# TruBridge, Inc. (TBRG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TruBridge, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1169445/000116944522000003/cpsi-20211231.htm
Accession: 0001169445-22-000003
Filing date: 2022-03-15
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TBRG/
All MD&A years: /company/TBRG/mda/
Next year: /company/TBRG/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the "Selected Financial Data" and our financial statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this Annual Report.

Background

CPSI is a leading provider of healthcare solutions and services for community hospitals and other healthcare systems and post-acute care facilities. Founded in 1979, CPSI offers its products and services through six companies - Evident, LLC ("Evident"), American HealthTech, Inc. ("AHT"), TruBridge, LLC ("TruBridge"), iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), TruCode LLC ("TruCode") and Healthcare Resource Group, Inc. ("HRG"). 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.

•TruCode, included within our TruBridge segment, provides configurable, knowledge-based software that gives coders, clinical documentation integrity specialists and auditors the flexibility to code according to their knowledge, preferences and experience.

•HRG, which was acquired on March 1, 2022 and will be included within our TruBridge segment, provides specialized RCM solutions for facilities of all sizes.

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 18 to the consolidated financial statements included herein for additional information on our three reportable segments.

Management Overview

Strategy

Our core strategy is to achieve meaningful long-term revenue growth by cross-selling TruBridge services into our existing EHR customer base, expanding TruBridge market share with sales to new community hospitals and larger health systems, and pursuing competitive EHR takeaway opportunities in the acute and post-acute markets. During 2020, we engaged a top-tier international consulting firm to assess our core growth strategy, with the outcome of this eight-week engagement being the

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confirmation of our current core strategy and the identification of other innovative potential growth opportunities. We may also seek to grow through acquisitions of businesses, technologies or products if we determine that such acquisitions are likely to help us meet our strategic goals.

The opportunity to cross-sell TruBridge services is greatest within our Acute Care EHR customer base. As such, retention of existing Acute Care EHR customers is a key component of our long-term growth strategy by protecting this base of potential 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 not been lost due to customer attrition from our production environment customer base. Production environment customers are those that are using our applications to document live patient encounters, as opposed to legacy environment customers that have view-only access to historical patient records. Historically, these retention rates had consistently remained in the mid-to-high 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 2021, retention rates returned to the mid-to-high 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 remaining EHR solutions.

As we pursue meaningful long-term revenue growth by leveraging TruBridge as a growth agent, we are placing ever-increasing value in further developing our already significant recurring revenue base to further stabilize our revenues and cash flows. As such, maintaining and growing recurring revenues are key components of our long-term growth strategy, aided by the aforementioned focus on customer retention. This includes a renewed focus on driving demand for subscriptions for our existing technology solutions and expanding the footprint for TruBridge services beyond our EHR customer base.

While the combination of revenue growth and operating leverage results in increased margin realization, we also look to increase margins through specific cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies. However, in the immediate future, we anticipate incremental margin pressure from the continued client transition from perpetual license arrangements to “Software as a Service” arrangements as described below.

Industry Dynamics

Turbulence in the U.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected by U.S. regulatory and national health initiatives. In recent years, there have been significant changes to provider reimbursement by the U.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing the fee-for-service reimbursement model in part by enrolling in an advanced payment model that incentivizes high-quality, cost effective-care via value-based reimbursement. This pressure could further encourage adoption of healthcare IT and increase demand for business management, consulting, and managed IT services, as the future success of these healthcare providers is greatly dependent upon their ability to engage patient populations and to coordinate patient care across a multitude of settings, while optimizing operating efficiency along the way.

Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology while those with the necessary capital have become more selective in their investments. Despite these challenges, we believe healthcare IT will be an area of continued investment due to its unique potential to improve safety and efficiency and reduce costs while meeting current and future regulatory, compliance and government reimbursement requirements.

License Model Preferences

Much of the variability in our periodic revenues and profitability has been and will continue to be due to changing demand for different license models for our technology solutions, with variability in operating cash flows further impacted by the financing decisions within those license models. Our technology solutions are generally deployed in one of two license models: (1) perpetual licenses, for which the related revenue is recognized effectively upon installation, and (2) “Software as a Service” or

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“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.

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 began during 2019, with 43% of the year's new acute care EHR installations being performed in a SaaS model, compared to only 12% in 2018. This shift in customer preference toward the SaaS license model has since continued, with SaaS installations representing approximately 68% of new acute care EHR installations during 2020 and 63% during 2021. 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, with an even greater reduction during 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).

Margin Optimization Efforts

The aforementioned engagement during 2020 with a top-tier international consulting firm to assess our core growth strategy included an element geared towards margin optimization by identifying opportunities to further improve our cost structure. The end result was a margin optimization plan centered around execution against initiatives related to organizational realignment, expanded use of offshore partnerships and the use of automation to increase the efficiency and value of our associates' efforts.

Regarding the organizational realignment, on February 1, 2021, we committed to a reduction in force that resulted in the termination of approximately 1.0% of our workforce (21 employees). The reduction in force 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, with the last of the impacted employees exiting in the third quarter. The Company incurred expenses of approximately $2.7 million related to the reduction in force. These expenses consisted of one-time termination benefits to the affected employees, including but not limited to severance payments, healthcare benefits, and payments for accrued vacation time. As a result of the reduction in force, the Company expects to realize approximately $3.9 million in annual savings compared to prior expense levels.

The remaining margin optimization initiatives of enhanced leveraging of offshore partnerships and automation have commenced and, to date, have provided meaningful efficiencies to our operations, particularly within TruBridge. As a service organization, TruBridge's cost structure is heavily dependent upon human capital, subjecting TruBridge to the complexities and risks associated with this resource. Chief among these complexities and risks is the ever-present pressure of wage inflation, which has recently become a reality as national and international economies recover from the economic downturn caused by the COVID-19 pandemic. We believe that our efforts towards margin optimization are well-timed, enabling a rapid response to actual or expected wage inflation in order to preserve TruBridge gross margins, but we cannot guarantee that these efforts will fully eliminate any related margin deterioration.

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Labor Capitalization

During the second quarter of 2021, our ongoing monitoring activities associated with the capitalization of software development costs and the related correlation between capitalization rates and operational metrics designed to reflect the distribution of work revealed that our then-current labor capitalization methodology did not fully reflect all of the critical activities necessary to develop software assets. Consequently, during the second quarter of 2021, we elected to change our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use of Software. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change in accounting for software development costs is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. In connection with this change, we capitalized $8.8 million of software development costs during 2021. We estimate that the effect of this change was to increase capitalized amounts by approximately $4.6 million during 2021 with a corresponding decrease to product development costs.

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.

At the outset of the COVID-19 pandemic, community hospital patient volumes in the United States and other countries around the world rapidly deteriorated, negatively impacting the revenues, gross margins, and income of our TruBridge service offerings. Although these patient volumes have since largely recovered, the persistence of the pandemic and the unprecedented nature of the resulting challenges it has imposed on national and global healthcare and economic systems make the path to complete recovery uncertain for community hospitals and may negatively impact the future financial performance of our TruBridge services. Additionally, new EHR system installations have been, and may continue to be, negatively impacted by restrictive travel and social distancing protocols. The Company began to experience these impacts in March 2020, which increased in significance during the second quarter of 2020 before gradually improving over the remainder of 2020 and 2021. However, uncertainty remains with respect to the pace of economic recovery, as well as the potential for resurgence in transmission of COVID-19 and related business closures due to the emergence of virus variants and vaccine hesitancy and refusal among various populations.

The Company expects the negative impacts of the pandemic to continue for the foreseeable future, but the degree of the impact will depend on the ability of our community hospital clients to return to normal 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 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 has a negative impact on gross margins and income. Although TruBridge revenues have improved significantly from their pandemic-caused lows, we cannot predict the potential negative impacts any COVID-19 resurgence will have on patient volumes and the resulting revenues.

•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. While travel has begun to rebound with the easing of certain COVID-19 travel restrictions, any COVID-19 resurgence may result in the re-imposition of travel restrictions.

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•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, 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. While these funds certainly helped mitigate the financial pressures our clients faced, the clinical and operational challenges remain immense and are likely to cause certain of our customers to continue to 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 translate to lower cash flows from operating activities, which may impact how we execute under our capital allocation strategy and may adversely affect our financial condition.

2021 Financial Overview

We generated revenues of $280.6 million from the sale of our products and services during 2021, compared to $264.5 million during 2020, an increase of 6% that is primarily attributed to the aforementioned improvement in hospital patient volumes from the early days of the COVID-19 pandemic and the corresponding positive impact on TruBridge revenues. This increase in revenues is the primary driver behind the corresponding increase in net income, which increased by $4.2 million to $18.4 million during 2021, compared to $14.2 million during 2020. Despite this increased profitability, net cash provided by operating activities decreased by $1.4 million, from $49.1 million provided by operations during 2020 to $47.7 million provided by operations for 2021 as the aforementioned revenue increase coupled with delayed client cash collections resulted in a significant expansion of accounts receivable.

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Results of Operations

The following table sets forth certain items included in our results of operations for each of the three years in the period ended December 31, 2021, expressed as a percentage of our total revenues for these periods:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2021","","2020","","2019"],["(In thousands)","Amount","","% Sales","","Amount","","% Sales","","Amount","","% Sales"],["INCOME DATA:"],["Sales revenues:"],["System sales and support:"],["Acute Care EHR","$","125,379","","","44.7","%","","$","134,770","","","51.0","%","","$","144,074","","","52.5","%"],["Post-acute Care EHR","17,730","","","6.3","%","","18,184","","","6.9","%","","21,278","","","7.7","%"],["Total system sales and support","143,109","","","51.0","%","","152,954","","","57.8","%","","165,352","","","60.2","%"],["TruBridge","137,520","","","49.0","%","","111,534","","","42.2","%","","109,282","","","39.8","%"],["Total sales revenues","280,629","","","100.0","%","","264,488","","","100.0","%","","274,634","","","100.0","%"],["Costs of sales:"],["System sales and support:"],["Acute Care EHR","65,776","","","23.4","%","","64,540","","","24.4","%","","68,569","","","25.0","%"],["Post-acute Care EHR","4,888","","","1.7","%","","4,821","","","1.8","%","","5,303","","","1.9","%"],["Total system sales and support","70,664","","","25.2","%","","69,361","","","26.2","%","","73,872","","","26.9","%"],["TruBridge","69,083","","","24.6","%","","58,881","","","22.3","%","","56,617","","","20.6","%"],["Total costs of sales","139,747","","","49.8","%","","128,242","","","48.5","%","","130,489","","","47.5","%"],["Gross profit","140,882","","","50.2","%","","136,246","","","51.5","%","","144,145","","","52.5","%"],["Operating expenses:"],["Product development","30,389","","","10.8","%","","33,457","","","12.6","%","","36,861","","","13.4","%"],["Sales and marketing","21,978","","","7.8","%","","22,835","","","8.6","%","","26,495","","","9.6","%"],["General and administrative","50,022","","","17.8","%","","47,479","","","18.0","%","","45,200","","","16.5","%"],["Amortization of acquisition-related intangibles","13,786","","","4.9","%","","11,421","","","4.3","%","","11,006","","","4.0","%"],["Total operating expenses","116,175","","","41.4","%","","115,192","","","43.6","%","","119,562","","","43.5","%"],["Operating income","24,707","","","8.8","%","","21,054","","","8.0","%","","24,583","","","9.0","%"],["Other income (expense):"],["Other income","1,529","","","0.5","%","","1,494","","","0.6","%","","807","","","0.3","%"],["Gain on contingent consideration","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","5,000","","","1.8","%"],["Loss on extinguishment of debt","\u2014","","","\u2014","%","","(202)","","","(0.1)","%","","\u2014","","","\u2014","%"],["Interest expense","(3,160)","","","(1.1)","%","","(3,562)","","","(1.3)","%","","(6,694)","","","(2.4)","%"],["Total other income (expense)","(1,631)","","","(0.6)","%","","(2,270)","","","(0.9)","%","","(887)","","","(0.3)","%"],["Income before taxes","23,076","","","8.2","%","","18,784","","","7.1","%","","23,696","","","8.6","%"],["Provision for income taxes","4,646","","","1.7","%","","4,538","","","1.7","%","","3,228","","","1.2","%"],["Net income","$","18,430","","","6.6","%","","$","14,246","","","5.4","%","","$","20,468","","","7.5","%"]]
[[/GREPCENT_TABLE]]

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2021 Compared to 2020

Revenues

Total revenues for the year ended December 31, 2021 increased by $16.1 million, or 6%, compared to the year ended December 31, 2020.

System sales and support revenues, consisting of the Acute Care EHR and Post-acute Care EHR segments, decreased by $9.8 million, or 6%, from the year ended December 31, 2020. System sales and support revenues were comprised of the following for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020"],["Recurring system sales and support revenues (1)"],["Acute Care EHR","$","108,440","","","$","105,597"],["Post-acute Care EHR","16,472","","","16,272"],["Total recurring system sales and support revenues","124,912","","","121,869"],["Non-recurring system sales and support revenues (2)"],["Acute Care EHR","16,939","","","29,173"],["Post-acute Care EHR","1,258","","","1,912"],["Total non-recurring system sales and support revenues","18,197","","","31,085"],["Total system sales and support revenue","$","143,109","","","$","152,954"],["(1) Mostly comprised of support and maintenance, third-party subscriptions, and SaaS revenues."],["(2) Mostly comprised of installation revenues from the sale of our acute and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model."]]
[[/GREPCENT_TABLE]]

Recurring system sales and support revenues increased by $3.0 million, or 2%, during 2021. Acute Care EHR recurring revenues increased by $2.8 million, or 3%, as attrition from the Thrive and Centriq customer base has normalized to more historical levels and our SaaS customer base has continued to grow, strengthening recurring revenues. Post-acute Care EHR recurring revenues increased by $0.2 million, or 1%, as attrition has stabilized as we continue to make technological improvements to the AHT product line.

Non-recurring system sales and support revenues decreased by $12.9 million, or 41%, mostly driven by a $12.2 million, or 42%, decrease in Acute Care EHR non-recurring revenues. We installed our Acute Care EHR solutions at sixteen new hospital clients during 2021 (ten of which were under a SaaS arrangement, resulting in revenue being recognized ratably over the contract term; comparatively, revenues related to perpetual license arrangements are recognized when the related installation is complete) compared to twenty-five new hospital clients during 2020 (seventeen of which were under a SaaS arrangement). In addition to the decrease in the number of non-SaaS new customer implementations, the related non-recurring revenues decreased as 2020 benefited from a high volume of late-installing applications for non-SaaS implementations that went live in prior periods. Comparatively, the continued shift in customer preferences towards SaaS arrangements and the continuing impacts of COVID-19 on client purchasing and implementation plans have decreased the opportunities for such follow-on revenue activities for recent implementations and decreased demand for add-on applications within our existing Acute Care EHR customer base.

TruBridge revenues increased by $26.0 million, or 23%, compared to 2021. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the aforementioned impact of improving hospital patient volumes on TruBridge revenues, resulted in revenue increases of $8.6 million, or 21%, for our accounts receivable management services; $5.7 million, or 18%, for our insurance services division; and $1.4 million, or 16%, for our medical coding services. Additionally, increased demand for patient engagement solutions resulted in a revenue increase of $2.2 million, or 53%, related to GRH's solutions and services. Lastly, the acquisition of TruCode in May 2021 resulted in an additional $7.4 million of revenue during 2021.

Costs of Sales

Total costs of sales increased by $11.5 million compared to 2020. As a percentage of total revenues, costs of sales increased to 50% of revenues during 2021 from 48% during 2020.

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Costs of Acute Care EHR system sales and support increased by $1.2 million, or 2%, compared to 2020, as our increased usage of vendor partnerships to fulfill customer needs increased the related costs of third-party software by $3.6 million, which was partially offset by a $2.1 million decrease in hardware costs associated with the decrease in non-recurring revenues. The gross margin on Acute Care EHR system sales and support decreased to 48% in 2021 from 52% in 2020, as the increase in costs of sales worked in tandem with decreased non-recurring revenues to decrease margins.

Costs of Post-acute Care EHR system sales and support increased slightly to $4.9 million in 2021 from $4.8 million in 2020. This slight increase in costs of sales coupled with the aforementioned decrease in non-recurring revenues resulted a slight decrease in the related gross margins to 72% in 2021 compared to 73% in 2020.

Our costs associated with TruBridge sales and support increased by $10.2 million, or 17%, in 2021, primarily driven by resource expansion necessitated by the growing customer base and improved patient volumes. The acquisition of TruCode in May 2021 resulted in an additional $1.7 million of costs of sales during 2021. The gross margin on these services increased to 50% in 2021, compared to 47% during 2020, as the growing recurring revenue base worked in tandem with operational efficiencies to increase margins.

Product Development

Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs decreased by $3.1 million, or 9%, compared to 2020, with the primary driver being a $5.5 million, or 165%, increase in product development labor capitalization pursuant to the aforementioned change in our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use Software. This increased capitalization rate was partially offset by increased amortization of the related assets and increased payroll costs associated with expanding resources. The acquisition of TruCode in May 2021 resulted in $0.8 million of additional product development expenses during 2021.

Sales and Marketing

Sales and marketing costs decreased by $0.9 million, or 4%, compared to 2020. The aforementioned reduction-in-force combined with reduced non-recurring revenues resulted in decreased payroll and commission expenses. The acquisition of TruCode in May 2021 resulted in $0.4 million of additional sales and marketing expenses during 2021.

General and Administrative

General and administrative expenses increased by $2.5 million, or 5%, compared to 2020, mostly due to $2.5 million in severance costs associated with our 2021 reduction-in-force, an increase of $0.8 million in employee health claims, and the acquisition of TruCode in May 2021, which resulted in $1.1 million of additional general and administrative expenses during 2021 (exclusive of non-recurring transaction-related costs). Partially offsetting this aggregate $4.4 million increase in severance, employee health claims, and TruCode-related costs was a $1.8 million decrease in bad debt expense due to generally improved collections experience and the lack of any severe collectability determinations for customers with large receivables balances.

Amortization of Acquisition-Related Intangibles

Amortization expense associated with acquisition-related intangible assets increased by $2.4 million, or 21%, due to changes in estimates regarding the remaining useful lives of certain of our acquired intangible assets combined with the amortization of intangibles acquired in the TruCode acquisition.

Total Operating Expenses

As a percentage of total revenues, total operating expenses decreased to 41% in 2021 compared to 44% in 2020.

Total Other Income (Expense)

Total other income (expense) improved to expense of $1.6 million during 2021 compared to expense of $2.3 during 2020. This improvement was mostly attributable to a decreasing interest rate environment and lowered average amounts outstanding under our long-term debt facilities, resulting in a $0.4 million decrease in related interest expense.

Income Before Taxes

As a result of the foregoing factors, income before taxes increased to $23.1 million in 2021, compared to $18.8 million in 2020.

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Provision for Income Taxes

Our effective income tax rates for 2021 and 2020 were 20% and 24%, respectively. Lowered provision-to-return adjustments resulted in an incremental 2.6% decrease in our effective tax rate for 2021 compared to 2020, while decreased tax shortfalls related to stock-based compensation arrangements resulted in an incremental 1.9% decrease in our effective tax rate for 2021 compared to 2020.

Net Income

Net income for 2021 increased by $4.2 million to $18.4 million, or $1.26 per basic and diluted share, compared with $14.2 million, or $0.98 per basic and diluted share, for 2020.

2020 Compared to 2019

To review the results of operations comparison of the year ended December 31, 2020 compared with the year ended December 31, 2019, please refer to our Annual Report on Form 10-K filed on March 12, 2021 with the Securities and Exchange Commission or follow the link below.

https://www.sec.gov/ix?doc=/Archives/edgar/data/1169445/000162828021004641/cpsi-20201231.htm

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $11.4 million and our remaining borrowing capacity under the revolving credit facility of $79.0 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 December 31, 2021, we had $100.4 million in principal amount of indebtedness outstanding under the credit facilities. We believe that our cash and cash equivalents of $11.4 million as of December 31, 2021, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the revolving credit facility of $79.0 million as of December 31, 2021, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months and beyond. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Annual Report on Form 10-K. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms. Aside from normal operating cash requirements, obligations under our Credit Agreement (as discussed below) and operating leases (see Note 15 - Operating Leases for further information), and opportunistic uses of capital in share repurchases and business acquisition transactions, we do not have any material cash commitments or planned cash commitments. Although the Company currently has no obligations related to planned acquisitions, the Company's strategy includes the potential for future acquisitions, which may be funded thorough draws on the credit facilities or the use of the other sources of liquidity described above. On March 1, 2022, we made a draw of $48.0 million on the revolving credit facility in connection with the closing of the HRG acquisition, leaving a remaining $31.0 million of available borrowing capacity under the revolving credit facility as of that date. A portion of the proceeds from the draw, together with available cash on hand, was used by CPSI to make the various required payments at the closing of the acquisition

Operating Cash Flow Activities

Net cash provided by operating activities decreased by $1.4 million, from $49.1 million for 2020 to $47.7 million for 2021, despite a $4.2 million increase in net income from 2020 to 2021. The decrease in cash flows provided by operating activities was primarily due to less cash-advantageous changes in working capital, most notably as it relates to accounts receivable. During 2020, accounts receivable contracted by $6.4 million, or 16%, driven by a 4% reduction in annual revenues coupled with a significant decrease in days sales outstanding ("DSO") from 52 days to 45 days. During 2021, accounts receivable expanded by $2.0 million, or 6%, driven by a corresponding 6% increase in annual revenues with DSO remaining unchanged at

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45 days. The resulting impact to operating cash flows was a $3.7 million increase during 2020 compared to a $3.2 million decrease during 2021.

Investing Cash Flow Activities

Net cash used in investing activities increased from $6.7 million in 2020 to $69.9 million during 2021. Most notably, we used $59.6 million of cash during 2021 to fund our acquisition of TruCode, with no such acquisitions occurring during 2020. Cash outflows for purchases of property and equipment decreased from $3.3 million in 2020 to $0.9 million during 2021. This decrease in cash outflows 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 2021. Lastly, cash outflows related to capitalized internal software development efforts increased by $6.0 million due to the aforementioned change in methodology for estimating labor costs eligible for capitalization.

Financing Cash Flow Activities

During 2021, our financing activities were a net source of cash in the amount of $20.9 million, as $61.0 million in borrowings from our revolving line of credit were offset by long-term debt principal payments of $38.8 million and $1.3 million used to repurchase shares of our common stock, which are treated as treasury stock. Financing activities used $37.0 million during 2020, primarily due to $31.6 million net paid in long-term debt principal, $4.3 million cash paid in dividends and $1.3 million used to repurchase shares of our common stock.

On September 4, 2020, our Board of Directors approved a stock repurchase program to repurchase up to $30.0 million in aggregate amount of the Company's outstanding shares of common stock through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 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 December 31, 2021, we had $69.4 million in principal amount outstanding under the term loan facility and $31.0 million in principal amount outstanding under the revolving credit facility. Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted 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

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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 December 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 our 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. The excess cash flow mandatory prepayment requirement under the credit agreement did not result in a prepayment in 2021 or 2020.

Bookings

Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the years ended December 31, 2021 and 2020, respectively:

[[GREPCENT_TABLE]]
[["(In thousands)","2021","2020"],["System sales and support (1)"],["Acute Care EHR","$","37,633","","$","42,449"],["Post-acute Care EHR","3,240","","6,341"],["Total system sales and support","40,873","","48,790"],["TruBridge (2)","29,340","","33,238"],["Total bookings","$","70,213","","$","82,028"],["(1) Generally calculated as the total contract price (for system sales) including annualized contract value (for support) for perpetual license system sales and total contract price for SaaS sales."],["(2) Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts)."]]
[[/GREPCENT_TABLE]]

Sales activities during the first half 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 required by the Centers for Medicare and Medicaid Services' Hospital Price Transparency mandate requiring hospitals to provide clear, accessible pricing information online. These topics disproportionately dominated sales discussions and resources. Such headwinds began dissipating during the third quarter of 2021, resulting in overall bookings growth of $2.2 million, or 5%, for the second half of 2021 compared to the second half of 2020. However, the significant impact of these headwinds placed severe pressure on bookings for the first half of the year, resulting in bookings for 2021 that were $11.8 million, or 14%, below 2020 levels.

Acute Care EHR bookings in 2021 decreased by $4.8 million, or 11%, compared to 2020, as the impact of the aforementioned headwinds on bookings experienced during the first half of 2021 outweighed the increased strength in demand for new EHR installations during the second half of 2021.

Bookings for our Post-acute EHR segment decreased by $3.1 million, or 49%. Bookings volumes during the second and third quarters of 2020 were unusually high, representing the highest bookings periods for this business segment since 2016. By comparison, bookings for 2021 were significantly impacted by the aforementioned headwinds.

TruBridge bookings decreased by $3.9 million, or 12%, despite large international client wins propelling a record year for GRH bookings, which increased to $9.0 million in 2021 compared to $2.4 million during 2020. Exclusive of GRH, TruBridge bookings from existing EHR customers decreased by $7.4 million, or 36%, from 2020 levels while bookings from outside our EHR client base decreased by $3.1 million, or 29%, due to the aforementioned headwinds.

Bookings represent our sales activity during the periods reported above. The amount and volume of pending contracts at the end of the period is described under “Business – Backlog.” Some of the contracts in our backlog are subject to modification or cancellation at the convenience of the customer, or for default in the event that we are unable to perform under the contract.

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There can be no assurance that our bookings or backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable.

Critical Accounting Policies and Estimates

General 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We are required to make some estimates and judgments that affect the preparation of these financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, but actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to clients in an amount that reflects the consideration we expect to receive in exchange for those products and services. We enter into contracts that can include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations. The Company employs the 5-step revenue recognition model under ASC 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

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 and related training services, software application support, hardware, and hardware maintenance services to acute care community hospitals and post-acute care providers.

•Non-recurring Revenues

•Perpetual software licenses and installation, conversion, and related training services are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's stand-alone selling price ("SSP"), net of discounts. We determine each module's SSP using the residual method. Fees for licenses and installation, conversion, and related training services are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 11 - Financing Receivables for further information. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date which the client begins using the system in a live environment.

•Hardware revenue is recognized on a gross basis 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 three to five years. Payment is due monthly for support services provided.

•Subscriptions to third party content revenue is recognized on a gross basis 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.

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•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.

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. SSP for TruBridge BPS services is determined based on observable stand-alone selling prices. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.

TruBridge also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP, which is determined by observable stand-alone selling prices. Payment is due monthly as services are performed.

Lastly, TruBridge also provides certain software solutions and related support under SaaS arrangements and time-based software licenses. Revenue from SaaS arrangements is recognized in a manner consistent with SaaS arrangements for EHR software, as discussed above. Revenue from time-based software licenses is recognized upon delivery to the client (“point in time”) and revenue from non-license components (i.e., support) is recognized ratably over the respective contract term (“over time”). SSP for time-based licenses is determined using the residual approach, while the non-license component is based on cost plus reasonable margin.

Our contracts with clients often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine SSP for each distinct performance obligation. We use observable SSP for items that are sold on a stand-alone basis to similarly situated clients at unit prices within a sufficiently narrow range. For performance obligations that are sold to different clients for a broad range of amounts, or for performance obligations that are never sold on a stand-alone basis, the residual method in determining SSP is applied and requires significant judgment.

Allocating the transaction price, including estimating SSP of promised goods and services for contracts with discounts or variable consideration, may require significant judgment. Due to the short time frame of the implementation cycle, discount allocation is immaterial as revenue is recognized net of discounts within the same reporting period. In scenarios where the Company enters into a contract that includes both a software license and BPS or other services that are charged based on volume of services rendered, the Company allocates variable amounts entirely to a distinct good or service. The terms of the variable payment relate specifically to the entity’s efforts to satisfy that performance obligation.

Although we believe that our approach to estimates and judgments regarding revenue recognition is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material.

Allowance for Credit Losses

Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns, resulting in the establishment of general reserves. Additionally, if it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific allowance for credit losses may be recorded to reduce the related receivable to the amount expected to be recovered. Refer to Note 11 of the consolidated financial statements included herein for a detailed discussion about our credit loss accounting policy related to trade accounts receivable.

The Company has sold information and patient care systems to certain healthcare providers under short-term payment plans and sales-type leases. The Company establishes an allowance for credit losses for these financing receivables based on the historical level of customer defaults under such financing arrangements. Additionally, if it is determined that a customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific allowances may be recorded to reduce the related receivable to the amount expected to be recovered.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We adopted the new standard as of January 1, 2020. Adoption of this standard did not have a material impact on our consolidated financial statements. Although we believe that that our approach to estimates and judgments regarding our allowance for credit losses is reasonable, actual results could differ and we may be exposed to increases or decreases in required allowances that could be material.

Estimates

The Company uses estimates to record certain transactions and liabilities. These estimates are generally based on management’s best judgment, past experience, and utilization of third party services such as actuarial and other expert services. Because these estimates are subjective and variable, actual results could differ significantly from these estimates. Significant estimates included in our financial statements include those for self-insurance reserves under our health insurance plan, reserves for uncertain tax positions, bad debt and credit allowances, legal liability exposure or lack thereof, and accrued expenses.

Business Combinations, including Purchased Intangible Assets

The Company accounts for business combinations at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments relate to adjustments to the fair value of assets acquired and liabilities assumed based on information that we should have known at the time of acquisition. All changes to purchase accounting that do not qualify as measurement period adjustments are included in current period earnings.

The fair value amount assigned to an intangible asset is based on an exit price from a market participant’s viewpoint, and utilizes data such as discounted cash flow analysis and replacement cost models. We review acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill is not amortized but is evaluated for impairment annually or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. We test annually for impairment as of October 1.

As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a quantitative goodwill impairment assessment which compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds that reporting unit's fair value. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered to be impaired.

Critical estimates in valuing certain intangible assets and the fair value of the reporting unit during goodwill impairment tests include, but are not limited to, identifying reporting units, historical and projected customer retention rates, anticipated growth in revenue from the acquired customers, and expected future cash outflows.

Significant judgments in testing goodwill for impairment also include assigning assets and liabilities to the reporting unit and determining the fair value of each reporting unit based on management’s best estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.

Management’s best estimates and assumptions are employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.

Future business and economic conditions, as well as differences actually related to any of the assumptions, could materially affect the financial statements through impairment of goodwill or intangible assets, and acceleration of the amortization period of the purchased intangible assets, which are finite-lived assets.

As of October 1, 2021, the date of our most recent impairment test, our Post-acute Care EHR and TruBridge reporting units had fair values that were substantially in excess of their respective carrying values, at 50% and 240%, respectively. The calculated fair value of our Acute Care EHR reporting unit exceeded the reporting unit’s carrying value by 23% and, as such, poses a heightened risk of impairment if the reporting unit’s operating results were to decline in future periods. During the three months

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ended December 31, 2021, there were no identified indicators of impairment that required the Company to complete an interim quantitative assessment related to any of the Company’s reporting units or indefinitely-lived intangible assets.

Software Development Costs

Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. We capitalize incurred labor costs for software development from the time the preliminary project phase is completed until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We estimate the useful life of our capitalized software and amortize its value on a straight-line basis over that estimated life, which is estimated to be five years. If the actual life of the asset is deemed to be impaired, a write-down of the value of the asset may be recorded as a charge to earnings. Amortization begins when the related features are placed in service.

Quantitative and Qualitative Disclosures about Market and Interest Rate Risk

Our exposure to market risk relates primarily to the potential change in the British Bankers Association London Interbank Offered Rate ("LIBOR"). We had $100.4 million of outstanding borrowings under our credit facilities with Regions Bank at December 31, 2021. The term loan facility and revolving credit facility bear interest at a rate per annum equal to an applicable margin plus (1) the Adjusted LIBOR rate for the relevant interest period, subject to a floor of 0.5%, (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month LIBOR rate plus one percent per annum,subject to the aforementioned floor, or (3) a combination of (1) and (2). Accordingly, we are exposed to fluctuations in interest rates on borrowings under our credit facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of December 31, 2021 would result in a change in interest expense of approximately $1.0 million annually. Certain tenors of LIBOR began being phased out in late 2021, with full discontinuation planned for mid-2023. We believe the rate selected as the preferred alternative to LIBOR will be an acceptable replacement rate when LIBOR is fully discontinued. However, we plan to continue using the available LIBOR tenors until 2023 and as such cannot reasonably estimate the expected impact of the planned discontinuation of LIBOR at this time.

We did not have investments as of December 31, 2021. We do not utilize derivative financial instruments to manage our interest rate risks.

Recent Accounting Pronouncements

There were no new accounting standards required to be adopted in 2021 that had a material impact on our consolidated financial statements, and we do not believe that any recently issued but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.