Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 708K
2: EX-10.1 Material Contract HTML 46K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
62: R1 Cover HTML 76K
11: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 114K
41: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 35K
(Parenthetical)
70: R4 Condensed Consolidated Statements of Income HTML 94K
63: R5 Condensed Consolidated Statement of Stockholders? HTML 52K
Equity (Unaudited)
12: R6 Condensed Consolidated Statements of Cash Flows HTML 111K
(Unaudited)
42: R7 Basis of Presentation HTML 28K
73: R8 Recent Accounting Pronouncements HTML 27K
60: R9 Revenue Recognition HTML 63K
58: R10 Business Combination HTML 43K
71: R11 Property and Equipment HTML 43K
38: R12 Software Development HTML 35K
13: R13 Other Accrued Liabilities HTML 39K
61: R14 Net Income Per Share HTML 49K
72: R15 Income Taxes HTML 26K
39: R16 Stock-Based Compensation HTML 93K
14: R17 Financing Receivables HTML 107K
64: R18 Intangible Assets and Goodwill HTML 84K
69: R19 Long-Term Debt HTML 57K
36: R20 Operating Leases HTML 45K
26: R21 Commitments and Contingencies HTML 25K
54: R22 Fair Value HTML 29K
82: R23 Segment Reporting HTML 75K
37: R24 Subsequent Events HTML 25K
27: R25 Basis of Presentation (Policies) HTML 97K
55: R26 Revenue Recognition (Tables) HTML 49K
83: R27 Business Combination (Tables) HTML 39K
35: R28 Property and Equipment (Tables) HTML 43K
28: R29 Software Development (Tables) HTML 32K
17: R30 Other Accrued Liabilities (Tables) HTML 39K
44: R31 Net Income Per Share (Tables) HTML 46K
68: R32 Stock-Based Compensation (Tables) HTML 89K
57: R33 Financing Receivables (Tables) HTML 110K
16: R34 Intangible Assets and Goodwill (Tables) HTML 89K
43: R35 Long-Term Debt (Tables) HTML 54K
67: R36 Operating Leases (Tables) HTML 45K
56: R37 Segment Reporting (Tables) HTML 76K
15: R38 Revenue Recognition (Detail) HTML 27K
45: R39 Revenue Recognition Deferred Revenue (Details) HTML 30K
23: R40 REVENUE RECOGNITION Costs to obtain and fulfill HTML 29K
contracts (Details)
30: R41 BUSINESS COMBINATION - Preliminary allocation of HTML 60K
the purchase price paid (Details)
81: R42 BUSINESS COMBINATION - Narrative (Details) HTML 35K
53: R43 Property and Equipment (Details) HTML 46K
22: R44 Software Development (Details) HTML 29K
29: R45 Other Accrued Liabilities (Details) HTML 43K
80: R46 Net Income Per Share (Details) HTML 52K
52: R47 Net Income Per Share Narrative (Details) HTML 24K
21: R48 Income Taxes (Details) HTML 26K
31: R49 STOCK-BASED COMPENSATION - Total Stock-Based HTML 41K
Compensation Expense (Details)
47: R50 STOCK-BASED COMPENSATION - Summary of Restricted HTML 56K
Stock Activity (Details)
18: R51 STOCK-BASED COMPENSATION - Summary of Performance HTML 52K
Share Awards (Details)
65: R52 FINANCING RECEIVABLES - Short term Payment Plans HTML 36K
(Details)
74: R53 FINANCING RECEIVABLES - Additional Information HTML 32K
(Details)
48: R54 FINANCING RECEIVABLES - Components of Receivables HTML 38K
(Details)
19: R55 FINANCING RECEIVABLES - Future Minimum Lease HTML 53K
Payments (Details)
66: R56 FINANCING RECEIVABLES - Allowance for Financing HTML 37K
Credit Losses (Details)
75: R57 FINANCING RECEIVABLES - Analysis of Age of HTML 33K
Financing Receivables Amounts (Details)
46: R58 FINANCING RECEIVABLES - Summary of Financing HTML 52K
Receivables (Details)
20: R59 INTANGIBLE ASSETS AND GOODWILL - Definited-lived HTML 47K
Intangible Assets (Details)
49: R60 INTANGIBLE ASSETS AND GOODWILL - Remaining HTML 39K
Amortization of Definite-lived Intangible Assets
(Details)
78: R61 INTANGIBLE ASSETS AND GOODWILL - Schedule of HTML 33K
Goodwill (Details)
32: R62 LONG-TERM DEBT - Schedule of long-term debt HTML 42K
(Details)
24: R63 Long-Term Debt (Details) HTML 69K
50: R64 Long-Term Debt - Annual Future Maturities HTML 45K
(Details)
79: R65 OPERATING LEASES - Narrative (Details) HTML 32K
33: R66 OPERATING LEASES - Supplemental Balance Sheet HTML 36K
Information (Details)
25: R67 OPERATING LEASES - Future Minimum Lease Payments HTML 42K
Payable Under these Operating Leases (Details)
51: R68 Segment Reporting (Details) HTML 62K
77: R69 Subsequent Events (Details) HTML 27K
40: XML IDEA XML File -- Filing Summary XML 149K
76: XML XBRL Instance -- cpsi-20200331_htm XML 1.77M
34: EXCEL IDEA Workbook of Financial Reports XLSX 73K
7: EX-101.CAL XBRL Calculations -- cpsi-20200331_cal XML 260K
8: EX-101.DEF XBRL Definitions -- cpsi-20200331_def XML 498K
9: EX-101.LAB XBRL Labels -- cpsi-20200331_lab XML 1.26M
10: EX-101.PRE XBRL Presentations -- cpsi-20200331_pre XML 809K
6: EX-101.SCH XBRL Schema -- cpsi-20200331 XSD 133K
59: JSON XBRL Instance as JSON Data -- MetaLinks 302± 451K
84: ZIP XBRL Zipped Folder -- 0001169445-20-000009-xbrl Zip 243K
(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i74-3032373
(State
or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
i6600 Wall Street, iMobile,
iAlabama
i36695
(Address of Principal Executive Offices)
(Zip
Code)
(i251) i639-8100
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
iCommon Stock, par value $.001 per share
iCPSI
iThe
NASDAQ Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
iAccelerated
filer
ý
Non-accelerated filer
¨
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ý
As
of May 1, 2020, there were i14,512,105 shares of the issuer’s common stock outstanding.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
6
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iBASIS OF PRESENTATION
i
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, 2019 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, 2019 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
i
Principles of Consolidation
The
condensed consolidated financial statements of CPSI include the accounts of TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), Healthland Holding Inc. ("HHI"), and iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), all of which are wholly-owned subsidiaries of CPSI. The accounts of HHI include those of its wholly-owned subsidiaries, Healthland Inc. ("Healthland"), Rycan Technologies, Inc. ("Rycan"), and American HealthTech, Inc. ("AHT"). All significant intercompany balances and transactions have been eliminated.
2. iiRECENT
ACCOUNTING PRONOUNCEMENTS/
New Accounting Standards Adopted in 2020
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We adopted this guidance as of January 1, 2020. Adoption of the standard did not 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. iiiREVENUE
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
Accounting Standards Codification ("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.
7
System Sales and Support
The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, training, hardware and software application support and hardware maintenance services to acute care and post-acute care community hospitals.
Non-recurring Revenues
•Perpetual software licenses, installation, conversion, and related training 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 stand-alone selling price ("SSP"), net of discounts. Fees for licenses, installation, conversion, and related training 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. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date on 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. 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 ifive years. Payment is due monthly for support 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. Payment is due monthly for subscriptions to third party content.
•Software as a Service ("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 - Segment Reporting, for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
TruBridge
TruBridge 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 SSP, net of discounts. 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.
TruBridge also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP. Payment is due monthly as services are performed.
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.
8
i
The following table details deferred revenue for the three months ended March 31, 2020 and 2019,
included in the condensed consolidated balance sheets:
The
deferred revenue recorded during the three months ended March 31, 2020 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 three months ended March 31, 2020 and 2019 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 licensing agreements, 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, with the exception of commissions generated from TruBridge sales. TruBridge commissions, which are paid up to twelve months in advance of services performed, are capitalized and amortized over the prepayment period. Costs to obtain a contract are expensed within sales and marketing expenses 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, conversion and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption "System sales and support - Cost of sales."
i
Costs
to obtain and fulfill contracts related to SaaS 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 three months ended March 31, 2020 and 2019, included in the condensed consolidated balance sheets:
Less
costs to obtain and fulfill contracts recognized as expense
(i1,285)
(i1,134)
Ending
balance
$
i5,043
$
i3,805
/
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. iBUSINESS
COMBINATION
Acquisition of Get Real Health
On May 3, 2019, we acquired all of the assets and liabilities of iNetXperts, Corp., a Maryland corporation doing business as Get Real Health (“Get Real Health”), pursuant to a Stock Purchase Agreement dated April 23, 2019, as amended on May 2, 2019. Based in Rockville, Maryland, Get Real Health delivers technology solutions to improve patient outcomes and engagement strategies with care providers.
9
Consideration for the acquisition included
cash (net of cash of the acquired entity) of $i10.8 million (inclusive of seller's transaction expenses), plus a contingent earnout payment of up to $i14.0
million tied to Get Real Health's earnings before interest, tax, depreciation, and amortization ("EBITDA") (subject to certain pro-forma adjustments) for 2019. As of December 31, 2019, the $i5.0 million contingent consideration estimated in the allocation of purchase price paid was fully reversed as Get Real Health's earnings did not achieve the
required level for earnout payment. During 2019, we incurred approximately $i0.6 million of pre-tax acquisition costs in connection with the acquisition of Get Real Health. Acquisition costs are included in general and administrative expenses in our consolidated statements of income.
Our acquisition of Get Real Health 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.
i
The allocation of the purchase price paid for Get Real Health was as follows:
(In
thousands)
Purchase Price Allocation
Acquired cash
$
i159
Accounts receivable
i364
Prepaid
expenses
i107
Property and equipment
i365
Operating
lease asset
i1,285
Intangible assets
i7,890
Goodwill
i9,767
Accounts
payable and accrued liabilities
(i594)
Deferred taxes, net
(i1,736)
Operating
lease liability
(i1,285)
Contingent consideration
(i5,000)
Deferred
revenue
(i430)
Net assets acquired
$
i10,892
/
The
intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives. The amortization is included in amortization of acquisition-related intangibles 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.
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 life is shorter than our estimated useful life, we will amortize the remaining book value over the remaining 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. Upon the software's availability for general release, we commence amortization of the capitalized software costs on a module-by-module basis.
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 FASB Codification topic, 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.
i
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 March 31,
(In thousands, except per share data)
2020
2019
Net income
$
i4,090
$
i3,444
Less:
Net income attributable to participating securities
(i134)
(i130)
Net
income attributable to common stockholders
$
i3,956
$
i3,314
Weighted
average shares outstanding used in basic per common share computations
i13,904
i13,656
Add:
Dilutive potential common shares
i—
i—
Weighted
average shares outstanding used in diluted per common share computations
i13,904
i13,656
Basic
EPS
$
i0.28
$
i0.24
Diluted
EPS
$
i0.28
$
i0.24
/
During
2018, 2019 and 2020, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of time-vesting restricted stock if the predefined performance criteria are met. The awards provide for an aggregate target of i252,852 shares, none of which have been included in the calculation of diluted EPS for the three months
ended March 31, 2020 because the related threshold award performance levels have not been achieved as of March 31, 2020. See Note 10 - Stock-Based Compensation for more information.
9. iINCOME TAXES
iThe
Company determines the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our effective tax rate for the three months ended March 31, 2020 and 2019, was a tax expense of ii23/%.
10.
iiSTOCK-BASED COMPENSATION/
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.
12
i
The following table details total stock-based compensation expense for the three months ended March 31,
2020 and 2019, included in the condensed consolidated statements of income:
Three Months Ended March 31,
(In thousands)
2020
2019
Costs
of sales
$
i528
$
i531
Operating
expenses
i1,830
i1,905
Pre-tax
stock-based compensation expense
i2,358
i2,436
Less:
income tax effect
(i519)
(i536)
Net
stock-based compensation expense
$
i1,839
$
i1,900
/
The
Company's stock-based compensation awards are in the form of restricted stock and performance share awards granted pursuant to the Company's 2012 Restricted Stock Plan for Non-Employee Directors, Amended and Restated 2014 Incentive Plan and 2019 Incentive Plan (the "Plans"). As of March 31, 2020, there was $i13.6
million of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the Plans, which is expected to be recognized over a weighted-average period ofi2.0 years.
Restricted Stock
The
Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plans with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from one to ithree years. The Company
records expenses for these grants on a straight-line basis over the applicable vesting periods. Shares of restricted stock may also be issued pursuant to the settlement of performance share awards, for which the Company records expenses in the manner described in the "Performance Share Awards" section below.
i
A summary of restricted stock activity (including shares of
restricted stock issued pursuant to the settlement of performance share awards) under the Plans during the three months ended March 31, 2020 and 2019 is as follows:
Unvested
restricted stock outstanding at beginning of period
i525,859
$
i30.51
i475,132
$
i32.00
Granted
i136,771
i26.16
i133,936
i30.89
Performance
share awards settled through the issuance of restricted stock
i19,678
i30.15
i138,566
i29.80
Vested
(i202,468)
i30.20
(i143,945)
i33.81
Unvested
restricted stock outstanding at end of period
i479,840
$
i29.39
i603,689
$
i30.82
/
Performance
Share Awards
The Company granted performance share awards to executive officers and certain key employees under the Amended and Restated 2014 Incentive Plan prior to 2019 and under the 2019 Incentive Plan beginning in 2019. The number of shares of common stock earned and issuable under each award is determined at the end of a one-year or 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. The three-year performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR")
compared to an industry index. If certain levels of the performance objective are met, the award results in the issuance of shares of restricted stock or common stock corresponding to such level. One-year performance share awards are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally ithree years. Three-year 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.
13
In the event that the Company's financial performance meets the predetermined targets for the performance objectives of the one-year and three-year performance share awards, the Company will issue each award recipient the number of shares of restricted stock or common stock, as applicable, 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 will be issued. The total number of shares issued for the three-year 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 one-year and three-year 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 three-year 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 of one-year performance share awards is recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. Expense of three-year 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.
i
A summary of performance share award activity under the Plans during the three months ended March 31,
2020 and 2019 is as follows, based on the target award amounts set forth in the performance share award agreements:
Performance share awards outstanding at beginning of period
i200,709
$
i30.75
i184,776
$
i30.15
Granted
i107,298
i26.96
i—
i—
Adjusted
for actual performance, net of forfeitures
(i35,477)
i30.15
i46,176
i29.80
Performance
share awards settled through the issuance of restricted stock
(i19,678)
i30.15
(i138,566)
i29.80
Performance
share awards outstanding at end of period
i252,852
$
i29.27
i92,386
$
i30.50
/
11.
iFINANCING RECEIVABLES
Short-Term Payment Plans
The Company provides fixed monthly payment arrangements ("short-term payment plans") over terms ranging from three to itwelve
months for meaningful use stage three and other 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. iThese receivables, included in the current portion of financing receivables, were comprised of the following at March 31, 2020 and December 31, 2019:
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 2026. 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 iseven years.
Credit
Quality of Financing Receivables and Allowance for Expected Credit Losses
i
The following table is a roll-forward of the allowance for expected credit losses for the three months ended March 31, 2020 and year ended December 31, 2019:
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.
15
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. iThe 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 March 31, 2020 and December 31, 2019:
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. iThe 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:
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.
As
of March 31, 2020, 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 HHI in January 2016, we entered into a syndicated credit agreement with Regions Bank ("Regions") serving as administrative agent, which provided for a $i125 million term loan facility and a
$i50 million revolving credit facility. On February 8, 2018, we entered into a Third Amendment to the credit agreement that increased the aggregate principal amount of our credit facilities from $i162 million
to $i167 million, which includes a $i117 million term loan facility and a $i50
million 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, (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 plus ione
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 i2.0% to i3.5%.
The applicable margin range for base rate loans ranges from i1.0% to i2.5%, in each case based on the
Company's consolidated leverage ratio.
Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginning December 31, 2017, with quarterly principal payments of approximately $i1.5 million through September 30, 2019, approximately $i2.2
million through September 30, 2021 and approximately $i2.9 million through September 30, 2022, with maturity on October 13, 2022 or such earlier date as the obligations under the credit agreement become due and payable pursuant to the terms of the credit agreement. Any principal outstanding under the revolving credit facility is due and payable on the maturity date.
i
Anticipated
annual future maturities of the term loan facility and revolving credit facility are as follows as of March 31, 2020:
(In thousands)
2020
$
i6,581
2021
i9,506
2022
i86,543
2023
i—
2024
i—
Thereafter
i—
$
i102,630
/
Our
credit facilities are secured pursuant to a Pledge and Security Agreement, dated January 8, 2016, 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 credit agreement are also guaranteed by the Subsidiary Guarantors.
The credit agreement, as amended by the Third Amendment, provides incremental facility capacity of $i50 million, subject to certain conditions. The 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 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 credit agreement requires the
Company to maintain a minimum fixed charge coverage ratio of i1.25:1.00 throughout the duration of such agreement. Under the credit agreement, the Company is required to comply with a maximum consolidated leverage ratio of i3.50:1.00.
The 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 the credit agreement as of March 31, 2020.
18
The credit agreement requires the Company to mandatorily prepay the credit facilities with i50%
of excess cash flow (minus certain specified other payments). 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. The excess cash flow mandatory prepayment requirement under the credit agreement resulted in a $i7.0 million prepayment on the term loan facility
during the first quarter of 2019 related to excess cash flow generated by the Company during 2018. An excess cash flow prepayment was not required during the first quarter of 2020.
14. iOPERATING LEASES
The
Company leases office space in various locations in Alabama, Louisiana, Pennsylvania, Minnesota, Maryland, and Mississippi. These leases have terms expiring from 2020 through 2030 but do contain optional extension terms. Leases with an initial term of i12 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.
i
Supplemental
balance sheet information related to operating leases was as follows:
Operating lease liabilities, net of current portion
i5,950
Total
operating lease liabilities
$
i7,522
Weighted average remaining lease term in years
i7
Weighted
average discount rate
i5.1%
/
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.
i
The future minimum lease payments payable under these operating leases subsequent to March 31, 2020 are as follows:
(In
thousands)
2020
$
i1,177
2021
i1,518
2022
i1,436
2023
i1,363
2024
i980
Thereafter
i2,383
Total
lease payments
i8,857
Less imputed interest
(i1,335)
Total
$
i7,522
/
Total
rent expense for the three months ended March 31, 2020 and 2019 was $i0.4 million and $i0.6
million, respectively.
Total cash paid for amounts included in the measurement of lease liabilities within operating cash flows from operating leases for the three months ended March 31, 2020 was $i0.4 million.
15. iCOMMITMENTS
AND CONTINGENCIES
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. Management does not believe it is reasonably possible that such matters will have a material adverse effect on the Company’s financial statements.
19
16. iFAIR
VALUE
i
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.
Our chief operating decision makers ("CODM") utilize ithree operating segments,
"Acute Care EHR,""Post-acute Care EHR" and "TruBridge," based on our three distinct business units with unique market dynamics and opportunities. Revenues and cost of sales are primarily derived from the provision of services and sales of our proprietary software, and our CODM assess the performance of these three segments at the gross profit level. Operating expenses and items such as interest, income tax, capital expenditures and total assets are managed at a consolidated level and thus are not included in our operating segment disclosures. Our CODM group is comprised of the Chief Executive Officer, Chief Growth 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.
i
The
following table presents a summary of the revenues and gross profits of our three operating segments for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31,
(In
thousands)
2020
2019
Revenues:
Acute Care EHR
Recurring revenue
$
i26,438
$
i27,389
Non-recurring
revenue
i10,077
i10,059
Total
Acute Care EHR revenue
i36,515
i37,448
Post-acute
Care EHR
Recurring revenue
i4,134
i4,478
Non-recurring
revenue
i537
i1,321
Total
Post-acute Care EHR revenue
i4,671
i5,799
TruBridge
i28,571
i25,894
Total
revenues
$
i69,757
$
i69,141
Cost
of sales:
Acute Care EHR
$
i17,259
$
i17,066
Post-acute
Care EHR
i1,328
i1,271
TruBridge
i15,057
i13,689
Total
cost of sales
$
i33,644
$
i32,026
Gross
profit:
Acute Care EHR
$
i19,256
$
i20,382
Post-acute
Care EHR
i3,343
i4,528
TruBridge
i13,514
i12,205
Total
gross profit
$
i36,113
$
i37,115
Corporate
operating expenses
$
(i29,981)
$
(i31,067)
Other
income
i362
i248
Interest
expense
(i1,179)
(i1,804)
Income
before taxes
$
i5,315
$
i4,492
/
21
18.
iSUBSEQUENT EVENTS
Dividends
On May 5, 2020, the Company announced a dividend for the second quarter of 2020 in the amount of $i0.10
per share, payable on May 29, 2020, to stockholders of record as of the close of business on May 15, 2020.
COVID-19
The COVID-19 pandemic has caused, and is continuing to cause, severe economic, market and other disruptions to the U.S. and global economies. Although the pandemic had a muted impact on our results for the first quarter of 2020 and financial condition as of March 31, 2020, the Company began experiencing increasingly adverse business conditions beginning in the latter half of March and through the date of this report. Most notably:
•Travel restrictions and social
distancing protocols have created an additional challenge to our on-site implementation and sales teams. Although we have shown success with remote implementation models and our sales representatives are engaging in remote contact with existing customers and prospects, we expect these restrictions and protocols to have an incrementally negative impact on implementation revenues and new sales generation.
•Patient volumes at our client hospitals have experienced a severe decline from historical levels. As the overwhelming majority of TruBridge revenues are directly or indirectly correlated with client patient volumes, we expect these reduced patient volumes to negatively impact our related revenues.
•Although we have experienced no notable disruption to our operating cash flows through the date of this report, we currently expect that
the aforementioned limitations on travel and decreased client patient volumes will ultimately result in decreased cash collections from our customers as long as these conditions persist. These decreases in cash collections could be further negatively impacted by the amount and extent to which the pandemic impacts the financial condition and liquidity of our customers.
At this time, the Company is uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health efforts to contain and combat the spread of COVID-19, and while the extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, the outbreak could result in a material impact to the
Company’s future financial position, results of operations, cash flows and liquidity.
22
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 could materially affect our revenue, 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;
23
•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; and
•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.
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 3,300 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. As a result, retention of existing EHR customers is a key component of our long-term growth strategy by protecting this base of potential cross-sell customers, while at the same time serving as a leading indicator of our market position and stability of revenues and cash flows.
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,
24
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 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,
25
the former of which also resulted in a positive impact to operating cash flows. We expect financing receivables to continue to decrease during 2020, 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 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, its impact on the
Company’s results in the first quarter of 2020 is not indicative of its impact on the Company’s results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “The impact of COVID-19 and related economic disruptions could materially affect our revenue, gross margin and income, as well as our financial position and/or liquidity" included in “Part II-Item 1A-Risks Factors” in this Quarterly Report on Form 10-Q.
As a result of COVID-19, community hospital patient volume in the United States and other countries around the world have rapidly deteriorated. The decreased levels of our hospital clients' patient volumes will negatively impact our revenues, gross margins, and income for our TruBridge service offerings. We also expect that new EHR system installations will
be negatively impacted by restrictive travel and social distancing protocols. The Company began to experience this impact in March 2020 and expects it to persist and be more significant in the second and third quarters 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 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 flow through to 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.
•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,
26
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 is 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. This 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 three months ended March 31, 2020, we generated revenues of $69.8 million from the sale of our products and services, compared to $69.1 million during the three months ended March 31, 2019, an increase of 1% that is primarily attributed to continued TruBridge client growth. We view sales of TruBridge solutions within our existing EHR client base as our leading performance indicator. Our net income for the three months ended March 31,
2020 increased by $0.6 million to $4.1 million from the three months ended March 31, 2019, primarily as of result of decreased long-term debt interest. Net cash provided by operating activities decreased slightly by $0.3 million during the three months ended March 31, 2019 to $7.6 million during the three months ended March 31, 2020, primarily due to changes in working capital.
27
The following table sets forth certain items included in our results of operations for the three months ended March 31, 2020 and 2019, expressed
as a percentage of our total revenues for these periods:
Revenues. Total revenues for the three months ended March 31, 2020 increased by $0.6 million, or 1%, compared to the three months ended March 31, 2019.
28
System sales and support revenues decreased by $2.1 million, or 5%, compared to the first quarter of 2019. System sales and support revenues were comprised of the following during the respective periods:
Three
Months Ended March 31,
(In thousands)
2020
2019
Recurring system sales and support revenues (1)
Acute Care EHR
$
26,438
$
27,389
Post-acute
Care EHR
4,134
4,478
Total recurring system sales and support revenues
30,572
31,867
Non-recurring system sales and support revenues (2)
Acute Care EHR
10,077
10,059
Post-acute
Care EHR
537
1,321
Total non-recurring system sales and support revenues
10,614
11,380
Total system sales and support revenue
$
41,186
$
43,247
(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 $1.3 million, or 4%, compared to the first quarter of 2019. Acute Care EHR recurring revenues decreased by $1.0 million, or 3%, as attrition from the Thrive and Centriq customer
base outweighed new Thrive customer growth and additional support fees. Post-acute Care EHR recurring revenues decreased by $0.3 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 $0.8 million, or 7%. Acute Care EHR non-recurring revenues were relatively flat. We installed our Acute Care EHR solutions at nine new hospital clients during the first quarter of 2020 (eight 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 first quarter of 2019 (one under a SaaS arrangement). Acute Care EHR revenues
from new system implementations increased by $3.0 million, but were primarily offset by a $2.4 million decrease in MU3 installation revenue as the 2019 year-end deadline for compliance has passed. In addition, other add-on sales and non-recurring revenue decreased by $0.6 million. Non-recurring Post-acute Care EHR revenues decreased by $0.8 million, or 59%, in the first quarter of 2020, as installation bookings have weakened as we continue our ongoing product releases and efforts to make technological improvements to the AHT product line.
TruBridge revenues increased by 10%, or $2.7 million, compared to the first quarter of 2019. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. Most notably, an expanded customer
base for our accounts receivable management services resulted in a revenue increase of $1.1 million, or 12%. Additionally, continued increasing demand for hosting services resulted in an increase of $0.3 million, or 11%, in our IT management services revenues. Get Real Health, which was acquired during the second quarter of 2019, contributed $1.3 million to TruBridge revenue during the first quarter of 2020.
Costs of Sales. Total costs of sales increased by 5%, or $1.6 million, compared to the first quarter of 2019. As a percentage of total revenues, costs of sales were 48% of revenues in the first quarter of 2020 compared to 46% of revenues in the first quarter of 2019.
Costs of Acute Care EHR system sales and support increased by $0.2 million, or 1%, compared to the first quarter of 2019, primarily due to increases of $0.4 million in third-party software
costs and $0.5 million in travel and other costs due to increased installation activity. These increases were partially offset by a decrease of $0.3 million in payroll and $0.4 million in hardware costs. Gross margin on Acute Care EHR system sales and support decreased to 53% in the first quarter of 2020, compared to 54% in the first quarter of 2019.
Costs of Post-acute Care EHR system sales and support increased by $0.1 million, or 4%, compared to the first quarter of 2019, as we had incremental increases in payroll and hardware. The gross margin on Post-acute Care EHR system sales and support decreased to 72% in the first quarter of 2020, compared to 78% in the first quarter of 2019.
29
Our costs associated with TruBridge
sales and support increased by 10%, or $1.4 million, compared to the first quarter of 2019. The primary driver was a payroll increase of $1.1 million as demand for our ARMs service increases. Get Real Health, acquired in the second quarter of 2019, contributed $0.3 million in TruBridge costs of sales during the first quarter of 2020. The gross margin on these services remained flat at 47% in the first quarter of 2020 and 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 $1.0 million, or 10%, compared to the first quarter of 2019, primarily due to a decrease in payroll of $0.5 million, with an additional $0.9 million of payroll capitalized for software
development. Get Real Health contributed $0.6 million in expenses during the first quarter of 2020.
Sales and Marketing. Sales and marketing expenses decreased by 7%, or $0.5 million, compared to the first quarter of 2019, primarily due to decreases in payroll costs of $0.1 million, travel costs of $0.2 million, and general marketing spend of $0.2 million. Get Real Health contributed $0.1 million in sales and marketing costs during the first quarter of 2020.
General and Administrative. General and administrative expenses remained flat compared to the first quarter of 2019. Most notably, we saw a $1.0 million decrease in non-recurring transaction-related costs resulting from the the GRH acquisition and other strategic initiatives which we incurred during the first quarter of 2019. These costs were primarily offset by an increase of
$0.7 million in employee health costs, along with $0.4 million contributed by Get Real Health in general and administrative costs during the first quarter of 2020.
Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets increased by $0.3 million, compared to the first quarter of 2019, due to the inclusion of Get Real Health intangibles.
Total Operating Expenses. As a percentage of total revenues, total operating expenses decreased to 43% of revenues in the first quarter of 2020, compared to 45% in the first quarter of 2019.
Total Other Income (Expense). Total other income (expense) decreased from expense of $1.6 million during the first quarter of 2019 to expense of $0.8
million during the first quarter of 2020, primarily as our long-term debt and accompanying interest rate have both decreased from the first quarter of 2019.
Income Before Taxes. As a result of the foregoing factors, income before taxes increased by $0.8 million, compared to the first quarter of 2019.
Provision for Income Taxes. Our effective tax rate for the three months ended March 31 2020 and 2019, was a tax expense of 23%.
Net Income. Net income for the three months ended March 31, 2020 increased by $0.6 million to $4.1 million, or $0.28 per basic and diluted share, compared with net income of $3.4 million, or $0.24 per basic and diluted share, for the three months ended March 31,
2019. Net income represented 6% of revenue for the three months ended March 31, 2020, compared to 5% of revenue for the three months ended March 31, 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 first quarter of 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” below.
Sources of Liquidity
As of March 31, 2020, our principal sources of liquidity consisted of cash and cash equivalents of $4.3 million and our remaining borrowing capacity under the revolving credit facility of $34.0 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 of December 31, 2019. In conjunction with our acquisition of HHI in January 2016, we entered into the syndicated credit agreement which provided for a $125 million term loan facility and a $50 million revolving credit facility. On February 8, 2018, the
Company entered into the Third Amendment to the credit agreement to increase the aggregate principal amount of the credit facilities from $162 million to $167 million, which includes a $117 million term loan facility and a $50 million revolving credit facility.
As of March 31, 2020, we had $102.6 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of $4.3 million as of March 31, 2020, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of $34.0 million as of March 31,
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. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.
Operating Cash Flow Activities
Net cash provided by operating activities decreased by $0.3 million, from $7.9 million provided by operations for the three months ended
March 31, 2019 to $7.6 million provided by operations for the three months ended March 31, 2020. The decrease in cash flows provided from operations is primarily due to changes in working capital, partially offset by greater net income during the first three months of 2020. Working capital was a net use of cash during the first three months of 2019 in the amount of $3.0 million, compared to a net use of cash during the first three months of 2020 of $4.3 million.
Investing Cash Flow Activities
Net cash used in investing activities increased by $2.6 million, with $3.0 million used in the three months ended March 31, 2020 compared to $0.5 million used during the three months ended March 31,
2019. The first three months of 2020 included $0.9 million in capitalized software development costs compared to none during the first three months of 2019.We do not anticipate the need for significant capital expenditures during the remainder of 2020.
Financing Cash Flow Activities
During the three months ended March 31, 2020, our financing activities used net cash of $7.6 million, as we paid a net $6.2 million in long-term debt principal and declared and paid dividends in the amount of $1.4 million. During the three months ended March 31, 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 $8.7 million during the three months
ended March 31, 2019, primarily due to $7.1 million net paid in long-term debt principal and $1.4 million cash paid in dividends.
We believe that paying dividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash. However, the declaration of dividends by CPSI is subject to compliance with the terms of our Amended Credit Agreement and the discretion of our Board of Directors, which may decide to change or terminate the Company's dividend policy at any time. Our Board of Directors will continue to take into account such matters as general business conditions, capital needs, our financial results and other such factors the Board of Directors may deem relevant.
Credit Agreement
As
of March 31, 2020, we had $86.6 million in principal amount outstanding under the term loan facility and $16.0 million in principal amount outstanding under the revolving credit facility. Each of the 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, (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 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 2.0% to 3.5%. The applicable margin range for base rate loans ranges from 1.0% to 2.5%, in each case based on the
Company's consolidated leverage ratio.
Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginning December 31, 2017, with quarterly principal payments of approximately $1.5 million through September 30, 2019, approximately $2.2 million through September 30, 2021 and approximately $2.9 million through September 30, 2022, with maturity on October 13, 2022 or such earlier date as the obligations under the credit agreement become due and payable pursuant to the terms of the credit agreement. Any principal outstanding under the revolving credit facility is due and payable on the amended maturity date.
Our
credit facilities are secured pursuant to a Pledge and Security Agreement, dated January 8, 2016, 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 credit agreement are also guaranteed by the Subsidiary Guarantors.
31
The credit agreement, as amended by the Third Amendment, provides incremental facility capacity of $50 million, subject to certain conditions. The 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 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 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 credit agreement, the
Company is required to comply with a maximum consolidated leverage ratio of 3.50:1.00. The 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 the credit agreement as of March 31, 2020.
The 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 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. The excess cash flow mandatory prepayment requirement under the credit agreement resulted in a $7.0 million prepayment on the term loan facility during the first quarter of 2019 related to excess cash flow generated by the Company during 2018. An excess cash flow prepayment 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 and TruBridge services. As of March 31, 2020, we had a twelve-month backlog of approximately $12 million in connection with non-recurring system purchases and approximately $234 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, and TruBridge services. As of March 31, 2019, we had a twelve-month backlog of approximately $17 million in connection with non-recurring system purchases and approximately $227 million in connection with recurring
payments under support and maintenance and TruBridge services.
Bookings
Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the three months ended March 31, 2020 and 2019:
Three
Months Ended March 31,
(In thousands)
2020
2019
System sales and support (1)
Acute Care EHR
$
8,919
$
8,285
Post-acute
Care EHR
913
1,431
Total system sales and support
9,832
9,716
TruBridge
(2)
9,511
4,228
Total bookings
$
19,343
$
13,944
(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 first quarter of 2020 increased by $0.6 million, or 8%, over the first quarter of 2019, mostly propelled by increased demand for new EHR installations. Acute Care EHR new installation bookings increased $2.2
32
million compared to the first three months of 2019. This increase was partially offset by a $0.5 million decrease in MU3 related add-on sales and a $1.1 million decrease in other EHR add-on sales compared to the first quarter of 2019.
Post-acute Care EHR bookings in the first quarter of 2020 decreased by $0.5 million, or 36%, from the first quarter of 2019 as bookings have weakened as we continue our ongoing product
releases and efforts to make technological improvements to the AHT product line.
TruBridge bookings in the first quarter of 2020 increased by $5.3 million, or 125%, over the first quarter of 2019, mostly due to our recently-introduced initiative to expand our TruBridge footprint outside of our traditional EHR customer base, resulting in significant client wins.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, as defined by Item 303(a)(4) of SEC Regulation S-K, as of March 31, 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 with U.S. GAAP. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported values of assets, liabilities, revenues, expenses and other financial amounts that are not readily apparent from other sources. Actual results may differ from these estimates and these estimates may differ under different assumptions or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes.
In our Annual Report on Form 10-K for the year ended December 31, 2019, we identified our critical
accounting polices related to revenue recognition, allowance for doubtful accounts, allowance for credit losses, and estimates. There have been no significant changes to these critical accounting policies during the three months ended March 31, 2020.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risk relates primarily to the potential change in the British Bankers Association London Interbank
Offered Rate ("LIBOR"). We had $102.6 million of outstanding borrowings under our credit facilities with Regions Bank at March 31, 2020. The term loan facility and revolving credit facility bear interest at a rate per annum equal to an applicable margin plus (1) the Adjusted LIBOR rate for the relevant interest period, (2) an alternate base rate determined by reference to the greatest 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 plus one percent per annum, or (3) a combination of (1) and (2). Accordingly, we are exposed to fluctuations in interest rates on borrowings under the credit facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of March 31, 2020 would result in a change in interest expense
of approximately $1.0 million annually.
We did not have investments and do not utilize derivative financial instruments to manage our interest rate risks.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.
33
As
of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f))
during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
PART II
OTHER INFORMATION
Item 1.
Legal
Proceedings.
From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any claims outside the ordinary course of business that are material to our financial condition or results of operations.
Item 1A.
Risk Factors.
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition or operating results. Other than as described below, there have been no material changes to the risk factors disclosed in Part I-Item 1A of the Company’s 2019 Annual Report.
The impact of COVID-19 and related economic disruptions
could materially affect our revenue, gross margin and income, as well as our financial position and/or liquidity.
Beginning in March 2020, the global pandemic related to the novel coronavirus COVID-19 began to impact the global economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include the following:
•Revenues, Gross Margins and Income. We expect that the impact of COVID-19 on our community hospital client base, and the related decrease in patient volumes, will negatively impact our variable revenues, gross margins and income driven by collection volume. We also expect that new EHR system installations
will be negatively impacted by restrictive travel and social distancing protocols. We began to experience this impact in March 2020 and expect it to persist and be more significant in the second and third quarters 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. In addition, although we have experienced no notable disruption to our operating cash flows through the date of this report, we currently expect that the aforementioned limitations on travel and decreased client patient volumes will ultimately result in decreased cash collections from our customers as long as these conditions persist. For further discussion, see “Failure to maintain our margins and services rates for
implementation services could have a material adverse effect on our operating performance and financial conditions” in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019.
•Adverse Legislative and/or Regulatory Action. Federal, state and local government actions to address and contain the impact of COVID-19 may adversely affect us. For further discussion, see “There is significant uncertainty in the healthcare industry, both as a result of recently enacted legislation and changing government regulation, which may have a material adverse impact on the businesses of our hospital clients and ultimately on our business, financial condition and results of operations” in the risk factors discussed in our Annual Report
on Form 10-K for the year ended December 31, 2019.
•Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our client community hospitals are unable to work because of illness, government directives or otherwise. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on the internet and telecommunications access and capabilities. For further discussion, see “Breaches of security and viruses in our systems could result in client claims against us and harm to our reputation causing us to
35
incur
expenses and/or lose clients” in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019.
The extent to which the COVID-19 pandemic will impact our financial condition and results of operations will depend on future developments, which are highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience material adverse impacts to our business as a result of the global or U.S. economic impact and any recession that has occurred or may occur in the future. There are no comparable recent events that provided guidance as to effect the COVID-19
pandemic may have, and, as a result, the ultimate impact of the pandemic on our operations and financial results is highly uncertain and subject to change.
Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and may adversely impact our ability to access capital, at all or on reasonable terms. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described under “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
Interactive Data Files for CPSI’s Form 10-Q for the period ended March 31, 2020
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
