COMPUTER PROGRAMS & SYSTEMS INC - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number: 000-49796
COMPUTER PROGRAMS AND SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 74-3032373 | |||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
54 St. Emanuel Street, Mobile, Alabama | 36602 | |||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||
(251) 639-8100
(Registrant’s Telephone Number, Including Area Code)
6600 Wall Street Mobile, Alabama 36695
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
Common Stock, par value $.001 per share | CPSI | The NASDAQ Stock Market LLC | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ý | |||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ | |||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of May 7, 2021, there were 14,728,829 shares of the issuer’s common stock outstanding.
1
COMPUTER PROGRAMS AND SYSTEMS, INC.
Quarterly Report on Form 10-Q
(For the three months ended March 31, 2021)
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements. | ||||
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 18,016 | $ | 12,671 | |||||||
Accounts receivable (net of allowance for expected credit losses of $2,088 and $1,701, respectively) | 33,793 | 32,414 | |||||||||
Financing receivables, current portion, net (net of allowance for expected credit losses of $486 and $541, respectively) | 9,710 | 10,821 | |||||||||
| Inventories | 1,342 | 1,084 | |||||||||
| Prepaid income taxes | 2,188 | 1,789 | |||||||||
| Prepaid expenses and other | 7,833 | 8,365 | |||||||||
| Total current assets | 72,882 | 67,144 | |||||||||
| Property and equipment, net | 13,079 | 13,139 | |||||||||
| Software development costs, net | 4,009 | 3,210 | |||||||||
| Operating lease assets | 9,030 | 6,610 | |||||||||
Financing receivables, net of current portion (net of allowance for expected credit losses of $891 and $948, respectively) | 10,460 | 11,477 | |||||||||
| Other assets, net of current portion | 2,998 | 2,787 | |||||||||
| Intangible assets, net | 68,632 | 71,689 | |||||||||
| Goodwill | 150,216 | 150,216 | |||||||||
| Total assets | $ | 331,306 | $ | 326,272 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 6,742 | $ | 7,716 | |||||||
| Current portion of long-term debt | 3,457 | 3,457 | |||||||||
| Deferred revenue | 8,833 | 8,130 | |||||||||
| Accrued vacation | 5,306 | 5,353 | |||||||||
| Other accrued liabilities | 16,394 | 12,786 | |||||||||
| Total current liabilities | 40,732 | 37,442 | |||||||||
| Long-term debt, net of current portion | 67,496 | 73,360 | |||||||||
| Operating lease liabilities, net of current portion | 7,527 | 5,092 | |||||||||
| Deferred tax liabilities | 11,436 | 10,378 | |||||||||
| Total liabilities | 127,191 | 126,272 | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.001 par value; 30,000 shares authorized; 14,715 and 14,511 shares issued and outstanding, respectively | 15 | 15 | |||||||||
| Additional paid-in capital | 182,656 | 181,622 | |||||||||
| Retained earnings | 23,768 | 19,624 | |||||||||
Treasury stock, 80 shares and 47 shares, respectively | (2,324) | (1,261) | |||||||||
| Total stockholders’ equity | 204,115 | 200,000 | |||||||||
| Total liabilities and stockholders’ equity | $ | 331,306 | $ | 326,272 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Sales revenues: | |||||||||||
| System sales and support | $ | 36,366 | $ | 41,186 | |||||||
| TruBridge | 31,639 | 28,571 | |||||||||
| Total sales revenues | 68,005 | 69,757 | |||||||||
| Costs of sales: | |||||||||||
| System sales and support | 17,376 | 18,587 | |||||||||
| TruBridge | 15,779 | 15,057 | |||||||||
| Total costs of sales | 33,155 | 33,644 | |||||||||
| Gross profit | 34,850 | 36,113 | |||||||||
| Operating expenses: | |||||||||||
| Product development | 8,429 | 8,271 | |||||||||
| Sales and marketing | 5,301 | 6,997 | |||||||||
| General and administrative | 13,149 | 11,847 | |||||||||
| Amortization of acquisition-related intangibles | 3,057 | 2,866 | |||||||||
| Total operating expenses | 29,936 | 29,981 | |||||||||
| Operating income | 4,914 | 6,132 | |||||||||
| Other income (expense): | |||||||||||
| Other income | 814 | 362 | |||||||||
| Interest expense | (627) | (1,179) | |||||||||
| Total other income (expense) | 187 | (817) | |||||||||
| Income before taxes | 5,101 | 5,315 | |||||||||
| Provision for income taxes | 957 | 1,225 | |||||||||
| Net income | $ | 4,144 | $ | 4,090 | |||||||
| Net income per common share—basic | $ | 0.29 | $ | 0.28 | |||||||
| Net income per common share—diluted | $ | 0.28 | $ | 0.28 | |||||||
| Weighted average shares outstanding used in per common share computations: | |||||||||||
| Basic | 14,159 | 13,904 | |||||||||
| Diluted | 14,221 | 13,904 | |||||||||
| Dividends declared per common share | $ | — | $ | 0.10 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-in-Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 and 2020: | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 14,511 | $ | 15 | $ | 181,622 | $ | 19,624 | $ | (1,261) | $ | 200,000 | ||||||||||||||||||||||||
| Net income | — | — | — | 4,144 | — | 4,144 | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 210 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Forfeiture of restricted stock | (6) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,034 | — | — | 1,034 | |||||||||||||||||||||||||||||
| Treasury stock acquired | — | — | — | — | (1,063) | (1,063) | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 14,715 | $ | 15 | $ | 182,656 | $ | 23,768 | $ | (2,324) | $ | 204,115 | ||||||||||||||||||||||||
| Balance at December 31, 2019 | 14,356 | $ | 14 | $ | 174,618 | $ | 9,715 | $ | — | $ | 184,347 | ||||||||||||||||||||||||
| Net income | — | — | — | 4,090 | — | 4,090 | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 156 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,358 | — | — | 2,358 | |||||||||||||||||||||||||||||
| Dividends | — | — | — | (1,435) | — | (1,435) | |||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 14,512 | $ | 15 | $ | 176,975 | $ | 12,370 | $ | — | $ | 189,360 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities: | |||||||||||
| Net income | $ | 4,144 | $ | 4,090 | |||||||
| Adjustments to net income: | |||||||||||
| Provision for credit losses | 938 | 999 | |||||||||
| Deferred taxes | 1,058 | 1,065 | |||||||||
| Stock-based compensation | 1,034 | 2,358 | |||||||||
| Depreciation | 553 | 420 | |||||||||
| Amortization of acquisition-related intangibles | 3,057 | 2,866 | |||||||||
| Amortization of software development costs | 73 | 38 | |||||||||
| Amortization of deferred finance costs | 73 | 86 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (2,183) | (88) | |||||||||
| Financing receivables | 1,994 | (4) | |||||||||
| Inventories | (258) | 62 | |||||||||
| Prepaid expenses and other | 321 | (1,079) | |||||||||
| Accounts payable | (974) | 206 | |||||||||
| Deferred revenue | 703 | (821) | |||||||||
| Other liabilities | 3,576 | (2,732) | |||||||||
| (Prepaid income taxes)/income taxes payable | (399) | 128 | |||||||||
| Net cash provided by operating activities | 13,710 | 7,594 | |||||||||
| Investing Activities: | |||||||||||
| Investment in software development | (872) | (921) | |||||||||
| Purchase of property and equipment | (493) | (2,120) | |||||||||
| Net cash used in investing activities | (1,365) | (3,041) | |||||||||
| Financing Activities: | |||||||||||
| Dividends paid | — | (1,435) | |||||||||
| Payments of long-term debt principal | (937) | (2,195) | |||||||||
| Payments of revolving line of credit | (5,000) | (4,000) | |||||||||
| Treasury stock purchases | (1,063) | — | |||||||||
| Net cash used in financing activities | (7,000) | (7,630) | |||||||||
| Increase (decrease) in cash and cash equivalents | 5,345 | (3,077) | |||||||||
| Cash and cash equivalents at beginning of period | 12,671 | 7,357 | |||||||||
| Cash and cash equivalents at end of period | $ | 18,016 | $ | 4,280 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 554 | $ | 1,093 | |||||||
| Cash paid for income taxes, net of refund | $ | 298 | $ | 31 | |||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
6
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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, 2020 was derived from the audited consolidated balance sheet at that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of Computer Programs and Systems, Inc. ("CPSI" or the "Company") for the year ended December 31, 2020 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Principles of Consolidation
The condensed consolidated financial statements of CPSI include the accounts of TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), Healthland Holding Inc. ("HHI"), and iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), all of which are wholly-owned subsidiaries of CPSI. The accounts of HHI include those of its wholly-owned subsidiaries, Healthland Inc. ("Healthland"), Rycan Technologies, Inc. ("Rycan"), and American HealthTech, Inc. ("AHT"). All significant intercompany balances and transactions have been eliminated.
2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted in 2021
There were no new accounting standards required to be adopted in 2021 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 Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized net of shipping charges and any taxes collected from clients, which are subsequently remitted to governmental authorities.
System Sales and Support
The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, training, hardware and software application support and hardware maintenance services to acute care and post-acute care community hospitals.
7
Non-recurring Revenues
•Perpetual software licenses, installation, conversion, and related training are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's stand-alone selling price ("SSP"), net of discounts. Fees for licenses, installation, conversion, and related training are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 10 - Financing Receivables for further information. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date on which the client begins using the system in a live environment.
•Hardware revenue is recognized separately from software licenses at the point in time it is delivered to the client. The SSP of hardware is cost plus a reasonable margin. Payment is generally due upon delivery of the hardware to the client. Standard manufacturer warranties apply to hardware.
Recurring Revenues
•Software application support and hardware maintenance services sold with software licenses and hardware are separate and distinct performance obligations. Revenue for support and maintenance services is recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally to five years. Payment is due monthly for support services provided.
•Subscriptions to third party content revenue is recognized as a separate performance obligation ratably over the subscription term based on SSP, which is cost plus a reasonable margin. Payment is due monthly for subscriptions to third party content.
•Software as a Service ("SaaS") arrangements for EHR software and related conversion and training services are considered a single performance obligation. Revenue is recognized on a monthly basis as the SaaS service is provided to the client over the contract term. Payment is due monthly for SaaS services provided.
Refer to Note 16 - Segment Reporting, for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
TruBridge
TruBridge provides an array of business processing services ("BPS") consisting of accounts receivable management, private pay services, insurance services, medical coding, electronic billing, statement processing, payroll processing, and contract management. Fees are recognized over the period of the client contractual relationship as the services are performed based on the SSP, net of discounts. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.
TruBridge also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP. Payment is due monthly as services are performed.
Deferred Revenue
Deferred revenue represents amounts invoiced to clients for which the services under contract have not been completed and revenue has not been recognized, including annual renewals of certain software subscriptions and customer deposits for implementations to be performed at a later date. Revenue is recognized ratably over the life of the software subscriptions as services are provided and at the point-in-time when implementations have been completed.
8
The following table details deferred revenue for the three months ended March 31, 2021 and 2020, included in the condensed consolidated balance sheets:
| (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||
| Beginning balance | $ | 8,130 | $ | 8,628 | |||||||
| Deferred revenue recorded | 5,847 | 6,194 | |||||||||
| Less deferred revenue recognized as revenue | (5,144) | (7,015) | |||||||||
| Ending balance | $ | 8,833 | $ | 7,807 | |||||||
The deferred revenue recorded during the three months ended March 31, 2021 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, 2021 and 2020 is comprised primarily of the periodic recognition of annual renewals that were deferred until earned and deposits for future EHR installations that were deferred until earned.
Costs to Obtain and Fulfill a Contract with a Customer
Costs to obtain a contract include the commission costs related to SaaS licensing agreements, which are capitalized and amortized ratably over the expected life of the customer. As a practical expedient, we generally recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less, with the exception of commissions generated from TruBridge sales. TruBridge commissions, which are paid up to twelve months in advance of services performed, are capitalized and amortized over the prepayment period. Costs to obtain a contract are expensed within sales and marketing expenses in the accompanying condensed consolidated statements of income.
Contract fulfillment costs related to the implementation of SaaS arrangements are capitalized and amortized ratably over the expected life of the customer. Costs to fulfill contracts consist of the payroll costs for the implementation of SaaS arrangements, including time for training, conversion and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption "System sales and support - Cost of sales" in the accompanying condensed consolidated statements of income.
Costs to obtain and fulfill contracts related to SaaS arrangements are included within the "Prepaid expenses and other" and "Other assets, net of current portion" line items on our condensed consolidated balance sheets.
The following table details costs to obtain and fulfill contracts with customers for the three months ended March 31, 2021 and 2020, included in the condensed consolidated balance sheets:
| (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||
| Beginning balance | $ | 5,992 | $ | 4,440 | |||||||
| Costs to obtain and fulfill contracts capitalized | 1,836 | 1,888 | |||||||||
| Less costs to obtain and fulfill contracts recognized as expense | (1,475) | (1,285) | |||||||||
| Ending balance | $ | 6,353 | $ | 5,043 | |||||||
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.
9
4. PROPERTY AND EQUIPMENT
Property and equipment, net was comprised of the following at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Land | $ | 2,848 | $ | 2,848 | |||||||
| Buildings and improvements | 8,538 | 8,242 | |||||||||
| Computer equipment | 7,342 | 7,144 | |||||||||
| Leasehold improvements | 1,283 | 1,283 | |||||||||
| Office furniture and fixtures | 829 | 829 | |||||||||
| Automobiles | 18 | 18 | |||||||||
| Property and equipment, gross | 20,858 | 20,364 | |||||||||
| Less: accumulated depreciation | (7,779) | (7,225) | |||||||||
| Property and equipment, net | $ | 13,079 | $ | 13,139 | |||||||
5. SOFTWARE DEVELOPMENT
Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. We capitalize incurred labor costs for software development from the time the preliminary project phase is completed until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We estimate the useful life of our capitalized software and amortize its value on a straight-line basis over that estimated life, which is estimated to be five years. We evaluate capitalized software development costs for impairment when there is an indication that the useful life has changed or that the unamortized costs may not be recoverable. A write-down of the value of the asset may be recorded as a charge to earnings. Upon the software's availability for general release, we commence amortization of the capitalized software costs on a module-by-module basis.
Software development, net was comprised of the following at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Software development costs | $ | 4,200 | $ | 3,328 | |||||||
| Less: accumulated amortization | (191) | (118) | |||||||||
| Software development costs, net | $ | 4,009 | $ | 3,210 | |||||||
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Salaries and benefits | $ | 9,891 | $ | 7,876 | |||||||
| Severance | 1,644 | 25 | |||||||||
| Commissions | 844 | 1,040 | |||||||||
| Self-insurance reserves | 1,929 | 1,776 | |||||||||
| Other | 583 | 551 | |||||||||
| Operating lease liabilities, current portion | 1,503 | 1,518 | |||||||||
| Other accrued liabilities | $ | 16,394 | $ | 12,786 | |||||||
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7. NET INCOME 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 9) 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) | 2021 | 2020 | |||||||||
| Net income | $ | 4,144 | $ | 4,090 | |||||||
| Less: Net income attributable to participating securities | (103) | (134) | |||||||||
| Net income attributable to common stockholders | $ | 4,041 | $ | 3,956 | |||||||
| Weighted average shares outstanding used in basic per common share computations | 14,159 | 13,904 | |||||||||
| Add: Dilutive potential common shares | 62 | — | |||||||||
| Weighted average shares outstanding used in diluted per common share computations | 14,221 | 13,904 | |||||||||
| Basic EPS | $ | 0.29 | $ | 0.28 | |||||||
| Diluted EPS | $ | 0.28 | $ | 0.28 | |||||||
During 2019, 2020, and 2021, 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 249,952 shares, of which 62,267 have been included in the calculation of diluted EPS for the three months ended March 31, 2021. The remaining 187,685 shares have been excluded from the calculation of diluted EPS because the related threshold award performance levels have not been achieved as of March 31, 2021. See Note 9 - Stock-Based Compensation and Equity for more information.
8. INCOME TAXES
The Company determines the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our effective tax rate for the three months ended March 31, 2021 decreased to 18.8% from 23.0% for the three months ended March 31, 2020, primarily as a result of the tax consequences of stock-based compensation. Specifically, excess tax benefits resulting from restricted stock vesting benefited our effective tax rate by 1.6% during the first quarter of 2021. Comparatively, the first quarter of 2020 experienced a tax benefit shortfall resulting from restricted stock vesting that increased our effective tax rate by 2.4% for the period.
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9. STOCK-BASED COMPENSATION AND EQUITY
Stock-based compensation expense is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employee's or non-employee director's requisite service period.
The following table details total stock-based compensation expense for the three months ended March 31, 2021 and 2020, included in the condensed consolidated statements of income:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Costs of sales | $ | 213 | $ | 528 | |||||||
| Operating expenses | 821 | 1,830 | |||||||||
| Pre-tax stock-based compensation expense | 1,034 | 2,358 | |||||||||
| Less: income tax effect | (227) | (519) | |||||||||
| Net stock-based compensation expense | $ | 807 | $ | 1,839 | |||||||
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 2014 Incentive Plan and 2019 Incentive Plan, as amended (the "Plans"). As of March 31, 2021, there was $11.1 million of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the Plans, which is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock
The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plans with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from to three years. The Company records expenses for these grants on a straight-line basis over the applicable vesting periods. Shares of restricted stock have also been issued pursuant to the settlement of performance share awards with one-year performance periods, for which the Company records expenses in the manner described in the "Performance Share Awards" section below. Although no such one-year performance share awards were granted during the quarter ended March 31, 2021, shares issued pursuant to past one-year performance share awards are still subject to vesting.
A summary of restricted stock activity (including shares of restricted stock issued pursuant to the settlement of performance share awards) under the Plans during the three months ended March 31, 2021 and 2020 is as follows:
| Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||
| 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 | 412,967 | $ | 28.87 | 525,859 | $ | 30.51 | |||||||||||||||||
| Granted | 134,314 | 31.26 | 136,771 | 26.16 | |||||||||||||||||||
| Performance share awards settled through the issuance of restricted stock | — | — | 19,678 | 30.15 | |||||||||||||||||||
| Vested | (245,455) | 29.16 | (202,468) | 30.20 | |||||||||||||||||||
| Forfeited | (6,329) | 29.10 | — | — | |||||||||||||||||||
| Unvested restricted stock outstanding at end of period | 295,497 | $ | 29.71 | 479,840 | $ | 29.39 | |||||||||||||||||
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Performance Share Awards
The Company granted performance share awards to executive officers and certain key employees under the Amended and Restated 2014 Incentive Plan prior to 2019 and under the 2019 Incentive Plan beginning in 2019. The number of shares of common stock earned and issuable under each award is determined at the end of a one-year or three-year performance period, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. The three-year performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR") compared to an industry index. If certain levels of the performance objective are met, the award results in the issuance of shares of restricted stock or common stock corresponding to such level. One-year performance share awards are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally three years. Three-year performance share awards that result in the issuance of shares of common stock are not subject to time-based vesting at the conclusion of the three-year performance period.
In the event that the Company's financial performance meets the predetermined targets for the performance objectives of the one-year and three-year performance share awards, the Company will issue each award recipient the number of shares of restricted stock or common stock, as applicable, equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined targets, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined targets, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance levels, no shares will be issued. The total number of shares issued for the three-year performance share award may be increased, decreased, or unchanged based on the TSR modifier described above.
The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the one-year and three-year performance share awards is the quoted market value of CPSI's common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the three-year performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.
Expense of one-year performance share awards is recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. Expense of three-year performance share awards is recognized using ratable straight-line amortization over the three-year performance period. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made.
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A summary of performance share award activity under the Plans during the three months ended March 31, 2021 and 2020 is as follows, based on the target award amounts set forth in the performance share award agreements:
| Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||
| Shares | Weighted-Average Grant Date Fair Value Per Share | Shares | Weighted-Average Grant Date Fair Value Per Share | ||||||||||||||||||||
| Performance share awards outstanding at beginning of period | 252,852 | $ | 29.27 | 200,709 | $ | 30.75 | |||||||||||||||||
| Granted | 93,444 | 31.26 | 107,298 | 26.96 | |||||||||||||||||||
| Adjusted for actual performance, net of forfeitures | (20,373) | 29.92 | (35,477) | 30.15 | |||||||||||||||||||
| Performance share awards settled through the issuance of restricted stock | (75,971) | 30.50 | (19,678) | 30.15 | |||||||||||||||||||
| Performance share awards outstanding at end of period | 249,952 | $ | 29.59 | 252,852 | $ | 29.27 | |||||||||||||||||
Stock Repurchases
On September 4, 2020, our Board of Directors approved a stock repurchase program under which we may repurchase up to $30.0 million of our common stock through September 3, 2022. We repurchased 12,056 shares during the three months ended March 31, 2021 and no shares during the three months ended March 31, 2020. The approximate dollar value of shares that may yet be repurchased under the stock repurchase program was $28.3 million as of March 31, 2021. 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, the Board of Directors opted to indefinitely suspend all quarterly dividends.
In addition to shares repurchased under the approved stock repurchase program, we purchased 21,444 shares during the three months ended March 31, 2021 to fund required tax withholding related to the vesting of restricted stock. Shares withheld to cover required tax withholdings related to the vesting of restricted stock do not reduce our total share repurchase authority.
10. FINANCING RECEIVABLES
Short-Term Payment Plans
The Company provides fixed monthly payment arrangements ("short-term payment plans") over terms ranging from to twelve months for meaningful use stage three and other add-on software installations. As a practical expedient, we do not adjust the amount of consideration recognized as revenue for the financing component as unearned income when we expect payment within one year or less. These receivables, included in the current portion of financing receivables, were comprised of the following at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Short-term payment plans, gross | $ | 929 | $ | 1,973 | |||||||
| Less: allowance for losses | (46) | (99) | |||||||||
| Short-term payment plans, net | $ | 883 | $ | 1,874 | |||||||
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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 2026. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from to seven years.
The components of these receivables were as follows at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Long-term financing arrangements, gross | $ | 22,696 | $ | 24,082 | |||||||
| Less: allowance for expected credit losses | (1,331) | (1,390) | |||||||||
| Less: unearned income | (2,078) | (2,268) | |||||||||
| Long-term financing arrangements, net | $ | 19,287 | $ | 20,424 | |||||||
Future minimum payments to be received subsequent to March 31, 2021 are as follows:
| (In thousands) | |||||
| Years Ending December 31, | |||||
| 2021 | $ | 7,893 | |||
| 2022 | 6,737 | ||||
| 2023 | 4,278 | ||||
| 2024 | 2,670 | ||||
| 2025 | 1,106 | ||||
| Thereafter | 12 | ||||
| Total minimum payments to be received | 22,696 | ||||
| Less: allowance for expected credit losses | (1,331) | ||||
| Less: unearned income | (2,078) | ||||
| Receivables, net | $ | 19,287 | |||
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, 2021 and year ended December 31, 2020:
| (In thousands) | Balance at Beginning of Period | Provision | Charge-offs | Recoveries | Balance at End of Period | ||||||||||||||||||||||||
| March 31, 2021 | $ | 1,489 | $ | 134 | $ | (246) | $ | — | $ | 1,377 | |||||||||||||||||||
| December 31, 2020 | $ | 2,971 | $ | 1,632 | $ | (3,114) | $ | — | $ | 1,489 | |||||||||||||||||||
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.
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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, 2021 and December 31, 2020:
| (In thousands) | 1 to 90 Days Past Due | 91 to 180 Days Past Due | 181 + Days Past Due | Total Past Due | |||||||||||||||||||
| March 31, 2021 | $ | 917 | $ | 229 | $ | 841 | $ | 1,987 | |||||||||||||||
| December 31, 2020 | $ | 1,270 | $ | 227 | $ | 672 | $ | 2,169 | |||||||||||||||
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, 2021 | December 31, 2020 | |||||||||
| 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 | $ | 12,051 | $ | 11,719 | |||||||
Uninvoiced client financing receivables related to trade accounts receivable that are 91 to 180 Days Past Due | 644 | 1,092 | |||||||||
Uninvoiced client financing receivables related to trade accounts receivable that are 181 + Days Past Due | 1,075 | 2,668 | |||||||||
| Total uninvoiced client financing receivables balances of clients with a trade accounts receivable | $ | 13,770 | $ | 15,479 | |||||||
| Total uninvoiced client financing receivables of clients with no related trade accounts receivable | 6,848 | 6,335 | |||||||||
| Total financing receivables with contractual maturities of one year or less | 929 | 1,973 | |||||||||
| Less: allowance for expected credit losses | (1,377) | (1,489) | |||||||||
| Total financing receivables | $ | 20,170 | $ | 22,298 | |||||||
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11. INTANGIBLE ASSETS AND GOODWILL
Our purchased definite-lived intangible assets as of March 31, 2021 and December 31, 2020 are summarized as follows:
March 31, 2021 | |||||||||||||||||||||||
| (In thousands) | Customer Relationships | Trademark | Developed Technology | Total | |||||||||||||||||||
| Gross carrying amount, beginning of period | $ | 84,370 | $ | 11,120 | $ | 29,700 | 125,190 | ||||||||||||||||
| Accumulated amortization | (35,346) | (4,509) | (16,703) | (56,558) | |||||||||||||||||||
Net intangible assets as of March 31, 2021 | $ | 49,024 | $ | 6,611 | $ | 12,997 | $ | 68,632 | |||||||||||||||
| Weighted average remaining years of useful life | 8 | 12 | 4 | 8 | |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Customer Relationships | Trademark | Developed Technology | Total | |||||||||||||||||||
| Gross carrying amount, beginning of period | $ | 84,370 | $ | 11,120 | $ | 29,700 | $ | 125,190 | |||||||||||||||
| Accumulated amortization | (33,612) | (4,297) | (15,592) | (53,501) | |||||||||||||||||||
Net intangible assets as of December 31, 2020 | $ | 50,758 | $ | 6,823 | $ | 14,108 | $ | 71,689 | |||||||||||||||
The following table represents the remaining amortization of definite-lived intangible assets as of March 31, 2021:
| (In thousands) | |||||
| For the year ended December 31, | |||||
| 2021 | $ | 8,974 | |||
| 2022 | 11,932 | ||||
| 2023 | 10,044 | ||||
| 2024 | 8,510 | ||||
| 2025 | 8,194 | ||||
| Thereafter | 20,978 | ||||
| Total | $ | 68,632 | |||
The following table sets forth the change in the carrying amount of goodwill by segment for the three months ended March 31, 2021:
| (In thousands) | Acute Care EHR | Post-acute Care EHR | TruBridge | Total | ||||||||||
Balance as of December 31, 2020 | $ | 97,095 | $ | 29,570 | $ | 23,551 | $ | 150,216 | ||||||
Balance as of March 31, 2021 | $ | 97,095 | $ | 29,570 | $ | 23,551 | $ | 150,216 | ||||||
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.
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12. LONG-TERM DEBT
Long-term debt was comprised of the following at March 31, 2021 and December 31, 2020:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Term loan facility | $ | 72,188 | $ | 73,125 | |||||||
| Revolving credit facility | — | 5,000 | |||||||||
| Debt obligations | 72,188 | 78,125 | |||||||||
| Less: unamortized debt issuance costs | (1,235) | (1,308) | |||||||||
| Debt obligation, net | 70,953 | 76,817 | |||||||||
| Less: current portion | (3,457) | (3,457) | |||||||||
| Long-term debt | $ | 67,496 | $ | 73,360 | |||||||
As of March 31, 2021, the carrying value of debt approximated the fair value due to the variable interest rate, which reflected the market rate.
Credit Agreement
In conjunction with our acquisition of HHI in January 2016, we entered into a syndicated credit agreement with Regions Bank ("Regions") serving as administrative agent, which provided for a $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 includes a $75 million term loan facility and a $110 million revolving credit facility.
Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted LIBOR rate for the relevant interest period, 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 LIBOR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for LIBOR loans and the letter of credit fee ranges from 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 September 30, 2020, with quarterly principal payments of approximately $0.9 million through June 30, 2022, approximately $1.4 million through June 30, 2024 and approximately $1.9 million through March 31, 2025, with maturity on June 16, 2025 or such earlier date as the obligations under the Amended and Restated Credit Agreement 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, 2021:
| (In thousands) | |||||
| 2021 | $ | 2,813 | |||
| 2022 | 4,687 | ||||
| 2023 | 5,625 | ||||
| 2024 | 6,563 | ||||
| 2025 | 52,500 | ||||
| Thereafter | — | ||||
| $ | 72,188 | ||||
Our credit facilities are secured pursuant to an Amended and Restated Pledge and Security Agreement, dated 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
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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 Amended and Restated Credit Agreement provides incremental facility capacity of $50 million, subject to certain conditions. The Amended and Restated Credit Agreement includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated 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 Amended and Restated Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the Amended and Restated Credit Agreement, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in such agreement as of March 31, 2021.
The Amended and Restated Credit Agreement requires the Company to mandatorily prepay the credit facilities with 50% of excess cash flow (minus certain specified other payments). This mandatory prepayment requirement is applicable only if the Company's consolidated net leverage ratio exceeds 2.50:1.00. The Company is permitted to voluntarily prepay the credit facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of LIBOR rate loans made on a day other than the last day of any applicable interest period. An excess cash flow prepayment related to excess cash flow generated during 2020 was not required during the first quarter of 2021.
13. OPERATING LEASES
The Company leases office space in various locations in Alabama, Louisiana, Pennsylvania, Minnesota, Maryland, and Mississippi. These leases have terms expiring from 2021 through 2030 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.
Supplemental balance sheet information related to operating leases was as follows:
| (In thousands) | March 31, 2021 | ||||
| Operating lease assets | |||||
| Operating lease assets | $ | 9,030 | |||
| Operating lease liabilities | |||||
| Other accrued liabilities | $ | 1,503 | |||
| Operating lease liabilities, net of current portion | 7,527 | ||||
| Total operating lease liabilities | $ | 9,030 | |||
| Weighted average remaining lease term in years | 6 | ||||
| Weighted average discount rate | 4.6% | ||||
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.
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The future minimum lease payments payable under these operating leases subsequent to March 31, 2021 are as follows:
| (In thousands) | |||||
| 2021 | $ | 1,503 | |||
| 2022 | 1,943 | ||||
| 2023 | 1,872 | ||||
| 2024 | 1,469 | ||||
| 2025 | 1,202 | ||||
| Thereafter | 2,340 | ||||
| Total lease payments | 10,329 | ||||
| Less imputed interest | (1,299) | ||||
| Total | $ | 9,030 | |||
Total lease expense for both the three months ended March 31, 2021 and 2020 was $0.4 million.
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, 2021 was $0.4 million.
14. 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.
15. FAIR VALUE
FASB Codification topic, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Codification does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The Codification requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
As of March 31, 2021 and December 31, 2020, we did not have any instruments that require fair value measurement.
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16. SEGMENT REPORTING
Our chief operating decision makers ("CODM") utilize three operating segments, "Acute Care EHR," "Post-acute Care EHR" and "TruBridge," based on our three distinct business units with unique market dynamics and opportunities. Revenues and cost of sales are primarily derived from the provision of services and sales of our proprietary software, and our CODM assess the performance of these three segments at the gross profit level. Operating expenses and items such as interest, income tax, capital expenditures and total assets are managed at a consolidated level and thus are not included in our operating segment disclosures. Our CODM group is comprised of the Chief Executive Officer, Chief Growth Officer, Chief Operating Officer, and Chief Financial Officer. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.
The following table presents a summary of the revenues and gross profits of our three operating segments for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Revenues: | |||||||||||
| Acute Care EHR | |||||||||||
| Recurring revenue | $ | 27,210 | $ | 26,438 | |||||||
| Non-recurring revenue | 4,680 | 10,077 | |||||||||
| Total Acute Care EHR revenue | 31,890 | 36,515 | |||||||||
| Post-acute Care EHR | |||||||||||
| Recurring revenue | 4,222 | 4,134 | |||||||||
| Non-recurring revenue | 254 | 537 | |||||||||
| Total Post-acute Care EHR revenue | 4,476 | 4,671 | |||||||||
| TruBridge | 31,639 | 28,571 | |||||||||
| Total revenues | $ | 68,005 | $ | 69,757 | |||||||
| Cost of sales: | |||||||||||
| Acute Care EHR | $ | 16,212 | $ | 17,259 | |||||||
| Post-acute Care EHR | 1,164 | 1,328 | |||||||||
| TruBridge | 15,779 | 15,057 | |||||||||
| Total cost of sales | $ | 33,155 | $ | 33,644 | |||||||
| Gross profit: | |||||||||||
| Acute Care EHR | $ | 15,678 | $ | 19,256 | |||||||
| Post-acute Care EHR | 3,312 | 3,343 | |||||||||
| TruBridge | 15,860 | 13,514 | |||||||||
| Total gross profit | $ | 34,850 | $ | 36,113 | |||||||
| Corporate operating expenses | $ | (29,936) | $ | (29,981) | |||||||
| Other income | 814 | 362 | |||||||||
| Interest expense | (627) | (1,179) | |||||||||
| Income before taxes | $ | 5,101 | $ | 5,315 | |||||||
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17. SUBSEQUENT EVENTS
On April 5, 2021, the Company relocated its principal executive office pursuant to a sublease for 20,093 square feet of office space in downtown Mobile, Alabama, which sublease was signed in February 2021.
18. COVID-19 PANDEMIC
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. In February 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency.
The COVID-19 pandemic has caused, and is continuing to cause, severe economic, market and other disruptions to the U.S. and global economies. Although the pandemic had a muted impact on our results for the first quarter of 2020, the Company began experiencing increasingly adverse business conditions beginning in the latter half of March 2020 through the date of this report, including our results of operations for the first quarter of 2021. Most notably:
•Travel restrictions and social distancing protocols have created an additional challenge to our on-site implementation and sales teams. Although we have shown success with remote implementation models and our sales representatives are engaging in remote contact with existing customers and prospects, these restrictions and protocols are expected to continue to have an incrementally negative impact on implementation revenues and new sales generation.
•Although patient volumes at our client hospitals have largely recovered from the severe declines in such volumes experienced during much of 2020, there can be no guarantee as to the permanence of this recovery. As the overwhelming majority of TruBridge revenues are directly or indirectly correlated with client patient volumes, any further reduction in these patient volumes may negatively impact our related revenues.
•Although we have experienced no notable disruption to our operating cash flows through the date of this report, we currently expect that the aforementioned limitations on travel and decreased client patient volumes will ultimately result in decreased cash collections from our customers as long as these conditions persist. These decreases in cash collections could be further negatively impacted by the amount and extent to which the pandemic impacts the financial condition and liquidity of our customers.
Despite these adverse business conditions, the pandemic has had a muted impact on our financial condition as of March 31, 2021.
At this time, the Company is uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health efforts to contain and combat the spread of COVID-19, and while the extent to which the COVID-19 pandemic continues to impact the Company’s results will depend on future developments, the outbreak could result in a material impact to the Company’s future financial position, results of operations, cash flows and liquidity.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | ||||
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
This discussion and analysis contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified generally by the use of forward-looking terminology and words such as "expects," "anticipates," "estimates," "believes," "predicts," "intends," "plans," "potential," "may," "continue," "should," "will" and words of comparable meaning. Without limiting the generality of the preceding statement, all statements in this report relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking statements. We caution investors that any such forward-looking statements are only predictions and are not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include:
Risks Related to Our Industry
•the ongoing COVID-19 pandemic and related economic disruption;
•saturation of our target market and hospital consolidations;
•unfavorable economic or market conditions that may cause a decline in spending for information technology and services;
•significant legislative and regulatory uncertainty in the healthcare industry;
•exposure to liability for failure to comply with regulatory requirements;
Risks Related to Our Business
•competition with companies that have greater financial, technical and marketing resources than we have;
•potential future acquisitions that may be expensive, time consuming, and subject to other inherent risks;
•our ability to attract and retain qualified client service and support personnel;
•disruption from periodic restructuring of our sales force;
•our potential inability to manage our growth in the new markets we may enter;
•exposure to numerous and often conflicting laws, regulations, policies, standards or other requirements through our international business activities;
•potential litigation against us;
Risks Related to Our Products and Services
•potential failure to develop new products or enhance current products that keep pace with market demands;
•exposure to claims if our products fail to provide accurate and timely information for clinical decision-making;
•exposure to claims for breaches of security and viruses in our systems;
•undetected errors or problems in new products or enhancements;
•our potential inability to convince customers to migrate to current or future releases of our products;
•failure to maintain our margins and service rates;
•increase in the percentage of total revenues represented by service revenues, which have lower gross margins;
•exposure to liability in the event we provide inaccurate claims data to payors;
•exposure to liability claims arising out of the licensing of our software and provision of services;
•dependence on licenses of rights, products and services from third parties;
•a failure to protect our intellectual property rights;
•exposure to significant license fees or damages for intellectual property infringement;
•service interruptions resulting from loss of power and/or telecommunications capabilities;
Risks Related to Our Indebtedness
•our potential inability to secure additional financing on favorable terms to meet our future capital needs;
•substantial indebtedness that may adversely affect our business operations;
•our ability to incur substantially more debt;
•pressures on cash flow to service our outstanding debt;
•restrictive terms of our credit agreement on our current and future operations;
Risks Related to Our Common Stock and Other General Risks
•changes in and interpretations of financial accounting matters that govern the measurement of our performance;
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•the potential for our goodwill or intangible assets to become impaired;
•quarterly fluctuations in our financial results due to various factors;
•volatility in our stock price;
•failure to maintain effective internal control over financial reporting;
•lack of employment or non-competition agreements with most of our key personnel;
•inherent limitations in our internal control over financial reporting;
•vulnerability to significant damage from natural disasters; and
•exposure to market risk related to interest rate changes.
Additional information concerning these and other factors that could cause differences between forward-looking statements and future actual results is discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Background
CPSI is a leading provider of healthcare solutions and services for community hospitals and other healthcare systems and post-acute care facilities. Founded in 1979, CPSI offers its products and services through four companies - Evident, LLC ("Evident"), TruBridge, LLC ("TruBridge"), American HealthTech, Inc. ("AHT"), and iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"). These combined companies are focused on improving the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our clients. The individual contributions of each of these companies towards this combined focus are as follows:
•Evident, which makes up our Acute Care EHR reporting segment, provides comprehensive acute care electronic health record ("EHR") solutions, Thrive and Centriq, and related services for community hospitals and their physician clinics.
•AHT, which makes up our Post-acute Care EHR reporting segment, provides a comprehensive post-acute care EHR solution and related services for skilled nursing and assisted living facilities.
•TruBridge, our third reporting segment, focuses on providing business management, consulting, and managed IT services along with its complete revenue cycle management ("RCM") solution for all care settings, regardless of their primary healthcare information solutions provider.
•Get Real Health, included within our TruBridge segment, delivers technology solutions to improve patient outcomes and engagement strategies with care providers.
Our companies currently support acute care facilities and post-acute care facilities with a geographically diverse customer mix within the domestic community healthcare market. Our target market for our acute care solutions includes community hospitals with fewer than 200 acute care beds. Our primary focus within this defined target market is on hospitals with fewer than 100 beds, which comprise approximately 98% of our acute care hospital EHR client base. The target market for our post-acute care solutions consists of approximately 15,500 skilled nursing facilities that are either independently owned or part of a larger management group with multiple facilities. Our target market for our TruBridge services includes community hospitals with fewer than 600 acute care beds.
See Note 16 to the condensed consolidated financial statements included herein for additional information on our three reportable segments.
Management Overview
Through much of our history, our strategy has been to achieve meaningful long-term revenue growth through sales of healthcare IT systems and related services to existing and new clients within our target market. Prospectively, our ability to continue to realize long-term revenue growth is largely dependent on our ability to sell new and additional products and services to our existing customer base, including cross-selling opportunities presented between our operating segments, Acute Care EHR, Post-acute Care EHR, and TruBridge. Chief among these cross-selling opportunities is the ability to continue to sell TruBridge services into our Acute Care EHR customer base. As a result, retention of existing Acute Care EHR customers is a key component of our long-term growth strategy by protecting this base of potential TruBridge 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 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. Historically, these retention rates had consistently remained in the mid-to-high
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90th percentile ranges. However, fiscal years 2017 through 2019 saw retention rates decrease to the low 90th percentile ranges due to, among other factors, (i) post-acquisition customer concerns regarding our long-term commitment to the Centriq platform, acquired in January 2016, (ii) an intensified competitive market, primarily due to aggressive pricing and marketing by a highly disruptive new entrant into the Acute Care EHR marketplace, and (iii) the announced sunset of the Classic platform, also acquired in January 2016. During 2020 and through the first quarter of 2021, retention rates returned to the mid-90th percentile ranges, as (i) the lingering effects of the Centriq acquisition continue to abate, (ii) the competitive environment continues to normalize as the aforementioned disruptive new entrant into this market has since departed the market altogether, and (iii) the Classic platform was sunset in the fourth quarter of 2019, with all related customers having either changed EHR vendors or migrated to one of our EHR solutions.
As we consider the long-term growth prospects of our business, we are seeking to further stabilize our revenues and cash flows and leverage TruBridge services as a growth agent. As a result, we are placing ever-increasing value in further developing our already significant recurring revenue base. 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 TruBridge services beyond our EHR customer base.
During 2020, we took pause and engaged a top-tier international consulting firm to assess our company-wide growth strategy. The outcome of this eight-week effort was the confirmation of our current strategy of cross-selling TruBridge into the existing EHR base, expanding TruBridge market share with sales to new community and larger health systems, and pursuing competitive EHR takeaway opportunities in the acute and post-acute markets. 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 business model is designed such that, as revenue growth materializes, earnings and profitability growth are naturally bolstered through the increased margin realization afforded us by operating leverage. Once a hospital has installed our solutions, we continue to provide support services to the customer on a continuing basis and make available to the customer our broad portfolio of business management, consulting, and managed IT services, all of which contribute to recurring revenue growth. The provision of these recurring revenue services typically requires fewer resources than the initial system installation, resulting in increased overall gross margins and operating margins. We also look to increase margins through cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies. However, in the immediate future, we anticipate incremental margin pressure from the continued client transition from perpetual license arrangements to “Software as a Service” arrangements as described below.
Turbulence in the U.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected by U.S. regulatory and national health initiatives than by the economic cycles of our economy. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology. Additionally, in response to these challenges, hospitals have become more selective regarding where they invest capital, resulting in a focus on strategic spending that generates a return on their investment. Despite these challenges, we believe healthcare information technology is often viewed as more strategically beneficial to hospitals than other possible purchases because the technology also plays an important role in healthcare by improving safety and efficiency and reducing costs. Additionally, we believe most hospitals recognize that they must invest in healthcare information technology to meet current and future regulatory, compliance and government reimbursement requirements.
In recent years, there have been significant changes to provider reimbursement by the U.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing fee-for-service in part by enrolling in an advanced payment model 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.
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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Although the overwhelming majority of our historical installations have been under a perpetual license model, the dramatic shift in customer preferences to a SaaS license model continued in 2020, with 68% of the year's new acute care EHR installations being performed in a SaaS model, compared to 43% in 2019 and only 12% in 2018. These SaaS offerings are becoming increasingly attractive to our clients because this configuration allows them to obtain access to advanced software products without a significant initial capital outlay. We expect this trend to continue for the foreseeable future, with the resulting impact on the Company’s financial statements being reduced system sales revenues in the period of installation in exchange for increased recurring periodic revenues (reflected in system sales and support revenues) over the term of the SaaS arrangement. This naturally places downward pressure on short-term revenue growth and profitability metrics, but benefits long-term revenue growth and profitability which, in our view, is consistent with our goal of delivering long-term shareholder value.
For customers electing to purchase our technology solutions under a perpetual license, we have historically made financing arrangements available on a case-by-case basis, depending on the various aspects of the proposed contract and customer attributes. These financing arrangements continue to comprise the majority of our perpetual license installations, and include short-term payment plans and longer-term lease financing through us or third-party financing companies. During 2018, total financing receivables increased dramatically and had a significant impact on operating cash flows. This increase in financing arrangements was primarily due to two reasons. First, meaningful use stage 3 (“MU3”) installations are primarily financed through short-term payment plans and demand for such installations increased significantly in late 2017. Second, competitor financing options, primarily through accounts receivable management collections and Cloud EHR arrangements, have applied pressure to reduce initial customer capital investment requirements for new EHR installations, leading to the offering of long-term lease options. In 2019, we experienced a modest reduction in total financing receivables due to the natural exhaustion of the MU3 opportunity and the aforementioned dramatic shift in license preferences towards SaaS arrangements, the former of which also resulted in a positive impact to operating cash flows. A more substantial reduction in total financing receivables occurred in 2020 and has continued into the first quarter of 2021.
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).
On February 1, 2021, we committed to a reduction in force that resulted in the termination of approximately 1.0% of our workforce (21 employees). The reduction in force is a component of a broader strategic review of the Company's operations that is intended to more effectively align our resources with business priorities. Substantially all of the employees impacted by the reduction in force exited the Company in the first quarter of 2021. The Company estimates that it will incur expenses of approximately $2.7 million related to the reduction in force, of which approximately $2.1 million was incurred in the first quarter of 2021, with the remaining expenses to be incurred during the remainder of 2021. These expenses consist of one-time termination benefits to the affected employees, including but not limited to severance payments, healthcare benefits, and payments for accrued vacation time. The Company expects to pay for the expenses from cash flow from operations and does not expect to incur any debt. After the reduction in force is fully implemented, the Company expects to realize approximately $3.9 million in annual savings compared to prior expense levels.
COVID-19
The continuing impacts of COVID-19 and related economic conditions on the Company’s results are highly uncertain and outside the Company’s control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate.
As a result of COVID-19, community hospital patient volume in the United States and other countries around the world have rapidly deteriorated. Although recent operational metrics indicate promising signs that these patient volumes are improving, the persistence of the pandemic and the unprecedented nature of the resulting challenges it has imposed on national and global healthcare and economic systems are likely to continue to negatively impact patient volumes and make uncertain the exact path to recovery for community hospitals. These decreased levels of our hospital clients' patient volumes have negatively impacted, and will continue to negatively impact, our revenues, gross margins, and income for our TruBridge service offerings. Additionally, new EHR system installations have been, and will continue to be, negatively impacted by restrictive travel and social distancing protocols. The Company began to experience this impact in March 2020, which increased in significance during the second quarter of 2020. Gradual signs of improvements started in the third quarter of 2020 and have continued through the fourth quarter of 2020 and the first quarter of 2021. The Company expects these impacts to continue for the forseeable future, but the degree of the impact will depend on the ability of our community hospital clients to return to normal
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operations and patient volume. We believe that COVID-19 has impacted, and will continue to impact, our business results in the following additional areas:
•Bookings – A decline in new business and add-on bookings as certain client purchasing decisions and projects are delayed to focus on treating patients, procuring necessary medical supplies, and managing their organization through this crisis. This decline in bookings eventually results in reduced backlog and lower subsequent revenue.
•TruBridge Revenues - Decreased levels of patient volume within our community hospital client base will negatively impact our revenues for our TruBridge service offerings as the overwhelming majority of TruBridge revenues are directly or indirectly correlated with client patient volumes. This decline in revenues will have a negative impact on gross margins and income.
•Associate productivity – A decline in associate productivity, primarily for our implementation personnel, as a large amount of work is typically done at client sites, which is being impacted by travel restrictions and our clients’ focus on the pandemic. Our clients’ focus on the pandemic has also led to pauses on existing projects and postponed start dates for others, which translates into lower implementation revenues, gross margin and income. We are mitigating this by doing more work remotely than we have in the past, but we cannot fully offset the negative impact.
•Travel – Associate travel restrictions reduce client-related travel, which reduces reimbursed travel revenues and lowers our costs of sales as a percent of revenues. Such restrictions also reduce non-reimbursable travel, which lowers operating expenses.
•Cash collections – A delay in client cash collections due to COVID-19’s impact on national reimbursement processes, and client focus on managing their own organizations’ liquidity during this time, could impact our cash collections. The federal government has allocated unprecedented resources specifically designed to assist healthcare providers with their operating and capital needs during the pandemic, allocating a total of $175 billion through the Coronavirus Aid, Relief, and Economic Security (CARES) Act Provider Relief Fund. Further, $10 billion has been specifically targeted for rural providers, which is of particular interest to our client base, which is comprised mostly of non-urban community hospitals. Of this $10 billion, the average rural hospital was expected to receive a total of approximately $3.6 million in direct financial relief. While these funds certainly help mitigate the financial pressures our clients face, the clinical and operational challenges remain immense and are likely to cause certain of our customers to more aggressively manage cash resources in order to preserve liquidity, resulting in uncharacteristic aging of our trade accounts receivable. Additionally, the aforementioned decrease in community hospital patient volumes has had, and will continue to have, a negative impact on TruBridge billings for services and resulting revenues. These factors would translate to lower cash flows from operating activities. Lower cash flows from operating activities may impact how we execute under our capital allocation strategy and may adversely affect our financial condition.
Results of Operations
During the three months ended March 31, 2021, we generated revenues of $68.0 million from the sale of our products and services, compared to $69.8 million million during the three months ended March 31, 2020, a decrease of 3% that is primarily attributed to decreased non-recurring revenues from our Acute Care EHR segment due to the aforementioned shift in customer preference towards SaaS arrangements and the impact of COVID-19 on client purchasing and implementation plans. Our net income for the three months ended March 31, 2021, increased by $0.1 million to $4.1 million from the three months ended March 31, 2020, primarily as the aforementioned revenue declines have been offset by corresponding decreases in operating expenses, costs of sales, and tax expense, as well as decreased interest expense arising from our long-term debt obligations. Net cash provided by operating activities increased by $6.1 million, from $7.6 million during the three months ended March 31, 2020 to $13.7 million during the three months ended March 30, 2021, primarily due to cash advantageous changes in working capital.
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The following table sets forth certain items included in our results of operations for the three months ended March 31, 2021 and 2020, expressed as a percentage of our total revenues for these periods:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (In thousands) | Amount | % Sales | Amount | % Sales | ||||||||||||||||||||||
| INCOME DATA: | ||||||||||||||||||||||||||
| Sales revenues: | ||||||||||||||||||||||||||
| System sales and support: | ||||||||||||||||||||||||||
| Acute Care EHR | $ | 31,890 | 46.9 | % | $ | 36,515 | 52.3 | % | ||||||||||||||||||
| Post-acute Care EHR | 4,476 | 6.6 | % | 4,671 | 6.7 | % | ||||||||||||||||||||
| Total System sales and support | 36,366 | 53.5 | % | 41,186 | 59.0 | % | ||||||||||||||||||||
| TruBridge | 31,639 | 46.5 | % | 28,571 | 41.0 | % | ||||||||||||||||||||
| Total sales revenues | 68,005 | 100.0 | % | 69,757 | 100.0 | % | ||||||||||||||||||||
| Costs of sales: | ||||||||||||||||||||||||||
| System sales and support: | ||||||||||||||||||||||||||
| Acute Care EHR | 16,212 | 23.8 | % | 17,259 | 24.7 | % | ||||||||||||||||||||
| Post-acute Care EHR | 1,164 | 1.7 | % | 1,328 | 1.9 | % | ||||||||||||||||||||
| Total System sales and support | 17,376 | 25.6 | % | 18,587 | 26.6 | % | ||||||||||||||||||||
| TruBridge | 15,779 | 23.2 | % | 15,057 | 21.6 | % | ||||||||||||||||||||
| Total costs of sales | 33,155 | 48.8 | % | 33,644 | 48.2 | % | ||||||||||||||||||||
| Gross profit | 34,850 | 51.2 | % | 36,113 | 51.8 | % | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Product development | 8,429 | 12.4 | % | 8,271 | 11.9 | % | ||||||||||||||||||||
| Sales and marketing | 5,301 | 7.8 | % | 6,997 | 10.0 | % | ||||||||||||||||||||
| General and administrative | 13,149 | 19.3 | % | 11,847 | 17.0 | % | ||||||||||||||||||||
| Amortization of acquisition-related intangibles | 3,057 | 4.5 | % | 2,866 | 4.1 | % | ||||||||||||||||||||
| Total operating expenses | 29,936 | 44.0 | % | 29,981 | 43.0 | % | ||||||||||||||||||||
| Operating income | 4,914 | 7.2 | % | 6,132 | 8.8 | % | ||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Other income | 814 | 1.2 | % | 362 | 0.5 | % | ||||||||||||||||||||
| Interest expense | (627) | (0.9) | % | (1,179) | (1.7) | % | ||||||||||||||||||||
| Total other income (expense) | 187 | 0.3 | % | (817) | (1.2) | % | ||||||||||||||||||||
| Income before taxes | 5,101 | 7.5 | % | 5,315 | 7.6 | % | ||||||||||||||||||||
| Provision for income taxes | 957 | 1.4 | % | 1,225 | 1.8 | % | ||||||||||||||||||||
| Net income | $ | 4,144 | 6.1 | % | $ | 4,090 | 5.9 | % | ||||||||||||||||||
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Revenues
Total revenues for the three months ended March 31, 2021 decreased by $1.8 million, or approximately 3%, compared to the three months ended March 31, 2020.
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System sales and support revenues decreased by $4.8 million, or 12%, compared to the first quarter of 2020. System sales and support revenues were comprised of the following during the respective periods:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
Recurring system sales and support revenues (1) | |||||||||||
| Acute Care EHR | $ | 27,210 | $ | 26,438 | |||||||
| Post-acute Care EHR | 4,222 | 4,134 | |||||||||
| Total recurring system sales and support revenues | 31,432 | 30,572 | |||||||||
Non-recurring system sales and support revenues (2) | |||||||||||
| Acute Care EHR | 4,680 | 10,077 | |||||||||
| Post-acute Care EHR | 254 | 537 | |||||||||
| Total non-recurring system sales and support revenues | 4,934 | 10,614 | |||||||||
| Total system sales and support revenue | $ | 36,366 | $ | 41,186 | |||||||
(1) Mostly comprised of support and maintenance, third-party subscriptions, and SaaS revenues. | |||||||||||
(2) Mostly comprised of installation revenues from the sale of our acute care and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model. | |||||||||||
Recurring system sales and support revenues increased by $0.9 million, or 3%, compared to the first quarter of 2020. Acute Care EHR recurring revenues increased by $0.8 million, or 3%, as attrition from the Thrive and Centriq customer base has normalized to more historical levels and our SaaS customer base has continued to grow, strengthening recurring revenues. Post-acute Care EHR recurring revenues increased by $0.1 million, or 2%, as attrition has stabilized as we continue to make technological improvements to the AHT product line.
Non-recurring system sales and support revenues decreased by $5.7 million, or 54%, compared to the first quarter of 2020. Acute Care EHR non-recurring revenues decreased by $5.4 million, or 54%. We installed our Acute Care EHR solutions at five new hospital clients during the first quarter of 2021 (two of which were under a SaaS arrangement, resulting in revenue being recognized ratably over the contract term) compared to nine new hospital clients during the first quarter of 2020 (eight under a SaaS arrangement). Despite this increase in non-SaaS new customer implementations, the related non-recurring revenues decreased as the first quarter of 2020 benefited from a high volume of late-installing applications for non-SaaS implementations that went live in prior periods. Comparatively, the continued shift in customer preference towards SaaS arrangements and the continuing impacts of COVID-19 on client purchasing and implementation plans has decreased the opportunities for such follow-on revenue activities for recent implementations.
TruBridge revenues increased by $3.1 million, or 11%, compared to the first quarter of 2020. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. Most notably, an expanded customer base for our accounts receivable management services resulted in a revenue increase of $1.9 million, or 18%. Additionally, revenue from our insurance services division increased by $0.8 million, or 10%, and revenue from medical coding services increased by $0.3 million, or 12%.
Costs of Sales
Total costs of sales decreased by $0.5 million, or 1%, compared to the first quarter of 2020. As a percentage of total revenues, costs of sales increased slightly to 49% of revenues in the first quarter of 2021 compared to 48% of revenues in the first quarter of 2020, as the decrease in revenue outpaced the decrease in costs of sales.
Costs of Acute Care EHR system sales and support decreased by $1.0 million, or 6%, compared to the first quarter of 2020, primarily due to travel costs savings of approximately $0.9 million due to the impact of COVID-19 on associate travel. The gross margin on Acute Care EHR system sales and support decreased to 49% in the first quarter of 2021, compared to 53% in the first quarter of 2020 as the aforementioned decrease in non-recurring revenues outpaced the related decrease in cost of sales.
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Costs of Post-acute Care EHR system sales and support decreased by $0.2 million, or 12%, compared to the first quarter of 2020, primarily due to reduced third party software costs combined with reduced hardware costs and improved personnel efficiency. The gross margin on Post-acute Care EHR system sales and support increased to 74% in the first quarter of 2021, compared to 72% in the first quarter of 2020, as growth in recurring revenues worked in tandem with cost efficiencies to increase margins.
Our costs associated with TruBridge sales and support increased by $0.7 million, or 5%, compared to the first quarter of 2020, primarily due to a $0.5 million, or 97%, increase in temporary labor costs necessary to support the growing revenue base. The gross margin on these services increased to 50% in the first quarter of 2021, compared to 47% during the first quarter of 2020, as the growing recurring revenue base worked in tandem with operational efficiencies to increase margins.
Product Development
Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs increased by $0.2 million, or 2%, compared to the first quarter of 2020, with the primary driver being a $0.3 million, or 4%, increase in payroll costs resulting primarily from annual compensation adjustments.
Sales and Marketing
Sales and marketing costs decreased by $1.7 million, or 24%, compared to the first quarter of 2020. The aforementioned reduction-in-force combined with reduced revenues resulted in payroll and commission expenses decreasing a combined $1.0 million, while travel restrictions related to COVID-19 resulted in a $0.3 million decrease in travel costs. Finally, stock compensation expense decreased by $0.4 million, due mostly to lowered expectations regarding eventual achievement of targets associated with our long-term performance share awards.
General and Administrative
General and administrative expenses increased by $1.3 million, or 11% , compared to the first quarter of 2020, mostly due to $2.1 million in reduction-in-force-related severance costs in the first quarter of 2021 combined with an increase of $0.5 million in costs associated with health benefits offered to our employees through our self-insured health plans. These increases were partially offset by decreases in employee retirement plan, legal and accounting, and stock-based compensation expenses.
Amortization of Acquisition-Related Intangibles
Amortization expense associated with acquisition-related intangible assets increased by $0.2 million, or 7%, compared to the first quarter of 2020, due to changes in estimates regarding the remaining useful lives of certain of our acquired intangible assets.
Total Operating Expenses
Total operating expenses remained flat at $30.0 million for the first quarter of 2021 and the first quarter of 2020. As a percentage of total revenues, total operating expenses increased to 44% of revenues in the first quarter of 2021, compared to 43% in the first quarter of 2020.
Total Other Income (Expense)
Total other income (expense) improved to income of $0.2 million during the first quarter of 2021 compared to expense of $0.8 million during the first quarter of 2020. The combined effects of a decreasing interest rate environment and lowered amounts outstanding under our long-term debt facilities resulted in a $0.6 million decrease in related interest expense.
Income Before Taxes
As a result of the foregoing factors, income before taxes decreased by $0.2 million, compared to the first quarter of 2020.
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Provision for Income Taxes
Our effective tax rate for the three months ended March 31, 2021 decreased to 18.8% from 23.0% for the three months ended March 31, 2020, primarily as a result of the tax consequences of stock-based compensation. Specifically, excess tax benefits resulting from restricted stock vesting benefited our effective tax rate by 1.6% during the first quarter of 2021. Comparatively, the first quarter of 2020 experienced a tax benefit shortfall resulting from restricted stock vesting that increased our effective tax rate by 2.4% for the period.
Net Income
Net income for the three months ended March 31, 2021 increased by less than $0.1 million to $4.1 million, or $0.29 per basic and $0.28 per diluted share, compared with net income of $4.1 million, or $0.28 per basic and diluted share, for the three months ended March 31, 2020. Net income represented 6% of revenue for both the three months ended March 31, 2021 and the three months ended March 31, 2020.
Liquidity and Capital Resources
The Company’s liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the three months ended March 31, 2021. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company’s liquidity and capital resources, see “COVID-19” in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I, "Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Sources of Liquidity
As of March 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $18.0 million and our remaining borrowing capacity under the revolving credit facility of $110.0 million, compared to $12.7 million of cash and cash equivalents and $105.0 million of remaining borrowing capacity under the revolving credit facility as of December 31, 2020. In conjunction with our acquisition of HHI 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 includes a $75 million term loan facility and a $110 million revolving credit facility.
As of March 31, 2021, we had $72.2 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of $18.0 million as of March 31, 2021, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of $110.0 million as of March 31, 2021, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Form 10-Q. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.
Operating Cash Flow Activities
Net cash provided by operating activities increased by $6.1 million from $7.6 million provided by operations for the three months ended March 31, 2020 to $13.7 million provided by operations for the three months ended March 31, 2021. The increase in cash flows provided by operations is primarily due to advantageous changes in working capital, which was a net use of cash during the first three months of 2020 in the amount of $4.3 million, compared to a net inflow of cash during the first three months of 2021 in the amount of $2.8 million.
Investing Cash Flow Activities
Net cash used in investing activities decreased by $1.7 million, with $1.4 million used in the three months ended March 31, 2021 compared to $3.0 million used during the three months ended March 31, 2020. Cash outflows for purchases of property and equipment decreased from $2.1 million in the first three months of 2020 to $0.5 million during the first three months of 2021. The decrease is mostly due to the addition of a West Coast data center to enhance our remote hosting capabilities in 2020 without similar capital expenditures during the first three months of 2021.
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Financing Cash Flow Activities
During the three months ended March 31, 2021, our financing activities used net cash of $7.0 million, as we paid a net $5.9 million in long-term debt principal and used $1.1 million to repurchase shares of our common stock, which are treated as treasury stock. Financing cash flow activities used $7.6 million during the three months ended March 31, 2020, primarily due to $6.2 million net paid in long-term debt principal and $1.4 million cash paid in dividends.
On September 4, 2020, our Board of Directors approved a stock repurchase program to repurchase up to $30 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. These shares may be purchased from time to time over a two-year period 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 March 31, 2021, we had $72.2 million in principal amount outstanding under the term loan facility and no 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 LIBOR 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 LIBOR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for LIBOR loans and the letter of credit fee ranges from 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 September 30, 2020, with quarterly principal payments of approximately $0.9 million through June 30, 2022, approximately $1.4 million through June 30, 2024 and approximately $1.9 million through March 31, 2025, with maturity on June 16, 2025 or such earlier date as the obligations under the Amended and Restated Credit Agreement 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 an Amended and Restated Pledge and Security Agreement, dated 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 Amended and Restated Credit Agreement provides incremental facility capacity of $50 million, subject to certain conditions. The Amended and Restated Credit Agreement includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated 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 Amended and Restated Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the Amended and Restated Credit Agreement, the Company is required to comply with a maximum consolidated net leverage ratio of 3.50:1.00. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in such agreement as of March 31, 2021.
The Amended and Restated Credit Agreement requires the Company to mandatorily prepay the credit facilities with 50% of excess cash flow (minus certain specified other payments). This mandatory prepayment requirement is applicable only if the Company's consolidated net leverage ratio exceeds 2.50:1.00. The Company is permitted to voluntarily prepay the credit facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of LIBOR rate loans made on a day other than the last day of any applicable interest period. An excess cash flow prepayment related to excess cash flow generated during 2020 was not required during the first quarter of 2021.
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Backlog
Backlog consists of revenues we reasonably expect to recognize over the next twelve months under all existing contracts, including those with remaining performance obligations that have original expected durations of one year or less and those with fees that are variable in which we estimate future revenues. The revenues to be recognized may relate to a combination of one-time fees for system sales and recurring fees for support and maintenance and TruBridge services. As of March 31, 2021, we had a twelve-month backlog of approximately $9 million in connection with non-recurring system purchases and approximately $249 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, and TruBridge services. As of March 31, 2020, we had a twelve-month backlog of approximately $12 million in connection with non-recurring system purchases and approximately $234 million in connection with recurring payments under support and maintenance and TruBridge services.
Bookings
Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||
| (In thousands) | 2021 | 2020 | ||||||||||||
System sales and support (1) | ||||||||||||||
| Acute Care EHR | $ | 5,442 | $ | 8,919 | ||||||||||
| Post-acute Care EHR | 648 | 913 | ||||||||||||
| Total system sales and support | 6,090 | 9,832 | ||||||||||||
TruBridge (2) | 2,687 | 9,511 | ||||||||||||
| Total bookings | $ | 8,777 | $ | 19,343 | ||||||||||
(1) Generally calculated as the total contract price (for system sales) and annualized contract value (for support). | ||||||||||||||
(2) Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts). | ||||||||||||||
Bookings for each of our operating segments experienced significant decreases compared to the first quarter of 2020, with Acute Care EHR bookings decreasing $3.5 million, or 39%, Post-acute Care EHR bookings decreasing $0.3 million, or 29%, and TruBridge bookings decreasing $6.8 million, or 72%. Sales activities during the first quarter of 2021 suffered from a number of incremental headwinds, chief among them being (a) COVID-19 related distractions, including increased infection rates for certain geographies and widespread focus on eventual vaccine rollouts, (b) reorganization transitions related to our February 2021 reduction-in-force, and (c) lower-value regulatory purchases disproportionately dominated sales discussions and resources. We view these incremental headwinds as being temporary delays in decision-making and not reflective of a diminished overall market opportunity.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, as defined by Item 303(a)(4) of SEC Regulation S-K, as of March 31, 2021.
Critical Accounting Policies and Estimates
Our Management Discussion and Analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported values of assets, liabilities, revenues, expenses and other financial amounts that are not readily apparent from other sources. Actual results may differ from these estimates and these estimates may differ under different assumptions or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes.
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In our Annual Report on Form 10-K for the year ended December 31, 2020, we identified our critical accounting polices related to revenue recognition, allowance for credit losses, estimates, and business combinations, including purchased intangible assets. There have been no significant changes to these critical accounting policies during the three months ended March 31, 2021.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. | ||||
Our exposure to market risk relates primarily to the potential change in the British Bankers Association London Interbank Offered Rate ("LIBOR"). We had $72.2 million of outstanding borrowings under our credit facilities with Regions Bank at March 31, 2021. 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 LIBOR 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 LIBOR 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 the credit facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of March 31, 2021 would result in a change in interest expense of approximately $0.7 million annually.
We did not have investments and do not utilize derivative financial instruments to manage our interest rate risks.
Item 4. | Controls and Procedures. | ||||
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. | Legal Proceedings. | ||||
From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any claims outside the ordinary course of business that are material to our financial condition or results of operations.
Item 1A. | Risk Factors. | ||||
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition or operating results. There have been no material changes to the risk factors disclosed in Part 1, "Item 1A. Risk Factors" in our Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | ||||
Repurchases of Equity Securities
The following table provides information about our repurchases of common stock during the three months ended March 31, 2021:
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(3) | ||||||||||
| Beginning of Period | $ | 28,695,292 | ||||||||||||
| January 1, 2021 - January 31, 2021 | 7,251 | $ | 28.83 | 7,251 | 28,486,244 | |||||||||
| February 1, 2021 - February 28, 2021 | 6,289 | 29.69 | 4,055 | 28,365,734 | ||||||||||
| March 1, 2021 - March 31, 2021 | 19,960 | 30.77 | 750 | $ | 28,343,267 | |||||||||
| Total | 33,500 | $ | 30.15 | 12,056 | ||||||||||
(1) We purchased 21,444 shares during the three months ended March 31, 2021 that were not made pursuant to our previously announced stock repurchase program, but were purchased to fund required tax withholding related to the vesting of restricted stock. Shares withheld to cover required tax withholdings related to the vesting of restricted stock do not reduce our total share repurchase authority. | ||||||||||||||
(2) Shares purchased during the three months ended March 31, 2021 pursuant to our previously announced stock repurchase program. | ||||||||||||||
(3) On September 4, 2020, our Board of Directors approved a stock repurchase program under which we may repurchase up to $30.0 million of our common stock through September 3, 2022. 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 Ace of 1934, as amended. | ||||||||||||||
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Item 3. | Defaults Upon Senior Securities. | ||||
Not applicable.
Item 4. | Mine Safety Disclosures. | ||||
Not applicable.
Item 5. | Other Information. | ||||
On February 22, 2021, CPSI entered into a sublease agreement (the “Sublease”) with Red Square, LP (the “Sublandlord”) in order to sublease a portion of a building in Mobile, Alabama that will house our principal executive office. The subleased portion of the building consists of a two-story office building in downtown Mobile with approximately 20,093 square feet of office space (the “Leased Office”). The Sublease term begins on April 1, 2021 and ends on June 5, 2024. CPSI will pay base rent of $37,937 per month. The Sublandlord is leasing the Leased Office from Central Optical, LLC (the “Landlord”) pursuant to a lease agreement (the “Master Lease”). The Landlord consented to the Sublease. The terms of the Master Lease are incorporated into the Sublease. The Sublandlord will remain responsible for paying certain maintenance items, taxes and the Landlord’s insurance expense as required under the Master Lease. CPSI is responsible for all other costs and obligations required of the Sublandlord under the Master Lease, and is responsible for all utilities for the Leased Office. The Sublandlord will leave the Leased Office with the items of furniture, fixtures and equipment (“FF&E”) listed in an attachment to the Sublease. At the expiration of the Sublease, the parties will negotiate for the sale of the FF&E to CPSI at a mutually agreeable price.
On March 1, 2021, CPSI entered into a lease agreement (the “New Lease”) with the Landlord to continue leasing the Leased Office from the Landlord upon the expiration of the Master Lease. The New Lease term will begin on June 6, 2024 and end on May 31, 2027. CPSI will pay base rent of $34,959 per month. In addition to the base rent, CPSI will be responsible for paying certain expenses of the Landlord related to the Leased Office, including insurance, and will be responsible for all costs of maintenance (other than the roof and exterior walls), taxes and utilities for the Leased Office.
The foregoing description of the Sublease and the New Lease is only a summary, does not purport to be complete and is qualified in its entirety by reference to, and should be read in conjunction with, the complete text of the Sublease and the New Lease, which are filed as Exhibits 10.1 and 10.2, respectively, to this Quarterly Report on Form 10-Q and incorporated herein by reference.
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Item 6. | Exhibits. | ||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101 | Interactive Data Files for CPSI’s Form 10-Q for the period ended March 31, 2021 | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COMPUTER PROGRAMS AND SYSTEMS, INC. | ||||||||||||||
| May 10, 2021 | By: | /s/ J. Boyd Douglas | ||||||||||||
| J. Boyd Douglas | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
| May 10, 2021 | By: | /s/ Matt J. Chambless | ||||||||||||
| Matt J. Chambless | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
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