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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, par value $.001 per share
CPSI
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
As of August 7, 2019, there were 14,355,180 shares of the issuer’s common stock outstanding.

1


COMPUTER PROGRAMS AND SYSTEMS, INC.
Quarterly Report on Form 10-Q
(For the three and six months ended June 30, 2019)
TABLE OF CONTENTS
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


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, 2019December 31, 2018
Assets
Current assets:
Cash and cash equivalents$6,849 $5,732 
Accounts receivable, net of allowance for doubtful accounts of $2,008 and $2,124, respectively
37,748 40,474 
Financing receivables, current portion, net13,243 15,059 
Inventories1,869 1,498 
Prepaid income taxes3,115 2,120 
Prepaid expenses and other5,800 5,055 
Total current assets68,624 69,938 
Property and equipment, net11,532 10,875 
Operating lease assets6,909 — 
Financing receivables, net of current portion18,196 19,263 
Other assets, net of current portion974 995 
Intangible assets, net88,987 86,226 
Goodwill149,869 140,449 
Total assets$345,091 $327,746 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$5,422 $5,668 
Current portion of long-term debt7,783 6,486 
Deferred revenue10,117 10,201 
Accrued vacation4,395 3,929 
Other accrued liabilities15,282 12,219 
Total current liabilities42,999 38,503 
Long-term debt, net of current portion122,040 124,583 
Operating lease liabilities, net of current portion5,646 — 
Deferred tax liabilities7,247 4,877 
Total liabilities177,932 167,963 
Stockholders’ equity:
Common stock, $0.001 par value; 30,000 shares authorized; 14,355 and 14,083 shares issued and outstanding, respectively
14 14 
Additional paid-in capital169,920 164,793 
Accumulated deficit(2,775)(5,024)
Total stockholders’ equity167,159 159,783 
Total liabilities and stockholders’ equity$345,091 $327,746 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3


COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Sales revenues:
System sales and support$39,640 $42,746 $82,887 $88,498 
TruBridge26,516 25,159 52,410 50,290 
Total sales revenues66,156 67,905 135,297 138,788 
Costs of sales:
System sales and support17,673 19,528 36,010 37,946 
TruBridge13,948 13,531 27,637 26,910 
Total costs of sales31,621 33,059 63,647 64,856 
Gross profit34,535 34,846 71,650 73,932 
Operating expenses:
Product development9,297 9,314 18,526 18,071 
Sales and marketing7,016 7,518 14,508 15,232 
General and administrative12,090 13,188 23,914 25,552 
Amortization of acquisition-related intangibles2,516 2,601 5,039 5,203 
Total operating expenses30,919 32,621 61,987 64,058 
Operating income3,616 2,225 9,663 9,874 
Other income (expense):
Other income283 194 532 392 
Interest expense(1,763)(1,807)(3,567)(3,785)
Total other income (expense)(1,480)(1,613)(3,035)(3,393)
Income before taxes2,136 612 6,628 6,481 
Provision for income taxes473 284 1,521 2,185 
Net income$1,663 $328 $5,107 $4,296 
Net income per common share—basic$0.12 $0.02 $0.36 $0.31 
Net income per common share—diluted$0.12 $0.02 $0.36 $0.31 
Weighted average shares outstanding used in per common share computations:
Basic13,794 13,561 13,725 13,518 
Diluted13,794 13,561 13,725 13,518 
Dividends declared per common share$0.10 $0.10 $0.20 $0.20 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
Common StockAdditional Paid-in-CapitalAccumulated DeficitTotal Stockholders’ Equity
Three Months Ended June 30, 2019 and 2018:SharesAmount
Balance at March 31, 201914,355 $14 $167,229 $(3,002)$164,241 
Net income— — — 1,663 1,663 
Stock-based compensation— — 2,691 — 2,691 
Dividends— — — (1,436)(1,436)
Balance at June 30, 201914,355 $14 $169,920 $(2,775)$167,159 
Balance at March 31, 201814,086 $14 $157,017 $(14,463)$142,568 
Net income— — — 328 328 
Stock-based compensation— — 2,753 — 2,753 
Dividends— — — (1,408)(1,408)
Balance at June 30, 201814,086 $14 $159,770 $(15,543)$144,241 
Six Months Ended June 30, 2019 and 2018:
Balance at December 31, 201814,083 $14 $164,793 $(5,024)$159,783 
Net income— — — 5,107 5,107 
Issuance of restricted stock272 — — —  
Stock-based compensation— — 5,127 — 5,127 
Dividends— — — (2,858)(2,858)
Balance at June 30, 201914,355 $14 $169,920 $(2,775)$167,159 
Balance at December 31, 201713,760 $14 $155,078 $(19,006)$136,086 
Net income— — — 4,296 4,296 
Adoption of accounting standard— — — 1,970 1,970 
Issuance of restricted stock326 — — —  
Stock-based compensation— — 4,692 — 4,692 
Dividends— — — (2,803)(2,803)
Balance at June 30, 201814,086 $14 $159,770 $(15,543)$144,241 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5


COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
20192018
Operating Activities:
Net income$5,107 $4,296 
Adjustments to net income:
Provision for bad debt1,990 1,695 
Deferred taxes1,177 1,404 
Stock-based compensation5,127 4,692 
Depreciation730 1,067 
Amortization of acquisition-related intangibles5,039 5,203 
Amortization of deferred finance costs173 173 
Changes in operating assets and liabilities:
Accounts receivable1,265 (4,453)
Financing receivables2,718 (1,669)
Inventories(371)(62)
Prepaid expenses and other(617)(594)
Accounts payable(840)(1,806)
Deferred revenue(514)2,363 
Other liabilities(2,528)(3,030)
Prepaid income taxes/income taxes payable(995)(1,461)
Net cash provided by operating activities17,461 7,818 
Investing Activities:
Purchase of business, net of cash received(10,840) 
Purchase of property and equipment(1,022)(417)
Net cash used in investing activities(11,862)(417)
Financing Activities:
Dividends paid(2,858)(2,803)
Payments of long-term debt principal(10,118)(10,335)
Payments of contingent consideration(206) 
Proceeds from revolving line of credit11,000 7,300 
Payments of revolving line of credit(2,300)(591)
Net cash used in financing activities(4,482)(6,429)
Increase in cash and cash equivalents1,117 972 
Cash and cash equivalents at beginning of period5,732 520 
Cash and cash equivalents at end of period$6,849 $1,492 
Supplemental disclosure of cash flow information:
Cash paid for interest$3,388 $3,539 
Cash paid for income taxes, net of refund$1,339 $2,242 
6


COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.     BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.
Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2018 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, 2018 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of Consolidation
The condensed consolidated financial statements of CPSI include the accounts of TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), Healthland Holding Inc. ("HHI"), and iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), all of which are wholly-owned subsidiaries of CPSI. The accounts of HHI include those of its wholly-owned subsidiaries, Healthland Inc. ("Healthland"), Rycan Technologies, Inc. ("Rycan"), and American HealthTech, Inc. ("AHT"). All significant intercompany balances and transactions have been eliminated.

2.     RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted in 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. We adopted this guidance as of January 1, 2019 using the current period adjustment method. The impact on the financial statements of implementation of this standard was an increase in lease assets and lease liabilities of $4.9 million as of the adoption date, January 1, 2019. Adoption of the standard did not significantly impact our consolidated net earnings or cash flows.
New Accounting Standards Yet to be Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2019, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2020. The Company is currently evaluating the impact that the implementation of this standard will have on its consolidated financial statements.

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

3.     REVENUE RECOGNITION
Revenue is recognized upon transfer of control of promised products or services to clients in an amount that reflects the consideration we expect to receive in exchange for those products and services. We enter into contracts that can include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations. The Company employs the 5-step revenue recognition model under Accounting Standards Codification
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("ASC") 606, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized net of shipping charges and any taxes collected from clients, which are subsequently remitted to governmental authorities.
System Sales and Support
The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, training, hardware and software application support and hardware maintenance services to acute care and post-acute care community hospitals.
Non-recurring Revenues
Perpetual software licenses, installation, conversion, and related training are not considered separate and distinct performance obligations due to the proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's stand-alone selling price ("SSP"), net of discounts. Fees for licenses, installation, conversion, and related training are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 10 - Financing Receivables for further information. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date on which the client begins using the system in a live environment.
Hardware revenue is recognized separately from software licenses at the point in time it is delivered to the client. The SSP of hardware is cost plus a reasonable margin. Payment is generally due upon delivery of the hardware to the client. Standard manufacturer warranties apply to hardware.
Recurring Revenues
Software application support and hardware maintenance services sold with software licenses and hardware are separate and distinct performance obligations. Revenue for support and maintenance services is recognized based on SSP, which is the renewal price, ratably over the life of the contract, which is generally 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 16 - Segment Reporting, for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
TruBridge
TruBridge provides an array of business processing services ("BPS") consisting of accounts receivable management, private pay services, insurance services, medical coding, electronic billing, statement processing, payroll processing, and contract management. Fees are recognized over the period of the client contractual relationship as the services are performed based on the SSP, net of discounts. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.
TruBridge also provides professional IT services. Revenue from professional IT services is recognized as the services are performed based on SSP. Payment is due monthly as services are performed.

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Deferred Revenue
Deferred revenue represents amounts invoiced to clients for which the services under contract have not been completed and revenue has not been recognized, including annual renewals of certain software subscriptions and customer deposits for implementations to be performed at a later date. Revenue is recognized ratably over the life of the software subscriptions as services are provided and at the point-in-time when implementations have been completed.
The following table details deferred revenue for the six months ended June 30, 2019 and 2018, included in the condensed consolidated balance sheets:
(In thousands)Six Months Ended June 30, 2019Six Months Ended June 30, 2018
Beginning balance$10,201 $9,937 
Deferred revenue recorded10,116 11,700 
Deferred revenue acquired430  
Less deferred revenue recognized as revenue(10,630)(9,337)
Ending balance$10,117 $12,300 
The deferred revenue recorded during the six months ended June 30, 2019 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, 2019 and 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 twelve months in advance of services performed, are capitalized and amortized over the prepayment period. Costs to obtain a contract are expensed within sales and marketing expenses in the accompanying condensed consolidated statements of income.
Contract fulfillment costs related to the implementation of SaaS arrangements are capitalized and amortized ratably over the expected life of the customer. Costs to fulfill contracts consist of the payroll costs for the implementation of SaaS arrangements, including time for training, conversion, and installation that is necessary for the software to be utilized. Contract fulfillment costs are expensed within the caption "System sales and support - Cost of sales."
Costs to obtain and fulfill contracts related to SaaS arrangements are included within the "Prepaid expenses and other" and "Other assets, net of current portion" line items on our condensed consolidated balance sheets.
The following table details costs to obtain and fulfill contracts with customers for the six months ended June 30, 2019 and 2018, included in the condensed consolidated balance sheets:
(In thousands)Six Months Ended June 30, 2019Six Months Ended June 30, 2018
Beginning balance$3,017 $3,775 
Costs to obtain and fulfill contracts capitalized2,752 1,562 
Less costs to obtain and fulfill contracts recognized as expense(2,292)(2,125)
Ending balance$3,477 $3,212 
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.  BUSINESS COMBINATION
Acquisition of Get Real Health
On May 3, 2019, we acquired all of the assets and liabilities of iNetXperts, Corp., a Maryland corporation doing business as Get Real Health (“Get Real Health”), pursuant to a Stock Purchase Agreement dated April 23, 2019, as amended on May 2, 2019. Based in Rockville, Maryland, Get Real Health delivers technology solutions to improve patient outcomes and engagement strategies with care providers.

Consideration for the acquisition included cash (net of cash of the acquired entity) of $10.8 million (inclusive of seller's transaction expenses), plus a contingent earnout payment of up to $14.0 million tied to Get Real Health's earnings before interest, tax, depreciation, and amortization ("EBITDA") (subject to certain pro-forma adjustments) for 2019. During 2019, we have incurred approximately $0.4 million of pre-tax acquisition costs in connection with the acquisition of Get Real Health. Acquisition costs are included in general and administrative expenses in our consolidated statements of income.

Our acquisition of Get Real Health will be treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. Our allocation of the purchase price is based on management's judgment after evaluating several factors, including a preliminary valuation assessment. The allocation is preliminary and subject to changes, which could be significant, as additional information becomes available and appraisals of intangible assets and deferred tax positions are finalized.

The preliminary allocation of the purchase price paid for Get Real Health of June 30, 2019 was as follows:


(In thousands)Purchase Price Allocation
Acquired cash$159 
Accounts receivable364 
Prepaid expenses107 
Property and equipment365 
Operating lease asset1,285 
Intangible assets7,800 
Goodwill9,420 
Accounts payable and accrued liabilities(594)
Deferred taxes, net(1,192)
Operating lease liability(1,285)
Contingent consideration(5,000)
Deferred revenue(430)
Net assets acquired$10,999 

The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives. The amortization is included in amortization of acquisition-related intangibles in our condensed consolidated statements of income.

The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy (see Note 15 - Fair Value). Level 3 inputs included, among others, discount rates that we estimated would be used by a market participant in valuing these assets and liabilities, projections of revenues and cash flows, client attrition rates and market comparables.

Our condensed consolidated statement of operations for the three months ended June 30, 2019 includes revenues of approximately $0.2 million and pre-tax loss of approximately $0.7 million attributed to the acquired business since the May 3, 2019 acquisition date.

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The following unaudited pro forma revenue, net loss and earnings per share amounts for the three and six months ended June 30, 2019 and 2018 give effect to the Get Real Health acquisition as if it had been completed on January 1, 2018. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the periods presented had the Get Real Health acquisition been completed during the periods presented. In addition, the unaudited pro forma financial information does not purport to project future operating results. The pro forma information does not fully reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Get Real Health acquisition.


Three Months Ended June 30,Six Months Ended June 30,
(In thousands, except per share data)2019201820192018
Pro forma revenues$66,501 $68,462 $136,885 $140,257 
Pro forma net income (loss)$815 $(811)$4,053 $2,491 
Pro forma diluted earnings (loss) per share$0.06 $(0.06)$0.30 $0.18 

Pro forma net income (loss) was calculated by adjusting the results for the applicable period to reflect (i) the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied on January 1, 2018 and (ii) adjustments to amortized revenue during fiscal 2019 and 2018 as a result of the acquisition date valuation of assumed deferred revenue.

5.  PROPERTY AND EQUIPMENT
Property and equipment, net was comprised of the following at June 30, 2019 and December 31, 2018:
(In thousands)June 30, 2019December 31, 2018
Land$2,848 $2,848 
Buildings and improvements7,866 7,752 
Computer equipment3,503 2,766 
Leasehold improvements1,734 1,198 
Office furniture and fixtures1,943 1,938 
Automobiles18 18 
Property and equipment, gross17,912 16,520 
Less: accumulated depreciation(6,380)(5,645)
Property and equipment, net$11,532 $10,875 

6.     OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at June 30, 2019 and December 31, 2018:
(In thousands)June 30, 2019December 31, 2018
Salaries and benefits$5,685 $8,722 
Severance972 992 
Commissions755 830 
Self-insurance reserves1,042 1,017 
Contingent consideration5,000 206 
Other565 452 
Operating lease liabilities, current portion1,263— 
Other accrued liabilities$15,282 $12,219 

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7.     NET INCOME PER SHARE
The Company presents basic and diluted earnings per share ("EPS") data for its common stock. Basic EPS is calculated by dividing the net income attributable to stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to stockholders of the Company and the weighted average number of shares of common stock outstanding during the period for the effects of all dilutive potential common shares, including awards under stock-based compensation arrangements.
The Company's unvested restricted stock awards (see Note 9) are considered participating securities under 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.
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 June 30,Six Months Ended June 30,
(In thousands, except per share data)2019201820192018
Net income$1,663 $328 $5,107 $4,296 
Less: Net income attributable to participating securities(62)(8)(194)(144)
Net income attributable to common stockholders$1,601 $320 $4,913 $4,152 
Weighted average shares outstanding used in basic per common share computations13,794 13,561 13,725 13,518 
Add: Dilutive potential common shares    
Weighted average shares outstanding used in diluted per common share computations13,794 13,561 13,725 13,518 
Basic EPS$0.12 $0.02 $0.36 $0.31 
Diluted EPS$0.12 $0.02 $0.36 $0.31 
During 2018 and 2019, 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 200,709 shares, none of which have been included in the calculation of diluted EPS for the three and six months ended June 30, 2019 because the related threshold award performance level has not been achieved as of June 30, 2019. See Note 9 - Stock-based Compensation for more information.

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

Our effective tax rate for the three months ended June 30, 2019 decreased to 22.1% from 46.4% for the three months ended June 30, 2018. Our implementation of the Internal Revenue Service’s “Guidance for Allowance of the Credit for Increasing Research Activities under IRC Section 41 for Taxpayers that Expense Research and Development Costs on their Financial Statements pursuant to ASC 730,” commonly referred to as the “ASC 730 Safe Harbor Directive,” during the second half of 2018 has significantly increased our estimated research and development (“R&D”) tax credits, resulting in an incremental benefit to our effective tax rate of 9.9% for the second quarter of 2019 compared to the second quarter of 2018. Additionally, 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. This year-to-date adjustment, which was 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 for the period. There was no such adjustment recorded during the second quarter of 2019, resulting in a 20.7% reduction in our effective tax rate for the three months ended June 30, 2019 compared to the second quarter of 2018.
Our effective tax rate for the six months ended June 30, 2019 decreased to 22.9% from 33.7% for the six months ended June 30, 2018. Our implementation of the aforementioned ASC 730 Safe Harbor Directive during the second half of 2018 has significantly increased our estimated research and development (“R&D”) tax credits, resulting in an incremental benefit to our effective tax rate of 6.3% for the first six months of 2019 compared to the first six months of 2018. Additionally, we have experienced a decrease in tax shortfalls related to stock-based compensation, resulting in an incremental benefit to our effective tax rate of 3.3% for the first six months of 2019 compared to the first six months of 2018.

9.     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, 2019 and 2018, included in the condensed consolidated statements of income:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2019201820192018
Costs of sales$516 $585 $1,047 $1,024 
Operating expenses2,175 2,168 4,080 3,668 
Pre-tax stock-based compensation expense2,691 2,753 5,127 4,692 
Less: income tax effect(592)(606)(1,128)(1,032)
Net stock-based compensation expense$2,099 $2,147 $3,999 $3,660 
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, Amended and Restated 2014 Incentive Plan and 2019 Incentive Plan (the "Plans"). As of June 30, 2019, there was $14.9 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 1.9 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.
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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, 2019 and 2018 is as follows:
Six Months Ended June 30, 2019Six Months Ended June 30, 2018
SharesWeighted-Average
Grant Date
Fair Value Per Share
SharesWeighted-Average
Grant Date
Fair Value Per Share
Unvested restricted stock outstanding at beginning of period475,132 $32.00 309,195 $38.36 
Granted133,936 30.89 148,841 30.20 
Performance share awards settled through the issuance of restricted stock138,566 29.80 177,395 29.94 
Vested(221,775)33.48 (153,424)40.81 
Unvested restricted stock outstanding at end of period525,859 $30.51 482,007 $31.96 
Performance Share Awards
The Company grants performance share awards to executive officers and certain key employees under the Amended and Restated 2014 Incentive Plan and the 2019 Incentive Plan. The number of shares of common stock earned and issuable under each award is determined at the end of a one-year or three-year performance period, as applicable, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. The three-year performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR") compared to an industry index. If certain levels of the performance objective are met, the award results in the issuance of shares of restricted stock or common stock corresponding to such level. One-year performance share awards are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally three years. Three-year performance share awards that result in the issuance of shares of common stock are not subject to time-based vesting at the conclusion of the three-year performance period.
In the event that the Company's financial performance meets the predetermined targets for the performance objectives of the one-year and three-year performance share awards, the Company will issue each award recipient the number of shares of restricted stock or common stock, as applicable, equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined targets, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined targets, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance levels, no shares will be issued. The total number of shares issued for the three-year performance share award may be increased, decreased, or unchanged based on the TSR modifier described above.
The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the one-year performance share awards is the quoted market value of CPSI's common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the three-year performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.
Expense of one-year performance share awards is recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. Expense of three-year performance share awards is recognized using ratable straight-line amortization over the three-year performance period. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made.
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A summary of performance share award activity under the Plans during the six months ended June 30, 2019 and 2018 is as follows, based on the target award amounts set forth in the performance share award agreements:
Six Months Ended June 30, 2019Six Months Ended June 30, 2018
SharesWeighted-Average
Grant Date
Fair Value Per Share
SharesWeighted-Average
Grant Date
Fair Value Per Share
Performance share awards outstanding at beginning of period184,776 $30.15 189,325 $29.94 
Granted110,310 30.95 184,776 30.15 
Adjusted for actual performance, net of forfeitures44,189 29.77 (11,930)29.94 
Performance share awards settled through the issuance of restricted stock(138,566)29.80 (177,395)29.94 
Performance share awards outstanding at end of period200,709 $30.75 184,776 $30.15 

10.     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, 2019 and December 31, 2018:
(In thousands)June 30, 2019December 31, 2018
Short-term payment plans, gross$3,887 $5,773 
Less: allowance for losses(272)(404)
Short-term payment plans, net$3,615 $5,369 
Long-Term Financing Arrangements
Additionally, the Company provides financing for purchases of its information and patient care systems to certain healthcare providers under long-term financing arrangements expiring in various years through 2026. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from two to seven years.
The components of these receivables were as follows at June 30, 2019 and December 31, 2018:
(In thousands)June 30, 2019December 31, 2018
Long-term financing arrangements, gross$33,840 $34,841 
Less: allowance for losses(2,090)(2,163)
Less: unearned income(3,926)(3,725)
Long-term financing arrangements, net$27,824 $28,953 
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Future minimum payments to be received subsequent to June 30, 2019 are as follows:
(In thousands)
Years Ending December 31,
2019$6,110 
202010,667 
20217,679 
20225,397 
20232,498 
Thereafter1,489 
Total minimum payments to be received33,840 
Less: allowance for losses(2,090)
Less: unearned income(3,926)
Receivables, net$27,824 
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, 2019 and year ended December 31, 2018:
(In thousands)Balance at Beginning of PeriodProvisionCharge-offsRecoveriesBalance at End of Period
June 30, 2019$2,567 $165 $(370)$ $2,362 
December 31, 2018$3,244 $1,691 $(2,368)$ $2,567 
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. Financing receivables are written off only after the Company has exhausted all collection efforts.
Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying condensed consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of June 30, 2019 and December 31, 2018:
(In thousands)1 to 90 Days Past Due91 to 180 Days Past Due181 + Days Past DueTotal Past Due
June 30, 2019$1,341 $340 $166 $1,847 
December 31, 2018$1,302 $210 $245 $1,757 
From time to time, the Company may agree to alternative payment terms outside of the terms of the original financing receivable agreement due to customer difficulties in achieving the original terms. In general, such alternative payment arrangements do not result in a re-aging of the related receivables. Rather, payments pursuant to any alternative payment arrangements are applied to the already outstanding invoices beginning with the oldest outstanding invoices as the payments are received.
Because amounts are reclassified to trade accounts receivable when they become due, there are no past due amounts included within financing receivables current portion or financing receivables, net of current portion, in the accompanying condensed consolidated balance sheets.
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The Company utilizes an aging of trade accounts receivable as the primary credit quality indicator for its financing receivables, which is facilitated by the reclassification of customer payment amounts to trade accounts receivable when they become due. The table below categorizes customer financing receivable balances (excluding short-term payment plans), based on the age of the oldest payment outstanding that has been reclassified to trade accounts receivable:
(In thousands)June 30, 2019December 31, 2018
Stratification of uninvoiced client financing receivables based on aging of related trade accounts receivable:
Uninvoiced client financing receivables related to trade accounts receivable that are 1 to 90 Days Past Due$19,018 $17,290 
Uninvoiced client financing receivables related to trade accounts receivable that are 91 to 180 Days Past Due
4,914 2,247 
Uninvoiced client financing receivables related to trade accounts receivable that are 181 + Days Past Due
1,528 885 
Total uninvoiced client financing receivables balances of clients with a trade accounts receivable$25,460 $20,422 
Total uninvoiced client financing receivables of clients with no related trade accounts receivable4,454 10,694 
Total financing receivables with contractual maturities of one year or less3,887 5,773 
Less: allowance for losses(2,362)(2,567)
Total financing receivables$31,439 $34,322 

11.  INTANGIBLE ASSETS AND GOODWILL
Our purchased definite-lived intangible assets as of June 30, 2019 and December 31, 2018 are summarized as follows:
(In thousands)Customer RelationshipsTrademarkDeveloped TechnologyTotal
Gross carrying amount as of December 31, 2017 $82,300 $10,900 $24,100 $117,300 
Accumulated amortization as of December 31, 2018(19,476)(2,613)(8,985)(31,074)
Net intangible assets as of December 31, 2018$62,824 $8,287 $15,115 $86,226 
Gross carrying amount as of December 31, 2018$82,300 $10,900 $