# TruBridge, Inc. (TBRG) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from TruBridge, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1169445/000116944523000003/cpsi-20221231.htm Accession: 0001169445-23-000003 Filing date: 2023-03-16 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/TBRG/ All MD&A years: /company/TBRG/mda/ Previous year: /company/TBRG/mda/fy2021/ (FY 2021) Next year: /company/TBRG/mda/fy2023/ (FY 2023) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the "Selected Financial Data" and our financial statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this Annual Report. Background CPSI is a leading provider of healthcare solutions and services for community hospitals, their clinics and other healthcare systems. Founded in 1979, CPSI is the parent of six companies – Evident, LLC ("Evident"), American HealthTech, Inc. ("AHT"), TruBridge, LLC ("TruBridge"), iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), TruCode LLC ("TruCode"), and Healthcare Resource Group, Inc. ("HRG"). Our combined companies are focused on helping improve the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our customers. Evident provides comprehensive acute care electronic healthcare record ("EHR") solutions for community hospitals and their affiliated clinics. AHT is one of the nation’s largest providers of post-acute care EHR solutions and services for post-acute care facilities. TruBridge focuses on providing business, consulting and managed IT services, along with its complete revenue cycle management ("RCM") solution, for all care settings. Get Real Health focuses on solutions aimed at improving patient engagement for individuals and healthcare providers. TruCode provides medical coding software that enables complete and accurate code assignment for optimal reimbursement. HRG provides specialized RCM solutions for facilities of all sizes. Commencing with the fourth quarter of 2022, the Company operates its business in three operating segments, which are also our reportable segments: RCM, EHR, and Patient Engagement. The individual companies align with the reporting segments and contribute towards the combined focus of improving the health of the communities we serve as follows: •The RCM reporting segment includes TruBridge, HRG, and TruCode, and focuses on providing business management, consulting, and managed IT services along with its complete RCM solution for all care settings, regardless of their primary healthcare information solutions provider. •The EHR segment includes Evident and AHT, and provides comprehensive acute and post-acute care EHR solutions and related services for community hospitals, their physician clinics, and skilled nursing and assisted living facilities. •The Patient Engagement segment offers comprehensive patient engagement and empowerment technology solutions through Get Real Health to improve patient outcomes and engagement strategies with care providers. Our companies currently support community hospitals and other healthcare systems with a geographically diverse patient mix within the domestic community healthcare market. Our target market for our RCM, EHR, and Patient Engagement solutions includes community hospitals with fewer than 400 acute care beds and their clinics, as well as independent or small to medium sized chains of skilled nursing facilities. 98% of our acute care hospital EHR customer base is comprised of hospitals with fewer than 100 beds. The target market for our post-acute care solutions consists of approximately 15,500 skilled nursing facilities that are either independently owned or part of a larger management group with multiple facilities. See Note 18 to the consolidated financial statements included herein for additional information on our three reportable segments. Management Overview Strategy Our core strategy is to achieve meaningful long-term revenue growth by cross-selling RCM services into our existing EHR customer base, expanding RCM market share with sales to new community hospitals and larger health systems, and pursuing competitive EHR takeaway opportunities in the acute and post-acute markets. During 2020, we engaged a top-tier international consulting firm to assess our core growth strategy, with the outcome of this eight-week engagement being the confirmation of our current core strategy and the identification of other innovative potential growth opportunities. We may also seek to grow 44 through acquisitions of businesses, technologies or products if we determine that such acquisitions are likely to help us meet our strategic goals. The opportunity to cross-sell RCM services is greatest within our Acute Care EHR customer base. As such, retention of existing Acute Care EHR customers is a key component of our long-term growth strategy by protecting this base of potential RCM customers, while at the same time serving as a leading indicator of our market position and stability of revenues and cash flows. We determine retention rates by reference to the amount of beginning-of-period Acute Care EHR recurring revenues that have not been lost due to customer attrition from our production environment customer base. Production environment customers are those that are using our applications to document live patient encounters, as opposed to legacy environment customers that have view-only access to historical patient records. Since 2019, these retention rates have consistently remained in the mid-to-high 90th percentile ranges and did not materially deviate from this range during 2022. We have increased customer retention efforts by enhancing support services, investing in tooling and instrumentation to proactively monitor for potential disruptions, and deploying in-application experience software that delivers application specific insights while using our products. As we pursue meaningful long-term revenue growth by leveraging RCM as a growth agent, we are placing ever-increasing value in further developing our already significant recurring revenue base to further stabilize our revenues and cash flows. As such, maintaining and growing recurring revenues are key components of our long-term growth strategy, aided by the aforementioned focus on customer retention. This includes a renewed focus on driving demand for subscriptions for our existing technology solutions and expanding the footprint for RCM services beyond our EHR customer base. While the combination of revenue growth and operating leverage results in increased margin realization, we also look to increase margins through specific cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies. However, in the immediate future, we anticipate incremental margin pressure from the continued client transition from perpetual license arrangements to “Software as a Service” ("SaaS") arrangements as described below. Industry Dynamics 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. 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 the fee-for-service reimbursement model in part by enrolling in an advanced payment model that incentivizes high-quality, cost effective-care via value-based reimbursement. This pressure could further encourage adoption of healthcare IT and increase demand for business management, consulting, and managed IT services, as the future success of these healthcare providers is greatly dependent upon their ability to engage patient populations and to coordinate patient care across a multitude of settings, while optimizing operating efficiency along the way. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology while those with the necessary capital have become more selective in their investments. Despite these challenges, we believe healthcare IT will be an area of continued investment due to its unique potential to improve safety and efficiency and reduce costs while meeting current and future regulatory, compliance and government reimbursement requirements. EHR License Model Preferences Much of the variability in our periodic revenues and profitability has been and will continue to be due to changing demand for different license models for our technology solutions, with variability in operating cash flows further impacted by the financing decisions within those license models. Our technology solutions are generally deployed in one of two license models: (1) perpetual licenses, for which the related revenue is recognized effectively upon installation, and (2) “Software as a Service” or “SaaS” arrangements, including our Cloud Electronic Health Record (“Cloud EHR”) offering, which generally result in revenue being recognized monthly as the services are provided over the term of the arrangement. The overwhelming majority of our historical EHR installations have been under a perpetual license model, but new customer demand has dramatically shifted towards a SaaS license model in the past several years. SaaS license models made up only 12% of annual new acute care EHR installations in 2018, increasing to 63% during 2021 and 100% during 2022. These SaaS offerings are becoming increasingly attractive to our clients because this configuration allows them to obtain access to advanced 45 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 EHR revenues in the period of installation in exchange for increased recurring periodic revenues (reflected in EHR 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 traditional 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 have comprised the majority of our perpetual license installations over the past several years, and include short-term payment plans and longer-term lease financing through us or third-party financing companies. The aforementioned shift in customer preference towards SaaS arrangements has significantly reduced the frequency of new financing arrangements for customer purchases under a perpetual license. When combined with scheduled payments on existing financing arrangements, the reduced frequency of new financing arrangements has resulted in a substantial reduction in financing receivables during 2022. For those perpetual license clients not seeking a financing arrangement, the payment schedule of the typical contract is structured to provide for a scheduling deposit due at contract signing, with the remainder of the contracted fees due at various stages of the installation process (delivery of hardware, installation of software and commencement of training, and satisfactory completion of a monthly accounting cycle or end-of-month operation by each respective application, as applicable). Margin Optimization Efforts Our core growth strategy includes an element geared towards margin optimization by identifying opportunities to further improve our cost structure by executing against initiatives related to organizational realignment, expanded use of offshore partnerships and the use of automation to increase the efficiency and value of our associates' efforts. Regarding the organizational realignment, on February 1, 2021, we committed to a reduction in force that resulted in the termination of approximately 1.0% of our workforce (21 employees). The reduction in force was a component of a broader strategic review of the Company's operations that was intended to more effectively align our resources with business priorities. Substantially all of the employees impacted by the reduction in force exited the Company in the first quarter of 2021, with the last of the impacted employees exiting in the third quarter of 2021. The Company incurred expenses of approximately $2.7 million related to the reduction in force. These expenses consisted of one-time termination benefits to the affected employees, including but not limited to severance payments, healthcare benefits, and payments for accrued vacation time. As a result of the reduction in force, the Company realized approximately $3.9 million in annual savings beginning in 2021 compared to prior expense levels. The remaining margin optimization initiatives of enhanced leveraging of offshore partnerships and automation have commenced and, to date, have provided meaningful efficiencies to our operations, particularly within RCM. As a service organization, RCM's cost structure is heavily dependent upon human capital, subjecting it to the complexities and risks associated with this resource. Chief among these complexities and risks is the ever-present pressure of wage inflation, which has recently become a reality as national and international economies recover from the economic downturn caused by the COVID-19 pandemic and has compelled the Company to make compensation adjustments that are outside of historical norms. We believe that our efforts towards margin optimization are well-timed, enabling a rapid response to actual or expected wage inflation in order to preserve RCM gross margins, but we cannot guarantee that these efforts will fully eliminate any related margin deterioration. In addition to wage inflation, we are a party to contracts with certain third-party suppliers and vendors that allow for annual price adjustments indexed to inflation. While we continually seek to proactively manage controllable expenses, inflationary pressure on costs could lead to erosion of margins. Labor Capitalization During the second quarter of 2021, our ongoing monitoring activities associated with the capitalization of software development costs and the related correlation between capitalization rates and operational metrics designed to reflect the distribution of work revealed that our then-current labor capitalization methodology did not fully reflect all of the critical activities necessary to develop software assets. Consequently, during the second quarter of 2021, we elected to change our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use of Software. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We 46 believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change in accounting for software development costs is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. In connection with this change, we capitalized $8.8 million of software development costs during 2021. We estimate that the effect of this change was to increase capitalized amounts by approximately $4.6 million during 2021 with a corresponding decrease to product development costs that were expensed. The additional capitalized amounts will be amortized over an average of five years, leading to increased amortization expense in future years. COVID-19 The impact of the COVID-19 pandemic on our operations was broad-sweeping, most notably causing severe deterioration in United States community hospital patient volumes that negatively impacted the revenues, gross margins, and income of our RCM service offerings. While patient volumes have continued to recover and are largely in line with pre-COVID-19 levels, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted, including as a result of macro-economic impacts to the global supply chain, labor shortages, and inflationary pressures. However, we continue to assess its impact on our business and continue to actively manage our response. For further details on the potential impact of COVID-19 on our business, refer to "Risk Factors," in Part I, Item 1A. 2022 Financial Overview In the fourth quarter of 2022, the Company made a number of changes to its organizational structure and management system to align the Company's operating model to its strategic initiatives. With these changes the Company revised its reportable segments to RCM, EHR, and Patient Engagement, but this realignment of the Company's reportable segments did not impact its consolidated financial statements. Throughout this discussion, prior-year results have been recast to conform with the change in reportable segments noted above. We generated revenues of $326.6 million from the sale of our products and services during 2022, compared to $280.6 million during 2021, an increase of 16% that is due to the combination of inorganic growth through our recent acquisitions of TruCode and HRG and organic growth as RCM solutions continue to gain traction in the domestic healthcare landscape. Despite this increase in revenues, net income decreased by $2.6 million to $15.9 million during 2022, compared to $18.4 million during 2021, as investments in operational capacity combined with increased interest expense and amortization of acquisition-related intangibles more than offset annual revenue gains. Corresponding to this decreased profitability, net cash provided by operating activities decreased by $15.3 million, from $47.7 million provided by operations during 2021 to $32.4 million provided by operations for 2022, as the aforementioned increase in revenue coupled with delayed client cash collections resulted in a significant expansion of accounts receivable. 47 Results of Operations The following table sets forth certain items included in our results of operations for each of the three years in the period ended December 31, 2022, expressed as a percentage of our total revenues for these periods: [[GREPCENT_TABLE]] [["","Year ended December 31,"],["","2022","","2021","","2020"],["(In thousands)","Amount","","% Sales","","Amount","","% Sales","","Amount","","% Sales"],["INCOME DATA:"],["Sales revenues:"],["RCM","$","179,870","","","55.1","%","","$","131,242","","","46.8","%","","$","107,431","","","38.3","%"],["EHR","139,823","","","42.8","%","","143,109","","","51.0","%","","152,954","","","54.5","%"],["Patient engagement","6,955","","","2.1","%","","6,278","","","2.2","%","","4,103","","","1.6","%"],["Total sales revenues","326,648","","","100.0","%","","280,629","","","100.0","%","","264,488","","","100.0","%"],["Costs of sales:"],["RCM","97,010","","","29.7","%","","66,015","","","23.5","%","","57,461","","","21.7","%"],["EHR","71,347","","","21.8","%","","70,664","","","25.2","%","","69,361","","","26.2","%"],["Patient engagement","3,856","","","1.2","%","","3,068","","","1.1","%","","1,420","","","0.5","%"],["Total costs of sales","172,213","","","52.7","%","","139,747","","","49.8","%","","128,242","","","48.5","%"],["Gross profit","154,435","","","47.3","%","","140,882","","","50.2","%","","136,246","","","51.5","%"],["Operating expenses:"],["Product development","30,926","","","9.5","%","","30,389","","","10.8","%","","33,457","","","12.6","%"],["Sales and marketing","27,131","","","8.3","%","","21,978","","","7.8","%","","22,835","","","8.6","%"],["General and administrative","56,192","","","17.2","%","","50,022","","","17.8","%","","47,479","","","18.0","%"],["Amortization of acquisition-related intangibles","17,403","","","5.3","%","","13,786","","","4.9","%","","11,421","","","4.3","%"],["Total operating expenses","131,652","","","40.3","%","","116,175","","","41.4","%","","115,192","","","43.6","%"],["Operating income","22,783","","","7.0","%","","24,707","","","8.8","%","","21,054","","","8.0","%"],["Other income (expense):"],["Other income","1,178","","","0.4","%","","1,529","","","0.5","%","","1,494","","","0.6","%"],["Gain on contingent consideration","565","","","0.2","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Loss on extinguishment of debt","(125)","","","\u2014","%","","\u2014","","","\u2014","%","","(202)","","","(0.1)","%"],["Interest expense","(6,320)","","","(1.9)","%","","(3,160)","","","(1.1)","%","","(3,562)","","","(1.3)","%"],["Total other income (expense)","(4,702)","","","(1.4)","%","","(1,631)","","","(0.6)","%","","(2,270)","","","(0.9)","%"],["Income before taxes","18,081","","","5.5","%","","23,076","","","8.2","%","","18,784","","","7.1","%"],["Provision for income taxes","2,214","","","0.7","%","","4,646","","","1.7","%","","4,538","","","1.7","%"],["Net income","$","15,867","","","4.9","%","","$","18,430","","","6.6","%","","$","14,246","","","5.4","%"]] [[/GREPCENT_TABLE]] 2022 Compared to 2021 Revenues Total revenues for the year ended December 31, 2022 increased by $46.0 million, or 16%, compared to the year ended December 31, 2021. RCM revenues increased by $48.6 million, or 37%, compared to 2021 due to acquisition-fueled growth and organic growth of our revenue cycle service offerings. TruCode, acquired in May 2021, contributed $13.8 million of revenue during 2022, compared to only $7.4 million during 2021, which reflected only eight months of activity. Our acquisition of HRG in March 2022 provided further inorganic growth, contributing an estimated $34.1 million of revenue during 2022. Organic revenue growth has materialized as our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the positive impact of improving hospital patient volumes on RCM revenues, resulted in organic revenue growth of $8.1 million, or 7%. 48 EHR revenues decreased by $3.3 million, or 2%, from the year ended December 31, 2021, and were comprised of the following for the years ended December 31, 2022 and 2021: [[GREPCENT_TABLE]] [["","Year ended December 31,"],["(In thousands)","2022","","2021"],["Recurring EHR revenues (1)"],["Acute Care EHR","$","109,340","","","$","108,440"],["Post-acute Care EHR","15,384","","","16,472"],["Total recurring EHR revenues","124,724","","","124,912"],["Non-recurring EHR revenues (2)"],["Acute Care EHR","13,138","","","16,939"],["Post-acute Care EHR","1,961","","","1,258"],["Total non-recurring EHR revenues","15,099","","","18,197"],["Total EHR revenue","$","139,823","","","$","143,109"],["(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 and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model."]] [[/GREPCENT_TABLE]] Recurring EHR revenues remained flat with a $0.2 million, or 0.2%, decrease in 2022 compared to 2021. Acute Care EHR recurring revenues increased by $0.9 million, or 1%, as recent efforts to emphasize SaaS arrangements have led to the accumulation of significant sources of recurring revenue, albeit at the expense of non-recurring revenue. Post-acute Care EHR recurring revenues decreased by $1.1 million, or 7%, primarily due to the loss of certain significant customers during early 2022. Non-recurring EHR revenues decreased by $3.1 million, or 17%, compared to 2021. Acute Care EHR non-recurring revenues decreased by $3.8 million, or 22%, compared to 2021, due mostly to a decrease in the number of perpetual license installations of our Acute Care EHR solutions. We installed our Acute Care EHR solutions at nineteen new hospital clients during 2022 (all of which were under a SaaS arrangements resulting in revenue being recognized ratably over the contract term) compared to seventeen new hospital clients during 2021 (ten under a SaaS arrangement). Post-acute EHR non-recurring revenues increased by $0.7 million, or 56%, compared to 2021 due to a temporarily beneficial shift in license mix. Patient Engagement revenues increased by $0.7 million, or 11%, compared to 2021 as escalating demand for patient engagement solutions continues to propel organic growth for Get Real Health's products and services. Costs of Sales Total costs of sales increased by $32.5 million compared to 2021. As a percentage of total revenues, costs of sales increased to 53% of revenues during 2022 from 50% during 2021. Our costs associated with RCM sales and support increased by $31.0 million, or 47%, in 2022, primarily driven by our recent acquisitions of TruCode and HRG. The remaining cost increases for RCM are organic in nature, caused by resource expansion necessitated by the growing customer base and improved patient volumes. The gross margin on these services decreased to 46% in 2022, compared to 50% during 2021, due to the addition of HRG, which is comprised of mostly lower margin services. Costs of EHR system sales and support increased by $0.7 million, or 1%, compared to 2021, primarily driven by increased labor and travel costs. The increase in EHR costs of sales coupled with the aforementioned decrease in non-recurring revenues resulted in a decrease in the related gross margins to 49% in 2022 compared to 51% in 2021. Costs of Patient Engagement sales and support increased by $0.8 million, or 26%, compared to 2021. Increased labor costs related to investments aimed at aggressively addressing increasing demand for patient engagement solutions comprised the majority of the increase. The increase in costs of sales outpaced the increase in revenues in 2022 as we continue to invest in this nascent business, resulting in the compression of gross margins to 45% in 2022 compared to 51% in 2021. 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 increased by $0.5 million, or 2%, compared to 2021. A $5.6 million, or 64%, increase in product 49 development labor capitalization pursuant to the aforementioned change in our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use Software was offset by increased amortization of the related assets and increased costs associated related to our strategy to migrate to a public cloud environment. In addition, our recent acquisitions of TruCode and HRG resulted in a combined $1.9 million of product development expenses during 2022 compared to only $0.8 million in 2021. Sales and Marketing Sales and marketing costs increased by $5.2 million, or 23%, compared to 2021. 2022 marked the return of our in-person National Client Conference, which had migrated to virtual-only since the onset of the COVID-19 pandemic, resulting in incremental expense of $1.1 million. Resource expansion resulted in a $1.3 million increase in payroll costs and an improved sales environment resulted in a $0.6 million increase in commission expenses. Similarly, travel costs have increased by $0.3 million as travel patterns return to pre-COVID levels. Marketing program costs increased by $0.7 million due to more aggressive marketing of our solutions and services combined with specific campaigns to increase brand awareness for our portfolio of companies. In addition, our recent acquisitions of TruCode and HRG resulted in a combined increase in sales and marketing expense of $1.5 million in 2022, compared to only $0.4 million of additional sales and marketing expenses during 2021. General and Administrative General and administrative expenses increased by $6.2 million, or 12%, compared to 2021, mostly due to volatility in employee health claims coupled with an expanding employee base that resulted in a $4.1 million increase in employee benefits cost. In addition, our commitment to improving the employee experience and becoming an employer of choice resulted in a $1.9 million increase in human resources cost. Lastly, our recent acquisitions of TruCode and HRG resulted in a combined increase in general and administrative expenses of $2.9 million in 2022, compared to only $1.1 million of additional general and administrative expenses during 2021. Partially offsetting this aggregate $7.8 million increase in employee benefits, human resources, and acquisition-related costs was a $1.6 million decrease in bad debt expense due to generally improved collections experience and the lack of any severe collectability determinations for customers with large receivables balances. Amortization of Acquisition-Related Intangibles Amortization expense associated with acquisition-related intangible assets increased by $3.6 million, or 26%, primarily due to amortization of intangibles acquired in the TruCode and HRG acquisitions. Total Operating Expenses As a percentage of total revenues, total operating expenses decreased to 40% in 2022 compared to 41% in 2021. Total Other Income (Expense) Total other income (expense) increased to expense of $4.7 million during 2022 compared to expense of $1.6 million during 2021. A rising interest rate environment and a higher level of funded debt caused a $3.2 million increase in interest expense, which was partially offset by a $0.6 million gain on contingent consideration. During 2022, $0.6 million of the original $2.5 million contingent consideration estimated in determining the TruCode purchase price was reversed as TruCode's earnings over the earnout period were less than estimated on the date of acquisition. Income Before Taxes As a result of the foregoing factors, income before taxes decreased to $18.1 million in 2022, compared to $23.1 million in 2021. Provision for Income Taxes Our effective income tax rates for 2022 and 2021 were 12% and 20%, respectively. Lowered provision-to-return adjustments resulted in an incremental 3.5% decrease in our effective tax rate for 2022 compared to 2021, while the tax-free gain on contingent consideration and increased Work Opportunity Tax Credits resulted in incremental decreases in our effective tax rate of 2.2% and 1.2%, respectively, for 2022 compared to 2021. Net Income Net income for 2022 decreased by $2.6 million to $15.9 million, or $1.08 per basic and diluted share, compared with $18.4 million, or $1.26 per basic and diluted share, for 2021. 50 Supplemental Segment Information Our reportable segments have been determined in accordance with ASC 280 - Segment Reporting. We have three reportable operating segments: RCM, EHR, and Patient Engagement. We evaluate each of our three operating segments based on segment revenues and segment adjusted EBITDA. Adjusted EBITDA consists of GAAP net income as reported and adjusts for (i) deferred revenue purchase accounting adjustments arising from purchase allocation adjustments related to business acquisitions; (ii) depreciation expense; (iii) amortization of software development costs; (iv) amortization of acquisition-related intangible assets; (v) stock-based compensation; (vi) severance and other non-recurring charges; (vii) interest expense and other, net; (viii) gain on contingent consideration; and (ix) the provision for income taxes. The segment measurements provided to and evaluated by the chief operating decision makers ("CODM") are described in Note 18 to the consolidated financial statements. These results should be considered in addition to, and not as a substitute for, results reported in accordance with GAAP. The following table presents a summary of the revenues and adjusted EBITDA of our three operating segments for the years ended December 31, 2022 and 2021. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Change"],["","2022","","2021","","$","","%"],["(In thousands)"],["Revenues by segment:"],["RCM","$","179,870","","","$","131,242","","","$","48,628","","","37","%"],["EHR","139,823","","","143,109","","","(3,286)","","","(2)","%"],["Patient engagement","6,955","","","6,278","","","677","","","11","%"],["Adjusted EBITDA by segment:"],["RCM","$","36,242","","","$","30,211","","","$","6,031","","","20","%"],["EHR","19,091","","","23,061","","","(3,970)","","","(17)","%"],["Patient engagement","566","","","(595)","","","1,161","","","195","%"]] [[/GREPCENT_TABLE]] Segment Revenues Refer to the corresponding discussion of revenues for each of our reportable segments previously provided under the Revenues heading of this Management's Discussion and Analysis. There are no intersegment revenues to be eliminated in computing segment revenue. Segment Adjusted EBITDA - Year Ended December 31, 2022 Compared with Year Ended December 31, 2021 RCM adjusted EBITDA increased by $6.0 million, or 20%, compared to 2021. Revenue growth of of 37% was partially offset by a 360 basis point decrease in gross margins, as growth materialized from lower-margin, resource-intensive service lines. This decrease in gross margins combined with expanded operating expenses to limit adjusted EBITDA growth despite this dramatic increase in revenues. EHR adjusted EBITDA decreased by $4.0 million, or 17%. The aforementioned decrease in revenues combined with an increase in cost of sales caused a $4.0 million decrease in gross profit, which was partially offset by improved operating expenses resulting from increased product development labor capitalization rates. Patient Engagement adjusted EBITDA increased by $1.2 million, or 195%. Although gross profit decreased by $0.1 million as the increase in cost of sales outpaced the increase in revenue, this was more than offset by a marked increase in capitalizable product development work resulting in significantly reduced operating expenses. 2021 Compared to 2020 Revenues Total revenues for the year ended December 31, 2021 increased by $16.1 million, or 6%, compared to the year ended December 31, 2020. 51 RCM revenues increased by $23.8 million, or 22%, compared to 2020. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the aforementioned impact of improving hospital patient volumes on RCM revenues, resulted in revenue increases of $8.6 million, or 21%, for our accounts receivable management services; $5.7 million, or 18%, for our insurance services division; and $1.4 million, or 16%, for our medical coding services. Lastly, the acquisition of TruCode in May 2021 resulted in an additional $7.4 million of revenue during 2021. EHR revenues decreased by $9.8 million, or 6%, from the year ended December 31, 2020, and were comprised of the following for the years ended December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","Year ended December 31,"],["(In thousands)","2021","","2020"],["Recurring EHR revenues (1)"],["Acute Care EHR","$","108,440","","","$","105,597"],["Post-acute Care EHR","16,472","","","16,272"],["Total recurring EHR revenues","124,912","","","121,869"],["Non-recurring EHR revenues (2)"],["Acute Care EHR","16,939","","","29,173"],["Post-acute Care EHR","1,258","","","1,912"],["Total non-recurring EHR revenues","18,197","","","31,085"],["Total EHR revenue","$","143,109","","","$","152,954"],["(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 and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model."]] [[/GREPCENT_TABLE]] Recurring EHR revenues increased by $3.0 million, or 2%, during 2021. Acute Care EHR recurring revenues increased by $2.8 million, or 3%, as attrition from the Thrive and Centriq customer base has normalized to more historical levels and our SaaS customer base has continued to grow, strengthening recurring revenues. Post-acute Care EHR recurring revenues increased by $0.2 million, or 1%, as attrition has stabilized as we continue to make technological improvements to the AHT product line. Non-recurring EHR revenues decreased by $12.9 million, or 41%, mostly driven by a $12.2 million, or 42%, decrease in Acute Care EHR non-recurring revenues. We installed our Acute Care EHR solutions at seventeen new hospital clients during 2021 (ten of which were under a SaaS arrangement, resulting in revenue being recognized ratably over the contract term; comparatively, revenues related to perpetual license arrangements are recognized when the related installation is complete) compared to twenty-five new hospital clients during 2020 (seventeen of which were under a SaaS arrangement). In addition to the decrease in the number of non-SaaS new customer implementations, the related non-recurring revenues decreased as 2020 benefited from a high volume of late-installing applications for non-SaaS implementations that went live in prior periods. Comparatively, the continued shift in customer preferences towards SaaS arrangements and the continuing impacts of COVID-19 on client purchasing and implementation plans have decreased the opportunities for such follow-on revenue activities for recent implementations and decreased demand for add-on applications within our existing Acute Care EHR customer base. Patient Engagement revenues increased by $2.2 million, or 53%, as a result of increasing demand for Get Real Health's patient engagement solutions and services. Costs of Sales Total costs of sales increased by $11.5 million compared to 2020. As a percentage of total revenues, costs of sales increased to 50% of revenues during 2021 from 48% during 2020. Our costs associated with RCM sales and support increased by $8.6 million, or 15%, in 2021, primarily driven by resource expansion necessitated by the growing customer base and improved patient volumes. The acquisition of TruCode in May 2021 resulted in an additional $1.7 million of costs of sales during 2021. The gross margin on these services increased to 50% in 2021, compared to 47% during 2020, as the growing recurring revenue base worked in tandem with operational efficiencies to increase margins. 52 Costs of EHR system and sales support increased by $1.3 million, or 2%, in 2021. Costs of Acute Care EHR revenues increased by $1.2 million, or 2%, compared to 2020, as our increased usage of vendor partnerships to fulfill customer needs increased the related costs of third-party software by $3.6 million. This increase was partially offset by a $2.1 million decrease in hardware costs associated with the decrease in non-recurring revenues. Costs of Post-acute Care EHR revenues increased slightly to $4.9 million in 2021 from $4.8 million in 2020. The gross margin on EHR system sales and support decreased to 51% in 2021 from 55% in 2020, as the increase in costs of sales worked in tandem with decreased non-recurring revenues to decrease margins. Costs of Patient Engagement sales and support increased by $1.6 million, or 116%, compared to 2020, primarily due to increased labor and vendor costs. The rate of increase in costs of sales outpaced the increase in revenues in 2021 as we continue to invest in this nascent business, resulting in the compression of gross margins to 51% in 2021 compared to 65% in 2020. 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 $3.1 million, or 9%, compared to 2020, with the primary driver being a $5.5 million, or 165%, increase in product development labor capitalization pursuant to the aforementioned change in our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use Software. This increased capitalization rate was partially offset by increased amortization of the related assets and increased payroll costs associated with expanding resources. The acquisition of TruCode in May 2021 resulted in $0.8 million of additional product development expenses during 2021. Sales and Marketing Sales and marketing costs decreased by $0.9 million, or 4%, compared to 2020. The aforementioned reduction-in-force combined with reduced non-recurring revenues resulted in decreased payroll and commission expenses. The acquisition of TruCode in May 2021 resulted in $0.4 million of additional sales and marketing expenses during 2021. General and Administrative General and administrative expenses increased by $2.5 million, or 5%, compared to 2020, mostly due to $2.5 million in severance costs associated with our 2021 reduction-in-force, an increase of $0.8 million in employee health claims, and the acquisition of TruCode in May 2021, which resulted in $1.1 million of additional general and administrative expenses during 2021 (exclusive of non-recurring transaction-related costs). Partially offsetting this aggregate $4.4 million increase in severance, employee health claims, and TruCode-related costs was a $1.8 million decrease in bad debt expense due to generally improved collections experience and the lack of any severe collectability determinations for customers with large receivables balances. Amortization of Acquisition-Related Intangibles Amortization expense associated with acquisition-related intangible assets increased by $2.4 million, or 21%, due to changes in estimates regarding the remaining useful lives of certain of our acquired intangible assets combined with the amortization of intangibles acquired in the TruCode acquisition. Total Operating Expenses As a percentage of total revenues, total operating expenses decreased to 41% in 2021 compared to 44% in 2020. Total Other Income (Expense) Total other income (expense) improved to expense of $1.6 million during 2021 compared to expense of $2.3 million during 2020. This improvement was mostly attributable to a decreasing interest rate environment and lowered average amounts outstanding under our long-term debt facilities, resulting in a $0.4 million decrease in related interest expense. Income Before Taxes As a result of the foregoing factors, income before taxes increased to $23.1 million in 2021, compared to $18.8 million in 2020. 53 Provision for Income Taxes Our effective income tax rates for 2021 and 2020 were 20% and 24%, respectively. Lowered provision-to-return adjustments resulted in an incremental 2.6% decrease in our effective tax rate for 2021 compared to 2020, while decreased tax shortfalls related to stock-based compensation arrangements resulted in an incremental 1.9% decrease in our effective tax rate for 2021 compared to 2020. Net Income Net income for 2021 increased by $4.2 million to $18.4 million, or $1.26 per basic and diluted share, compared with $14.2 million, or $0.98 per basic and diluted share, for 2020. Supplemental Segment Information Our reportable segments have been determined in accordance with ASC 280 - Segment Reporting. We have three reportable operating segments: RCM, EHR, and Patient Engagement. We evaluate each of our three operating segments based on segment revenues and segment adjusted EBITDA. Adjusted EBITDA consists of GAAP net income as reported and adjusts for (i) deferred revenue purchase accounting adjustments arising from purchase allocation adjustments related to business acquisitions; (ii) depreciation expense; (iii) amortization of software development costs; (iv) amortization of acquisition-related intangible assets; (v) stock-based compensation; (vi) severance and other non-recurring charges; (vii) interest expense and other, net; (viii) gain on contingent consideration; and (ix) the provision for income taxes. The segment measurements provided to and evaluated by the CODM are described in Note 18 to the consolidated financial statements. These results should be considered in addition to, and not as a substitute for, results reported in accordance with GAAP. The following table present a summary of the revenues and adjusted EBITDA of our three operating segments for the years ended December 31, 2021 and 2020. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Change"],["","2021","","2020","","$","","%"],["(In thousands)"],["Revenues by segment:"],["RCM","$","131,242","","","$","107,431","","","$","23,811","","","22","%"],["EHR","143,109","","","152,954","","","(9,845)","","","(6)","%"],["Patient engagement","6,278","","","4,103","","","2,175","","","53","%"],["Adjusted EBITDA by segment:"],["RCM","$","30,211","","","$","22,780","","","$","7,431","","","33","%"],["EHR","23,061","","","21,488","","","1,573","","","7","%"],["Patient engagement","(595)","","","(881)","","","286","","","32","%"]] [[/GREPCENT_TABLE]] Segment Revenues Refer to the corresponding discussion of revenues for each of our reportable segments previously provided under the Revenues heading of this Management's Discussion and Analysis. There are no intersegment revenues to be eliminated in computing segment revenue. Segment Adjusted EBITDA - Year Ended December 31, 2021 Compared with Year Ended December 31, 2020 RCM adjusted EBITDA increased by $7.4 million, or 33%, compared to 2020. The acquisition of TruCode resulted in an incremental $3.9 million of adjusted EBITDA, with the remaining $3.5 million of adjusted EBITDA growth resulting from the business unit's 15% organic revenue growth. EHR adjusted EBITDA increased by $1.6 million, or 7%. The aforementioned decrease in revenues combined with an increase in cost of sales to cause an $11.1 million decrease in gross profit, which was wholly offset by improved operating expenses resulting primarily from increased product development labor capitalization rates and reduced sales and marketing costs. 54 Patient engagement adjusted EBITDA increased by $0.3 million, or 32% as significant revenue gains led to improved profitability metrics for this nascent business unit. Liquidity and Capital Resources Sources of Liquidity As of December 31, 2022, our principal sources of liquidity consisted of cash and cash equivalents of $7.0 million and our remaining borrowing capacity under the revolving credit facility of $86.3 million, compared to $11.4 million of cash and cash equivalents and $79.0 million of remaining borrowing capacity under the revolving credit facility as of December 31, 2021. In January 2016, we entered into a syndicated credit agreement which provided for a $125 million term loan facility and a $50 million revolving credit facility. On June 16, 2020, we entered into an Amended and Restated Credit Agreement that increased the aggregate principal amount of our credit facilities to $185 million, which included a $75 million term loan facility and a $110 million revolving credit facility. On May 2, 2022, we entered into a First Amendment to the Amended Restated Credit Agreement that further increased the aggregate principal amount of our credit facilities to $230 million, which included a $70 million term loan facility and a $160 million revolving credit facility. As of December 31, 2022, we had $141.1 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of $7.0 million as of December 31, 2022, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of $86.3 million as of December 31, 2022, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months and beyond. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Annual Report on Form 10-K. 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. Aside from normal operating cash requirements, obligations under our Credit Agreement (as discussed below) and operating leases (see Note 15 to the consolidated financial statements included herein for further information), and opportunistic uses of capital in share repurchases and business acquisition transactions, we do not have any material cash commitments or planned cash commitments. Although the Company currently has no obligations related to planned acquisitions, the Company's strategy includes the potential for future acquisitions, which may be funded thorough draws on the credit facilities or the use of the other sources of liquidity described above. Operating Cash Flow Activities Net cash provided by operating activities decreased by $15.4 million, from $47.7 million for 2021 to $32.4 million for 2022, primarily due to disadvantageous changes in working capital, most notably as it relates to expansion in accounts receivable. During 2021, accounts receivable expanded by $2.0 million, or 6%, driven by a corresponding 6% increase in annual revenue with days sales outstanding ("DSO") remaining unchanged from the previous year at 45 days. During 2022, accounts receivable expanded by $16.9 million, or 49%, driven by a 16% increase in annual revenues while integration-related delays associated with our recent acquisition of HRG and the now higher proportion of revenues billed in arrears, resulted in a significant increase in DSO from 45 to 58 days. The resulting impact to operating cash flows was a $3.2 million decrease during 2021 compared to a $12.4 million decrease in 2022. In addition, under the Tax Cuts and Jobs Act, Internal Revenue Code ("IRC") Section 174 amended the federal tax treatment of research or experimental expenditures paid or incurred during the tax year, which allowed for expensing of such costs in the year incurred for federal income tax purposes. Effective for the 2022 tax year, taxpayers are required to capitalize and amortize specified research or experimental expenditures over a five-year period. As a result of the change to IRC Section 174, a deferred tax asset of $9.8 million was recorded for the tax year ended December 31, 2022, with the resulting impact of deferred taxes to operating cash flows being a $6.7 million decrease during 2022 compared to a $3.5 million increase during 2021. Investing Cash Flow Activities Net cash used in investing activities decreased from $69.9 million during 2021 to $62.7 million during 2022. Most notably, we completed our $43.4 million acquisition of HRG during the first quarter of 2022. We completed our $59.6 million acquisition of TruCode during the second quarter of 2021. In addition, cash outflows related to capitalized internal software development efforts increased from $9.4 million in 2021 to $19.1 million in 2022 due to the aforementioned change in methodology for estimating labor costs eligible for capitalization and a favorable shift in workload mix away from support functions towards capitalizable projects. 55 Financing Cash Flow Activities During 2022, our financing activities were a net source of cash in the amount of $25.9 million, as $48.0 million in borrowings from our revolving line of credit, used to fund our acquisition of HRG, were partially offset by long-term debt principal payments of $8.9 million and $11.9 million used to repurchase shares of our common stock, which are treated as treasury stock. During 2021, our financing activities were a net source of cash in the amount of $20.9 million, as $61.0 million in borrowings from our revolving line of credit were partially offset by long-term debt principal payments of $38.8 million and $1.3 million used to repurchase shares of our common stock. On September 4, 2020, our Board of Directors approved a stock repurchase program to repurchase up to $30.0 million in aggregate amount of the Company's outstanding shares of common stock through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. On July 27, 2022, our Board of Directors extended the expiration of the stock repurchase program to September 4, 2024. These shares may be purchased from time to time throughout the duration of the stock repurchase program depending upon market conditions. Our ability to repurchase shares is subject to compliance with the terms of our Amended and Restated Credit Agreement. Concurrent with the authorization of this stock repurchase program, the Board of Directors opted to indefinitely suspend all quarterly dividends. Credit Agreement As of December 31, 2022, we had $67.4 million in principal amount outstanding under the term loan facility and $73.7 million in principal amount outstanding under the revolving credit facility. Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted SOFR rate for the relevant interest period, subject to a floor of 0.50%, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month SOFR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin for SOFR loans and the letter of credit fee ranges from 1.8% to 3.0%. The applicable margin for base rate loans ranges from 0.8% to 2.0%, in each case based on the Company's consolidated net leverage ratio. Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginning June 30, 2022, with quarterly principal payments of approximately $0.9 million through March 31, 2027, with maturity on May 2, 2027 or such earlier date as the obligations under the Amended and Restated Credit Agreement as amended by the First Amendment become due and payable pursuant to the terms of such agreement. Any principal outstanding under the revolving credit facility is due and payable on the maturity date. Our credit facilities are secured pursuant to the Amended and Restated Credit Agreement, dated as of June 16, 2020, among the parties identified as obligors therein and Regions, as collateral agent, on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the “Subsidiary Guarantors”), including certain registered intellectual property and the capital stock of certain of the Company’s direct and indirect subsidiaries. Our obligations under the Amended and Restated Credit Agreement are also guaranteed by the Subsidiary Guarantors. The First Amendment provides incremental facility capacity of $75 million, subject to certain conditions. The Amended and Restated Credit Agreement, as amended by the First Amendment, includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase, or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated net leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. The First Amendment requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the First Amendment, the Company is required to comply with a maximum consolidated net leverage ratio of 3.75:1.00 for each quarter through March 31, 2023, after which time the maximum consolidated net leverage ratio will be 3.50:1.00. Further, under the First Amendment, in connection with any acquisition by the Company exceeding $25 million, the Company may elect to increase the maximum permitted consolidated net leverage ratio for the fiscal quarter in which the acquisition occurs and each of the following three fiscal quarters by 0.50:1.00 above the otherwise permitted maximum. If the consolidated net leverage ratio is less than 2.50:1:00, there is no limit on the incremental facility. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We 56 believe that we were in compliance with the covenants contained in such agreement as of December 31, 2022. On March 10, 2023, the calculation of the fixed charge coverage ratio was amended to specifically exclude from the definition of fixed charges the Company's share repurchases conducted during the third and fourth quarters of 2022. Any failure by us to comply with this or another covenant in the future may result in an event of default. There can be no assurance that we will be able to continue to comply with this covenant or obtain amendments to avoid future covenant violations, or that such amendments will be available on commercially acceptable terms. The First Amendment removed the requirement that the Company mandatorily prepay the credit facilities with excess cash flow generated during the prior fiscal year. The Company is permitted to voluntarily prepay the credit facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of SOFR rate loans made on a day other than the last day of any applicable interest period. Bookings Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the years ended December 31, 2022 and 2021, respectively: [[GREPCENT_TABLE]] [["(In thousands)","2022","2021"],["RCM(1)","$","48,065","","$","20,333"],["EHR(2)","38,152","","40,873"],["Patient engagement (1)","3,188","","9,007"],["Total Bookings","$","89,405","","$","70,213"],["(1) Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts)."],["(2) Generally calculated as the total contract price (for system sales) including annualized contract value (for support) for perpetual license system sales and total contract price for SaaS sales."]] [[/GREPCENT_TABLE]] RCM bookings during 2022 increased by $27.7 million, or 136%, compared to 2021 as we experienced strength in our core markets for RCM services, particularly as it relates to bookings from our existing EHR customer base. Sales activities and bookings during 2021 suffered from a number of incremental headwinds, chief among them being (a) COVID-19 related distractions, including increased infection rates for certain geographies and widespread focus on eventual vaccine rollouts, (b) reorganization transitions related to our February 2021 reduction-in-force, and (c) lower-value regulatory purchases required by the Centers for Medicare and Medicaid Services' Hospital Price Transparency mandate requiring hospitals to provide clear, accessible pricing information online. These topics disproportionately dominated sales discussions and resources, with the related headwinds beginning to dissipate during the third quarter of 2021 and having little to no effect on 2022. Conversely, 2022 bookings benefited from growing demand for outsourced RCM services, with bookings from within our EHR customers base increasing by $17.7 million, or 138%. Our recent acquisition of HRG enhanced our core competencies in generating sales momentum outside of our EHR customer base, with these "net new" bookings increasing by $10 million, or 135%. EHR bookings during 2022 decreased by $2.7 million, or 7%, compared to 2021, primarily due to a $3.6 million decrease in Acute Care EHR bookings resulting from a challenging decision environment for new Acute Care EHR system sales arrangements.This decrease was partially offset by a $0.9 million increase in Post-acute Care EHR bookings as an improved sales environment worked in tandem with recent product innovations designed to improve the competitive position of our AHT products. Patient engagement bookings decreased by $5.8 million, or 65%, compared to 2021. 2021 bookings were propelled by large international client wins for Get Real Health's patient engagement solutions, while 2022 lacked any such large international client wins. Bookings represent our sales activity during the periods reported above. The amount and volume of pending contracts at the end of the period is described under “Business – Backlog.” Some of the contracts in our backlog are subject to modification or cancellation at the convenience of the customer, or for default in the event that we are unable to perform under the contract. There can be no assurance that our bookings or backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. 57 Critical Accounting Policies and Estimates General  Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We are required to make some estimates and judgments that affect the preparation of these financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, but actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to clients in an amount that reflects the consideration we expect to receive in exchange for those products and services. We enter into contracts that can include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations. The Company employs the 5-step revenue recognition model under ASC 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Refer to Note 2 to the consolidated financial statements included herein for further discussion regarding our revenue recognition policies and significant judgments involved in our application of ASC 606. Although we believe that our approach to estimates and judgements regarding revenue recognition is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material. Allowance for Credit Losses Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns, resulting in the establishment of general reserves. Additionally, if it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific allowance for credit losses may be recorded to reduce the related receivable to the amount expected to be recovered. Refer to Note 11 of the consolidated financial statements included herein for a detailed discussion about our credit loss accounting policy related to trade accounts receivable. The Company has sold information and patient care systems to certain healthcare providers under short-term payment plans and sales-type leases. The Company establishes an allowance for credit losses for these financing receivables based on the historical level of customer defaults under such financing arrangements. Additionally, if it is determined that a customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific allowances may be recorded to reduce the related receivable to the amount expected to be recovered. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), 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 the new standard as of January 1, 2020. Adoption of this standard did not have a material impact on our consolidated financial statements. Although we believe that that our approach to estimates and judgments regarding our allowance for credit losses is reasonable, actual results could differ and we may be exposed to increases or decreases in required allowances that could be material. Estimates The Company uses estimates to record certain transactions and liabilities. These estimates are generally based on management’s best judgment, past experience, and utilization of third party services such as actuarial and other expert services. Because these estimates are subjective and variable, actual results could differ significantly from these estimates. Significant estimates included in our financial statements include those for self-insurance reserves under our health insurance plan, reserves for uncertain tax positions, bad debt and credit allowances, legal liability exposure or lack thereof, and accrued expenses. Business Combinations, including Purchased Intangible Assets The Company accounts for business combinations at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments relate to adjustments to the fair value of assets acquired 58 and liabilities assumed based on information that we should have known at the time of acquisition. All changes to purchase accounting that do not qualify as measurement period adjustments are included in current period earnings. The fair value amount assigned to an intangible asset is based on an exit price from a market participant’s viewpoint, and utilizes data such as discounted cash flow analysis and replacement cost models. We review acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill is not amortized but is evaluated for impairment annually or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. We test annually for impairment as of October 1. As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a quantitative goodwill impairment assessment which compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds that reporting unit's fair value. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered to be impaired. Critical estimates in valuing certain intangible assets and the fair value of the reporting unit during goodwill impairment tests include, but are not limited to, identifying reporting units, historical and projected customer retention rates, anticipated growth in revenue from the acquired customers, and expected future cash outflows. Significant judgments in testing goodwill for impairment also include assigning assets and liabilities to the reporting unit and determining the fair value of each reporting unit based on management’s best estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Management’s best estimates and assumptions are employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Future business and economic conditions, as well as differences actually related to any of the assumptions, could materially affect the financial statements through impairment of goodwill or intangible assets, and acceleration of the amortization period of the purchased intangible assets, which are finite-lived assets. As of October 1, 2022, the date of our most recent impairment test, our TruBridge reporting unit had a fair value that was substantially in excess of its carrying value, at 154% . The calculated fair value of our Post-acute EHR and Acute Care EHR reporting units exceeded the reporting units' carrying values by 24% and 13%, respectively, and as such, pose a heightened risk of impairment if the reporting unit’s operating results were to decline in future periods. During the three months ended December 31, 2022, there were no identified indicators of impairment that required the Company to complete an interim quantitative assessment related to any of the Company’s reporting units or indefinitely-lived intangible assets. Software Development Costs 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 of the asset is deemed to be impaired, a write-down of the value of the asset may be recorded as a charge to earnings. Amortization begins when the related features are placed in service. Refer to Note 5 to the consolidated financial statements included herein for further discussion of software development. 59 Quantitative and Qualitative Disclosures about Market and Interest Rate Risk Our exposure to market risk relates primarily to the potential fluctuations in the Secured Overnight Financing Rate ("SOFR") which replaced the British Bankers Association London Interbank Offered Rate ("LIBOR") as the new benchmark interest rate for our credit facilities. We had $141.1 million of outstanding borrowings under our credit facilities with Regions Bank at December 31, 2022. The term loan facility and revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted SOFR rate for the relevant interest period, subject to a floor of 0.5%, (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 SOFR rate, subject to the aforementioned floor, 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 our credit facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of December 31, 2022 would result in a change in interest expense of approximately $1.4 million annually. We did not have investments as of December 31, 2022. We do not currently utilize derivative financial instruments to manage our interest rate risks. Recent Accounting Pronouncements There were no new accounting standards required to be adopted in 2022 that had a material impact on our consolidated financial statements, and we do not believe that any recently issued but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.