TruBridge, Inc. (TBRG) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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
During much of the Company's history, our strategy, operations, and financial results have been largely associated with developments in the electronic health record ("EHR") industry. With the rapid maturity of the EHR industry and the increasing prevalence of and demand for outsourced revenue cycle management ("RCM") services and complementary solutions, we've seen our strategy, operations, and financial results naturally evolve to become more heavily associated with RCM, with RCM revenues comprising 57% of our consolidated revenue for 2023. In recognition of this significant shift in strategic focus, Computer Programs and Systems, Inc. changed its corporate name to TruBridge, Inc. on March 4, 2024. Contemporaneous with this name change, the former wholly-owned subsidiaries Evident, LLC, TruBridge, LLC, and TruCode, LLC were merged into the parent company, while the former wholly-owned subsidiary Rycan Technologies, Inc. was merged into its parent and another wholly-owned subsidiary, Healthland Holding Inc. With these changes, the Company's remaining legal structure includes TruBridge, Inc., the parent company, with Viewgol, LLC ("Viewgol"), iNetXperts, Corp. d/b/a Get Real Health, Healthcare Resource Group, Inc. ("HRG"), and Healthland Holding Inc. as its wholly-owned subsidiaries.
Founded in 1979, TruBridge is a leading provider of healthcare services and solutions for community hospitals, their clinics and other healthcare systems. 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.
The Company operates its business in three operating segments, which are also our reportable segments: RCM, EHR, and Patient Engagement. These reporting segments contribute towards the combined focus of improving the health of the communities we serve as follows:
•The RCM reporting segment focuses on providing business management, consulting, and managed IT services along with a complete RCM solution for all care settings, regardless of their primary healthcare information solutions provider.
•The EHR segment provides comprehensive acute care EHR solutions and related services for community hospitals and their physician clinics. Prior to our sale of American HealthTech, Inc. in January 2024, our EHR segment also provided post-acute care EHR solutions and related services for skilled nursing and assisted living facilities.
•The Patient Engagement segment offers comprehensive patient engagement and empowerment technology solutions 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.
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
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competitive EHR takeaway opportunities. We may also seek to grow through acquisitions of businesses, technologies or products if we determine that such acquisitions are likely to help us meet our strategic goals.
Our growth strategy is heavily dependent on our ability to cross-sell RCM services to our Acute Care EHR customer base. As such, retention of our 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. Specifically, we achieved retention rates of 98.2% and 94.9% in 2021 and 2022, respectively, decreasing to 92.1% in 2023, as EHR product consolidation has led to an increase in attrition from our non-flagship products (retention for our flagship EHR product was approximately 95.2% in 2023). 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 is expected to result 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.
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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 100% during 2022 and 2023. These SaaS offerings are 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 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 2023.
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 margin optimization by identifying opportunities to further improve our cost structure by executing against initiatives related to organizational realignment, expanded use of offshore resources and the use of automation to increase the efficiency and value of our associates' efforts.
Initial organizational realignment efforts began during 2021, when we committed to a reduction in force intended to more effectively align our resources with business priorities. Other related initiatives include our ongoing implementation of the Scaled Agile Framework® throughout our EHR product development, implementation and support functions to enhance cohesion, time-to-market and customer satisfaction. This framework is a set of organization and workflow patterns intended to guide enterprises in scaling lean and agile practices and promote alignment, collaboration, and delivery across large numbers of agile teams.
The remaining margin optimization initiatives of expanded utilization of offshore resources 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. Prior to our October 2023 acquisition of Viewgol, we were solely reliant upon third-party partnerships for offshore resources, increasing both the execution risk of this initiative and the related cost of scaling this labor force. With Viewgol as a subsidiary, we have greatly enhanced our control over the resource availability for this initiative and we expect to achieve meaningful per-unit cost efficiencies. However, in the near-term, we expect to see additional pressure on margins due to the integration and ramp-up of Viewgol.
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 profitability, 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 has led to, and could lead to, erosion of margins.
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2023 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 $339.4 million from the sale of our products and services during 2023, compared to $326.6 million during 2022, an increase of 4% that is due to the combination of inorganic growth through our recent acquisitions of HRG and Viewgol and organic growth as RCM solutions continue to gain traction in the domestic healthcare landscape. Despite this increase in revenues, net income (loss) decreased by $61.7 million to a net loss of $45.8 million during 2023, compared to net income of $15.9 million during 2022. Heavily impacting our results for 2023 were (i) $35.9 million of goodwill impairment charges related to our divestiture of American HealthTech, Inc., the impact of deteriorating macroeconomic conditions and moderated assumptions regarding growth expectations and eventual margin achievement on the fair values of our Acute care EHR and Patient Engagement reporting units; (ii) $2.3 million of impairment charges related to trademark intangible assets resulting from our March 2024 name change and corporate rebranding initiative (see Note 12 - Intangible Assets and Goodwill for further information); (iii) $17.7 million of incremental severance and other nonrecurring charges resulting from various restructuring and acquisition initiatives; and (iv) $6.2 million of incremental interest expense driven by the combined factors of an increasing interest rate environment and acquisition-fueled increases in debt. Corresponding to this decreased profitability, net cash provided by operating activities decreased by $31.3 million, from $32.4 million provided by operations during 2022 to $1.1 million provided by operations for 2023.
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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, 2023, expressed as a percentage of our total revenues for these periods:
| Year ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||||||||
| (In thousands) | Amount | % Sales | Amount | % Sales | Amount | % Sales | ||||||||||||||
| INCOME DATA: | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| RCM | $ | 193,929 | 57.1 | % | $ | 179,870 | 55.1 | % | $ | 131,242 | 46.8 | % | ||||||||
| EHR | 138,063 | 40.7 | % | 139,823 | 42.8 | % | 143,109 | 51.0 | % | |||||||||||
| Patient engagement | 7,443 | 2.2 | % | 6,955 | 2.1 | % | 6,278 | 2.2 | % | |||||||||||
| Total revenues | 339,435 | 100.0 | % | 326,648 | 100.0 | % | 280,629 | 100.0 | % | |||||||||||
| Expenses | ||||||||||||||||||||
| Costs of revenue (exclusive of amortization and depreciation) | ||||||||||||||||||||
| RCM | 110,192 | 32.5 | % | 97,024 | 29.7 | % | 66,015 | 23.5 | % | |||||||||||
| EHR | 62,048 | 18.3 | % | 65,661 | 20.1 | % | 66,698 | 23.8 | % | |||||||||||
| Patient engagement | 3,628 | 1.1 | % | 3,856 | 1.2 | % | 3,068 | 1.1 | % | |||||||||||
| Total costs of revenue (exclusive of amortization and depreciation) | 175,868 | 51.8 | % | 166,541 | 51.0 | % | 135,781 | 48.4 | % | |||||||||||
| Product development | 37,246 | 11.0 | % | 31,898 | 9.8 | % | 32,809 | 11.7 | % | |||||||||||
| Sales and marketing | 28,049 | 8.3 | % | 27,131 | 8.3 | % | 21,978 | 7.8 | % | |||||||||||
| General and administrative | 76,153 | 22.4 | % | 54,965 | 16.8 | % | 48,481 | 17.3 | % | |||||||||||
| Amortization | 24,522 | 7.2 | % | 20,887 | 6.4 | % | 14,717 | 5.2 | % | |||||||||||
| Depreciation | 1,946 | 0.6 | % | 2,443 | 0.7 | % | 2,156 | 0.8 | % | |||||||||||
| Goodwill impairment | 35,913 | 10.6 | % | — | — | % | — | — | % | |||||||||||
| Trademark impairment | 2,342 | 0.7 | % | — | — | % | — | — | % | |||||||||||
| Total expenses | 382,039 | 112.6 | % | 303,865 | 93.0 | % | 255,922 | 91.2 | % | |||||||||||
| Operating income (loss) | (42,604) | (12.6) | % | 22,783 | 7.0 | % | 24,707 | 8.8 | % | |||||||||||
| Other income (expense): | ||||||||||||||||||||
| Other income | 745 | 0.2 | % | 1,178 | 0.4 | % | 1,529 | 0.5 | % | |||||||||||
| Gain on contingent consideration | — | — | % | 565 | 0.2 | % | — | — | % | |||||||||||
| Loss on extinguishment of debt | — | — | % | (125) | — | % | — | — | % | |||||||||||
| Interest expense | (12,521) | (3.7) | % | (6,320) | (1.9) | % | (3,160) | (1.1) | % | |||||||||||
| Total other income (expense) | (11,776) | (3.5) | % | (4,702) | (1.4) | % | (1,631) | (0.6) | % | |||||||||||
| Income (loss) before taxes | (54,380) | (16.0) | % | 18,081 | 5.5 | % | 23,076 | 8.2 | % | |||||||||||
| Provision (benefit) for income taxes | (8,591) | (2.5) | % | 2,214 | 0.7 | % | 4,646 | 1.7 | % | |||||||||||
| Net income (loss) | $ | (45,789) | (13.5) | % | $ | 15,867 | 4.9 | % | $ | 18,430 | 6.6 | % |
2023 Compared to 2022
Revenues
Total revenues for the year ended December 31, 2023 increased by $12.8 million, or 4%, compared to the year ended December 31, 2022.
RCM revenues increased by $14.1 million, or 8%, compared to 2022, as acquisition-fueled growth from our March 2022 acquisition of HRG and our October 2023 acquisition of Viewgol added to the organic growth of our RCM offerings.
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EHR revenues decreased by $1.8 million, or 1%, from the year ended December 31, 2022, and were comprised of the following for the years ended December 31, 2023 and 2022:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | ||||
| Recurring EHR revenues (1) | ||||||
| Acute Care EHR | $ | 111,276 | $ | 109,340 | ||
| Post-acute Care EHR | 14,712 | 15,384 | ||||
| Total recurring EHR revenues | 125,988 | 124,724 | ||||
| Non-recurring EHR revenues (2) | ||||||
| Acute Care EHR | 10,657 | 13,138 | ||||
| Post-acute Care EHR | 1,418 | 1,961 | ||||
| Total non-recurring EHR revenues | 12,075 | 15,099 | ||||
| Total EHR revenue | $ | 138,063 | $ | 139,823 | ||
| (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. |
Recurring EHR revenues increased by $1.3 million, or 1%, in 2023 compared to 2022. Although customer attrition during 2023 resulted in a decrease in Post-acute care EHR recurring revenues of $0.7 million, or 4%, Acute Care EHR recurring revenues increased by $1.9 million, or 2%, as continued efforts to emphasize SaaS arrangements have led to the accumulation of significant sources of recurring revenue.
Non-recurring EHR revenues decreased by $3.0 million, or 20%, compared to 2022. The consequence of our continued focus on increasing recurring revenues has been the de-emphasizing of nonrecurring, perpetual license sales.
EHR revenues for 2023 included $16.1 million in revenues from American HealthTech, Inc. which the Company sold in January 2024. See Note 19 – Subsequent Events to the consolidated financial statements included herein for more information.
Patient Engagement revenues increased by $0.5 million, or 7%, compared to 2022 as delivery of certain services formerly provided by our Acute Care EHR segment are now the responsibility of our Patient Engagement segment, with the related revenues and direct costs now reflected in our Patient Engagement segment's results.
Costs of Revenue (exclusive of amortization and depreciation)
Total costs of revenue (exclusive of amortization and depreciation) increased by $9.3 million compared to 2022. As a percentage of total revenues, costs of revenue (exclusive of amortization and depreciation) increased slightly to 52% during 2023 compared to 51% during 2022.
Costs associated with our RCM revenues increased by $13.2 million, or 14%, compared to 2022. This increase has primarily been driven by our recent acquisitions of HRG and Viewgol and the aforementioned necessary responses to domestic labor market challenges, which have increased the costs associated with our people-intensive service offerings. Additionally, (i) revenue growth during 2023 has largely come from lower margin revenue streams; (ii) during 2023 we experienced the loss of a single large customer with a margin profile well beyond our typical customer margin profile; and (iii) we faced increased costs during 2023 associated with enhancing our compliance function within the RCM business unit to accommodate scale.
Costs associated with our EHR revenues decreased by $3.6 million, or 6%, compared to 2022, primarily as our ongoing implementation of the Scaled Agile Framework® resulted in job displacement for a number of our employees.
Costs associated with our Patient Engagement revenues were effectively flat, decreasing by $0.2 million compared to 2022.
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 $5.3 million, or 17%, compared to 2022, primarily due to increased costs related to our strategy to migrate to a public cloud environment and other workplace modernization initiatives.
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Sales and Marketing
Sales and marketing costs increased by $0.9 million, or 3%, compared to 2022 as the restructuring of our sales force in early 2023 resulted in a significant expansion of related resources.
General and Administrative
General and administrative expenses increased by $21.2 million, or 39%, compared to 2022. Our ongoing implementation of the Scaled Agile Framework® resulted in job displacement for a number of our employees, resulting in an $8.9 million increase in related non-recurring severance costs. Other non-recurring charges increased by $8.8 million, largely as the result of acquisition-related activity and lease termination costs related to our efforts to right-size our real estate footprint.
Amortization & Depreciation
Combined amortization and depreciation expense increased by $3.1 million, or 13%, as increasing capitalized software development asset balances resulted in an increase in the related amortization.
Trademark & Goodwill Impairment
Our combined impairment charges related to trademark intangibles and goodwill were $38.3 million in 2023, with none in 2022. Trademark impairment charges of $2.3 million were recorded as our recently-completed corporate name change and rebranding initiative resulted in the near abandonment of previously-recognized trademark assets. Total goodwill impairment charges of $35.9 million resulted from the combination of: (i) a $21.9 million impairment charge related to our Post-acute care EHR business unit, as we adjusted the carrying value of the reporting unit to align with the agreed-upon eventual sales price; (ii) a $6.4 million impairment charge related to our Acute Care EHR business unit as the combined pressures of an increase in the related discount rate and moderated assumptions regarding eventual margin achievement lowered the estimated fair value of the reporting unit; and (iii) a $7.6 million impairment charge related to our Patient Engagement reporting unit as our growth expectations for this reporting unit have moderated significantly as the related pipelines have been slow to develop.
Total Other Income (Expense)
Total other income (expense) increased to expense of $11.8 million during 2023 compared to expense of $4.7 million during 2022. A rising interest rate environment and a higher level of funded debt caused a $6.2 million increase in interest expense. Additionally, during 2022, $0.6 million of the original $2.5 million contingent consideration estimated in determining the TruCode purchase price was reversed as updated estimates of TruCode's earnings over the earnout period were less than estimated on the date of acquisition.
Income (Loss) Before Taxes
As a result of the foregoing factors, income (loss) before taxes decreased to a loss of $54.4 million in 2023, compared to income of $18.1 million in 2022.
Provision (Benefit) for Income Taxes
Our effective income tax rates for 2023 and 2022 were 16% and 12%, respectively. Our effective tax rate for 2023 was significantly impacted by the non-deductible nature of our goodwill impairment charges and the changing relationship between net income or loss and research and development tax credits, which accumulate as benefits even in years with loss positions such as 2023. Our effective tax rate for 2022 was impacted by the non-taxable nature of our recorded gain on contingent consideration, which served to reduce the year's effective tax rate by 2.2%.
Net Income (Loss)
Net income (loss) for 2023 decreased by $61.7 million to a loss of $45.8 million, or a loss of $3.15 per basic and diluted share, compared with income of $15.9 million, or $1.08 per basic and diluted share, for 2022.
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.
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Adjusted EBITDA consists of GAAP net income (loss) 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) impairment of goodwill; (ix) impairment of trademark intangibles; (x) (gain) loss on contingent consideration; and (xi) the provision (benefit) for income taxes. The segment measurements provided to and evaluated by the chief operating decision makers ("CODM") are described in Note 18 to the condensed 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, 2023 and 2022.
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (In thousands) | ||||||||||||||
| Revenues by segment: | ||||||||||||||
| RCM | $ | 193,929 | $ | 179,870 | $ | 14,059 | 8 | % | ||||||
| EHR | 138,063 | 139,823 | (1,760) | (1) | % | |||||||||
| Patient engagement | 7,443 | 6,955 | 488 | 7 | % | |||||||||
| Adjusted EBITDA by segment: | ||||||||||||||
| RCM | $ | 24,800 | $ | 35,219 | $ | (10,419) | (30) | % | ||||||
| EHR | 22,900 | 22,507 | 393 | 2 | % | |||||||||
| Patient engagement | (124) | (1,827) | 1,703 | 93 | % |
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, 2023 Compared with Year Ended December 31, 2022
RCM adjusted EBITDA decreased by $10.4 million, or 30%, compared to 2022. While revenues have increased by $14 million, or 8%, this growth has been met with an increase in costs of revenue (exclusive of amortization and depreciation) of $13.2 million, or 14%, primarily due to upward pressure on costs associated with our people-intensive service offerings. This direct-labor headwind was compounded by expanding operating expenses driven by the aforementioned product development costs related to our strategy to migrate to the public cloud and general and administrative costs related to our ongoing implementation of the Scaled Agile Framework®.
EHR adjusted EBITDA increased by $0.4 million, or 2%. Although revenues decreased by $1.8 million, or 1%, the ongoing implementation of the Scaled Agile Framework® resulted in job displacement for a number of our employees, thereby benefiting the segment's profitability.
Patient Engagement adjusted EBITDA increased by $1.7 million, or 93%, as the previously-discussed improved revenue performance worked in tandem with reduced operating expenses to result in improved adjusted EBITDA.
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.
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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 materialized in 2022 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% in 2022.
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:
| 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. |
Recurring EHR revenues remained essentially 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 care 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 Revenue (exclusive of amortization and depreciation)
Total costs of revenue (exclusive of amortization and depreciation) increased by $30.8 million compared to 2021. As a percentage of total revenues, costs of revenues (exclusive of amortization and depreciation) increased to 51% of revenues during 2022 from 48% during 2021.
Costs associated with our RCM revenues 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.
Costs associated with our EHR revenues decreased by $1.0 million, or 2%, in 2022, primarily driven by decreasing costs related to third-party content. These costs scale with overall customer counts, which contracted moderately during 2022.
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Costs associated with our Patient Engagement revenues 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.
Product Development
Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs decreased by $0.9 million, or 3%, as a $5.6 million increase in product development labor capitalization costs (pursuant to the previously disclosed 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 costs 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 $6.5 million, or 13%, 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 & Depreciation
Combined amortization and depreciation expense increased by $6.5 million, or 38%, in 2022 primarily due to the amortization of intangibles acquired in the TruCode and HRG acquisitions and increased amortization of capitalized software development costs resulting from increases in the related capitalized software development asset balances.
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 an incremental decrease in our effective tax rate of 2.2% for 2022 compared to 2021.
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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.
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 (loss) 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) impairment of goodwill; (ix) impairment of trademark intangibles; (x) (gain) loss on contingent consideration; and (xi) the provision (benefit) for income taxes. The segment measurements provided to and evaluated by the chief operating decision makers ("CODM") are described in Note 18 to the condensed 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.
| 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 | $ | 35,219 | $ | 28,265 | $ | 6,954 | 25 | % | ||||||
| EHR | 22,507 | 26,505 | (3,998) | (15) | % | |||||||||
| Patient engagement | (1,827) | (2,093) | 266 | 13 | % |
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 $7.0 million, or 25%, compared to 2021. Revenue growth of 37% was partially offset by a 47% increase in costs of revenues (exclusive of amortization and depreciation), as growth materialized from lower-margin, resource-intensive service lines. This direct labor headwind 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 15%, mostly due to the aforementioned decrease in revenues.
Patient Engagement adjusted EBITDA increased by $0.3 million, mostly due to the aforementioned increase in revenues.
Liquidity and Capital Resources
Sources of Liquidity
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As of December 31, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $3.8 million and our remaining borrowing capacity under the revolving credit facility of $24.3 million, compared to $7.0 million of cash and cash equivalents and $86.3 million of remaining borrowing capacity under the revolving credit facility as of December 31, 2022. 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, 2023, we had $199.6 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of $3.8 million as of December 31, 2023, our future operating cash flows, and our remaining borrowing capacity under the revolving credit facility of $24.3 million as of December 31, 2023, 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, 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 through 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 $31.3 million from $32.4 million for 2022 to $1.1 million for 2023, as the Company’s net income (loss) decreased by $61.7 million. The Company's net income excluding the significant non-cash expenses of amortization, depreciation, and impairment charges decreased by $20.2 million, mostly as significant restructuring events (such as our ongoing implementation of the Scaled Agile Framework® and related mid-year 2023 Voluntary Early Retirement Program) and acquisition activity (such as our October 2023 acquisition of Viewgol) resulted in incremental nonrecurring expenses of $17.7 million, as well as increased interest on the credit facility. This reduction in profit was met with detrimental changes in working capital as (i) net cash inflows related to financing receivables decreased by $3.5 million as we continue to work down receivable balances from previous years' transactions, and (ii) the timing of income tax payments resulted in a net $0.9 million cash outflow for 2023 compared to a net $3.9 million inflow for 2022. Significant cash outflows related to nonrecurring transactions and restructuring events had a significant impact on 2023 cash flows. As the cash effects of these events subside, the Company expects to have sufficient cash flow to satisfy ongoing obligations.
Investing Cash Flow Activities
Net cash used in investing activities decreased from $62.7 million during 2022 to $60.1 million during 2023. Most notably, we completed our $36.7 million acquisition of Viewgol during the fourth quarter of 2023. We completed our $43.4 million acquisition of HRG during the first quarter of 2022. Conversely, cash outflows related to capitalized software development efforts increased from $19.1 million in 2022 to $23.1 million in 2023 as our workload mix has shifted away from addressing deficiencies in legacy code related to existing applications towards adding features and functionalities to our cloud-native solutions and increased development efforts related to non-customer-facing, internal-use software.
Financing Cash Flow Activities
During 2023, our financing activities were a net source of cash in the amount of $55.9 million, as $67.0 million in borrowings from our revolving line of credit (most of which was used to fund our acquisition of Viewgol, with related transaction expenses), were partially offset by long-term debt principal payments of $8.5 million and $2.6 million used to repurchase shares of our common stock, which are treated as treasury stock. 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, with cash outflows mostly comprised of long-term debt principal payments of $8.9 million and $11.9 million used to repurchase shares of our common stock.
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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, 2023, we had $63.9 million in principal amount outstanding under the term loan facility and $135.7 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 required the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the First Amendment, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. Further, under the First Amendment, in connection with any acquisition by the Company exceeding $25 million, the Company may elect to increase the maximum permitted consolidated net leverage ratio for the fiscal quarter in which the acquisition occurs and each of the following three fiscal quarters by 0.50:1.00 above the otherwise permitted maximum. If the consolidated net leverage ratio is less than 2.50:1.00, there is no limit on the amount of incremental facilities. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. On March 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.
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As of September 30, 2023, we were not in compliance with the fixed charge coverage ratio required by the Amended and Restated Credit Agreement. On November 8, 2023, the Company and the subsidiary guarantors entered into a Waiver with Regions Bank, as administrative agent, and various other lenders, which provided for a one-time waiver of this failure as an event of default. As of December 31, 2023, the Company was similarly not in compliance with the fixed charge coverage ratio required by the Amended and Restated Credit Agreement and a one-time waiver was provided in conjunction with the Fourth Amendment described below. On January 16, 2024, the definition of "Consolidated EBITDA" under the Amended and Restated Credit Agreement was modified to allow for more cost exclusions related to acquisitions and other nonrecurring events and to release American HealthTech, Inc. ("AHT") from its obligations as a Subsidiary Guarantor in connection with the closing of our sale of AHT. On February 29, 2024, the definition of “Consolidated EBITDA” was further amended, pursuant to the Fourth Amendment to the Amended and Restated Credit Agreement. The Fourth Amendment decreased the required consolidated fixed charge coverage ratio from 1.25:1.00 to 1.15:1.00 for each fiscal quarter ending March 31, 2024 through and including December 31, 2024.
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, 2023 and 2022, respectively:
| (In thousands) | 2023 | 2022 | |||
|---|---|---|---|---|---|
| RCM(1) | $ | 48,986 | $ | 48,065 | |
| EHR(2) | 33,143 | 38,152 | |||
| Patient engagement (1) | 2,973 | 3,188 | |||
| Total Bookings | $ | 85,102 | $ | 89,405 | |
| (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. |
RCM bookings were effectively flat for 2023, increasing only $0.9 million, or 2%, compared to 2022. Net-new bookings increased by $3.4 million, or 23%, while cross-sell bookings decreased by $3.5 million, or 12%, experiencing uncharacteristically high volatility as the pace of prospective sales decisions slowed. With the relative strength in net-new bookings effectively offset by declining cross-sell bookings, bookings for our Encoder product proved the difference in the year-to-year comparison, increasing by $1.1 million.
EHR bookings during 2023 decreased by $5.0 million, or 13%, compared to 2022, primarily due to a challenging decision environment for new Acute Care EHR system arrangements, including lower volumes for migration opportunities from Centriq (acquired in our 2016 acquisition of HHI) to Thrive, our flagship hospital EHR product.
Bookings for our nascent Patient Engagement business unit were effectively flat, decreasing by $0.2 million during 2023 compared to 2022.
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.
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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 judgments 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.
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.
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 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.
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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, 2023, the date of our most recent impairment test, the estimated fair value for our RCM reporting unit was substantially in excess of its carrying value, exceeding its carrying value by 48%. The estimated fair values of our Post-acute care EHR, Acute care EHR, and Patient Engagement reporting units were each below their respective carrying values, resulting in goodwill impairment charges of $2.2 million, $6.4 million, and $7.6 million, respectively. During the fourth quarter of 2023, the decision to accept an offer for the sale of AHT that was well below the related reporting unit’s carrying value was considered a triggering event requiring reassessment of the Post-acute care EHR reporting unit’s goodwill, resulting in an additional goodwill impairment charge of $19.7 million. Further, management considered the continued decrease in the Company’s market capitalization since our most recent quantitative analysis dated October 1, 2023 to be a triggering event warranting a further quantitative goodwill impairment analysis as of December 31, 2023. As a result of this updated quantitative goodwill impairment analysis, management concluded that there was no further impairment to goodwill.
Software Development Costs
Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. Under ASC 350-40, software development costs related to preliminary project activities and post-implementation and maintenance activities are expensed as incurred. We capitalize direct costs related to application development activities that are probable to result in additional functionality. Capitalized costs are amortized on a straight-line basis over five years. We test for impairment whenever events or changes in circumstances that could impact recoverability occur.
Estimates
The Company uses estimates to record certain other 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 reserves related to uncertain tax positions, bad debt and credit allowances, legal liability exposure or lack thereof, accrued expenses, and (prior to 2023) self-insurance reserves under our health insurance plan.
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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 $199.6 million of outstanding borrowings under our credit facilities with Regions Bank at December 31, 2023. 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, 2023 would result in a change in interest expense of approximately $2.0 million annually.
We did not have investments as of December 31, 2023. 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 2023 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.