CPSI(CPSI) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The unaudited condensed consolidated financial statements and accompanying notes detail the company's financial position and performance Condensed Consolidated Balance Sheets | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Assets | $345,091 | $327,746 | | Total Liabilities | $177,932 | $167,963 | | Total Stockholders' Equity | $167,159 | $159,783 | Condensed Consolidated Statements of Income | Metric (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Sales Revenues | $66,156 | $67,905 | $135,297 | $138,788 | | Gross Profit | $34,535 | $34,846 | $71,650 | $73,932 | | Operating Income | $3,616 | $2,225 | $9,663 | $9,874 | | Net Income | $1,663 | $328 | $5,107 | $4,296 | | Diluted EPS | $0.12 | $0.02 | $0.36 | $0.31 | Condensed Consolidated Statement of Stockholders' Equity | Metric (in thousands) | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Total Stockholders' Equity | $167,159 | $159,783 | | Net Income (6 months) | $5,107 | N/A | | Stock-based Compensation (6 months) | $5,127 | N/A | | Dividends (6 months) | $(2,858) | N/A | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------- | :--------------------------- | :--------------------------- | | Net Cash from Operating Activities | $17,461 | $7,818 | | Net Cash from Investing Activities | $(11,862) | $(417) | | Net Cash from Financing Activities | $(4,482) | $(6,429) | | Increase in Cash & Equivalents | $1,117 | $972 | | Cash & Equivalents at Period End | $6,849 | $1,492 | Notes to Condensed Consolidated Financial Statements - The notes provide detailed explanations of the company's accounting policies, significant transactions, and financial statement line items, prepared in accordance with U.S. GAAP and SEC regulations[23][24] Note 1. BASIS OF PRESENTATION - Financial statements consolidate CPSI and its wholly-owned subsidiaries: TruBridge, Evident, Healthland Holding Inc (HHI), and iNetXperts, Corp d/b/a Get Real Health[25] Note 2. RECENT ACCOUNTING PRONOUNCEMENTS - Adopted ASU 2016-02 (Leases) on January 1, 2019, increasing lease assets and liabilities by $4.9 million, with no significant impact on net earnings or cash flows[26] - ASU 2016-13 (Financial Instruments-Credit Losses) will be effective in Q1 2020; its impact is currently under evaluation[27] Note 3. REVENUE RECOGNITION - Revenue recognition follows ASC 606, based on a 5-step model for identifying contracts, performance obligations, transaction price, allocation, and recognition[29][31] - System sales and support include non-recurring (perpetual software licenses, installation, hardware) and recurring (software application support, hardware maintenance, SaaS arrangements) revenue streams[32][35][37] - TruBridge revenue from business processing services (BPS) and professional IT services is recognized as services are performed, often based on transaction volume or percentage of collections[38][39] Deferred Revenue (in thousands) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | | Beginning balance | $10,201 | $9,937 | | Deferred revenue recorded | $10,116 | $11,700 | | Deferred revenue acquired | $430 | — | | Less deferred revenue recognized as revenue | $(10,630) | $(9,337) | | Ending balance | $10,117 | $12,300 | Costs to Obtain and Fulfill Contracts (in thousands) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | | Beginning balance | $3,017 | $3,775 | | Costs to obtain and fulfill contracts capitalized | $2,752 | $1,562 | | Less costs to obtain and fulfill contracts recognized as expense | $(2,292) | $(2,125) | | Ending balance | $3,477 | $3,212 | Note 4. BUSINESS COMBINATION - Acquired Get Real Health on May 3, 2019, for $10.8 million cash (net of acquired cash) plus a contingent earnout of up to $14.0 million[48][49] - Get Real Health contributed approximately $0.2 million in revenue and a pre-tax loss of $0.7 million to CPSI's consolidated statement of operations for the three months ended June 30, 2019[53] Preliminary Purchase Price Allocation (in thousands) | Asset/Liability | Allocation | | :-------------- | :--------- | | Acquired cash | $159 | | Accounts receivable | $364 | | Prepaid expenses | $107 | | Property and equipment | $365 | | Operating lease asset | $1,285 | | Intangible assets | $7,800 | | Goodwill | $9,420 | | Accounts payable and accrued liabilities | $(594) | | Deferred taxes, net | $(1,192) | | Operating lease liability | $(1,285) | | Contingent consideration | $(5,000) | | Deferred revenue | $(430) | | Net assets acquired | $10,999 | Pro Forma Financial Information (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Pro forma revenues | $66,501 | $68,462 | $136,885 | $140,257 | | Pro forma net income (loss) | $815 | $(811) | $4,053 | $2,491 | | Pro forma diluted EPS | $0.06 | $(0.06) | $0.30 | $0.18 | Note 5. PROPERTY AND EQUIPMENT Property and Equipment, Net (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Land | $2,848 | $2,848 | | Buildings and improvements | $7,866 | $7,752 | | Computer equipment | $3,503 | $2,766 | | Leasehold improvements | $1,734 | $1,198 | | Office furniture and fixtures | $1,943 | $1,938 | | Automobiles | $18 | $18 | | Property and equipment, gross | $17,912 | $16,520 | | Less: accumulated depreciation | $(6,380) | $(5,645) | | Property and equipment, net | $11,532 | $10,875 | Note 6. OTHER ACCRUED LIABILITIES Other Accrued Liabilities (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Salaries and benefits | $5,685 | $8,722 | | Severance | $972 | $992 | | Commissions | $755 | $830 | | Self-insurance reserves | $1,042 | $1,017 | | Contingent consideration | $5,000 | $206 | | Other | $565 | $452 | | Operating lease liabilities, current portion | $1,263 | — | | Total other accrued liabilities | $15,282 | $12,219 | Note 7. NET INCOME PER SHARE - Unvested restricted stock awards are considered participating securities, requiring the use of the two-class method for EPS calculation[61] Basic and Diluted EPS (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income attributable to common stockholders | $1,601 | $320 | $4,913 | $4,152 | | Basic EPS | $0.12 | $0.02 | $0.36 | $0.31 | | Diluted EPS | $0.12 | $0.02 | $0.36 | $0.31 | | Weighted average shares outstanding (Basic) | 13,794 | 13,561 | 13,725 | 13,518 | | Weighted average shares outstanding (Diluted) | 13,794 | 13,561 | 13,725 | 13,518 | Note 8. INCOME TAXES - Effective tax rate for Q2 2019 decreased to 22.1% from 46.4% in Q2 2018, benefiting from increased R&D tax credits and the absence of a prior-year state income allocation adjustment[67] - Effective tax rate for H1 2019 decreased to 22.9% from 33.7% in H1 2018, due to increased R&D tax credits and decreased tax shortfalls related to stock-based compensation[68] Note 9. STOCK-BASED COMPENSATION - As of June 30, 2019, $14.9 million of unrecognized compensation expense related to unvested stock-based compensation is expected to be recognized over a weighted-average period of 1.9 years[70] Stock-Based Compensation Expense (in thousands) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Pre-tax stock-based compensation expense | $2,691 | $2,753 | $5,127 | $4,692 | | Net stock-based compensation expense | $2,099 | $2,147 | $3,999 | $3,660 | Restricted Stock Activity (Shares) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | | Unvested restricted stock outstanding at beginning of period | 475,132 | 309,195 | | Granted | 133,936 | 148,841 | | Performance share awards settled | 138,566 | 177,395 | | Vested | (221,775) | (153,424) | | Unvested restricted stock outstanding at end of period | 525,859 | 482,007 | Performance Share Award Activity (Shares) | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----- | :--------------------------- | :--------------------------- | | Performance share awards outstanding at beginning of period | 184,776 | 189,325 | | Granted | 110,310 | 184,776 | | Adjusted for actual performance, net of forfeitures | 44,189 | (11,930) | | Performance share awards settled | (138,566) | (177,395) | | Performance share awards outstanding at end of period | 200,709 | 184,776 | Note 10. FINANCING RECEIVABLES - Provides short-term payment plans (3-12 months) and long-term financing arrangements (2-7 years) for software installations[81][82] Financing Receivables, Net (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Short-term payment plans, net | $3,615 | $5,369 | | Long-term financing arrangements, net | $27,824 | $28,953 | | Total financing receivables, net | $31,439 | $34,322 | Allowance for Financing Credit Losses (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :----- | :------------ | :---------------- | | Balance at Beginning of Period | $2,567 | $3,244 | | Provision | $165 | $1,691 | | Charge-offs | $(370) | $(2,368) | | Balance at End of Period | $2,362 | $2,567 | Future Minimum Payments to be Received (in thousands) | Year Ending December 31, | Amount | | :----------------------- | :----- | | 2019 | $6,110 | | 2020 | $10,667 | | 2021 | $7,679 | | 2022 | $5,397 | | 2023 | $2,498 | | Thereafter | $1,489 | | Total minimum payments | $33,840 | Note 11. INTANGIBLE ASSETS AND GOODWILL - Goodwill is evaluated for impairment annually on October 1, or more frequently if indicators of impairment are present[94] Net Intangible Assets (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Customer Relationships | $61,754 | $62,824 | | Trademark | $8,083 | $8,287 | | Developed Technology | $19,150 | $15,115 | | Total Net Intangible Assets | $88,987 | $86,226 | Goodwill by Segment (in thousands) | Segment | December 31, 2018 | Acquired | June 30, 2019 | | :------ | :---------------- | :------- | :------------ | | Acute Care EHR | $97,095 | — | $97,095 | | Post-acute Care EHR | $29,570 | — | $29,570 | | TruBridge | $13,784 | $9,420 | $23,204 | | Total Goodwill | $140,449 | $9,420 | $149,869 | Note 12. LONG-TERM DEBT - The Amended Credit Facilities include a $117 million term loan and a $50 million revolving credit facility, bearing interest at a rate based on LIBOR or an alternate base rate plus an applicable margin[96][97] - The company was in compliance with all debt covenants, including a minimum fixed charge coverage ratio of 1.25:1.00 and a maximum consolidated leverage ratio of 3.50:1.00, as of June 30, 2019[100] Long-Term Debt (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Term loan facility | $92,479 | $102,432 | | Revolving credit facility | $38,393 | $29,693 | | Finance lease obligation | $85 | $250 | | Debt obligations | $130,957 | $132,375 | | Less: unamortized debt issuance costs | $(1,134) | $(1,306) | | Debt obligation, net | $129,823 | $131,069 | | Less: current portion | $(7,783) | $(6,486) | | Long-term debt | $122,040 | $124,583 | Anticipated Annual Future Maturities of Debt (in thousands) | Year | Amount | | :--- | :----- | | 2019 | $3,741 | | 2020 | $8,775 | | 2021 | $9,506 | | 2022 | $108,935 | | 2023 | — | | Thereafter | — | | Total | $130,957 | Note 13. OPERATING LEASES - Total rent expense for the six months ended June 30, 2019, was $1.3 million[105] - Cash paid for operating leases for the six months ended June 30, 2019, was $0.9 million[106] Supplemental Balance Sheet Information Related to Operating Leases (in thousands) | Category | June 30, 2019 | | :------- | :------------ | | Operating lease assets | $6,909 | | Operating lease liabilities, current portion | $1,263 | | Operating lease liabilities, net of current portion | $5,646 | | Total operating lease liabilities | $6,909 | | Weighted average remaining lease term | 7 years | | Weighted average discount rate | 5.2% | Note 14. COMMITMENTS AND CONTINGENCIES - Routine litigation is not expected to have a material adverse effect on financial statements[107] Note 15. FAIR VALUE - Fair value measurements are classified into Level 1 (quoted active market prices), Level 2 (observable market-based inputs), and Level 3 (unobservable inputs)[111][112][113] - The fair value of contingent consideration for Get Real Health is estimated at $5.0 million based on the probability of meeting EBITDA targets, using Level 3 inputs[113][114] Fair Value of Contingent Consideration (in thousands) | Description | Carrying Amount at 6/30/2019 | Fair Value at June 30, 2019 (Level 3) | | :---------- | :--------------------------- | :------------------------------------ | | Contingent consideration | $5,000 | $5,000 | Note 16. SEGMENT REPORTING - Operates three segments: Acute Care EHR, Post-acute Care EHR, and TruBridge, with performance assessed at the gross profit level[117] Segment Revenues (in thousands) | Segment | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Acute Care EHR | $34,048 | $37,207 | $71,495 | $77,390 | | Post-acute Care EHR | $5,592 | $5,539 | $11,392 | $11,108 | | TruBridge | $26,516 | $25,159 | $52,410 | $50,290 | | Total Revenues | $66,156 | $67,905 | $135,297 | $138,788 | Segment Gross Profit (in thousands) | Segment | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Acute Care EHR | $17,702 | $19,237 | $38,083 | $42,663 | | Post-acute Care EHR | $4,265 | $3,981 | $8,794 | $7,889 | | TruBridge | $12,568 | $11,628 | $24,773 | $23,380 | | Total Gross Profit | $34,535 | $34,846 | $71,650 | $73,932 | Note 17. SUBSEQUENT EVENTS - Declared a Q3 2019 dividend of $0.10 per share, payable August 30, 2019[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The company's strategy, operational results, and financial condition are analyzed, highlighting revenue trends and the Get Real Health acquisition Background - CPSI operates through Evident (Acute Care EHR), AHT (Post-acute Care EHR), TruBridge (business management, RCM, IT services), and Get Real Health (patient engagement, integrated into TruBridge)[125][126][127] - Serves approximately 1,000 acute care and 3,300 post-acute care facilities, with 98% of acute care EHR clients having fewer than 100 beds[128] Management Overview - Long-term growth strategy focuses on selling new products/services to existing customers, customer retention, and growing recurring revenues, particularly through TruBridge services[130][131] - Aims to increase margins through operating leverage and cost containment, such as integrating acute care product lines and a voluntary severance program[132][133] - Increased prevalence of SaaS arrangements for new system installations and add-on sales, shifting revenue recognition to a monthly basis over the contract term[139] - Financing arrangements, including short-term payment plans and long-term lease financing, are increasingly offered to clients[137] - The acquisition of Get Real Health strengthens patient engagement solutions and is expected to be accretive to FY2019 earnings[140] Results of Operations Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018 - Acute Care EHR recurring revenues decreased by $1.3 million (4%) due to customer attrition, partially offset by new Thrive customer growth[147] - Non-recurring Acute Care EHR revenues decreased by $1.9 million, primarily due to a $2.7 million decrease in MU3 installation revenues, despite more new hospital clients[148] - TruBridge revenue growth was driven by new RCM customer growth ($0.4 million, 5%), accounts receivable management services ($0.6 million, 7%), and IT management services ($0.3 million, 10%)[149] - Product development expenses remained flat, while sales and marketing expenses decreased by $0.5 million (7%) and general and administrative expenses decreased by $1.1 million (8%)[155][156][157] Key Financials (3 Months Ended June 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Total Revenues | $66,156 | $67,905 | $(1,749) | -2.6% | | System Sales & Support Revenue | $39,640 | $42,746 | $(3,106) | -7.3% | | TruBridge Revenue | $26,516 | $25,159 | $1,357 | +5.4% | | Net Income | $1,663 | $328 | $1,335 | +407.0% | | Effective Tax Rate | 22.1% | 46.4% | -24.3% | N/A | Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018 - Acute Care EHR recurring revenues decreased by $2.0 million (4%) due to attrition, while non-recurring revenues decreased by $3.9 million, including a $4.7 million decrease in MU3 installation revenues[165][166] - TruBridge revenue growth was driven by insurance services ($1.2 million, 9%), accounts receivable management ($1.0 million, 6%), and IT management services ($0.6 million, 10%)[167] - Product development expenses increased by $0.5 million (3%), while sales and marketing decreased by $0.7 million (5%) and general and administrative expenses decreased by $1.6 million (6%)[173][174][175] Key Financials (6 Months Ended June 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Total Revenues | $135,297 | $138,788 | $(3,491) | -2.5% | | System Sales & Support Revenue | $82,887 | $88,498 | $(5,611) | -6.3% | | TruBridge Revenue | $52,410 | $50,290 | $2,120 | +4.2% | | Net Income | $5,107 | $4,296 | $811 | +18.9% | | Effective Tax Rate | 22.9% | 33.7% | -10.8% | N/A | Liquidity and Capital Resources - Net cash provided by operating activities increased by $9.6 million to $17.5 million for the six months ended June 30, 2019, primarily due to advantageous changes in working capital[185] - Net cash used in investing activities increased by $11.4 million to $11.9 million, primarily due to the $11.0 million acquisition of Get Real Health[186] - Net cash used in financing activities was $4.5 million, including $1.4 million in net long-term debt principal payments and $2.9 million in dividends[188] - The company expects to use additional draws on its Amended Revolving Credit Facility to fund potential earnout payments of up to $14.0 million for the Get Real Health acquisition[184] - A $7.0 million prepayment was made on the Amended Term Loan Facility in Q1 2019 from 2018 excess cash flow[196] Liquidity Position (in millions) | Metric | June 30, 2019 | December 31, 2018 | | :----- | :------------ | :---------------- | | Cash and cash equivalents | $6.8 | $5.7 | | Remaining borrowing capacity (Amended Revolving Credit Facility) | $11.6 | $20.3 | | Indebtedness outstanding (Amended Credit Facilities) | $130.9 | N/A | Off-Balance Sheet Arrangements - No off-balance sheet arrangements as of June 30, 2019[200] Critical Accounting Policies and Estimates - Critical accounting policies include revenue recognition, allowance for doubtful accounts, and allowance for credit losses[203] - No significant changes to critical accounting policies during the six months ended June 30, 2019[203] Item 3. Quantitative and Qualitative Disclosures about Market Risk. The company's primary market risk exposure relates to interest rate fluctuations on its variable-rate debt - Primary market risk is interest rate fluctuations on $130.9 million of variable-rate debt under Amended Credit Facilities[204] - A 100 basis point change in interest rates would result in an approximate $1.3 million annual change in interest expense[204] - The company does not use derivative financial instruments to manage interest rate risks[205] Item 4. Controls and Procedures. Management confirms the effectiveness of disclosure controls and procedures, noting no material changes in internal controls Evaluation of Disclosure Controls and Procedures - CEO and CFO concluded that disclosure controls and procedures are effective at the reasonable assurance level[207] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting during Q2 2019[208] - Ongoing integration of Get Real Health and implementation of controls for new lease accounting standard are being evaluated for impact on internal controls[208] PART II. OTHER INFORMATION Item 1. Legal Proceedings. Routine litigation is not expected to materially impact the company's financial condition or results of operations - No material claims outside the ordinary course of business[211] Item 1A. Risk Factors. This section refers to the comprehensive risk factor discussion in the company's 2018 Annual Report on Form 10-K - Refer to the Annual Report on Form 10-K for December 31, 2018, for a comprehensive discussion of risk factors[212] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This item is not applicable to the current report - Not applicable[214] Item 3. Defaults Upon Senior Securities. This item is not applicable to the current report - Not applicable[215] Item 4. Mine Safety Disclosures. This item is not applicable to the current report - Not applicable[216] Item 5. Other Information. There is no other information to report under this item - None[217] Item 6. Exhibits. This section lists key documents filed with the report, including agreements, governance policies, and certifications - Includes Stock Purchase Agreement for Get Real Health, corporate governance documents, incentive plans, and CEO/CFO certifications[220] SIGNATURES The report is duly signed and certified by the President & CEO and the Chief Financial Officer - Signed by J. Boyd Douglas (President and CEO) and Matt J. Chambless (CFO) on August 9, 2019[225][226]