UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

			For the quarterly period ended June 30, ~~2017.~~2018.

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

For the transition period from to .

Commission file number: 000-49796

COMPUTER PROGRAMS AND SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)



~~Delaware~~


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

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

(251) 639-8100

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging Growth Company

~~Large accelerated filer~~

~~Accelerated filer~~

~~Non-accelerated filer~~

¨ ~~(Do not check if a smaller reporting company)~~

~~Smaller reporting company~~

~~Emerging Growth Company~~

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

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

As of August ~~7, 2017,~~6, 2018 there ~~were 13,755,726 shares~~were 14,085,989 shares of the issuer’s common stock outstanding.

Table of Contents

COMPUTER PROGRAMS AND SYSTEMS, INC.

Quarterly Report on Form 10-Q

(For the three and six months ended June 30, ~~2017~~)2018)

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Item 1.~~

~~Financial Statements~~

Condensed Consolidated Balance Sheets (Unaudited) – June 30 ~~2017~~, 2018 and December 31, ~~2016~~2017

Condensed Consolidated Statements of Income (Unaudited) – ~~Three~~T hree and Six Months Ended June 30 , 2018 and 2017 ~~and 2016~~

~~Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2017 and 2016~~

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) – Six Months Ended June 30 ~~2017~~, 2018

Condensed Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30 , 2018 and 2017 ~~and 2016~~

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

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

2624

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

4036

Item 4.

Controls and Procedures

4136

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1.1A.

~~Legal Proceedings~~Risk Factors

4238

Item ~~1A.~~2.

~~Risk Factors~~

~~Item 2.~~

Unregistered Sales of Equity Securities and Use of Proceeds

4238

Item 3.

Defaults Upon Senior Securities

4238

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

PART I

FINANCIAL INFORMATION



Item 1.			Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	June 30, 2017		December 31, 2016			June 30, 2018		December 31, 2017
Assets					Assets
Current assets:					Current assets:
Cash and cash equivalents	$	1,741	$	2,220	Cash and cash equivalents	$	1,492	$	520
Accounts receivable, net of allowance for doubtful accounts of $2,566 and $2,370, respectively	34,655		31,812
Accounts receivable, net of allowance for doubtful accounts of $3,213 and $2,654, respectively					Accounts receivable, net of allowance for doubtful accounts of $3,213 and $2,654, respectively	41,216		38,061
Financing receivables, current portion, net	5,899		5,459		Financing receivables, current portion, net	14,788		15,055
Inventories	1,075		1,697		Inventories	1,478		1,417
Prepaid income taxes	758		567		Prepaid income taxes	651		—
Prepaid expenses and other	3,808		2,794		Prepaid expenses and other	6,038		2,824
Total current assets	47,936		44,549		Total current assets	65,663		57,877
Property and equipment, net	12,485		13,439		Property and equipment, net	11,042		11,692
Financing receivables, net of current portion	9,093		5,595		Financing receivables, net of current portion	13,025		11,485
Other assets, net of current portion					Other assets, net of current portion	1,155		—
Intangible assets, net	101,915		107,118		Intangible assets, net	91,510		96,713
Goodwill	168,449		168,449		Goodwill	140,449		140,449

Total assets	$	339,878	$	339,150	Total assets	$	322,844	$	318,216
Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:					Current liabilities:
Accounts payable	$	11,429	$	6,841	Accounts payable	$	5,814	$	7,620
Current portion of long-term debt	7,389		5,817		Current portion of long-term debt	5,830		5,820
Deferred revenue	8,564		5,840		Deferred revenue	12,300		8,707
Accrued vacation	4,604		3,650		Accrued vacation	4,702		3,794
Income taxes payable					Income taxes payable	—		810
Other accrued liabilities	10,079		8,797		Other accrued liabilities	10,160		14,098
Total current liabilities	42,065		30,945		Total current liabilities	38,806		40,849
Long-term debt, less current portion	136,011		146,989
Long-term debt, net of current portion					Long-term debt, net of current portion	133,151		136,614
Deferred tax liabilities	5,166		3,246		Deferred tax liabilities	6,646		4,667
Total liabilities	183,242		181,180		Total liabilities	178,603		182,130
Stockholders’ equity:					Stockholders’ equity:
Common stock, $0.001 par value; 30,000 shares authorized; 13,756 and 13,533 shares issued and outstanding	14		13
Common stock, $0.001 par value; 30,000 shares authorized; 14,086 and 13,760 shares issued and outstanding, respectively					Common stock, $0.001 par value; 30,000 shares authorized; 14,086 and 13,760 shares issued and outstanding, respectively	14		14
Additional paid-in capital	150,878		147,911		Additional paid-in capital	159,770		155,078
Retained earnings	5,744		10,046

Accumulated deficit					Accumulated deficit	(15,543)		(19,006)
Total stockholders’ equity	156,636		157,970		Total stockholders’ equity	144,241		136,086
Total liabilities and stockholders’ equity	$	339,878	$	339,150	Total liabilities and stockholders’ equity	$	322,844	$	318,216

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

Table of Contents

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016				2018		2017		2018		2017
Sales revenues:													Sales revenues:
System sales and support	$	45,474		$	47,719		$	88,897		$	97,428		System sales and support	$	42,746	$	45,474	$	88,498	$	88,897
TruBridge	22,203			20,696			42,854			40,630			TruBridge	25,159		22,203		50,290		42,854
Total sales revenues	67,677			68,415			131,751			138,058			Total sales revenues	67,905		67,677		138,788		131,751
Costs of sales:													Costs of sales:
System sales and support	18,859			21,886			37,789			44,153			System sales and support	19,528		19,753		37,946		39,540
TruBridge	11,933			11,616			23,520			22,903			TruBridge	13,531		11,933		26,910		23,520
Total costs of sales	30,792			33,502			61,309			67,056			Total costs of sales	33,059		31,686		64,856		63,060
Gross profit	36,885			34,913			70,442			71,002			Gross profit	34,846		35,991		73,932		68,691
Operating expenses:													Operating expenses:
Product development	9,308			8,179			18,243			15,369			Product development	9,314		8,414		18,071		16,492
Sales and marketing	7,607			6,717			14,734			13,447			Sales and marketing	7,518		7,607		15,232		14,734
General and administrative	12,921			12,130			24,581			31,168			General and administrative	13,188		12,921		25,552		24,581
Amortization of acquisition-related intangibles	2,601			2,624			5,203			4,979			Amortization of acquisition-related intangibles	2,601		2,601		5,203		5,203
Total operating expenses	32,437			29,650			62,761			64,963			Total operating expenses	32,621		31,543		64,058		61,010
Operating income	4,448			5,263			7,681			6,039			Operating income	2,225		4,448		9,874		7,681
Other income (expense):													Other income (expense):
Other income	70			69			140			68			Other income	194		70		392		140
Interest expense	(1,938		)	(1,642		)	(3,745		)	(3,110		)	Interest expense	(1,807)		(1,938)		(3,785)		(3,745)
Total other income (expense)	(1,868		)	(1,573		)	(3,605		)	(3,042		)	Total other income (expense)	(1,613)		(1,868)		(3,393)		(3,605)
Income before taxes	2,580			3,690			4,076			2,997			Income before taxes	612		2,580		6,481		4,076
Provision for income taxes	993			1,694			2,243			2,664			Provision for income taxes	284		993		2,185		2,243
Net income	$	1,587		$	1,996		$	1,833		$	333		Net income	$	328	$	1,587	$	4,296	$	1,833
Net income per common share—basic	$	0.11		$	0.15		$	0.13		$	0.03		Net income per common share—basic	$	0.02	$	0.11	$	0.31	$	0.13
Net income per common share—diluted	$	0.11		$	0.15		$	0.13		$	0.03		Net income per common share—diluted	$	0.02	$	0.11	$	0.31	$	0.13
Weighted average shares outstanding used in per common share computations:													Weighted average shares outstanding used in per common share computations:
Basic	13,420			13,317			13,397			13,171			Basic	13,561		13,420		13,518		13,397
Diluted	13,420			13,365			13,397			13,227			Diluted	13,561		13,420		13,518		13,397
Dividends declared per common share	$	0.20		$	0.64		$	0.45		$	1.28		Dividends declared per common share	$	0.10	$	0.20	$	0.20	$	0.45

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

~~COMPUTER PROGRAMS AND SYSTEMS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(In thousands)~~

~~(Unaudited)~~

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Net income $ 1,587
$ 1,996
$ 1,833
$ 333
Other comprehensive income, net of tax
Change in unrealized income with realized income on the Statement of Income

—
6
—
38
Total other comprehensive income, net of tax —
6
—
38
Comprehensive income $ 1,587
$ 2,002
$ 1,833
$ 371

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

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


																	Common Stock										Additional Paid-in Capital							Accumulated Deficit		Total Stockholders’ Equity
	Common Stock			Additional Paid-in Capital				Retained Earnings				Total Stockholders’ Equity
											Shares							Amount
Balance at December 31, 2017							Balance at December 31, 2017				13,760							$	14				$	155,078				$	(19,006)			$	136,086
Net income															Net income		—					—			—						4,296				4,296
Adoption of accounting standards (Note 2)															Adoption of accounting standards (Note 2)		—					—			—					1,970				1,970
	Shares	Amount				Additional Paid-in Capital				Retained Earnings					Total Stockholders’ Equity
Balance at December 31, 2016	13,533	$	13
Net income	—	—
Common stock issued upon exercise of stock options	—	—				1								—						1
Issuance of restricted stock	223	1		(1		)		—										—			Issuance of restricted stock	326			—		—							—		—

Stock-based compensation	—	—		2,967				—				2,967				Stock-based compensation		—					—			4,692					—				4,692
Dividends	—	—		—				(6,135		)		(6,135		)	Dividends		—					—			—					(2,803)				(2,803)
Balance at June 30, 2017	13,756	$	14	$	150,878			$	5,744			$	156,636
Balance at June 30, 2018															Balance at June 30, 2018		14,086					$	14		$	159,770				$	(15,543)			$	144,241

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

Table of Contents

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,							Six Months Ended June 30,
	2017			2016				2018		2017
Operating Activities:							Operating Activities:
Net income	1,833			$	333		Net income	$	4,296	$	1,833
Adjustments to net income:							Adjustments to net income:
Provision for bad debt	473			451			Provision for bad debt	1,695		473
Deferred taxes	1,920			1,748			Deferred taxes	1,404		1,920
Stock-based compensation	2,967			2,877			Stock-based compensation	4,692		2,967
Excess tax benefit from stock-based compensation	—			(244		)
Depreciation	1,419			1,740			Depreciation	1,067		1,419
Amortization of acquisition-related intangibles	5,203			4,979			Amortization of acquisition-related intangibles	5,203		5,203
Amortization of deferred finance costs	365			330			Amortization of deferred finance costs	173		365
Changes in operating assets and liabilities (net of acquired assets and liabilities):
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	(3,013		)	(2,564		)	Accounts receivable	(4,453)		(3,013)
Financing receivables	(4,241		)	(574		)	Financing receivables	(1,669)		(4,241)
Inventories	622			(10		)	Inventories	(62)		622
Prepaid expenses and other	(1,014		)	242			Prepaid expenses and other	(594)		(1,014)
Accounts payable	4,588			(4,260		)	Accounts payable	(1,806)		4,588
Deferred revenue	2,724			(8,573		)	Deferred revenue	2,363		2,724
Other liabilities	2,236			(5,825		)	Other liabilities	(3,030)		2,236
Prepaid income taxes/income taxes payable	(191		)	868			Prepaid income taxes/income taxes payable	(1,461)		(191)
Net cash provided by (used in) operating activities	15,891			(8,482		)
Net cash provided by operating activities							Net cash provided by operating activities	7,818		15,891
Investing Activities:							Investing Activities:
Purchases of property and equipment	(465		)	(39		)	Purchases of property and equipment	(417)		(465)
Purchase of business, net of cash received	—			(162,611		)
Sale of investments	—			10,861
Net cash used in investing activities	(465		)	(151,789		)	Net cash used in investing activities	(417)		(465)
Financing Activities:							Financing Activities:
Dividends paid	(6,135		)	(17,244		)	Dividends paid	(2,803)		(6,135)
Proceeds from long-term debt	—			156,572

Payments of long-term debt principal	(9,771		)	(1,562		)	Payments of long-term debt principal	(10,335)		(3,271)

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

Proceeds from exercise of stock options	1			1,134			Proceeds from exercise of stock options	—		1
Excess tax benefit from stock-based compensation	—			244
Net cash provided by (used in) financing activities	(15,905		)	139,144
Decrease in cash and cash equivalents	(479		)	(21,127		)
Net cash used in financing activities							Net cash used in financing activities	(6,429)		(15,905)
Increase (decrease) in cash and cash equivalents							Increase (decrease) in cash and cash equivalents	972		(479)
Cash and cash equivalents at beginning of period	2,220			24,951			Cash and cash equivalents at beginning of period	520		2,220
Cash and cash equivalents at end of period	$	1,741		$	3,824		Cash and cash equivalents at end of period	$	1,492	$	1,741
Supplemental disclosure of cash flow information:							Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,355		$	2,780		Cash paid for interest	$	3,539	$	3,355
Cash paid for income taxes, net of refund	$	514		$	—		Cash paid for income taxes, net of refund	$	2,242	$	514
Supplemental disclosure of non-cash information:
Fair value of common stock and options issued as consideration for acquisition of HHI	$	—		$	97,017
Write-off of fully depreciated assets	$	—		$	2,769

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

Table of Contents

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, ~~2016~~2017 was derived from the audited consolidated balance sheet at that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of Computer Programs and Systems, Inc. ("CPSI" or the "Company") for the year ended December 31, ~~2016~~2017 and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2017.

Principles of Consolidation

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

Presentation

Effective January 1, ~~2017, we adopted~~2018, our interface services team, which provides the design, development, implementation, and support services for all interfaces for data exchange from the CPSI applications, was previously considered a ~~revised presentation~~part of ~~sales revenues~~our product development division and has been integrated with our acute care client service team. This transition will work to create a consistent, personal, and convenient service experience for our clients characterized by transparent communication with prompt resolution. With this change, the ~~associated~~payroll and related costs of ~~sales in~~this group of employees that were formerly included within the caption "Product development" on our condensed consolidated statements of income which we believe is better aligned with and representative of the amount and profitability of our revenue streams, as well as the way we manage our business, review our operating performance and market our products. Specifically:

The Company's sales revenues and costs of sales amounts formerly presented with the caption "Business management, consulting, and managed IT services" are now presented within the caption "TruBridge" within the condensed consolidated statements of income;

~~Rycan's sales revenues and costs of sales amounts formerly included within the caption "Systems sales and support"~~ are now included within the caption ~~"TruBridge" within the condensed consolidated statements of income;~~

~~Healthland and AHT revenues and costs of sales related to hosting services formerly included within the caption "Systems~~"System sales and ~~support" are now included within the caption "TruBridge" within the condensed consolidated statements~~support - Cost of ~~income; and~~sales."

Certain Rycan expenses formerly included within the caption "General and administrative" are now included in cost of sales with the caption "TruBridge" within the condensed consolidated statements of income.

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

Amounts presented for the three and six months ended June 30, ~~2016~~2017 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the three months ended June 30, ~~2016:~~2017:


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

Table of Contents

(In thousands) As previously reported Reclassifications As reclassified
Sales revenues:
System sales $ 50,561
$ (2,842 ) $ 47,719
TruBridge 17,854
2,842
20,696
Costs of sales:
System Sales 23,367
(1,481 ) 21,886
TruBridge 9,913
1,703
11,616
Operating expenses:
General and administrative 12,352
(222 ) 12,130

The following table provides the amounts reclassified for the six months ended June 30, ~~2016:~~2017:


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

(In thousands) As previously reported Reclassifications As reclassified
Sales revenues:
System sales $ 102,941
$ (5,513 ) $ 97,428
TruBridge 35,117
5,513
40,630
Costs of sales:
System Sales 47,229
(3,076 ) 44,153
TruBridge 19,440
3,463
22,903
Operating expenses:
General and administrative 31,555
(387 ) 31,168

2. ~~BUSINESS COMBINATION~~RECENT ACCOUNTING PRONOUNCEMENTS

~~Acquisition of HHI~~New Accounting Standards Adopted in 2018

~~On January 8, 2016, we acquired all~~In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes prior revenue recognition guidance. This guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2017, which was effective for the Company as of the first quarter of our fiscal year ending December 31, 2018. We adopted this new accounting standard codified as Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, and the related amendments ("new revenue standard") during the first quarter of 2018 and have applied it to all contracts using the modified retrospective method, pursuant to which the cumulative effect of initially applying the new revenue standard is recognized as an adjustment to retained earnings and impacted balance sheet line items as of January 1, 2018, the date of adoption. The comparative previous period information continues to be reported under the accounting standards in effect for that period.

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

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

Due to the aforementioned changes in assets and liabilities of HHI, including its wholly-owned subsidiaries, Healthland, AHT and Rycan. Healthland provides electronic health records ("EHR") and clinical information management solutions to over 350 hospital customers at the time of acquisition. AHT is a provider of clinical and financial solutions in the post-acute care market, serving over 3,300 skilled nursing facilities at the time of acquisition. Rycan offered SaaS-based revenue cycle management workflow and automation software to over 290 hospital customers at the time of acquisition.

~~We believe the acquisition of HHI:~~

~~strengthened our position in providing healthcare information systems to community healthcare organizations with approximately 1,200 combined hospital customers at the time of acquisition;~~

~~introduced CPSI~~related to the ~~post-acute care market; and~~adoption of the new revenue standard, our deferred tax liability increased $0.6 million as of the date of adoption.

~~expanded~~In total, the ~~products offered by and capabilities~~adoption of ~~TruBridge~~ASU 2014-09 resulted in a net increase in retained earnings of $2.0 million as of the date of adoption.

In accordance with the ~~addition of Rycan and its suite of~~new revenue ~~cycle management software products.~~

~~These factors, combined with~~standard requirements, the ~~synergies and economies of scale expected from combining the operations of CPSI and HHI, were the basis for the acquisition.~~

~~Consideration for the acquisition included cash (net of cash~~disclosures of the ~~acquired entities)~~impact of ~~$162.6 million (inclusive~~adoption on our condensed consolidated income statements and balance sheet were as follows:

Table of ~~seller's transaction expenses), 1,973,880 shares~~Contents


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


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


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

The effects of ~~common stock~~the changes in balance sheet accounts resulting from the adoption of ~~CPSI ("CPSI Common Stock"), and~~ the ~~assumption~~new revenue standard are primarily due to the beginning adjustments for adoption mentioned above, accompanied by ~~CPSI of stock options that became exercisable for 174,972 shares of CPSI Common Stock. During~~incremental changes resulting from activity during the ~~three and six months ended~~period ending June 30, ~~2016, we incurred approximately $0.5 million and $8.0 million, respectively, of pre-tax acquisition costs~~2018. Refer to Note 3 - Revenue Recognition for more information on period activity.

The new revenue standard requirements did not impact our net cash provided by or used in ~~connection with the acquisition of HHI. Acquisition costs are included in general and administrative expenses in~~operating, investing, or financing cash flows on our condensed consolidated statements of ~~income.~~

(In thousands)
Purchase Price

Cash consideration, net of acquired cash received

$ 162,611
Fair value of common stock and options issued as consideration 97,017
Total consideration

$ 259,628

~~Our acquisition of HHI was treated as a purchase~~cash flows, although components within changes in ~~accordance with Accounting Standards Codification (the "Codification") 805,~~ ~~Business Combinations~~, of the Financial Accounting Standards Board ("FASB"), 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 was based on management's judgment after evaluating several factors, including a valuation assessment.

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

(In thousands) Purchase Price Allocation
Acquired cash $ 5,371
Accounts receivable 5,789
Financing receivables 2,184
Inventories 216
Prepaid expenses 3,228
Property and equipment 1,263
Intangible assets 117,300
Goodwill 168,449
Accounts payable and accrued liabilities (17,490 )
Deferred taxes, net (4,010 )
Contingent consideration (1,620 )
Deferred revenue (15,681 )
Net assets acquired $ 264,999

The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives. The amortization is included in amortization of acquisition-related intangibles in our condensed consolidated statements of income. Of the goodwill acquired, $23.3 million is expected to be tax deductible.

~~The fair value measurements of tangible and intangible~~operating assets and liabilities were ~~based~~immaterially impacted by adoption.

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

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

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

New Accounting Standards Yet to be Adopted

In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance will require the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018, which will be effective for the Company as of the first quarter of our fiscal year ending December 31, 2019. The Company is currently evaluating the method of adoption and potential utilization of practical expedients. The estimated impact on the financial statements of implementation of this standard is increased lease assets and lease liabilities in the ~~market and thus represent Level 3 measurements within~~range of $4 to $6 million as of the ~~fair value measurement hierarchy (see Note 13). Level 3 inputs included, among others, discount rates~~anticipated adoption date, January 1, 2019.

We do not believe that ~~we estimated~~any other recently issued but not yet effective accounting standards, if adopted, would ~~be used by~~have a ~~market participant in valuing these assets and liabilities, projections of revenues and cash flows, client attrition rates and market comparables.~~material impact on our consolidated financial statements.

~~The gross contractual amount of accounts receivable of HHI at the date of acquisition was $9.4 million.~~

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 ~~recognizes~~employs the 5-step revenue recognition model under ASC 606 to: (1) identify the contract with the client, (2) identify the performance obligations in ~~accordance with U.S. GAAP, principally those required by~~ the ~~Software~~ ~~topic~~contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

Revenue ~~Recognition~~ ~~subtopic~~is recognized net of ~~the FASB Codification~~shipping charges and ~~those prescribed by the SEC.~~

~~The Company's revenue is generated~~any taxes collected from ~~two sources:~~

~~System Salesand Support~~ - the sale of information systems and the provision of system support services. The sale of information systems includes perpetual software licenses, conversion, installation and training services, hardware and peripherals, "Software as a Service" (or "SaaS") services, and forms and supplies. System support services includes software application support, hardware maintenance, and continuing education.

~~TruBridge~~ ~~- the provision of business management services,~~clients, which ~~includes electronic billing, statement processing, payroll processing, accounts receivable management, contract management and insurance services, as~~

~~well as Internet service provider ("ISP") services and consulting and managed IT services (collectively, "other professional IT services").~~are subsequently remitted to governmental authorities.

System Sales and Support

The Company enters into contractual obligations to sell perpetual software licenses, installation, conversion, ~~installation and~~ training, ~~services,~~ hardware and software application support and hardware maintenance ~~services. On average, the Company is able~~services to ~~complete a system~~acute care and post-acute care community hospitals.

Non-recurring Revenues

• Perpetual software licenses, installation, in ~~three~~ to ~~four~~ ~~weeks. The methods employed by the Company to recognize revenue, which~~conversion, and related training are ~~discussed by element below, achieve results materially consistent with the provisions of Accounting Standards Update ("ASU") 2009-13,~~ ~~Multiple-Deliverable Revenue Arrangements~~,not considered separate and distinct performance obligations due to the ~~relatively short period during~~proprietary nature of our software and are, therefore, accounted for as a single performance obligation on a module-by-module basis. Revenue is recognized as each module's implementation is completed based on the module's stand-alone selling price ("SSP"), net of discounts. Fees for licenses, installation, conversion, and related training are typically due in three installments: (1) at placement of order, (2) upon installation of software and commencement of training, and (3) upon satisfactory completion of monthly accounting cycle or end-of-month operation by application and as applicable for each application. Often, short-term and/or long-term financing arrangements are provided for software implementations; refer to Note 9 - Financing Receivables for further information. Electronic health records ("EHR") implementations include a system warranty that terminates thirty days from the software go-live date, the date which ~~there are multiple undelivered elements,~~ the ~~relatively small amount of non-software related elements in~~client begins using the system ~~sale arrangements, and the limited number~~in a live environment.

Table of ~~contracts in-process~~Contents

• Hardware revenue is recognized separately from software licenses at the ~~end of each reporting period.~~point in time it is delivered to the client. The ~~Company recognizes revenue on the elements noted above as follows:~~

Perpetual software licenses and conversion, installation and training services – The selling price of perpetual software licenses and conversion, installation and training services is based on management’s best estimate of selling price. In determining management’s best estimate of selling price, we consider the following: (1) competitor pricing, (2) supply and demand of installation staff, (3) overall economic conditions, and (4) our pricing practices as they relate to discounts. The method of recognizing revenue for the perpetual license of the associated modules included in the arrangement, and the related conversion, installation and training services over the term the services are performed, is on a module by module basis as the related perpetual licenses are delivered and the respective conversion, installation and training for each specific module is completed, as this is representative of the pattern of provision of these services.

~~Hardware – We recognize revenue for hardware upon shipment. The selling price~~SSP of hardware is ~~based on management’s best estimate of selling price, which consists of~~ cost plus a ~~targeted~~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 ~~– We have established vendor-specific objective evidence ("VSOE")~~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 ~~fair value of our~~contact, which is generally three to five years. Payment is due monthly for support services provided.

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

• Software as a Service ("SaaS") arrangements for EHR software ~~application support~~ and ~~hardware maintenance~~related conversion and training services ~~by reference to the price our customers~~ are ~~required to pay for the services when sold separately via renewals. Support and maintenance revenue~~considered a single performance obligation. Revenue is recognized on a ~~straight-line~~monthly basis as the SaaS service is provided to the client over the ~~term of the maintenance~~ contract ~~which~~term. Payment is ~~generally~~ ~~three~~ to ~~five~~ ~~years.~~

due monthly for SaaS services provided.

Refer to Note 14 - ~~The Company accounts~~Segment Reporting, for ~~SaaS arrangements in accordance with the requirements of the~~ ~~Hosting Arrangement section under the~~ ~~Software~~ ~~topic~~further information, including revenue by client base (acute care or post-acute care) bifurcated by recurring and ~~Revenue Recognition~~ subtopic of the Codification. The Codification states that the software elements of SaaS services should not be accounted for as a hosting arrangement "if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software." Each SaaS contract entered into by the Company includes a system purchase and buyout clause, and this clause specifies the total amount of the system buyout. In addition, a clause is included in the contract which states that should the system be bought out by the customer, the customer would be required to enter into a general support agreement (for post-contract support services) for the remainder of the original SaaS term. Accordingly, the Company has concluded that SaaS customers do not have the right to take possession of the system without significant penalty (i.e., the purchase price of the system), resulting in the determination that these contracts are service contracts for which revenue is recognized when the services are performed.

non-recurring revenue.

TruBridge

TruBridge ~~consists~~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, ~~accounts receivable management,~~and contract ~~management and insurance services. While TruBridge arrangements~~management. Fees are ~~contracts separate from~~recognized over the ~~system sale and support contracts, these contracts are often executed within a short time frame of each other. The amount~~period of the ~~total arrangement consideration allocated to these services is based on VSOE of fair value by reference to the rate at which our customers renew as well~~client contractual relationship as the rate at which the services are sold to customers when the TruBridge agreement is not executed within a short time frame of the system sale and support contracts. If VSOE of fair value does not exist for these services, we allocate arrangement consideration based on third-party evidence ("TPE") of selling price or, if neither VSOE nor TPE is available, estimated selling price. Because the pricing is transaction based (per unit pricing), customers are billed and revenue recognized as services are performed based on ~~transaction levels.~~the SSP, net of discounts. Fees for many of these services are invoiced, and revenue recognized accordingly, based on the volume of transactions or a percentage of client accounts receivable collections. Payment is due monthly for BPS with certain amounts varying based on utilization and/or volumes.

~~The Company will occasionally provide ISP and other~~TruBridge also provides professional IT services. ~~Depending on the nature of the services provided, these services may be considered software elements or non-software elements. The selling price of services~~

considered to be software elements is based on VSOE of the fair value of the services by reference to the price our customers are required to pay for the services when sold separately. The selling price of services considered to be non-software elements is based on third-party evidence of selling price of similar services. Revenue from ~~these elements~~professional services is recognized as the services are performed based on SSP. Payment is due monthly as services are performed.

Deferred Revenue

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


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

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

Costs to Obtain and Fulfill a Contract with a Customer

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

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

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

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


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

Significant Judgments

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

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

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

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

Remaining Performance Obligations

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

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4. PROPERTY AND EQUIPMENT

Property and equipment ~~were~~was comprised of the following at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


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

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

(In thousands) June 30,
2017 December 31,
2016
Land $ 2,848
$ 2,848
Buildings and improvements 9,432
9,432
Maintenance equipment 802
802
Computer equipment 5,639
5,174
Leasehold improvements 5,007
5,007
Office furniture and fixtures 3,591
3,591
Automobiles 335
335
27,654
27,189
Less: accumulated depreciation (15,169 ) (13,750 )
Property and equipment, net $ 12,485
$ 13,439

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities ~~were~~was comprised of the following at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


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

(In thousands) June 30,
2017 December 31,
2016
Salaries and benefits $ 4,098
$ 5,397
Severance 2,129
337
Commissions 1,082
518
Self-insurance reserves 1,029
887
Contingent consideration 1,120
1,120
Other 621
538
$ 10,079
$ 8,797

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

6. NET INCOME PER SHARE

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

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

equaling net income less net income attributable to participating securities. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method.

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


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

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

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

Three Months Ended Six Months Ended
(in thousands, except per share data) June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016
Net income $ 1,587
$ 1,996
$ 1,833
$ 333
Less: Net (income) loss attributable to participating securities (45 ) (32 ) (41 ) 15
Net income attributable to common stockholders $ 1,542
$ 1,964
$ 1,792
$ 348

Weighted average shares outstanding used in basic per common share computations 13,420
13,317
13,397
13,171
Add: Dilutive potential common shares —
48
—
56
Weighted average shares outstanding used in diluted per common share computations 13,420
13,365
13,397
13,227

Basic EPS $ 0.11
$ 0.15
$ 0.13
$ 0.03
Diluted EPS $ 0.11
$ 0.15
$ 0.13
$ 0.03

During ~~2017,~~2018, performance share awards were granted to certain executive officers and key employees of the Company that will result in the issuance of time-vesting restricted stock if the predefined performance criteria are met. The awards provide for an aggregate target of ~~189,325~~184,776 shares, none of which have been included in the calculation of diluted EPS for the three and six months ended June 30, ~~2017~~2018 because the related threshold award performance level has not been achieved as of June 30, ~~2017.~~2018. See Note 8.8 - Stock-based Compensation for more information.

7. INCOME TAXES

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

Our effective tax rate for the three months ended June 30, ~~2017 decreased~~2018 increased to ~~38.5%~~46% from ~~45.9%~~38% for the three months ended June 30, ~~2016. During~~2017. Our effective tax rate for the three months ended June 30, ~~2016~~2018 was heavily impacted by the ~~identification~~year-to-date impact of ~~nondeductible facilitative transaction costs and adjustments~~changing state income allocation determinations among our various subsidiaries from entities with lower effective state rates to entities with higher effective state rates. The year-to-date adjustment, when recorded in a three-month period of significantly lower net income before taxes compared to the immediately preceding period, had an outsized impact on our ~~estimated state~~ effective tax rate, ~~resulted~~resulting in ~~combined additional income tax expense of $0.4 million, increasing~~a 25% increase in the ~~period's~~ effective tax rate. This increase was partially offset by the tax benefits of the Tax Cuts and Jobs Act, which reduced our corporate federal rate ~~by 11.2%. Conversely, during~~from 35% to 21% effective at the ~~three months ended June 30, 2017 we experienced a shortfall tax expense related to restricted stock~~beginning of ~~$0.2 million that increased the effective rate by 6.1% due to the adoption of ASU 2016-09 as detailed in Note 15.~~2018.

Our effective tax rate for the six months ended June 30, ~~2017~~2018 decreased to ~~55.0% compared to 88.9%~~34% from 55% for the six months ended June 30, ~~2016. During~~2017. Our effective tax rate for the six months ended June 30, ~~2016~~2018 was impacted by the ~~identification~~Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of ~~nondeductible facilitative transaction costs resulted in additional income~~2018. The six months ended June 30, 2018 also included a $0.4 million shortfall tax expense ~~of $1.4 million, increasing~~related to stock-based compensation that increased the ~~period's~~ effective ~~tax~~ rate by ~~49.1%~~6%. ~~Conversely, during~~During the six months ended June 30, 2017 we experienced a shortfall tax expense related to ~~restricted stock~~stock-based compensation of $0.9 million that increased the effective ~~tax~~ rate by ~~22.6% due to the adoption of ASU 2016-09 as detailed in Note 15.~~23%.

8. STOCK-BASED COMPENSATION

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

The following table details total stock-based compensation expense for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~,2017, included in the condensed consolidated statements of income:

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	Three Months Ended						Six Months Ended							Three Months Ended						Six Months Ended
(In thousands)	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016			(In thousands)	2018		2017		2018		2017
Costs of sales	$	425		$	374		$	743		$	773		Costs of sales	$	585	$	425	$	1,024	$	743
Operating expenses	1,261			1,120			2,224			2,104			Operating expenses	2,168		1,261		3,668		2,224
Pre-tax stock-based compensation expense	1,686			1,494			2,967			2,877			Pre-tax stock-based compensation expense	2,753		1,686		4,692		2,967
Less: income tax effect	(658		)	(583		)	(1,157		)	(1,122		)	Less: income tax effect	(606)		(658)		(1,032)		(1,157)
Net stock-based compensation expense	$	1,028		$	911		$	1,810		$	1,755		Net stock-based compensation expense	$	2,147	$	1,028	$	3,660	$	1,810

The Company's stock-based compensation awards are in the form of restricted stock and performance share awards ~~made~~granted pursuant to the Company's ~~2005 Restricted Stock Plan,~~ 2012 Restricted Stock Plan for Non-Employee Directors and ~~the~~ Amended and Restated 2014 Incentive Plan (the "Plans"). As of June 30, ~~2017,~~2018, there was ~~$14.1~~$17.6 million of unrecognized compensation ~~cost~~expense related to ~~non-vested~~unvested stock-based compensation arrangements granted under the Plans, which is expected to be recognized over a weighted-average period of ~~2.4~~ 2.2 years.

Restricted Stock

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

A summary of restricted stock activity (including shares of restricted stock issued pursuant to the settlement of performance share awards) under the Plans during the six months endedJune 30, ~~2017~~2018 and ~~2016~~2017 is as follows:


										Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016					Shares	Weighted-Average Grant Date Fair Value Per Share		Shares	Weighted-Average Grant Date Fair Value Per Share
Unvested restricted stock outstanding at beginning of period									Unvested restricted stock outstanding at beginning of period	309,195	$	38.36	184,885	$	54.63
Granted									Granted	148,841	30.20		222,390	32.87
Performance share awards settled through the issuance of restricted stock									Performance share awards settled through the issuance of restricted stock	177,395	29.94		—	—
Vested									Vested	(153,424)	40.81		(80,558)	55.34
	Shares		Weighted-Average Grant Date Fair Value Per Share		Shares		Weighted-Average Grant Date Fair Value Per Share
Nonvested restricted stock outstanding at beginning of period	184,885		$	54.63	191,397		$	57.12
Granted	222,390		32.87		86,984		52.21
Vested	(80,558	)	55.34		(72,393	)	57.75
Nonvested restricted stock outstanding at end of period	326,717		$	39.64	205,988		$	54.82
Unvested restricted stock outstanding at end of period									Unvested restricted stock outstanding at end of period	482,007	$	31.96	326,717	$	39.64

Performance Share Awards

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

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

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

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

A summary of performance share award activity under the 2014 Incentive Plan during the six months endedJune 30, ~~2017~~2018 and ~~2016~~2017 is as follows, based on the target award amounts set forth in the performance share award agreements:


	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016					Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Grant Date Fair Value Per Share		Shares	Weighted-Average Grant Date Fair Value Per Share
Performance share awards outstanding at beginning of period	77,594		$	49.64	49,471		$	49.29	Performance share awards outstanding at beginning of period	189,325	$	29.94	77,594	$	49.64
Granted	189,325		29.94		77,594		49.64		Granted	184,776	30.15		189,325	29.94
Forfeited or unearned	(77,594	)	49.64		(49,471	)	49.29		Forfeited or unearned	(11,930)	29.94		(77,594)	49.64
Performance share awards settled through the issuance of restricted stock									Performance share awards settled through the issuance of restricted stock	(177,395)	29.94		—	—
Performance share awards outstanding at end of period	189,325		$	29.94	77,594		$	49.64	Performance share awards outstanding at end of period	184,776	$	30.15	189,325	$	29.94

9. FINANCING RECEIVABLES

Short-Term Payment Plans

The Company has sold information and patient care systems to certain healthcare providers under Second Generation Meaningful Use Installment Plans (see below) with maximum contractual terms of three years and expected terms of less than one year and other arrangements requiringprovides fixed monthly ~~payments~~payment arrangements ("short-term payment plans") over terms ranging from three to 12twelve months ~~("Fixed Periodic Payment Plans").~~for meaningful use stage three and other add-on software installations. As a practical expedient, we do not adjust the amount of consideration recognized as revenue for the financing component as unearned income when we expect payment within one year or less. These receivables, ~~collectively referred to as short-term payment plans and~~ included in the current portion of financing receivables, were comprised of the following at June 30, ~~2017~~2018 and December 31, ~~2016~~:2017:


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

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(In thousands) June 30,
2017 December 31,
2016
Second Generation Meaningful Use Installment Plans, gross $ 320
$ 3,080
Fixed Periodic Payment Plans, gross 1,384
1,988
Short-term payment plans, gross $ 1,704
$ 5,068

Less: allowance for losses (317 ) (1,796 )
Short-term payment plans, net $ 1,387
$ 3,272
Long-Term Financing Arrangements

~~Sales-Type Leases~~

Additionally, the Company ~~leases~~provides financing for purchases of its information and patient care systems to certain healthcare providers under ~~sales-type leases~~long-term financing arrangements expiring in various years through ~~2024.~~2025. Under long-term financing arrangements, the transaction price is adjusted by a discount rate that reflects market conditions that would be used for a separate financing transaction between the Company and licensee at contract conception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income in the condensed consolidated statements of income. These receivables typically have terms from two to seven years, bear interest at various rates, and are usually collateralized by a security interest in the underlying assets. Since the Company has a history of successfully collecting amounts due under the original payment terms of these extended payment arrangements without making any concessions to its customers, the Company satisfies the requirement for revenue recognition. The Company’s history with these types of extended payment term arrangements supports management’s assertion that revenues are fixed and determinable and collection is probable. years.

The components of these ~~lease~~ receivables were as follows at June 30, ~~2017~~2018 and December 31, ~~2016~~:2017:


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

(In thousands) June 30,
2017 December 31,
2016
Sales-type leases, gross $ 16,727
$ 8,981
Less: allowance for losses (1,612 ) (402 )
Less: unearned income (1,510 ) (797 )
Sales-type leases, net $ 13,605
$ 7,782

Future minimum ~~lease~~ payments to be received subsequent to June 30, ~~2017~~2018 are as follows:


(In thousands)				(In thousands)
Years Ended December 31,				Years Ended December 31,
2017	$	3,001
2018	4,071			2018	$	4,778
2019	3,398			2019	7,874
2020	2,914			2020	5,080
2021	2,123			2021	4,042
2022				2022	2,656
Thereafter	1,220			Thereafter	1,174

Total minimum lease payments to be received	16,727
Total minimum payments to be received				Total minimum payments to be received	25,604
Less: allowance for losses	(1,612		)	Less: allowance for losses	(1,922)
Less: unearned income	(1,510		)	Less: unearned income	(2,753)
Receivables, net				Receivables, net	$	20,929

Lease receivables, net	$	13,605

Credit Quality of Financing Receivables and Allowance for Credit Losses

The following table is a roll-forward of the allowance for financing credit losses for the six months ended June 30, ~~2017~~2018 and year ended December 31, ~~2016~~:2017:


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

(In thousands) Balance at Beginning of Period Provision Charge-offs Recoveries Balance at End of Period
June 30, 2017 $ 2,198
$ 303
$ (572 ) $ —
$ 1,929
December 31, 2016 $ 654
$ 1,762
$ (218 ) $ —
$ 2,198

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

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Financing receivables are written off only after the Company has exhausted all collection efforts. The Company has been successful in collecting its financing receivables and considers the credit quality of such arrangements to be ~~good, especially as the underlying assets act as collateral for the receivables.~~good.

Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying condensed consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of June 30, ~~2017~~2018 and December 31, ~~2016~~:2017:

(In thousands)
1 to 90 Days
Past Due

91 to 180 Days
Past Due

181 + Days
Past Due

Total
Past Due
June 30, 2017 $ 384
$ 33
$ 42
$ 459
December 31, 2016 $ 228
$ 31
$ 34
$ 293


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

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

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

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


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

(In thousands) June 30,
2017 December 31,
2016
Customer balances with amounts reclassified to trade accounts receivable that are:
1 to 90 Days Past Due $ 8,632
$ 6,167
91 to 180 Days Past Due 1,511
550
181 + Days Past Due 827
273
Total customer balances with past due amounts reclassified to trade accounts receivable $ 10,970
$ 6,990
Total customer balances with no past due amounts reclassified to trade accounts receivable 4,247
1,194
Total financing receivables with contractual maturities of one year or less 1,704
5,068
Less: allowance for losses (1,929 ) (2,198 )
Total financing receivables $ 14,992
$ 11,054

~~Second Generation Meaningful Use Installment Plans~~

~~Beginning in the fourth quarter~~Table of 2012, we offered to our customers license agreements with payment terms that provided us with greater visibility into and control over the customer’s meaningful use attestation process and significantly reduced the maximum timeframe over which customers must satisfy their full payment obligations in purchasing our system (“Second Generation Meaningful Use Installment Plans”). As the overall payment period durations of the Second Generation Meaningful Use Installment Plans are consistent with that of our historical system sale financing arrangements, revenues under the Second Generation Meaningful Use Installment Plans are recognized upon installation of our EHR solution. Although these arrangements provide for a maximum payment term of three years, management has determined the expected term for these arrangements to be less than one year due to (a) historical collection patterns of required EHR incentive payment amounts and (b) the estimated significance of those amounts, the receipt of which is expected to result in minimal or no remaining balance for the related arrangements. As a result, all related amounts are included as a component of financing receivables, current portion, net in the accompanying condensed consolidated balance sheets and as a component of ~~short-term payment plans~~ ~~within this note.~~Contents

10. INTANGIBLE ASSETS AND GOODWILL

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

(In thousands) Customer Relationships Trademark Developed Technology Total
Gross carrying amount $ 82,300
$ 10,900
$ 24,100
$ 117,300
Accumulated amortization (9,668 ) (1,257 ) (4,460 ) (15,385 )
Net intangible assets $ 72,632
$ 9,643
$ 19,640
$ 101,915
Weighted average remaining years of useful life 11 14 7 11


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

The following table represents the remaining amortization of definite-lived intangible assets as of June 30, ~~2017:~~2018:


(In thousands)			(In thousands)
For the year ended December 31,			For the year ended December 31,
2017	$	5,202
2018	10,406		2018	$	5,203
2019	10,112		2019	10,112
2020	10,106		2020	10,106
2021	10,066		2021	10,066
Due thereafter	56,023
2022			2022	10,066
Thereafter			Thereafter	45,957
Total	$	101,915	Total	$	91,510

The following table sets forth the change in the carrying amount of goodwill by segment for the six months ended June 30, ~~2017:~~2018:


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

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

(In thousands) Acute Care EHR Post-acute Care EHR TruBridge Total
Balance as of December 31, 2016 $ 97,095
$ 57,570
$ 13,784
$ 168,449
Goodwill acquired —
—
—
—
Balance as of June 30, 2017 $ 97,095
$ 57,570
$ 13,784
$ 168,449

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

Table of ~~June 30, 2017, there was no impairment to goodwill.~~Contents

11. LONG-TERM DEBT

Long-term debt was comprised of the following at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


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

(In thousands) June 30, 2017 December 31, 2016
Term loan facility $ 118,750
$ 121,875
Revolving credit facility 26,500
33,000
Capital lease obligation 716
861
Debt obligations 145,966
155,736
Less: unamortized debt issuance costs (2,566 ) (2,930 )
Debt obligation, net 143,400
152,806
Less: current portion (7,389 ) (5,817 )
Long-term debt $ 136,011
$ 146,989

As of June 30, ~~2017,~~2018, the carrying value of debt approximates the fair value due to the variable interest rate, which reflects the market rate.

Credit Agreement

In conjunction with our acquisition of HHI onin January 8, 2016, we entered into a syndicated credit agreement ~~on the same date~~ (the ~~"Credit~~"Previous Credit Agreement"), with Regions Bank ("Regions") serving as administrative agent, which provided for a ~~$125,000,000~~$125 million term loan facility (the ~~"Term~~"Previous Term Loan Facility") and a ~~$50,000,000~~$50 million revolving credit facility ("(the "Previous Revolving Credit Facility"). ~~The cash portion~~On October 13, 2017, we entered into a Second Amendment (the "Second Amendment") to refinance and decrease the aggregate committed size of the ~~purchase price for HHI was partially funded by~~credit facilities from $175 million to $162 million, which included a $117 million term loan facility (the "Amended Term Loan Facility") and a $45 million revolving credit facility (the "Amended Revolving Credit Facility" and, together with the ~~$125,000,000~~Amended Term Loan Facility, the "Amended Credit Facilities"). On February 8, 2018, we entered into a Third Amendment (the "Third Amendment") to the Amended Credit Agreement to increase the aggregate principle amount of the Amended Credit Facilities from $162 million to $167 million which includes the $117 million Amended Term Loan Facility and ~~$25,000,000 borrowed under the~~a $50 million Amended Revolving Credit Facility.

~~The Term Loan Facility bears~~Each of the Amended Credit Facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted LIBOR rate for the relevant interest period, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the ~~one-month~~one month LIBOR rate plus one percent per annum, or (3) a combination of (1) and (2). ~~Interest~~The applicable margin range for LIBOR loans and the letter of credit fee ranges from 2.00% to 3.50%. The applicable margin range for base rate loans ranges from 1.00% to 2.50%, in each case based on the ~~outstanding principal of~~Company's consolidated leverage ratio.

Principal payments with respect to the Amended Term Loan Facility is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans. Principal payments are due on the last day of each fiscal quarter beginning ~~March~~December 31, ~~2016,~~2017, with quarterly principal payments of approximately $1.46 million through September 30, 2019, approximately $2.19 million through September 30, 2021 and approximately $2.93 million through September 30, 2022, with the ~~remainder due at~~ maturity on ~~January 8, 2021~~October 13, 2022 or such earlier date as the obligations under the Amended Credit Agreement become due and payable pursuant to the terms of the Amended Credit Agreement (the ~~"Maturity~~"Amended Maturity Date"). Any principal outstanding under the Amended Revolving Credit Facility is due and payable on the Amended Maturity Date.

Anticipated annual future maturities of the Amended Term Loan Facility, Amended Revolving Credit Facility, and capital lease obligation are as follows as of June 30, ~~2017:~~2018:


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

(In thousands)
2017 $ 3,276
2018 9,690
2019 12,750
2020 15,625
2021 104,625
Thereafter —
$ 145,966

~~Borrowings under the Revolving Credit Facility bear interest at a rate similar to that~~Table of the Term Loan Facility, with interest payment dates similar to that of the Term Loan Facility. The Revolving Credit Facility includes a $5 million swingline sublimit, with swingline loans bearing interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Revolving Credit Facility is due and payable on the Maturity Date.Contents

The ~~Term Loan Facility and amounts borrowed under the Revolving~~Amended Credit ~~Facility~~Facilities are secured pursuant to a Pledge and Security Agreement, dated January 8, 2016, among the parties identified as ~~Obligors~~obligors therein and Regions, as collateral agent, ~~(the “Security Agreement”),~~ on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the “Subsidiary Guarantors”), including certain registered intellectual property and the capital stock of certain

of the Company’s direct and indirect subsidiaries. Our obligations under the Amended Credit Agreement are also guaranteed by the Subsidiary Guarantors.

The Amended Credit Agreement, as amended by the Third Amendment, provides incremental facility capacity of $50 million, subject to certain conditions. The Amended Credit Agreement includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on ~~its~~the Company's equity securities or payments to redeem, repurchase or retire ~~its~~the Company's equity ~~securities;~~securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other ~~entity;~~person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with ~~its~~ affiliates; and materially alter the business ~~it conducts. In addition,~~we conduct. The Amended Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the Amended Credit Agreement, the Company is required to comply with a ~~minimum fixed charge coverage ratio throughout the duration of the Credit Agreement and a~~ maximum consolidated leverage ~~ratio.~~ratio of 3.95:1.00 through December 31, 2017 and 3.50:1.00 from January 1, 2018 and thereafter. The Amended Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in the Amended Credit Agreement as of June 30, 2018.

The Amended Credit Agreement requires the Company to mandatorily prepay the ~~Term Loan Facility and amounts borrowed under the Revolving~~Amended Credit ~~Facility~~Facilities with (i) ~~100%~~75% of ~~net~~excess cash ~~proceeds from~~flow (minus certain ~~sales and dispositions, subject to certain reinvestment rights, (ii) 100%~~specified other payments) during each of net cash proceeds from certain issuances or incurrences of additional debt, (iii) 50% of net cash proceeds from certain issuances or sales of equity securities, subject to a step down to 0% if the Company’s consolidated leverage ratio is no greater than 2.50:1.0, and (iv) beginning with the fiscal ~~year~~years ending December 31, ~~2016,~~2017 and December 31, 2018 and (ii) 50% of excess cash flow (minus certain specified other payments)~~, subject to a step down to 0% of excess cash flow if~~ during the ~~Company’s consolidated leverage ratio is no greater than 2.50:1.0.~~fiscal year ending December 31, 2019 and thereafter. The Company is permitted to voluntarily prepay the ~~Term Loan Facility and amounts borrowed under the Revolving~~Amended Credit ~~Facility~~Facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of LIBOR rate loans made on a day other than the last day of any applicable interest period. AsThe excess cash flow mandatory prepayment requirement under the Amended Credit Agreement resulted in a $7.3 million prepayment on the Amended Term Loan Facility during the first quarter of ~~June 30,~~2018 related to excess cash flow generated by the Company during 2017. This mandatory prepayment was funded by drawing down on the Amended Revolving Credit Facility, as excess cash flow generated by the Company during 2017 ~~we believe that we were in compliance with all debt covenants contained in~~was primarily used to voluntarily prepay amounts due under the Amended Revolving Credit ~~Agreement.~~Facility.

12. COMMITMENTS AND CONTINGENCIES

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

13. FAIR VALUE

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

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

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

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

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

The following table summarizes the carrying amounts and fair ~~values~~value of ~~certain liabilities~~the contingent consideration at June 30, ~~2017:~~2018:


			Fair Value at June 30, 2017 Using									Fair Value at June 30, 2018 Using
	Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs			Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	6/30/2017		(Level 1)		(Level 2)		(Level 3)		(In thousands)	6/30/2018		(Level 1)		(Level 2)		(Level 3)
Description									Description
Contingent consideration	$	1,120	$	—	$	—	$	1,120	Contingent consideration	$	615	$	—	$	—	$	615
Total	$	1,120	$	—	$	—	$	1,120	Total	$	615	$	—	$	—	$	615

The following table summarizes the carrying amounts and fair ~~values~~value of ~~certain liabilities~~the contingent consideration at December 31, ~~2016~~:2017:


			Fair Value at December 31, 2016 Using									Fair Value at December 31, 2017 Using
	Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs			Carrying Amount at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	12/31/2016		(Level 1)		(Level 2)		(Level 3)		(In thousands)	12/31/2017		(Level 1)		(Level 2)		(Level 3)
Description									Description
Contingent consideration	$	1,120	$	—	$	—	$	1,120	Contingent consideration	$	586	$	—	$	—	$	586
Total	$	1,120	$	—	$	—	$	1,120	Total	$	586	$	—	$	—	$	586

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

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14. SEGMENT REPORTING

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

~~As of January 1, 2017, the operating segment formerly identified as "TruBridge, Rycan, and Other Outsourcing" is now identified as "TruBridge".~~

The following table presents a summary of the revenues and gross profits of our three operating segments for the three and six months ended June 30, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016			(In thousands)	2018		2017		2018		2017
Revenues:													Revenues:
Acute Care EHR	$	39,394		$	40,754		$	76,525		$	83,494		Acute Care EHR
Recurring revenue													Recurring revenue	$	28,342	$	28,001	$	56,477	$	56,539
Non-recurring revenue													Non-recurring revenue	8,865		11,393		20,913		19,985
Total Acute Care EHR revenue													Total Acute Care EHR revenue	37,207		39,394		77,390		76,524
Post-acute Care EHR	6,080			6,965			12,372			13,934			Post-acute Care EHR
Recurring revenue													Recurring revenue	4,656		5,108		9,487		10,186
Non-recurring revenue													Non-recurring revenue	883		972		1,621		2,187
Total Post-acute Care EHR revenue													Total Post-acute Care EHR revenue	5,539		6,080		11,108		12,373
TruBridge	22,203			20,696			42,854			40,630			TruBridge	25,159		22,203		50,290		42,854
Total revenues	$	67,677		$	68,415		$	131,751		$	138,058		Total revenues	$	67,905	$	67,677	$	138,788	$	131,751

Cost of sales:													Cost of sales:
Acute Care EHR	$	16,836		$	19,364		33,753			39,250			Acute Care EHR	$	17,970	$	17,730	$	34,727	$	35,504
Post-acute Care EHR	2,023			2,522			4,036			4,903			Post-acute Care EHR	1,558		2,023		3,219		4,036
TruBridge	11,933			11,616			23,520			22,903			TruBridge	13,531		11,933		26,910		23,520
Total cost of sales	$	30,792		$	33,502		$	61,309		$	67,056		Total cost of sales	$	33,059	$	31,686	$	64,856	$	63,060

Gross profit:													Gross profit:
Acute Care EHR	$	22,558		$	21,390		42,772			44,244			Acute Care EHR	$	19,237	$	21,664	$	42,663	$	41,020
Post-acute Care EHR	4,057			4,443			8,336			9,031			Post-acute Care EHR	3,981		4,057		7,889		8,337
TruBridge	10,270			9,080			19,334			17,727			TruBridge	11,628		10,270		23,380		19,334
Total gross profit	$	36,885		$	34,913		$	70,442		$	71,002		Total gross profit	$	34,846	$	35,991	$	73,932	$	68,691

Corporate operating expenses	$	(32,437	)	(29,650		)	(62,761		)	(64,963		)	Corporate operating expenses	$	(32,621)	$	(31,543)	$	(64,058)	$	(61,010)
Other income	70			69			140			68			Other income	194		70		392		140
Interest expense	(1,938		)	(1,642		)	(3,745		)	(3,110		)	Interest expense	(1,807)		(1,938)		(3,785)		(3,745)
Income before taxes	$	2,580		$	3,690		$	4,076		$	2,997		Income before taxes	$	612	$	2,580	$	6,481	$	4,076

15. ~~RECENT ACCOUNTING PRONOUNCEMENTS~~

~~New Accounting Standards Adopted in 2017~~

~~In July 2015, the FASB issued ASU 2015-11,~~ ~~Simplifying the Measurement of Inventory~~. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The requirement would replace the current lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail method. The amended guidance will be effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15,

~~2017. The amended guidance should be applied prospectively with earlier application permitted. The adoption of ASU 2015-11 did not have a material effect on our financial statements.~~

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting,~~ which simplifies the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and the classification of awards on the statement of cash flows. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2016, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2017. The adoption of ASU 2016-09 had a material effect on our financial statements in the period of adoption and is disclosed in Note 7 of the financial statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment,~~ that removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019 with early adoption permitted for any goodwill impairment tests performed after January 1, 2017. The guidance is to be applied prospectively.

We have elected to early adopt ASU 2017-04 and the guidance will be applied for all goodwill impairment tests performed after January 1, 2017. The adoption of ASU 2017-04 may have a material impact on our financial statements if one or more of our reporting unit's carrying value exceeds its fair value at the time of impairment assessment.

~~New Accounting Standards Yet to be Adopted~~

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~, to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2018. Although we have not fully completed the assessment of our systems, data, and processes that will be affected by the implementation of this standard, we currently anticipate that this standard will not significantly alter revenue recognition practices for our system sales and support and TruBridge revenue streams but may have a material impact on our consolidated financial statements with respect to the capitalization of certain commissions and contract fulfillment costs which are currently expensed as incurred. We intend to adopt this standard using the modified retrospective method, in which the cumulative effect of initially applying the guidance will be recognized as an adjustment to retained earnings or impacted balance sheet line items as of January 1, 2018, the date of adoption.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance will require the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2019. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classifications of Certain Cash Receipts and Cash Payments,~~ which clarifies cash flow classification for eight specific issues, including debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and proceeds from settlement of corporate-owned life insurance policies. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements.

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Clarifying the Definition of a Business,~~ to assist an entity in evaluating when a set of transferred assets and activities is a business. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and should be applied prospectively to any transactions occurring within the period of adoption. Early adoption is permitted, including for interim or annual periods in which the

~~financial statements have not been issued or made available for issuance. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements.~~

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

~~16.~~ SUBSEQUENT EVENTS

OnOn August ~~3, 2017,~~2, 2018, the Company announced a dividend for the third quarter of ~~2017~~2018 in the amount of ~~$0.30~~$0.10 per share, payable on ~~September 1, 2017,~~August 31, 2018, to stockholders of record as of the close of business on August ~~17, 2017.~~16, 2018.

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

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

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

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

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

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

• saturation of our target market and hospital consolidations;

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

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

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

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

• market risks related to interest rate changes;

our ability to successfully integrate the businesses of Healthland Inc., American HealthTech, Inc., and Rycan Technologies, Inc. with our business and the inherent risks associated with any potential future acquisitions;

~~our ability to remediate a material weakness in our internal control over financial reporting;~~

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

• failure to develop new ~~or enhance current~~ technology and products in response to market demands;

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

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

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

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

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

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

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

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

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

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

Additional information concerning these and other factors that could cause differences between forward-looking statements and future actual results is discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

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Background

CPSI ~~founded in 1979,~~ is a leading provider of healthcare ~~information technology ("IT")~~ solutions and services for ~~rural~~community hospitals and ~~community hospitals~~other healthcare systems and post-acute care facilities. ~~With~~Founded in 1979, CPSI offers our ~~January 2016 acquisition of Healthland Holding Inc. ("HHI"), CPSI is now the parent of five~~products and services through four companies - Evident, LLC ("Evident"), TruBridge, LLC ("TruBridge"), Healthland Inc. ("Healthland"), and American HealthTech, Inc. ("AHT")~~, and Rycan Technologies, Inc. ("Rycan")~~. ~~Our~~These combined companies are focused on helping improve the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our ~~customers.~~clients. The individual contributions of each of ~~our five wholly-owned subsidiaries~~these companies towards this combined focus are as follows:

• Evident, formed in April 2015, provides a comprehensive acute care electronic health record ("EHR") ~~solutions~~solution, Thrive, and related services for ~~rural and~~ community hospitals ~~including those solutions previously sold under the CPSI name as well as an expanded range of offerings targeted specifically at rural~~ and their physician clinics.

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

• TruBridge focuses ~~exclusively~~ on providing business management, consulting, and managed IT services ~~to rural and community healthcare organizations,~~along with its complete revenue cycle management ("RCM") solution for all care settings, regardless of their ~~IT vendor.~~primary healthcare information solutions provider.

~~Healthland, acquired in the acquisition of HHI,~~• AHT provides ~~integrated technology solutions~~a comprehensive post-acute care EHR solution and ~~services to small rural, community, and critical access hospitals.~~

~~AHT, acquired in the acquisition of HHI, is one of the nation's largest providers of financial and clinical technology solutions and~~related services for ~~post-acute care~~skilled nursing and assisted living facilities.

~~Rycan, acquired in the acquisition of HHI, provides revenue cycle management workflow and automation software to rural and community hospitals, healthcare systems, and skilled nursing organizations.~~

~~The combined company~~Our companies currently ~~supports~~ support approximately ~~1,300~~ 1,100 acute care facilities and ~~over 3,300~~approximately 3,500 post-acute care facilities with a geographically diverse customer mix within the domestic ~~rural and~~ community healthcare market. Our ~~customers~~clients primarily consist of ~~rural and~~ community hospitals with ~~300~~200 or fewer acute care beds, with hospitals having 100 or fewer beds comprising approximately ~~95%~~94% of our hospital EHR customer base.

~~As discussed~~We operate in ~~this Item under “Results of Operations by Segment” below, we now manage our operations using~~ three ~~operating segments which are also our~~ reportable segments: (1) ~~acute care~~Acute Care EHR, (2) ~~post-acute care~~Post-acute Care EHR and (3) TruBridge. See Note 14 to the consolidated financial statements included herein for additional information on our segment reporting.

Acute Care EHR

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

Post-acute Care EHR

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

TruBridge

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

Management Overview

Historically, we have primarily sought revenue growth through sales of healthcare IT systems and related services to existing and new ~~customers~~clients within our target market, a strategy that has resulted in a ten-year compounded annual growth rate in legacy revenues (i.e., revenues related to our legacy Evident and TruBridge operations) of approximately ~~4.5%~~5.9% as of the end of our most recently completed fiscal year. Important to our potential for continued long-term revenue growth is our ability to

sell new and additional products and services to our existing customer base, including cross-selling opportunities presented with the acquisition of ~~HHI.~~Healthland Holding Inc. ("HHI"), the parent company of Healthland, AHT and Rycan Technologies, Inc. We believe that as our combined customer base grows, the demand for additional products and services, including business management, consulting and managed IT services, will also continue to grow, supporting further increases in recurring revenues. We also expect to drive revenue growth from new product development that we may generate from our research and development activities.

January 2016 marked an important milestone for CPSI, as we announced the completion of our acquisition of HHI, the first major acquisition in the Company's history. ~~With this~~This acquisition ~~CPSI now has a presence in well over 1,000 rural~~expanded our footprint for servicing acute care facilities and ~~community hospitals and over 3,300~~introduced us to the post-acute care ~~facilities,~~segment, adding significantly to our already substantial recurring revenue base and further expanding our ability to generate organic recurring revenue growth through additional cross-selling opportunities now available

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

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

We also look to increase margins through cost containment measures where ~~appropriate.~~appropriate as we continue to leverage opportunities for greater operating efficiencies of the combined entity. For example, during ~~2016~~the first quarter of 2018, we ~~instituted several changes related to~~further integrated our ~~employee benefits offerings, including~~acute care product lines into a ~~spousal carve-out~~combined client support group. Using best practices of the combined companies' implementation processes, we have decreased travel costs for ~~healthcare benefits. Additionally,~~our acute-care installations by approximately 25%. During the fourth quarter of 2017, TruBridge eliminated approximately $0.6 million per quarter of cloud hosting service costs for the HHI customer base by utilizing in-house resources. Also, during the first quarter of 2017, we instituted a ~~one-time,~~limited-time, voluntary severance program offering those employees meeting certain predetermined criteria severance packages involving continuing periodic cash payments and healthcare benefits for varying periods, depending upon the individual's years of service with the Company. Lastly, the acquisition of HHI in January of 2016 presents us with additional opportunities to leverage the greater operating efficiencies of the combined entity in order to drive further earnings and profitability growth in the future.

Turbulence in the U.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected by U.S. regulatory and national health projects than by the economic cycles of our economy. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as ~~rural and~~ 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 ~~customers~~clients often do not have the necessary capital to make investments in information technology. Additionally, in response to these challenges, hospitals have become more selective regarding where they invest capital, resulting in a focus on strategic spending that generates a return on their investment. Despite these challenges, we believe healthcare information technology is often viewed as more strategically beneficial to hospitals than other possible purchases because the ~~technology offers the possibility of a quick return on investment. Information~~ technology also plays an important role in healthcare by improving safety and efficiency and reducing costs. Additionally, we believe most hospitals recognize that they must invest in healthcare information technology to meet current and future regulatory, compliance and government reimbursement requirements.

In recent years, there have been significant changes to provider reimbursement by the U.S. federal government, followed by commercial payers and state governments. There is increasing pressure on healthcare organizations to reduce costs and increase quality while replacing fee-for-service in part by enrolling in an advanced payment model. This pressure could further encourage adoption of healthcare IT and increase demand for business management, consulting, and managed IT services as the future success of these healthcare providers is greatly dependent upon their ability to engage patient populations and to coordinate patient care across a multitude of settings, while optimizing operating efficiency along the way.

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

During 2017, total financing receivables increased by $15.5 million, which had a significant impact on operating cash flow. The increase in financing arrangements was primarily due to two reasons. First, meaningful use stage three ("MU3") installations are primarily financed through short-term payment plans. Second, competitor financing options, primarily through accounts receivables management collections and cloud EHR arrangements, have applied pressure to reduce initial customer capital investment requirements for new EHR installations, leading to the offering of long-term lease options.

We have also historically made our software applications available to ~~customers~~clients through "Software as a Service" or "SaaS" configurations, including our Cloud Electronic Health Record ("Cloud EHR") offering. These offerings are attractive to some ~~customers~~clients because this configuration allows them to obtain access to advanced software products without a significant initial capital outlay. ~~Although the broader enterprise software marketplace has been experiencing an increasing trend of SaaS~~

~~arrangements~~We have experienced a substantial increase in the ~~past few years, this trend has been slower to develop within our market~~prevalence of such SaaS arrangements for new system installations and add-on sales to existing ~~customers. However, we experienced a substantial increase in the prevalence of such arrangements within our system sales arrangements in~~clients since 2015, a trend ~~which continued in 2016 and~~ we expect to continue for the foreseeable future. Unlike our historical perpetual license arrangements under which the related revenue is recognized effectively upon installation, the SaaS arrangements result in revenue being recognized monthly as the services are provided over the term of the arrangement. As a

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result, the effect of this trend on the Company's financial statements is reduced system sales revenues during the period of installation in exchange for increased recurring periodic revenues (reflected in system sales and support revenues) over the term of the SaaS arrangement.

American Recovery and Reinvestment Act of 2009

While ongoing financial challenges facing healthcare organizations have impacted and are expected to continue to impact the ~~rural and~~ community hospitals that comprise our target market, we believe that the ~~financial incentives and penalties offered by~~reduced reimbursement under the American Recovery and Reinvestment Act of 2009 (the "ARRA") for ~~the adoption of~~those providers failing to adopt qualifying EHRs ~~have increased and~~ will continue to support demand for healthcare information technology and will have a positive impact on our business prospects through at least 2018. ~~As of June 30, 2017, incentive payments totaling over $37 billion have been made to aid healthcare organizations in modernizing their operations through~~

While we believe that the acquisition and wide-spread use of healthcare information technology. Eligible hospitals could begin receiving these incentive payments in any year from 2011 through 2015, but the total incentive payment is decreasedexpanded requirements for ~~hospitals that started receiving payments in 2014 and later. Additionally, reimbursements under Medicare have been reduced for those eligible healthcare providers that did not begin to demonstrate~~continued compliance with meaningful use rules have resulted in an expanded replacement market for EHRs, it is uncertain whether revenues generated from this replacement market will be sufficient to offset the impacts of ~~an EHR by October 1, 2014.~~

~~The~~the overall accelerated adoption and increased penetration of EHRs ~~resulting from~~within our target market. As a result, our system sales revenues and profitability may be materially and adversely affected during the ~~ARRA's EHR incentive program has resulted in a narrowing market for new system installations and~~short-term.

Similarly, compliance with the meaningful use rules has accelerated the purchases of incremental applications by our existing clients. Consequently, our penetration rates within our existing customer base ~~to satisfy~~for our current menu of applications have increased significantly under the ~~current meaningful use rules,~~ARRA, thereby ~~also~~significantly narrowing the market for add-on sales to existing ~~customers~~clients. As a result of the announcement from CMS on August 2, 2018 of a final rule that changes the attestation period for ~~meaningful use stage two-related incremental applications. Despite these narrowing markets,~~2019 and 2020 to any continuous 90-day period instead of the previously-required full year attestation period, hospitals now have until October 1, 2019 to install compliant technology in order to meet the requirements of the program during 2019, compared to a deadline of January 1, 2019 under the previous rule. While we expect to continue to benefit from the ARRA's EHR incentive program as the expanded requirements for continued eligibility for incentive payments and related payment adjustments for those healthcare providers not in compliance with meaningful use rules are expected to result in both an expanded replacement market for EHRs and additional orders from our existing customer base to purchase incremental applications necessary to satisfy such expanded requirements, particularly as the stage three meaningful use rules become effective. The stage three requirements are optional for 2017 and 2018, with all providers required to comply withbelieve that the stage three requirements ~~beginning in 2019. However, as~~of the ~~EHR replacement market is not likely to develop rapidly and revenues from~~meaningful use program (re-named "Promoting Interoperability" by such rule) provide a significant opportunity for add-on sales ~~to existing customers for incremental stage three-related applications are not likely to significantly materialize until~~revenues through 2019, the related stage three rules become effective, our system sales revenues and profitability are expected to be materially and adversely affected during the short-term. Although we are pursuing other strategic initiatives designed to result in system sales revenue growth in the future in the form of selective expansion into English-speaking international markets, selective expansion within the 100 to 300 bed hospital market and targeted expansion for our ambulatory solutions, there can be no guarantee that such initiatives will prove successful or will benefit the Company in a sufficiently timely fashion to offset the short-term effects of the aforementioned narrowing markets. On August 2, 2017, the Centers for Medicare and Medicaid Services ("CMS") announced a final rule that effectively delays the requirement for stage three compliance from the first day of 2018 to the first day of 2019. The delay by ~~the~~ CMS is expected to delay some of the contract revenues we previously anticipated and there is a risk of further delays or reductions in the regulatory requirements imposed on hospitals, which could have an adverse effect on our revenues.

~~Health Care Reform~~

~~In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively referred~~Although we are pursuing other strategic initiatives designed to as the "Health Reform Laws." This sweeping legislation implemented changes to the healthcare and health insurance industries from 2010 through 2015, requiring substantially all U.S. citizens and legal residents to have qualifying health insurance coverage startingresult in 2014 and providing the means by which it will be made available to them. The Health Reform Laws have had little direct impact on our internal operation and do not appear to have had a significant impact on the businesses of our hospital customers to date. However, we have not been able to determine at this point whether the ultimate impact will be positive, negative or neutral; it is likely that the Health Reform Laws will affect hospitals differently depending upon the populations they service. Rural and community hospitals typically service higher uninsured populations than larger urban hospitals and rely more heavily on Medicare and Medicaid for reimbursement. It remains to be seen whether the increasesystem sales revenue growth in the ~~insured populations for rural~~future in the form of selective expansion into English-speaking international markets, selective expansion within the 100 to 200 bed hospital market, and continued development of new software applications such as our Business Intelligence solution which provides community ~~hospitals, as well as~~hospital leaders valuable insight into financial, operational, and clinical data, there can be no guarantee that such initiatives will prove successful or will benefit the ~~increase~~Company in ~~Medicare and Medicaid reimbursements under the ARRA for hospitals that implement EHR technology, will be enough~~a sufficiently timely fashion to offset ~~cuts in Medicare and Medicaid reimbursements contained in~~ the ~~Health Reform Laws or as a result~~short-term effects of ~~sequestration or other federal legislation.~~

~~We believe healthcare reform initiatives will continue during~~ the foreseeable future. If adopted, some aspects of previously proposed reforms, such as further reductions in Medicare and Medicaid payments, could adversely affect the businesses of our customers and thereby harm our business.aforementioned narrowing markets.

Results of Operations

~~Despite impressive growth in~~During the six months ended June 30, 2018, we generated revenues of $138.8 million from the sale of our ~~TruBridge~~products and services, ~~which management views as the primary agent for long-term revenue growth for CPSI, revenue challenges faced by our system sales and support operations have resulted in decreased total revenues as,~~compared to $131.8 million during the six months ended June 30, 2017, ~~we generated revenues~~an increase of ~~$131.8 million from the sales of our products and services, compared to $138.1 million during the six months ended June 30, 2016, a decrease of 4.6%. This decrease in revenues~~5% that is primarily attributed to ~~(1) the continuing challenging environment for add-on~~TruBridge client growth. We view sales of TruBridge solutions within our ~~acute care~~existing EHR ~~customer~~client base (2) the exhaustion of migration revenue opportunities for Healthland customers moving from the legacy Classic platform to Healthland’s flagship Centriq platform, (3) the revenue impact of 2016-reported attrition within the Healthland customer base, and (4) decreased installation volumes of AHT’s post-acute EHR solution. Despite the decrease in total revenues,as our leading performance indicator. Our net income for the six months ended June 30, 2018 increased by $2.5 million to $4.3 million from the six months ended June 30, 2017 ~~increased 450.4% due to the realization~~as a result of ~~acquisition-related synergies over the trailing twelve months and the lack~~revenue growth accompanied with improved gross margins of ~~any significant transaction-related costs during~~53%, a 1% increase from the first six months of 2017. ~~This improved profitability, coupled with more cash-advantageous~~Net cash provided by operating activities decreased by $8.1 million to $7.8 million provided from operations during the six months ended June 30, 2018, primarily due to a reduction of short-term liabilities and other changes in working ~~capital, resulted in an improvement in cash flow from operations, increasing from cash used in operations~~capital.

Table of ~~$8.5 million during the first six months of 2016 to cash provided by operations of $15.9 million during the first six months of 2017.~~Contents

The following table sets forth certain items included in our results of operations for the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, expressed as a percentage of our total revenues for these periods:


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

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Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
(In thousands) Amount % Sales Amount % Sales Amount % Sales Amount % Sales
INCOME DATA:
Sales revenues:
System sales and support $ 45,474
67.2 % $ 47,719
69.7 % $ 88,897
67.5 % $ 97,428
70.6 %
TruBridge 22,203
32.8 % 20,696
30.3 % 42,854
32.5 % 40,630
29.4 %
Total sales revenues 67,677
100.0 % 68,415
100.0 % 131,751
100.0 % 138,058
100.0 %
Costs of sales:
System sales and support 18,859
27.9 % 21,886
32.0 % 37,789
28.7 % 44,153
32.0 %
TruBridge 11,933
17.6 % 11,616
17.0 % 23,520
17.9 % 22,903
16.6 %
Total costs of sales 30,792
45.5 % 33,502
49.0 % 61,309
46.5 % 67,056
48.6 %
Gross profit 36,885
54.5 % 34,913
51.0 % 70,442
53.5 % 71,002
51.4 %
Operating expenses:
Product development 9,308
13.8 % 8,179
12.0 % 18,243
13.8 % 15,369
11.1 %
Sales and marketing 7,607
11.2 % 6,717
9.8 % 14,734
11.2 % 13,447
9.7 %
General and administrative 12,921
19.1 % 12,130
17.7 % 24,581
18.7 % 31,168
22.6 %
Amortization of acquisition-related intangibles 2,601
3.8 % 2,624
3.8 % 5,203
3.9 % 4,979
3.6 %
Total operating expenses 32,437
47.9 % 29,650
43.3 % 62,761
47.6 % 64,963
47.1 %
Operating income 4,448
6.6 % 5,263
7.7 % 7,681
5.8 % 6,039
4.4 %
Other income (expense):
Other income 70
0.1 % 69
0.1 % 140
0.1 % 68
— %
Interest expense (1,938 ) (2.9 )% (1,642 ) (2.4 )% (3,745 ) (2.8 )% (3,110 ) (2.3 )%
Total other income (expense) (1,868 ) (2.8 )% (1,573 ) (2.3 )% (3,605 ) (2.7 )% (3,042 ) (2.2 )%
Income before taxes 2,580
3.8 % 3,690
5.4 % 4,076
3.1 % 2,997
2.2 %
Provision for income taxes 993
1.5 % 1,694
2.5 % 2,243
1.7 % 2,664
1.9 %
Net income $ 1,587
2.3 % $ 1,996
2.9 % $ 1,833
1.4 % $ 333
0.2 %

Three Months Ended June 30, ~~2017~~2018 Compared with Three Months Ended June 30, ~~2016~~2017

Revenues. Total revenues for the three months ended June 30, ~~2017 decreased 1.1%, or $0.7~~2018 increased slightly $0.2 million, compared to the three months ended June 30, ~~2016.~~2017.

System sales and support revenues decreased by ~~4.7%~~6%, or ~~$2.2~~$2.7 million, ~~from~~compared to the ~~three months ended June 30, 2016.~~second quarter 2017. System sales and support revenues were comprised of the ~~following for the three months ended June 30, 2017 and 2016.~~following:


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

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

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

Three Months Ended
(In thousands) June 30, 2017 June 30, 2016
Recurring system sales and support revenues ⁽¹⁾
$ 33,109
$ 34,236
Non-recurring system sales and support revenues ⁽²⁾
12,365
13,483
Total system sales and support revenue $ 45,474
$ 47,719

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

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

~~Nonrecurring~~ Non-recurring system sales and support revenues decreased ~~$1.1~~$2.6 million, or ~~8.2%~~21%, ~~primarily~~ as ~~Evident’s~~volatility in the timing of new customer installations coupled with relative weakness in non-MU3 related add-on ~~volumes decreased and~~sales resulted in a decrease in Acute Care EHR non-recurring revenues of $2.5 million, or 22%. We installed our Acute Care EHR solutions at three new hospital clients during the ~~market for Healthland migrations from~~second quarter 2018 (one under a SaaS arrangement, resulting in revenue being recognized ratably over the ~~legacy Classic platform~~contractual term) compared to ~~Healthland’s flagship Centriq platform continues to decrease. Related to Evident’s new system installation volumes, we completed installation of our Thrive EHR solution at~~ ten new hospital clients during the ~~three months ended June 30,~~second quarter 2017 (one ~~of which was~~ under a Cloud EHR arrangement, under which the related costs are all captured in the period of installation with the resulting revenue recognized ratably over the contractual term as the services are provided) compared to fiveSaaS arrangement). The ten new hospital client implementations during the ~~three months ended June 30, 2016 (none of which were under~~second quarter 2017 marked the highest during a ~~Cloud EHR arrangement), with~~quarter since the HHI acquisition, presenting a ~~resulting revenue increase of $2.8 million. Evident’s add-on sales decreased by $0.9 million due to lower installation volumes of Emergency Department Information Systems~~particularly difficult comparison versus the current quarter's results and Thrive Provider EHR. Platform migration opportunities for Healthland customers moving from Classic to Centriq are naturally decreasing over time as we have completed most migrations for this finite population, resulting in a ~~$1.7~~$3.7 million, or 60%, decrease in ~~nonrecurring~~new system implementation revenues. This decrease in new system implementation revenues was partially offset by a $3.4 million increase in MU3 implementations from ~~our Healthland operations as we completed three migrations during the three months ended June 30, 2016 compared to one~~$0.2 million in the ~~three months ended June 30, 2017. These~~second quarter 2017 to $3.6 million in the second quarter 2018. However, the impact on our results of these increased MU3 implementation volumes was muted by relative weakness in non-MU3 related add-on sales as a result of the Company's and clients' emphasis on MU3 certification prior to the October 1, 2019 deadline. Non-recurring Post-acute Care EHR revenues decreased by $0.1 million, or 9%, in the second quarter of 2018 as a result of slowing new installation ~~revenues at Evident and Healthland have been compounded by decreased installations of AHT’s post-acute EHR solution, resulting in a $0.9 million decrease in related revenues.~~bookings due to aggressive competition during our effort to make technological improvements to the AHT product line.

Recurring system sales and support revenues ~~decreased $1.1~~were relatively flat, decreasing slightly from $33.1 million in the second quarter of 2017 to $33.0 million in the second quarter of 2018. Acute Care EHR recurring revenues increased $0.3 million, or ~~3.3%. Our recently acquired~~1%, as new Thrive customer growth and additional support fees for MU3-related add-on sales have outweighed attrition primarily from the Healthland customer ~~base contains a heavy concentration of calendar year-end support and maintenance renewal terms. As a result,~~base. Post-acute Care EHR recurring revenues decreased by $0.5 million, or 9%, due to attrition attributed to the ~~majority of the revenue impact related to Healthland attrition through 2016 customer support terminations did not materialize until the first quarter of 2017.~~aforementioned aggressive competitive environment.

TruBridge revenues increased ~~7.3%~~13%, or ~~$1.5~~$3.0 million, ~~from~~compared to the ~~three months ended June 30, 2016.~~second quarter 2017. Our hospital ~~customers~~clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions, most notably resulting in an expanded customer base for our accounts receivable management services, ~~(increasing 5.2%~~increasing $2.4 million, or 38%, ~~or $0.3 million). Our insurance services revenues have increased 15.7%, or $0.7 million, primarily as~~and our recent acquisition of HHI exposes Rycan’s solutions, which we consider to be best-of-breed, to a broader and more robust sales channel. Our IT managed services revenues have increased 19.5%, or $0.4 million, as we continue to see increasing demand for remote hosting for our acute and post-acute EHR solutions. Our medical coding services, ~~have increased 31.4%~~increasing $1.1 million, or 89%, ~~or $0.3 million, as new key customers have been added.~~ compared to the second quarter 2017. These increases ~~have been~~were partially offset by a ~~12.2%,~~$0.6 million, or ~~$0.1 million,~~52%, decrease in consulting ~~revenues~~services as ~~ICD-10~~consulting opportunities related ~~projects~~to Thrive software add-on sales have decreased ~~based on the related regulatory compliance deadline~~ and ~~decreased implementations of our Computerized Practitioner Order Entry (“CPOE”) and Physician Documentation applications~~medical coding initiatives have ~~limited the related consulting opportunities.~~been completed.

Costs of Sales. Total costs of sales ~~decreased~~increased by ~~8.1%~~4%, or ~~$2.7~~$1.4 million, ~~from~~compared to the second quarter ~~of 2016.~~2017. As a percentage of total revenues, costs of sales ~~decreased from 49.0%~~increased to 49% in the second quarter ~~of 2016~~2018, compared to ~~45.5%~~47% in the second quarter 2017.

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

Costs of Post-acute Care EHR system sales and support decreased by ~~13.8%~~$0.5 million, or 23%, ~~or $3.0 million, from~~compared to the ~~three months ended June 30, 2016~~second quarter 2017, primarily due to ~~decreased equipment~~reduced payroll costs ~~and travel associated with the overall decrease in nonrecurring system sales revenues discussed above, leading to a combined $1.6 million decrease. Payroll and related costs decreased by $1.5~~of $0.2 million, or ~~12.3%~~19%, ~~primarily~~ as the realization of HHI ~~acquisition~~integration synergies over the trailing twelve months ~~have~~has resulted in reduced headcount. Third-party software costs, hardware costs, and travel costs decreased by a ~~decrease in~~

~~associated headcount. As a result,~~total of $0.3 million due to the decreased installation volume mentioned above. The gross margin on Post-acute Care EHR system sales and support increased to ~~58.5%~~72% in the ~~three months ended June 30, 2017 from 54.1%~~second quarter 2018, compared to 67% in the ~~three months ended June 30, 2016.~~second quarter 2017.

Our costs associated with TruBridge sales and support increased ~~2.7%~~13%, or ~~$0.3~~$1.6 million, ~~in the three months ended June 30, 2017~~ with the largest contributing factor being an increase in payroll and related costs of ~~8.7%~~29%, or ~~$0.6~~$2.1 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base. Increased payroll was partially offset by an approximate $0.6 million decrease in cloud hosting costs as a result of moving to in-house resources during the fourth quarter of 2017 for cloud services provided to the HHI customer ~~base and increase capacity in advance of anticipated future increases in demand.~~base. The ~~gross~~gross margin on these services ~~increased to 46.3%~~was 46% in the ~~three months ended June 30, 2017 from 43.9% in the three months ended June 30, 2016. This margin improvement is the result~~second quarters of ~~revenues materializing during the second quarter of 2017 for which the related investments in capacity had been made in prior periods.~~2018 and 2017.

Product ~~Development Costs.~~ Development. Product development ~~expense consists~~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 ~~13.8%~~11%, or ~~$1.1~~$0.9 million, ~~from~~compared to the ~~three months ended June 30, 2016,~~second quarter 2017, as a result of increased headcount dedicated to functionality additions and enhancements across the product lines, as well as integration across product lines.

Sales and ~~Marketing Expenses.~~Marketing. Sales and marketing ~~expense increased 13.2%~~expenses decreased 1%, or ~~$0.9~~$0.1 million, from the three months ended June 30, 2016, with the largest contributing factor being a $0.6 million increase in commission expense resulting from the aforementioned increase in Evident’s new system implementation volumes and related revenues and continued bookings growth for TruBridge. Addingcompared to the ~~increased commission expense was an approximately $0.4 million increase in marketing program expenses~~second quarter 2017, primarily due to ~~more aggressive marketing~~decreased payroll costs of ~~our family of community healthcare companies as we continue~~10%, or $0.3 million, partially offset by increased TruBridge-specific and MU3 commissions expense compared to ~~mature our brand positioning after~~ the ~~HHI acquisition.~~second quarter 2017.

General and ~~Administrative Expenses.~~Administrative. General and administrative expenses increased ~~6.5%~~2%, or $0.3 million, compared to the second quarter 2017, primarily due to a $0.8 million ~~from the three months ended June 30, 2016, mostly due to $1.7~~increase in bad debt expense, a $0.6 million, ofor 17%, increase in employee health costs, and a $0.4 million increase in stock compensation expense ~~associated with a one-time, voluntary severance program that, although initiated during the first quarter of 2017, concluded~~ during the second quarter 2018. Bad debt was negatively impacted by a few of ~~2017. Additionally,~~ our three separate national user conferences held during the second and third quarters of 2016 were combined into a single national user conference across our entire customer base for 2017. This newly combined conference took place during the second quarter of 2017, resulting in an increase in related expenses of $0.4 million. This combined $2.1 million increase in severance and national user conference expenseshospital clients that have not been or may not be able to fulfill their financial obligations, while increased prescription drug utilization drove employee health costs higher. These increases were partially offset by a ~~$0.6~~$1.5 million decrease in ~~legal and accounting primarily as a result of litigation-related insurance proceeds, a $0.4 million decrease in HHI transaction costs, and a $0.5 million decrease in payroll and related costs due~~voluntary severance program expense compared to the ~~realization of synergies during the trailing twelve months from the HHI acquisition.~~second quarter 2017.

Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets ~~remained relatively~~was unchanged ~~from~~compared to the second quarter ~~of 2016.~~2017.

Total Operating Expenses. As a percentage of total revenues, total operating expenses increased to ~~47.9%~~48% in the second quarter ~~of 2017~~2018, compared to ~~43.3%~~47% in the second quarter ~~of 2016.~~2017.

Total Other Income (Expense). Total other income (expense) ~~increased~~decreased from expense of $1.9 million during the second quarter 2017 to expense of $1.6 million during the ~~three months ended June 30, 2016~~second quarter 2018, as our long-term debt interest rate was reduced when our leverage ratio fell below the target ratio coupled with an increase in interest income due to ~~expense~~the expansion of ~~$1.9 million during the three months ended June 30, 2017, as market conditions have resulted in increased interest rates paid on~~long-term payment plans offered to our ~~variable-rate debt obligations.~~clients.

Income Before Taxes. As a result of the foregoing factors, income before taxes decreased by ~~30.1%~~76%, or ~~$1.1~~$2.0 million, ~~from~~compared to the ~~three months ended June 30, 2016.~~second quarter 2017.

Provision for Income Taxes. Our effective ~~income~~ tax ~~rates~~rate for the three months ended June 30, ~~2017 and 2016 were 38.5% and 45.9%, respectively. During~~2018 increased to 46% from 38% for the three months ended June 30, ~~2016 the identification of nondeductible facilitative transaction costs and adjustments in our estimated state~~2017. Our effective tax rate ~~resulted in combined additional income tax expense of $0.4 million, increasing the period's effective tax rate by 11.2%. Conversely, during~~for the three months ended June 30, ~~2017 we experienced~~2018 was heavily impacted by the year-to-date impact of changing state income allocation determinations among our various subsidiaries from entities with lower effective state rates to entities with higher effective state rates. The year-to-date adjustment, when recorded in a ~~shortfall~~three-month period of significantly lower net income before taxes compared to the immediately preceding period, had an outsized impact on our effective tax ~~expense related to restricted stock of $0.2 million that increased~~rate, resulting in a 25% increase in the effective tax rate. This increase was partially offset by the tax benefits of the Tax Cuts and Jobs Act, which reduced our corporate federal rate ~~by 6.1% due~~from 35% to 21% effective at the ~~adoption~~beginning of ~~ASU 2016-09.~~2018.

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Net Income. Net income for the three months ~~ended~~ended June 30, ~~2017~~2018 decreased ~~by $0.4~~by $1.3 million to a$0.3 million, or $0.02 per basic and diluted share, compared with net income of $1.6 million, or $0.11 per basic and diluted share, ~~compared with net income of $2.0 million, or $0.15 per basic and diluted share,~~ for the three months ended June 30, ~~2016.~~2017. Net income represented ~~2.3%~~less than 1% of revenue for the three months ended June 30, ~~2017,~~2018, compared to ~~2.9%~~2% of revenue for the three months ended June 30, ~~2016.~~2017.

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

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

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


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

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

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

Non-recurring system sales and support revenues increased $0.4 million, or 2%, primarily as year-to-date revenue contributions from MU3 implementations have outpaced the negative impact of new system implementation volatility and relative weakness in ~~three reportable segments: (1)~~non-MU3 related add-on sales, resulting in an overall increase in Acute Care EHR ~~(2) Post-acute~~non-recurring revenues of $0.9 million, or 5%. MU3 implementations contributed $7.9 million of Acute Care EHR ~~and (3) TruBridge. See Note 14 above for additional information on~~non-recurring revenue during the first six months of 2018, compared to only $0.2 million during the first six months of 2017. These revenue contributions were partially offset by a $4.1 million, or 44%, decrease in new system implementation revenues, as we installed our ~~segment reporting. The following table presents~~Acute Care EHR solutions at nine new hospital clients during the six months ended June 30, 2018 (two under a ~~summary of our operating segment information for~~SaaS arrangement), compared to thirteen new hospital clients during the ~~three~~six months ended June 30, 2017 (two under a SaaS arrangement). Further mitigating the significant impact of MU3 implementation revenues has been the relative weakness in non-MU3 related add-on sales as a result of the Company's and ~~2016, respectively:~~

Three Months Ended
(In thousands) June 30, 2017 June 30, 2016
Sales revenues:
Acute Care EHR $ 39,394
$ 40,754
Post-acute Care EHR 6,080
6,965
TruBridge 22,203
20,696
Total revenues $ 67,677
$ 68,415

Costs of sales:
Acute Care EHR $ 16,836
$ 19,364
Post-acute Care EHR 2,023
2,522
TruBridge

11,933
11,616
Total costs of sales $ 30,792
$ 33,502

Gross profit:
Acute Care EHR $ 22,558
$ 21,390
Post-acute Care EHR 4,057
4,443
TruBridge

10,270
9,080
Total gross profit $ 36,885
$ 34,913

~~Acute Care EHR~~

~~Acute~~clients' emphasis on MU3 certification prior to the October 1, 2019 deadline. Non-recurring Post-acute Care EHR revenues decreased ~~$1.4~~by $0.6 million, or ~~3.3%~~26%, ~~primarily~~ as ~~Evident’s add-on volumes~~a result of slowing new installation bookings due to aggressive competition during our effort to make technological improvements to the AHT product line.

Recurring system sales and support revenues decreased and the market for Healthland migrations from the legacy Classic platform to Healthland’s flagship Centriq platform continues to decrease. Related to Evident’s new system installation volumes, we completed installation of our Thrive EHR solution at ten new hospital clients$0.8 million, or 1%, during the ~~three~~six months ended June 30, 2018. Acute Care EHR recurring revenues decreased slightly by $0.1 million as a result of 2017 ~~(one~~price freezes for the existing customer base to ease the impact of ~~which was under a Cloud~~MU3 implementation, coupled with attrition primarily from the Healthland customer base, outweighing new customer growth. Post-acute Care EHR ~~arrangement)~~recurring revenues decreased by $0.7 million, or 7%, due to attrition attributed to the aforementioned aggressive competitive environment.

TruBridge revenues increased 17%, or $7.4 million, compared to ~~five during~~ the three months ended June 30, 2016 (none of which were under a Cloud EHR arrangement), with a resulting revenue increase of $2.8 million. Evident’s add-on sales decreased by $0.9 million due to lower installation volumes of Emergency Department Information Systems and Thrive Provider EHR. Platform migration opportunities for Healthland customers moving from Classic to Centriq are naturally decreasing over time as we have completed most migrations for this finite population, resulting in a $1.7 million decrease in nonrecurring revenues from our Healthland operations as we completed three migrations during the three months ended June 30, 2016 compared to one in the threesix months ended June 30, 2017. Recurring Acute Care revenues decreased $1.2 million, or 4.0%. Our recently acquired Healthland customer base contains a heavy concentration of calendar year-end support and maintenance renewal terms. As a result, the majority of the revenue impact related to Healthland attrition through 2016 customer support terminations did not materialize until the first quarter of 2017 and we continued to experience that impact in the second quarter.

Acute Care EHR costs of sales decreased by 13.1%, or $2.5 million, from the second quarter of 2016, primarily due to decreased equipment costs and travel associated with the decrease in nonrecurring sales revenues discussed above, leading to a combined $1.5 million decrease. Payroll and related costs decreased by $1.0 million, or 9.0%, primarily as the realization of HHI acquisition synergies over the trailing twelve months have resulted in a decrease in associated headcount. As a result, the gross margin on Acute Care EHR revenues increased to 57.3% in the three months ended June 30, 2017 from 52.5% in the three months ended June 30, 2016.

~~Post-acute Care EHR~~

~~Post-cute Care EHR revenues decreased by 12.7%, or $0.9 million, from the three months ended June 30, 2016, due to decreased AHT product line installations during the three months ended June 30, 2017.~~

Post-acute Care EHR costs of sales decreased by 19.8%, or $0.5 million, from the three months ended June 30, 2016, primarily due to reduced associated headcount resulting from acquisition-related synergies captured during the trailing twelve months combined with the repurposing of certain individuals to our corporate-wide product development teams.

The gross margin on Post-acute Care EHR revenues increased from 63.8% during the three months ended June 30, 2016 to 66.7% during the three months ended June 30, 2017 due to the aforementioned cost of sales reductions.

~~TruBridge~~

~~TruBridge revenues increased 7.3%, or $1.5 million, from the three months ended June 30, 2016.~~ Our hospital ~~customers~~clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever-increasing administrative burden of operating their own business office functions, most notably resulting in an expanded customer base for our accounts receivable management services, ~~(increasing 5.2%~~increasing $5.2 million, or 42%, ~~or $0.3 million). Our insurance services revenues have increased 15.7%, or $0.7 million, primarily as~~and our recent acquisition of HHI exposes Rycan’s solutions, which we consider to be best-of-breed, to a broader and more robust sales channel. Our IT managed services revenues have increased 19.5%, or $0.4 million, as we continue to see increasing demand for remote hosting for our acute and post-acute EHR solutions. Our medical coding services, ~~have increased 31.4%~~increasing $2.6 million, or 120%, ~~or $0.3 million, as new key customers have been added.~~compared to the six months ended June 30, 2017. These increases ~~have been~~were partially offset by a ~~12.2%~~$0.7 million, or 35%, decrease in consulting services as consulting opportunities related to Thrive software add-on sales have decreased and medical coding initiatives have been completed.

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Costs of Sales. Total costs of sales increased by 3%, or ~~$0.1~~$1.8 million, compared to the six months ended June 30, 2017. As a percentage of total revenues, costs of sales decreased to 47% in the six months ended June 30, 2018, compared to 48% in the six months ended June 30, 2017.

Costs of Acute Care EHR system sales and support decreased by $0.8 million, or 2%, compared to the six months ended June 30, 2017, primarily due to a $1.0 million, or 36%, decrease in ~~consulting revenues as ICD-10 related projects have decreased based on the related regulatory compliance deadline~~equipment costs (which are minimal for MU3 implementations), and decreased ~~implementations~~travel costs of ~~our Computerized Practitioner Order Entry (“CPOE”)~~$1.0 million, or 30%, due to improved implementation techniques, partially offset by a $1.3 million, or 25%, increase in third-party software costs, primarily due to fees for use of CPT codes implemented by the AMA during 2018 that are passed to the customer. The dual effect of increased revenues and ~~Physician Documentation applications have limited~~these beneficial cost improvements resulted in the ~~related consulting opportunities.~~gross margin on Acute Care EHR system sales and support increasing to 55% in the six months ended June 30, 2018 compared to 54% in the six months ended June 30, 2017.

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

Our costs associated with TruBridge ~~increased 2.7%~~sales and support increased 14%, or ~~$0.3~~$3.4 million, ~~in the three months ended June 30, 2017~~ with the largest contributing factor being an increase in payroll and related costs of ~~8.7%~~29%, or ~~$0.6~~$4.3 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer ~~base and increase capacity~~base. Increased payroll was partially offset by an approximate $1.2 million decrease in ~~advance~~cloud hosting costs as a result of ~~anticipated future increases in demand.~~moving to in-house resources during the fourth quarter of 2017 for cloud services provided to the HHI customer base. The gross margin on these services increased to 46.3% in the three months ended June 30, 2017 from 43.9% in the three months ended June 30, 2016. This margin improvement is the result of revenues materializing during the second quarter of 2017 for which the related investments in capacity had been made in prior periods.

~~Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016~~

~~Revenues.~~ ~~Total revenues for the six months ended June 30, 2017 decreased 4.6%, or $6.3 million, compared to the six months ended June 30, 2016.~~

System sales and support revenues decreased by 8.8%, or $8.5 million, from the six months ended June 30, 2016. System sales and support revenues were comprised of the following for the six months ended June 30, 2017 and June 30, 2016:

Six Months Ended
(In thousands) June 30, 2017 June 30, 2016
Recurring system sales and support revenues ⁽¹⁾
66,725
68,735
Non-recurring system sales and support revenues ⁽²⁾
22,172
28,693
Total system sales and support revenue $ 88,897
$ 97,428

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

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

Nonrecurring system sales and support revenues decreased $6.5 million, or 22.7%, primarily as Evident’s system add-on volumes decreased and the market for Healthland migrations from the legacy Classic platform to Healthland’s flagship Centriq platform continues to decrease. Related to Evident’s new system installation volumes, we completed installation of our Thrive EHR solution at thirteen new hospital clients during the six months ended June 30, 2017 (two of which were under a Cloud EHR arrangement) compared to eleven new hospital clients during the six months ended June 30, 2016 (one of which was under a Cloud EHR arrangement), with a resulting revenue increase of $1.4 million. Evident’s add-on sales decreased by $2.6 million due to lower installation volumes of Emergency Department Information Systems and Thrive Provider EHR. Platform migration opportunities for Healthland customers moving from Classic to Centriq are naturally decreasing over time as we have completed most migrations for this finite population, resulting in a $3.0 million decrease in nonrecurring revenues from our Healthland operations as we completed six migrations during the six months ended June 30, 2016 compared to one46% in the six months ended June 30, 2017. These decreased installation revenues at Evident and Healthland have been compounded by decreased installations of AHT’s post-acute EHR solution, resulting in a $1.7 million decrease in related revenues.

Recurring system sales and support revenues decreased $2.0 million, or 2.9%. Our recently acquired Healthland customer base contains a heavy concentration of calendar year-end support and maintenance renewal terms. As a result, the majority of the revenue impact related2018 compared to ~~Healthland attrition through 2016 customer support terminations did not materialize until the first quarter of 2017.~~

TruBridge revenues increased 5.5%, or $2.2 million, from the six months ended June 30, 2016. The current environment has resulted in an expanded customer base for our private pay services (increasing 3.3%, or $0.2 million) and accounts receivable management services (increasing 5.0%, or $0.6 million). Our insurance services revenues have increased 12.0%, or $1.1 million, primarily as our recent acquisition of HHI exposes Rycan’s solutions, which we consider to be best-of-breed, to a broader and more robust sales channel. Our IT managed services revenues have increased 18.5%, or $0.8 million, as we continue to see increasing demand for remote hosting for our acute and post-acute EHR solutions. Our medical coding services have increased 16.9%, or $0.3 million, as new key customers have been added. These increases have been partially offset by a 22.3%, or $0.5 million, decrease in consulting revenues as ICD-10 related projects have decreased based on the related regulatory compliance deadline and decreased implementations of our Computerized Practitioner Order Entry (“CPOE”) and Physician Documentation applications have limited the related consulting opportunities.

~~Costs of Sales~~. Total costs of sales decreased by 8.6%, or $5.7 million, from the six months ended June 30, 2016. As a percentage of total revenues, costs of sales decreased from 48.6% in the six months ended June 30, 2016 to 46.5% in the six months ended June 30, 2017.

Costs of system sales and support decreased by 14.4%, or $6.4 million, from the six months ended June 30, 2016 primarily due to decreased equipment costs and travel associated with the overall decrease in nonrecurring system sales revenues discussed above, leading to a combined $3.2 million decrease. Payroll and related costs decreased by $2.1 million, or 8.7%, primarily as the realization of HHI acquisition synergies over the trailing twelve months have resulted in a decrease in associated headcount. As a result, the gross margin on system sales and support increased to 57.5%45% in the six months ended June 30, 2017, ~~from 54.7% in~~primarily attributed to the ~~six months ended June 30, 2016.~~

Our costs associated with TruBridge increased 2.7%, or $0.6 million, with the largest contributing factor being an increase in payroll and related costs of 8.3%, or $1.1 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base and increase capacity in advance of anticipated future increases in demand. The gross margin on these services increased to 45.1% in the six months ended June 30, 2017 from 43.6% in the six months ended June 30, 2016. This margin improvement is the result of revenues materializing during the second quarterrealization of 2017 ~~for~~bookings to revenue in which the ~~related investments in capacity had been made in prior periods.~~aforementioned accompanying payroll costs constricted margins during 2017.

Product ~~Development Costs.~~ Development. Product development ~~expense consists~~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 ~~18.7%~~10%, or ~~$2.9~~$1.6 million, ~~from~~compared to the six months ended June 30, ~~2016,~~2017, as a result of increased headcount dedicated to functionality additions and enhancements across the product lines, as well as integration across product lines.

Sales and ~~Marketing Expenses.~~Marketing. Sales and marketing ~~expense~~expenses increased ~~9.6%~~3%, or ~~$1.3~~$0.5 million, ~~from~~compared to the six months ended June 30, 2016, with the largest contributing factor being a $0.9 million increase in commission expense resulting from the aforementioned increase in Evident’s new system implementation volumes and related revenues and continued bookings growth for TruBridge. Adding to the increased commission expense was an approximately $0.7 million increase in marketing program expenses2017, primarily due to ~~more aggressive marketing of our family of community healthcare companies as we continue to mature our brand positioning after the HHI acquisition.~~increased TruBridge-specific and MU3 commissions expense.

General and ~~Administrative Expenses.~~Administrative. General and administrative expenses ~~decreased 21.1%~~increased 4%, or ~~$6.6~~$1.0 million, ~~from~~compared to the six months ended June 30, ~~2016,~~2017, primarily due to ~~$8.0~~a $1.2 million increase in ~~HHI transaction costs incurred during the six months ended June 30, 2016 with no such~~bad debt expense and a $1.3 million, or 20%, increase in employee health costs during the six months ended June 30, ~~2017. Adding~~2018. Bad debt was negatively impacted by a few of our hospital clients that have not been or may not be able to ~~the decrease in HHI transaction~~fulfill their financial obligations, while increased prescription drug utilization drove employee health costs ishigher. These notable increases were partially offset by a ~~$0.7~~$1.9 million decrease in costs associated with the employer match portion of our defined contribution retirement plan resulting from changes to plan design to achieve better distribution of employer match throughout the year and a $2.3 million decrease in payroll and related costs duevoluntary severance program expense compared to the realization of synergies during the trailing twelve months from the HHI acquisition. Partially offsetting this combined $11.1 million decrease in HHI transaction costs, employer match expenses, and payroll and related costs has been $2.1 million of expense associated with a one-time, voluntary retirement program that was concluded during the first six months ofended June 30, 2017. Additionally, our three separate national user conferences held during the second and third quarters of 2016 were combined into a single national user conference across our entire customer base for 2017. This newly combined conference took place during the second quarter of 2017, resulting in an increase in related expenses of $0.4 million.

Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets ~~increased by 4.5%, or $0.2 million, from~~was unchanged compared to the six months ended June 30, ~~2016. This is due to seven additional days of amortization during the six months ended June 30, 2017 due to the closing date of the HHI acquisition.~~2017.

Total Operating Expenses. As a percentage of total revenues, total operating expenses ~~increased to 47.6% in the~~remained flat at 46% for both six ~~months ended June 30, 2017 compared to 47.1% in the six months ended June 30, 2016.~~month periods.

Total Other Income (Expense). Total other income (expense) ~~increased~~decreased from ~~expense of $3.0 million during the six months ended June 30, 2016 to~~ expense of $3.6 million during the six months ended June 30, 2017 to expense of $3.4 million during the six months ended June 30, 2018, as ~~market conditions have resulted in~~interest income has increased ~~interest rates paid on~~due to the expansion of long-term payment plans offered to our ~~variable-rate debt obligations.~~clients.

Income Before Taxes. As a result of the foregoing factors, income before taxes increased by ~~36.0%~~59%, or ~~$1.1~~$2.4 million, ~~from~~compared to the six months ended June 30, ~~2016.~~2017.

Provision for Income Taxes. Our effective ~~income~~ tax ~~rates~~rate for the six months ended June 30, ~~2017 and 2016 were 55.0% and 88.9%, respectively. During~~2018 decreased to 34% from 55% for the six months ended June 30, ~~2016 the identification of nondeductible facilitative transaction costs resulted in additional income tax expense of $1.5 million, increasing the period's~~2017. Our effective tax rate for the six months ended June 30, 2018 was impacted by ~~49.1%~~the Tax Cuts and Jobs Act, which reduced our corporate federal rate from 35% to 21% effective at the beginning of 2018. The six months ended June 30, 2018 also included a $0.4 million shortfall tax expense related to stock-based compensation that

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increased the effective rate by 6%. ~~Conversely, during~~During the six months ended June 30, 2017 we experienced a shortfall tax expense related to ~~restricted stock~~stock-based compensation of $0.9 million that increased the effective ~~tax~~ rate by ~~22.6% due to the adoption of ASU 2016-09.~~23%.

Net Income. Net income for the six months ended June 30, ~~2017~~2018 increased by ~~$1.5~~$2.5 million to a net income of $4.3 million, or $0.31 per basic and diluted share, compared with net income of $1.8 million, or $0.13 per basic and diluted share, ~~compared with net income of $0.3 million, or $0.03 per basic and diluted share,~~ for the six months ended June 30, ~~2016.~~2017. Net income represented ~~1.4%~~3% of revenue for the six months ended June 30, ~~2017,~~2018, compared to ~~0.2%~~1% of revenue for the six months ended June 30, ~~2016.~~

~~Results of Operations by Segment.~~ We operate in three reportable segments: (1) Acute Care EHR, (2) Post-acute Care EHR and (3) TruBridge. See Note 14 above for additional information on our segment reporting. The following table presents a summary of our operating segment information for the six months ended June 30, 2017 and 2016, respectively:

Six Months Ended
(In thousands) June 30, 2017 June 30, 2016
Sales revenues:
Acute Care EHR $ 76,525
$ 83,494
Post-acute Care EHR 12,372
13,934
TruBridge 42,854
40,630
Total revenues $ 131,751
$ 138,058

Costs of sales:
Acute Care EHR 33,753
39,250
Post-acute Care EHR 4,036
4,903
TruBridge

23,520
22,903
Total costs of sales $ 61,309
$ 67,056

Gross profit:
Acute Care EHR 42,772
44,244
Post-acute Care EHR 8,336
9,031
TruBridge

19,334
17,727
Total gross profit $ 70,442
$ 71,002

~~Acute Care EHR~~

Acute Care EHR revenues decreased $7.0 million, or 8.3%, primarily as Evident’s system add-on volumes decreased and the market for Healthland migrations from the legacy Classic platform to Healthland’s flagship Centriq platform continues to decrease. Related to Evident’s new system installation volumes, we completed installation of our Thrive EHR solution at thirteen new hospital clients during the six months ended June 30, 2017 (two of which were under a Cloud EHR arrangement) compared to eleven new hospital clients during the six months ended June 30, 2016 (one of which was under a Cloud EHR arrangement), with a resulting revenue increase of $1.4 million. Evident’s add-on sales decreased by $2.6 million due to lower installation volumes of Emergency Department Information Systems and Thrive Provider EHR. Platform migration opportunities for Healthland customers moving from Classic to Centriq are naturally decreasing over time as we have completed most migrations for this finite population, resulting in a $3.0 million decrease in nonrecurring revenues from our Healthland operations as we completed six migrations during the six months ended June 30, 2016 compared to one in the six months ended June 30, 2017. Recurring Acute Care revenues decreased $2.1 million, or 3.6%. Our recently acquired Healthland customer base contains a heavy concentration of calendar year-end support and maintenance renewal terms. As a result, the majority of the revenue impact related to Healthland attrition through 2016 customer support terminations did not materialize until the first quarter of 2017.

Acute Care EHR costs of sales decreased by 14.0%, or $5.5 million, from the six months ended June 30, 2016, primarily due to decreased equipment costs and travel associated with the decrease in nonrecurring sales revenues discussed above, leading to a combined $2.8 million decrease. Payroll and related costs decreased by $1.7 million, or 7.9%, primarily as the realization of HHI acquisition synergies over the trailing twelve months have resulted in a decrease in associated headcount. As a result, the gross margin on Acute Care EHR revenues increased to 55.9% in the six months ended June 30, 2017 from 53.0% in the six months ended June 30, 2016.

~~Post-acute Care EHR~~

~~Post-cute Care EHR revenues decreased by 11.2%, or $1.6 million, from the six months ended June 30, 2016, due to decreased AHT product line installations during the six months ended June 30, 2017.~~

Post-acute Care EHR costs of sales decreased by 17.7%, or $0.9 million, from the six months ended June 30, 2016, primarily due to a $0.4 million decrease in equipment costs and travel expenses associated with the decreased system sales volumes discussed above, coupled with reduced associated headcount resulting from acquisition-related synergies captured during the trailing twelve months combined with the repurposing of certain individuals to our corporate-wide product development teams.

The gross margin on Post-acute Care EHR revenues increased from 64.8% during the six months ended June 30, 2016 to 67.4% during the six months ended June 30, 2017 due to the aforementioned cost of sales reductions.

~~TruBridge~~

TruBridge revenues increased 5.5%, or $2.2 million, from the six months ended June 30, 2016. Our hospital customers 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, resulting in an expanded customer base for our private pay services (increasing 3.3%, or $0.2 million) and accounts receivable management services (increasing 5.0%, or $0.6 million). Our insurance services revenues have increased 12.0%, or $1.1 million, primarily as our recent acquisition of HHI exposes Rycan’s solutions, which we consider to be best-of-breed, to a broader and more robust sales channel. Our IT managed services revenues have increased 18.5%, or $0.8 million, as we continue to see increasing demand for remote hosting for our acute and post-acute EHR solutions. Our medical coding services have increased 16.9%, or $0.3 million, as new key customers have been added. These increases have been partially offset by a 22.3%, or $0.5 million decrease in consulting revenues as ICD-10 related projects have decreased based on the related regulatory compliance deadline and decreased implementations of our Computerized Practitioner Order Entry (“CPOE”) and Physician Documentation applications have limited the related consulting opportunities.

Our costs associated with TruBridge increased 2.7%, or $0.6 million, with the largest contributing factor being an increase in payroll and related costs of 8.3%, or $1.1 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base and increase capacity in advance of anticipated future increases in demand. The gross margin on these services increased to 45.1% in the six months ended June 30, 2017 from 43.6% in the six months ended June 30, 2016. This margin improvement is the result of revenues materializing during the second quarter of 2017 for which the related investments in capacity had been made in prior periods.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, ~~2017,~~2018, our principal sources of liquidity consisted of cash and cash equivalents of ~~$1.7~~$1.5 million and our remaining borrowing capacity under the Amended Revolving Credit Facility ~~(as defined below)~~of $15.3 million, compared to ~~$2.2~~$0.5 million of cash and cash equivalents and $17.0 million of remaining borrowing capacity under the Amended Revolving Credit Facility as of December 31, ~~2016. As noted previously,~~2017. In conjunction with our acquisition of HHI in January 2016, we ~~completed our acquisition of HHI. In conjunction with the acquisition, we~~ entered into ~~a syndicated credit agreement (the "Credit~~the Previous Credit Agreement~~") described further below, with Regions Bank ("Regions") serving as administrative agent,~~ which provided for athe $125 million ~~term loan facility (the "Term~~Previous Term Loan ~~Facility")~~Facility and the $50 million Previous Revolving Credit Facility. On October 13, 2017, the Company entered into the Second Amendment to refinance and decrease the aggregate committed size of the credit facilities from $175 million to $162 million, which included the $117 million Amended Term Loan Facility and the $45 million Amended Revolving Credit Facility. On February 8, 2018, the Company entered into the Third Amendment to increase the aggregate principle amount of the Amended Credit Facilities from $162 million to $167 million, which includes the $117 million Amended Term Loan Facility and a $50 million revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Credit Facilities"). The cash portion of the purchase price for our acquisition of HHI was primarily funded by the $125 million Term Loan Facility and $25 million borrowed under theAmended Revolving Credit Facility.

As of June 30, ~~2017,~~2018, we had ~~$145.3~~$140.1 million in principal amount of indebtedness outstanding under the Amended Credit Facilities.

We believe that our cash and cash equivalents of ~~$1.7~~$1.5 million as of June 30, ~~2017,~~2018, the future operating cash flows of the combined entity, and our remaining borrowing capacity under the Amended Revolving Credit Facility of ~~$23.5~~$15.3 million as of June 30, ~~2017,~~2018, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of filing of this Form 10-Q. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we may be required to obtain additional sources of funds through additional operational improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

Operating Cash Flow Activities

Net cash provided by operating activities ~~increased $24.4~~decreased $8.1 million, from ~~$8.5 million used in operations for the six months ended 2016 to~~ $15.9 million provided by operations for the six months ended ~~2017. This increase~~June 30, 2017 to $7.8 million provided by operations for the six months ended June 30, 2018. The decrease in cash flows provided from operations is primarily due to ~~the aforementioned $1.5~~a $6.3 million ~~increase~~contraction in net income and more cash-advantageous changes in working capital. During the first six months of 2016, we invested heavily in improving the working capital of the HHI entities post-acquisition in order to normalize the aging of vendor payables and improve acquired vendor relationships, resulting in a combined cash outflow of $10.1 million during the first six months of 2016. Comparatively, the timing of vendor payments during the first six months of 2017 resulted in expansion of theseother liabilities ~~and a resulting benefit to cash flows of $6.8 million, for a total beneficial swing in cash flows from these working capital components of $16.9 million.~~

Additionally, our acquisition of HHI in January 2016 included significant deferred revenue balances, the amortization of which benefited revenues during the first six months of 2016 with no corresponding cash benefit. Conversely, deferred revenue balances grew during the six months ended June 30, ~~2017 due~~2018 as a result of the timing of vendor and payroll payments compared to a ~~high volume of advance billings for third party subscriptions, providing cash benefits with no related revenue impact. These deferred revenue dynamics alone resulted~~$6.6 million expansion during the six months ended June 30, 2017. The $2.5 million increase in ~~an $11.3 million improvement in cash flows as displayed in the condensed consolidated statement of cash flows.~~

~~These cash flow improvements have been partially~~net income was mostly offset by ~~an increasing level of customer financing arrangements for the purchase of our EHR systems. The first six months of 2017 saw~~a combined accounts and financing receivables expansion ~~that was $3.7~~of $6.1 million ~~more than such expansion~~ during the ~~first~~ six months ended June 30, 2018. The increase in financing arrangements is primarily due to two reasons. First, meaningful use stage three installations are primarily financed through short-term payment plans. Second, competitor financing options, primarily accounts receivables management collections and cloud EHR arrangements, have applied pressure to reduce initial customer capital investment requirements for new EHR installations, leading to the offering of ~~2016.~~long-term lease options.

Investing Cash Flow Activities

Net cash used in investing activities ~~decreased to $0.5~~remained relatively flat with $0.4 million used in the six months ended June 30, ~~2017 from $151.8~~2018 compared to $0.5 million used during the six months ended June 30, 2016. We utilized cash (net of cash acquired) of $162.6 million for the acquisition of HHI during the six months ended June 30, 2016, partially offset by sales of investments in available-for-sale securities of $10.9 million during this period.2017. We do not anticipate the need for significant capital expenditures during the remainder of ~~2017.~~2018.

Financing Cash Flow Activities

During the six months ended June 30, ~~2017,~~2018, our financing activities used net cash of ~~$15.9~~$6.4 million, as we paid ~~$9.8~~a net $3.6 million in ~~long term~~long-term debt ~~principle~~principal and we declared and paid dividends in the amount of ~~$6.1~~$2.8 million. During the six months ended June 30, 2018, we made a $7.3 million prepayment on the Amended Term Loan Facility by drawing down on the Amended Revolving Credit Facility, in accordance with the excess cash flow mandatory prepayment requirements of the Amended Credit Agreement. Financing cash flow activities ~~provided $139.1~~used $15.9 million during the six months ended June 30, ~~2016,~~2017, primarily due to ~~the proceeds of the aforementioned credit facility of $156.6~~$9.8 million ~~partially offset by $17.2~~paid in long-term debt principal and $6.1 million cash paid in dividends. The decrease in dividends paid is a result of moving to a fixed dividend policy during the fourth quarter of 2017.

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We believe that paying dividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash. However, the declaration of dividends by CPSI is subject to compliance with the terms of our Amended Credit Agreement and the discretion of our Board of Directors, which may decide to change or terminate the Company's dividend

policy at any time. Our Board of Directors will continue to take into account such matters as general business conditions, capital needs, our financial results and such other factors as our Board of Directors may deem relevant.

Credit Agreement

As noted above, in conjunction with our acquisition of HHI in January 2016, we entered into a Credit Agreement which provided for a $125 million Term Loan Facility and a $50 million Revolving Credit Facility. As of June 30, ~~2017,~~2018, we had ~~$118.8~~$105.4 million in principal amount outstanding under the Amended Term Loan Facility and ~~$26.5~~$34.7 million in principal amount outstanding under the Amended Revolving Credit Facility.

~~The Term Loan Facility bears~~ Each of the Amended Credit Facilities continues to bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted LIBOR rate for the relevant interest period, (2) an alternate base rate determined by reference to the greater of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month LIBOR rate plus one percent per annum, or (3) a combination of (1) and (2). The applicable margin ~~will~~ range ~~from 2.25% to 3.50%~~ for LIBOR loans and ~~1.25%~~the letter of credit fee ranges from 2.00% to ~~2.50%~~3.50%. The applicable margin range for base rate loans ranges from 1.00% to 2.50%, in each case based on ~~our~~the Company's consolidated leverage ~~ratio (as defined in~~ratio.

Principal payments with respect to the ~~Credit Agreement). Interest on the outstanding principal of the~~Amended Term Loan Facility will be payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans. Principal payments are due on the last day of each fiscal quarter beginning ~~March~~December 31, ~~2016,~~2017, with quarterly principal payments of approximately ~~$0.8~~$1.46 million ~~in 2016,~~through September 30, 2019, approximately ~~$1.6~~$2.19 million ~~in 2017, approximately $2.3 million in 2018, approximately $3.1 million in 2019~~through September 30, 2021 and approximately ~~$3.9~~$2.93 million ~~in 2020,~~through September 30. 2022, with the ~~remainder due at~~ maturity on ~~January 8, 2021~~October 13, 2022 or such earlier date as the obligations under the Amended Credit Agreement become due and payable pursuant to the terms of the Amended Credit Agreement (the ~~“Maturity Date”~~"Amended Maturity Date").

Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the Adjusted LIBOR rate for the relevant interest period or (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month LIBOR rate plus one percent per annum. The applicable margin will range from 2.25% to 3.50% for LIBOR loans and 1.25% to 2.50% for base rate loans, in each case based on our consolidated leverage ratio. Interest on borrowings under the Revolving Credit Facility is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans. The Revolving Credit Facility includes a $5 million swingline sublimit, with swingline loans bearing interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Amended Revolving Credit Facility is due and payable on the Amended Maturity Date.

The ~~Term Loan Facility and amounts borrowed under the Revolving~~Amended Credit ~~Facility~~Facilities are secured pursuant to a Pledge and Security Agreement, dated January 8, 2016, among the parties identified as obligors therein and Regions, as collateral agent, ~~(the “Security Agreement”),~~ on a first priority basis by a security interest in substantially all of the tangible and intangible assets (subject to certain exceptions) of the Company and certain subsidiaries of the Company, as guarantors (collectively, the “Subsidiary Guarantors”), including certain registered intellectual property and the capital stock of certain of the Company’s direct and indirect subsidiaries. Our obligations under the Amended Credit Agreement are also guaranteed by the Subsidiary Guarantors.

The Amended Credit Agreement, as amended by the Third Amendment, provides incremental facility capacity of $50 million, subject to certain conditions. The Amended Credit Agreement includes a number of restrictive covenants that, among other things and in each case subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and the Subsidiary Guarantors, including the ability to incur additional debt; incur liens and encumbrances; make certain restricted payments, including paying dividends on the Company's equity securities or payments to redeem, repurchase or retire the Company's equity securities (which are subject to our compliance, on a pro forma basis to give effect to the restricted payment, with the fixed charge coverage ratio and consolidated leverage ratio described below); enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with affiliates; and materially alter the business we conduct. ~~In addition,~~The Amended Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio of 1.25:1.00 throughout the duration of such agreement. Under the Amended Credit Agreement, the Company is required to comply with a ~~minimum fixed charge coverage ratio of 1.25:1.0 throughout the duration of the Credit Agreement and a~~ maximum consolidated leverage ratio ~~(as defined in the Credit Agreement, as amended)~~ of ~~3.50:1.0~~3.95:1.00 through ~~September 30,~~December 31, 2017 ~~3.00:1.0~~and 3.50:1.00 from ~~October~~January 1, ~~2017 through September 30,~~ 2018 and ~~2.50:1.0~~ thereafter. The Amended Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. We believe that we were in compliance with the covenants contained in the Amended Credit Agreement as of June 30, ~~2017.~~2018.

~~leverage ratio is no greater than 2.50:1.0, and (iv) beginning with~~ the fiscal ~~year~~years ending December 31, ~~2016,~~2017 and December 31, 2018 and (ii) 50% of excess cash flow (minus certain specified other payments)~~, subject to a step down to 0% of excess cash flow if~~ during the ~~Company’s consolidated leverage ratio is no greater than 2.50:1.0.~~fiscal year ending December 31, 2019 and thereafter. The Company is permitted to voluntarily prepay the ~~Term Loan Facility and amounts borrowed under the Revolving~~Amended Credit ~~Facility~~Facilities at any time without penalty, subject to customary “breakage” costs with respect to prepayments of LIBOR rate loans made on a day other than the last day of any applicable interest period. The excess cash flow mandatory prepayment requirement under the Amended Credit Agreement resulted in a $7.3 million prepayment on the Amended Term Loan Facility during the first quarter of 2018 related to excess cash flow generated by the Company during 2017. This mandatory prepayment was funded by drawing down on the Amended Revolving Credit Facility, as excess cash flow generated by the Company during 2017 was primarily used to voluntarily prepay amounts due under the Amended Revolving Credit Facility.

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Backlog

Backlog consists of revenues we reasonably expect to recognize over the next 12twelve months under all existing ~~contracts.~~contracts, including those with remaining performance obligations that have original expected durations of one year or less and those with fees that are variable in which we estimate future revenues. The revenues to be recognized may relate to a combination of one-time fees for system sales and recurring fees for support and maintenance and TruBridge services. As of June 30, ~~2017,~~2018, we had a ~~total~~twelve-month backlog of approximately ~~$37.2~~$38 million in connection with non-recurring system purchases and approximately ~~$217.2~~$229 million in connection with recurring payments under support and maintenance, Cloud EHR contracts, and TruBridge services. ~~Of the $37.2 million in non-recurring backlog as~~As of June 30, 2017, approximately $16.1 million represents firm orders for incremental applications associated with stage three meaningful use requirements of the ARRA’s EHR incentive program. On August 2, 2017, the CMS announced a final rule that effectively delays the requirement for stage three compliance from the first day of 2018 to the first day of 2019. As a result, we are unable to estimate with a reasonable amount of certainty what amount of the stage three backlog is expected to be recognized as revenue over the next twelve months. As of June 30, 2016, we had a twelve-month backlog of approximately ~~$15.5~~$37 million in connection with non-recurring system purchases and approximately ~~$210.8~~$217 million in connection with recurring payments under support and maintenance and TruBridge services.

Bookings

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


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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements, as defined by Item 303(a)(4) of SEC Regulation S-K, as of June 30, ~~2017.~~2018.

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

Critical Accounting Policies and Estimates

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

In our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, we identified our critical accounting polices related to revenue recognition, allowance for doubtful accounts, allowance for credit losses, and estimates. During the first quarter of 2018, we adopted the new accounting standard codified as Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, and all related amendments and have applied it to all contracts using the modified retrospective method, pursuant to which the cumulative effect of initially applying the new revenue standard is recognized as an adjustment to retained earnings and impacted balance sheet line items as of January 1, 2018, the date of adoption. Refer to Note 2 - Recent Accounting Pronouncements of the Notes to Financial Statements (Part 1, Item 1 of this Form 10-Q) for further discussion.

There have been no other significant changes to these critical accounting policies during the six months ended June 30, ~~2017.~~2018.



Item 3.			Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risk relates primarily to the potential change in the British Bankers Association London Interbank Offered Rate ("LIBOR"). We had ~~$145.3~~$140.1 million of outstanding borrowings under our Amended Credit Facilities with Regions Bank at June 30, ~~2017.~~2018. The Amended Term Loan Facility and Amended Revolving Credit Facility bear interest at a rate per annum equal to an applicable margin plus (1) the Adjusted LIBOR rate for the relevant interest period, (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus one half of one percent per annum and (c) the one month LIBOR rate plus one percent per annum, or (3) a combination of (1) and (2). Accordingly, we are exposed to fluctuations in interest rates on borrowings under the Amended Credit Facilities. A one hundred basis point change in interest rate on our borrowings outstanding as of June 30, ~~2017~~2018 would result in a change in interest expense of approximately ~~$1.5~~$1.4 million annually.

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



Item 4.			Controls and Procedures.

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Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

As previously disclosed under "Item 9A - Controls and Procedures" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, the Company identified a material weakness related to the Company's business combination process. The Company identified deficiencies in its internal controls over review of third-party valuations and properly establishing and accounting for opening balance sheet amounts. The Company has taken actions to remediate the material weakness related to our internal control over financial reporting. We have made improvements to the design of the related controls, including standardized review procedures over third-party valuations. We intend to supplement our in-house accounting and financial reporting functions with third-party consultants with extensive experience in accounting for complex business combinations. However, as the Company did not complete another acquisition, neither we nor our external auditors tested the operating effectiveness of these newly designed controls.

Successful remediation of the material weakness described above requires review and evidence of the effectiveness of the related internal control processes as part of our periodic assessments of our internal control over financial reporting. As we continue to evaluate and work to enhance our internal control over financial reporting, we may determine that additional measures should be taken to address the material weakness described above or other control deficiencies, or that we should modify the remediation plan.

~~Except as noted in the preceding paragraphs, there~~There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate adoption on January 1, 2018. There were no significant changes to our internal controls over financial reporting due to the adoption of the new standard.

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PART II

OTHER INFORMATION



Item 1.			Legal Proceedings.

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



Item 1A.			Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~,2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition or operating results.



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

Not Applicable.



Item 3.			Defaults Upon Senior Securities.

Not applicable.



Item 4.			Mine Safety Disclosures.

Not applicable.



Item 5.			Other Information.

As previously reported, at the 2017 Annual Meeting of Stockholders (the “Annual Meeting”) held on May 11, 2017, the Company’s stockholders approved the 2014 Plan to increase the number of shares of common stock available for grant under the 2014 Plan from 700,000 to 2,100,000 shares. A more detailed summary of the principal features of the 2014 Plan can be found in the Company’s definitive proxy statement for the Annual Meeting, as filed with the Securities and Exchange Commission on March 31, 2017 (the “Proxy”). The foregoing description does not purport to be complete and is qualified in its entirety by reference to such summary and the full text of the 2014 Plan filed as Appendix A to the Proxy and incorporated herein by reference.None.

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~~Item 6.~~	~~Exhibits.~~



~~3.1~~Item 6.			Exhibits.


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

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

~~10.1~~31.1		~~Computer Programs and Systems, Inc. Amended and Restated 2014 Incentive Plan (filed as Appendix A to CPSI's Schedule 14A dated March 31, 2017 and incorporated herein by reference)~~

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

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

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

101		Interactive Data Files for CPSI’s Form 10-Q for the period ended June 30, ~~2017~~2018

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SIGNATURES

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

COMPUTER PROGRAMS AND SYSTEMS, INC.

August 7, 2018

~~COMPUTER PROGRAMS AND SYSTEMS, INC.~~

By:

~~Date: August 8, 2017~~

~~By:~~

/s/ J. Boyd Douglas

J. Boyd Douglas

President and Chief Executive Officer

~~Date: August 8, 2017~~

~~By:~~

/S~~/ Matt J. Chambless~~

~~Matt J. Chambless~~

~~Chief Financial Officer~~

~~Exhibit Index~~

~~No.~~

~~Exhibit~~

August 7, 2018

By:

/S/ Matt J. Chambless

~~3.1~~

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

Matt J. Chambless

~~3.2~~

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

~~10.1~~

~~Computer Programs and Systems, Inc. Amended and Restated 2014 Incentive Plan (filed as Appendix A to CPSI's Schedule 14A dated March 31, 2017 and incorporated herein by reference)~~

~~31.1~~

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

~~31.2~~

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

~~32.1~~

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

~~101~~

~~Interactive Data Files for CPSI’s Form 10-Q for the period ended June 30, 2017~~



(In thousands)	As previously reported		Reclassifications			As reclassified
Sales revenues:
System sales	$	50,561	$	(2,842	)	$	47,719
TruBridge	17,854		2,842			20,696
Costs of sales:
System Sales	23,367		(1,481		)	21,886
TruBridge	9,913		1,703			11,616
Operating expenses:
General and administrative	12,352		(222		)	12,130



(In thousands)	Purchase Price
Cash consideration, net of acquired cash received	$	162,611
Fair value of common stock and options issued as consideration	97,017
Total consideration	$	259,628



(In thousands)	Purchase Price Allocation
Acquired cash	$	5,371
Accounts receivable	5,789
Financing receivables	2,184
Inventories	216
Prepaid expenses	3,228
Property and equipment	1,263
Intangible assets	117,300
Goodwill	168,449
Accounts payable and accrued liabilities	(17,490		)
Deferred taxes, net	(4,010		)
Contingent consideration	(1,620		)
Deferred revenue	(15,681		)
Net assets acquired	$	264,999



(In thousands)	June 30, 2017			December 31, 2016
Term loan facility	$	118,750		$	121,875
Revolving credit facility	26,500			33,000
Capital lease obligation	716			861
Debt obligations	145,966			155,736
Less: unamortized debt issuance costs	(2,566		)	(2,930		)
Debt obligation, net	143,400			152,806
Less: current portion	(7,389		)	(5,817		)
Long-term debt	$	136,011		$	146,989



(In thousands)
2017	$	3,276
2018	9,690
2019	12,750
2020	15,625
2021	104,625
Thereafter	—
	$	145,966