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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 September 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 November 4, 2019, there were 14,355,656 shares of the issuer’s common stock outstanding.

1


COMPUTER PROGRAMS AND SYSTEMS, INC.
Quarterly Report on Form 10-Q
(For the three and nine months ended September 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) 

September 30, 2019December 31, 2018
Assets
Current assets:
Cash and cash equivalents$3,988  $5,732  
Accounts receivable, net of allowance for doubtful accounts of $2,121 and $2,124, respectively
39,350  40,474  
Financing receivables, current portion, net12,295  15,059  
Inventories1,472  1,498  
Prepaid income taxes2,130  2,120  
Prepaid expenses and other6,444  5,055  
Total current assets65,679  69,938  
Property and equipment, net11,826  10,875  
Operating lease assets8,061  —  
Financing receivables, net of current portion18,214  19,263  
Other assets, net of current portion1,139  995  
Intangible assets, net85,977  86,226  
Goodwill149,960  140,449  
Total assets$340,856  $327,746  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,580  $5,668  
Current portion of long-term debt8,430  6,486  
Deferred revenue8,656  10,201  
Accrued vacation4,324  3,929  
Other accrued liabilities13,984  12,219  
Total current liabilities42,974  38,503  
Long-term debt, net of current portion112,540  124,583  
Operating lease liabilities, net of current portion6,578  —  
Deferred tax liabilities6,733  4,877  
Total liabilities168,825  167,963  
Stockholders’ equity:
Common stock, $0.001 par value; 30,000 shares authorized; 14,356 and 14,083 shares issued and outstanding, respectively
14  14  
Additional paid-in capital172,093  164,793  
Accumulated deficit(76) (5,024) 
Total stockholders’ equity172,031  159,783  
Total liabilities and stockholders’ equity$340,856  $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 September 30,Nine Months Ended September 30,
2019201820192018
Sales revenues:
System sales and support$40,990  $44,425  $123,877  $132,923  
TruBridge27,709  24,872  80,119  75,162  
Total sales revenues68,699  69,297  203,996  208,085  
Costs of sales:
System sales and support18,761  19,583  54,776  57,528  
TruBridge14,023  13,590  41,660  40,501  
Total costs of sales32,784  33,173  96,436  98,029  
Gross profit35,915  36,124  107,560  110,056  
Operating expenses:
Product development9,158  9,305  27,684  27,375  
Sales and marketing6,654  7,546  21,158  22,778  
General and administrative10,996  11,220  34,909  36,772  
Amortization of acquisition-related intangibles3,100  2,692  8,139  7,895  
Total operating expenses29,908  30,763  91,890  94,820  
Operating income6,007  5,361  15,670  15,236  
Other income (expense):
Other income4  201  535  593  
Interest expense(1,702) (1,829) (5,269) (5,615) 
Total other income (expense)(1,698) (1,628) (4,734) (5,022) 
Income before taxes4,309  3,733  10,936  10,214  
Provision (benefit) for income taxes174  (2,016) 1,695  170  
Net income$4,135  $5,749  $9,241  $10,044  
Net income per common share—basic$0.29  $0.41  $0.65  $0.72  
Net income per common share—diluted$0.29  $0.41  $0.65  $0.72  
Weighted average shares outstanding used in per common share computations:
Basic13,829  13,604  13,760  13,547  
Diluted13,829  13,604  13,760  13,547  
Dividends declared per common share$0.10  $0.10  $0.30  $0.30  
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 September 30, 2019 and 2018:SharesAmount
Balance at June 30, 201914,355  $14  $169,920  $(2,775) $167,159  
Net income—  —  —  4,135  4,135  
Common stock issued upon exercise of stock options1  —  3  —  3  
Stock-based compensation—  —  2,170  —  2,170  
Dividends—  —  —  (1,436) (1,436) 
Balance at September 30, 201914,356  $14  $172,093  $(76) $172,031  
Balance at June 30, 201814,086  $14  $159,770  $(15,543) $144,241  
Net income—  —  —  5,749  5,749  
Stock-based compensation—  —  2,611  —  2,611  
Dividends—  —  —  (1,409) (1,409) 
Balance at September 30, 201814,086  $14  $162,381  $(11,203) $151,192  
Nine Months Ended September 30, 2019 and 2018:
Balance at December 31, 201814,083  $14  $164,793  $(5,024) $159,783  
Net income—  —  —  9,241  9,241  
Common stock issued upon exercise of stock options1  —  3  —  3  
Issuance of restricted stock272  —  —  —    
Stock-based compensation—  —  7,297  —  7,297  
Dividends—  —  —  (4,293) (4,293) 
Balance at September 30, 201914,356  $14  $172,093  $(76) $172,031  
Balance at December 31, 201713,760  $14  $155,078  $(19,006) $136,086  
Net income—  —  —  10,044  10,044  
Adoption of accounting standard—  —  —  1,970  1,970  
Issuance of restricted stock326  —  —  —    
Stock-based compensation—  —  7,303  —  7,303  
Dividends—  —  —  (4,211) (4,211) 
Balance at September 30, 201814,086  $14  $162,381  $(11,203) $151,192  
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)
 
Nine Months Ended September 30,
20192018
Operating Activities:
Net income$9,241  $10,044  
Adjustments to net income:
Provision for bad debt1,975  2,366  
Deferred taxes376  (231) 
Stock-based compensation7,297  7,303  
Depreciation1,084  1,416  
Amortization of acquisition-related intangibles8,139  7,895  
Amortization of deferred finance costs259  259  
Changes in operating assets and liabilities:
Accounts receivable(157) (4,174) 
Financing receivables3,483  (5,975) 
Inventories26  219  
Prepaid expenses and other(1,426) (47) 
Accounts payable1,318  (1,641) 
Deferred revenue(1,975) 1,178  
Other liabilities(4,116) (1,821) 
Prepaid income taxes/income taxes payable(11) (1,939) 
Net cash provided by operating activities25,513  14,852  
Investing Activities:
Purchase of business, net of cash received(10,733)   
Purchase of property and equipment(1,670) (818) 
Net cash used in investing activities(12,403) (818) 
Financing Activities:
Dividends paid(4,293) (4,211) 
Payments of long-term debt principal(11,665) (11,877) 
Payments of contingent consideration(206)   
Proceeds from revolving line of credit11,000  7,300  
Payments of revolving line of credit(9,693) (591) 
Proceeds from exercise of stock options3    
Net cash used in financing activities(14,854) (9,379) 
(Decrease) Increase in cash and cash equivalents(1,744) 4,655  
Cash and cash equivalents at beginning of period5,732  520  
Cash and cash equivalents at end of period$3,988  $5,175  
Supplemental disclosure of cash flow information:
Cash paid for interest$5,003  $5,276  
Cash paid for income taxes, net of refund$1,330  $2,340  
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 nine months ended September 30, 2019 and 2018, included in the condensed consolidated balance sheets:
(In thousands)Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018
Beginning balance$10,201  $9,937  
Deferred revenue recorded13,888  15,847  
Deferred revenue acquired430    
Less deferred revenue recognized as revenue(15,863) (14,669) 
Ending balance$8,656  $11,115  
The deferred revenue recorded during the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2019 and 2018, included in the condensed consolidated balance sheets:
(In thousands)Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018
Beginning balance$3,017  $3,775  
Costs to obtain and fulfill contracts capitalized4,130  2,356  
Less costs to obtain and fulfill contracts recognized as expense(3,509) (3,129) 
Ending balance$3,638  $3,002  
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 $0.5 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 as of September 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 assets7,890  
Goodwill9,511  
Accounts payable and accrued liabilities(594) 
Deferred taxes, net(1,480) 
Operating lease liability(1,285) 
Contingent consideration(5,000) 
Deferred revenue(430) 
Net assets acquired$10,892  

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 and nine months ended September 30, 2019 includes revenues of approximately $0.5 million and $0.7 million, respectively, and pre-tax loss of approximately $0.7 million and $1.4 million, respectively, attributed to the acquired business since the May 3, 2019 acquisition date.

10


The following unaudited pro forma revenue, net loss and earnings per share amounts for the three and nine months ended September 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 September 30,Nine Months Ended September 30,
(In thousands, except per share data)2019201820192018
Pro forma revenues$68,699  $70,365  $205,459  $210,622  
Pro forma net income $3,486  $5,208  $7,519  $7,516  
Pro forma diluted earnings per share$0.25  $0.38  $0.55  $0.55  

Pro forma net income 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 September 30, 2019 and December 31, 2018:
(In thousands)September 30, 2019December 31, 2018
Land$2,848  $2,848  
Buildings and improvements8,038  7,752  
Computer equipment3,964  2,766  
Leasehold improvements1,712  1,198  
Office furniture and fixtures1,954  1,938  
Automobiles18  18  
Property and equipment, gross18,534  16,520  
Less: accumulated depreciation(6,708) (5,645) 
Property and equipment, net$11,826  $10,875  









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6.     OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at September 30, 2019 and December 31, 2018:
(In thousands)September 30, 2019December 31, 2018
Salaries and benefits$4,103  $8,722  
Severance647  992  
Commissions794  830  
Self-insurance reserves1,382  1,017  
Contingent consideration5,000  206  
Other575  452  
Operating lease liabilities, current portion1,483—  
Other accrued liabilities$13,984  $12,219  

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 September 30,Nine Months Ended September 30,
(In thousands, except per share data)2019201820192018
Net income$4,135  $5,749  $9,241  $10,044  
Less: Net income attributable to participating securities(151) (197) (347) (338) 
Net income attributable to common stockholders$3,984  $5,552  $8,894  $9,706  
Weighted average shares outstanding used in basic per common share computations13,829  13,604  13,760  13,547  
Add: Dilutive potential common shares        
Weighted average shares outstanding used in diluted per common share computations13,829  13,604  13,760  13,547  
Basic EPS$0.29  $0.41  $0.65  $0.72  
Diluted EPS$0.29  $0.41  $0.65  $0.72  
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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 nine months ended September 30, 2019 because the related threshold award performance levels have not been achieved as of September 30, 2019. See Note 9 - Stock-based Compensation for more information.

8.     INCOME TAXES
The Company determines the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our effective tax rate for the three months ended September 30, 2019, was a tax expense of 4% compared to a tax benefit of 54% for the three months ended September 30, 2018. During the third quarter of 2018, we implemented 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". This Directive provides guidance regarding the examination of certain research and development ("R&D") expenses under ASC 730, Research and Development, and indicates that the IRS will not challenge certain qualified research expenses (QREs) that are characterized as a taxpayer’s adjusted ASC 730 financial statement R&D costs. Under this guidance, taxpayers now have the option to reconcile ASC 730 with the QREs claimed on their tax return by adjusting ASC 730 financial statement R&D costs to arrive at the amount the IRS considers as qualifying for the safe harbor. The implementation of this guidance, including corresponding 2017 provision-to-return and 2018 year-to-date adjustments, resulted in an overall benefit to our effective tax rate of 81% related to R&D credits for the three months ended September 31, 2018. R&D credits (inclusive of 2018 provision-to-return adjustments) for the three months ended September 30, 2019 benefited our effective tax rate by 20% for the related period.
Our effective tax rate for the nine months ended September 30, 2019 increased to 15% from 2% for the nine months ended September 30, 2018. This significant increase in our effective tax rate was primarily due to the implementation of the ASC 730 Safe Harbor Directive during the first nine months of 2018, resulting in an overall benefit to our effective tax rate of 31% related to R&D credits for the first nine months of 2018, inclusive of 2017 provision-to-return adjustments. R&D credits (inclusive of 2018 provision-to-return adjustments) for the nine months ended September 30, 2019 benefited our effective tax rate by 13% for the related period.
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 nine months ended September 30, 2019 and 2018, included in the condensed consolidated statements of income:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2019201820192018
Costs of sales$467  $566  $1,514  $1,590  
Operating expenses1,703  2,044  5,783  5,713  
Pre-tax stock-based compensation expense2,170  2,610  7,297  7,303  
Less: income tax effect(477) (574) (1,605) (1,607) 
Net stock-based compensation expense$1,693  $2,036  $5,692  $5,696  
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 September 30, 2019, there was $11.2 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 1.7 years.
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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 nine months ended September 30, 2019 and 2018 is as follows:
Nine Months Ended September 30, 2019Nine Months Ended September 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 granted performance share awards to executive officers and certain key employees under the Amended and Restated 2014 Incentive Plan prior to 2019 and under the 2019 Incentive Plan beginning in 2019. The number of shares of common stock earned and issuable under each award is determined at the end of a one-year or three-year performance period, 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 and three-year performance share awards is the quoted market value of CPSI's common stock on the grant date less the present value of the expected dividends not received during the relevant period. The TSR modifier applicable to the three-year performance share awards is considered a market condition and therefore is reflected in the grant date fair value of the award. A Monte Carlo simulation has been used to account for this market condition in the grant date fair value of the award.
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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 Plans during the nine months ended September 30, 2019 and 2018 is as follows, based on the target award amounts set forth in the performance share award agreements:
Nine Months Ended September 30, 2019Nine Months Ended September 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