NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.
Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2023 was derived from the audited consolidated balance sheet at that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of TruBridge, Inc. (“TruBridge” or the “Company”) for the year ended December 31, 2023 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
During the third quarter of 2023, we changed the presentation of certain costs previously recorded within the expense captions of "Product development" and "General and administrative" to better comply with the disclosure requirements of Staff Accounting Bulletin Topic 11.B., Miscellaneous Disclosure: Depreciation and Depletion Excluded from Cost of Sales. These changes are summarized as follows:
•Amortization expense associated with capitalized software development costs, previously recorded within the expense caption of "Product development," have been combined with amounts previously recorded within the expense caption "Amortization of acquisition-related intangibles" and reflected in a newly-presented expense caption of "Amortization."
•Depreciation expense previously recorded within the expense caption of "General and administrative" have been reclassified within the newly-presented expense caption of "Depreciation."
•The expense caption previously labelled as "Costs of sales" has been renamed "Costs of revenue (exclusive of amortization and depreciation)," with the previously reported reference to "Gross profit" removed from the current presentation.
The following table provides the amounts reclassified for the three months ended March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| (in thousands) | As previously reported | | Re-classifications | | As reclassified | | | | As currently reported |
| Costs of revenue (exclusive of amortization and depreciation) | | | | | | | | | |
| RCM | $ | 27,183 | | | $ | — | | | $ | 27,183 | | | | | $ | 27,183 | |
| EHR | 16,348 | | | — | | | 16,348 | | | | | 16,348 | |
| Patient engagement | 646 | | | — | | | 646 | | | | | 646 | |
| Other expenses | | | | | | | | | |
| Product development | 9,836 | | | (1,484) | | | 8,352 | | | | | 8,352 | |
| Sale and marketing | 6,959 | | | (2) | | | 6,957 | | | | | 6,957 | |
| General and administrative | 14,952 | | | (499) | | | 14,453 | | | | | 14,453 | |
| Amortization of acquisition-related intangibles | 4,014 | | | (4,014) | | | — | | | | | — | |
| Amortization | — | | | 5,500 | | | 5,500 | | | | | 5,500 | |
| Depreciation | — | | | 499 | | | 499 | | | | | 499 | |
Principles of Consolidation
The condensed consolidated financial statements of TruBridge include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted in 2024
There were no new accounting standards required to be adopted in 2024 that would have a material impact on our consolidated financial statements.
New Accounting Standards Yet to be Adopted
We do not believe that any other recently issued but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
3. REVENUE RECOGNITION
Revenue is recognized upon transfer of control of promised products or services to clients in an amount that reflects the consideration we expect to receive in exchange for those products and services. We enter into contracts that can include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations. The Company employs the 5-step revenue recognition model under ASC 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized net of shipping charges and any taxes collected from clients, which are subsequently remitted to governmental authorities.
•Revenue Cycle Management
Our revenue cycle management (“RCM”) business unit provides an array of business processing services (“BPS'’) consisting of accounts receivable management, private pay services, insurance services, medical coding, electronic billing, statement processing, payroll processing, and contract management. Fees are recognized over the period of the client contractual relationship as the services are performed based on the stand-alone selling price (“SSP”), net of discounts. SSP for BPS services is determined based on observable stand-alone selling prices. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.
Our RCM business unit also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP, which is determined by observable stand-alone selling prices. Payment is due monthly as services are performed.
Lastly, our RCM business unit also provides certain software solutions and related support under Software as a Service (“SaaS”) arrangements and time-based software licenses. Revenue from SaaS arrangements is recognized in a manner consistent with SaaS arrangements for electronic health records (“EHR”) software, as discussed below. Revenue from time-based software licenses is recognized upon delivery to the client (“point in time”) and revenue from non-license components (i.e., support) is recognized ratably over the respective contract term (“over time”). SSP for time-based licenses is determined using the residual approach, while the non-license component is based on cost plus reasonable margin.
•Electronic Health Records
The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, and related training services, software application support, hardware, and hardware maintenance services to acute care community hospitals and post-acute providers.
•Non-recurring Revenues
•Perpetual software licenses and installation, conversion, and related training services are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's SSP, net of discounts. We determine each module's SSP using the residual method. Fees for licenses and installation, conversion, and related training services are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 11 - Financing Receivables for further information. EHR implementations include a system warranty that terminates thirty days from the software go-live date, the date which the client begins using the system in a live environment.
•Hardware revenue is recognized separately from software licenses at the point in time it is delivered to the client. The SSP of hardware is cost plus a reasonable margin and revenue is recognized on a gross basis. Payment is generally due upon delivery of the hardware to the client. Standard manufacturer warranties apply to hardware.
•Recurring Revenues
•Software application support and hardware maintenance services sold with software licenses and hardware are separate and distinct performance obligations. Revenue for support and maintenance services is recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally three to five years. Payment is due monthly for support and maintenance services provided.
•Subscriptions to third-party content revenue is recognized as a separate performance obligation ratably over the subscription term based on SSP, which is cost plus a reasonable margin, and revenue is recognized on a gross basis. Payment is due monthly for subscriptions to third party content.
•SaaS arrangements for EHR software and related conversion and training services are considered a single performance obligation. Revenue is recognized on a monthly basis as the SaaS service is provided to the client over the contract term. Payment is due monthly for SaaS services provided.
Refer to Note 17 - Segment Reporting for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
•Patient Engagement
The Company enters into contractual obligations to sell perpetual and term-based software licenses, implementation and customization professional services, and software application support services to a variety of healthcare organizations including hospital systems, health ministries, and government and non-profit organizations.
•Non-recurring Revenues
•Perpetual software licenses are sold only to one re-seller client and are considered a separate and distinct performance obligation. Revenue is recognized at the point in time perpetual licenses are delivered to the client, which occurs at the time of sale. The SSP of perpetual licenses is directly observable. Payment is generally due upon delivery of licenses.
•Implementation and customization services are considered a separate and distinct performance obligation. Revenue is recognized over time based on SSP, which is generally directly observable. Payment for professional services is typically due in two installments: (1) upon signature of the agreement and (2) upon customer acceptance of the delivered services.
•Recurring Revenues
•Term-based software licenses are considered a separate and distinct performance obligation. Revenue is recognized based on SSP, which is directly observable, at the point in time the term-based licenses
are delivered to the client or upon annual renewal. Payment is generally due upon delivery of licenses or upon annual renewal.
•Software application support services sold with software licenses are separate and distinct performance obligations. The related revenues are recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally three to five years. Payment is generally due for the full amount of annual support fees at the beginning of an annual license term.
Refer to Note 17 - Segment Reporting for further information.
Deferred Revenue
Deferred revenue represents amounts invoiced to clients for which the services under contract have not been completed and revenue has not been recognized, including annual renewals of certain software subscriptions and customer deposits for implementations to be performed at a later date. Revenue is recognized ratably over the life of the software subscriptions as services are provided and at the point-in-time when implementations have been completed.
The following table details deferred revenue for the three months ended March 31, 2024 and 2023, included in the condensed consolidated balance sheets: | | | | | | | | | | | | | |
| (In thousands) | | | Three Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 |
| Beginning balance | | | $ | 8,677 | | | $ | 11,590 | |
| Deferred revenue recorded | | | 4,360 | | | 6,490 | |
| | | | | |
| Less deferred revenue recognized as revenue | | | (3,958) | | | (6,443) | |
| Ending balance | | | $ | 9,079 | | | $ | 11,637 | |
The deferred revenue recorded during the three months ended March 31, 2024 and 2023 is comprised primarily of the annual renewals of certain software subscriptions billed during the first quarter of each year and deposits collected for future EHR installations. The deferred revenue recognized as revenue during the three months ended March 31, 2024 and 2023 is comprised primarily of the periodic recognition of annual renewals that were deferred until earned and deposits for future EHR installations that were earned during the period.
Costs to Obtain and Fulfill a Contract with a Customer
Costs to obtain a contract include the commission costs related to SaaS and RCM arrangements, which are capitalized and amortized ratably over the expected life of the customer contract. As a practical expedient, we generally recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less. Costs to obtain a contract are expensed within the caption “Expenses - Sales and marketing” in the accompanying condensed consolidated statements of income.
Contract fulfillment costs related to the implementation of SaaS arrangements are capitalized and amortized ratably over the expected life of the customer contract. Costs to fulfill contracts consist of the payroll costs for the implementation of SaaS arrangements, including time for training, conversions, and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption “Costs of revenue (exclusive of amortization and depreciation) - EHR” in the accompanying condensed consolidated statements of income.
Costs to obtain and fulfill contracts related to SaaS and RCM arrangements are included within the “Prepaid expenses and other current assets” and "Other assets, net of current portion" line items on our condensed consolidated balance sheets as shown in the table below for the three months ended March 31, 2024 and 2023: | | | | | | | | | | | | | |
| (In thousands) | Three Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 | | |
| Beginning balance | $ | 13,115 | | | $ | 11,557 | | | |
| Costs to obtain and fulfill contracts capitalized | 1,703 | | | 1,824 | | | |
| Less costs to obtain and fulfill contracts recognized as expense | (1,884) | | | (1,264) | | | |
| Ending balance | $ | 12,934 | | | $ | 12,117 | | | |
Remaining Performance Obligations
Disclosures regarding remaining performance obligations are not considered material as the overwhelming majority of the Company's remaining performance obligations either (a) are related to contracts with an expected duration of one year or less, or (b) exhibit revenue recognition in the amount to which the Company has the right to invoice.
4. BUSINESS COMBINATIONS AND DISPOSITIONS
Sale of American HealthTech, Inc.
On January 16, 2024, we entered into a Stock Purchase Agreement (the “Purchase Agreement”), by and among the Company, American HealthTech, Inc. a Mississippi corporation (“AHT”), and Healthland Inc., a Minnesota corporation and an indirect, wholly-owned subsidiary of the Company (“Healthland” and, together with the Company, the “Seller Parties”) and PointClickCare Technologies USA Corp., a Delaware corporation (“Buyer”). The Transaction (hereinafter defined) also closed on January 16, 2024. Under the Purchase Agreement, Buyer purchased from Healthland all of the issued and outstanding capital stock of AHT (the “Transaction”), with AHT becoming a wholly-owned subsidiary of Buyer. Prior to this transaction, results for AHT were reported within our EHR operating segment.
The Purchase Agreement provides for an aggregate purchase price (the “Purchase Price”) of $25 million (the “Base Cash Consideration”), subject to adjustments based on working capital, cash, indebtedness and transaction expenses of AHT. Additionally, pursuant to the Purchase Agreement, a total of approximately $3.75 million was withheld from the Base Cash Consideration at the closing and deposited by Buyer into various escrow accounts with an escrow agent, including $2.5 million as a general indemnity escrow and $1 million as a special indemnity escrow. Based upon the adjustments and the various escrow holdbacks, Buyer paid a net amount of approximately $21.41 million to Healthland at the closing. The Purchase Price was subject to a post-closing true-up. In connection with the closing of the Transaction, Buyer has provided offers of employment to certain key employees of the Company that primarily supported AHT’s business.
The Purchase Agreement contains customary representations, warranties and covenants. The representations and warranties made by the Seller Parties to Buyer cover a broad range of items related to, among other things, the business and financial condition of AHT. Subject to certain exceptions and limitations, the Seller Parties have agreed to indemnify Buyer for certain breaches of representations, warranties and covenants and certain other enumerated items. Such limitations on the Seller Parties’ indemnification obligations are subject to various exceptions for certain fundamental representations, tax representations, special representations, and fraud. Subject to certain exceptions and limitations, Buyer has likewise agreed to indemnify the Seller Parties for certain breaches of representations, warranties and covenants and certain other enumerated items.
As part of the divestiture, as of January 16, 2024 we entered into a transition services agreement with the buyer to assist them in the transition of certain functions, including, but not limited to, information technology, finance and accounting for the period of 18 months accordance with the terms of this agreement. Aside from these customary transition services, there will be no continuing involvement after the disposal.
The Company finalized the accounting for the sale during the three months ended March 31, 2024 and has recorded a $1.25 million gain on sale, which is reflected under the caption “Other income” in the condensed consolidated statements of operations.
The accompanying condensed consolidated balance sheet as of December 31, 2023 includes amounts related to this Transaction under the captions "Assets of held for sale disposal group" and "Liabilities of held for sale disposal group", the details of which are as follows as of December 31, 2023:
| | | | | |
| (In thousands) | |
| Assets of held for sale disposal group | |
| Accounts receivable, net | $ | 3,087 | |
| Financing receivables, net | 37 | |
| Prepaid expenses | 34 | |
| Software costs, net | 3,386 | |
| Intangibles, net | 11,739 | |
| Goodwill | 7,694 | |
| Total | $ | 25,977 | |
| |
| Liabilities of held for sale disposal group | |
| Accounts payable | $ | 178 | |
| Other accrued liabilities | 576 | |
Deferred tax liability | 223 | |
| Total | $ | 977 | |
Acquisition of Viewgol, LLC
On October 16, 2023, we acquired all of the assets and liabilities of Viewgol, LLC (“Viewgol”), a Delaware limited liability company, pursuant to a Securities Purchase Agreement dated October 16, 2023. Based in Frisco, Texas, Viewgol is a provider of ambulatory RCM analytics and complementary outsourcing services with an extensive offshore presence we intend to leverage and grow to accommodate the growing demand for RCM services by our pre-existing acute care customers.
Consideration for the acquisition included cash (net of cash of the acquired entity) of $37.4 million (inclusive of seller's transaction expenses). Also included in the acquisition consideration were contingent earnout payments of (i) up to $21.5 million based on the Viewgol business achieving earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $6.0 million or more during fiscal year 2024 (the “EBITDA Earnout Amount”), and (ii) up to $10.0 million based on the number of productive agents the Viewgol business hires in India in fiscal year 2024 (the “Offshore Earnout Amount”); provided, however, that none of the Offshore Earnout Amounts may be earned if the EBITDA Earnout Amount’s minimum EBITDA threshold of $6.0 million is not achieved during fiscal 2024. During 2023, we incurred approximately $4.7 million of pre-tax acquisition expenses in our condensed consolidated statements of operations.
Our acquisition of Viewgol was treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. Our allocation of the purchase price was based on management's judgment after evaluating several factors, including a valuation assessment.
The preliminary estimated fair values of assets acquired and liabilities assumed as of December 31, 2023, and as updated through March 31, 2024, are as follows:
| | | | | | | | |
| (In thousands) | Purchase Price Allocation as of December 31, 2023 | Purchase Price Allocation as of March 31, 2024 |
| Acquired cash | $ | 1,449 | | $ | 1,449 | |
| Accounts receivable | 2,233 | | 2,233 | |
| Prepaid expenses | 132 | | 132 | |
| Property and equipment | 1,112 | | 1,112 | |
| Intangible assets | 17,720 | | 17,720 | |
| Goodwill | 17,263 | | 17,927 | |
| Accounts payable and accrued liabilities | (711) | | (711) | |
| Contingent consideration | (1,044) | | (1,044) | |
| Net assets acquired | $ | 38,154 | | $ | 38,818 | |
In March 2024, the Company estimates an additional $664,000 for working capital adjustments will be paid which is reflected under the caption “Goodwill” in the condensed consolidated balance sheet.
The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives. The amortization is included under the caption “Amortization of acquisition-related intangibles” in our condensed consolidated statements of operations.
The fair value measurements of tangible and intangible assets and liabilities (including those related to contingent consideration) were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy (see Note 16 - Fair Value). Level 3 inputs included, among others, discount rates that we estimated would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, client attrition rates and market comparables.
Our condensed consolidated statement of operations as of March 31, 2024 includes net sales of $4.8 million, gross profit of $2.1 million, net income of $0.8 million and adjusted EBITDA of $1.0 million (see note 17 - Segment Reporting for more information regarding, and definition of, adjusted EBITDA) attributed to the Viewgol acquistion.
5. PROPERTY AND EQUIPMENT
Property and equipment, net was comprised of the following at March 31, 2024 and December 31, 2023: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Land | $ | 2,848 | | | $ | 2,848 | |
| Buildings and improvements | 8,487 | | | 8,481 | |
| | | |
| Computer equipment | 10,241 | | | 10,104 | |
| Leasehold improvements | 631 | | | 631 | |
| Office furniture and fixtures | 618 | | | 586 | |
| Automobiles | 18 | | | 18 | |
| Property and equipment, gross | 22,843 | | | 22,668 | |
| Less: accumulated depreciation | (14,093) | | | (13,694) | |
| Property and equipment, net | $ | 8,750 | | | $ | 8,974 | |
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at March 31, 2024 and December 31, 2023: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Salaries and benefits | $ | 9,125 | | | $ | 5,194 | |
| Severance | 3,359 | | | 5,806 | |
| Commissions | 714 | | | 1,185 | |
| | | |
| Contingent consideration | 1,044 | | | 1,044 | |
| | | |
| Operating lease liabilities, current portion | 1,601 | | | 1,804 | |
| Other | 2,383 | | | 4,859 | |
| Other accrued liabilities | $ | 18,226 | | | $ | 19,892 | |
8. NET INCOME (LOSS) PER SHARE
The Company presents basic and diluted earnings per share (“EPS”) data for its common stock. Basic EPS is calculated by dividing the net income attributable to stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to stockholders of the Company and the weighted average number of shares of common stock outstanding during the period for the effects of all dilutive potential common shares, including awards under stock-based compensation arrangements.
The Company's unvested restricted stock awards (see Note 10 - Stock-Based Compensation and Equity) are considered participating securities under ASC 260, Earnings Per Share, because they entitle holders to non-forfeitable rights to dividends until the awards vest or are forfeited. When a company has a security that qualifies as a “participating security,” the Codification requires the use of the two-class method when computing basic EPS. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net income to allocate to common stockholders, income is allocated to both common stock and participating securities based on their respective weighted average shares outstanding for the period, with net income attributable to common stockholders ultimately equaling net income less net income attributable to participating securities. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method.
The following is a calculation of the basic and diluted EPS for the Company's common stock, including a reconciliation between net income and net income attributable to common stockholders: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (In thousands, except per share data) | 2024 | | 2023 | | | | |
| Net income (loss) | $ | (2,516) | | | $ | 3,084 | | | | | |
| Less: Net (income) loss attributable to participating securities | 68 | | | (63) | | | | | |
| Net income (loss) attributable to common stockholders | $ | (2,448) | | | $ | 3,021 | | | | | |
| | | | | | | |
| Weighted average shares outstanding used in basic per common share computations | 14,234 | | | 14,136 | | | | | |
| Add: Dilutive potential common shares | — | | | — | | | | | |
| Weighted average shares outstanding used in diluted per common share computations | 14,234 | | | 14,136 | | | | | |
| | | | | | | |
| Basic EPS | $ | (0.17) | | | $ | 0.21 | | | | | |
| Diluted EPS | $ | (0.17) | | | $ | 0.21 | | | | | |
During 2022, 2023, and 2024, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of common stock if the predefined performance criteria are met. The awards provide for an aggregate target of 512,103 shares, of which none have been included in the calculation of diluted EPS for the three months ended March 31, 2024 because the related threshold award performance levels have not been achieved as of March 31, 2024. See Note 10 - Stock-Based Compensation and Equity for more information.
6. SOFTWARE DEVELOPMENT
Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. We capitalize incurred labor costs for software development from the time the preliminary project phase is completed until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We amortize capitalized software value on a straight-line basis over that estimated useful life of five years. If the actual useful life of the asset is determined to be shorter than our estimated useful life, we will amortize the remaining book value over the remaining actual useful life, or the asset may be deemed to be impaired and, accordingly, a write-down of the value of the asset may be recorded as a charge to earnings. Amortization begins when the related software features are placed in service.
Software development costs, net was comprised of the following at March 31, 2024 and December 31, 2023: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Software development costs | $ | 56,188 | | | $ | 51,349 | |
| Less: accumulated amortization | (14,951) | | | (12,210) | |
| Software development costs, net | $ | 41,237 | | | $ | 39,139 | |
9. INCOME TAXES
The Company determines the tax provision for interim periods using an estimate of our annual effective tax rate ("ETR"), adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual ETR, and if our estimated tax rate changes, we make a cumulative adjustment. If a reliable estimate of the annual ETR cannot be made, the actual ETR for the year to date may be the best estimate of the annual ETR.
Our effective tax rate for the three months ended March 31, 2024 increased to 38.8% from 20.8% for the three months ended March 31, 2023, with the largest contributing factor being the impact of the gain recorded on the sale of American HealthTech, Inc. Also impacting the effective tax rate is the research and development ("R&D") tax credit. This credit, which is not correlated with taxable income, resulted in an incremental benefit of 24.2% during the first quarter of 2024 over the corresponding benefit during the first quarter of 2023. In periods with taxable income, the benefit from the R&D tax credit serves to reduce income tax expense, thereby lowering the effective tax rate. However, in periods with taxable loss, the benefit from the R&D tax credit serves to increase the income tax benefit, thereby increasing the effective tax rate.
10. STOCK-BASED COMPENSATION AND EQUITY
Stock-based compensation expense is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employees’ or non-employee directors’ requisite service period.
The following table details total stock-based compensation expense for the three months ended March 31, 2024 and 2023, included in the condensed consolidated statements of income: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (In thousands) | 2024 | | 2023 | | | | |
| Costs of revenue (exclusive of amortization and depreciation) | $ | 36 | | | $ | 181 | | | | | |
| Other expenses | 764 | | | 1,066 | | | | | |
| Pre-tax stock-based compensation expense | 800 | | | 1,247 | | | | | |
| Less: income tax effect | (168) | | | (274) | | | | | |
| Net stock-based compensation expense | $ | 632 | | | $ | 973 | | | | | |
The Company's stock-based compensation awards are in the form of restricted stock and performance share awards granted pursuant to the Company's Amended and Restated 2019 Incentive Plan (the "Plan"). As of March 31, 2024, there was $12.4 million of unrecognized compensation expense related to unvested and unearned, as applicable, stock-based compensation arrangements granted under the Plan, which is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock
The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plan with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. During the vesting period, recipients of restricted stock are entitled to dividends and possess voting rights. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from one to three years. The Company records expenses for these grants on a straight-line basis over the applicable vesting periods.
A summary of restricted stock activity under the Plan during the three months ended March 31, 2024 and 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 | | |
| Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | | | |
| Unvested restricted stock outstanding at beginning of period | 343,315 | | | $ | 29.08 | | | 281,161 | | | $ | 32.24 | | | | | |
| Granted | 495,003 | | | 10.03 | | | 185,487 | | | 29.23 | | | | | |
| | | | | | | | | | | |
| Vested | (145,180) | | | 31.90 | | | (133,298) | | | 31.33 | | | | | |
| Forfeited | (44,122) | | | 31.32 | | | — | | | — | | | | | |
| Unvested restricted stock outstanding at end of period | 649,016 | | | $ | 14.73 | | | 333,350 | | | $ | 30.93 | | | | | |
Performance Share Awards
The Company grants performance share awards to executive officers and certain key employees under the Plan, with the number of shares of common stock earned and issuable under each award determined at the end of a three-year performance period, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. These performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return (“TSR”) compared to a small-cap stock market index. If certain levels of the performance objective are met, the award results in the issuance of shares of common stock corresponding to such level. Performance share awards that result in the issuance of shares of common stock are not subject to time-based vesting at the conclusion of the three-year performance period.
In the event that the Company's financial performance meets the predetermined targets for the performance objectives of the performance share awards, the Company will issue each award recipient the number of shares of common stock equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined targets, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined targets, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance levels, no shares may be issued. The total number of shares issued for the performance share award may be increased, decreased, or unchanged based on the TSR modifier described above.
The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the performance share awards is the quoted market value of TruBridge’s common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.
Expense related to performance share awards is recognized using ratable straight-line amortization over the three-year performance period. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made.
A summary of performance share award activity under the Plan during the three months ended March 31, 2024 and 2023 is as follows, based on the target award amounts set forth in the performance share award agreements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 | | |
| Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | Shares | | Weighted-Average
Grant Date
Fair Value Per Share | | | | |
| Performance share awards outstanding at beginning of period | 273,791 | | | $ | 33.17 | | | 252,375 | | | $ | 31.84 | | | | | |
| Granted | 323,461 | | | 10.03 | | | 123,406 | | | 31.21 | | | | | |
| Forfeited or unearned | (85,149) | | | 37.98 | | | (96,069) | | | 26.96 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Performance share awards outstanding at end of period | 512,103 | | | $ | 18.24 | | | 279,712 | | | $ | 33.24 | | | | | |
Stock Repurchases
On September 4, 2020, our Board of Directors approved a stock repurchase program under which we were authorized to repurchase up to $30.0 million of our common stock through September 3, 2022. On July 27, 2022, the Board of Directors extended the expiration date of the stock repurchase program to September 4, 2024. We repurchased 49,789 shares for the three months ended March 31, 2023, and there were no shares repurchased for three months ended March 31, 2024. The approximate dollar value of shares that may yet be repurchased under the stock repurchase program was $16.5 million as of March 31, 2024. Any future stock repurchase transactions may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Any repurchase activity will depend on many factors, such as the availability of shares of our common stock, general market conditions, the trading price of our common stock, alternative uses for capital, the Company’s financial performance, compliance with the terms of our Amended and Restated Credit Agreement and other factors. Concurrent with the authorization of this stock repurchase program in September 2020, the Board of Directors opted to indefinitely suspend all quarterly dividends.
In addition to shares repurchased under the approved stock repurchase program, we purchased 41,000 and 39,716 shares as of March 31, 2024 and 2023, respectively, to fund required tax withholdings. Shares withheld to cover required tax withholdings related to the vesting of restricted stock do not reduce our total share repurchase authority.
Common Stock Rights Agreement
On March 26, 2024, the Company’s board of directors declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock. The dividend was paid to the stockholders of record at the close of business on April 4, 2024. Each Right initially entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one half of a share of common stock, at an exercise price of $28.00 for each one half of a share of common stock (equivalent to $56.00 for each whole share of common stock), subject to certain adjustments. The Rights currently are not exercisable and will only become exercisable upon the occurrence of certain events as described in the Rights Agreement. The Rights will expire prior to the earliest of (i) the close of business on March 25, 2025, or such later date as may be established by the Board prior to the expiration of the Rights; (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement; (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement; and (iv) upon the occurrence of certain transactions (the earliest of (i), (ii), (iii) and (iv) is referred to as the “Expiration Date”). The complete description and terms of the Rights are set forth in the Rights Agreement, dated as of March 26, 2024, by and between the Company and Computershare Trust Company, N.A. as rights agent, as amended by the Amendment to the Rights Agreement dated as of April 22, 2024 (as amended, the “Rights Agreement”). Given the nature of the Rights and their contingent activation, which has been deemed remote, no value is recognized in stockholders’ equity.
11. FINANCING RECEIVABLES
Short-Term Payment Plans
The Company provides fixed monthly payment arrangements ("short-term payment plans") over terms ranging from three to twelve months for certain add-on software installations. As a practical expedient, we do not adjust the amount of consideration recognized as revenue for the financing component as unearned income when we expect payment within one year or less. These receivables, included in the current portion of financing receivables, were comprised of the following at March 31, 2024 and December 31, 2023:
| | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Short-term payment plans, gross | $ | 666 | | | $ | 788 | |
| Less: allowance for losses | (33) | | | (39) | |
| Short-term payment plans, net | $ | 633 | | | $ | 749 | |
Long-Term Financing Arrangements
Additionally, the Company provides financing for purchases of its information and patient care systems to certain healthcare providers under long-term financing arrangements expiring in various years through 2030. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from two to seven years.
The components of these receivables were as follows at March 31, 2024 and December 31, 2023: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Long-term financing arrangements, gross | $ | 4,660 | | | $ | 5,212 | |
| Less: allowance for expected credit losses | (350) | | | (377) | |
| Less: unearned income | (316) | | | (361) | |
| Long-term financing arrangements, net | $ | 3,994 | | | $ | 4,474 | |
Future minimum payments to be received subsequent to March 31, 2024 are as follows: | | | | | |
| (In thousands) | |
| Years Ending December 31, | |
| 2024 | $ | 2,375 | |
| 2025 | 1,938 | |
| 2026 | 206 | |
| 2027 | 69 | |
| 2028 | 62 | |
| Thereafter | 10 | |
| Total minimum payments to be received | 4,660 | |
| Less: allowance for expected credit losses | (350) | |
| Less: unearned income | (316) | |
| Receivables, net | $ | 3,994 | |
| |
Credit Quality of Financing Receivables and Allowance for Expected Credit Losses
The following table is a roll-forward of the allowance for expected credit losses for the three months ended March 31, 2024 and year ended December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance at Beginning of Period | | Provision | | Charge-offs | | Recoveries | | Sale of AHT | | Balance at End of Period |
| March 31, 2024 | $ | 416 | | | $ | (31) | | | $ | — | | | $ | — | | | $ | (2) | | | $ | 383 | |
| December 31, 2023 | $ | 549 | | | $ | (133) | | | $ | — | | | $ | — | | | $ | — | | | $ | 416 | |
The Company’s financing receivables are comprised of a single portfolio segment, as the balances are all derived from short-term payment plan arrangements and long-term financing arrangements within our target market of community hospitals. The Company evaluates the credit quality of its financing receivables based on a combination of factors, including, but not limited to, customer collection experience, current and future economic conditions, the customer’s financial condition, and known risk characteristics impacting the respective customer base of community hospitals, the most notable of which relate to enacted and potential changes in Medicare and Medicaid reimbursement rates as community hospitals typically generate a significant portion of their revenues and related cash flows from beneficiaries of these programs. In addition to specific account identification, the Company utilizes historical collection experience to establish the allowance for expected credit losses. Financing receivables are written off only after the Company has exhausted all collection efforts.
Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying condensed consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of March 31, 2024 and December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 1 to 90 Days Past Due | | 91 to 180 Days Past Due | | 181 + Days Past Due | | Total Past Due |
| March 31, 2024 | $ | 532 | | | $ | 275 | | | $ | 495 | | | $ | 1,302 | |
| December 31, 2023 | $ | 857 | | | $ | 231 | | | $ | 323 | | | $ | 1,411 | |
From time to time, the Company may agree to alternative payment terms outside of the terms of the original financing receivable agreement due to customer difficulties in achieving the original terms. In general, such alternative payment arrangements do not result in a re-aging of the related receivables. Rather, payments pursuant to any alternative payment arrangements are applied to the already outstanding invoices beginning with the oldest outstanding invoices as the payments are received.
Because amounts are reclassified to trade accounts receivable when they become due, there are no past due amounts included within financing receivables, current portion, net or financing receivables, net of current portion in the accompanying condensed consolidated balance sheets.
The Company utilizes an aging of trade accounts receivable as the primary credit quality indicator for its financing receivables, which is facilitated by the reclassification of customer payment amounts to trade accounts receivable when they become due. The table below categorizes customer financing receivable balances (excluding short-term payment plans) based on the age of the oldest payment outstanding that has been reclassified to trade accounts receivable: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Stratification of uninvoiced client financing receivables based on aging of related trade accounts receivable: | | | |
| Uninvoiced client financing receivables related to trade accounts receivable that are 1 to 90 Days Past Due | $ | 984 | | | $ | 1,068 | |
Uninvoiced client financing receivables related to trade accounts receivable that are 91 to 180 Days Past Due | 839 | | | 1,720 | |
Uninvoiced client financing receivables related to trade accounts receivable that are 181 + Days Past Due | 1,348 | | | 965 | |
| Total uninvoiced client financing receivables balances of clients with a trade accounts receivable | $ | 3,171 | | | $ | 3,753 | |
| Total uninvoiced client financing receivables of clients with no related trade accounts receivable | 1,173 | | | 1,098 | |
| Total financing receivables with contractual maturities of one year or less | 666 | | | 788 | |
| Less: allowance for expected credit losses | (383) | | | (416) | |
| Total financing receivables | $ | 4,627 | | | $ | 5,223 | |
12. INTANGIBLE ASSETS AND GOODWILL
The following tables summarize the gross carrying amounts, accumulated amortization and accumulated impairment of identifiable intangible assets with definite lives by major class as of March 31, 2024 and December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (In thousands) | Customer Relationships | | Trademark | | Developed Technology | | Non-Compete Agreements | | Total |
| Gross carrying amount, beginning of period | $ | 116,470 | | | $ | 7,720 | | | $ | 31,900 | | | $ | 1,620 | | | $ | 157,710 | |
| | | | | | | | | |
| Accumulated amortization | (43,031) | | | (5,378) | | | (20,269) | | | (604) | | | (69,282) | |
| Accumulated impairment | — | | | (2,342) | | | — | | | — | | | (2,342) | |
Net intangible assets as of March 31, 2024 | $ | 73,439 | | | $ | — | | | $ | 11,631 | | | $ | 1,016 | | | $ | 86,086 | |
| Weighted average remaining years of useful life | 8.2 | | 0.0 | | 8.3 | | 3.2 | | 8.2 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| (In thousands) | Customer Relationships | | Trademark | | Developed Technology | | Non-Compete Agreements | | Total |
| Gross carrying amount, beginning of period | $ | 132,170 | | | $ | 12,320 | | | $ | 40,800 | | | $ | 1,400 | | | $ | 186,690 | |
| Intangible assets acquired | 16,100 | | | — | | | 1,400 | | | 220 | | | 17,720 | |
| Accumulated amortization | (63,686) | | | (6,974) | | | (29,934) | | | (522) | | | (101,116) | |
| Accumulated impairment | — | | | (2,342) | | | | | | | (2,342) | |
| Held for sale | (8,735) | | | (3,004) | | | | | | | (11,739) | |
Net intangible assets as of December 31, 2023 | $ | 75,849 | | | $ | — | | | $ | 12,266 | | | $ | 1,098 | | | $ | 89,213 | |
During the fourth quarter of 2023, the Company committed to the Company-wide rebranding and legal entity consolidation initiative that culminated in the change of the Company’s corporate name to “TruBridge, Inc.” on March 4, 2024. As a result of this initiative, it was expected that certain of the Company’s brand names and related trademarks would cease to be used, resulting in total trademark impairment recorded during the year ended December 31, 2023 of $2.3 million. Of the total trademark impairment charge, $1.0 million is derived from our RCM segment, $1.2 million is derived from our EHR segment, and $0.1 million is derived from our Patient Engagement segment.
The following table represents the remaining amortization of definite-lived intangible assets as of March 31, 2024: | | | | | |
| (In thousands) | |
| For the year ended December 31, | |
| 2024 | $ | 9,379 | |
| 2025 | 12,190 | |
| 2026 | 11,517 | |
| 2027 | 10,497 | |
| 2028 | 10,203 | |
| Thereafter | 32,300 | |
| Total | $ | 86,086 | |
The following table sets forth the change in the carrying value of our goodwill balances by reportable segment for the three months ended March 31, 2024: | | | | | | | | | | | | | | |
| (In thousands) | RCM | EHR | Patient Engagement | Total |
Gross value at December 31, 2023 | $ | 79,084 | | $ | 126,665 | | $ | 9,767 | | $ | 215,516 | |
| Accumulated impairment | — | | (28,307) | | (7,606) | | (35,913) | |
| Held for sale | — | | (7,694) | | — | | (7,694) | |
| Carrying value at December 31, 2023 | 79,084 | | 90,664 | | 2,161 | | 171,909 | |
| Purchase price adjustment (Viewgol) | 664 | | — | | — | | 664 | |
| Gross value at March 31, 2024 | 79,748 | | 118,971 | | 9,767 | | 208,486 | |
| Accumulated impairment | — | | (28,307) | | (7,606) | | (35,913) | |
Carrying value as of March 31, 2024 | $ | 79,748 | | $ | 90,664 | | $ | 2,161 | | $ | 172,573 | |
Goodwill is evaluated for impairment annually on October 1, or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. During the three months ended March 31, 2024, our share price experienced a sustained decline resulting in a decrease in our market capitalization. This decline in share price was identified as a triggering event requiring a quantitative assessment for goodwill impairment in each of our reporting units.
Our reporting units assessed for impairment of goodwill include: RCM (formerly the “TruBridge” reporting unit), EHR, and Patient Engagement (formerly a component of our former “TruBridge” reporting unit). We continue to monitor each reporting unit for interim impairment indicators and believe that the estimates and assumptions used in calculations are reasonable as of March 31, 2024. By using a combination of the income and market valuation approaches. Under the income approach, we used a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. Our forecasted cash flows reflected conditions as of March 31, 2024, and reflected management’s anticipated business outlook for each reporting unit, which requires the use of estimates. The market approach applied selected trading multiples of companies comparable to the respective reporting units to the Company’s financial measures. The income approach was given significantly more weight in determining the fair values. These quantitative evaluations of the fair values of each of our reporting units resulted in no impairment as of March 31, 2024. Should the fair value of any of our reporting units fall below its carrying amount because of reduced operating performance, market declines, and other adverse factors, goodwill impairment charges may be necessary in future period.
13. LONG-TERM DEBT
Long-term debt was comprised of the following at March 31, 2024 and December 31, 2023: | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31, 2023 |
| Term loan facility | $ | 63,000 | | | $ | 63,875 | |
| Revolving credit facility | 123,416 | | | 135,723 | |
| | | |
| Debt obligations | 186,416 | | | 199,598 | |
| Less: unamortized debt issuance costs | (1,610) | | | (1,187) | |
| Debt obligation, net | 184,806 | | | 198,411 | |
| Less: current portion | (3,074) | | | (3,141) | |
| Long-term debt | $ | 181,732 | | | $ | 195,270 | |
As of March 31, 2024, the carrying value of debt approximated the fair value due to the variable interest rate, which reflected the market rate.
Credit Agreement
In conjunction with our acquisition of Healthland Holding Inc. ("HHI") in January 2016, we entered into a syndicated credit agreement with Regions Bank ("Regions") serving as administrative agent, which provided for a $125 million term loan facility and a $50 million revolving credit facility. On June 16, 2020, we entered into an Amended and Restated Credit Agreement that increased the aggregate principal amount of our credit facilities to $185 million, including a $75 million term loan facility and a $110 million revolving credit facility. On May 2, 2022, we entered into a First Amendment (the "First Amendment") to the Credit Agreement that increased the aggregate principal amount of our credit facilities to $230 million, which includes a $70 million term loan facility and a $160 million revolving credit facility. In addition, the interest rate provisions of the First Amendment reflect the transition from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR") as the new benchmark interest rate for each loan.
Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted SOFR rate for the relevant interest period, subject to a floor of 0.50%, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month SOFR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for SOFR loans and the letter of credit fee ranges from 1.8% to 3.0%. The applicable margin range for base rate loans ranges from 0.8% to 2.0%, in each case based on the Company's consolidated net leverage ratio.
Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginning June 30, 2022, with quarterly principal payments of approximately $0.9 million through March 31, 2027, with maturity on May 2, 2027 or such earlier date as the obligations under the Amended and Restated Credit Agreement, as amended by the First Amendment, become due and payable pursuant to the terms of such agreement. Any principal outstanding under the revolving credit facility is due and payable on the maturity date.
Anticipated annual future maturities of the term loan facility and revolving credit facility are as follows as of March 31, 2024: | | | | | |
| (In thousands) | |
| 2024 | $ | 2,625 | |
| 2025 | 3,500 | |
| 2026 | 3,500 | |
| 2027 | 176,791 | |
| |
| |
| $ | 186,416 | |
Our credit facilities are secured pursuant to the Amended and Restated Credit Agreement, dated as of June 16, 2020, among the parties identified as obligors therein and Regions, as collateral agent, on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the “Subsidiary Guarantors”), including certain registered
intellectual property and the capital stock of certain of the Company’s direct and indirect subsidiaries. Our obligations under the Amended and Restated Credit Agreement are also guaranteed by the Subsidiary Guarantors.
The First Amendment provides incremental facility capacity of $75 million, subject to certain conditions. The Amended and Restated Credit Agreement, as amended by the First Amendment, includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase, or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated net leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. The First Amendment requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the First Amendment, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. Further, under the First Amendment, in connection with any acquisition by the Company exceeding $25 million, the Company may elect to increase the maximum permitted consolidated net leverage ratio for the fiscal quarter in which the acquisition occurs and each of the following three fiscal quarters by 0.50:1.00 above the otherwise permitted maximum. If the consolidated net leverage ratio is less than 2.50:1.00, there is no limit on the amount of incremental facilities. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. On March 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.
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 to the Amended and Restated Credit Agreement (described below). 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 of mandatory prepayment of 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.
Credit Facility Third Amendment
On January 16, 2024, the Company entered into a Third Amendment (the “Third Amendment”) to the Amended and Restated Credit Agreement, dated as of June 16, 2020, by and among the Company; the Subsidiary Guarantors; Regions Bank, as administrative agent and collateral agent; and various other lenders from time to time. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Credit Agreement.
The Third Amendment modified the term “Consolidated EBITDA” to provide that the following amounts will be added back to Consolidated Net Income: (i) the reasonably expected value of all earn-out consideration in connection with any Permitted Acquisition, provided that the aggregate amount of fees and out-of-pocket expenses incurred in connection with anticipated Permitted Acquisitions which are not consummated during any period of four fiscal quarters ending on or after the Closing Date will not exceed the greater of $7 million and 10% of Consolidated EBITDA; (ii) any fees, costs or expenses related to the implementation of cost savings, operating expense reductions and synergies related to Permitted Acquisitions, restructurings and other initiatives; and (iii) costs and expenses related to the previously disclosed U.S. Securities and Exchange Commission investigation that occurred during the fiscal year ended December 31, 2023, in an aggregate amount not to exceed $1.25 million. Additionally, the Third Amendment (y) removed from the maximum aggregate amount of fees and expenses that can be added back to Consolidated Net Income any losses resulting from any Asset Sales or Involuntary Disposition and (z) increased the maximum amount of fees and expenses that can be added back to Consolidated Net Income related to savings initiatives, Equity Transactions, the incurrence of Indebtedness and amendments to the Credit Documents from 10% to 15% of Consolidated EBITDA (determined prior to giving effect to such adjustments).
Credit Facility Fourth Amendment
On February 29, 2024, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement, by and among the Company; the Subsidiary Guarantors; the Administrative Agent; and various other lenders. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Credit Agreement.
The Fourth Amendment modified the term “Consolidated EBITDA” to provide that the additional following amounts will be added back to Consolidated Net Income: (i) costs and expenses related to the voluntary early retirement program during the fiscal year ending December 31, 2023; and (ii) fees, costs and expenses in categories identified to the Administrative Agent to the extent incurred during the fiscal year ending December 31, 2024, in an aggregate amount not to exceed $7.25 million. Additionally, the modified definition of “Consolidated EBITDA” limits the amount of pro forma “run rate” cost savings, operating expense reductions and synergies (collectively, “Savings”) related to the Viewgol acquisition that can be added back to Consolidated Net Income to an aggregate amount not to exceed $6.6 million; however, Savings related to the Viewgol acquisition are not subject to the cap of 15% of Consolidated EBITDA that otherwise applies to Savings related to Permitted Acquisitions, restructurings or cost savings initiatives.
Finally, the Consolidated Fixed Charge Coverage Ratio covenant was decreased from 1.25:1.00 to 1.15:1.00 for each fiscal quarter ending March 31, 2024 through and including December 31, 2024. As of December 31, 2023, the Company was not in compliance with the Consolidated Fixed Charge Coverage Ratio required by the Credit Agreement, and the Fourth Amendment provides for a one-time waiver of this failure as an event of default. We believe that we were in compliance with the covenants contained in such agreement as of March 31, 2024.
14. OPERATING LEASES
The Company leases office space in various locations in Alabama, Pennsylvania, Maryland, Mississippi, and Washington. These leases have terms expiring from 2024 through 2029 but do contain optional extension terms. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
On April 30, 2023, the company terminated its lease agreement for approximately 12,500 square feet of office space in Plymouth, Minnesota. Pursuant to a Termination of Lease Agreement dated April 18, 2023, the Company paid $1.1 million to the landlord as consideration for the early termination. In connection with the lease termination, the Company derecognized the assets and liabilities associated with the operating lease and recorded a $0.1 million loss on the disposal of leasehold improvement.
Supplemental balance sheet information related to operating leases was as follows: | | | | | | | | | | | | | |
| (In thousands) | March 31,
2024 | | December 31,
2023 | | |
| Operating lease assets: | | | | | |
| Operating lease assets | $ | 4,672 | | | $ | 5,192 | | | |
| Operating lease liabilities: | | | | | |
| Other accrued liabilities | 1,601 | | 1,804 | | |
| Operating lease liabilities, net of current portion | 2,848 | | | 3,074 | | | |
| Total operating lease liabilities | $ | 4,449 | | | $ | 4,878 | | | |
| Weighted average remaining lease term in years | 3.9 | | 4 | | |
| Weighted average discount rate | 4.1% | | 4.2% | | |
Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
The future minimum lease payments payable under these operating leases subsequent to March 31, 2024 are as follows: | | | | | |
| (In thousands) | |
| 2024 | $ | 1,326 | |
| 2025 | 1,063 | |
| 2026 | 1,025 | |
| 2027 | 706 | |
| 2028 | 462 | |
| Thereafter | 231 | |
| Total lease payments | 4,813 | |
| Less imputed interest | (364) | |
| Total | $ | 4,449 | |
Total lease expense for the three months ended March 31, 2024 and 2023 was $0.5 million and $0.6 million, respectively.
Total cash paid for amounts included in the measurement of lease liabilities within operating cash flows from operating leases for the three months ended March 31, 2024 and 2023 was $0.5 million and $0.6 million, respectively.
15. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. Management does not believe it is reasonably possible that such matters will have a material adverse effect on the Company’s financial statements. The Company recorded a liability of $1.0 million related to contingent consideration for Viewgol's former equity holders as of December 31, 2023 and March 31, 2024.
16. FAIR VALUE
FASB Codification topic, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Codification does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The Codification requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
At March 31, 2024, we measured the fair value of contingent consideration that represents the potential earnout incentive for Viewgol’s former equity holders. We estimated the fair value of these contingent consideration based on the probability of Viewgol meeting EBITDA targets (subject to certain pro-forma adjustments).
The following table summarizes the carrying amount and fair value of the contingent consideration at March 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at March 31, 2024 Using |
| (In thousands) | Carrying Amount at March 31, 2024 | | Quoted Price in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Description | | | | | | | |
Contingent consideration | $ | 1,044 | | | $ | — | | | $ | — | | | $ | 1,044 | |
| Total | $ | 1,044 | | | $ | — | | | $ | — | | | $ | 1,044 | |
17. SEGMENT REPORTING
Our chief operating decision makers (“CODM”) identifies the following three operating segments “RCM”, “EHR”, and “Patient Engagement”. These segments represent the components of the Company for which separate financial information is available that is utilized on a regular basis by the CODM in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenues and adjusted EBITDA. The Company previously evaluated the performance of the segments based on segment gross profit. Management believes adjusted EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating results by excluding the effects of expenses that are not reflective of its operating business performance. Our CODM group is comprised of the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.
Adjusted EBITDA consists of GAAP net income (loss) as reported and adjusts for (i) depreciation expense; (ii) amortization of software development costs; (iii) amortization of acquisition-related intangible assets; (iv) stock-based compensation; (v) severance and other non-recurring charges; (vi) interest expense and other, net; and (ix) the provision (benefit) for income taxes. There are no intersegment revenues to be eliminated in computing segment revenue.
The CODM do not evaluate operating segments nor make decisions regarding operating segments based on assets. Consequently, we do not disclose total assets by reportable segment.
The following table presents a summary of the revenues and adjusted EBITDA of our three operating segments for the three months ended March 31, 2024 and 2023: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (In thousands) | 2024 | | 2023 | | | | |
| Revenues by segment: | | | | | | | |
| RCM | $ | 53,038 | | | $ | 48,631 | | | | | |
| EHR | | | | | | | |
| Recurring revenue | | | | | | | |
| Acute EHR | 25,910 | | | 27,613 | | | | | |
| Post-acute EHR | 582 | | | 3,906 | | | | | |
| Total recurring EHR revenue | 26,492 | | | 31,519 | | | | | |
| Non-recurring revenue | | | | | | | |
| Acute EHR | 1,449 | | | 3,292 | | | | | |
| Post-acute EHR | 81 | | | 380 | | | | | |
| Total non-recurring EHR revenue | 1,530 | | | 3,672 | | | | | |
| Total EHR revenue | $ | 28,022 | | | $ | 35,191 | | | | | |
| Patient Engagement | 2,187 | | | 2,411 | | | | | |
| Total revenues | $ | 83,247 | | | $ | 86,233 | | | | | |
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| Adjusted EBITDA by segment: | | | | | | | |
| RCM | $ | 6,396 | | | $ | 7,898 | | | | | |
| EHR | 2,929 | | | 6,157 | | | | | |
| Patient Engagement | 129 | | | 588 | | | | | |
| Total adjusted EBITDA | $ | 9,454 | | | $ | 14,643 | | | | | |
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The following table reconciles net income to adjusted EBITDA: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (In thousands) | 2024 | | 2023 | | | | |
| Net income (loss), as reported | $ | (2,516) | | | $ | 3,084 | | | | | |
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| Depreciation expense | 400 | | | 499 | | | | | |
| Amortization of software development costs | 2,742 | | | 1,486 | | | | | |
| Amortization of acquisition-related intangibles | 3,127 | | | 4,014 | | | | | |
| Stock-based compensation | 800 | | | 1,247 | | | | | |
| Severance and other non-recurring charges | 3,844 | | | 1,104 | | | | | |
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| Interest expense | 4,072 | | | 2,669 | | | | | |
| Gain on sale of AHT | (1,250) | | | — | | | | | |
| Other | (173) | | | (269) | | | | | |
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| Provision (benefit) for income taxes | (1,592) | | | 809 | | | | | |
| Total adjusted EBITDA | $ | 9,454 | | | $ | 14,643 | | | | | |
Certain of the items excluded or adjusted to arrive at adjusted EBITDA are described below:
•Amortization of acquisition-related intangibles - Acquisition-related amortization expense is a non-cash expense arising primarily from the acquisition of intangibles in connection with acquisitions or investments. We exclude acquisition-related amortization expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
•Stock-based compensation - Stock-based compensation expense is a non-cash expense arising from the grant of stock-based awards. We exclude stock-based compensation expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of the timing and valuation of grants of new stock-based awards, including grants in connection with acquisitions.
•Severance and other non-recurring charges - Non-recurring charges relate to certain severance and other charges incurred in connection with activities that are considered non-recurring. We exclude non-recurring expenses (primarily related to costs associated with our recent business transformation initiative and non-recurring lease termination costs) and transaction-related costs from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods.
•Other – Other charges consist of a miscellaneous of items such as interest income, service charges, other (income)/loss, and foreign currency (gain)/loss. We exclude these other charges from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods.