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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, 2022
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.)
54 St. Emanuel Street, Mobile, Alabama
36602
(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 2, 2022, there were 14,514,137 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, 2022)
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,
2022
December 31, 2021
Assets
Current assets:
Cash and cash equivalents$15,558 $11,431 
Accounts receivable (net of allowance for expected credit losses of $2,565 and $1,826, respectively)
45,627 34,431 
Financing receivables, current portion, net (net of allowance for expected credit losses of $251 and $325, respectively)
5,028 6,488 
Inventories1,754 855 
Prepaid income taxes955 4,599 
Prepaid expenses and other11,890 11,194 
Total current assets80,812 68,998 
Property and equipment, net10,301 11,590 
Software development costs, net23,955 11,644 
Operating lease assets7,999 7,097 
Financing receivables, net of current portion (net of allowance for expected credit losses of $376 and $397, respectively)
4,227 7,231 
Other assets, net of current portion5,631 3,874 
Intangible assets, net106,486 95,203 
Goodwill198,584 177,713 
Total assets$437,995 $383,350 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,476 $8,079 
Current portion of long-term debt3,141 4,394 
Deferred revenue12,255 11,529 
Accrued vacation6,350 5,262 
Other accrued liabilities16,181 17,163 
Total current liabilities45,403 46,427 
Long-term debt, net of current portion137,174 94,966 
Operating lease liabilities, net of current portion6,088 5,505 
Deferred tax liabilities16,372 13,880 
Total liabilities205,037 160,778 
Stockholders’ equity:
Common stock, $0.001 par value; 30,000 shares authorized; 14,914 and 14,734 shares issued, respectively
15 15 
Additional paid-in capital192,363 187,079 
Retained earnings51,404 38,054 
Treasury stock, 354 shares and 89 shares, respectively
(10,824)(2,576)
Total stockholders’ equity232,958 222,572 
Total liabilities and stockholders’ equity$437,995 $383,350 
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,
2022202120222021
Sales revenues:
TruBridge$47,878 $34,531 $139,569 $98,736 
System sales and support34,949 35,560 103,855 107,893 
Total sales revenues82,827 70,091 243,424 206,629 
Costs of sales:
TruBridge26,190 17,377 73,863 50,349 
System sales and support18,619 17,425 52,278 52,250 
Total costs of sales44,809 34,802 126,141 102,599 
Gross profit38,018 35,289 117,283 104,030 
Operating expenses:
Product development7,822 7,700 22,036 22,598 
Sales and marketing7,309 5,200 22,578 15,813 
General and administrative13,458 14,184 41,235 38,322 
Amortization of acquisition-related intangibles4,486 3,674 12,917 10,114 
Total operating expenses33,075 30,758 98,766 86,847 
Operating income4,943 4,531 18,517 17,183 
Other income (expense):
Other income355 123 914 1,160 
(Loss) gain on contingent consideration(589)— 992 — 
Loss on extinguishment of debt— — (125)— 
Interest expense(1,771)(825)(4,044)(2,249)
Total other income (expense)(2,005)(702)(2,263)(1,089)
Income before taxes2,938 3,829 16,254 16,094 
Provision for income taxes777 1,085 2,904 3,065 
Net income$2,161 $2,744 $13,350 $13,029 
Net income per common share—basic$0.15 $0.19 $0.91 $0.89 
Net income per common share—diluted$0.15 $0.19 $0.91 $0.89 
Weighted average shares outstanding used in per common share computations:
Basic14,365 14,334 14,405 14,276 
Diluted14,365 14,343 14,405 14,303 
Dividends declared per common share$— $— $— $— 
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 StockAdditional Paid-in-CapitalRetained EarningsTreasury StockTotal Stockholders’ Equity
SharesAmount
Three Months Ended September 30, 2022 and 2021:
Balance at June 30, 202214,897 $15 $190,499 $49,243 $(6,824)$232,933 
Net income— — — 2,161 — 2,161 
Issuance of restricted stock17 — — — — — 
Stock-based compensation— — 1,864 — — 1,864 
Treasury stock acquired— — — — (4,000)(4,000)
Balance at September 30, 202214,914 $15 $192,363 $51,404 $(10,824)$232,958 
Balance at June 30, 202114,734 $15 $184,101 $29,909 $(2,483)$211,542 
Net income— — — 2,744 — 2,744 
Stock-based compensation— — 1,700 — — 1,700 
Balance at September 30, 202114,734 $15 $185,801 $32,653 $(2,483)$215,986 
Nine Months Ended September 30, 2022 and 2021:
Balance at December 31, 202114,734 $15 $187,079 $38,054 $(2,576)$222,572 
Net income— — — 13,350 — 13,350 
Issuance of restricted stock189 — — — — — 
Forfeiture of restricted stock(9)— — — — — 
Stock-based compensation— — 5,284 — — 5,284 
Treasury stock acquired— — — — (8,248)(8,248)
Balance at September 30, 202214,914 $15 $192,363 $51,404 $(10,824)$232,958 
Balance at December 31, 202014,511 $15 $181,622 $19,624 $(1,261)$200,000 
Net income— — — 13,029 — 13,029 
Issuance of restricted stock229 — — — — — 
Forfeiture of common stock(6)— — — — — 
Stock-based compensation— — 4,179 — — 4,179 
Treasury stock acquired— — — — (1,222)(1,222)
Balance at September 30, 202114,734 $15 $185,801 $32,653 $(2,483)$215,986 
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)
 
Nine Months Ended September 30,
20222021
Operating Activities:
Net income$13,350 $13,029 
Adjustments to net income:
Provision for credit losses1,202 2,080 
Deferred taxes(3,073)2,306 
Stock-based compensation5,284 4,179 
Depreciation1,890 1,641 
Loss on extinguishment of debt125 — 
Amortization of acquisition-related intangibles12,917 10,114 
Amortization of software development costs2,283 527 
Amortization of deferred finance costs242 220 
Gain on contingent consideration(992)— 
Loss on disposal of PP&E— 313 
Changes in operating assets and liabilities:
Accounts receivable(6,877)1,304 
Financing receivables4,598 5,962 
Inventories(899)(67)
Prepaid expenses and other(1,982)(2,892)
Accounts payable(988)(2,723)
Deferred revenue726 1,414 
Other liabilities(1,239)(666)
Prepaid income taxes3,644 (2,267)
Net cash provided by operating activities30,211 34,474 
Investing Activities:
Purchase of business, net of cash acquired(43,696)(59,634)
Investment in software development(14,594)(6,447)
Purchase of property and equipment(134)(915)
Net cash used in investing activities(58,424)(66,996)
Financing Activities:
Proceeds from long-term debt575 — 
Payments of long-term debt principal(2,687)(2,813)
Proceeds from revolving line of credit48,000 61,000 
Payments of revolving line of credit(5,300)(20,000)
Treasury stock purchases(8,248)(1,222)
Net cash provided by financing activities32,340 36,965 
Increase in cash and cash equivalents4,127 4,443 
Cash and cash equivalents at beginning of period11,431 12,671 
Cash and cash equivalents at end of period$15,558 $17,114 
Supplemental disclosure of cash flow information:
Cash paid for interest$3,677 $1,979 
Cash paid for income taxes, net of refund$2,656 $3,116 
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, 2021 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, 2021 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

During the second quarter of 2021, we elected to change our method of estimating the labor costs incurred in developing software assets requiring capitalization under Accounting Standards Codification ("ASC") 350-40, Internal Use Software. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. See Note 6, “Software Development,” for further information.
Principles of Consolidation
The condensed consolidated financial statements of CPSI include the accounts of TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), Healthland Holding Inc. ("HHI"), iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), TruCode LLC ("TruCode"), and Healthcare Resource Group, Inc. ("HRG"), 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 2022

There were no new accounting standards required to be adopted in 2022 that would have a material impact on our consolidated financial statements.
New Accounting Standards Yet to be Adopted

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, Revenue from Contracts with Customers, to: (1) identify the contract with the client, (2) identify the performance obligations in the contract, (3)


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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.
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 stand-alone selling price ("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.
Lastly, TruBridge also provides various revenue cycle optimization software solutions on a subscription or Software as a Service (“SaaS”) basis. Subscription revenue is recognized as a separate performance obligation ratably over the subscription term based on SSP, which is cost plus a reasonable margin. SaaS revenue is recognized as a separate performance obligation on a monthly basis as the SaaS service is provided to the client over the contract term. Payment is due monthly for subscriptions and SaaS services provided.
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 community hospitals and post-acute care providers.
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 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 11 - Financing Receivables for further information. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date 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.
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.


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Refer to Note 17 - Segment Reporting, for further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and non-recurring revenue.
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, 2022 and 2021, included in the condensed consolidated balance sheets:
(In thousands)Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Beginning balance$11,529 $8,130 
Deferred revenue recorded19,474 16,886 
Deferred revenue acquired— 1,300 
Less deferred revenue recognized as revenue(18,748)(15,472)
Ending balance$12,255 $10,844 
The deferred revenue recorded during the nine months ended September 30, 2022 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, 2022 and 2021 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" in the accompanying condensed consolidated statements of income.
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, 2022 and 2021, included in the condensed consolidated balance sheets:
(In thousands)Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Beginning balance$7,312 $5,992 
Costs to obtain and fulfill contracts capitalized7,460 4,719 
Less costs to obtain and fulfill contracts recognized as expense(5,440)(4,441)
Ending balance$9,332 $6,270 


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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.

4.     BUSINESS COMBINATION
Acquisition of Healthcare Resource Group
On March 1, 2022, we acquired all of the assets and liabilities of Healthcare Resource Group, Inc., a Washington corporation ("HRG"), pursuant to a Stock Purchase Agreement dated March 1, 2022. Based in Spokane, Washington, HRG is a leading provider of customized revenue cycle management ("RCM") solutions and consulting services that enable hospitals and clinics to improve efficiency, profitability, and patient satisfaction.

Consideration for the acquisition included cash (net of cash of the acquired entity) of $43.9 million (inclusive of seller's transaction expenses). During 2022, we have incurred approximately $1.0 million of pre-tax acquisition costs in connection with the acquisition of HRG. Acquisition costs are included in general and administrative expenses in our consolidated statements of income.

Our acquisition of HRG 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 HRG as of September 30, 2022 was as follows:

(In thousands)Purchase Price Allocation
Acquired cash$3,989 
Accounts receivable5,655
Prepaid expenses398
Property and equipment467
Other assets73
Intangible assets24,200
Operating lease assets1,315
Goodwill21,081
Accounts payable and accrued liabilities(2,403)
Deferred taxes, net(5,565)
Operating lease liability(1,315)
Net assets acquired$47,895 

The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives, which range from four to nine years. 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 16 - 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.



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Our condensed consolidated statement of operations for the nine months ended September 30, 2022 includes revenues of approximately $24.5 million and pre-tax net income of approximately $5.8 million attributed to the acquired business since the March 1, 2022 acquisition date.

The following unaudited pro forma revenue, net income and earnings per share amounts for the three and nine months ended September 30, 2022 give effect to the HRG acquisition as if it had been completed on January 1, 2021. 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 HRG 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 HRG acquisition.

Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands, except per share data)2022202120222021
Pro forma revenues$82,827 $78,395 $249,764 $231,049 
Pro forma net income $2,285 $2,146 $13,973 $11,520 
Pro forma diluted earnings per share$0.16 $0.15 $0.95 $0.78 

Pro forma net income was calculated by adjusting the results for the applicable period to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied on January 1, 2021 and other miscellaneous, immaterial adjustments.
Acquisition of TruCode
On May 12, 2021, we acquired all of the assets and liabilities of TruCode LLC, a Virginia limited liability company (“TruCode”), pursuant to a Stock Purchase Agreement dated May 12, 2021. Based in Alpharetta, Georgia, TruCode provides configurable, knowledge-based software that gives coders, clinical documentation improvement specialists and auditors the flexibility to code according to their knowledge, preferences and experience. The cloud-based medical coding solution has been bundled with the TruBridge solutions and services to enhance revenue cycle performance for healthcare organizations of all sizes.

Consideration for the acquisition included cash (net of cash of the acquired entity) of $59.9 million (inclusive of sellers' transaction expenses), plus a contingent earnout payment of up to $15.0 million tied to TruCode's earnings before interest, tax, depreciation, and amortization ("EBITDA") (subject to certain pro-forma adjustments) for the twelve-month period concluding on the anniversary date of the acquisition (the "earnout period"). As of September 30, 2022, $1.0 million of the original $2.5 million contingent consideration estimated in determining the purchase price was reversed as TruCode's earnings over the earnout period were less than estimated at the date of acquisition. During 2021, we incurred approximately $0.9 million of pre-tax acquisition costs in connection with the acquisition of TruCode. Acquisition costs are included in general and administrative expenses in our consolidated statements of income.

Our acquisition of TruCode was 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 valuation assessment.




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The allocation of the purchase price paid for TruCode was as follows:

(In thousands)Purchase Price Allocation
Acquired cash$4,249 
Accounts receivable924
Prepaid expenses2
Intangible assets37,300
Goodwill27,287
Accounts payable and accrued liabilities(1,840)
Contingent consideration(2,500)
Deferred revenue(1,300)
Net assets acquired$64,122 

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 16 - 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.

5. PROPERTY AND EQUIPMENT
Property and equipment, net was comprised of the following at September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Land$2,848 $2,848 
Buildings and improvements8,279 8,269 
Computer equipment8,133 7,868 
Leasehold improvements783 783 
Office furniture and fixtures1,008 682 
Automobiles18 18 
Property and equipment, gross21,069 20,468 
Less: accumulated depreciation(10,768)(8,878)
Property and equipment, net$10,301 $11,590 

6. SOFTWARE DEVELOPMENT
Software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software. We capitalize incurred labor costs for software development from the time the preliminary project phase is completed until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We estimate the useful life of our capitalized software and amortize its value on a straight-line basis over that estimated life, which is estimated to be five years. If the actual life of the asset is deemed to be impaired, a write-down of the value of the asset may be recorded as a charge to earnings. Amortization begins when the related software features are placed in service.
During the second quarter of 2021, our ongoing monitoring activities associated with the capitalization of software development costs and the related correlation between capitalization rates and operational metrics designed to reflect the distribution of work revealed that our then-current labor capitalization methodology did not fully reflect all of the critical activities necessary to develop software assets. Consequently, during the second quarter of 2021, we elected to change our


12







method of estimating the labor costs incurred in developing software assets. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change in accounting for software development costs is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. In connection with this change, we capitalized software development costs of $8.8 million during the year ended December 31, 2021. We estimate that the effect of this change was to increase capitalized amounts by approximately $4.6 million for the year ended December 31, 2021, with a corresponding decrease to product development costs.
Software development costs, net was comprised of the following at September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Software development costs$27,287 $12,693 
Less: accumulated amortization(3,332)(1,049)
Software development costs, net$23,955 $11,644 

7.     OTHER ACCRUED LIABILITIES
Other accrued liabilities was comprised of the following at September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Salaries and benefits$8,857 $8,482 
Severance147 236 
Commissions1,001 1,158 
Self-insurance reserves1,450 1,409 
Contingent consideration1,508 2,500 
Operating lease liabilities, current portion2,051 1,592 
Other1,167 1,786 
Other accrued liabilities$16,181 $17,163 

8.     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 10) are considered participating securities under ASC 260, 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 September 30,Nine Months Ended September 30,
(In thousands, except per share data)2022202120222021
Net income$2,161 $2,744 $13,350 $13,029 
Less: Net income attributable to participating securities(42)(59)(261)(293)
Net income attributable to common stockholders$2,119 $2,685 $13,089 $12,736 
Weighted average shares outstanding used in basic per common share computations14,365 14,334 14,405 14,276 
Add: Dilutive potential common shares— — 27 
Weighted average shares outstanding used in diluted per common share computations14,365 14,343 14,405 14,303 
Basic EPS$0.15 $0.19 $0.91 $0.89 
Diluted EPS$0.15 $0.19 $0.91 $0.89 
During 2020, 2021, and 2022, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of common stock if the predefined performance criteria are met. The awards provide for an aggregate target of 279,374 shares, of which none have been included in the calculation of diluted EPS for the three or nine months ended September 30, 2022 because the related threshold award performance levels have not been achieved as of September 30, 2022. See Note 10 - Stock-Based Compensation and Equity for more information.

9.     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, 2022 decreased to 26.4% from 28.3% for the three months ended September 30, 2021, resulting in an immaterial impact to income tax expense.
Our effective tax rate for the nine months ended September 30, 2022 decreased slightly to 17.9% from 19.0% for the nine months ended September 30, 2021.

10.   STOCK-BASED COMPENSATION AND EQUITY
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, 2022 and 2021, included in the condensed consolidated statements of income:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2022202120222021
Costs of sales$274 $311 $851 $793 
Operating expenses1,590 1,389 4,433 3,386 
Pre-tax stock-based compensation expense1,864 1,700 5,284 4,179 
Less: income tax effect(410)(374)(1,162)(919)
Net stock-based compensation expense$1,454 $1,326 $4,122 $3,260 
The Company's stock-based compensation awards are in the form of restricted stock and performance share awards granted pursuant to the Company's Amended and Restated 2019 Incentive Plan (the "Plan"). As of September 30, 2022, there was


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$12.0 million of unrecognized compensation expense related to unvested and unearned stock-based compensation arrangements granted under the Plan, which is expected to be recognized over a weighted-average period of 2.0 years.
Restricted Stock
The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plan with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. During the vesting period, recipients of restricted stock are entitled to dividends and posses voting rights. 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.
A summary of restricted stock activity under the Plan during the nine months ended September 30, 2022 and 2021 is as follows:
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
SharesWeighted-Average
Grant Date
Fair Value Per Share
SharesWeighted-Average
Grant Date
Fair Value Per Share
Unvested restricted stock outstanding at beginning of period314,883 $29.79 412,967 $28.87 
Granted161,375 34.22 153,700 31.22 
Vested(181,405)29.79 (245,455)29.16 
Forfeited(8,936)31.60 (6,329)29.10 
Unvested restricted stock outstanding at end of period285,917 $32.23 314,883 $29.79 
Performance Share Awards
The Company grants performance share awards to executive officers and certain key employees under the Plan, with the number of shares of common stock earned and issuable under each award determined at the end of a 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. These performance share awards include a modifier to the total number of shares earned based on the Company's total shareholder return ("TSR") compared to a small-cap stock market index. If certain levels of the performance objective are met, the award results in the issuance of shares of common stock corresponding to such level. 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 performance share awards, the Company will issue each award recipient the number of shares of common stock 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 may be issued. The total number of shares issued for the 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 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 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 related to 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 Plan during the nine months ended September 30, 2022 and 2021 is as follows, based on the target award amounts set forth in the performance share award agreements:
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
SharesWeighted-Average
Grant Date
Fair Value Per Share
SharesWeighted-Average
Grant Date
Fair Value Per Share
Performance share awards outstanding at beginning of period249,952 $29.59 252,852 $29.27 
Granted101,799 37.98 93,444 31.26 
Forfeited or unearned(45,060)31.70 (20,373)29.92 
Earned and issued(27,317)31.75 (75,971)30.50 
Performance share awards outstanding at end of period279,374 $32.09 249,952 $29.59 

Stock Repurchases
On September 4, 2020, our Board of Directors approved a stock repurchase program under which we were authorized to repurchase up to $30.0 million of our common stock through September 3, 2022. On July 27, 2022, the Board of Directors extended the expiration date of the stock repurchase program to September 4, 2024. We repurchased 212,299 shares during the nine months ended September 30, 2022 and 17,387 shares during the nine months ended September 30, 2021. The approximate dollar value of shares that may yet be repurchased under the stock repurchase program was $21.6 million as of September 30, 2022. Any future stock repurchase transactions may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Any repurchase activity will depend on many factors, such as the availability of shares of our common stock, general market conditions, the trading price of our common stock, alternative uses for capital, the Company’s financial performance, compliance with the terms of our Amended and Restated Credit Agreement and other factors. Concurrent with the authorization of this stock repurchase program in September 2020, the Board of Directors opted to indefinitely suspend all quarterly dividends.
In addition to shares repurchased under the approved stock repurchase program, we purchased 52,905 shares during the nine months ended September 30, 2022 and 21,444 shares during the nine months ended September 30, 2021 to fund required tax withholdings related to the vesting of restricted stock. Shares withheld to cover required tax withholdings related to the vesting of restricted stock do not reduce our total share repurchase authority.

11.   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 certain 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 September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Short-term payment plans, gross$402 $121 
Less: allowance for losses(20)(6)
Short-term payment plans, net$382 $115 


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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 2028. 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 decrease in long-term financing arrangement balances during the nine months ended September 30, 2022 is primarily a result of the continued evolution of customer licensing preferences. Although the overwhelming majority of our historical EHR installations prior to 2019 were made under a perpetual license model, the dramatic shift in customer preferences to a SaaS license model began during 2019 with 49% of the year's new acute care EHR installations being performed in a SaaS model, compared to only 12% in 2018. The shift in customer preference toward a SaaS model has since continued, with SaaS installations representing approximately 68% of new acute care EHR installations in 2020, 63% in 2021 and 100% in the first nine months of 2022. Due to the nature of the revenue recognition requirements for SaaS arrangements coupled with recurring monthly payments, these arrangements do not give rise to long-term financing arrangements.
The components of these receivables were as follows at September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Long-term financing arrangements, gross$10,291 $15,659 
Less: allowance for expected credit losses(607)(716)
Less: unearned income(811)(1,339)
Long-term financing arrangements, net$8,873 $13,604 
Future minimum payments to be received subsequent to September 30, 2022 are as follows:
(In thousands)
Years Ending December 31,
2022$2,744 
20234,146 
20242,315 
2025948 
2026117 
Thereafter21 
Total minimum payments to be received10,291 
Less: allowance for expected credit losses(607)
Less: unearned income(811)
Receivables, net$8,873 


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Credit Quality of Financing Receivables and Allowance for Expected Credit Losses
The following table is a roll-forward of the allowance for expected credit losses for the nine months ended September 30, 2022 and year ended December 31, 2021:
(In thousands)Balance at Beginning of PeriodProvisionCharge-offsRecoveriesBalance at End of Period
September 30, 2022$722 $(133)$38 $— $627 
December 31, 2021$1,489 $481 $(1,248)$— $722 
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, current and future 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 expected 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 September 30, 2022 and December 31, 2021:
(In thousands)1 to 90 Days Past Due91 to 180 Days Past Due181 + Days Past DueTotal Past Due
September 30, 2022$1,052 $201 $270 $1,523 
December 31, 2021$713 $78 $73 $864 
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, net 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)September 30,
2022
December 31, 2021
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$4,985 $9,100 
Uninvoiced client financing receivables related to trade accounts receivable that are 91 to 180 Days Past Due
2,237 329 
Uninvoiced client financing receivables related to trade accounts receivable that are 181 + Days Past Due
867 386 
Total uninvoiced client financing receivables balances of clients with a trade accounts receivable$8,089 $9,815 
Total uninvoiced client financing receivables of clients with no related trade accounts receivable1,391 4,505 
Total financing receivables with contractual maturities of one year or less402 121 
Less: allowance for expected credit losses(627)(722)
Total financing receivables$9,255 $13,719 

12. INTANGIBLE ASSETS AND GOODWILL
Our purchased definite-lived intangible assets as of September 30, 2022 and December 31, 2021 are summarized as follows:
September 30, 2022
(In thousands)Customer RelationshipsTrademarkDeveloped TechnologyNon-Compete AgreementsTotal
Gross carrying amount, beginning of period$112,570 $12,320 $37,600 $— $162,490 
Intangible assets acquired19,600 — 3,200 1,400 24,200 
Accumulated amortization (49,623)(5,851)(24,567)(163)(80,204)
Net intangible assets as of September 30, 2022
$82,547 $6,469 $16,233 $1,237 $106,486 
Weighted average remaining years of useful life8138510
December 31, 2021
(In thousands)Customer RelationshipsTrademarkDeveloped TechnologyNon-Compete AgreementsTotal
Gross carrying amount, beginning of period $84,370 $11,120 $29,700 $— $125,190 
Intangible assets acquired 28,200 1,200 7,900 — 37,300 
Accumulated amortization(41,738)(5,177)(20,372)— (67,287)
Net intangible assets as of December 31, 2021
$70,832 $7,143 $17,228 $— $95,203 


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The following table represents the remaining amortization of definite-lived intangible assets as of September 30, 2022:
(In thousands)
For the year ended December 31,
2022$4,486 
202316,058 
202414,523 
202514,208 
202612,919 
Thereafter44,292 
Total$106,486 
The following table sets forth the change in the carrying amount of goodwill by segment for the nine months ended September 30, 2022:
(In thousands)Acute Care EHRPost-acute Care EHRTruBridgeTotal
Balance as of December 31, 2021
$97,095 $29,570 $51,048 $177,713 
Goodwill acquired— — 20,871 20,871 
Balance as of September 30, 2022
$97,095 $29,570 $71,919 $198,584 

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.

13. LONG-TERM DEBT
Long-term debt was comprised of the following at September 30, 2022 and December 31, 2021:
(In thousands)September 30,
2022
December 31, 2021
Term loan facility$68,250 $69,375 
Revolving credit facility73,700 31,000 
Debt obligations141,950 100,375 
Less: unamortized debt issuance costs(1,635)(1,015)
Debt obligation, net140,315 99,360 
Less: current portion(3,141)(4,394)
Long-term debt$137,174 $94,966 
As of September 30, 2022, the carrying value of debt approximated the fair value due to the variable interest rate, which reflected the market rate.
Credit Agreement
In conjunction with our acquisition of HHI in January 2016, we entered into a syndicated credit agreement with Regions Bank ("Regions") serving as administrative agent, which provided for a $125 million term loan facility and a $50 million revolving credit facility. On June 16, 2020, we entered into an Amended and Restated Credit Agreement that increased the aggregate principal amount of our credit facilities to $185 million, including a $75 million term loan facility and a $110 million revolving credit facility. On May 2, 2022, we entered into a First Amendment (the "First Amendment") to the Amended and Restated Credit Agreement, that increased the aggregate principal amount of our credit facilities to $230 million, which includes a $70 million term loan facility and a $160 million revolving credit facility. In addition, the interest rate provisions of the First Amendment reflect the transition from the London Interbank Offered Rate (" LIBOR") to the Secured Overnight Financing Rate ("SOFR") as the new benchmark interest rate for each loan.
Each of our credit facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted SOFR rate for the relevant interest period, subject to a floor of 0.50%, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant


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interest period plus one half of one percent per annum and (c) the one month SOFR rate, subject to the aforementioned floor, plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin range for SOFR loans and the letter of credit fee ranges from 1.8% to 3.0%. The applicable margin range for base rate loans ranges from 0.8% to 2.0%, in each case based on the Company's consolidated net leverage ratio.
Principal payments with respect to the term loan facility are due on the last day of each fiscal quarter beginning June 30, 2022, with quarterly principal payments of approximately $0.9 million through March 31, 2027, with maturity on May 2, 2027 or such earlier date as the obligations under the Amended and Restated Credit Agreement as amended by the First Amendment become due and payable pursuant to the terms of such agreement. Any principal outstanding under the revolving credit facility is due and payable on the maturity date.
Anticipated annual future maturities of the term loan facility and revolving credit facility are as follows as of September 30, 2022:
(In thousands)
2022$875 
20233,500 
20243,500 
20253,500 
20263,500 
Thereafter127,075 
$141,950 
Our credit facilities are secured pursuant to the Amended and Restated Credit Agreement, dated as of June 16, 2020, among the parties identified as obligors therein and Regions, as collateral agent, on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the “Subsidiary Guarantors”), including certain registered intellectual property and the capital stock of certain of the Company’s direct and indirect subsidiaries. Our obligations under the Amended and Restated Credit Agreement are also guaranteed by the Subsidiary Guarantors.
The First Amendment provides incremental facility capacity of $75 million, subject to certain conditions. The Amended and Restated Credit Agreement, as amended by the First Amendment, includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase, or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated net leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. The First Amendment requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the First Amendment, the Company is required to comply with a maximum consolidated net leverage ratio of 3.75:1.00 for each quarter through March 31, 2023, after which time the maximum consolidated net leverage ratio will be 3.50:1.00. Further, under the First Amendment, in connection with any acquisition by the Company exceeding $25 million, the Company may elect to increase the maximum permitted consolidated net leverage ratio for the fiscal quarter in which the acquisition occurs and each of the following three fiscal quarters by 0.50:1.00 above the otherwise permitted maximum. If the consolidated net leverage ratio is less than 2.50:1.00, there is no limit on the amount of incremental facilities. The Amended and Restated Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in such agreement as of September 30, 2022.
The First Amendment removed the requirement that the Company mandatorily prepay the credit facilities with excess cash flow generated during the prior fiscal year. The Company is permitted to voluntarily prepay the credit facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of SOFR rate loans made on a day other than the last day of any applicable interest period.



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14.   OPERATING LEASES
The Company leases office space in various locations in Alabama, Pennsylvania, Minnesota, Maryland, Mississippi, and Washington. These leases have terms expiring from 2022 through 2030 but do contain optional extension terms. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Supplemental balance sheet information related to operating leases was as follows:
(In thousands)September 30,
2022
Operating lease assets
Operating lease assets$7,999 
Operating lease liabilities
Other accrued liabilities2,051 
Operating lease liabilities, net of current portion6,088 
Total operating lease liabilities$8,139 
Weighted average remaining lease term in years5
Weighted average discount rate4.4%
Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
The future minimum lease payments payable under these operating leases subsequent to September 30, 2022 are as follows:
(In thousands)
2022$511 
20232,063 
20241,994 
20251,258 
20261,225 
Thereafter2,065 
Total lease payments9,116 
Less imputed interest(977)
Total$8,139 
Total lease expense for the nine months ended September 30, 2022 and 2021 was $1.6 million and $1.4 million, respectively.
Total cash paid for amounts included in the measurement of lease liabilities within operating cash flows from operating leases for the nine months ended September 30, 2022 and 2021 was $1.6 million and $2.3 million, respectively.

15.  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.

16.  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


22







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.
As of September 30, 2022, we measured the fair value of contingent consideration that represents the potential earnout incentive for TruCode's former equity holders. We estimated the fair value of the contingent consideration based on the probability of TruCode meeting EBITDA targets (subject to certain pro-forma adjustments). We did not have any other instruments that required fair value measurement as of September 30, 2022.
The following tables summarize the carrying amounts and fair value of the contingent consideration at September 30, 2022 and December 31, 2021, respectively:
Fair Value at September 30, 2022 Using
Carrying Amount atQuoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(In thousands)9/30/2022(Level 1)(Level 2)(Level 3)
Description
Contingent consideration$1,508 $— $— $1,508 
Total$1,508 $— $— $1,508 
Fair Value at December 31, 2021 Using
Carrying Amount atQuoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(In thousands)12/31/2021(Level 1)(Level 2)(Level 3)
Description
Contingent consideration$2,500 $— $— $2,500 
Total$2,500 $— $— $2,500 

17.  SEGMENT REPORTING
Our chief operating decision makers ("CODM") utilize three operating segments, "TruBridge," "Acute Care EHR," and "Post-acute Care EHR" based on our three distinct business units with unique market dynamics and opportunities. These segments represent the components of the Company for which separate financial information is available that is utilized on a regular basis by the CODM in assessing segment performance and in allocating the Company's resources. Management evaluates the performance of the segments based on revenues and adjusted EBITDA. The Company previously evaluated the performance of the segments based on segment gross profit. Management believes adjusted EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating results by excluding the effects of expenses that are not reflective of its operating business performance. Our CODM group is comprised of the Chief Executive Officer, Chief Growth Officer, and Chief Financial Officer. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.
Adjusted EBITDA consists of GAAP net income as reported and adjusts for (i) deferred revenue purchase accounting adjustments arising from purchase allocation adjustments related to business acquisitions; (ii) depreciation expense; (iii) amortization of software development costs; (iv) amortization of acquisition-related intangible assets; (v) stock-based compensation; (vi) severance and other non-recurring charges; (vii) interest expense and other, net; (viii) gain (loss) on contingent consideration; and (ix) the provision for income taxes. There are no intersegment revenues to be eliminated in computing segment revenue.


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The CODM do not evaluate operating segments nor make decisions regarding operating segments based on assets. Consequently, we do not disclose total assets by reportable segment.
The following table presents a summary of the revenues and adjusted EBITDA of our three operating segments for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2022202120222021
Revenues by segment:
TruBridge$47,878 $34,531 139,569 98,736 
Acute Care EHR
Recurring revenue27,237 26,776 $81,333 $80,792 
Non-recurring revenue3,500 4,350 9,467 13,786 
Total Acute Care EHR revenue30,737 31,126 90,800 94,578 
Post-acute Care EHR
Recurring revenue3,817 4,010 11,504 12,402 
Non-recurring revenue395 424 1,551 913 
Total Post-acute Care EHR revenue4,212 4,434 13,055 13,315 
Total revenues$82,827 $70,091 $243,424 $206,629 
Adjusted EBITDA by segment:
TruBridge8,060 6,840 27,609 20,216 
Acute Care EHR4,584 4,773 13,915 15,650 
Post-acute Care EHR705 624 1,147 2,487 
Total adjusted EBITDA$13,349 $12,237 $42,671 $38,353 
The following table reconciles net income from continuing operations to adjusted EBITDA:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2022202120222021
Net income from continuing operations, as reported$2,161 $2,744 13,350 13,029 
Deferred revenue and other acquisition-related adjustments— 388 109 546 
Depreciation expense622 525 1,890 1,641 
Amortization of software development costs1,024 262 2,283 527 
Amortization of acquisition-related intangibles4,486 3,674 12,917 10,114 
Stock-based compensation1,864 1,700 5,284 4,179 
Severance and other non-recurring charges410 1,157 1,671 4,163 
Interest expense and other, net1,416 702 3,255 1,089 
(Gain)/Loss on contingent consideration589 — (992)— 
Provision for income taxes777 1,085 2,904 3,065 
Total adjusted EBITDA$13,349 $12,237 $42,671 $38,353 
Certain of the items excluded or adjusted to arrive at adjusted EBITDA are described below:
Deferred revenue and other acquisition-related adjustments - Deferred revenue and other acquisition-related adjustments includes acquisition-related deferred revenue adjustments, which reflect the fair value adjustments to deferred revenues acquired in business acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin, to perform services related to the acquiree's software and product support, which assumes a legal obligation to do so, based on the deferred revenue balance as of the acquisition date. We add back deferred revenue and other adjustments for adjusted EBITDA because we believe the inclusion of this amount directly correlates to the underlying performance of our operations.


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Amortization of acquisition-related intangibles - Acquisition related amortization expense is a non-cash expense arising primarily from the acquisition of intangibles in connection with acquisitions or investments. We exclude acquisition-related amortization expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
Stock-based compensation - Stock-based compensation expense is a non-cash expense arising from the grant of stock-based awards. We exclude stock-based compensation expense from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of the timing and valuation of grants of new stock-based awards, including grants in connection with acquisitions.
Severance and other non-recurring charges - Non-recurring charges relate to certain severance and other charges incurred in connection with activities that are considered non-recurring. We exclude non-recurring expenses (primarily related to costs associated with our recent business transformation initiative and non-recurring lease termination costs) and transaction-related costs from adjusted EBITDA because we believe (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods.



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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:
Risks Related to Our Industry
the ongoing COVID-19 pandemic and related economic disruption;
saturation of our target market and hospital consolidations;
unfavorable economic or market conditions that may cause a decline in spending for information technology and services;
significant legislative and regulatory uncertainty in the healthcare industry;
exposure to liability for failure to comply with regulatory requirements;
Risks Related to Our Business
competition with companies that have greater financial, technical and marketing resources than we have;
potential future acquisitions that may be expensive, time consuming, and subject to other inherent risks;
our ability to attract and retain qualified personnel;
disruption from periodic restructuring of our sales force;
our potential inability to manage our growth in the new markets we may enter;
exposure to numerous and often conflicting laws, regulations, policies, standards or other requirements through our international business activities;
potential litigation against us;
our use of offshore third-party resources;
Risks Related to Our Products and Services
potential failure to develop new products or enhance current products that keep pace with market demands;
exposure to claims if our products fail to provide accurate and timely information for clinical decision-making;
exposure to claims for breaches of security and viruses in our systems;
undetected errors or problems in new products or enhancements;
our potential inability to convince customers to migrate to current or future releases of our products;
failure to maintain our margins and service rates;
increase in the percentage of total revenues represented by service revenues, which have lower gross margins;
exposure to liability in the event we provide inaccurate claims data to payors;
exposure to liability claims arising out of the licensing of our software and provision of services;
dependence on licenses of rights, products and services from third parties;
a failure to protect our intellectual property rights;
exposure to significant license fees or damages for intellectual property infringement;
service interruptions resulting from loss of power and/or telecommunications capabilities;

Risks Related to Our Indebtedness
our potential inability to secure additional financing on favorable terms to meet our future capital needs;
substantial indebtedness that may adversely affect our business operations;
our ability to incur substantially more debt;
pressures on cash flow to service our outstanding debt;
restrictive terms of our credit agreement on our current and future operations;

Risks Related to Our Common Stock and Other General Risks
changes in and interpretations of financial accounting matters that govern the measurement of our performance;


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the potential for our goodwill or intangible assets to become impaired;
quarterly fluctuations in our financial results due to various factors;
volatility in our stock price;
failure to maintain effective internal control over financial reporting;
lack of employment or non-competition agreements with most of our key personnel;
inherent limitations in our internal control over financial reporting;
vulnerability to significant damage from natural disasters; and
exposure to market risk related to interest rate changes.
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, 2021.
Background
CPSI is a leading provider of healthcare solutions and services for community hospitals and other healthcare systems and post-acute care facilities. Founded in 1979, CPSI offers its products and services through six companies - TruBridge, LLC ("TruBridge"), Evident, LLC ("Evident"), American HealthTech, Inc. ("AHT"), iNetXperts, Corp. d/b/a Get Real Health ("Get Real Health"), TruCode LLC ("TruCode"), and Healthcare Resource Group, Inc. ("HRG"). These combined companies are focused on improving the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our clients. The individual contributions of each of these companies towards this combined focus are as follows:
TruBridge provides 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.
Evident, which makes up our Acute Care EHR reporting segment, provides comprehensive acute care electronic health record ("EHR") solutions, Thrive and Centriq, and related services for community hospitals and their physician clinics.
AHT, which makes up our Post-acute Care EHR reporting segment, provides a comprehensive post-acute care EHR solution and related services for skilled nursing and assisted living facilities.
Get Real Health, included within our TruBridge segment, delivers technology solutions to improve patient outcomes and engagement strategies with care providers.
TruCode, included within our TruBridge segment, provides configurable, knowledge-based software that gives coders, clinical documentation improvement specialists and auditors the flexibility to code according to their knowledge, preferences and experience.
HRG, included within our TruBridge segment, provides customized RCM solutions and consulting services that enable hospitals and clinics to improve efficiency, profitability, and patient satisfaction.
Our companies currently support acute care facilities and post-acute care facilities with a geographically diverse customer mix within the domestic community healthcare market. Our target market for our TruBridge services includes community hospitals with fewer than 600 acute care beds. Our target market for our acute care solutions includes community hospitals with fewer than 200 acute care beds. Our primary focus within this defined target market is on hospitals with fewer than 100 beds, which comprise approximately 98% of our acute care hospital EHR client base. The target market for our post-acute care solutions consists of approximately 15,500 skilled nursing facilities that are either independently owned or part of a larger management group with multiple facilities.
See Note 17 to the condensed consolidated financial statements included herein for additional information on our three reportable segments.
Management Overview
Strategy
Our core strategy is to achieve meaningful long-term revenue growth by cross-selling TruBridge services into our existing EHR customer base, expanding TruBridge market share with sales to new community hospitals and larger health systems, and pursuing competitive EHR takeaway opportunities in the acute and post-acute markets. We may also seek to grow through


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acquisitions of businesses, technologies or products if we determine that such acquisitions are likely to help us meet our strategic goals.
The opportunity to cross-sell TruBridge services is greatest within our Acute Care EHR customer base. As such, retention of existing Acute Care EHR customers is a key component of our long-term growth strategy by protecting this base of potential TruBridge customers, while at the same time serving as a leading indicator of our market position and stability of revenues and cash flows.
We determine retention rates by reference to the amount of beginning-of-period Acute Care EHR recurring revenues that have not been lost due to customer attrition from our production environment customer base. Production environment customers are those that are using our applications to document live patient encounters, as opposed to legacy environment customers that have view-only access to historical patient records. These retention rates have consistently remained in the mid-to-high 90th percentile ranges and have not materially deviated from this range during the first nine months of 2022. We have increased customer retention efforts by enhancing support services, investing in tooling and instrumentation to proactively monitor for potential disruptions and deploying in-application experience software that delivers application specific insights while using our products.
As we pursue meaningful long-term revenue growth by leveraging TruBridge as a growth agent, we are placing ever-increasing value in further developing our already significant recurring revenue base to further stabilize our revenues and cash flows. As such, maintaining and growing recurring revenues are key components of our long-term growth strategy, aided by the aforementioned focus on customer retention. This includes a renewed focus on driving demand for subscriptions for our existing technology solutions and expanding the footprint for TruBridge services beyond our EHR customer base.
While the combination of revenue growth and operating leverage results in increased margin realization, we also look to increase margins through specific cost containment measures where appropriate as we continue to leverage opportunities for greater operating efficiencies. However, in the immediate future, we anticipate incremental margin pressure from the continued client transition from perpetual license arrangements to “Software as a Service” arrangements as described below.
Industry Dynamics
Turbulence in the U.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected by U.S. regulatory and national health initiatives. In recent years, there have been significant changes to provider reimbursement by the U.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing the fee-for-service reimbursement model in part by enrolling in an advanced payment model that incentivizes high-quality, cost effective-care via value-based reimbursement. This pressure could further encourage adoption of healthcare IT and increase demand for business management, consulting, and managed IT services, as the future success of these healthcare providers is greatly dependent upon their ability to engage patient populations and to coordinate patient care across a multitude of settings, while optimizing operating efficiency along the way.
Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as community hospitals, have been affected by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital clients often do not have the necessary capital to make investments in information technology while those with the necessary capital have become more selective in their investments. Despite these challenges, we believe healthcare IT will be an area of continued investment due to its unique potential to improve safety and efficiency and reduce costs while meeting current and future regulatory, compliance and government reimbursement requirements.
License Model Preferences
Much of the variability in our periodic revenues and profitability has been and will continue to be due to changing demand for different license models for our technology solutions, with variability in operating cash flows further impacted by the financing decisions within those license models. Our technology solutions are generally deployed in one of two license models: (1) perpetual licenses, for which the related revenue is recognized effectively upon installation, and (2) “Software as a Service” or “SaaS” arrangements, including our Cloud Electronic Health Record (“Cloud EHR”) offering, which generally result in revenue being recognized monthly as the services are provided over the term of the arrangement.
The overwhelming majority of our historical installations have been under a perpetual license model, but new customer demand has dramatically shifted towards a SaaS license model in the past several years. SaaS license models made up only 12% of annual new acute care EHR installations in 2018, increasing to 63% during 2021 and 100% for the first nine months of 2022. These SaaS offerings are becoming increasingly attractive to our clients because this configuration allows them to obtain access


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to advanced software products without a significant initial capital outlay. We expect this trend to continue for the foreseeable future, with the resulting impact on the Company’s financial statements being reduced system sales revenues in the period of installation in exchange for increased recurring periodic revenues (reflected in system sales and support revenues) over the term of the SaaS arrangement. This naturally places downward pressure on short-term revenue growth and profitability metrics, but benefits long-term revenue growth and profitability which, in our view, is consistent with our goal of delivering long-term shareholder value.
For customers electing to purchase our technology solutions under a perpetual license, we have historically made financing arrangements available on a case-by-case basis, depending on the various aspects of the proposed contract and customer attributes. These financing arrangements have comprised the majority of our perpetual license installations over the past several years, and include short-term payment plans and longer-term lease financing through us or third-party financing companies. The aforementioned shift in customer preference towards SaaS arrangements has significantly reduced the frequency of new financing arrangements for customer purchases under a perpetual license. When combined with scheduled payments on existing financing arrangements, the reduced frequency of new financing arrangements has resulted in a substantial reduction in financing receivables during 2021 and the first nine months of 2022.
For those perpetual license clients not seeking a financing arrangement, the payment schedule of the typical contract is structured to provide for a scheduling deposit due at contract signing, with the remainder of the contracted fees due at various stages of the installation process (delivery of hardware, installation of software and commencement of training, and satisfactory completion of a monthly accounting cycle or end-of-month operation by each respective application, as applicable).
Margin Optimization Efforts
Our core growth strategy includes an element geared towards margin optimization by identifying opportunities to further improve our cost structure by executing against initiatives related to organizational realignment, expanded use of offshore partnerships and the use of automation to increase the efficiency and value of our associates' efforts.
Regarding the organizational realignment, on February 1, 2021, we committed to a reduction in force that resulted in the termination of approximately 1.0% of our workforce (21 employees). The reduction in force was a component of a broader strategic review of the Company's operations that was intended to more effectively align our resources with business priorities. Substantially all of the employees impacted by the reduction in force exited the Company in the first quarter of 2021, with the last of the impacted employees exiting in the third quarter of 2021. The Company incurred expenses of approximately $2.7 million related to the reduction in force. These expenses consisted of one-time termination benefits to the affected employees, including but not limited to severance payments, healthcare benefits, and payments for accrued vacation time. As a result of the reduction in force, the Company realized approximately $3.9 million in annual savings compared to prior expense levels.
The remaining margin optimization initiatives of enhanced leveraging of offshore partnerships and automation have commenced and, to date, have provided meaningful efficiencies to our operations, particularly within TruBridge. As a service organization, TruBridge's cost structure is heavily dependent upon human capital, subjecting TruBridge to the complexities and risks associated with this resource. Chief among these complexities and risks is the ever-present pressure of wage inflation, which has recently become a reality as national and international economies recover from the economic downturn caused by the COVID-19 pandemic and has compelled the Company to make compensation adjustments that are outside of historical norms. We believe that our efforts towards margin optimization are well-timed, enabling a rapid response to actual or expected wage inflation in order to preserve TruBridge gross margins, but we cannot guarantee that these efforts will fully eliminate any related margin deterioration.
In addition to wage inflation, we are a party to contracts with certain third-party suppliers and vendors that allow for annual price adjustments indexed to inflation. While we continually seek to proactively manage controllable expenses, inflationary pressure on costs could lead to erosion of margins.
Labor Capitalization
During the second quarter of 2021, our ongoing monitoring activities associated with the capitalization of software development costs and the related correlation between capitalization rates and operational metrics designed to reflect the distribution of work revealed that our then-current labor capitalization methodology did not fully reflect all of the critical activities necessary to develop software assets. Consequently, during the second quarter of 2021, we elected to change our method of estimating the labor costs incurred in developing software assets requiring capitalization under ASC 350-40, Internal Use of Software. Prior to this change, we estimated the associated labor costs using an estimated time-equivalent for workload metrics commonly utilized within agile software development environments. With this change, we now estimate these labor costs using the distribution of these agile workload metrics between capitalizable and non-capitalizable units of work. We


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believe this change is preferable as the new methodology better estimates capitalizable labor costs and is consistent with industry best practices. We have determined that this change in accounting for software development costs is a change in accounting estimate effected by a change in accounting principle and, as such, has been accounted for on a prospective basis. In connection with this change, we capitalized $8.8 million of software development costs during 2021. We estimate that the effect of this change was to increase capitalized amounts by approximately $4.6 million during 2021 with a corresponding decrease to product development costs. The additional capitalized amounts will be amortized over an average of 5 years, leading to increased amortization expense in future years.
COVID-19
The impact of the COVID-19 pandemic on our operations was broad-sweeping, most notably causing severe deterioration in United States community hospital patient volumes that negatively impacted the revenues, gross margins, and income of our TruBridge service offerings. While patient volumes have continued to recover and are largely in line with pre-COVID-19 levels, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted, including as a result of macro-economic impacts to the global supply chain, labor shortages, and inflationary pressures. However, we continue to assess its impact on our business and continue to actively manage our response. For further details on the potential impact of COVID-19 on our business, refer to "Risk Factors," in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Results of Operations
During the first nine months of 2022, we generated revenues of $243.4 million from the sale of our products and services, compared to $206.6 million during the first nine months of 2021, an increase of 18% that is due to the combination of inorganic growth through our recent acquisitions of TruCode and HRG and organic growth for TruBridge as revenue cycle solutions continue to gain traction in the domestic healthcare landscape. Despite this substantial increase in revenues, net income increased only $0.3 million to $13.4 million during the first nine months of 2022 from the prior year-year period as investments in operational capacity combined with increased interest expense to minimize incremental profitability. Net cash provided by operating activities decreased by $4.3 million, from $34.5 million during the first nine months of 2021 to $30.2 million during the first nine months of 2022, primarily due to less cash-advantageous changes in working capital, most notably as it relates to expansion in accounts receivable.


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The following table sets forth certain items included in our results of operations for the three and nine months ended September 30, 2022 and 2021, expressed as a percentage of our total revenues for these periods:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands)Amount% SalesAmount% SalesAmount% SalesAmount% Sales
INCOME DATA:
Sales revenues:
TruBridge$47,878 57.8 %$34,531 49.3 %$139,569 57.3 %$98,736 47.8 %
System sales and support:
Acute Care EHR30,737 37.1 %31,126 44.4 %90,800 37.3 %94,578 45.8 %
Post-acute Care EHR4,212 5.1 %4,434 6.3 %13,055 5.4 %13,315 6.4 %
Total System sales and support34,949 42.2 %35,560 50.7 %103,855 42.7 %107,893 52.2 %
Total sales revenues82,827 100 %70,091 100 %243,424 100 %206,629 100 %
Costs of sales:
TruBridge26,190 31.6 %17,377 24.8 %73,863 30.3 %50,349 24.4 %
System sales and support:
Acute Care EHR17,245 20.8 %16,200 23.1 %48,038 19.7 %48,644 23.5 %
Post-acute Care EHR1,374 1.7 %1,225 1.7 %4,240 1.7 %3,606 1.7 %
Total System sales and support18,619 22.5 %17,425 24.9 %52,278 21.5 %52,250 25.3 %
Total costs of sales44,809 54.1 %34,802 49.7 %126,141 51.8 %102,599 49.7 %
Gross profit38,018 45.9 %35,289 50.3 %117,283 48.2 %104,030 50.3 %
Operating expenses:
Product development7,822 9.4 %7,700 11.0 %22,036 9.1 %22,598 10.9 %
Sales and marketing7,309 8.8 %5,200 7.4 %22,578 9.3 %15,813 7.7 %
General and administrative13,458 16.2 %14,184 20.2 %41,235 16.9 %38,322 18.5 %
Amortization of acquisition-related intangibles4,486 5.4 %3,674 5.2 %12,917 5.3 %10,114 4.9 %
Total operating expenses33,075 39.9 %30,758 43.9 %98,766 40.6 %86,847 42.0 %
Operating income4,943 6.0 %4,531 6.5 %18,517 7.6 %17,183 8.3 %
Other income (expense):
Other income355 0.4 %123 0.2 %914 0.4 %1,160 0.6 %
(Loss) gain on contingent consideration(589)(0.7)%— — %992 0.4 %— — %
Loss on extinguishment of debt— — %— — %(125)(0.1)%— — %
Interest expense(1,771)(2.1)%(825)(1.2)%(4,044)(1.7)%(2,249)(1.1)%
Total other income (expense)(2,005)(2.4)%(702)(1.0)%(2,263)(0.9)%(1,089)(0.5)%
Income before taxes2,938 3.5 %3,829 5.5 %16,254 6.7 %16,094 7.8 %
Provision for income taxes777 0.9 %1,085 1.5 %2,904 1.2 %3,065 1.5 %
Net income$2,161 2.6 %$2,744 3.9 %$13,350 5.5 %$13,029 6.3 %
Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021
Revenues
Total revenues for the three months ended September 30, 2022 increased by $12.7 million, or approximately 18%, compared to the three months ended September 30, 2021.
TruBridge revenues increased by $13.3 million, or 39%, compared to the third quarter of 2021, as acquisition-fueled growth added to the organic growth of our revenue cycle service and patient engagement offerings. HRG, acquired in March 2022, provided inorganic revenue growth, contributing $9.9 million of revenues during the third quarter of 2022. Organic revenue


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growth has materialized as our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the positive impact of improving hospital patient volumes on TruBridge revenues, resulted in organic revenue growth of $3.5 million, or 10%.
System sales and support revenues decreased by $0.6 million, or 2%, compared to the third quarter of 2021. System sales and support revenues were comprised of the following during the respective periods:
Three Months Ended September 30,
(In thousands)20222021
Recurring system sales and support revenues (1)
Acute Care EHR$27,237 $26,776 
Post-acute Care EHR3,817 4,010 
Total recurring system sales and support revenues31,054 30,786 
Non-recurring system sales and support revenues (2)
Acute Care EHR3,500 4,350 
Post-acute Care EHR395 424 
Total non-recurring system sales and support revenues3,895 4,774 
Total system sales and support revenue$34,949 $35,560 
(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.
Recurring system sales and support revenues increased by $0.3 million, or 1%, compared to the third quarter of 2021. Acute Care EHR recurring revenues increased by $0.5 million, or 2%, as recent efforts to emphasize SaaS arrangements have resulted in the accumulation of significant sources of recurring revenues, albeit at the expense of nonrecurring revenues. Post-acute Care EHR recurring revenues decreased by $0.2 million, or 5%, due to the loss of certain significant customers during early 2022.
Non-recurring system sales and support revenues decreased by $0.9 million, or 18%, compared to the third quarter of 2021. Acute Care EHR non-recurring revenues decreased by $0.9 million compared to the third quarter of 2021, due partly to a decrease in the number of perpetual license installations of our Acute Care EHR solutions. We installed our Acute Care EHR solutions at six new hospital clients during the third quarter of 2022 (all of which are under SaaS arrangements, resulting in revenue being recognized ratably over the contract term) compared to five new hospital clients during the third quarter of 2021 (two under a SaaS arrangement). This decrease in perpetual license activity for new hospital installations resulted in a $0.3 million decrease in revenues from the third quarter of 2021. High penetration rates within our Acute Care EHR customer base for our suite of complementary applications resulted in a $0.5 million decrease in the related revenues from add-on sales. Lastly, Post-acute Care EHR nonrecurring revenues were relatively unchanged from amounts during the third quarter of 2021.
Costs of Sales
Total costs of sales increased by $10.0 million, or 29%, compared to the third quarter of 2021. As a percentage of total revenues, costs of sales increased to 54% of revenues during the third quarter of 2022 compared to 50% during the third quarter of 2021.
Our costs associated with TruBridge sales and support increased by $8.8 million, or 51%, compared to the third quarter of 2021, primarily driven by our recent acquisition of HRG, which contributed total expenses of $5.8 million to the third quarter of 2022. The remaining cost increases for TruBridge are organic in nature, caused by resource expansion necessitated by the growing customer base and improved patient volumes. The gross margin on these services decreased to 45% in the third quarter of 2022 compared to 50% in the third quarter of 2021 due to the addition of HRG, which is mostly comprised of lower margin services.
Costs of Acute Care EHR system sales and support increased by $1.0 million, or 6%, compared to the third quarter of 2021, as a competitive labor market necessitated compensation adjustments during 2022 that were higher than our historical norms and associate travel has increased substantially as the global travel disruptions caused by the COVID-19 pandemic have abated. The gross margin on Acute Care EHR system sales and support decreased to 44% in the third quarter of 2022, compared to 48% in the third quarter of 2021, as high incremental-margin nonrecurring revenues continue to decline due to our continuing strategy of shifting more of the customer license mix from perpetual to SaaS.


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Costs of Post-acute Care EHR system sales and support increased by $0.1 million, or 12%, compared to the third quarter of 2021, with increased labor and travel costs comprising the majority of the increase. The gross margin on Post-acute Care EHR system sales and support decreased to 67% in the third quarter of 2022, compared to 72% in the third quarter of 2021, as the increase in costs of sales worked in tandem with a decrease in revenues to reduce margins.
Product Development
Product development expenses consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs increased by $0.1 million, or 2%, compared to the third quarter of 2021, as increased costs associated with our strategy to migrate to a public cloud environment, resource expansion, and increased amortization of capitalized software development costs were mostly offset by an increase in product development labor capitalization. Our recent acquisition of HRG resulted in $0.1 million of incremental product development expenses during the third quarter of 2022.
Sales and Marketing
Sales and marketing costs increased by $2.1 million, or 41%, compared to the third quarter of 2021. Resource expansion resulted in a $0.4 million increase in payroll costs and an improved sales environment resulted in a $0.5 million increase in commission expenses. Marketing program costs increased by $0.4 million due to more aggressive marketing of our solutions and services combined with specific campaigns to increase brand awareness for our portfolio of companies. Lastly, our recent acquisition of HRG resulted in incremental sales and marketing expense of $0.3 million during the third quarter of 2022.
General and Administrative
General and administrative expenses decreased by $0.7 million, or 5%, compared to the third quarter of 2021. Health claims experience associated with our self-insured employee health benefits plan improved significantly from the third quarter of 2021, resulting in a $0.4 million decrease in the related expense despite increased enrollment driven by our recent acquisition of HRG. Bad debt expense decreased by $0.8 million as receivables collection experience has improved. The combined $1.2 million decrease in health claims expense and bad debt expense more that offset the incremental recurring expenses related to our recent acquisition of HRG, which totaled $0.7 million during the third quarter of 2022.
Amortization of Acquisition-Related Intangibles
Amortization expense associated with acquisition-related intangible assets increased by $0.8 million, or 22%, compared to the third quarter of 2021, due mostly to the amortization of intangibles acquired in the HRG acquisition.
Total Operating Expenses
Total operating expenses increased by $2.3 million, or 8%, compared to the third quarter of 2021. As a percentage of total revenues, total operating expenses decreased to 40% of revenues in the third quarter of 2022, compared to 44% in the third quarter of 2021.
Total Other Income (Expense)
Total other income (expense) increased to expense of $2.0 million during the third quarter of 2022 compared to expense of $0.7 million during the third quarter of 2021, due mostly to a $0.9 million increase in interest expense caused by a rising interest rate environment and a higher level of funded debt. Adding to this increased interest expense was a $0.6 million loss on contingent consideration. Our acquisition of TruCode in May 2021 included a contingent earnout payment of up to $15 million tied to TruCode's earnings before interest, tax, depreciation, and amortization ("EBITDA") (subject to certain pro-forma adjustments) for the twelve month period concluding on the anniversary date of the acquisition (the "earnout period"). During the third quarter of 2022, we increased our estimate of the eventual earnout payment from $0.9 million to $1.5 million as certain costs were identified that are specifically excluded from the related purchase agreement's definitions governing EBITDA calculations, increasing our estimates of the related EBITDA amount.
Income Before Taxes
As a result of the foregoing factors, income before taxes decreased by $0.9 million in the third quarter of 2022 compared to the third quarter of 2021.


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Provision for Income Taxes
Our effective tax rate for the three months ended September 30, 2022 decreased to 26.4% from 28.3% for the three months ended September 30, 2021, resulting in an immaterial impact to income tax expense.
Net Income
Net income for the third quarter of 2022 decreased by $0.6 million to $2.2 million, or $0.15 per basic and diluted share, compared with net income of $2.7 million, or $0.19 per basic and diluted share, for the third quarter of 2021. Net income represented 2.6% of revenue for the third quarter of 2022, compared to 3.9% of revenue for the third quarter of 2021.
Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021
Revenues
Total revenues for the first nine months of 2022 increased by $36.8 million, or approximately 18%, compared to the first nine months of 2021.
TruBridge revenues increased by $40.8 million, or 41%, compared to the first nine months 2021, as acquisition-fueled growth added to the organic growth of our revenue cycle service and patient engagement offerings. TruCode, acquired in May 2021, contributed $10.2 million of revenues during the first nine months of 2022, compared to only $4.3 million of revenues during the first nine months of 2021, which reflects less than five months' activity. Our acquisition of HRG in March 2022 provided further inorganic revenue growth, contributing $24.5 million of revenues during the first nine months of 2022. Organic revenue growth has materialized as our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions. This increasing demand for services, coupled with the positive impact of improving hospital patient volumes on TruBridge revenues, resulted in organic revenue growth of $10.5 million, or 11%.
System sales and support revenues decreased by $4.0 million, or 4%, compared to the first nine months of 2021. System sales and support revenues were comprised of the following during the respective periods:
Nine Months Ended September 30,
(In thousands)20222021
Recurring system sales and support revenues (1)
Acute Care EHR$81,333 $80,792 
Post-acute Care EHR11,504 12,402 
Total recurring system sales and support revenues92,837 93,194 
Non-recurring system sales and support revenues (2)
Acute Care EHR9,467 13,786 
Post-acute Care EHR1,551 913 
Total non-recurring system sales and support revenues11,018 14,699 
Total system sales and support revenue$103,855 $107,893 
(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.
Recurring system sales and support revenues decreased by $0.4 million, or less than 1%, compared to the first nine months of 2021. Acute Care EHR recurring revenues increased by $0.5 million, or 1%, as recent efforts to emphasize SaaS arrangements have resulted in the accumulation of significant sources of recurring revenues, albeit at the expense of nonrecurring revenues. Post-acute Care EHR recurring revenues decreased by $0.9 million, or 7%, due to the loss of certain significant customers during early 2022.