share award may be increased, decreased, or unchanged based on the TSR modifier described above.
The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the performance share awards is the quoted market value of CPSI's common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.
Expense related to performance share awards is recognized using ratable straight-line amortization over the three-year performance period. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made.
A summary of performance share award activity under the Plan during the nine months ended September 30, 2023 and 2022 is as follows, based on the target award amounts set forth in the performance share award agreements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 | | |
| Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | | | |
| Performance share awards outstanding at beginning of period | 252,375 | | | $ | 31.84 | | | 249,952 | | | $ | 29.59 | | | | | |
| Granted | 122,071 | | | 31.21 | | | 101,799 | | | 37.98 | | | | | |
| Forfeited or unearned | (100,655) | | | 27.46 | | | (45,060) | | | 31.70 | | | | | |
| Earned and issued | — | | | — | | | (27,317) | | | 31.75 | | | | | |
| | | | | | | | | | | |
| Performance share awards outstanding at end of period | 273,791 | | | $ | 33.17 | | | 279,374 | | | $ | 32.09 | | | | | |
Stock Repurchases
On September 4, 2020, our Board of Directors approved a stock repurchase program under which we were authorized to repurchase up to $30.0 million of our common stock through September 3, 2022. On July 27, 2022, the Board of Directors extended the expiration date of the stock repurchase program to September 4, 2024. We repurchased 49,789 shares during the nine months ended September 30, 2023 and 212,299 shares during the nine months ended September 30, 2022. The approximate dollar value of shares that may yet be repurchased under the stock repurchase program was $16.5 million as of September 30, 2023. Any future stock repurchase transactions may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Any repurchase activity will depend on many factors, such as the availability of shares of our common stock, general market conditions, the trading price of our common stock, alternative uses for capital, the Company’s financial performance, compliance with the terms of our Amended and Restated Credit Agreement and other factors. Concurrent with the authorization of this stock repurchase program in September 2020, the Board of Directors opted to indefinitely suspend all quarterly dividends.
In addition to shares repurchased under the approved stock repurchase program, we purchased 39,716 shares during the nine months ended September 30, 2023 and 52,905 shares during the nine months ended September 30, 2022 to fund required tax withholdings related to the vesting of restricted stock. Shares withheld to cover required tax withholdings related to the vesting of restricted stock do not reduce our total share repurchase authority.
11. FINANCING RECEIVABLES
Short-Term Payment Plans
The Company provides fixed monthly payment arrangements ("short-term payment plans") over terms ranging from three to twelve months for certain add-on software installations. As a practical expedient, we do not adjust the amount of consideration recognized as revenue for the financing component as unearned income when we expect payment within one year or less. These receivables, included in the current portion of financing receivables, were comprised of the following at September 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Short-term payment plans, gross | $ | 1,107 | | | $ | 330 | |
| Less: allowance for losses | (55) | | | (16) | |
| Short-term payment plans, net | $ | 1,052 | | | $ | 314 | |
Long-Term Financing Arrangements
Additionally, the Company provides financing for purchases of its information and patient care systems to certain healthcare providers under long-term financing arrangements expiring in various years through 2029. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from two to seven years.
The decrease in long-term financing arrangement balances during the nine months ended September 30, 2023 is primarily a result of the continued evolution of customer licensing preferences. Although the overwhelming majority of our historical EHR installations prior to 2019 were made under a perpetual license model, the dramatic shift in customer preferences to a SaaS license model began during 2019 with 49% of the year's new acute care EHR installations being performed in a SaaS model, compared to only 12% in 2018. The shift in customer preference toward a SaaS model has since continued, with SaaS installations representing approximately 68% of new acute care EHR installations in 2020, 63% in 2021, and 100% in 2022 and the nine months ended September 30, 2023. Due to the nature of the revenue recognition requirements for SaaS arrangements coupled with recurring monthly payments, these arrangements do not give rise to long-term financing arrangements.
The components of these receivables were as follows at September 30, 2023 and December 31, 2022: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Long-term financing arrangements, gross | $ | 5,575 | | | $ | 8,683 | |
| Less: allowance for expected credit losses | (385) | | | (533) | |
| Less: unearned income | (376) | | | (678) | |
| Long-term financing arrangements, net | $ | 4,814 | | | $ | 7,472 | |
Future minimum payments to be received subsequent to September 30, 2023 are as follows: | | | | | |
| (In thousands) | |
| Years Ending December 31, | |
| 2023 | $ | 1,142 | |
| 2024 | 2,859 | |
| 2025 | 1,391 | |
| 2026 | 153 | |
| 2027 | 15 | |
| Thereafter | 15 | |
| Total minimum payments to be received | 5,575 | |
| Less: allowance for expected credit losses | (385) | |
| Less: unearned income | (376) | |
| Receivables, net | $ | 4,814 | |
| |
Credit Quality of Financing Receivables and Allowance for Expected Credit Losses
The following table is a roll-forward of the allowance for expected credit losses for the nine months ended September 30, 2023 and year ended December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance at Beginning of Period | | Provision | | Charge-offs | | Recoveries | | Balance at End of Period |
| September 30, 2023 | $ | 549 | | | $ | (109) | | | $ | — | | | $ | — | | | $ | 440 | |
| December 31, 2022 | $ | 722 | | | $ | (211) | | | $ | — | | | $ | 38 | | | $ | 549 | |
The Company’s financing receivables are comprised of a single portfolio segment, as the balances are all derived from short-term payment plan arrangements and long-term financing arrangements within our target market of community
hospitals. The Company evaluates the credit quality of its financing receivables based on a combination of factors, including, but not limited to, customer collection experience, current and future economic conditions, the customer’s financial condition, and known risk characteristics impacting the respective customer base of community hospitals, the most notable of which relate to enacted and potential changes in Medicare and Medicaid reimbursement rates as community hospitals typically generate a significant portion of their revenues and related cash flows from beneficiaries of these programs. In addition to specific account identification, the Company utilizes historical collection experience to establish the allowance for expected credit losses. Financing receivables are written off only after the Company has exhausted all collection efforts.
Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying condensed consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of September 30, 2023 and December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 1 to 90 Days Past Due | | 91 to 180 Days Past Due | | 181 + Days Past Due | | Total Past Due |
| September 30, 2023 | $ | 576 | | | $ | 153 | | | $ | 264 | | | $ | 993 | |
| December 31, 2022 | $ | 1,086 | | | $ | 278 | | | $ | 283 | | | $ | 1,647 | |
From time to time, the Company may agree to alternative payment terms outside of the terms of the original financing receivable agreement due to customer difficulties in achieving the original terms. In general, such alternative payment arrangements do not result in a re-aging of the related receivables. Rather, payments pursuant to any alternative payment arrangements are applied to the already outstanding invoices beginning with the oldest outstanding invoices as the payments are received.
Because amounts are reclassified to trade accounts receivable when they become due, there are no past due amounts included within financing receivables, current portion, net or financing receivables, net of current portion in the accompanying condensed consolidated balance sheets.
The Company utilizes an aging of trade accounts receivable as the primary credit quality indicator for its financing receivables, which is facilitated by the reclassification of customer payment amounts to trade accounts receivable when they become due. The table below categorizes customer financing receivable balances (excluding short-term payment plans) based on the age of the oldest payment outstanding that has been reclassified to trade accounts receivable: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Stratification of uninvoiced client financing receivables based on aging of related trade accounts receivable: | | | |
| Uninvoiced client financing receivables related to trade accounts receivable that are 1 to 90 Days Past Due | $ | 1,720 | | | $ | 3,876 | |
Uninvoiced client financing receivables related to trade accounts receivable that are 91 to 180 Days Past Due | 1,564 | | | 1,369 | |
Uninvoiced client financing receivables related to trade accounts receivable that are 181 + Days Past Due | 1,107 | | | 1,894 | |
| Total uninvoiced client financing receivables balances of clients with a trade accounts receivable | $ | 4,391 | | | $ | 7,139 | |
| Total uninvoiced client financing receivables of clients with no related trade accounts receivable | 808 | | | 866 | |
| Total financing receivables with contractual maturities of one year or less | 1,107 | | | 330 | |
| Less: allowance for expected credit losses | (440) | | | (549) | |
| Total financing receivables | $ | 5,866 | | | $ | 7,786 | |
12. INTANGIBLE ASSETS AND GOODWILL
Our purchased definite-lived intangible assets as of September 30, 2023 and December 31, 2022 are summarized as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| (In thousands) | Customer Relationships | | Trademark | | Developed Technology | | Non-Compete Agreements | | Total |
| Gross carrying amount, beginning of period | $ | 132,170 | | | $ | 12,320 | | | $ | 40,800 | | | $ | 1,400 | | | $ | 186,690 | |
| | | | | | | | | |
| Accumulated amortization | (60,619) | | | (6,750) | | | (28,922) | | | (443) | | | (96,734) | |
Net intangible assets as of September 30, 2023 | $ | 71,551 | | | $ | 5,570 | | | $ | 11,878 | | | $ | 957 | | | $ | 89,956 | |
| Weighted average remaining years of useful life | 7.6 | | 12.5 | | 8.3 | | 3.4 | | 9.5 |
| | | | | | | | | |
| December 31, 2022 |
| (In thousands) | Customer Relationships | | Trademark | | Developed Technology | | Non-Compete Agreements | | Total |
| Gross carrying amount, beginning of period | $ | 112,570 | | | $ | 12,320 | | | $ | 37,600 | | | $ | — | | | $ | 162,490 | |
| Intangible assets acquired | 19,600 | | | — | | | 3,200 | | | 1,400 | | | 24,200 | |
| Accumulated amortization | (52,371) | | | (6,076) | | | (26,010) | | | (233) | | | (84,690) | |
Net intangible assets as of December 31, 2022 | $ | 79,799 | | | $ | 6,244 | | | $ | 14,790 | | | $ | 1,167 | | | $ | 102,000 | |
The following table represents the remaining amortization of definite-lived intangible assets as of September 30, 2023: | | | | | |
| (In thousands) | |
| For the year ended December 31, | |
| 2023 | $ | 4,014 | |
| 2024 | 14,523 | |
| 2025 | 14,208 | |
| 2026 | 12,919 | |
| 2027 | 9,047 | |
| Thereafter | 35,245 | |
| Total | $ | 89,956 | |
The following table sets forth the change in the carrying amount of goodwill by segment for the nine months ended September 30, 2023: | | | | | | | | | | | | | | |
| (In thousands) | RCM | EHR | Patient Engagement | Total |
Balance as of December 31, 2022 | $ | 61,821 | | $ | 126,665 | | $ | 9,767 | | $ | 198,253 | |
| Goodwill impairment | — | | — | | — | | — | |
| | | | |
Balance as of September 30, 2023 | $ | 61,821 | | $ | 126,665 | | $ | 9,767 | | $ | 198,253 | |
Goodwill is evaluated for impairment annually on October 1, or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist.
13. LONG-TERM DEBT
Long-term debt was comprised of the following at September 30, 2023 and December 31, 2022: | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31, 2022 |
| Term loan facility | $ | 64,750 | | | $ | 67,375 | |
| Revolving credit facility | 78,416 | | | 73,700 | |
| | | |
| Debt obligations | 143,166 | | | 141,075 | |
| Less: unamortized debt issuance costs | (1,277) | | | (1,546) | |
| Debt obligation, net | 141,889 | | | 139,529 | |
| Less: current portion | (3,141) | | | (3,141) | |
| Long-term debt | $ | 138,748 | | | $ | 136,388 | |
As of September 30, 2023, the carrying value of debt approximated the fair value due to the variable interest rate, which reflected the market rate.
Credit Agreement
In conjunction with our acquisition of Healthland Holding Inc. ("HHI") in January 2016, we entered into a syndicated credit agreement with Regions Bank ("Regions") serving as administrative agent, which provided for a $125 million term loan facility and a $50 million revolving credit facility. On June 16, 2020, we entered into an Amended and Restated Credit Agreement that increased the aggregate principal amount of our credit facilities to $185 million, including a $75 million term loan facility and a $110 million revolving credit facility. On May 2, 2022, we entered into a First Amendment (the "First Amendment") to the Amended and Restated Credit Agreement, that increased the aggregate principal amount of our credit facilities to $230 million, which includes a $70 million term loan facility and a $160 million revolving credit facility. In addition, the interest rate provisions of the First Amendment reflect the transition from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR") as the new benchmark interest rate for each loan.
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 SOFR 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 SOFR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for SOFR 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 beginning June 30, 2022, with quarterly principal payments of approximately $0.9 million through March 31, 2027, with maturity on May 2, 2027 or such earlier date as the obligations under the Amended and Restated Credit Agreement, as amended by the First Amendment, 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.
Anticipated annual future maturities of the term loan facility and revolving credit facility are as follows as of September 30, 2023: | | | | | |
| (In thousands) | |
| 2023 | $ | 875 | |
| 2024 | 3,500 | |
| 2025 | 3,500 | |
| 2026 | 3,500 | |
| 2027 | 131,791 | |
| Thereafter | — | |
| $ | 143,166 | |
Our credit facilities are secured pursuant to the Amended and Restated Credit Agreement, dated as of June 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 First Amendment provides incremental facility capacity of $75 million, subject to certain conditions. The Amended and Restated Credit Agreement, as amended by the First Amendment, 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 First Amendment requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the First Amendment, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. Further, under the First Amendment, in connection with any acquisition by the Company exceeding $25 million, the Company may elect to increase the maximum permitted consolidated net leverage ratio for the fiscal quarter in which the acquisition occurs and each of the following three fiscal quarters by 0.50:1.00 above the otherwise permitted maximum. If the consolidated net leverage ratio is less than 2.50:1.00, there is no limit on the amount of incremental facilities. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. On March 9, 2023, the calculation of the fixed charge coverage ratio was amended to specifically exclude from the definition of fixed charges the Company's share repurchases conducted during the third and fourth quarters of 2022. As of September 30, 2023, we were not in compliance with the fixed charge coverage ratio required by the Amended and Restated Credit Agreement. On November 8, 2023, the Company and the subsidiary guarantors entered into a Waiver with Regions Bank, as administrative agent, and various other lenders, which provided for a one-time waiver of this failure as an event of default.
The First Amendment removed the requirement that the Company mandatorily prepay the credit facilities with excess cash flow generated during the prior fiscal year. 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 SOFR rate loans made on a day other than the last day of any applicable interest period.
14. OPERATING LEASES
The Company leases office space in various locations in Alabama, Pennsylvania, Minnesota, Maryland, Mississippi, and Washington. These leases have terms expiring from 2023 through 2029 but do contain optional extension terms. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
On April 30, 2023, the company terminated its lease agreement for approximately 12,500 square feet of office space in Plymouth, Minnesota. Pursuant to a Termination of Lease Agreement dated April 18, 2023, the Company paid $1.1 million to the landlord as consideration for the early termination. In connection with the lease termination, the Company derecognized the assets and liabilities associated with the operating lease and recorded a $0.1 million loss on the disposal of leasehold improvement.
Supplemental balance sheet information related to operating leases was as follows: | | | | | | | | | | | | | |
| (In thousands) | September 30,
2023 | | December 31,
2022 | | |
| Operating lease assets | | | | | |
| Operating lease assets | $ | 5,138 | | | $ | 7,567 | | | |
| Operating lease liabilities | | | | | |
| Other accrued liabilities | 1,880 | | 2,063 | | |
| Operating lease liabilities, net of current portion | 3,421 | | | 5,651 | | | |
| Total operating lease liabilities | $ | 5,301 | | | $ | 7,714 | | | |
| Weighted average remaining lease term in years | 4.2 | | 5 | | |
| Weighted average discount rate | 4.2% | | 4.4% | | |
Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
The future minimum lease payments payable under these operating leases subsequent to September 30, 2023 are as follows: | | | | | |
| (In thousands) | |
| 2023 | $ | 476 | |
| 2024 | 1,804 | |
| 2025 | 1,063 | |
| 2026 | 1,025 | |
| 2027 | 706 | |
| Thereafter | 693 | |
| Total lease payments | 5,767 | |
| Less imputed interest | (466) | |
| Total | $ | 5,301 | |
Total lease expense for the nine months ended September 30, 2023 and 2022 was $1.5 million and $1.6 million, respectively.
Total cash paid for amounts included in the measurement of lease liabilities within operating cash flows from operating leases for the nine months ended September 30, 2023 and 2022 was $1.5 million and $1.6 million, respectively.
15. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. In March 2022, the Company was served with a qui tam complaint (United States, ex. rel. Kruse v. Computer Programs and Systems, Inc., et. al., Case No. 3cv18-938 (N.D. Tex.)). The complaint alleges that at various times since 2012, CPSI, TruBridge and three hospital customers violated and conspired to violate the federal False Claims Act, 31 U.S.C. 3729(a)(1)(A), (B), (C) and (G), and (a)(3), the Oklahoma Medicaid False Claims Act, the Texas False Claims Act, and the New Mexico False Claims Act, and demands unspecified damages. The complaint further alleges that TruBridge retaliated against the relator in violation of 31 U.S.C. 3730(h), when it terminated the relator's employment in May 2017. Although the U.S. Department of Justice and all of the state and local governments have declined to intervene, the relator continues to pursue the case. The court has set a trial date for February 2025. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations. Given the current status of these matters, the Company is unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount or range of reasonably possible loss. Depending on the outcome of these matters, there could be a material impact on the Company's financial statements.
16. FAIR VALUE
FASB Codification topic, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. Fair value is the price that would be received to sell
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Codification does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The Codification requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
As of September 30, 2023, we did not have any instruments that require fair value measurement.
17. SEGMENT REPORTING
Our chief operating decision makers ("CODM") previously utilized the following three operating segments, "Acute Care EHR", "Post-acute Care EHR" and "TruBridge". However, in the fourth quarter of 2022, the Company made a number of changes to its organizational structure and management system to better align the Company's operating model to its strategic initiatives. As a result of these changes, the Company revised its operating segments. The new operating and reportable segments, based on our three distinct business units with unique market dynamics and opportunities, are "RCM", "EHR", and "Patient Engagement". These segments represent the components of the Company for which separate financial information is available that is utilized on a regular basis by the CODM in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenues and adjusted EBITDA. The Company previously evaluated the performance of the segments based on segment gross profit. Management believes adjusted EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating results by excluding the effects of expenses that are not reflective of its operating business performance. Our CODM group is comprised of the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The segment disclosures below for the three and nine months ended Septemberr 30, 2022 have been recast to conform to the current year presentation.
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) loss on contingent consideration; and (ix) the provision (benefit) for income taxes. There are no intersegment revenues to be eliminated in computing segment revenue.
The CODM do not evaluate operating segments nor make decisions regarding operating segments based on assets. Consequently, we do not disclose total assets by reportable segment.
The following table presents a summary of the revenues and adjusted EBITDA of our three operating segments for the three and nine months ended September 30, 2023 and 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues by segment: | | | | | | | |
| RCM | $ | 46,582 | | | $ | 46,875 | | | $ | 142,973 | | | $ | 134,200 | |
| EHR | | | | | | | |
| Recurring revenue | | | | | | | |
| Acute EHR | 27,925 | | | 27,237 | | | 83,886 | | | 81,333 | |
| Post-acute EHR | 3,594 | | | 3,817 | | | 11,230 | | | 11,504 | |
| Total recurring EHR revenue | 31,519 | | | 31,054 | | | 95,116 | | | 92,837 | |
| Non-recurring revenue | | | | | | | |
| Acute EHR | 2,624 | | | 3,500 | | | 8,460 | | | 9,467 | |
| Post-acute EHR | 350 | | | 395 | | | 1,075 | | | 1,551 | |
| Total non-recurring EHR revenue | 2,974 | | | 3,895 | | | 9,535 | | | 11,018 | |
| Total EHR revenue | $ | 34,493 | | | $ | 34,949 | | | $ | 104,651 | | | $ | 103,855 | |
| Patient Engagement | 1,637 | | | 1,003 | | | 5,943 | | | 5,369 | |
| Total revenues | $ | 82,712 | | | $ | 82,827 | | | $ | 253,567 | | | $ | 243,424 | |
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| Adjusted EBITDA by segment: | | | | | | | |
| RCM | $ | 4,623 | | | $ | 8,750 | | | $ | 18,205 | | | 26,395 | |
| EHR | 5,669 | | | 5,751 | | | 17,394 | | | 17,621 | |
| Patient Engagement | (570) | | | (1,152) | | | (6) | | | (1,345) | |
| Total adjusted EBITDA | $ | 9,722 | | | $ | 13,349 | | | $ | 35,593 | | | $ | 42,671 | |
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The following table reconciles net income to adjusted EBITDA: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss), as reported | $ | (3,562) | | | $ | 2,161 | | | (3,315) | | | 13,350 | |
| Deferred revenue and other purchase accounting adjustments | — | | | — | | | — | | | 109 | |
| Depreciation expense | 297 | | | 622 | | | 1,392 | | | 1,890 | |
| Amortization of software development costs | 2,194 | | | 1,024 | | | 5,506 | | | 2,283 | |
| Amortization of acquisition-related intangibles | 4,014 | | | 4,486 | | | 12,043 | | | 12,917 | |
| Stock-based compensation | 1,038 | | | 1,864 | | | 2,162 | | | 5,284 | |
| Severance and other non-recurring charges | 7,392 | | | 410 | | | 15,313 | | | 1,671 | |
| Interest expense and other, net | 2,847 | | | 1,416 | | | 7,836 | | | 3,255 | |
| (Gain) loss on contingent consideration | — | | | 589 | | | — | | | (992) | |
| Provision (benefit) for income taxes | (4,498) | | | 777 | | | (5,344) | | | 2,904 | |
| Total adjusted EBITDA | $ | 9,722 | | | $ | 13,349 | | | $ | 35,593 | | | $ | 42,671 | |
Certain of the items excluded or adjusted to arrive at adjusted EBITDA are described below:
•Deferred revenue and other purchase accounting adjustments - Deferred revenue purchase accounting adjustments includes acquisition-related deferred revenue adjustments, which reflect the fair value adjustments to deferred revenues acquired in business acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin, to perform services related to the acquiree's software and product support, which assumes a legal obligation to do so, based on the deferred revenue balance as of the acquisition date. We add back deferred revenue and other adjustments for adjusted EBITDA because we believe the inclusion of this amount directly correlates to the underlying performance of our operations.
•Amortization of acquisition-related intangibles - Acquisition-related amortization expense is a non-cash expense arising primarily from the acquisition of intangibles in connection with acquisitions or investments. We exclude acquisition-related amortization expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
•Stock-based compensation - Stock-based compensation expense is a non-cash expense arising from the grant of stock-based awards. We exclude stock-based compensation expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of the timing and valuation of grants of new stock-based awards, including grants in connection with acquisitions.
•Severance and other non-recurring charges - Non-recurring charges relate to certain severance and other charges incurred in connection with activities that are considered non-recurring. We exclude non-recurring expenses (primarily related to costs associated with our recent business transformation initiative and non-recurring lease termination costs) and transaction-related costs from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods.
•(Gain) loss on contingent consideration - The purchase agreement for our acquisition of TruCode in 2021 contained contingent consideration, or "earnout," provisions whereby the previous shareholders of TruCode would receive additional consideration at the conclusion of a one-year period beginning on the acquisition date and ending on the first anniversary of the acquisition date, depending on the achievement of certain profitability targets. After the initial measurement period, U.S. GAAP requires that any adjustments to the estimated fair value of this contingent liability, including upon final determination of amounts due, should be recorded in the relevant period's earnings. We exclude gains on contingent consideration from adjusted EBITDA because we believe (i) the amount of such gains in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such gains can vary between periods.
18. SUBSEQUENT EVENTS
On October 16, 2023, the Company acquired all of the assets and liabilities of Viewgol, LLC, a Delaware limited liability Company ("Viewgol"), pursuant to a Securities Purchase Agreement, dated October 16, 2023. Headquartered in Frisco, Texas, Viewgol is a full suite RCM service provider for the ambulatory healthcare market, providing analytics software paired with outsourcing capabilities through its Indian offshore resource center.
The Securities Purchase Agreement provides for an aggregate purchase price of $36.0 million, with an additional earnout of up to approximately $31.5 million based on a combination of achieving profitability metrics for 2024 and the creation of additional offshore resources supporting TruBridge, CPSI's existing RCM subsidiary.
The Company expects to account for the acquisition as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Due to the proximity of the acquisition date to the Company’s filing of its Quarterly Report on Form 10-Q for the period ended September 30, 2023, the initial accounting for the Viewgol business combination is incomplete, and therefore the Company is unable to disclose certain information required by ASC 805, including the provisional amounts recognized as of the acquisition date for fair value of consideration transferred, each major class of assets acquired and liabilities assumed, and goodwill.