CPSI 2017 Annual Report

43 Costs of Acute Care EHR system sales and support decreased by 8.3%, or $6.2 million, from 2016 primarily due to the realization of planned HHI acquisition synergies over the past two years, coupled with expected declining Healthland installation volumes. As a result, the gross margin on Acute Care EHR system sales and support increased to 58.3% 2017 from 53.0% 2016. Costs of Post-acute Care EHR system sales and support decreased by 22.2%, or $2.1 million, from 2016, primarily due to decreased payroll costs of $1.2 million, or 22.3%, as the realization of HHI acquisition synergies over the trailing twelve months have resulted in a decrease in associated headcount. Third party software costs, hardware costs, and travel costs decreased by a total of $0.9 million due to the decreased installation volume mentioned above. The gross margin on Post-acute Care EHR systems sales and support increased to 68.9% in 2017, from 63.8% in 2016. Our costs of sales associated with TruBridge increased 8.7%, or $4.0 million, in 2017 with the largest contributing factor being an increase in payroll and related costs of 14.0%, or $4.0 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 decreased slightly to 44.0% in 2017 from 44.1% in 2016 as a result of the aforementioned headcount increases to support a growing customer base. Product Development Costs. Product development costs 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 15.8%, or $5.1 million, from 2016, 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. Sales and marketing expense increased 21.4%, or $5.8 million, from 2016, with the largest contributing factor being a $4.9 million increase in commission expense resulting from the aforementioned increase in Evident’s new system implementation and add-on volumes, including Cloud EHR arrangements and related revenues and continued bookings growth for TruBridge. General and Administrative Expenses. General and administrative expenses decreased 11.3%, or $6.0 million, from 2016, primarily due to $8.2 million in HHI transaction costs during 2016 with none in 2017. This decrease was partially offset by an increase of $0.4 million in employee health claims, a $0.6 million increase in stock compensation, and a $1.2 million increase in bad debt expense, as our exposure to financially distressed clients increased during 2017, resulting in increased customer- specific reserves. The proliferation of customer financing has greatly increased our balance sheet risk, necessitating an increase in related general reserves. Amortization of Acquisition-Related Intangibles. Amortization expense associated with acquisition-related intangible assets increased $0.2 million due to the HHI acquisition taking place in January 2016; therefore, a full year of amortization did not occur during 2016. Goodwill Impairment. During the fourth quarter of 2017, the cumulation of events, including anticipated attrition of significant customer accounts and a product development acceleration investment plan in our Post-acute Care EHR software, triggered management to re-assess future discounted cash flow projections for the Post-acute Care EHR reporting unit. A goodwill impairment of $28.0 million was recorded against our Post-acute Care EHR reporting unit as of December 31, 2017. There was not an impairment during 2016. Total Operating Expenses. As a percentage of total revenues, total operating expenses increased to 56.4% in 2017 compared to 46.0% in 2016. Excluding the aforementioned non-cash $28.0 million goodwill impairment expense, as a percentage of total revenues, total operating expenses increased to 46.3% in 2017 compared to 46.0% in 2016. Total Other Income (Expense). Total other expense increased from an expense of $6.4 million during 2016 to an expense of $8.7 million during 2017, as we recognized a $1.3 million loss on extinguishment of debt. We partially expensed the capitalized loan fees associated with our Credit Facilities, which were refinanced during 2017. In addition, market conditions in 2017 have resulted in increased interest rates paid on our variable-rate debt obligations. Income (loss) Before Taxes. As a result of the foregoing factors, income before taxes decreased by 268.8%, or $21.5 million, from 2016. Provision for Income Taxes. Our effective income tax rates for 2017 and 2016 were (29.2)% and 50.8%, respectively. Our effective tax rate for the year ended December 31, 2017 was significantly impacted by tax shortfalls related to stock-based compensation resulting from our adoption of ASU 2016-09, the non-deductible nature of our goodwill impairment charges, and