COMPUTER PROGRAMS & SYSTEMS INC - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


ý			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

			For the quarterly period ended June 30, 2018.

o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-49796

COMPUTER PROGRAMS AND SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware						74-3032373
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

6600 Wall Street, Mobile, Alabama						36695
(Address of Principal Executive Offices)						(Zip Code)

(251) 639-8100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of August 6, 2018 there were 14,085,989 shares of the issuer’s common stock outstanding.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

Quarterly Report on Form 10-Q

(For the three and six months ended June 30, 2018)

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets (Unaudited) – June 30 , 2018 and December 31, 2017

Condensed Consolidated Statements of Income (Unaudited) – T hree and Six Months Ended June 30 , 2018 and 2017

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) – Six Months Ended June 30 , 2018

Condensed Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30 , 2018 and 2017

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

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PART I

FINANCIAL INFORMATION


Item 1.			Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	June 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	1,492	$	520
Accounts receivable, net of allowance for doubtful accounts of $3,213 and $2,654, respectively	41,216		38,061
Financing receivables, current portion, net	14,788		15,055
Inventories	1,478		1,417
Prepaid income taxes	651		—
Prepaid expenses and other	6,038		2,824
Total current assets	65,663		57,877
Property and equipment, net	11,042		11,692
Financing receivables, net of current portion	13,025		11,485
Other assets, net of current portion	1,155		—
Intangible assets, net	91,510		96,713
Goodwill	140,449		140,449

Total assets	$	322,844	$	318,216
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,814	$	7,620
Current portion of long-term debt	5,830		5,820
Deferred revenue	12,300		8,707
Accrued vacation	4,702		3,794
Income taxes payable	—		810
Other accrued liabilities	10,160		14,098
Total current liabilities	38,806		40,849
Long-term debt, net of current portion	133,151		136,614
Deferred tax liabilities	6,646		4,667
Total liabilities	178,603		182,130
Stockholders’ equity:
Common stock, $0.001 par value; 30,000 shares authorized; 14,086 and 13,760 shares issued and outstanding, respectively	14		14
Additional paid-in capital	159,770		155,078

Accumulated deficit	(15,543)		(19,006)
Total stockholders’ equity	144,241		136,086
Total liabilities and stockholders’ equity	$	322,844	$	318,216

The accompanying notes are an integral part of these condensed consolidated financial statements.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2018		2017		2018		2017
Sales revenues:
System sales and support	$	42,746	$	45,474	$	88,498	$	88,897
TruBridge	25,159		22,203		50,290		42,854
Total sales revenues	67,905		67,677		138,788		131,751
Costs of sales:
System sales and support	19,528		19,753		37,946		39,540
TruBridge	13,531		11,933		26,910		23,520
Total costs of sales	33,059		31,686		64,856		63,060
Gross profit	34,846		35,991		73,932		68,691
Operating expenses:
Product development	9,314		8,414		18,071		16,492
Sales and marketing	7,518		7,607		15,232		14,734
General and administrative	13,188		12,921		25,552		24,581
Amortization of acquisition-related intangibles	2,601		2,601		5,203		5,203
Total operating expenses	32,621		31,543		64,058		61,010
Operating income	2,225		4,448		9,874		7,681
Other income (expense):
Other income	194		70		392		140
Interest expense	(1,807)		(1,938)		(3,785)		(3,745)
Total other income (expense)	(1,613)		(1,868)		(3,393)		(3,605)
Income before taxes	612		2,580		6,481		4,076
Provision for income taxes	284		993		2,185		2,243
Net income	$	328	$	1,587	$	4,296	$	1,833
Net income per common share—basic	$	0.02	$	0.11	$	0.31	$	0.13
Net income per common share—diluted	$	0.02	$	0.11	$	0.31	$	0.13
Weighted average shares outstanding used in per common share computations:
Basic	13,561		13,420		13,518		13,397
Diluted	13,561		13,420		13,518		13,397
Dividends declared per common share	$	0.10	$	0.20	$	0.20	$	0.45

The accompanying notes are an integral part of these condensed consolidated financial statements.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock					Additional Paid-in Capital			Accumulated Deficit		Total Stockholders’ Equity

	Shares	Amount
Balance at December 31, 2017	13,760	$	14	$	155,078		$	(19,006)	$	136,086
Net income	—	—		—			4,296		4,296
Adoption of accounting standards (Note 2)	—	—		—			1,970		1,970

Issuance of restricted stock	326	—		—			—		—

Stock-based compensation	—	—		4,692			—		4,692
Dividends	—	—		—			(2,803)		(2,803)
Balance at June 30, 2018	14,086	$	14	$	159,770		$	(15,543)	$	144,241

The accompanying notes are an integral part of these condensed consolidated financial statements.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2018		2017
Operating Activities:
Net income	$	4,296	$	1,833
Adjustments to net income:
Provision for bad debt	1,695		473
Deferred taxes	1,404		1,920
Stock-based compensation	4,692		2,967
Depreciation	1,067		1,419
Amortization of acquisition-related intangibles	5,203		5,203
Amortization of deferred finance costs	173		365
Changes in operating assets and liabilities:
Accounts receivable	(4,453)		(3,013)
Financing receivables	(1,669)		(4,241)
Inventories	(62)		622
Prepaid expenses and other	(594)		(1,014)
Accounts payable	(1,806)		4,588
Deferred revenue	2,363		2,724
Other liabilities	(3,030)		2,236
Prepaid income taxes/income taxes payable	(1,461)		(191)
Net cash provided by operating activities	7,818		15,891
Investing Activities:
Purchases of property and equipment	(417)		(465)
Net cash used in investing activities	(417)		(465)
Financing Activities:
Dividends paid	(2,803)		(6,135)

Payments of long-term debt principal	(10,335)		(3,271)

Proceeds from revolving line of credit	7,300		—
Payments of revolving line of credit	(591)		(6,500)

Proceeds from exercise of stock options	—		1
Net cash used in financing activities	(6,429)		(15,905)
Increase (decrease) in cash and cash equivalents	972		(479)
Cash and cash equivalents at beginning of period	520		2,220
Cash and cash equivalents at end of period	$	1,492	$	1,741
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,539	$	3,355
Cash paid for income taxes, net of refund	$	2,242	$	514

The accompanying notes are an integral part of these condensed consolidated financial statements.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.

Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated balance sheet at that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of Computer Programs and Systems, Inc. ("CPSI" or the "Company") for the year ended December 31, 2017 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Principles of Consolidation

The condensed consolidated financial statements of CPSI include the accounts of TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), and Healthland Holding Inc. ("HHI"), all of which are wholly-owned subsidiaries of CPSI. The accounts of HHI include those of its wholly-owned subsidiaries, Healthland Inc. ("Healthland"), Rycan Technologies, Inc. ("Rycan"), and American HealthTech, Inc. ("AHT"). All significant intercompany balances and transactions have been eliminated.

Presentation

Effective January 1, 2018, our interface services team, which provides the design, development, implementation, and support services for all interfaces for data exchange from the CPSI applications, was previously considered a part of our product development division and has been integrated with our acute care client service team. This transition will work to create a consistent, personal, and convenient service experience for our clients characterized by transparent communication with prompt resolution. With this change, the payroll and related costs of this group of employees that were formerly included within the caption "Product development" on our condensed consolidated statements of income are now included within the caption "System sales and support - Cost of sales."

This reclassification had no effect on previously reported total sales revenues, operating income, income before taxes or net income.

Amounts presented for the three and six months ended June 30, 2017 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the three months ended June 30, 2017:


(In thousands)	As previously reported		Reclassification		As reclassified
Costs of sales:
System sales and support	$	18,859	$	894	$	19,753
Operating expenses:
Product development	$	9,308	$	(894)	$	8,414

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The following table provides the amounts reclassified for the six months ended June 30, 2017:


(In thousands)	As previously reported		Reclassification		As reclassified
Costs of sales:
System sales and support	$	37,789	$	1,751	$	39,540
Operating expenses:
Product development	$	18,243	$	(1,751)	$	16,492

2. RECENT ACCOUNTING PRONOUNCEMENTS

New Accounting Standards Adopted in 2018

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes prior revenue recognition guidance. This guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2017, which was effective for the Company as of the first quarter of our fiscal year ending December 31, 2018. We adopted this new accounting standard codified as Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, and the related amendments ("new revenue standard") during the first quarter of 2018 and have applied it to all contracts using the modified retrospective method, pursuant to which the cumulative effect of initially applying the new revenue standard is recognized as an adjustment to retained earnings and impacted balance sheet line items as of January 1, 2018, the date of adoption. The comparative previous period information continues to be reported under the accounting standards in effect for that period.

We completed an assessment of our systems, data, and processes that are affected by the implementation of this new revenue standard and have concluded that this standard does not significantly alter revenue recognition practices for our system sales and support and TruBridge revenue streams. The impact on our revenue recognition is limited to deferring and amortizing implementation fees over the contract life related to our Rycan revenue cycle management product, in which we previously recognized revenue as implementation was completed. Rycan implementation fees totaled $1.6 million in 2017, less than 1% of our 2017 revenues. The balance sheet impact of the deferred revenue related to these fees was an increase of $1.8 million as of the date of adoption. Also impacting deferred revenue was a decrease of $0.6 million related to previous billings which no longer required deferred recognition as of the date of adoption.

In addition to revenue recognition, the new revenue standard impacts our consolidated financial statements with respect to the capitalization of certain commissions and contract fulfillment costs which were previously expensed as incurred. Commissions and contract fulfillment costs related to the implementation of software as a service arrangements are now capitalized and amortized over the expected life of the customer. TruBridge commissions, which are paid up to twelve months in advance, are now capitalized and amortized over the prepayment period. The balance sheet impact of the prepaid assets was an increase of $3.8 million as of the date of adoption.

Due to the aforementioned changes in assets and liabilities related to the adoption of the new revenue standard, our deferred tax liability increased $0.6 million as of the date of adoption.

In total, the adoption of ASU 2014-09 resulted in a net increase in retained earnings of $2.0 million as of the date of adoption.

In accordance with the new revenue standard requirements, the disclosures of the impact of adoption on our condensed consolidated income statements and balance sheet were as follows:

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	Three Months Ended June 30, 2018
(In thousands)	As reported		Balances without adoption of ASC 606		Effect of adoption increase/(decrease)
Condensed Consolidated Statements of Income
Revenue: TruBridge	$	25,159	$	25,057	$	102
Cost of sales: System sales and support	19,528		19,529		(1)
Gross profit	34,846		34,743		103
Sales and marketing	7,518		7,121		397
Operating income	2,225		2,519		(294)
Provision for income taxes	284		346		(62)
Net income	$	328	$	560	$	(232)


	Six Months Ended June 30, 2018
(In thousands)	As reported		Balances without adoption of ASC 606		Effect of adoption increase/(decrease)
Condensed Consolidated Statements of Income
Revenue: TruBridge	$	50,290	$	50,129	$	161
Cost of sales: System sales and support	37,946		37,880		66
Gross profit	73,932		73,837		95
Sales and marketing	15,232		14,735		497
Operating income	9,874		10,276		(402)
Provision for income taxes	2,185		2,269		(84)
Net income	$	4,296	$	4,614	$	(318)


	June 30, 2018
(In thousands)	As reported		Balances without adoption of ASC 606		Effect of adoption increase/(decrease)
Condensed Consolidated Balance Sheet
Prepaid assets and other	$	6,038	$	3,981	$	2,057
Other assets, net of current	1,155		—		1,155
Total assets	322,844		319,632		3,212
Deferred revenue	12,300		11,230		1,070
Deferred tax liability	6,646		6,156		490
Total liabilities	178,603		177,043		1,560
Retained earnings	$	(15,543)	$	(17,195)	$	1,652

The effects of the changes in balance sheet accounts resulting from the adoption of the new revenue standard are primarily due to the beginning adjustments for adoption mentioned above, accompanied by incremental changes resulting from activity during the period ending June 30, 2018. Refer to Note 3 - Revenue Recognition for more information on period activity.

The new revenue standard requirements did not impact our net cash provided by or used in operating, investing, or financing cash flows on our condensed consolidated statements of cash flows, although components within changes in operating assets and liabilities were immaterially impacted by adoption.

In August 2016, the FASB issued ASU 2016-15, Classifications of Certain Cash Receipts and Cash Payments, which clarifies cash flow classification for eight specific issues, including debt prepayment or extinguishment costs, contingent

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consideration payments made after a business combination, proceeds from the settlement of insurance claims, and proceeds from settlement of corporate-owned life insurance policies. This guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2017, which was effective for the Company as of the first quarter of our fiscal year ending December 31, 2018. The adoption of ASU 2016-15 did not have a material effect on our financial statements.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, to assist an entity in evaluating when a set of transferred assets and activities is a business. The guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2017, and will be applied prospectively to any transactions occurring following adoption. The adoption of ASU 2017-01 did not have a material effect on our financial statements.

New Accounting Standards Yet to be Adopted

In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance will require the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018, which will be effective for the Company as of the first quarter of our fiscal year ending December 31, 2019. The Company is currently evaluating the method of adoption and potential utilization of practical expedients. The estimated impact on the financial statements of implementation of this standard is increased lease assets and lease liabilities in the range of $4 to $6 million as of the anticipated adoption date, January 1, 2019.

We do not believe that any other recently issued but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.

3. REVENUE RECOGNITION

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

Revenue is recognized net of shipping charges and any taxes collected from clients, which are subsequently remitted to governmental authorities.

System Sales and Support

The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, training, hardware and software application support and hardware maintenance services to acute care and post-acute care community hospitals.

Non-recurring Revenues

• Perpetual software licenses, installation, conversion, and related training are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's stand-alone selling price ("SSP"), net of discounts. Fees for licenses, installation, conversion, and related training are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 9 - 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.

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• Hardware revenue is recognized separately from software licenses at the point in time it is delivered to the client. The SSP of hardware is cost plus a reasonable margin. Payment is generally due upon delivery of the hardware to the client. Standard manufacturer warranties apply to hardware.

Recurring Revenues

• Software application support and hardware maintenance services sold with software licenses and hardware are separate and distinct performance obligations. Revenue for support and maintenance services is recognized based on SSP, which is the renewal price, ratably over the life of the contact, which is generally three to five years. Payment is due monthly for support services provided.

• Subscriptions to third party content revenue is recognized as a separate performance obligation ratably over the subscription term based on SSP, which is cost plus a reasonable margin. Payment is due monthly for subscriptions to third party content.

• Software as a Service ("SaaS") arrangements for EHR software and related conversion and training services are considered a single performance obligation. Revenue is recognized on a monthly basis as the SaaS service is provided to the client over the contract term. Payment is due monthly for SaaS services provided.

Refer to Note 14 - Segment Reporting, for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.

TruBridge

TruBridge provides an array of business processing services ("BPS") consisting of accounts receivable management, private pay services, insurance services, medical coding, electronic billing, statement processing, payroll processing, and contract management. Fees are recognized over the period of the client contractual relationship as the services are performed based on the SSP, net of discounts. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.

TruBridge also provides professional IT services. Revenue from professional services is recognized as the services are performed based on SSP. Payment is due monthly as services are performed.

Deferred Revenue

Deferred revenue represents amounts invoiced to clients for which the services under contract have not been completed and revenue has not been recognized, including annual renewals of certain software subscriptions and customer deposits for implementations to be performed at a later date. Revenue is recognized ratably over the life of the software subscriptions as services are provided and at the point-in-time when implementations have been completed.


(In thousands)	Six Months Ended June 30, 2018
Balance as of January 1, 2018	$	9,937
Deferred revenue recorded	11,700
Less deferred revenue recognized as revenue	(9,337)
Balance as of June 30, 2018	$	12,300

The $11.7 million of deferred revenue recorded during the six months ended June 30, 2018 is comprised primarily of the annual renewals of certain software subscriptions billed during the first quarter of each year and deposits collected for future EHR installations. The deferred revenue recognized as revenue during the six months ended June 30, 2018 is comprised primarily of the periodic recognition of annual renewals that were deferred until earned and deposits for future EHR installations that were deferred until earned.

Costs to Obtain and Fulfill a Contract with a Customer

Costs to obtain a contract include the commission costs related to SaaS licensing agreements, which are capitalized and amortized ratably over the expected life of the customer. As a practical expedient, we generally recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less, with the exception of commissions generated from TruBridge sales. TruBridge commissions, which are paid up to

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twelve months in advance, are capitalized and amortized over the prepayment period. Costs to obtain a contract are expensed within sales and marketing expenses in the accompanying condensed consolidated statements of income.

Contract fulfillment costs related to the implementation of SaaS arrangements are capitalized and amortized ratably over the expected life of the customer. Costs to fulfill contracts consist of the payroll costs for the implementation of SaaS arrangements, including time for training, conversion, and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption "System sales and support - Cost of sales."

Costs to obtain and fulfill contracts related to SaaS arrangements are included within the "Prepaid expenses and other" and "Other assets, net of current portion" line items on our condensed consolidated balance sheets.


(In thousands)	Six Months Ended June 30, 2018
Balance as of January 1, 2018	$	3,775
Costs to obtain and fulfill contracts recorded	1,562
Less costs to obtain and fulfill contracts recognized as expense	(2,125)
Balance as of June 30, 2018	$	3,212

Significant Judgments

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.

Significant judgment is required in determining the expected life of a customer, which is the amortization period for costs to obtain and fulfill a contract that have been capitalized. The Company determined that the expected life of the customer is not materially different from the initial contract term based on the characteristics of the SaaS offering.

Remaining Performance Obligations

Disclosures regarding remaining performance obligations are not considered material as the overwhelming majority of the Company's remaining performance obligations either (a) are related to contracts with an expected duration of one year or less, or (b) exhibit revenue recognition in the amount to which the Company has the right to invoice.

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4. PROPERTY AND EQUIPMENT

Property and equipment was comprised of the following at June 30, 2018 and December 31, 2017:


(In thousands)	June 30, 2018		December 31, 2017
Land	$	2,848	$	2,848
Buildings and improvements	8,247		8,240

Computer equipment	3,679		3,269
Leasehold improvements	5,001		5,001
Office furniture and fixtures	2,865		2,865
Automobiles	70		70
	22,710		22,293
Less: accumulated depreciation	(11,668)		(10,601)
Property and equipment, net	$	11,042	$	11,692

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities was comprised of the following at June 30, 2018 and December 31, 2017:


(In thousands)	June 30, 2018		December 31, 2017
Salaries and benefits	$	6,706	$	8,432
Severance	507		1,139
Commissions	713		2,416
Self-insurance reserves	1,037		1,024
Contingent consideration	615		586
Other	582		501
Other Accrued Liabilities	$	10,160	$	14,098

The accrued contingent consideration depicted above represents the potential earnout incentive for former Rycan shareholders, relating to the purchase of Rycan by HHI in 2015. We have estimated the fair value of the contingent consideration based on the amount of revenue we expect to be earned by Rycan through the year ending December 31, 2018 in accordance with the purchase agreement between the parties.

6. NET INCOME PER SHARE

The Company presents basic and diluted earnings per share ("EPS") data for its common stock. Basic EPS is calculated by dividing the net income attributable to stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to stockholders of the Company and the weighted average number of shares of common stock outstanding during the period for the effects of all dilutive potential common shares, including awards under stock-based compensation arrangements.

The Company's unvested restricted stock awards (see Note 8) are considered participating securities under FASB Codification topic, Earnings Per Share, because they entitle holders to non-forfeitable rights to dividends until the awards vest or are forfeited. When a company has a security that qualifies as a "participating security," the Codification requires the use of the two-class method when computing basic EPS. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net income to allocate to common stockholders, income is allocated to both common stock and participating securities based on their respective weighted average shares outstanding for the period, with net income attributable to common stockholders ultimately equaling net income less net income attributable to participating securities. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method.

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The following is a calculation of the basic and diluted EPS for the Company's common stock, including a reconciliation between net income and net income attributable to common stockholders:


	Three Months Ended						Six Months Ended
(In thousands, except per share data)	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Net income	$	328	$	1,587	$	4,296	$	1,833
Less: Net income attributable to participating securities	(8)		(45)		(144)		(41)
Net income attributable to common stockholders	$	320	$	1,542	$	4,152	$	1,792

Weighted average shares outstanding used in basic per common share computations	13,561		13,420		13,518		13,397
Add: Dilutive potential common shares	—		—		—		—
Weighted average shares outstanding used in diluted per common share computations	13,561		13,420		13,518		13,397

Basic EPS	$	0.02	$	0.11	$	0.31	$	0.13
Diluted EPS	$	0.02	$	0.11	$	0.31	$	0.13

During 2018, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of time-vesting restricted stock if the predefined performance criteria are met. The awards provide for an aggregate target of 184,776 shares, none of which have been included in the calculation of diluted EPS for the three and six months ended June 30, 2018 because the related threshold award performance level has not been achieved as of June 30, 2018. See Note 8 - Stock-based Compensation for more information.

7. INCOME TAXES

The Company determines the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

Our effective tax rate for the three months ended June 30, 2018 increased to 46% from 38% for the three months ended June 30, 2017. Our effective tax rate for the three months ended June 30, 2018 was heavily impacted by the year-to-date impact of changing state income allocation determinations among our various subsidiaries from entities with lower effective state rates to entities with higher effective state rates. The year-to-date adjustment, when recorded in a three-month period of significantly lower net income before taxes compared to the immediately preceding period, had an outsized impact on our effective tax rate, resulting in a 25% increase in the effective tax rate. This increase was partially offset by the tax benefits of the Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of 2018.

Our effective tax rate for the six months ended June 30, 2018 decreased to 34% from 55% for the six months ended June 30, 2017. Our effective tax rate for the six months ended June 30, 2018 was impacted by the Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of 2018. The six months ended June 30, 2018 also included a $0.4 million shortfall tax expense related to stock-based compensation that increased the effective rate by 6%. During the six months ended June 30, 2017 we experienced a shortfall tax expense related to stock-based compensation of $0.9 million that increased the effective rate by 23%.

8. STOCK-BASED COMPENSATION

Stock-based compensation expense is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employee's or non-employee director's requisite service period.

The following table details total stock-based compensation expense for the three and six months ended June 30, 2018 and 2017, included in the condensed consolidated statements of income:

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	Three Months Ended						Six Months Ended
(In thousands)	2018		2017		2018		2017
Costs of sales	$	585	$	425	$	1,024	$	743
Operating expenses	2,168		1,261		3,668		2,224
Pre-tax stock-based compensation expense	2,753		1,686		4,692		2,967
Less: income tax effect	(606)		(658)		(1,032)		(1,157)
Net stock-based compensation expense	$	2,147	$	1,028	$	3,660	$	1,810

The Company's stock-based compensation awards are in the form of restricted stock and performance share awards granted pursuant to the Company's 2012 Restricted Stock Plan for Non-Employee Directors and Amended and Restated 2014 Incentive Plan (the "Plans"). As of June 30, 2018, there was $17.6 million of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the Plans, which is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock

The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plans with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from one to three years. The Company records expenses for these grants on a straight-line basis over the applicable vesting periods. Shares of restricted stock may also be issued pursuant to the settlement of performance share awards, for which the Company records expenses in the manner described in the "Performance Share Awards" section below.

A summary of restricted stock activity (including shares of restricted stock issued pursuant to the settlement of performance share awards) under the Plans during the six months ended June 30, 2018 and 2017 is as follows:


	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Shares	Weighted-Average Grant Date Fair Value Per Share		Shares	Weighted-Average Grant Date Fair Value Per Share
Unvested restricted stock outstanding at beginning of period	309,195	$	38.36	184,885	$	54.63
Granted	148,841	30.20		222,390	32.87
Performance share awards settled through the issuance of restricted stock	177,395	29.94		—	—
Vested	(153,424)	40.81		(80,558)	55.34

Unvested restricted stock outstanding at end of period	482,007	$	31.96	326,717	$	39.64

Performance Share Awards

The Company grants performance share awards to executive officers and certain key employees under the Amended and Restated 2014 Incentive Plan. The number of shares of common stock earned and issuable under each award is determined at the end of each one-year or three-year performance period, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. The three-year performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR") compared to an industry index. If certain levels of the performance objective are met, the award results in the issuance of shares of restricted stock or common stock corresponding to such level. One-year performance share awards are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally three years. Three-year performance share awards result in the issuance of shares of common stock that are not subject to time-based vesting at the conclusion of the three-year performance period if earned.

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In the event that the Company's financial performance meets the predetermined target for the performance objective of the one-year and three-year performance share awards, the Company will issue each award recipient the number of shares of restricted stock or common stock, as applicable, equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined target, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined target, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance level, no shares will be issued. The total number of shares issued for the three-year performance share award may be increased, decreased, or unchanged based on the TSR modifier described above.

The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the one-year performance share awards is the quoted market value of CPSI's common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the three-year performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.

Expense of one-year performance share awards is recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. Expense of three-year performance share awards is recognized using ratable straight-line amortization over the three-year performance period. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made.

A summary of performance share award activity under the 2014 Incentive Plan during the six months ended June 30, 2018 and 2017 is as follows, based on the target award amounts set forth in the performance share award agreements:


	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Shares	Weighted-Average Grant Date Fair Value Per Share		Shares	Weighted-Average Grant Date Fair Value Per Share
Performance share awards outstanding at beginning of period	189,325	$	29.94	77,594	$	49.64
Granted	184,776	30.15		189,325	29.94
Forfeited or unearned	(11,930)	29.94		(77,594)	49.64
Performance share awards settled through the issuance of restricted stock	(177,395)	29.94		—	—
Performance share awards outstanding at end of period	184,776	$	30.15	189,325	$	29.94

9. FINANCING RECEIVABLES

Short-Term Payment Plans

The Company provides fixed monthly payment arrangements ("short-term payment plans") over terms ranging from three to twelve months for meaningful use stage three and other add-on software installations. As a practical expedient, we do not adjust the amount of consideration recognized as revenue for the financing component as unearned income when we expect payment within one year or less. These receivables, included in the current portion of financing receivables, were comprised of the following at June 30, 2018 and December 31, 2017:


(In thousands)	June 30, 2018		December 31, 2017
Short-term payment plans, gross	$	7,407	$	9,081
Less: allowance for losses	(523)		(638)
Short-term payment plans, net	$	6,884	$	8,443

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Long-Term Financing Arrangements

Additionally, the Company provides financing for purchases of its information and patient care systems to certain healthcare providers under long-term financing arrangements expiring in various years through 2025. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract conception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from two to seven years.

The components of these receivables were as follows at June 30, 2018 and December 31, 2017:


(In thousands)	June 30, 2018		December 31, 2017
Long-term financing arrangements, gross	$	25,604	$	22,968
Less: allowance for losses	(1,922)		(2,606)
Less: unearned income	(2,753)		(2,265)
Long-term financing arrangements, net	$	20,929	$	18,097

Future minimum payments to be received subsequent to June 30, 2018 are as follows:


(In thousands)
Years Ended December 31,
2018	$	4,778
2019	7,874
2020	5,080
2021	4,042
2022	2,656
Thereafter	1,174
Total minimum payments to be received	25,604
Less: allowance for losses	(1,922)
Less: unearned income	(2,753)
Receivables, net	$	20,929

Credit Quality of Financing Receivables and Allowance for Credit Losses

The following table is a roll-forward of the allowance for financing credit losses for the six months ended June 30, 2018 and year ended December 31, 2017:


(In thousands)	Balance at Beginning of Period		Provision		Charge-offs		Recoveries		Balance at End of Period
June 30, 2018	$	3,244	$	397	$	(1,196)	$	—	$	2,445
December 31, 2017	$	2,198	$	1,823	$	(777)	$	—	$	3,244

The Company’s financing receivables are comprised of a single portfolio segment, as the balances are all derived from short-term payment plan arrangements and long-term financing arrangements within our target market of community hospitals. The Company evaluates the credit quality of its financing receivables based on a combination of factors, including, but not limited to, customer collection experience, economic conditions, the customer’s financial condition, and known risk characteristics impacting the respective customer base of community hospitals, the most notable of which relate to enacted and potential changes in Medicare and Medicaid reimbursement rates as community hospitals typically generate a significant portion of their revenues and related cash flows from beneficiaries of these programs. In addition to specific account identification, the Company utilizes historical collection experience to establish the allowance for credit losses.

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Financing receivables are written off only after the Company has exhausted all collection efforts. The Company has been successful in collecting its financing receivables and considers the credit quality of such arrangements to be good.

Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying condensed consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of June 30, 2018 and December 31, 2017:


(In thousands)	1 to 90 Days Past Due		91 to 180 Days Past Due		181 + Days Past Due		Total Past Due
June 30, 2018	$	1,322	$	332	$	291	$	1,945
December 31, 2017	$	980	$	171	$	—	$	1,151

From time to time, the Company may agree to alternative payment terms outside of the terms of the original financing receivable agreement due to customer difficulties in achieving the original terms. In general, such alternative payment arrangements do not result in a re-aging of the related receivables. Rather, payments pursuant to any alternative payment arrangements are applied to the already outstanding invoices beginning with the oldest outstanding invoices as the payments are received.

Because amounts are reclassified to trade accounts receivable when they become due, there are no past due amounts included within financing receivables or financing receivables, net of current portion, in the accompanying condensed consolidated balance sheets.

The Company utilizes an aging of trade accounts receivable as the primary credit quality indicator for its financing receivables, which is facilitated by the reclassification of customer payment amounts to trade accounts receivable when they become due. The table below categorizes customer financing receivable balances (excluding short-term payment plans), none of which are considered past due, based on the age of the oldest payment outstanding that has been reclassified to trade accounts receivable:


(In thousands)	June 30, 2018		December 31, 2017
Stratification of uninvoiced client financing receivables based on aging of related trade accounts receivable:
1 to 90 Days Past Due	$	13,797	$	11,300
91 to 180 Days Past Due	3,579		3,727
181 + Days Past Due	1,890		967
Total uninvoiced client financing receivables balances of clients with a trade accounts receivable	$	19,266	$	15,994
Total uninvoiced client financing receivables of clients with no related trade accounts receivable	3,585		4,709
Total financing receivables with contractual maturities of one year or less	7,407		9,081
Less: allowance for losses	(2,445)		(3,244)
Total financing receivables	$	27,813	$	26,540

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10. INTANGIBLE ASSETS AND GOODWILL

Our purchased definite-lived intangible assets as of June 30, 2018 and December 31, 2017 are summarized as follows:


(In thousands)	Customer Relationships		Trademark		Developed Technology		Total
Gross carrying amount as of December 31, 2017 and June 30, 2018	$	82,300	$	10,900	$	24,100	$	117,300
Accumulated amortization as of December 31, 2017	(12,937)		(1,682)		(5,968)		(20,587)
Net intangible assets as of December 31, 2017	69,363		9,218		18,132		96,713
Accumulated amortization for the six months ended June 30, 2018	(3,270)		(424)		(1,509)		(5,203)
Net intangible assets as of June 30, 2018	$	66,093	$	8,794	$	16,623	$	91,510
Weighted average remaining years of useful life	10		13		6		10

The following table represents the remaining amortization of definite-lived intangible assets as of June 30, 2018:


(In thousands)
For the year ended December 31,
2018	$	5,203
2019	10,112
2020	10,106
2021	10,066
2022	10,066
Thereafter	45,957
Total	$	91,510

The following table sets forth the change in the carrying amount of goodwill by segment for the six months ended June 30, 2018:


(In thousands)	Acute Care EHR		Post-acute Care EHR		TruBridge		Total
Balance as of December 31, 2017	$	97,095	29,570		13,784		$	140,449

Goodwill impairment	$	—	—		—		—
Balance as of June 30, 2018	$	97,095	$	29,570	$	13,784	$	140,449

Goodwill is evaluated for impairment annually on October 1, or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist.

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11. LONG-TERM DEBT

Long-term debt was comprised of the following at June 30, 2018 and December 31, 2017:


(In thousands)	June 30, 2018		December 31, 2017
Term loan facility	$	105,357	$	115,538
Revolving credit facility	34,693		27,983
Capital lease obligation	410		565
Debt obligations	140,460		144,086
Less: unamortized debt issuance costs	(1,479)		(1,652)
Debt obligation, net	138,981		142,434
Less: current portion	(5,830)		(5,820)
Long-term debt	$	133,151	$	136,614

As of June 30, 2018, the carrying value of debt approximates the fair value due to the variable interest rate, which reflects the market rate.

Credit Agreement

In conjunction with our acquisition of HHI in January 2016, we entered into a syndicated credit agreement (the "Previous Credit Agreement") with Regions Bank ("Regions") serving as administrative agent, which provided for a $125 million term loan facility (the "Previous Term Loan Facility") and a $50 million revolving credit facility (the "Previous Revolving Credit Facility"). On October 13, 2017, we entered into a Second Amendment (the "Second Amendment") to refinance and decrease the aggregate committed size of the credit facilities from $175 million to $162 million, which included a $117 million term loan facility (the "Amended Term Loan Facility") and a $45 million revolving credit facility (the "Amended Revolving Credit Facility" and, together with the Amended Term Loan Facility, the "Amended Credit Facilities"). On February 8, 2018, we entered into a Third Amendment (the "Third Amendment") to the Amended Credit Agreement to increase the aggregate principle amount of the Amended Credit Facilities from $162 million to $167 million which includes the $117 million Amended Term Loan Facility and a $50 million Amended Revolving Credit Facility.

Each of the Amended 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, (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 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 2.00% to 3.50%. The applicable margin range for base rate loans ranges from 1.00% to 2.50%, in each case based on the Company's consolidated leverage ratio.

Principal payments with respect to the Amended Term Loan Facility are due on the last day of each fiscal quarter beginning December 31, 2017, with quarterly principal payments of approximately $1.46 million through September 30, 2019, approximately $2.19 million through September 30, 2021 and approximately $2.93 million through September 30, 2022, with the maturity on October 13, 2022 or such earlier date as the obligations under the Amended Credit Agreement become due and payable pursuant to the terms of the Amended Credit Agreement (the "Amended Maturity Date"). Any principal outstanding under the Amended Revolving Credit Facility is due and payable on the Amended Maturity Date.

Anticipated annual future maturities of the Amended Term Loan Facility, Amended Revolving Credit Facility, and capital lease obligation are as follows as of June 30, 2018:


(In thousands)
2018	$	3,085
2019	6,831
2020	8,775
2021	9,506
2022	112,263
Thereafter	—
	$	140,460

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The Amended Credit Facilities are secured pursuant to a Pledge and Security Agreement, dated January 8, 2016, 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 Credit Agreement are also guaranteed by the Subsidiary Guarantors.

The Amended Credit Agreement, as amended by the Third Amendment, provides incremental facility capacity of $50 million, subject to certain conditions. The Amended 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 leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. The Amended 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 Credit Agreement, the Company is required to comply with a maximum consolidated leverage ratio of 3.95:1.00 through December 31, 2017 and 3.50:1.00 from January 1, 2018 and thereafter. The Amended 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 the Amended Credit Agreement as of June 30, 2018.

The Amended Credit Agreement requires the Company to mandatorily prepay the Amended Credit Facilities with (i) 75% of excess cash flow (minus certain specified other payments) during each of the fiscal years ending December 31, 2017 and December 31, 2018 and (ii) 50% of excess cash flow (minus certain specified other payments) during the fiscal year ending December 31, 2019 and thereafter. The Company is permitted to voluntarily prepay the Amended 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 Amended Credit Agreement resulted in a $7.3 million prepayment on the Amended Term Loan Facility during the first quarter of 2018 related to excess cash flow generated by the Company during 2017. This mandatory prepayment was funded by drawing down on the Amended Revolving Credit Facility, as excess cash flow generated by the Company during 2017 was primarily used to voluntarily prepay amounts due under the Amended Revolving Credit Facility.

12. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. Management does not believe it is reasonably possible that such matters will have a material adverse effect on the Company’s financial statements.

13. FAIR VALUE

FASB Codification topic, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Codification does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The Codification requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

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The accrued contingent consideration depicted below represents the potential earnout incentive for former Rycan shareholders, relating to the purchase of Rycan by HHI in 2015. We have estimated the fair value of the contingent consideration based on the amount of revenue we expect to be earned by Rycan through the year ending December 31, 2018 in accordance with the purchase agreement between the parties.

The following table summarizes the carrying amounts and fair value of the contingent consideration at June 30, 2018:


			Fair Value at June 30, 2018 Using
	Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	6/30/2018		(Level 1)		(Level 2)		(Level 3)
Description
Contingent consideration	$	615	$	—	$	—	$	615
Total	$	615	$	—	$	—	$	615

The following table summarizes the carrying amounts and fair value of the contingent consideration at December 31, 2017:


			Fair Value at December 31, 2017 Using
	Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	12/31/2017		(Level 1)		(Level 2)		(Level 3)
Description
Contingent consideration	$	586	$	—	$	—	$	586
Total	$	586	$	—	$	—	$	586

The carrying amounts of other financial instruments reported in the consolidated balance sheets for current assets and current liabilities approximate their fair values because of the short-term nature of these instruments.

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14. SEGMENT REPORTING

Our chief operating decision makers ("CODM") utilize three operating segments, "Acute Care EHR," "Post-acute Care EHR" and "TruBridge," based on our three distinct business units with unique market dynamics and opportunities. Revenues and cost of sales are primarily derived from the provision of services and sales of our proprietary software, and our CODM assess the performance of these three segments at the gross profit level. Operating expenses and items such as interest, income tax, capital expenditures and total assets are managed at a consolidated level and thus are not included in our operating segment disclosures. Our CODM group is comprised of the Chief Executive Officer, Chief Growth Officer, Chief Operating Officer, and Chief Financial Officer. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.

The following table presents a summary of the revenues and gross profits of our three operating segments for the three and six months ended June 30, 2018 and 2017:


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018		2017		2018		2017
Revenues:
Acute Care EHR
Recurring revenue	$	28,342	$	28,001	$	56,477	$	56,539
Non-recurring revenue	8,865		11,393		20,913		19,985
Total Acute Care EHR revenue	37,207		39,394		77,390		76,524
Post-acute Care EHR
Recurring revenue	4,656		5,108		9,487		10,186
Non-recurring revenue	883		972		1,621		2,187
Total Post-acute Care EHR revenue	5,539		6,080		11,108		12,373
TruBridge	25,159		22,203		50,290		42,854
Total revenues	$	67,905	$	67,677	$	138,788	$	131,751

Cost of sales:
Acute Care EHR	$	17,970	$	17,730	$	34,727	$	35,504
Post-acute Care EHR	1,558		2,023		3,219		4,036
TruBridge	13,531		11,933		26,910		23,520
Total cost of sales	$	33,059	$	31,686	$	64,856	$	63,060

Gross profit:
Acute Care EHR	$	19,237	$	21,664	$	42,663	$	41,020
Post-acute Care EHR	3,981		4,057		7,889		8,337
TruBridge	11,628		10,270		23,380		19,334
Total gross profit	$	34,846	$	35,991	$	73,932	$	68,691

Corporate operating expenses	$	(32,621)	$	(31,543)	$	(64,058)	$	(61,010)
Other income	194		70		392		140
Interest expense	(1,807)		(1,938)		(3,785)		(3,745)
Income before taxes	$	612	$	2,580	$	6,481	$	4,076

15. SUBSEQUENT EVENTS

On August 2, 2018, the Company announced a dividend for the third quarter of 2018 in the amount of $0.10 per share, payable on August 31, 2018, to stockholders of record as of the close of business on August 16, 2018.

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Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

This discussion and analysis contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified generally by the use of forward-looking terminology and words such as "expects," "anticipates," "estimates," "believes," "predicts," "intends," "plans," "potential," "may," "continue," "should," "will" and words of comparable meaning. Without limiting the generality of the preceding statement, all statements in this report relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking statements. We caution investors that any such forward-looking statements are only predictions and are not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include:

• overall business and economic conditions affecting the healthcare industry, including the effects of the federal healthcare reform legislation enacted in 2010, and implementing regulations, on the businesses of our hospital clients;

• government regulation of our products and services and the healthcare and health insurance industries, including changes in healthcare policy affecting Medicare and Medicaid reimbursement rates and qualifying technological standards;

• changes in customer purchasing priorities, capital expenditures and demand for information technology systems;

• saturation of our target market and hospital consolidations;

• general economic conditions, including changes in the financial and credit markets that may affect the availability and cost of credit to us or our clients;

• our substantial indebtedness, and our ability to incur additional indebtedness in the future;

• our potential inability to generate sufficient cash in order to meet our debt service obligations;

• restrictions on our current and future operations because of the terms of our senior secured credit facilities;

• market risks related to interest rate changes;

• competition with companies that have greater financial, technical and marketing resources than we have;

• failure to develop new technology and products in response to market demands;

• failure of our products to function properly resulting in claims for medical and other losses;

• breaches of security and viruses in our systems resulting in customer claims against us and harm to our reputation;

• failure to maintain customer satisfaction through new product releases free of undetected errors or problems;

• interruptions in our power supply and/or telecommunications capabilities, including those caused by natural disaster;

• our ability to attract and retain qualified client service and support personnel;

• failure to properly manage growth in new markets we may enter;

• misappropriation of our intellectual property rights and potential intellectual property claims and litigation against us;

• changes in accounting principles generally accepted in the United States of America;

• significant charge to earnings if our goodwill or intangible assets become impaired; and

• fluctuations in quarterly financial performance due to, among other factors, timing of customer installations.

Additional information concerning these and other factors that could cause differences between forward-looking statements and future actual results is discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017.

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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 our products and services through four companies - Evident, LLC ("Evident"), TruBridge, LLC ("TruBridge"), Healthland Inc. ("Healthland"), and American HealthTech, Inc. ("AHT"). These combined companies are focused on helping improve the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our clients. The individual contributions of each of these companies towards this combined focus are as follows:

• Evident, formed in April 2015, provides a comprehensive acute care electronic health record ("EHR") solution, Thrive, and related services for community hospitals and their physician clinics.

• Healthland provides a comprehensive acute care EHR solution, Centriq, and related services for community hospitals and their physician clinics.

• TruBridge 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.

• AHT provides a comprehensive post-acute care EHR solution and related services for skilled nursing and assisted living facilities.

Our companies currently support approximately 1,100 acute care facilities and approximately 3,500 post-acute care facilities with a geographically diverse customer mix within the domestic community healthcare market. Our clients primarily consist of community hospitals with 200 or fewer acute care beds, with hospitals having 100 or fewer beds comprising approximately 94% of our hospital EHR customer base.

We operate in three reportable segments: (1) Acute Care EHR, (2) Post-acute Care EHR and (3) TruBridge. See Note 14 to the consolidated financial statements included herein for additional information on our segment reporting.

Acute Care EHR

Our Acute Care EHR segment consists of acute care software solutions and support sales generated by Evident and Healthland.

Post-acute Care EHR

Our Post-acute Care EHR segment consists of post-acute care software solutions and support sales generated by AHT.

TruBridge

Our TruBridge segment primarily consists of business management, consulting and managed IT services sales generated by TruBridge and the sale of the Rycan revenue cycle management workflow and automation software.

Management Overview

Historically, we have primarily sought revenue growth through sales of healthcare IT systems and related services to existing and new clients within our target market, a strategy that has resulted in a ten-year compounded annual growth rate in legacy revenues (i.e., revenues related to our legacy Evident and TruBridge operations) of approximately 5.9% as of the end of our most recently completed fiscal year. Important to our potential for continued long-term revenue growth is our ability to sell new and additional products and services to our existing customer base, including cross-selling opportunities presented with the acquisition of Healthland Holding Inc. ("HHI"), the parent company of Healthland, AHT and Rycan Technologies, Inc. We believe that as our combined customer base grows, the demand for additional products and services, including business management, consulting and managed IT services, will also continue to grow, supporting further increases in recurring revenues. We also expect to drive revenue growth from new product development that we may generate from our research and development activities.

January 2016 marked an important milestone for CPSI, as we announced the completion of our acquisition of HHI, the first major acquisition in the Company's history. This acquisition expanded our footprint for servicing acute care facilities and introduced us to the post-acute care segment, adding significantly to our already substantial recurring revenue base and further expanding our ability to generate organic recurring revenue growth through additional cross-selling opportunities now available

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within the combined company. We believe that the addition of HHI and its clients and products has enhanced and will continue to enhance our ability to grow our business and compete in the markets that we serve.

Our business model is designed such that, as revenue growth materializes, earnings and profitability growth are naturally bolstered through increased future margin realization. Once a hospital has installed our solutions, we continue to provide support services to the customer on an ongoing basis and make available to the customer our broad portfolio of business management, consulting, and managed IT services. The provision of these services typically requires fewer resources than the initial system installation, resulting in increased overall gross margins.

We also look to increase margins through cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies of the combined entity. For example, during the first quarter of 2018, we further integrated our acute care product lines into a combined client support group. Using best practices of the combined companies' implementation processes, we have decreased travel costs for our acute-care installations by approximately 25%. During the fourth quarter of 2017, TruBridge eliminated approximately $0.6 million per quarter of cloud hosting service costs for the HHI customer base by utilizing in-house resources. Also, during the first quarter of 2017, we instituted a limited-time, voluntary severance program offering those employees meeting certain predetermined criteria severance packages involving continuing periodic cash payments and healthcare benefits for varying periods, depending upon the individual's years of service with the Company.

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 projects than by the economic cycles of our economy. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology. Additionally, in response to these challenges, hospitals have become more selective regarding where they invest capital, resulting in a focus on strategic spending that generates a return on their investment. Despite these challenges, we believe healthcare information technology is often viewed as more strategically beneficial to hospitals than other possible purchases because the technology also plays an important role in healthcare by improving safety and efficiency and reducing costs. Additionally, we believe most hospitals recognize that they must invest in healthcare information technology to meet current and future regulatory, compliance and government reimbursement requirements.

In recent years, there have been significant changes to provider reimbursement by the U.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing fee-for-service in part by enrolling in an advanced payment model. 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.

We have historically made financing arrangements available to clients on a case-by-case basis depending upon the various aspects of the proposed contract and customer attributes. These financing arrangements include short-term payment plans and longer-term lease financing through us or third-party financing companies. For those 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).

During 2017, total financing receivables increased by $15.5 million, which had a significant impact on operating cash flow. The increase in financing arrangements was primarily due to two reasons. First, meaningful use stage three ("MU3") installations are primarily financed through short-term payment plans. Second, competitor financing options, primarily through accounts receivables 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.

We have also historically made our software applications available to clients through "Software as a Service" or "SaaS" configurations, including our Cloud Electronic Health Record ("Cloud EHR") offering. These offerings are attractive to some clients because this configuration allows them to obtain access to advanced software products without a significant initial capital outlay. We have experienced a substantial increase in the prevalence of such SaaS arrangements for new system installations and add-on sales to existing clients since 2015, a trend we expect to continue for the foreseeable future. Unlike our historical perpetual license arrangements under which the related revenue is recognized effectively upon installation, the SaaS arrangements result in revenue being recognized monthly as the services are provided over the term of the arrangement. As a

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result, the effect of this trend on the Company's financial statements is reduced system sales revenues during 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.

American Recovery and Reinvestment Act of 2009

While ongoing financial challenges facing healthcare organizations have impacted and are expected to continue to impact the community hospitals that comprise our target market, we believe that the reduced reimbursement under the American Recovery and Reinvestment Act of 2009 (the "ARRA") for those providers failing to adopt qualifying EHRs will continue to support demand for healthcare information technology and will have a positive impact on our business prospects through at least 2018.

While we believe that the expanded requirements for continued compliance with meaningful use rules have resulted in an expanded replacement market for EHRs, it is uncertain whether revenues generated from this replacement market will be sufficient to offset the impacts of the overall accelerated adoption and increased penetration of EHRs within our target market. As a result, our system sales revenues and profitability may be materially and adversely affected during the short-term.

Similarly, compliance with the meaningful use rules has accelerated the purchases of incremental applications by our existing clients. Consequently, our penetration rates within our existing customer base for our current menu of applications have increased significantly under the ARRA, thereby significantly narrowing the market for add-on sales to existing clients. As a result of the announcement from CMS on August 2, 2018 of a final rule that changes the attestation period for 2019 and 2020 to any continuous 90-day period instead of the previously-required full year attestation period, hospitals now have until October 1, 2019 to install compliant technology in order to meet the requirements of the program during 2019, compared to a deadline of January 1, 2019 under the previous rule. While we believe that the stage three requirements of the meaningful use program (re-named "Promoting Interoperability" by such rule) provide a significant opportunity for add-on sales revenues through 2019, the delay by CMS is expected to delay some of the contract revenues we previously anticipated and there is a risk of further delays or reductions in the regulatory requirements imposed on hospitals, which could have an adverse effect on our revenues.

Although we are pursuing other strategic initiatives designed to result in system sales revenue growth in the future in the form of selective expansion into English-speaking international markets, selective expansion within the 100 to 200 bed hospital market, and continued development of new software applications such as our Business Intelligence solution which provides community hospital leaders valuable insight into financial, operational, and clinical data, there can be no guarantee that such initiatives will prove successful or will benefit the Company in a sufficiently timely fashion to offset the short-term effects of the aforementioned narrowing markets.

Results of Operations

During the six months ended June 30, 2018, we generated revenues of $138.8 million from the sale of our products and services, compared to $131.8 million during the six months ended June 30, 2017, an increase of 5% that is primarily attributed to TruBridge client growth. We view sales of TruBridge solutions within our existing EHR client base as our leading performance indicator. Our net income for the six months ended June 30, 2018 increased by $2.5 million to $4.3 million from the six months ended June 30, 2017 as a result of revenue growth accompanied with improved gross margins of 53%, a 1% increase from the first six months of 2017. Net cash provided by operating activities decreased by $8.1 million to $7.8 million provided from operations during the six months ended June 30, 2018, primarily due to a reduction of short-term liabilities and other changes in working capital.

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The following table sets forth certain items included in our results of operations for the three and six months ended June 30, 2018 and 2017, expressed as a percentage of our total revenues for these periods:


	Three Months Ended June 30,											Six Months Ended June 30,
	2018					2017				2018			2017
(In thousands)	Amount		% Sales	Amount		% Sales	Amount		% Sales	Amount		% Sales
INCOME DATA:
Sales revenues:
System sales and support:
Acute Care EHR	$	37,207	54.8	$	39,394	58.2	$	77,390	55.8	$	76,524	58.1
Post-acute Care EHR	5,539		8.2	6,080		9.0	11,108		8.0	12,373		9.4
Total System sales and support	42,746		62.9	45,474		67.2	88,498		63.8	88,897		67.5
TruBridge	25,159		37.1	22,203		32.8	50,290		36.2	42,854		32.5
Total sales revenues	67,905		100.0	67,677		100.0	138,788		100.0	131,751		100.0
Costs of sales:
System sales and support:
Acute Care EHR	17,970		26.5	17,730		26.2	34,727		25.0	35,504		26.9
Post-acute Care EHR	1,558		2.3	2,023		3.0	3,219		2.3	4,036		3.1
Total System sales and support	19,528		28.8	19,753		29.2	37,946		27.3	39,540		30.0
TruBridge	13,531		19.9	11,933		17.6	26,910		19.4	23,520		17.9
Total costs of sales	33,059		48.7	31,686		46.8	64,856		46.7	63,060		47.9
Gross profit	34,846		51.3	35,991		53.2	73,932		53.3	68,691		52.1
Operating expenses:
Product development	9,314		13.7	8,414		12.4	18,071		13.0	16,492		12.5
Sales and marketing	7,518		11.1	7,607		11.2	15,232		11.0	14,734		11.2
General and administrative	13,188		19.4	12,921		19.1	25,552		18.4	24,581		18.7
Amortization of acquisition-related intangibles	2,601		3.8	2,601		3.8	5,203		3.7	5,203		3.9
Total operating expenses	32,621		48.0	31,543		46.6	64,058		46.2	61,010		46.3
Operating income	2,225		3.3	4,448		6.6	9,874		7.1	7,681		5.8
Other income (expense):
Other income	194		0.3	70		0.1	392		0.3	140		0.1
Interest expense	(1,807)		(2.7)	(1,938)		(2.9)	(3,785)		(2.7)	(3,745)		(2.8)
Total other income (expense)	(1,613)		(2.4)	(1,868)		(2.8)	(3,393)		(2.4)	(3,605)		(2.7)
Income before taxes	612		0.9	2,580		3.8	6,481		4.7	4,076		3.1
Provision for income taxes	284		0.4	993		1.5	2,185		1.6	2,243		1.7
Net income	$	328	0.5	$	1,587	2.3	$	4,296	3.1	$	1,833	1.4

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Three Months Ended June 30, 2018 Compared with Three Months Ended June 30, 2017

Revenues. Total revenues for the three months ended June 30, 2018 increased slightly $0.2 million, compared to the three months ended June 30, 2017.

System sales and support revenues decreased by 6%, or $2.7 million, compared to the second quarter 2017. System sales and support revenues were comprised of the following:


	Three Months Ended June 30,
(In thousands)	2018		2017
Recurring system sales and support revenues ⁽¹⁾
Acute Care EHR	$	28,342	$	28,001
Post-acute Care EHR	4,656		5,108
Total recurring system sales and support revenues	32,998		33,109
Non-recurring system sales and support revenues ⁽²⁾
Acute Care EHR	8,865		11,393
Post-acute Care EHR	883		972
Total non-recurring system sales and support revenues	9,748		12,365
Total system sales and support revenue	$	42,746	$	45,474

⁽¹⁾Mostly comprised of support and maintenance, third-party subscriptions, and SaaS revenues.

⁽²⁾Mostly comprised of installation revenues from the sale of our acute care and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model.

Non-recurring system sales and support revenues decreased $2.6 million, or 21%, as volatility in the timing of new customer installations coupled with relative weakness in non-MU3 related add-on sales resulted in a decrease in Acute Care EHR non-recurring revenues of $2.5 million, or 22%. We installed our Acute Care EHR solutions at three new hospital clients during the second quarter 2018 (one under a SaaS arrangement, resulting in revenue being recognized ratably over the contractual term) compared to ten new hospital clients during the second quarter 2017 (one under a SaaS arrangement). The ten new hospital client implementations during the second quarter 2017 marked the highest during a quarter since the HHI acquisition, presenting a particularly difficult comparison versus the current quarter's results and resulting in a $3.7 million, or 60%, decrease in new system implementation revenues. This decrease in new system implementation revenues was partially offset by a $3.4 million increase in MU3 implementations from $0.2 million in the second quarter 2017 to $3.6 million in the second quarter 2018. However, the impact on our results of these increased MU3 implementation volumes was muted by relative weakness in non-MU3 related add-on sales as a result of the Company's and clients' emphasis on MU3 certification prior to the October 1, 2019 deadline. Non-recurring Post-acute Care EHR revenues decreased by $0.1 million, or 9%, in the second quarter of 2018 as a result of slowing new installation bookings due to aggressive competition during our effort to make technological improvements to the AHT product line.

Recurring system sales and support revenues were relatively flat, decreasing slightly from $33.1 million in the second quarter of 2017 to $33.0 million in the second quarter of 2018. Acute Care EHR recurring revenues increased $0.3 million, or 1%, as new Thrive customer growth and additional support fees for MU3-related add-on sales have outweighed attrition primarily from the Healthland customer base. Post-acute Care EHR recurring revenues decreased by $0.5 million, or 9%, due to attrition attributed to the aforementioned aggressive competitive environment.

TruBridge revenues increased 13%, or $3.0 million, compared to the second quarter 2017. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions, most notably resulting in an expanded customer base for our accounts receivable management services, increasing $2.4 million, or 38%, and our medical coding services, increasing $1.1 million, or 89%, compared to the second quarter 2017. These increases were partially offset by a $0.6 million, or 52%, decrease in consulting services as consulting opportunities related to Thrive software add-on sales have decreased and medical coding initiatives have been completed.

Costs of Sales. Total costs of sales increased by 4%, or $1.4 million, compared to the second quarter 2017. As a percentage of total revenues, costs of sales increased to 49% in the second quarter 2018, compared to 47% in the second quarter 2017.

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Costs of Acute Care EHR system sales and support increased by $0.2 million, or 1%, compared to the second quarter 2017 primarily due to a $1.0 million, or 41%, increase in third-party software costs, primarily due to fees implemented for use of CPT codes by the American Medical Association ("AMA") during 2018 that are passed to the customer. This increase was partially offset by a $0.6 million, or 34%, decrease in travel costs due to improved implementation techniques and decreased equipment costs (which are minimal for MU3 implementations) of $0.1 million, or 11%. The dual effect of decreased revenues and increased third-party software costs resulted in the gross margin on Acute Care EHR system sales and support decreasing to 52% in the second quarter 2018, compared to 55% in the second quarter 2017.

Costs of Post-acute Care EHR system sales and support decreased by $0.5 million, or 23%, compared to the second quarter 2017, primarily due to reduced payroll costs of $0.2 million, or 19%, as the realization of HHI integration synergies over the trailing twelve months has resulted in reduced headcount. Third-party software costs, hardware costs, and travel costs decreased by a total of $0.3 million due to the decreased installation volume mentioned above. The gross margin on Post-acute Care EHR system sales and support increased to 72% in the second quarter 2018, compared to 67% in the second quarter 2017.

Our costs associated with TruBridge sales and support increased 13%, or $1.6 million, with the largest contributing factor being an increase in payroll and related costs of 29%, or $2.1 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base. Increased payroll was partially offset by an approximate $0.6 million decrease in cloud hosting costs as a result of moving to in-house resources during the fourth quarter of 2017 for cloud services provided to the HHI customer base. The gross margin on these services was 46% in the second quarters of 2018 and 2017.

Product Development. Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs increased 11%, or $0.9 million, compared to the second quarter 2017, as a result of increased headcount dedicated to functionality additions and enhancements across the product lines, as well as integration across product lines.

Sales and Marketing. Sales and marketing expenses decreased 1%, or $0.1 million, compared to the second quarter 2017, primarily due to decreased payroll costs of 10%, or $0.3 million, partially offset by increased TruBridge-specific and MU3 commissions expense compared to the second quarter 2017.

General and Administrative. General and administrative expenses increased 2%, or $0.3 million, compared to the second quarter 2017, primarily due to a $0.8 million increase in bad debt expense, a $0.6 million, or 17%, increase in employee health costs, and a $0.4 million increase in stock compensation expense during the second quarter 2018. Bad debt was negatively impacted by a few of our hospital clients that have not been or may not be able to fulfill their financial obligations, while increased prescription drug utilization drove employee health costs higher. These increases were partially offset by a $1.5 million decrease in voluntary severance program expense compared to the second quarter 2017.

Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets was unchanged compared to the second quarter 2017.

Total Operating Expenses. As a percentage of total revenues, total operating expenses increased to 48% in the second quarter 2018, compared to 47% in the second quarter 2017.

Total Other Income (Expense). Total other income (expense) decreased from expense of $1.9 million during the second quarter 2017 to expense of $1.6 million during the second quarter 2018, as our long-term debt interest rate was reduced when our leverage ratio fell below the target ratio coupled with an increase in interest income due to the expansion of long-term payment plans offered to our clients.

Income Before Taxes. As a result of the foregoing factors, income before taxes decreased by 76%, or $2.0 million, compared to the second quarter 2017.

Provision for Income Taxes. Our effective tax rate for the three months ended June 30, 2018 increased to 46% from 38% for the three months ended June 30, 2017. Our effective tax rate for the three months ended June 30, 2018 was heavily impacted by the year-to-date impact of changing state income allocation determinations among our various subsidiaries from entities with lower effective state rates to entities with higher effective state rates. The year-to-date adjustment, when recorded in a three-month period of significantly lower net income before taxes compared to the immediately preceding period, had an outsized impact on our effective tax rate, resulting in a 25% increase in the effective tax rate. This increase was partially offset by the tax benefits of the Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of 2018.

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Net Income. Net income for the three months ended June 30, 2018 decreased by $1.3 million to $0.3 million, or $0.02 per basic and diluted share, compared with net income of $1.6 million, or $0.11 per basic and diluted share, for the three months ended June 30, 2017. Net income represented less than 1% of revenue for the three months ended June 30, 2018, compared to 2% of revenue for the three months ended June 30, 2017.

Six Months Ended June 30, 2018 Compared with Six Months Ended June 30, 2017

Revenues. Total revenues for the six months ended June 30, 2018 increased 5%, or $7.0 million, compared to the six months ended June 30, 2017.

System sales and support revenues decreased slightly by $0.4 million from the six months ended June 30, 2017. System sales and support revenues were comprised of the following:


	Six Months Ended June 30,
(In thousands)	2018		2017
Recurring system sales and support revenues ⁽¹⁾
Acute Care EHR	$	56,477	$	56,539
Post-acute Care EHR	9,487		10,186
Total recurring system sales and support revenues	65,964		66,725
Non-recurring system sales and support revenues ⁽²⁾
Acute Care EHR	$	20,913	$	19,985
Post-acute Care EHR	1,621		2,187
Total non-recurring system sales and support revenues	22,534		22,172
Total system sales and support revenue	$	88,498	$	88,897

⁽¹⁾Mostly comprised of support and maintenance, third-party subscriptions, and SaaS revenues.

⁽²⁾Mostly comprised of installation revenues from the sale of our acute care and post-acute care EHR solutions and related applications under a perpetual (non-subscription) licensing model.

Non-recurring system sales and support revenues increased $0.4 million, or 2%, primarily as year-to-date revenue contributions from MU3 implementations have outpaced the negative impact of new system implementation volatility and relative weakness in non-MU3 related add-on sales, resulting in an overall increase in Acute Care EHR non-recurring revenues of $0.9 million, or 5%. MU3 implementations contributed $7.9 million of Acute Care EHR non-recurring revenue during the first six months of 2018, compared to only $0.2 million during the first six months of 2017. These revenue contributions were partially offset by a $4.1 million, or 44%, decrease in new system implementation revenues, as we installed our Acute Care EHR solutions at nine new hospital clients during the six months ended June 30, 2018 (two under a SaaS arrangement), compared to thirteen new hospital clients during the six months ended June 30, 2017 (two under a SaaS arrangement). Further mitigating the significant impact of MU3 implementation revenues has been the relative weakness in non-MU3 related add-on sales as a result of the Company's and clients' emphasis on MU3 certification prior to the October 1, 2019 deadline. Non-recurring Post-acute Care EHR revenues decreased by $0.6 million, or 26%, as a result of slowing new installation bookings due to aggressive competition during our effort to make technological improvements to the AHT product line.

Recurring system sales and support revenues decreased $0.8 million, or 1%, during the six months ended June 30, 2018. Acute Care EHR recurring revenues decreased slightly by $0.1 million as a result of 2017 price freezes for the existing customer base to ease the impact of MU3 implementation, coupled with attrition primarily from the Healthland customer base, outweighing new customer growth. Post-acute Care EHR recurring revenues decreased by $0.7 million, or 7%, due to attrition attributed to the aforementioned aggressive competitive environment.

TruBridge revenues increased 17%, or $7.4 million, compared to the six months ended June 30, 2017. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions, most notably resulting in an expanded customer base for our accounts receivable management services, increasing $5.2 million, or 42%, and our medical coding services, increasing $2.6 million, or 120%, compared to the six months ended June 30, 2017. These increases were partially offset by a $0.7 million, or 35%, decrease in consulting services as consulting opportunities related to Thrive software add-on sales have decreased and medical coding initiatives have been completed.

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Costs of Sales. Total costs of sales increased by 3%, or $1.8 million, compared to the six months ended June 30, 2017. As a percentage of total revenues, costs of sales decreased to 47% in the six months ended June 30, 2018, compared to 48% in the six months ended June 30, 2017.

Costs of Acute Care EHR system sales and support decreased by $0.8 million, or 2%, compared to the six months ended June 30, 2017, primarily due to a $1.0 million, or 36%, decrease in equipment costs (which are minimal for MU3 implementations), and decreased travel costs of $1.0 million, or 30%, due to improved implementation techniques, partially offset by a $1.3 million, or 25%, increase in third-party software costs, primarily due to fees for use of CPT codes implemented by the AMA during 2018 that are passed to the customer. The dual effect of increased revenues and these beneficial cost improvements resulted in the gross margin on Acute Care EHR system sales and support increasing to 55% in the six months ended June 30, 2018 compared to 54% in the six months ended June 30, 2017.

Costs of Post-acute Care EHR system sales and support decreased by $0.8 million, or 20%, compared to the six months ended June 30, 2017 primarily due to reduced payroll costs of $0.4 million, or 18%, as the realization of HHI integration synergies over the trailing twelve months has resulted in reduced headcount. Third-party software costs, hardware costs, and travel costs decreased by a total of $0.5 million due to the decreased installation volume mentioned above. The gross margin on Post-acute Care EHR system sales and support increased to 71% for the six months ended June 30, 2018, compared to 67% for the six months ended June 30, 2017.

Our costs associated with TruBridge sales and support increased 14%, or $3.4 million, with the largest contributing factor being an increase in payroll and related costs of 29%, or $4.3 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base. Increased payroll was partially offset by an approximate $1.2 million decrease in cloud hosting costs as a result of moving to in-house resources during the fourth quarter of 2017 for cloud services provided to the HHI customer base. The gross margin on these services increased to 46% in the six months ended June 30, 2018 compared to 45% in the six months ended June 30, 2017, primarily attributed to the realization of 2017 bookings to revenue in which the aforementioned accompanying payroll costs constricted margins during 2017.

Product Development. Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs increased 10%, or $1.6 million, compared to the six months ended June 30, 2017, as a result of increased headcount dedicated to functionality additions and enhancements across the product lines, as well as integration across product lines.

Sales and Marketing. Sales and marketing expenses increased 3%, or $0.5 million, compared to the six months ended June 30, 2017, primarily due to increased TruBridge-specific and MU3 commissions expense.

General and Administrative. General and administrative expenses increased 4%, or $1.0 million, compared to the six months ended June 30, 2017, primarily due to a $1.2 million increase in bad debt expense and a $1.3 million, or 20%, increase in employee health costs during the six months ended June 30, 2018. Bad debt was negatively impacted by a few of our hospital clients that have not been or may not be able to fulfill their financial obligations, while increased prescription drug utilization drove employee health costs higher. These notable increases were partially offset by a $1.9 million decrease in voluntary severance program expense compared to the six months ended June 30, 2017.

Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets was unchanged compared to the six months ended June 30, 2017.

Total Operating Expenses. As a percentage of total revenues, total operating expenses remained flat at 46% for both six month periods.

Total Other Income (Expense). Total other income (expense) decreased from expense of $3.6 million during the six months ended June 30, 2017 to expense of $3.4 million during the six months ended June 30, 2018, as interest income has increased due to the expansion of long-term payment plans offered to our clients.

Income Before Taxes. As a result of the foregoing factors, income before taxes increased by 59%, or $2.4 million, compared to the six months ended June 30, 2017.

Provision for Income Taxes. Our effective tax rate for the six months ended June 30, 2018 decreased to 34% from 55% for the six months ended June 30, 2017. Our effective tax rate for the six months ended June 30, 2018 was impacted by the Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of 2018. The six months ended June 30, 2018 also included a $0.4 million shortfall tax expense related to stock-based compensation that

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increased the effective rate by 6%. During the six months ended June 30, 2017 we experienced a shortfall tax expense related to stock-based compensation of $0.9 million that increased the effective rate by 23%.

Net Income. Net income for the six months ended June 30, 2018 increased by $2.5 million to a net income of $4.3 million, or $0.31 per basic and diluted share, compared with net income of $1.8 million, or $0.13 per basic and diluted share, for the six months ended June 30, 2017. Net income represented 3% of revenue for the six months ended June 30, 2018, compared to 1% of revenue for the six months ended June 30, 2017.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2018, our principal sources of liquidity consisted of cash and cash equivalents of $1.5 million and our remaining borrowing capacity under the Amended Revolving Credit Facility of $15.3 million, compared to $0.5 million of cash and cash equivalents and $17.0 million of remaining borrowing capacity under the Amended Revolving Credit Facility as of December 31, 2017. In conjunction with our acquisition of HHI in January 2016, we entered into the Previous Credit Agreement which provided for the $125 million Previous Term Loan Facility and the $50 million Previous Revolving Credit Facility. On October 13, 2017, the Company entered into the Second Amendment to refinance and decrease the aggregate committed size of the credit facilities from $175 million to $162 million, which included the $117 million Amended Term Loan Facility and the $45 million Amended Revolving Credit Facility. On February 8, 2018, the Company entered into the Third Amendment to increase the aggregate principle amount of the Amended Credit Facilities from $162 million to $167 million, which includes the $117 million Amended Term Loan Facility and a $50 million Amended Revolving Credit Facility.

As of June 30, 2018, we had $140.1 million in principal amount of indebtedness outstanding under the Amended Credit Facilities. We believe that our cash and cash equivalents of $1.5 million as of June 30, 2018, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the Amended Revolving Credit Facility of $15.3 million as of June 30, 2018, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Form 10-Q. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

Operating Cash Flow Activities

Net cash provided by operating activities decreased $8.1 million, from $15.9 million provided by operations for the six months ended June 30, 2017 to $7.8 million provided by operations for the six months ended June 30, 2018. The decrease in cash flows provided from operations is primarily due to a $6.3 million contraction in payables and other liabilities during the six months ended June 30, 2018 as a result of the timing of vendor and payroll payments compared to a $6.6 million expansion during the six months ended June 30, 2017. The $2.5 million increase in net income was mostly offset by a combined accounts and financing receivables expansion of $6.1 million during the six months ended June 30, 2018. The increase in financing arrangements is primarily due to two reasons. First, meaningful use stage three installations are primarily financed through short-term payment plans. Second, competitor financing options, primarily accounts receivables 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.

Investing Cash Flow Activities

Net cash used in investing activities remained relatively flat with $0.4 million used in the six months ended June 30, 2018 compared to $0.5 million used during the six months ended June 30, 2017. We do not anticipate the need for significant capital expenditures during the remainder of 2018.

Financing Cash Flow Activities

During the six months ended June 30, 2018, our financing activities used net cash of $6.4 million, as we paid a net $3.6 million in long-term debt principal and declared and paid dividends in the amount of $2.8 million. During the six months ended June 30, 2018, we made a $7.3 million prepayment on the Amended Term Loan Facility by drawing down on the Amended Revolving Credit Facility, in accordance with the excess cash flow mandatory prepayment requirements of the Amended Credit Agreement. Financing cash flow activities used $15.9 million during the six months ended June 30, 2017, primarily due to $9.8 million paid in long-term debt principal and $6.1 million cash paid in dividends. The decrease in dividends paid is a result of moving to a fixed dividend policy during the fourth quarter of 2017.

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We believe that paying dividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash. However, the declaration of dividends by CPSI is subject to compliance with the terms of our Amended Credit Agreement and the discretion of our Board of Directors, which may decide to change or terminate the Company's dividend policy at any time. Our Board of Directors will continue to take into account such matters as general business conditions, capital needs, our financial results and such other factors as our Board of Directors may deem relevant.

Credit Agreement

As of June 30, 2018, we had $105.4 million in principal amount outstanding under the Amended Term Loan Facility and $34.7 million in principal amount outstanding under the Amended Revolving Credit Facility. Each of the Amended 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, (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 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 2.00% to 3.50%. The applicable margin range for base rate loans ranges from 1.00% to 2.50%, in each case based on the Company's consolidated leverage ratio.

Principal payments with respect to the Amended Term Loan Facility are due on the last day of each fiscal quarter beginning December 31, 2017, with quarterly principal payments of approximately $1.46 million through September 30, 2019, approximately $2.19 million through September 30, 2021 and approximately $2.93 million through September 30. 2022, with the maturity on October 13, 2022 or such earlier date as the obligations under the Amended Credit Agreement become due and payable pursuant to the terms of the Amended Credit Agreement (the "Amended Maturity Date"). Any principal outstanding under the Amended Revolving Credit Facility is due and payable on the Amended Maturity Date.

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Backlog

Backlog consists of revenues we reasonably expect to recognize over the next twelve months under all existing contracts, including those with remaining performance obligations that have original expected durations of one year or less and those with fees that are variable in which we estimate future revenues. The revenues to be recognized may relate to a combination of one-time fees for system sales and recurring fees for support and maintenance and TruBridge services. As of June 30, 2018, we had a twelve-month backlog of approximately $38 million in connection with non-recurring system purchases and approximately $229 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, and TruBridge services. As of June 30, 2017, we had a twelve-month backlog of approximately $37 million in connection with non-recurring system purchases and approximately $217 million in connection with recurring payments under support and maintenance and TruBridge services.

Bookings

Bookings is a key operational metric used by management to assess the relative success of our sales generation efforts, and were as follows for the periods ending June 30, 2018 and 2017, respectively:


	Three Months Ended						Six Months Ended
(In thousands)	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
System sales and support ⁽¹⁾
Acute Care EHR	$	16,071	$	23,871	$	33,576	$	38,914
Post-acute Care EHR	1,054		1,127		1,781		3,039
Total system sales and support	17,125		24,998		35,357		41,953

TruBridge ⁽²⁾	6,371		8,699		10,189		15,293

Total bookings	$	23,496	$	33,697	$	45,546	$	57,246

⁽¹⁾ Generally calculated as the total contract price (for system sales) and annualized contract value (for support).
⁽²⁾Generally calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts).

Acute Care EHR bookings in the second quarter 2018 decreased $7.8 million, or 33%, compared to the second quarter 2017, and in the six months ended June 30, 2018 decreased $5.3 million, or 14%, compared to the six months ended June 30, 2017, mostly due to the demand dynamics related to the Company's MU3 software applications. Bookings during the three and six months ended June 30, 2017 were heavily influenced by the then-deadline of January 1, 2018 for hospital compliance with the stage three rules. Since that time, CMS has announced two rules (the most recent of which was proposed in April 2018) that would effectively delay the deadline for compliance to October 1, 2019. While we do not believe these events significantly alter the total opportunity presented by MU3, it has impacted our periodic bookings results by naturally extending the sales cycle.

Post-acute Care EHR bookings in the second quarter 2018 decreased $0.1 million, or 6%, compared to the second quarter 2017, and decreased $1.3 million, or 41%, compared to the six months ended June 30, 2017. New business opportunities for this segment, which consist solely of the operations of AHT, have suffered as a result of increased competition and underinvestment in AHT's product offerings (particularly prior to our acquisition of AHT as part of the January 2016 acquisition of HHI), making functionality and usability comparisons less favorable for AHT. Although management has formulated a strategy and enacted steps to improve the related product functionality and usability and is confident that such measures will translate into improved future bookings performance (and, eventually, revenue growth), there can be no guarantee that this strategy will be successful. During the fourth quarter of 2017, the anticipated attrition of significant customer accounts and a product development acceleration investment plan in our Post-acute Care EHR software led management to record a goodwill impairment of $28.0 million against our Post-acute Care EHR reporting unit as of December 31, 2017.

We continue to execute on our TruBridge strategy by moving up-market into larger healthcare facilities while expanding the scope of our relationships with new and existing clients by increasing revenue-generating touchpoints within those facilities. Our initial success in that endeavor has resulted in bookings volatility as our periodic bookings are heavily influenced by low-volume, high-value deals. Such large, enterprise client wins resulted in TruBridge bookings for the first two quarters of 2017 that were some of the highest in TruBridge history at that time, with bookings for the remainder of 2017 being heavily influenced by large, enterprise client wins. Absent any such large, enterprise client wins during the first two quarters of 2018, TruBridge bookings experienced a normalization that resulted in a decrease from the first two quarters of 2017. We continue to see demand for TruBridge's products and services that alleviate administrative burden on our clients and allow them to take

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advantage of our specialized capabilities. Particularly strong demand exists for TruBridge's accounts receivable management and medical coding services.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements, as defined by Item 303(a)(4) of SEC Regulation S-K, as of June 30, 2018.

The Company has other lease rights and obligations that it accounts for as operating leases that may be reclassified as balance sheet arrangements under accounting pronouncements recently finalized by the FASB.

Critical Accounting Policies and Estimates

Our Management Discussion and Analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported values of assets, liabilities, revenues, expenses and other financial amounts that are not readily apparent from other sources. Actual results may differ from these estimates and these estimates may differ under different assumptions or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes.

In our Annual Report on Form 10-K for the year ended December 31, 2017, we identified our critical accounting polices related to revenue recognition, allowance for doubtful accounts, allowance for credit losses, and estimates. During the first quarter of 2018, we adopted the new accounting standard codified as Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, and all related amendments and have applied it to all contracts using the modified retrospective method, pursuant to which the cumulative effect of initially applying the new revenue standard is recognized as an adjustment to retained earnings and impacted balance sheet line items as of January 1, 2018, the date of adoption. Refer to Note 2 - Recent Accounting Pronouncements of the Notes to Financial Statements (Part 1, Item 1 of this Form 10-Q) for further discussion.

There have been no other significant changes to these critical accounting policies during the six months ended June 30, 2018.


Item 3.			Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risk relates primarily to the potential change in the British Bankers Association London Interbank Offered Rate ("LIBOR"). We had $140.1 million of outstanding borrowings under our Amended Credit Facilities with Regions Bank at June 30, 2018. The Amended Term Loan Facility and Amended 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, (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, or (3) a combination of (1) and (2). Accordingly, we are exposed to fluctuations in interest rates on borrowings under the Amended Credit Facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of June 30, 2018 would result in a change in interest expense of approximately $1.4 million annually.

We did not have investments and do not utilize derivative financial instruments to manage our interest rate risks.


Item 4.			Controls and Procedures.

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Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate adoption on January 1, 2018. There were no significant changes to our internal controls over financial reporting due to the adoption of the new standard.

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PART II

OTHER INFORMATION


Item 1.			Legal Proceedings.

From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any claims outside the ordinary course of business that are material to our financial condition or results of operations.


Item 1A.			Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition or operating results.


Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.


Item 3.			Defaults Upon Senior Securities.

Not applicable.


Item 4.			Mine Safety Disclosures.

Not applicable.


Item 5.			Other Information.

None.

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Item 6.			Exhibits.


3.1						Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)

3.2						Amended and Restated Bylaws (filed as Exhibit 3 to CPSI’s Current Report on Form 8-K dated October 28, 2013 and incorporated herein by reference)

31.1						Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2						Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1						Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101						Interactive Data Files for CPSI’s Form 10-Q for the period ended June 30, 2018

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMPUTER PROGRAMS AND SYSTEMS, INC.

August 7, 2018

By:

/s/ J. Boyd Douglas

J. Boyd Douglas

President and Chief Executive Officer

August 7, 2018

By:

/S/ Matt J. Chambless

Matt J. Chambless

Chief Financial Officer