UNITED STATES
SECURITIES and EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2017June 30, 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-12537
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization)
18111 Von Karman Avenue, Suite 800, Irvine, California (Address of principal executive offices) | 95-2888568 (IRS Employer Identification No.)
92612 (Zip Code) |
(949) 255-2600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.01 Par Value | NXGN | NASDAQ Global Select Market |
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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Small 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 ☒
The number of outstanding shares of the Registrant’s common stock as of January 23, 2018July 22, 2019 was 63,713,92565,381,886 shares.
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
TABLE OF CONTENTS
FORM 10-Q
FOR THE THREE MONTHS ENDED December 31, 2017JUNE 30, 2019
|
| Item |
| Page |
|
|
|
| |
Item 1. |
|
| 3 | |
|
|
| 3 | |
|
|
| 4 | |
|
|
| 5 | |
|
| 6 | ||
Notes to Unaudited Condensed Consolidated Financial Statements |
|
| ||
Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
| 23 |
Item 3. |
|
|
| |
Item 4. |
|
|
| |
|
|
|
| |
Item 1. |
|
|
| |
Item 1A. |
|
|
| |
Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds. |
|
|
Item 3. |
|
|
| |
Item 4. |
|
|
| |
Item 5. |
|
|
| |
Item 6. |
|
|
| |
|
|
|
|
PART I. FINANCIALFINANCIAL INFORMATION
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 23,359 |
|
| $ | 37,673 |
|
| $ | 28,607 |
|
| $ | 33,079 |
|
Restricted cash and cash equivalents |
| 3,393 |
|
|
| 4,916 |
|
|
| 8,183 |
|
|
| 1,443 |
|
Accounts receivable, net |
| 79,416 |
|
|
| 83,407 |
|
|
| 81,748 |
|
|
| 87,459 |
|
Contract assets |
|
| 12,039 |
|
|
| 13,242 |
| |||||||
Inventory |
| 154 |
|
|
| 158 |
|
|
| 72 |
|
|
| 120 |
|
Income taxes receivable |
| 4,082 |
|
|
| 2,679 |
|
|
| 2,882 |
|
|
| 3,682 |
|
Prepaid expenses and other current assets |
| 17,944 |
|
|
| 17,969 |
|
|
| 21,985 |
|
|
| 20,826 |
|
Total current assets |
| 128,348 |
|
|
| 146,802 |
|
|
| 155,516 |
|
|
| 159,851 |
|
Equipment and improvements, net |
| 27,137 |
|
|
| 27,426 |
|
|
| 22,772 |
|
|
| 21,404 |
|
Capitalized software costs, net |
| 23,209 |
|
|
| 13,607 |
|
|
| 38,465 |
|
|
| 37,855 |
|
Operating lease assets |
|
| 41,992 |
|
|
| — |
| |||||||
Deferred income taxes, net |
| 7,197 |
|
|
| 11,265 |
|
|
| 6,207 |
|
|
| 6,194 |
|
Contract assets, net of current |
|
| 3,554 |
|
|
| 3,747 |
| |||||||
Intangibles, net |
| 80,663 |
|
|
| 69,213 |
|
|
| 47,442 |
|
|
| 52,595 |
|
Goodwill |
| 216,530 |
|
|
| 185,898 |
|
|
| 218,771 |
|
|
| 218,771 |
|
Other assets |
| 18,299 |
|
|
| 19,010 |
|
|
| 32,606 |
|
|
| 32,478 |
|
Total assets | $ | 501,383 |
|
| $ | 473,221 |
|
| $ | 567,325 |
|
| $ | 532,895 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 3,069 |
|
| $ | 4,618 |
|
| $ | 5,848 |
|
| $ | 5,432 |
|
Deferred revenue |
| 52,843 |
|
|
| 52,383 |
| ||||||||
Contract liabilities |
|
| 53,963 |
|
|
| 56,009 |
| |||||||
Accrued compensation and related benefits |
| 21,898 |
|
|
| 24,513 |
|
|
| 17,226 |
|
|
| 25,663 |
|
Income taxes payable |
| — |
|
|
| 405 |
|
|
| 57 |
|
|
| 64 |
|
Operating lease liabilities |
|
| 9,744 |
|
|
| — |
| |||||||
Other current liabilities |
| 30,153 |
|
|
| 46,775 |
|
|
| 41,412 |
|
|
| 41,064 |
|
Total current liabilities |
| 107,963 |
|
|
| 128,694 |
|
|
| 128,250 |
|
|
| 128,232 |
|
Deferred revenue, net of current |
| 853 |
|
|
| 1,394 |
| ||||||||
Deferred compensation |
| 6,473 |
|
|
| 6,629 |
|
|
| 6,046 |
|
|
| 5,905 |
|
Line of credit |
| 39,000 |
|
|
| 15,000 |
|
|
| 6,000 |
|
|
| 11,000 |
|
Operating lease liabilities, net of current |
|
| 44,281 |
|
|
| — |
| |||||||
Other noncurrent liabilities |
| 16,354 |
|
|
| 16,461 |
|
|
| 1,918 |
|
|
| 11,812 |
|
Total liabilities |
| 170,643 |
|
|
| 168,178 |
|
|
| 186,495 |
|
|
| 156,949 |
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
| ||||||||
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
| |||||||
Shareholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01 par value; authorized 100,000 shares; issued and outstanding 63,712 and 62,455 shares at December 31, 2017 and March 31, 2017, respectively |
| 637 |
|
|
| 625 |
| ||||||||
$0.01 par value; authorized 100,000 shares; issued and outstanding 65,383 and 64,838 shares at June 30, 2019 and March 31, 2019, respectively |
|
| 654 |
|
|
| 648 |
| |||||||
Additional paid-in capital |
| 240,584 |
|
|
| 228,549 |
|
|
| 268,488 |
|
|
| 264,908 |
|
Accumulated other comprehensive loss |
| (235 | ) |
|
| (358 | ) |
|
| (1,177 | ) |
|
| (1,231 | ) |
Retained earnings (1) |
| 89,754 |
|
|
| 76,227 |
| ||||||||
Retained earnings |
|
| 112,865 |
|
|
| 111,621 |
| |||||||
Total shareholders' equity |
| 330,740 |
|
|
| 305,043 |
|
|
| 380,830 |
|
|
| 375,946 |
|
Total liabilities and shareholders' equity | $ | 501,383 |
|
| $ | 473,221 |
|
| $ | 567,325 |
|
| $ | 532,895 |
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| Three Months Ended June 30, |
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2019 |
|
| 2018 |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license and hardware | $ | 13,131 |
|
| $ | 16,995 |
|
| $ | 40,198 |
|
| $ | 48,966 |
| |||||||
Software related subscription services |
| 24,690 |
|
|
| 22,546 |
|
|
| 73,584 |
|
|
| 63,911 |
| |||||||
Total software, hardware and related |
| 37,821 |
|
|
| 39,541 |
|
|
| 113,782 |
|
|
| 112,877 |
| |||||||
Support and maintenance |
| 40,362 |
|
|
| 39,924 |
|
|
| 123,171 |
|
|
| 116,905 |
| |||||||
Revenue cycle management and related services |
| 21,922 |
|
|
| 20,048 |
|
|
| 64,327 |
|
|
| 62,037 |
| |||||||
Electronic data interchange and data services |
| 23,136 |
|
|
| 21,790 |
|
|
| 69,446 |
|
|
| 65,527 |
| |||||||
Professional services |
| 8,474 |
|
|
| 6,565 |
|
|
| 24,518 |
|
|
| 19,893 |
| |||||||
Recurring | $ | 119,447 |
|
| $ | 120,007 |
| |||||||||||||||
Software, hardware, and other non-recurring |
| 12,414 |
|
|
| 13,193 |
| |||||||||||||||
Total revenues |
| 131,715 |
|
|
| 127,868 |
|
|
| 395,244 |
|
|
| 377,239 |
|
| 131,861 |
|
|
| 133,200 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license and hardware |
| 5,726 |
|
|
| 5,680 |
|
|
| 15,947 |
|
|
| 19,227 |
| |||||||
Software related subscription services |
| 11,693 |
|
|
| 9,345 |
|
|
| 32,822 |
|
|
| 27,107 |
| |||||||
Total software, hardware and related |
| 17,419 |
|
|
| 15,025 |
|
|
| 48,769 |
|
|
| 46,334 |
| |||||||
Support and maintenance |
| 7,525 |
|
|
| 7,299 |
|
|
| 22,583 |
|
|
| 20,903 |
| |||||||
Revenue cycle management and related services |
| 15,401 |
|
|
| 13,462 |
|
|
| 45,615 |
|
|
| 42,052 |
| |||||||
Electronic data interchange and data services |
| 13,581 |
|
|
| 12,662 |
|
|
| 40,313 |
|
|
| 38,232 |
| |||||||
Professional services |
| 7,708 |
|
|
| 5,904 |
|
|
| 22,278 |
|
|
| 19,643 |
| |||||||
Recurring |
| 50,540 |
|
|
| 48,153 |
| |||||||||||||||
Software, hardware, and other non-recurring |
| 6,278 |
|
|
| 7,154 |
| |||||||||||||||
Amortization of capitalized software costs and acquired intangible assets |
| 8,413 |
|
|
| 6,544 |
| |||||||||||||||
Total cost of revenue |
| 61,634 |
|
|
| 54,352 |
|
|
| 179,558 |
|
|
| 167,164 |
|
| 65,231 |
|
|
| 61,851 |
|
Gross profit |
| 70,081 |
|
|
| 73,516 |
|
|
| 215,686 |
|
|
| 210,075 |
|
| 66,630 |
|
|
| 71,349 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| 43,563 |
|
|
| 37,542 |
|
|
| 127,517 |
|
|
| 120,913 |
|
| 40,128 |
|
|
| 44,636 |
|
Research and development costs, net |
| 20,645 |
|
|
| 19,714 |
|
|
| 60,161 |
|
|
| 56,230 |
|
| 22,051 |
|
|
| 22,128 |
|
Amortization of acquired intangible assets |
| 1,956 |
|
|
| 2,568 |
|
|
| 6,015 |
|
|
| 7,889 |
|
| 865 |
|
|
| 1,168 |
|
Impairment of assets |
| 489 |
|
|
| — |
| |||||||||||||||
Restructuring costs |
| 130 |
|
|
| 231 |
|
|
| 130 |
|
|
| 4,685 |
|
| 1,707 |
|
|
| — |
|
Total operating expenses |
| 66,294 |
|
|
| 60,055 |
|
|
| 193,823 |
|
|
| 189,717 |
|
| 65,240 |
|
|
| 67,932 |
|
Income from operations |
| 3,787 |
|
|
| 13,461 |
|
|
| 21,863 |
|
|
| 20,358 |
|
| 1,390 |
|
|
| 3,417 |
|
Interest income |
| 15 |
|
|
| - |
|
|
| 36 |
|
|
| 9 |
|
| 79 |
|
|
| 29 |
|
Interest expense |
| (733 | ) |
|
| (629 | ) |
|
| (2,250 | ) |
|
| (2,445 | ) |
| (472 | ) |
|
| (730 | ) |
Other expense, net |
| (41 | ) |
|
| (4 | ) |
|
| (48 | ) |
|
| (146 | ) | |||||||
Income before provision for income taxes |
| 3,028 |
|
|
| 12,828 |
|
|
| 19,601 |
|
|
| 17,776 |
| |||||||
Provision for income taxes |
| 1,487 |
|
|
| 2,342 |
|
|
| 6,134 |
|
|
| 3,950 |
| |||||||
Other income (expense), net |
| (133 | ) |
|
| 374 |
| |||||||||||||||
Income before provision for (benefit of) income taxes |
| 864 |
|
|
| 3,090 |
| |||||||||||||||
Provision for (benefit of) income taxes |
| (380 | ) |
|
| 442 |
| |||||||||||||||
Net income | $ | 1,541 |
|
| $ | 10,486 |
|
| $ | 13,467 |
|
| $ | 13,826 |
| $ | 1,244 |
|
| $ | 2,648 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax |
| 222 |
|
|
| (89 | ) |
|
| 123 |
|
|
| (182 | ) |
| 54 |
|
|
| (499 | ) |
Unrealized gain on marketable securities, net of tax |
| — |
|
|
| — |
|
|
| — |
|
|
| 10 |
| |||||||
Comprehensive income | $ | 1,763 |
|
| $ | 10,397 |
|
| $ | 13,590 |
|
| $ | 13,654 |
| $ | 1,298 |
|
| $ | 2,149 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
| $ | 0.02 |
|
| $ | 0.04 |
|
Diluted | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
| $ | 0.02 |
|
| $ | 0.04 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 63,706 |
|
|
| 62,093 |
|
|
| 63,287 |
|
|
| 61,645 |
|
| 65,015 |
|
|
| 64,019 |
|
Diluted |
| 63,708 |
|
|
| 62,093 |
|
|
| 63,296 |
|
|
| 61,900 |
|
| 65,353 |
|
|
| 64,054 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
|
| Three Months Ended June 30, 2018 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
| Total |
| |||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance, March 31, 2018 |
|
| 63,995 |
|
|
| 640 |
|
|
| 244,462 |
|
|
| 78,708 |
|
|
| (400 | ) |
|
| 323,410 |
|
Common stock issued under stock plans, net of shares withheld for taxes |
|
| 225 |
|
|
| 2 |
|
|
| (204 | ) |
|
| — |
|
|
| — |
|
|
| (202 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 3,116 |
|
|
| — |
|
|
| — |
|
|
| 3,116 |
|
Cumulative effect adjustment related to the adoption of ASC 606 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,419 |
|
|
| — |
|
|
| 8,419 |
|
Components of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (499 | ) |
|
| (499 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,648 |
|
|
| — |
|
|
| 2,648 |
|
Balance, June 30, 2018 |
|
| 64,220 |
|
|
| 642 |
|
|
| 247,374 |
|
|
| 89,775 |
|
|
| (899 | ) |
|
| 336,892 |
|
|
| Three Months Ended June 30, 2019 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
| Total |
| |||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance, March 31, 2019 |
|
| 64,838 |
|
|
| 648 |
|
|
| 264,908 |
|
|
| 111,621 |
|
|
| (1,231 | ) |
|
| 375,946 |
|
Common stock issued under stock plans, net of shares withheld for taxes |
|
| 545 |
|
|
| 6 |
|
|
| (1,311 | ) |
|
| — |
|
|
| — |
|
|
| (1,305 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 4,891 |
|
|
| — |
|
|
| — |
|
|
| 4,891 |
|
Components of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 54 |
|
|
| 54 |
|
Net income |
|
| — |
|
|
| — |
|
|
|
|
|
|
| 1,244 |
|
|
| — |
|
|
| 1,244 |
|
Balance, June 30, 2019 |
|
| 65,383 |
|
|
| 654 |
|
|
| 268,488 |
|
|
| 112,865 |
|
|
| (1,177 | ) |
|
| 380,830 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended December 31, |
| |||||
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income | $ | 13,467 |
|
| $ | 13,826 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
| 8,017 |
|
|
| 7,562 |
|
Amortization of capitalized software costs |
| 4,409 |
|
|
| 6,626 |
|
Amortization of other intangibles |
| 17,350 |
|
|
| 16,953 |
|
Amortization of debt issuance costs |
| 807 |
|
|
| 807 |
|
Provision for bad debts |
| 5,084 |
|
|
| 2,503 |
|
Provision for inventory obsolescence |
| 55 |
|
|
| 369 |
|
Share-based compensation |
| 8,585 |
|
|
| 5,177 |
|
Deferred income taxes |
| 3,110 |
|
|
| 1,367 |
|
Excess tax benefit from share-based compensation |
| 328 |
|
|
| — |
|
Change in fair value of contingent consideration |
| — |
|
|
| 3,797 |
|
Loss on disposal of equipment and improvements |
| 150 |
|
|
| 452 |
|
Changes in assets and liabilities, net of amounts acquired: |
|
|
|
|
|
|
|
Accounts receivable |
| 960 |
|
|
| 16,005 |
|
Inventory |
| (51 | ) |
|
| (66 | ) |
Accounts payable |
| (2,442 | ) |
|
| (5,983 | ) |
Deferred revenue |
| (709 | ) |
|
| (8,195 | ) |
Accrued compensation and related benefits |
| (3,315 | ) |
|
| (50 | ) |
Income taxes |
| (1,956 | ) |
|
| 18,060 |
|
Deferred compensation |
| (156 | ) |
|
| 381 |
|
Other assets and liabilities |
| 3,082 |
|
|
| 1,832 |
|
Net cash provided by operating activities |
| 56,775 |
|
|
| 81,423 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Additions to capitalized software costs |
| (13,647 | ) |
|
| (6,371 | ) |
Additions to equipment and improvements |
| (7,606 | ) |
|
| (8,242 | ) |
Proceeds from sales and maturities of marketable securities |
| — |
|
|
| 9,291 |
|
Payments for acquisitions, net of cash acquired |
| (58,892 | ) |
|
| — |
|
HealthFusion working capital adjustment payment |
| — |
|
|
| (282 | ) |
Net cash used in investing activities |
| (80,145 | ) |
|
| (5,604 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds from line of credit |
| 50,000 |
|
|
| — |
|
Repayments on line of credit |
| (26,000 | ) |
|
| (80,000 | ) |
Payment of contingent consideration related to acquisitions |
| (18,817 | ) |
|
| — |
|
Proceeds from issuance of shares under employee plans |
| 4,640 |
|
|
| 999 |
|
Payments for taxes related to net share settlement of equity awards |
| (767 | ) |
|
| — |
|
Net cash provided by (used in) financing activities |
| 9,056 |
|
|
| (79,001 | ) |
Net decrease in cash and cash equivalents |
| (14,314 | ) |
|
| (3,182 | ) |
Cash and cash equivalents at beginning of period |
| 37,673 |
|
|
| 27,176 |
|
Cash and cash equivalents at end of period | $ | 23,359 |
|
| $ | 23,994 |
|
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(In thousands)
(Unaudited)
| Nine Months Ended December 31, |
| |||||
| 2017 |
|
| 2016 |
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash paid for income taxes | $ | 5,786 |
|
| $ | 4,455 |
|
Cash refunds from income taxes |
| 1,084 |
|
|
| 19,932 |
|
Cash paid for interest |
| 1,388 |
|
|
| 1,670 |
|
Common stock issued for Mirth share-based contingent consideration |
| - |
|
|
| 9,273 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Tenant improvement allowance from landlord | $ | 1,442 |
|
| $ | 3,094 |
|
Unpaid additions to equipment and improvements |
| 138 |
|
|
| 80 |
|
On April 14, 2017, we acquired Entrada in a transaction summarized as follows: |
|
|
|
|
|
|
|
Fair value of net assets acquired | $ | 35,293 |
|
| $ | — |
|
Cash paid, net of cash acquired | $ | (33,856 | ) |
| $ | — |
|
Liabilities assumed | $ | 1,437 |
|
| $ | — |
|
On August 16, 2017, we acquired EagleDream in a transaction summarized as follows: |
|
|
|
|
|
|
|
Fair value of net assets acquired | $ | 27,895 |
|
| $ | — |
|
Cash paid, net of cash acquired | $ | (25,036 | ) |
| $ | — |
|
Liabilities assumed | $ | 2,859 |
|
| $ | — |
|
|
| Three Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 1,244 |
|
| $ | 2,648 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of capitalized software costs |
|
| 4,125 |
|
|
| 2,257 |
|
Amortization of debt issuance costs |
|
| 177 |
|
|
| 177 |
|
Amortization of other intangibles |
|
| 5,153 |
|
|
| 5,455 |
|
Deferred income taxes |
|
| (13 | ) |
|
| 86 |
|
Depreciation |
|
| 2,092 |
|
|
| 2,393 |
|
Excess tax benefit from share-based compensation |
|
| (189 | ) |
|
| (33 | ) |
Impairment of assets |
|
| 489 |
|
|
| — |
|
Loss on disposal of equipment and improvements |
|
| 41 |
|
|
| 106 |
|
Non-cash operating lease costs |
|
| 1,815 |
|
|
| — |
|
Provision for bad debts |
|
| 606 |
|
|
| 792 |
|
Provision for inventory obsolescence |
|
| — |
|
|
| 10 |
|
Restructuring costs, net of amounts paid |
|
| 1,707 |
|
|
| — |
|
Share-based compensation |
|
| 4,891 |
|
|
| 3,116 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 5,105 |
|
|
| 486 |
|
Contract assets |
|
| 1,396 |
|
|
| 2,998 |
|
Inventory |
|
| 48 |
|
|
| 9 |
|
Accounts payable |
|
| 416 |
|
|
| (1,172 | ) |
Contract liabilities |
|
| (2,046 | ) |
|
| (6,057 | ) |
Accrued compensation and related benefits |
|
| (9,994 | ) |
|
| (11,088 | ) |
Income taxes |
|
| 982 |
|
|
| 624 |
|
Deferred compensation |
|
| 141 |
|
|
| (149 | ) |
Operating lease liabilities |
|
| (2,286 | ) |
|
| — |
|
Other assets and liabilities |
|
| 1,097 |
|
|
| 354 |
|
Net cash provided by operating activities |
|
| 16,997 |
|
|
| 3,012 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to capitalized software costs |
|
| (4,735 | ) |
|
| (4,785 | ) |
Additions to equipment and improvements |
|
| (3,689 | ) |
|
| (2,179 | ) |
Net cash used in investing activities |
|
| (8,424 | ) |
|
| (6,964 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
| — |
|
|
| 20,000 |
|
Repayments on line of credit |
|
| (5,000 | ) |
|
| (13,000 | ) |
Proceeds from issuance of shares under employee plans |
|
| 1,096 |
|
|
| 1,352 |
|
Payments for taxes related to net share settlement of equity awards |
|
| (2,401 | ) |
|
| (1,554 | ) |
Net cash provided by (used in) financing activities |
|
| (6,305 | ) |
|
| 6,798 |
|
Net increase in cash, cash equivalents, and restricted cash |
|
| 2,268 |
|
|
| 2,846 |
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
| 34,522 |
|
|
| 31,218 |
|
Cash, cash equivalents, and restricted cash at end of period |
| $ | 36,790 |
|
| $ | 34,064 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 257 |
|
| $ | 191 |
|
Cash refunds from income taxes |
|
| 1,430 |
|
|
| 367 |
|
Cash paid for interest |
|
| 275 |
|
|
| 286 |
|
Cash paid for amounts included in the measurement of operating lease liabilities |
|
| 2,617 |
|
|
| — |
|
Operating lease assets obtained in exchange for operating lease liabilities |
|
| 5,324 |
|
|
| — |
|
Accrued purchases of equipment and improvements |
|
| — |
|
|
| 92 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
QUALITY SYSTEMS,NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES INDEX
Note | Page | |||
Note 1 | 8 | |||
Note 2 | 9 | |||
Note 3 | 12 | |||
Note 4 | 13 | |||
Note 5 | 14 | |||
Note 6 | 14 | |||
Note 7 | 15 | |||
Note 8 | 15 | |||
Note 9 | 16 | |||
Note 10 | 17 | |||
Note 11 | 18 | |||
Note 12 | 18 | |||
Note 13 | 20 | |||
Note 14 | 20 | |||
Note 15 | 22 |
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation. The condensed consolidated financial statements include the accounts of Quality Systems,NextGen Healthcare, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.
Business Segments. We have determined that the Company operates in one segment as of June 30, 2017. We have made such determination by first identifying our Chief Executive Officer as our chief operating decision maker ("CODM") and considering the measures used by our CODM to allocate resources. Our CODM utilizes consolidated revenue and consolidated operating results to assess performance and make decisions about allocation of resources.
Previously, through the end of fiscal year 2017, we operated under two reportable segments, consisting of the Software and Related Solutions segment and the RCM and Related Services segment, which was consistent with the disaggregated financial information used and evaluated by our CODM to assess performance and make decisions about the allocation of resources. However, as part of our reorganization efforts that were substantially complete as of the end of fiscal year 2017, our internal organizational structure whereby certain functions that formerly existed within each individual operating segment has continued to evolve. Our former Chief Operating Officer was previously responsible for leading the operations of our former RCM and Related Services business while our former Chief Client Officer led our client success organization, consisting of the Software and Related Solutions business and other functions, such as sales and marketing. Upon the resignation of our former Chief Operating Officer in April 2017 and concurrent appointment of our former Chief Client Officer as Chief Operating Officer, our entire portfolio of software and services were aligned under our new Chief Operating Officer in an effort to provide our clients with an even more simplified experience and more effectively deliver a consolidated financial solution to our clients, rather than components of a solution. As a result of such changes in our internal organization structure, the CODM now operates the Company as a single functional organization. The CODM measures company-wide performance by reviewing consolidated revenue and operating results and evaluates the impact of allocating resources to overall profit and margins on a consolidated basis.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements as of December 31, 2017June 30, 2019 and for the three and nine months ended December 31, 2017June 30, 2019 have been prepared in accordance with the requirements of Quarterly Report on Form 10-Q and Article 10 of the Securities and Exchange Commission Regulation S-X and therefore do not include all information and notes which would be presented were such condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.2019. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
References to amounts in the condensed consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Significant Accounting Policies. We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), effective on April 1, 2019 using the cumulative-effect adjustment transition method, as described further below. There have been no other material changes to our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.2019.
Share-Based Compensation. The following table summarizes total share-based compensation expense included in the condensed consolidated statements of comprehensive income for the three and nine months ended December 31, 2017June 30, 2019 and 2016:2018:
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| Three Months Ended June 30, |
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2019 |
|
| 2018 |
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue | $ | 259 |
|
| $ | 144 |
|
| $ | 686 |
|
| $ | 459 |
| $ | 463 |
|
| $ | 233 |
|
Research and development costs |
| 557 |
|
|
| 273 |
|
|
| 1,431 |
|
|
| 690 |
|
| 1,028 |
|
|
| 610 |
|
Selling, general and administrative |
| 2,637 |
|
|
| 1,584 |
|
|
| 6,468 |
|
|
| 4,028 |
|
| 3,400 |
|
|
| 2,273 |
|
Total share-based compensation |
| 3,453 |
|
|
| 2,001 |
|
|
| 8,585 |
|
|
| 5,177 |
|
| 4,891 |
|
|
| 3,116 |
|
Income tax benefit |
| (1,080 | ) |
|
| (718 | ) |
|
| (2,940 | ) |
|
| (1,825 | ) |
| (1,215 | ) |
|
| (753 | ) |
Decrease in net income | $ | 2,373 |
|
| $ | 1,283 |
|
| $ | 5,645 |
|
| $ | 3,352 |
| $ | 3,676 |
|
| $ | 2,363 |
|
Recently Adopted Accounting Pronouncements. Recently adopted accounting pronouncements are discussed below or in the notes, where applicable.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which was intended to improve financial reporting about leasing transactions. The new guidance requires lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. We have implemented the necessary changes to our policies, processes, and internal controls over financial reporting to meet the requirements under the new guidance related to identifying and measuring right-of-use assets and lease liabilities, including related disclosures.
We adopted ASU 2016-02 and its subsequent amendments (together “ASC 842”) using the cumulative-effect adjustment transition method, which is the additional transition method described within ASU 2018-11, Leases (Topic 842): Targeted Improvements, issued by the FASB in July 2018, which allowed us to apply the new lease standard as of April 1, 2019, rather than the beginning of the earliest period presented. We elected the package of practical expedients that permitted us to not reassess: (1) whether any expired contracts are or contain leases; (2) the lease classification for any existing or expired leases, and (3) the initial direct costs for our existing leases.
Upon adoption of ASC 842, we recognized operating lease right-of-use assets of $38,784, operating lease liabilities of $8,873, and long-term operating lease liabilities of $42,114 on our condensed consolidated balance sheet as of April 1, 2019, and corresponding reductions to other current liabilities of $2,342 and other noncurrent liabilities of $9,861 associated with previously recognized deferred rent and remaining lease obligations. There was no cumulative-effect adjustment required to retained earnings. The adoption of ASC 842 did not have a significant effect on our condensed consolidated results of operations or cash flows. Comparative information in this Report has not been adjusted and continues to be reported under the previous lease accounting rules. Refer to Note 4 for additional details.
Recent Accounting Standards.Standards Not Yet Adopted. Recent accounting pronouncements requiring implementation in current or future periods are discussed below or in the notes, where applicable.
In May 2017,August 2018, the FinancialFASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("“ASU 2017-09"2018-15”). ASU 2017-09 clarifies2018-15 aligns the changesrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to termsdevelop or conditions of a share-based payment awardobtain internal-use software (and hosting arrangements that requireinclude an entity to apply modification accounting.internal-use software license). ASU 2017-092018-15 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.2019. Early applicationadoption is permitted, and prospective application is required.including adoption in an interim period. ASU 2017-092018-15 is effective for us in the first quarter of fiscal 2019,2021. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. ASU 2018-13 is effective for us in the first quarter of fiscal 2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step two of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective prospectively for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for us in the fourthfirst quarter of fiscal 2020,2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted in two scenarios as identified in the new standard. ASU 2017-01 is effective for us in the first quarter of fiscal 2019, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 provides guidance on the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 is effective for us in the first quarter of fiscal 2019, and we do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 requires the recognition of current and deferred income taxes for intra-entity asset transfers when the transaction occurs. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-16 is effective for us in the first quarter of fiscal 2019, and we are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to add and clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice related to how such cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 is effective for us in the first quarter of fiscal 2019, and we do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies the accounting for and reporting on share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The amendments in this update are to be applied differently upon adoption with certain amendments being applied prospectively, retrospectively and under a modified retrospective transition method. We adopted ASU 2016-09 in the first quarter of fiscal 2018. As permitted by ASU 2016-09, we have made an accounting policy election to account for forfeitures as they occur, which was adopted on a modified retrospective basis and resulted in a cumulative-effect adjustment of $0.1 million to retained earnings and additional paid-in capital as of April 1, 2017. ASU 2016-09 also eliminates additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, which was adopted on a prospective basis. The requirements to recognize previously unrecognized excess tax benefits on a modified retrospective basis did not have an impact on our consolidated financial statements. Upon adoption of ASU 2016-09, excess tax benefits and tax deficiencies are recognized in the income statement, and the tax effects of exercised or vested awards are treated as discrete items in the period they occur. The provisions of ASU 2016-09 could have an
impact to our future income tax expense, including increased volatility in our effective tax rate on a quarter by quarter basis due to a number of factors, including fluctuations in the stock price and the timing of stock option exercises and vesting of restricted share awards. Additionally, ASU 2016-09 addresses presentation of excess tax benefits and deficiencies and employee taxes paid related to shares withheld for tax withholdings purposes on the statement of cash flows, including a requirement to present excess tax benefits and deficiencies as an operating activity in the same manner as other cash flows related to income taxes on the statement of cash flows, which will be adopted on a prospective basis, and presentation of employee taxes paid related to shares withheld for tax withholdings purposes as a financing activity, which is consistent with our current presentation and thus did not impact our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
In May 2014, the FASB, along with the International Accounting Standards Board, issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards and GAAP. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about revenue and provides improved guidance for multiple element arrangements. In July 2015 decision, the FASB issued ASU 2015-14, Deferral of Effective Date ("ASU 2015-14") to delay the effective date by one year. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Consideration ("ASU 2016-08"). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing ("ASU 2016-10”). In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16 ("ASU 2016-11") and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) –Narrow Scope Improvements and Practical Expedients ("ASU 2016-12"). The new ASUs do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather help to provide further interpretive clarifications on the new guidance in ASU 2014-09. ASU 2014-09, as amended by ASU 2015-14, is effective for us in the first quarter of fiscal 2019. Companies are permitted to adopt this new guidance following either a full retrospective or modified retrospective approach.
We have completed our assessment of the potential impacts to our business processes, systems, and internal controls that could result from the implementation of the new revenue guidance. Based on our assessment, we currently believe that the impact on our consolidated financial statements could be material. We expect that revenue related to hardware, EDI, maintenance, and certain subscriptions would remain substantially unchanged, and we are the process of evaluating the impact of the new revenue guidance on our other revenue streams. Due to the complexity of our revenue recognition, a significant amount of work remains as we continue to evaluate all potential impacts of the new revenue guidance, and develop and implement the necessary changes to our current accounting systems, processes, and internal controls. Accordingly, our preliminary assessments are subject to change. We expect that the new revenue guidance will result in additional complexity to our revenue recognition, including the use of an increased amount of significant judgments and estimates, particularly as it relates to our RCM services revenue, as compared to our current revenue recognition. We preliminarily expect our RCM services revenue to decrease subsequent to the adoption of the new revenue guidance as a larger portion of our RCM fees is expected to be allocated to software and subscriptions revenue.
Additionally, certain incremental costs incurred to obtain contracts with customers, such as sales commissions, are within the scope of the new revenue guidance and are required to be capitalized and amortized to expense over the remaining performance periods of the contracts. Currently, our sales commission are capitalized and amortized to expense over the related period of revenue recognition. Although the amortization period of capitalized sales commissions may differ upon adoption of the new revenue guidance, we do not expect the adoption of this new revenue standard to have a material impact on our consolidated financial statements with respect to the capitalization and amortization of sales commissions.
We currently expect to implement the new revenue guidance when it becomes effective for us in the first quarter of fiscal 2019 utilizing the modified retrospective transition method. Under this transition method, prior period amounts will not be adjusted and the cumulative effect from prior periods of applying the new revenue guidance will be recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings.
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.
2. Revenue from Contracts with Customers
Revenue Recognition and Performance Obligations
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party software products, support and maintenance, managed services, electronic data interchange (“EDI”) and data services, and other non-recurring services, including implementation, training, and consulting services. Our contracts with customers may include multiple performance obligations that consist of various combinations of our software solutions and related services, which are generally capable of being distinct and accounted for as separate performance obligations.
The total transaction price is allocated to each performance obligation within an arrangement based on estimated standalone selling prices.We generally determine standalone selling prices based on the prices charged to customers, except for certain software licenses that are based on the residual approach and certain maintenance customers that are based on substantive renewal rates. In instances where standalone selling price is not observable, such as software licenses included in our revenue cycle management (“RCM”) arrangements, we estimate standalone selling price utilizing an expected cost plus a margin approach. When standalone selling prices are not observable, significant judgment is required in estimating the standalone selling price for each performance obligation.
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services.
We exclude sales tax from the measurement of the transaction price and record revenue net of taxes collected from customers and subsequently remitted to governmental authorities.
2.The following table presents our revenues disaggregated by our major revenue categories and by occurrence:
|
| Three Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Recurring revenues: |
|
|
|
|
|
|
|
|
Subscription services |
| $ | 30,144 |
|
| $ | 28,328 |
|
Support and maintenance |
|
| 39,652 |
|
|
| 41,248 |
|
Managed services |
|
| 25,681 |
|
|
| 26,270 |
|
Electronic data interchange and data services |
|
| 23,970 |
|
|
| 24,161 |
|
Total recurring revenues |
|
| 119,447 |
|
|
| 120,007 |
|
|
|
|
|
|
|
|
|
|
Software, hardware, and other non-recurring revenues: |
|
|
|
|
|
|
|
|
Software license and hardware |
|
| 7,095 |
|
|
| 7,443 |
|
Other non-recurring services |
|
| 5,319 |
|
|
| 5,750 |
|
Total software, hardware and other non-recurring revenues |
|
| 12,414 |
|
|
| 13,193 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 131,861 |
|
| $ | 133,200 |
|
Recurring revenues consist of subscription services, support and maintenance, managed services, and EDI and data services. Software, hardware, and other non-recurring revenues consist of sales of software license and hardware and certain non-recurring services, such as implementation, training, and consulting performed for clients who use our products.
Generally, we recognize revenue for our most significant performance obligations as follows:
Subscription services. Performance obligations involving subscription services, which include annual licenses, are satisfied over time as the customer simultaneously receives and consumes the benefits of the services throughout the contract period. We recognize revenue related to these services ratably over the respective noncancelable contract term.
Support and maintenance. Performance obligations involving support and maintenance are satisfied over time as the customer simultaneously receives and consumes the benefits of the maintenance services provided. Our support and maintenance services may consist of separate performance obligations, such as unspecified upgrades or enhancements and technical support, which are considered stand-ready in nature and can be offered at various points during the service period. Since the efforts associated with the combined support and maintenance services are rendered concurrently and provided evenly throughout the service period, we consider the series of support and maintenance services to be a single performance obligation. Therefore, we recognize revenue related to these services ratably over the respective noncancelable contract term.
Managed services. Managed services consist primarily of RCM and related services, but also includes transcription services and certain other recurring services. Performance obligations associated with RCM services are satisfied over time as the customer simultaneously receives and consumes the benefits of the services executed throughout the contract period. The majority of service fees under our RCM arrangements are variable consideration contingent upon collections by our clients. We estimate the variable consideration which we expect to be entitled to over the noncancelable contract term associated with our RCM service arrangements. The estimate of variable consideration included in the transaction price typically involves estimating the amounts we will ultimately collect on behalf of our clients and the relative fee we charge that is generally calculated as a percentage of those collections. Inputs to these estimates include, but are not limited to, historical service fees and collections amounts, timing of historical collections relative to the timing of when claims are submitted by our clients to their respective payers, macroeconomic trends, and anticipated changes in the number of providers. Significant judgement is required when estimating the total transaction price based on the variable consideration. We may apply certain constraints, when appropriate and permitted, to our estimates around our variable consideration in order to ensure that our estimates do not pose a risk of significantly misstating our revenue in any reporting period. RCM and related services may not be rendered evenly over the contract period as the timing of services are based on customer collections, which may vary throughout the service period. We recognize revenue for RCM based on the amount of collections received throughout the contract term as it most closely depicts our efforts to transfer our service obligations to the customer. Performance obligations related to the transcription services and other recurring services are generally satisfied as the corresponding services are provided and revenue is recognized as such services are rendered.
Electronic data interchange and data services. Performance obligations related to EDI and other transaction processing services are satisfied at the point in time the services are rendered. The transfer of control occurs when the transaction processing services are delivered and the customer receives the benefits from the services provided.
Software license and hardware. Software license and hardware are considered point-in-time performance obligations as control is transferred to customers upon the delivery of the software license and hardware. Our software licenses are considered functional licenses, and revenue recognition generally occurs on the date of contract execution as the customer is provided with immediate access to the license. We generally determine the amount of consideration allocated to the software license performance obligation using the residual approach, except for certain RCM arrangements where the amount allocated to the software license performance obligation is determined based on estimated relative standalone selling prices. For hardware, we recognize revenue upon transfer of such hardware or devices to the customer.
Other non-recurring services. Performance obligations related to other non-recurring services, including implementation, training, and consulting services, are generally satisfied as the corresponding services are provided. Once the services have been provided to the customer, the transfer of control has occurred. Therefore, we recognize revenue as such services are rendered.
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2019, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $492,100, of which we expect to recognize approximately 10% as services are rendered or goods are delivered, 50% over the next 12 months, and the remainder thereafter.
Contract Balances
Contract balances result from the timing differences between our revenue recognition, invoicing, and cash collections. Such contract balances include accounts receivables, contract assets and liabilities, and other customer deposits and liabilities balances. Accounts receivable includes invoiced amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount invoiced to the customer and the right to payment is not solely subject to the passage of time. Contract assets are generally associated with our sales of software licenses, but may also be associated other performance obligations such as subscription services, support and maintenance, annual licenses, and professional services, where control has been transferred to our customers but the associated payments are based on future customer collections (in the case of our RCM service arrangements) or based on future milestone payment due dates. In such instances, the revenue recognized may exceed the amount invoiced to the customer and such balances are included in contract assets since our right to receive payment is not unconditional, but rather is conditional upon customer collections or the continued functionality of the software and our ongoing support and maintenance obligations. Contract liabilities consist mainly of fees invoiced or paid by our clients for which the associated services have not been performed and revenues have not been recognized. Contract assets and contract liabilities are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term on our condensed consolidated balance sheets based on the timing of when we expect to complete the related performance obligations and invoice the customer. Contract liabilities are classified as current on our condensed consolidated balance sheets since the revenue recognition associated to the related customer payments and invoicing is expected to occur within the next twelve months. During the three months ended June 30, 2019 and 2018, we recognized $19,960 and $20,177, respectively, of revenues that were included in the contract liability balance at the beginning of the corresponding periods.
Our contracts with customers do not include any major financing components.
Costs to Obtain or Fulfill a Contract
We capitalize all incremental costs of obtaining a contract with a customer to the extent that such costs are directly related to a contract and expected to be recoverable. Our sales commissions and related sales incentives are considered incremental costs requiring capitalization. Capitalized contract costs are amortized to expense utilizing a method that is consistent with the transfer of the related goods or services to the customer. The amortization period ranges from less than one year up to eight years, based on the period over which the related goods and services are transferred, including consideration of the expected customer renewals and the related useful lives of the products.
Capitalized commissions costs were $19,997 as of June 30, 2019, of which $5,120 is current and included as other current assets and $14,877 is long-term and included within other assets on our condensed consolidated balance sheets, based on the expected timing of expense recognition. During the three months ended June 30, 2019, we recognized $1,662 of commissions expense primarily related to the amortization of capitalized commissions costs, which is included as a selling, general and administrative expense in the condensed consolidated statement of comprehensive income.
3. Fair Value Measurements
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2017June 30, 2019 and March 31, 2017:2019:
| Balance At |
|
| Quoted Prices in Active Markets for |
|
| Significant Other |
|
| Unobservable |
|
| Balance At |
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Unobservable Inputs |
| ||||||||
| December 31, 2017 |
|
| Identical Assets (Level 1) |
|
| Observable Inputs (Level 2) |
|
| Inputs (Level 3) |
|
| June 30, 2019 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) | $ | 23,359 |
|
| $ | 23,359 |
|
| $ | — |
|
| $ | — |
|
| $ | 28,607 |
|
| $ | 28,607 |
|
| $ | — |
|
| $ | — |
|
Restricted cash and cash equivalents |
| 3,393 |
|
|
| 3,393 |
|
|
| — |
|
|
| — |
|
|
| 8,183 |
|
|
| 8,183 |
|
|
| — |
|
|
| — |
|
| $ | 26,752 |
|
| $ | 26,752 |
|
| $ | — |
|
| $ | — |
|
| $ | 36,790 |
|
| $ | 36,790 |
|
| $ | — |
|
| $ | — |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Contingent consideration related to acquisitions |
| $ | 1,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,000 |
| |||||||||||||||
|
| $ | 1,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,000 |
|
| Balance At |
|
| Quoted Prices in Active Markets for |
|
| Significant Other |
|
| Unobservable |
|
| Balance At |
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Unobservable Inputs |
| ||||||||
| March 31, 2017 |
|
| Identical Assets (Level 1) |
|
| Observable Inputs (Level 2) |
|
| Inputs (Level 3) |
|
| March 31, 2019 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) | $ | 37,673 |
|
| $ | 37,673 |
|
| $ | — |
|
| $ | — |
|
| $ | 33,079 |
|
| $ | 33,079 |
|
| $ | — |
|
| $ | — |
|
Restricted cash and cash equivalents |
| 4,916 |
|
|
| 4,916 |
|
|
| — |
|
|
| — |
|
|
| 1,443 |
|
|
| 1,443 |
|
|
| — |
|
|
| — |
|
| $ | 42,589 |
|
| $ | 42,589 |
|
| $ | — |
|
| $ | — |
|
| $ | 34,522 |
|
| $ | 34,522 |
|
| $ | — |
|
| $ | — |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration related to acquisitions | $ | 18,817 |
|
| $ | — |
|
| $ | 18,817 |
|
| $ | — |
|
| $ | 1,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,000 |
|
| $ | 18,817 |
|
| $ | — |
|
| $ | 18,817 |
|
| $ | — |
|
| $ | 1,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,000 |
|
(1) | Cash equivalents consist primarily of money market funds. |
The contingent liability as of June 30, 2019 and March 31, 2019 relates to the acquisition of Inforth Technologies on January 31, 2018, which included contingent consideration up to an additional $4,000 of cash in the form of an earnout, subject to Inforth Technologies achieving certain applicable bookings targets through March 31, 2020. The categorization of the framework used to measure fair value of the contingent consideration liability was considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. We assess the fair value of the contingent consideration liability on a recurring basis and any adjustments to fair value subsequent to the measurement period are reflected in the condensed consolidated statements of comprehensive income as a component of selling, general and administrative expense. Key assumptions included probability-adjusted achievement estimates of applicable bookings targets that were not observable in the market. |
|
We believe that the fair value of other financial assets and liabilities, including accounts receivable, accounts payable, and line of credit, approximate their respective carrying values due to their nominal credit risk.
Non-Recurring Fair Value Measurements
We have certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. During the three and nine months ended December 31, 2017, no adjustments were recorded.
3. Business Combinations
Entrada Acquisition
On April 14, 2017,June 30, 2019, we completedrecorded certain impairments to our acquisition of Entrada, Inc. ("Entrada") pursuant to the terms of the Agreementoperating lease assets and Plan of Merger, dated April 11, 2017 (the "Agreement"). Based in Nashville, TN, Entrada is a leading provider of cloud-based solutions that are reshaping the way care is delivered by leveraging the power of mobile wheneverequipment and wherever care happens. Entrada’s best-in-class mobile application integrates with multiple clinical platforms and all major electronic health record systems. Entrada enables organizations to maximize their existing technology investments while simultaneously enhancing physician and staff productivity. The acquisition of Entrada and its cloud-based, mobile application is part of our commitment to deliver systematic solutions that meet its clients' transforming work requirements to become increasingly nimble and mobile.
The preliminary purchase price totaled $33,958, which included preliminary working capital and other customary adjustments. The acquisition was primarily funded by a draw against our revolving credit agreementimprovements (see Note 7)15).
4. Leases
We accountedhave operating lease agreements for our offices in the Entrada acquisitionUnited States and India with lease periods expiring between 2020 and 2026. ASC 842 requires the recognition of leasing arrangements on the balance sheet as a purchase business combination using the acquisition method of accounting. The preliminary purchase price was allocatedright-of-use assets and liabilities pertaining to the tangiblerights and intangibleobligations created by the leased assets. We determine whether an arrangement is a lease at inception and classify it as finance or operating.All of our existing material leases are classified as operating leases. Our leases do not contain any residual value guarantees.
Right-of-use lease assets acquired and corresponding lease liabilities assumedare recognized at commencement date based on their preliminary estimated fair valuesthe present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, we determine an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the acquisition date. The preliminary fair valueslease commencement date to determine the present value of acquiredfuture lease payments. Our lease terms may include options to extend or terminate the lease. Currently, it is not reasonably certain that we will exercise those options and therefore, we utilize the initial, noncancelable, lease term to calculate the lease assets and corresponding liabilities assumed represent management’s estimatefor all our leases. We have certain insignificant short-term leases with an initial term of fair valuetwelve months or less that are not recorded in our condensed consolidated balance sheets. Operating right-of-use lease assets are classified as operating lease assets on our condensed consolidated balance sheets.
Our lease agreements generally contain lease and are subjectnon-lease components. Non-lease components primarily include payments for maintenance and utilities. We have applied the practical expedient to change if additional information, suchcombine fixed payments for non-lease components with our lease payments for all of our leases and account for them together as changes to deferred taxes and/or working capital, becomes available. We expect to finalizea single lease component, which increases the purchase price allocation as soon as practicable within the measurement period, but not later than one year following the acquisition date.
The preliminary estimated fair valueamount of the acquired tangible and intangibleour lease assets and liabilities assumedcorresponding liabilities. Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities.
Operating lease costs are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of comprehensive income. Total operating lease costs were determined using multiple valuation approaches depending on$2,300 and $2,028 for the typethree months ended June 30, 2019 and 2018, respectively.
Components of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method and the relief from royalty method approach.operating lease costs are summarized as follows:
In connection with the Entrada acquisition, we recorded $15,400 of intangible assets
|
| Three Months Ended |
| |
|
| June 30, 2019 |
| |
Operating lease costs |
| $ | 2,163 |
|
Short-term lease costs |
|
| 26 |
|
Variable lease costs |
|
| 139 |
|
Less: Sublease income |
|
| (28 | ) |
Total operating lease costs |
| $ | 2,300 |
|
Supplemental cash flow information related to customer relationships, trade names and software technology. We are amortizing the Entrada customer relationships over 10 years and trade names and software technology over 5 years. The weighted average amortization period for the total amount of intangible assets acquired is 6.1 years.
The preliminary amount of goodwill represents the excess of the preliminary purchase price over the preliminary net identifiable assets acquired and liabilities assumed. Goodwill primarily represents, among other factors, the value of synergies expected to be realized and the assemblage of all assets that enable us to create new client relationships, neither of which qualify as separate amortizable intangible assets. Goodwill arising from the acquisition of Entrada is not deductible for tax purposes and is allocated to our single reportable segment.
The total preliminary purchase price for the Entrada acquisitionoperating leases is summarized as follows:
Initial purchase price | $ | 34,000 |
|
Preliminary working capital and other adjustments |
| (42 | ) |
Total preliminary purchase price | $ | 33,958 |
|
| April 14, 2017 |
| |
Preliminary fair value of the net tangible assets acquired and liabilities assumed: |
|
|
|
Acquired cash and cash equivalents | $ | 102 |
|
Accounts receivable, net |
| 1,835 |
|
Prepaid expense and other current assets |
| 145 |
|
Equipment and improvements, net |
| 134 |
|
Capitalized software costs, net |
| 364 |
|
Deferred income taxes, net |
| 1,041 |
|
Accounts payable |
| (639 | ) |
Accrued compensation and related benefits |
| (120 | ) |
Deferred revenues |
| (234 | ) |
Other liabilities |
| (444 | ) |
Total preliminary net tangible assets acquired and liabilities assumed |
| 2,184 |
|
Preliminary fair value of identifiable intangible assets acquired: |
|
|
|
Goodwill |
| 16,374 |
|
Software technology |
| 10,500 |
|
Customer relationships |
| 3,300 |
|
Trade name |
| 1,600 |
|
Total preliminary identifiable intangible assets acquired |
| 31,774 |
|
Total preliminary purchase price | $ | 33,958 |
|
|
| Three Months Ended |
| |
|
| June 30, 2019 |
| |
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 2,617 |
|
Operating lease assets obtained in exchange for operating lease liabilities |
|
| 5,324 |
|
The pro forma effectsAs of the Entrada acquisition would not have been material to the Company's resultsJune 30, 2019, our operating leases had a weighted average remaining lease term of operations5.2 years and are therefore not presented.
EagleDream Health Acquisition
On August 16, 2017, we completed the acquisitiona weighted average discount rate of EagleDream Health, Inc. ("EagleDream") pursuant to the Agreement and Plan of Merger (the “Merger Agreement"), dated July 31, 2017. Headquartered in Rochester, NY, EagleDream is a cloud-based analytics company that drives meaningful insight across clinical, financial and administrative data to optimize practice performance.
The preliminary purchase price totaled $25,609, which included preliminary working capital and other customary adjustments. The acquisition was partially funded by a draw against our revolving credit agreement (see Note 7)4.2%.
We accounted for the EagleDream acquisition as a purchase business combination using the acquisition method of accounting. The preliminary purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values Future minimum aggregate lease payments under operating leases as of the acquisition date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value andJune 30, 2019 are subject to change if additional information, such as changes to deferred taxes and/or working capital, becomes available. We expect to finalize the purchase price allocation as soon as practicable within the measurement period, but not later than one year following the acquisition date.
The preliminary estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method and the relief from royalty method approach.
In connection with the EagleDream acquisition, we recorded $13,400 of intangible assets related to customer relationships and software technology. We are amortizing the EagleDream customer relationships over 8 years and software technology over 5 years. The weighted average amortization period for the total amount of intangible assets acquired is 5.1 years.
The preliminary amount of goodwill represents the excess of the preliminary purchase price over the preliminary net identifiable assets acquired and liabilities assumed. Goodwill primarily represents, among other factors, the value of synergies expected to be realized and the assemblage of all assets that enable us to create new client relationships, neither of which qualify as separate amortizable intangible assets. Goodwill arising from the acquisition of EagleDream is not deductible for tax purposes and is allocated to our single reportable segment.
The total preliminary purchase price for the EagleDream acquisition is summarized as follows:
Initial purchase price | $ | 26,000 |
|
Preliminary working capital and other adjustments |
| (391 | ) |
Total preliminary purchase price | $ | 25,609 |
|
For the year ended March 31, |
|
|
|
|
2020 (remaining nine months) |
| $ | 8,759 |
|
2021 |
|
| 11,951 |
|
2022 |
|
| 11,372 |
|
2023 |
|
| 10,948 |
|
2024 |
|
| 9,044 |
|
Thereafter |
|
| 8,344 |
|
Total future lease payments |
|
| 60,418 |
|
Less interest |
|
| (6,393 | ) |
Total lease liabilities |
| $ | 54,025 |
|
| August 16, 2017 |
| |
Preliminary fair value of the net tangible assets acquired and liabilities assumed: |
|
|
|
Acquired cash and cash equivalents | $ | 573 |
|
Accounts receivable, net |
| 217 |
|
Prepaid expense and other current assets |
| 20 |
|
Accounts payable |
| (115 | ) |
Accrued compensation and related benefits |
| (271 | ) |
Deferred revenues |
| (394 | ) |
Deferred income taxes, net |
| (1,957 | ) |
Other liabilities |
| (122 | ) |
Total preliminary net tangible assets acquired and liabilities assumed |
| (2,049 | ) |
Preliminary fair value of identifiable intangible assets acquired: |
|
|
|
Goodwill |
| 14,258 |
|
Software technology |
| 12,800 |
|
Customer relationships |
| 600 |
|
Total preliminary identifiable intangible assets acquired |
| 27,658 |
|
Total preliminary purchase price | $ | 25,609 |
|
Future minimum lease payments (including interest) under non-cancelable operating leases as of March 31, 2019 are summarized as follows:
For the year ended March 31, |
|
|
|
|
2020 |
| $ | 10,511 |
|
2021 |
|
| 10,701 |
|
2022 |
|
| 10,161 |
|
2023 |
|
| 9,660 |
|
2024 |
|
| 7,730 |
|
Thereafter |
|
| 8,097 |
|
Total obligations and commitments |
| $ | 56,860 |
|
The pro forma effectsAs of June 30, 2019, we have not entered any material leases, which are not reflected in the EagleDream acquisition would not have been material to the Company's results of operations and are therefore not presented.table above.
4.
5. Goodwill
We test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. We will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. We have
As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not identified any events or circumstancesthat the fair value of goodwill is less than its carrying amount. The qualitative assessment includes consideration of factors such as margin of fair values of the reporting units as of December 31, 2017the most recent quantitative impairment assessment compared to the relative carrying value of net assets for each reporting unit. We assess for potential adverse changes in fair value since the most recent quantitative impairment assessment by considering changes in macroeconomic variables, changes in the industry in which we operate, and relevant company-specific factors. If we conclude that would require an interimit is more likely than not that the fair value is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair values of goodwill with its carrying value. If the carrying amount of goodwill exceeds its fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of goodwill with its carrying value. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. As of June 30, 2019, our qualitative assessment indicated that it was more likely than not that the fair value of goodwill exceeded its net carrying value and, therefore, additional impairment testing was not deemed necessary.
We do not amortize goodwill as it has been determined to have an indefinite useful life. The carrying amount of goodwill as of December 31, 2017 was $216,530, which reflects the acquisitions of Entradaboth June 30, 2019 and EagleDream (see Note 3). The carrying amount of goodwill as of March 31, 20172019 was $185,898.$218,771.
5.6. Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows, and reflects the acquisitions of Entrada and EagleDream (see Note 3):follows:
| December 31, 2017 |
|
| June 30, 2019 |
| ||||||||||||||||||||||
| Customer |
|
| Trade Name |
|
| Software |
|
|
|
|
|
| Customer |
|
| Software |
|
|
|
|
| |||||
| Relationships |
|
| and Contracts |
|
| Technology |
|
| Total |
|
| Relationships |
|
| Technology |
|
| Total |
| |||||||
Gross carrying amount | $ | 54,450 |
|
| $ | 7,080 |
|
| $ | 91,110 |
|
| $ | 152,640 |
|
| $ | 32,400 |
|
| $ | 93,000 |
|
| $ | 125,400 |
|
Accumulated amortization |
| (33,955 | ) |
|
| (3,118 | ) |
|
| (34,904 | ) |
|
| (71,977 | ) |
|
| (18,690 | ) |
|
| (59,268 | ) |
|
| (77,958 | ) |
Net intangible assets | $ | 20,495 |
|
| $ | 3,962 |
|
| $ | 56,206 |
|
| $ | 80,663 |
|
| $ | 13,710 |
|
| $ | 33,732 |
|
| $ | 47,442 |
|
| March 31, 2017 |
|
| March 31, 2019 |
| ||||||||||||||||||||||
| Customer |
|
| Trade Name |
|
| Software |
|
|
|
|
|
| Customer |
|
| Software |
|
|
|
|
| |||||
| Relationships |
|
| and Contracts |
|
| Technology |
|
| Total |
|
| Relationships |
|
| Technology |
|
| Total |
| |||||||
Gross carrying amount | $ | 50,550 |
|
| $ | 5,480 |
|
| $ | 67,810 |
|
| $ | 123,840 |
|
| $ | 54,450 |
|
| $ | 94,310 |
|
| $ | 148,760 |
|
Accumulated amortization |
| (28,972 | ) |
|
| (2,088 | ) |
|
| (23,567 | ) |
|
| (54,627 | ) |
|
| (39,875 | ) |
|
| (56,290 | ) |
|
| (96,165 | ) |
Net intangible assets | $ | 21,578 |
|
| $ | 3,392 |
|
| $ | 44,243 |
|
| $ | 69,213 |
|
| $ | 14,575 |
|
| $ | 38,020 |
|
| $ | 52,595 |
|
During the three months ended June 30, 2019, we retired $23,360 of fully amortized intangible assets. Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the condensed consolidated statements of comprehensive income was $1,956$865 and $2,568$1,168 for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively. Amortization expense related to software technology recorded as cost of revenue was $4,127$4,288 and $3,007$4,287 for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively.
Amortization expense related to customer relationships and trade name and contracts was $6,015 and $7,889 for the nine months ended December 31, 2017 and 2016, respectively. Amortization expense related to software technology was $11,335 and $9,064 for the nine months ended December 31, 2017 and 2016, respectively.
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of December 31, 2017:June 30, 2019:
| Amortization Expense Recorded As: |
|
| Estimated Remaining Amortization Expense |
| ||||||||||||||||||
| Operating Expense |
|
| Cost of Revenue |
|
| Total |
|
| Operating Expense |
|
| Cost of Revenue |
|
| Total |
| ||||||
For the year ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 (remaining three months) | $ | 1,922 |
|
| $ | 4,128 |
|
| $ | 6,050 |
| ||||||||||||
2019 |
| 5,577 |
|
|
| 16,511 |
|
|
| 22,088 |
| ||||||||||||
2020 |
| 4,580 |
|
|
| 16,511 |
|
|
| 21,091 |
| ||||||||||||
2020 (remaining nine months) |
| $ | 2,595 |
|
| $ | 12,864 |
|
| $ | 15,459 |
| |||||||||||
2021 |
| 3,731 |
|
|
| 12,628 |
|
|
| 16,359 |
|
|
| 2,803 |
|
|
| 13,268 |
|
|
| 16,071 |
|
2022 |
| 2,593 |
|
|
| 4,840 |
|
|
| 7,433 |
|
|
| 2,273 |
|
|
| 5,480 |
|
|
| 7,753 |
|
2023 and beyond |
| 6,054 |
|
|
| 1,588 |
|
|
| 7,642 |
| ||||||||||||
2023 |
|
| 1,866 |
|
|
| 1,760 |
|
|
| 3,626 |
| |||||||||||
2024 |
|
| 1,548 |
|
|
| 180 |
|
|
| 1,728 |
| |||||||||||
2025 and beyond |
|
| 2,625 |
|
|
| 180 |
|
|
| 2,805 |
| |||||||||||
Total | $ | 24,457 |
|
| $ | 56,206 |
|
| $ | 80,663 |
|
| $ | 13,710 |
|
| $ | 33,732 |
|
| $ | 47,442 |
|
6.7. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
Gross carrying amount | $ | 115,202 |
|
| $ | 104,948 |
|
| $ | 64,517 |
|
| $ | 59,782 |
|
Accumulated amortization |
| (91,993 | ) |
|
| (91,341 | ) |
|
| (26,052 | ) |
|
| (21,927 | ) |
Net capitalized software costs | $ | 23,209 |
|
| $ | 13,607 |
|
| $ | 38,465 |
|
| $ | 37,855 |
|
Amortization expense related to capitalized software costs was $1,838$4,125 and $1,807$2,257 for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively, and is recorded as cost of revenue in the condensed consolidated statements of comprehensive income.
Amortization expense related to capitalized software costs was $4,409 and $6,626 for the nine months ended December 31, 2017 and 2016, respectively.
The following table presents the remaining estimated amortization of capitalized software costs as of December 31, 2017.June 30, 2019. The estimated amortization is comprised of (i) amortization of released products and (ii) the expected amortization for products that are not yet available for sale based on their estimated economic lives and projected general release dates.
For the year ended March 31, |
|
|
|
|
|
|
|
2018 (remaining three months) | $ | 2,500 |
| ||||
2019 |
| 10,500 |
| ||||
2020 |
| 6,100 |
| ||||
2020 (remaining nine months) |
| $ | 15,800 |
| |||
2021 |
| 3,500 |
|
|
| 14,000 |
|
2022 |
| 609 |
|
|
| 7,200 |
|
2023 |
|
| 1,465 |
| |||
Total | $ | 23,209 |
|
| $ | 38,465 |
|
7.8. Line of Credit
On January 4, 2016,March 29, 2018, we entered into a $250,000$300,000 amended and restated revolving credit agreement (“Credit(the “Credit Agreement”) with JP MorganJPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain other agents and lenders. The Credit Agreement is secured by substantially all ofreplaces our existing and future property and material domestic subsidiaries. prior $250,000 revolving credit agreement originally entered into on January 4, 2016 (“Original Credit Agreement”). The Credit Agreement provides a subfacility of up to $10,000 for letters of credit and a subfacility of up to $10,000 for swing-line loans. loans and also includes a $100,000 accordion feature that provides us with the ability to obtain up to $400,000 in the aggregate of revolving credit commitments and/or term loans upon satisfaction of certain conditions.
The Credit Agreement matures on January 4, 2021March 29, 2023 and the full balance of the revolving loans and all other obligations under the agreement must be paid at that time. In addition, we are required to prepay the revolving loan balance if at any time the aggregate principal amount outstanding under the Credit Agreement exceeds the aggregate commitments thereunder. The Credit Agreement is secured by substantially all of our existing and future property. The revolving loans under the Credit Agreement will be available for letters of credit, permitted acquisitions, working capital and general corporate purposes. We were in compliance with all financial and non-financial covenants under the Credit Agreement as of December 31, 2017.June 30, 2019.
As of December 31, 2017,June 30, 2019, we had $39,000$6,000 in outstanding loans and $211,000$294,000 of unused credit under the Credit Agreement. As of March 31, 2017,2019, we had $15,000$11,000 in outstanding loans under the Credit Agreement.
Interest expense related to the Credit Agreement was $463$294 and $359$550 for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively. Amortization of deferred debt issuance costs was $269$177 for both the three months ended December 31, 2017June 30, 2019 and 2016.2018.
Interest expense related to the Credit Agreement was $1,390 and $1,631 for the nine months ended December 31, 2017 and 2016, respectively. Amortization of deferred debt issuance costs was $807 for both the nine months ended December 31, 2017 and 2016, respectively.
8.9. Composition of Certain Financial Statement Captions
Accounts receivable may include billed amounts invoiced for undelivered productswhere the right to receive payment is unconditional and services at each period end.only subject to the passage of time. Undelivered products and services are included as a component of the deferred revenuecontract liabilities balance on the accompanying condensed consolidated balance sheets.
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
Accounts receivable, gross | $ | 88,437 |
|
| $ | 93,377 |
|
| $ | 86,209 |
|
| $ | 93,513 |
|
Sales return reserve |
| (5,580 | ) |
|
| (7,213 | ) | ||||||||
Allowance for doubtful accounts |
| (3,441 | ) |
|
| (2,757 | ) |
|
| (4,461 | ) |
|
| (6,054 | ) |
Accounts receivable, net | $ | 79,416 |
|
| $ | 83,407 |
|
| $ | 81,748 |
|
| $ | 87,459 |
|
Inventory is comprised of computer systems and components.
Prepaid expenses and other current assets are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
Prepaid expenses | $ | 16,409 |
|
| $ | 14,884 |
|
| $ | 16,028 |
|
| $ | 15,548 |
|
Capitalized commissions costs |
|
| 5,120 |
|
|
| 4,816 |
| |||||||
Other current assets |
| 1,535 |
|
|
| 3,085 |
|
|
| 837 |
|
|
| 462 |
|
Prepaid expenses and other current assets | $ | 17,944 |
|
| $ | 17,969 |
|
| $ | 21,985 |
|
| $ | 20,826 |
|
Equipment and improvements are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
Computer equipment | $ | 26,886 |
|
| $ | 22,014 |
|
| $ | 29,283 |
|
| $ | 28,923 |
|
Internal-use software |
| 14,359 |
|
|
| 13,053 |
|
|
| 19,383 |
|
|
| 17,084 |
|
Furniture and fixtures |
| 11,448 |
|
|
| 10,472 |
|
|
| 11,714 |
|
|
| 11,660 |
|
Leasehold improvements |
| 16,231 |
|
|
| 16,360 |
|
|
| 15,589 |
|
|
| 15,150 |
|
Equipment and improvements, gross |
| 68,924 |
|
|
| 61,899 |
|
|
| 75,969 |
|
|
| 72,817 |
|
Accumulated depreciation and amortization |
| (41,787 | ) |
|
| (34,473 | ) |
|
| (53,197 | ) |
|
| (51,413 | ) |
Equipment and improvements, net | $ | 27,137 |
|
| $ | 27,426 |
|
| $ | 22,772 |
|
| $ | 21,404 |
|
The current portion of deferred revenuesOther assets are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
| ||
Professional services | $ | 21,887 |
|
| $ | 21,889 |
|
Software license, hardware and other |
| 12,251 |
|
|
| 12,680 |
|
Support and maintenance |
| 9,436 |
|
|
| 9,691 |
|
Software related subscription services |
| 9,269 |
|
|
| 8,123 |
|
Deferred revenue | $ | 52,843 |
|
| $ | 52,383 |
|
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||
Capitalized commission costs |
| $ | 14,877 |
|
| $ | 14,781 |
|
Deposits |
|
| 5,123 |
|
|
| 5,318 |
|
Debt issuance costs |
|
| 2,656 |
|
|
| 2,834 |
|
Other noncurrent assets |
|
| 9,950 |
|
|
| 9,545 |
|
Other assets |
| $ | 32,606 |
|
| $ | 32,478 |
|
Accrued compensation and related benefits are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
| ||
Payroll, bonus and commission | $ | 13,198 |
|
| $ | 15,836 |
|
Vacation |
| 8,700 |
|
|
| 8,677 |
|
Accrued compensation and related benefits | $ | 21,898 |
|
| $ | 24,513 |
|
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||
Accrued vacation |
| $ | 10,319 |
|
| $ | 9,893 |
|
Accrued bonus |
|
| 4,825 |
|
|
| 11,598 |
|
Accrued commissions |
|
| 1,479 |
|
|
| 3,418 |
|
Accrued payroll |
|
| 603 |
|
|
| 754 |
|
Accrued compensation and related benefits |
| $ | 17,226 |
|
| $ | 25,663 |
|
Other current and noncurrent liabilities are summarized as follows:
| December 31, 2017 |
|
| March 31, 2017 |
|
| June 30, 2019 |
|
| March 31, 2019 |
| ||||
Care services liabilities |
| $ | 8,183 |
|
|
| 1,443 |
| |||||||
Sales returns reserves and other customer liabilities |
|
| 7,234 |
|
|
| 7,838 |
| |||||||
Customer credit balances and deposits | $ | 4,406 |
|
| $ | 4,124 |
|
|
| 3,865 |
|
|
| 3,988 |
|
Care services liabilities |
| 3,393 |
|
|
| 4,957 |
| ||||||||
Accrued hosting costs |
|
| 3,234 |
|
|
| 4,674 |
| |||||||
Accrued employee benefits and withholdings |
|
| 2,795 |
|
|
| 2,426 |
| |||||||
Accrued consulting and outside services |
|
| 2,635 |
|
|
| 3,874 |
| |||||||
Accrued self insurance expense |
| 2,880 |
|
|
| 1,697 |
|
|
| 2,604 |
|
|
| 2,225 |
|
Accrued consulting and outside services |
| 2,384 |
|
|
| 2,496 |
| ||||||||
Deferred rent and lease obligations |
| 2,228 |
|
|
| 2,427 |
| ||||||||
Accrued outsourcing costs |
|
| 2,194 |
|
|
| 2,128 |
| |||||||
Accrued EDI expense |
| 2,025 |
|
|
| 2,490 |
|
|
| 1,944 |
|
|
| 2,037 |
|
Contingent consideration and other liabilities related to acquisitions |
|
| 1,000 |
|
|
| 1,000 |
| |||||||
Accrued royalties |
| 1,891 |
|
|
| 2,033 |
|
|
| 657 |
|
|
| 3,090 |
|
Accrued outsourcing costs |
| 1,853 |
|
|
| 1,588 |
| ||||||||
Sales tax payable |
|
| 641 |
|
|
| 509 |
| |||||||
Accrued legal expense |
| 1,560 |
|
|
| 853 |
|
|
| 551 |
|
|
| 699 |
|
Accrued hosting costs |
| 973 |
|
|
| 401 |
| ||||||||
Employee benefit plan withholdings |
| 655 |
|
|
| 739 |
| ||||||||
Sales tax payable |
| 601 |
|
|
| 448 |
| ||||||||
Contingent consideration and other liabilities related to acquisitions |
| — |
|
|
| 18,817 |
| ||||||||
Deferred rent and related lease obligations |
|
| — |
|
|
| 2,196 |
| |||||||
Other accrued expenses |
| 5,304 |
|
|
| 3,705 |
|
|
| 3,875 |
|
|
| 2,937 |
|
Other current liabilities | $ | 30,153 |
|
| $ | 46,775 |
|
| $ | 41,412 |
|
| $ | 41,064 |
|
|
|
|
|
|
|
|
| ||||||||
Deferred rent and lease obligations | $ | 11,116 |
|
| $ | 11,402 |
| ||||||||
Uncertain tax positions |
| 4,890 |
|
|
| 4,762 |
| ||||||||
Other liabilities |
| 348 |
|
|
| 297 |
| ||||||||
Other noncurrent liabilities | $ | 16,354 |
|
| $ | 16,461 |
|
9.
10. Income Taxes
The benefit of income taxes in the three months ended June 30, 2019 was $380 and the provision for income taxes in the three months ended December 31, 2017 and 2016June 30, 2018 was $1,487 and $2,342, respectively.$442. The effective tax rates were 49.1%44.0% benefit and 18.3%14.3% for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively. The provision for income taxes for the nine months ended December 31, 2017 and 2016 was $6,134 and $3,950, respectively. The effective tax rates were 31.3% and 22.2% for the nine months ended December 31, 2017 and 2016, respectively. The increasedecrease in the effective tax rate for the three and nine months ended December 31, 2017June 30, 2019 compared to the prior year periodsperiod was primarily due to a one-time
revaluationthe increased net benefit of deferred and foreign transition taxes, which was a result of new tax reform legislation enacted on December 22, 2017, as described further below. This increase in the effective tax rate was offset by a favorable benefit due to an increase in the research and development creditclaimed on our recently filed tax return.credits and stock option windfall partially offset by unfavorable impact of other nondeductible expenses.
The deferred tax assets and liabilities are presented net in the accompanying condensed consolidated balance sheets as noncurrent. We expect to receive the full benefit of the deferred tax assets recorded, with the exception of certain state credits, and state net operating loss carryforwards, and foreign accumulated minimum tax credits, for which we have recorded a valuation allowance.
Uncertain tax positions
We had liabilities of $4,890$3,206 and $4,762$2,894 for unrecognized tax benefits related to various federal, state and local income tax matters as of December 31, 2017June 30, 2019 and March 31, 2017,2019, respectively. If recognized, this amount would reduce our effective tax rate.
We are no longer subject to United States federal income tax examinations for tax years before fiscal year ended 2014.2015. With a few exceptions, we are no longer subject to state or local income tax examinations for tax years before fiscal year ended 2013.2014. We do not anticipate the total unrecognized tax benefits to significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.
United States Tax Reform
On December 22, 2017, the President of the United States signed and enacted into law H.R. 1 (the “Tax Reform”). This new tax legislation, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions that will impact our Company. Below is a summary of the provisions of the Tax Reform that we believe will be most impactful to our Company.
We are subject to the provisions of FASB Accounting Standards Codification 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The Tax Reform reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018, and thus we have revised our estimated annual effective tax rate to reflect the change in the federal statutory rate by using a blended rate of 31.5% for the annual period ended March 31, 2018. As a result of the enacted reduction in the federal corporate income tax rate, we recorded a one-time, non-cash increase to income tax expense for the three and nine months ended December 31, 2017 related to the remeasurement of certain deferred tax assets and liabilities. The resulting $3,095 decrease in net deferred tax assets was reasonably estimated and based on the tax rates at which they are expected to reverse in the future. We are currently in the process of analyzing certain aspects of the Tax Reform and continue to refine our calculations, which include, but are not limited to, computing the full year remeasurement of net deferred tax assets.
The Tax Reform also required a one-time transition tax based on total post-1986 foreign cumulative earnings and profits previously deferred from United States federal taxation, which was reasonably estimated at December 31, 2017 and recorded as a one-time income tax expense of $1,354 in the current period. This liability is expected to be paid with our annual tax returns for the fiscal year ended March 31, 2018. We will continue to analyze the calculation of cumulative foreign earnings and finalize the amounts held in cash or other specified assets.
We have recorded the provisional impacts of the Tax Reform at December 31, 2017 based on our most reasonable estimates, as noted above. The Tax Reform legislation includes various other provisions with effective dates for the Company beginning April 1, 2018 and beyond. For other changes that impact business related income, exclusions, deductions and credits with effective dates for our fiscal year beginning April 1, 2018, we will continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Reform. We will continue to analyze the provisions of the Tax Reform to fully assess the impact on our consolidated financial statements and expect to provide additional details in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.
10.11. Earnings per Share
The dual presentation of “basic” and “diluted” earnings per share is provided below. Share amounts below are in thousands.
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Earnings per share — Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 1,541 |
|
| $ | 10,486 |
|
| $ | 13,467 |
|
| $ | 13,826 |
|
| $ | 1,244 |
|
| $ | 2,648 |
|
Weighted-average shares outstanding — Basic |
| 63,706 |
|
|
| 62,093 |
|
|
| 63,287 |
|
|
| 61,645 |
|
|
| 65,015 |
|
|
| 64,019 |
|
Net income per common share — Basic | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
|
| $ | 0.02 |
|
| $ | 0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 1,541 |
|
| $ | 10,486 |
|
| $ | 13,467 |
|
| $ | 13,826 |
|
| $ | 1,244 |
|
| $ | 2,648 |
|
Weighted-average shares outstanding |
| 63,706 |
|
|
| 62,093 |
|
|
| 63,287 |
|
|
| 61,645 |
|
|
| 65,015 |
|
|
| 64,019 |
|
Effect of potentially dilutive securities |
| 2 |
|
|
| - |
|
|
| 9 |
|
|
| 255 |
|
|
| 338 |
|
|
| 35 |
|
Weighted-average shares outstanding — Diluted |
| 63,708 |
|
|
| 62,093 |
|
|
| 63,296 |
|
|
| 61,900 |
|
|
| 65,353 |
|
|
| 64,054 |
|
Net income per common share — Diluted | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
|
| $ | 0.02 |
|
| $ | 0.04 |
|
The computation of diluted net income per share does not include 3,228639 and 2,7852,853 options to acquire shares of common stock for the three and nine months ended December 31, 2017,June 30, 2019 and June 30, 2018, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
The computation of diluted net income per share does not include 3,054 and 3,015 options to acquire shares of common stock for the three and nine months ended December 31, 2016, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
11.12. Share-Based Awards
Employee Stock Option and Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance units (including performance options) and other share-based awards. The 2005 Plan provides that our employees and directors may, at the discretion of the Board of Directors ("Board") or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2005 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the 2005 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2005 Plan, awards under the 2005 Plan will fully vest under certain circumstances. The 2005 Plan expired on May 25, 2015. As of December 31, 2017,June 30, 2019, there were 689,260264,420 outstanding options under the 2005 Plan.
In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which 11,500,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-based awards. In August 2017, our shareholders approved an amendment to our 2015 Equity Incentive Plan, (the “Amended 2015 Plan”), to, among other items, increase the number of shares of common stock reserved for issuance thereunder by 6,000,000. The Amended 2015 Plan provides that our employees and directors may, at the discretion of the Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the Amended 2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the Amended 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the Amended 2015 Plan, awards under the Amended 2015 Plan will fully vest under certain circumstances. As of December 31, 2017,June 30, 2019, there were 3,134,3752,792,705 outstanding options, 1,601,5801,946,725 outstanding shares of restricted stock awards, 86,18746,375 outstanding shares of performance stock awards, and 9,269,8585,020,749 shares available for future grant under the Amended 2015 Plan.
The following table summarizes the stock option transactions during the ninethree months ended December 31, 2017:June 30, 2019:
|
|
|
|
|
| Weighted- |
|
| Weighted- |
|
|
|
|
| ||
|
|
|
|
|
| Average |
|
| Average |
|
| Aggregate |
| |||
|
|
|
|
|
| Exercise |
|
| Remaining |
|
| Intrinsic |
| |||
|
| Number of |
|
| Price |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| per Share |
|
| Life (years) |
|
| (in thousands) |
| ||||
Outstanding, April 1, 2017 |
|
| 2,885,415 |
|
| $ | 15.41 |
|
|
| 6.2 |
|
| $ | 3,150 |
|
Granted |
|
| 1,479,000 |
|
|
| 14.56 |
|
|
| 7.8 |
|
|
|
|
|
Exercised |
|
| (216,405 | ) |
|
| 16.62 |
|
|
| 6.0 |
|
| $ | 119 |
|
Forfeited/Canceled |
|
| (324,375 | ) |
|
| 17.93 |
|
|
| 4.7 |
|
|
|
|
|
Outstanding, December 31, 2017 |
|
| 3,823,635 |
|
| $ | 15.73 |
|
|
| 6.3 |
|
| $ | 733 |
|
Vested and expected to vest, December 31, 2017 |
|
| 3,401,964 |
|
| $ | 15.90 |
|
|
| 6.3 |
|
| $ | 654 |
|
Exercisable, December 31, 2017 |
|
| 923,480 |
|
| $ | 19.96 |
|
|
| 4.4 |
|
| $ | 190 |
|
|
|
|
|
|
| Weighted- |
|
| Weighted- |
|
|
|
|
| ||
|
|
|
|
|
| Average |
|
| Average |
|
| Aggregate |
| |||
|
|
|
|
|
| Exercise |
|
| Remaining |
|
| Intrinsic |
| |||
Employee Stock Options Summary |
| Number of |
|
| Price |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| per Share |
|
| Life (years) |
|
| (in thousands) |
| ||||
Outstanding, March 31, 2019 |
|
| 3,166,525 |
|
| $ | 15.36 |
|
|
| 5.5 |
|
| $ | 7,040 |
|
Exercised |
|
| (36,300 | ) |
|
| 12.52 |
|
|
| 3.7 |
|
| $ | 85 |
|
Forfeited/Canceled |
|
| (38,700 | ) |
|
| 27.67 |
|
|
| 1.6 |
|
|
|
|
|
Expired |
|
| (34,400 | ) |
|
| 43.04 |
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2019 |
|
| 3,057,125 |
|
| $ | 14.88 |
|
|
| 5.4 |
|
| $ | 15,915 |
|
Vested and expected to vest, June 30, 2019 |
|
| 2,801,387 |
|
| $ | 14.90 |
|
|
| 5.3 |
|
| $ | 14,575 |
|
Exercisable, June 30, 2019 |
|
| 1,491,953 |
|
| $ | 15.06 |
|
|
| 4.8 |
|
| $ | 7,718 |
|
We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
Expected term |
| 5.6 - 6.1 years |
|
| 6.3 years |
|
| 5.6 - 6.1 years |
|
| 6.0 - 6.6 years |
|
Expected volatility |
| 37.0% - 37.5% |
|
| 37.1% |
|
| 37.0% - 37.7% |
|
| 36.9% - 37.4% |
|
Expected dividends |
| 0.0% |
|
| 0.0% |
|
| 0.0% |
|
| 0.0% |
|
Risk-free rate |
| 2.1% - 2.2% |
|
| 1.5% |
|
| 1.9% - 2.2% |
|
| 1.2% - 1.5% |
|
The weighted-average grant date fair value of stock options granted during the nine months ended December 31, 2017 and 2016 was $5.59 and $4.92 per share, respectively.
During the nine months ended December 31, 2017, a total of 1,479,000 options to purchase shares of common stock were granted under the Amended 2015 Plan at an exercise price equal to the market price of our common stock on the date of grant, as summarized below:
Option Grant Date |
| Number of Shares |
|
| Exercise Price |
|
| Vesting Terms (1) |
| Expiration | ||
June 13, 2017 |
|
| 249,000 |
|
| $ | 16.37 |
|
| Four Years |
| June 13, 2025 |
May 24, 2017 |
|
| 60,000 |
|
| $ | 14.57 |
|
| Four Years |
| May 24, 2025 |
August 4, 2017 |
|
| 25,000 |
|
| $ | 16.13 |
|
| Four Years |
| August 4, 2025 |
October 31, 2017 |
|
| 915,000 |
|
| $ | 14.07 |
|
| Four Years |
| October 31, 2025 |
December 4, 2017 |
|
| 230,000 |
|
| $ | 14.38 |
|
| Four Years |
| December 4, 2025 |
Fiscal year 2018 grants |
|
| 1,479,000 |
|
|
|
|
|
|
|
|
|
|
|
Non-vested stock option award activity during the ninethree months ended December 31, 2017June 30, 2019 is summarized as follows:
|
|
|
|
|
| Weighted- |
| |
|
|
|
|
|
| Average |
| |
|
|
|
|
|
| Grant-Date |
| |
|
| Number of |
|
| Fair Value |
| ||
|
| Shares |
|
| per Share |
| ||
Outstanding, April 1, 2017 |
|
| 2,073,295 |
|
| $ | 5.09 |
|
Granted |
|
| 1,479,000 |
|
|
| 5.59 |
|
Vested |
|
| (442,690 | ) |
|
| 4.86 |
|
Forfeited/Canceled |
|
| (209,450 | ) |
|
| 4.57 |
|
Outstanding, December 31, 2017 |
|
| 2,900,155 |
|
| $ | 5.16 |
|
|
|
|
|
|
| Weighted- |
| |
|
|
|
|
|
| Average |
| |
|
|
|
|
|
| Grant-Date |
| |
Non-Vested Stock Option Award Summary |
| Number of |
|
| Fair Value |
| ||
|
| Shares |
|
| per Share |
| ||
Outstanding, March 31, 2019 |
|
| 1,845,855 |
|
| $ | 5.52 |
|
Vested |
|
| (276,283 | ) |
|
| 5.41 |
|
Forfeited/Canceled |
|
| (4,400 | ) |
|
| 6.62 |
|
Outstanding, June 30, 2019 |
|
| 1,565,172 |
|
| $ | 5.54 |
|
As of December 31, 2017, $12,861June 30, 2019, $7,072 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average period of 3.22.1 years. This amount does not include the cost of new options that may be granted in future periods or any changes in our forfeiture percentage. The total fair value of options vested during the ninethree months ended December 31, 2017 and 2016June 30, 2019 was $2,154 and $1,189, respectively.$1,494.
Restricted stock awards activity during the ninethree months ended December 31, 2017June 30, 2019 is summarized as follows:
|
|
|
|
|
| Weighted- |
| |||||||||
|
|
|
|
|
| Average |
|
|
|
|
|
| Weighted- |
| ||
|
|
|
|
|
| Grant-Date |
|
|
|
|
|
| Average |
| ||
|
| Number of |
|
| Fair Value |
|
|
|
|
|
| Grant-Date |
| |||
Restricted Stock |
| Shares |
|
| per Share |
|
| Number of |
|
| Fair Value |
| ||||
Outstanding, April 1, 2017 |
|
| 902,948 |
|
| $ | 12.92 |
| ||||||||
|
| Shares |
|
| per Share |
| ||||||||||
Outstanding, March 31, 2019 |
|
| 1,715,958 |
|
| $ | 16.29 |
| ||||||||
Granted |
|
| 1,140,374 |
|
|
| 15.50 |
|
|
| 623,705 |
|
|
| 19.25 |
|
Vested |
|
| (344,659 | ) |
|
| 12.66 |
|
|
| (373,038 | ) |
|
| 15.75 |
|
Canceled |
|
| (97,083 | ) |
|
| 14.10 |
|
|
| (19,900 | ) |
|
| 16.21 |
|
Outstanding, December 31, 2017 |
|
| 1,601,580 |
|
| $ | 14.82 |
| ||||||||
Outstanding, June 30, 2019 |
|
| 1,946,725 |
|
| $ | 17.35 |
|
Share-based compensation expense related to restricted stock awards was $2,333$3,296 and $1,054$1,920 for the three months ended December 31, 2017June 30, 2019 and 2016, respectively. Share-based compensation expense related to restricted stock awards was $6,079 and $2,571 for the nine months ended December 31, 2017 and 2016,2018, respectively.
The weighted-average grant date fair value for the restricted stock awards was estimated using the market price of the common stock on the date of grant. The fair value of the restricted stock awards is amortized on a straight-line basis over the vesting period, which is generally between one to threefour years.
As of December 31, 2017, $19,034June 30, 2019, $28,350 of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of 2.22.1 years. This amount does not include the cost of new restricted stock awards that may be granted in future periods.
On December 29, 2016, the Compensation Committee of the Board grantedapproved 123,082 performance stock awards to be granted to certain executive officers, of which 86,18746,375 shares are currently outstanding. The performance stock awards vest in four equal increments on each of the first four anniversaries of the grant date, subject in each case to the executive officer’s continued service and achievement of certain Company performance goals, including strong Company stock price performance. The weighted-average grant date fair value of the awards was $10.63 per share, which was estimated using a Monte Carlo-based valuation model. Share-based compensation expense related to the performance stock awards was $77 and $227$61 for the three and nine months ended December 31, 2017, respectively.June 30, 2019.
On October 23, 2018, the Compensation Committee of the Board approved 248,140 performance stock unit awards to be granted to certain executives and non-executive members of the executive leadership team, which vest only in the event certain performance goals are achieved and with continuous service through the date the goals are certified. Approximately 34% of the performance stock units are tied to our cumulative 3-year total shareholder return, 33% are tied to our fiscal year 2021 revenue, and 33% are tied to our fiscal year 2021 adjusted earnings per share goals, each as specifically defined in the equity award agreements. The number of shares to be issued may vary between 50% and 200% of the number of performance stock units depending on performance, and no such shares will be issued if threshold performance is not achieved. The weighted-average grant date fair value of the awards was $17.84 per share, which was estimated using a Monte Carlo-based valuation model for the awards based on total shareholder return and using a probability-adjusted achievement rate combined with the market price of the common stock on the date of grant for the awards based on revenue and earnings per share targets. Share-based compensation expense related to the performance stock unit awards was $438 for the three months ended June 30, 2019.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which 4,000,000 shares of common stock were reserved for future grant. The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to 15% of total base salary at a price equal to 90% of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period. Any shares purchased under the Purchase Plan are subject to a six-month holding period. Employees are limited to purchasing no more than 1,500 shares on any single purchase date and no more than $25,000$25 in total fair market value of shares during any one calendar year. As of December 31, 2017,June 30, 2019, we have issued 315,368497,487 shares under the Purchase Plan and 3,684,6323,502,513 shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was $88$122 and $70$132 for the three months ended December 31, 2017June 30, 2019 and 2016, respectively. Share-based compensation expense recorded for the employee share purchase plan was $265 and $277 for the nine months ended December 31, 2017 and 2016,2018, respectively.
12.13. Concentration of Credit Risk
We had cash deposits at United States banks and financial institutions which exceeded federally insured limits at December 31, 2017.June 30, 2019. We are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, we do not anticipate non-performance by these institutions.
13.
14. Commitments, Guarantees and Contingencies
The following table summarizes our significant contractual obligations at December 31, 2017 and the effect that such obligations are expected to have on our liquidity and cash in future periods:
|
|
|
|
|
| For the year ended March 31, |
| |||||||||||||||||||||
Contractual Obligations |
| Total |
|
| 2018 (remaining three months) |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 and beyond |
| |||||||
Operating lease obligations |
| $ | 60,114 |
|
| $ | 2,219 |
|
| $ | 9,321 |
|
| $ | 9,013 |
|
| $ | 8,998 |
|
| $ | 8,726 |
|
| $ | 21,837 |
|
Remaining lease obligations for vacated properties (1) |
|
| 4,659 |
|
|
| 547 |
|
|
| 1,413 |
|
|
| 794 |
|
|
| 816 |
|
|
| 551 |
|
|
| 538 |
|
Line of credit obligations (Note 7) |
|
| 39,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 39,000 |
|
|
| - |
|
|
| - |
|
Purchase commitments (2) |
|
| 32,322 |
|
|
| 312 |
|
|
| 3,840 |
|
|
| 5,297 |
|
|
| 7,073 |
|
|
| 7,900 |
|
|
| 7,900 |
|
Total |
| $ | 136,095 |
|
| $ | 3,078 |
|
| $ | 14,574 |
|
| $ | 15,104 |
|
| $ | 55,887 |
|
| $ | 17,177 |
|
| $ | 30,275 |
|
|
|
|
|
The deferred compensation liability as of December 31, 2017 was $6,473, which is not included in the table above as the timing of future benefit payments to employees is not determinable.
The uncertain tax position liability as of December 31, 2017 was $4,890, which is not included in the table above as the timing of expected payments is not determinable.
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.
We have historically offered short-term rights of return in certain sales arrangements. If we are able to estimate returns for these types of arrangements and all other criteria for revenue recognition have been met, revenue is recognized and these arrangements are recorded in the condensed consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in the condensed consolidated financial statements until the rights of return expire, provided also, that all other criteria of revenue recognition have been met.
Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringement claim by any third-party with respect to our software. As we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, we believe that our
estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these indemnification obligations.
Hussein Litigation
On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court granted on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and punitive damages and
costs. We filed a demurrer to the amended complaint. On July 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against Hussein, alleging that he breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiff in the cross-complaint.
On June 26, 2015, we filed a motion for summary judgment with respect to Hussein’s claims, which the Court granted on September 16, 2015, dismissing all of Hussein’s claims against us. On September 23, 2015, Hussein filed an application for reconsideration of the Court's summary judgment order, which the Court denied. Hussein filed a renewed application for reconsideration of the Court’s summary judgment order on August 3, 2017. The Court again denied Hussein’s application.
On October 28, 2015, May 9, 2016, and August 5, 2016, Hussein filed a motion for summary judgment, motion for summary adjudication, and motion for judgment on the pleadings, respectively, seeking to dismiss our cross-complaint. The Court denied each motion. Trial on our cross-complaint began June 12, 2017. On July 26, 2017, the Court issued a statement of decision granting Hussein’s motion for judgment on our cross-complaint.
Final judgment over Hussein’s claims and our cross-claims was entered on January 9, 2018. Hussein has noticed his appeal of the order granting summary judgment over his claims, and we are evaluatingnoticed a potential cross-appeal. At this time, we are unable to estimatecross-appeal on the probability or the amountcourt’s statement of liability, if any, related to this claim.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us and certain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointed lead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8:13-cv-01818-CJC-JPR, lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing the complaint with prejudice. Plaintiffs filed adecision granting Hussein’s motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. On July 28, 2017, the Ninth Circuit issued a decision reversing and remanding the District Court's orderjudgment on our motion to dismiss. On September 5, 2017, we filed a petition for rehearing en banc, whichcross-complaint. Briefing on the cross-appeals was deniedcompleted in fall 2018. A hearing on September 29, 2017. After the Ninth Circuit issued its mandate, the District Court reopened the case. The parties have begun discovery. We believe that the plaintiffs' claims are without merit and continue to defend against them vigorously, including by evaluating potential challenges to the Ninth Circuit decision.cross-appeals was held on July 15, 2019. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a purported shareholder of ours. The complaint arises from the same allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and gross mismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The matter was stayed pending the Ninth Circuit’s decision in the appeal described above under the caption, “Federal Securities Class Action.” This stay now has been lifted and, pursuant to a stipulated briefing schedule, Defendants’ motion to dismiss is due February 2, 2018.
On September 28, 2017, a complaint was filed against our Company and certain of our current and former officers and directors in the United States District Court for the Central District of California, captioned Kusumam Koshy, derivatively on behalf of Quality Systems Inc. vs. Craig Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig, Paul A. Holt, and Quality Systems, Inc., No. 8:17-cv-01694, by Kusumam Koshy, a purported shareholder of ours. The complaint alleges breach of fiduciary duties and abuse of control, as well as unjust enrichment and insider selling by individual directors arising out of the allegations described above under the captionscaption “Hussein Litigation” and “Federal Securities Class Action,” QSI’sa related, now-settled, federal securities class action, as well as the Company’s adoption of revised indemnification agreements, and the
resignation of certain officers of the Company. The complaint seeks restitution and disgorgement, court costs and attorneys’ fees, and enhanced corporate governance reforms and internal control procedures. On January 12, 2018, Defendants filed a motion to dismiss the derivative complaint.
On July 25, 2018, the Court dismissed the complaint with prejudice. On August 24, 2018, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit and filed her opening brief on January 23, 2019. We filed our response on March 25, 2019, and the plaintiff filed her reply on May 15, 2019. We believe that the plaintiffs’ claims areplaintiff’s appeal is without merit and intend to defend against themit vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Other Regulatory Matters
InCommencing in April 2017, we have received a request for documents and information from the United States Attorney's Office for the District of Vermont pursuant to a Civil Investigative Demand (“CID”). The CID relates toand other government agencies in connection with an investigation concerning the certification we obtained for our software under the United States Department of Health and Human Services' Electronic Health Record (EHR) Incentive Program. We have provided documents andThe requests for information in responserelate to, that CID. On December 11, 2017, we received a subpoena from the United States Department of Justice in connection with the same matter seeking among other things records relating tothings: (a) data used to determine objectives and measures under the Meaningful Use (MU) and the Physician Quality Reporting System (PQRS) programs, (b) EHR software code used in certifying the 2014 EHRour software and information, and (c) payments provided for the referral of EHR business.
We continue to cooperate in this investigation. Requests and investigations of this nature may lead to future requests for information and ultimately the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In addition, our responses to these and any future requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter. Given the highly-regulated nature of our industry, we may, from time to time, be subject to subpoenas, requests for information, or investigations from various government agencies. It is our practice to respond to such matters in a cooperative, thorough and timely manner. We continue to respond to this CID and subpoena and intend to cooperate fully with the government. Requests and investigations of this nature may lead to the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In addition, our responses to these requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter.
14.15. Restructuring Plan
In fiscal year 2016,During the three months ended June 30, 2019, we implemented a business restructuring plan as part of our reorganizationcontinued efforts to preserve and grow the value of the Company through client-focused innovations while reducing our cost structure. As part of the restructuring, we reduced our total workforce by approximately 4% primarily within the research and development function and intend to expand on our research and development resources in India. We recorded $7,078$1,707 of restructuring costs within operating expenses in our condensed consolidated statements of net income and comprehensive income. The restructuring plan was substantially complete by the end of fiscal 2017. The restructuring costs consisted primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, whicharrangement. These amounts were accrued when it was probable that the benefits would be paid, and the amounts were reasonably estimable. Also included in restructuring costs were certain facilities-related costsAs of June 30, 2019, the remaining liability associated with accruals for the remaining lease obligations at certain locations, including Solana Beach, Costa Mesa, andpayroll-related costs was $1,707, which we expect to be substantially paid during the second quarter of fiscal 2020.
In connection with the restructuring plan, we also vacated a portion of Horshamour Irvine, CA location and recorded impairments of $143 to our operating right-of-use assets and certain related fixed assets. Furthermore, we recorded impairments of $346 to our operating right-of-use assets and certain related fixed assets associated with contractual lease terms ending between January 2018 and September 2023. We haveour previously vacated each of the locations, or portions thereof, in St. Louis, MO and Horsham, PA based on changes to our projected sublease rental income and estimated sublease commencement dates. We are actively marketing theeach of these vacated locations for sublease. We The impairment analysis was performed at the asset group level and the impairment charge was estimated by comparing the remaining lease obligations at fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the cease-use date for each location based on the future contractual lease obligations, reduced by projected sublease rentals that could be reasonably obtained for the locations after a period of marketing, and adjusted for the effect deferred rents that have been recognized under the lease. The effect of discounting future cash flows using a credit-adjusted risk free rate was not significant. Sublease income and commencement dates were estimated based on data available from rental activity in the local markets.impairment date. Significant judgment was required to estimate the remaining lease obligations at fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded. As of December 31, 2017, the remaining lease obligation, net of estimated projected sublease rentals, was $1,363.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of our product development plans, business strategies, future operations, financial condition and prospects, developments in and the impacts of government regulation and legislation, including, without limitation, The American Recovery and Reinvestment Act, the Patient Protection and Affordable Care Act, and the Medicare Access and CHIP Reauthorization Act of 2015, uncertainties related to the future impact of United States tax reform, and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental and technological factors could affect our ability to achieve our goals, and interested persons are urged to review any risks that may be described in “Item 1A. Risk Factors” as set forth herein and other risk factors appearing in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 20172019 (“Annual Report”), as supplemented by additional risk factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q, as well as in our other public disclosures and filings with the Securities and Exchange Commission ("SEC"). Because of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Report.
This management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the condensed consolidated financial statements and notes thereto included elsewhere in this Report in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and related notes thereto included elsewhere in this Report. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period.
Company Overview
Quality Systems, Inc., known to our clients as NextGen Healthcare provides software, services and analytics solutions to the ambulatory care market. We areis a healthcare information technology and services company that delivers the foundational capabilities to organizations that want to promote healthy communities. Our technology provides a customizable platform that empowers physician practice success, enriches the patient care experience and lowers the costleading provider of healthcare.
We primarily derive revenue by developing and marketingambulatory-focused healthcare software and services that automate certain aspectssolutions. In pursuit of practice management (“PM”) and electronic health records (“EHR”) forour mission to empower the transformation of ambulatory care, practices. In addition,we provide innovative technology-based solutions that help our softwareclients succeed while they are managing more complexity and services facilitate interoperability. Our software can be licensed and delivered on-premise or in the cloud as software-as-a-service (“SaaS”). Our services include maintenance and support, professional services, and complementary services such as managed cloud services, revenue cycle management (“RCM”) and electronic data interchange (“EDI”). We market and sell our solutions through a dedicated sales force and to a much lesser extent, through resellers. assuming greater financial risk.
Our clients span the entire ambulatory care market from large multi-specialty to small single specialty practices to larger multi-specialty organizations. We have fully integrated our solutions so that our clients are able to provide their patients with comprehensive services utilizing a single platform. Our highly interoperable platform allows ambulatory practices to thrive especially in complex, heterogeneous healthcare communities where frictionless clinical data exchange is required to coordinate and include networksoptimize patient care.
NextGen Healthcare has historically enhanced our solutions through both organic and inorganic activities. In October 2015, we divested our former Hospital Solutions division to focus exclusively on the ambulatory marketplace. In January 2016, we acquired HealthFusion Holdings, Inc. and its cloud-based electronic health record and practice management solution. In April 2017, we acquired Entrada, Inc. and its cloud-based, mobile platform for clinical documentation and collaboration. In August 2017, we acquired EagleDream Health, Inc. and its cloud-based population health analytics solution. In January 2018, we acquired Inforth Technologies for its specialty-focused clinical content. The integration of practices such as physician hospital organizations (“PHOs”), management service organizations (“MSOs”), accountable care organizations (“ACOs”), ambulatory care centersthese acquired technologies have made NextGen Healthcare’s solutions among the most comprehensive and community health centers.powerful in the market.
Quality Systems, Inc.The Company was incorporated in California in 1974. Previously named Quality Systems, Inc., the Company changed its corporate name to NextGen Healthcare, Inc. in September 2018. Our principal offices are located at 18111 Von Karman Ave., Suite 800, Irvine, California, 92612. Our websites are located at www.nextgen.com92612, and www.qsii.com.our principal website is www.nextgen.com. We operate on a fiscal year ending on March 31.
Trends and Events in Our Business
We believe that the following trends and events as described below have contributed to our consolidated results of operations and may continue to impact our future results.
We believeOver the last decade, the ambulatory healthcare is more heavily influenced bymarket has experienced significant regulatory change, which has driven practice transformation and nationaltechnology advancements. Recognizing that it was imperative to digitize the American health projects than bysystem to stem the cyclesescalating cost of our economy. The healthcare industry has been significantly impacted byand improve the Obama Administration's broad healthcare reform efforts, includingquality of care being delivered, Congress enacted the Health Information Technology for Economic and Clinical Health portion ofAct in 2009 (“HITECH Act”). The legislation stimulated healthcare organizations to not only adopt electronic health records, but to use them to collect discrete data that could be used to drive quality care. This standardization supported early pay for reporting and pay-for-performance programs.
In 2010, the American Recovery and Reinvestment Act of 2009
("HITECH Act") and the Patient Protection and Affordable Care Act ("ACA"(“ACA”) established the roadmap for shifting American healthcare from volume (fee-for-service) to a value-based care (“VBC”) system that provided significant incentives to health care organizations for "Meaningful Use" adoption and interoperable electronic health record solutions.
We also believe that healthcare reform, including the repeal of the sustainable growth rate (SGR) formula as part ofrewards improved outcomes at lower costs (fee-for-value). This was followed by the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"(“MACRA”), andbipartisan legislation that further changed the way Medicare rewards clinicians for value vs. volume. Initially focused on government-funded care, the domain of the Centers for Medicare & Medicaid Services (“CMS”), these programs are now firmly established on the commercial insurance side of the industry as well.
VBC created the need for a movement towards a value-based, pay-for-performance model and quality initiative efforts will stimulate demand for robust electronic health record solutions as well as new healthcategory of healthcare information technology solutions from bundled billing capabilities(“HIT”) tools that could be used to identify and treat groups of patients, or cohorts, based on risk. Population Health Management (“PHM”) tools support these needs by identifying patient engagementrisk, engaging patients, coordinating care, and population health management. We believe MACRA may bedetermining when interventions are needed to improve clinical and financial outcomes. The United States PHM market was estimated at $3.1 billion in 2018 and is expected to more than double by 2022.
Importantly, the most importantintroduction of VBC programs was only an element of the three regulations for our market because it permanently changes how ambulatorybroader approach to reducing healthcare providers are reimbursedexpenditure. It was also accompanied by Medicare. It offers certainty andsignificant reductions in Medicare spending with a timeline forprojected reduction of $218 billion in payments by 2028, as reported by RevCycle Intelligence. The drive to reduce costs initially led to consolidation in the market’s move awayhealthcare system that was followed by a significant shift of care from volume-based, fee-for-service modelsthe inpatient to value-based payment models that reward the delivery ofoutpatient setting as more care is being moved to this lower cost high qualityenvironment. Ambulatory care settings have become an essential component of comprehensive, low cost distributed care.
While we expect In 2018, outpatient volumes reached over 3.5 billion encounters and are forecasted to benefit from the increasing demands for greater efficiencygrow 15% by 2028, as wellreported by Becker’s Health IT and CIO Report. The independent physicians’ practices segment is expected to generate more revenue than non-affiliated hospitals as government support for increased adoption ofit accepts electronic health records the marketintegrated PHM programs for physician based electronic health records software is becoming increasingly saturated while physician groupbetter primary and follow-up care, as reported by Frost & Sullivan. The need to sustain revenue has made it extremely important for practices are rapidly being consolidated by hospitals, insurance payers and other entities. Hospital software providers are leveragingto secure their position with their hospital clients to gainpatient market share, elevating patient loyalty to be a significant determinant of provider success. Capturing patient market share and thriving in a market driven by VBC requires both an integrated platform and a full view of the patient population’s clinical and cost data neither of which could be accomplished without new technologies to collect and analyze multi-sourced patient data. Effectively implemented, these new technologies allow organizations to enhance financial viability while exercising the freedom to join, affiliate, integrate or interoperate in ways that maximize strategic control.
In order to maintain financial success with hospital owned physician practices. Insurance providersshifting reimbursement rules and large physician groups are also consolidating physician offices creating additional opportunityshrinking reimbursement, we believe demand for ambulatory software providers like us. managed services, including revenue cycle management (“RCM”) services, hosting, transcription and scribe services, aligned and integrated with clinical technology solutions, will increase in the coming years.
Based on these trends, successful clients must undertake the following imperatives: 1) ensure healthy predictable financial outcomes, 2) provide high quality care at a lower cost in a risk-bearing environment, 3) ensure engaged and loyal patients, and 4) optimize clinician productivity while deploying HIT solutions, 5) support frictionless interoperability.
Our Strategy
Our core strategy is to focusbecome a trusted partner to our clients as they embark on addressing the growing needstheir value-based journey and begin to take on risk as part of accountable care organizations around interoperability, patient engagements, population health, and data analytics.
value-based contracts. We believeunderstand that our core strength lies inclients are now faced with a more complex, rapidly changing practice environment and that the central roleHIT solutions that support these endeavors must evolve to meet these challenging requirements. Providing our software productsclients with a comprehensive multi-faceted platform and accompanying services play into enable their success is the delivery of healthcare by the primary physician in an ambulatory setting. We intend to remain at the forefront of upcoming new regulatory requirements and meaningful use requirements for stimulus payments. We intend to continue the development and enhancement of our software solutions to support healthcare reform, such as the recently enacted MACRA, which promotes the transition from fee-for-service to value-based, pay-for-performance and patient-centric and quality initiatives such as accountable care organizations. Key elements of our future software development will be to expand our interoperability capabilities enhancing the competitiveness of our software offerings, make our products more intuitive and easy to use, and to enhance the capability of our MediTouch® Platform to allow us to deliver our software over the cloud to larger ambulatory care practices.
We have a history of enhancing our solutions through both organic and inorganic activities. Over the last few years, we have entered into strategic transactions to complement and enhance our product portfolio in the ambulatory care market. In October 2015, we divested our former Hospital Solutions division. In January 2016, we acquired HealthFusion Holdings, Inc. ("HealthFusion"), in April 2017, we acquired Entrada, Inc. ("Entrada"), and in August 2017, we acquired EagleDream Health, Inc. ("EagleDream").
We have and intend to continue investments in our infrastructure, including but not limited to maintaining and expanding sales, marketing and product development activities to improve patient care and reduce healthcare costs, providing industry-leading, integrated clinical and administrative healthcare data systems, services, and expertise to clinical, medical, technology, and healthcare business professionals while continuing our strong commitment of service in support of our client satisfaction programs. These investments in our infrastructure will continue while maintaining reasonable expense discipline. We strive to add new clients and expand our relationship with existing clients through delivery of add-on and complementary products and services and believe that our client base that is using our software on a daily basis is a strategic asset. We intend to leverage this strategic asset by expanding our product and service offerings towards this client base.
Led by our vision and mission, we are resetting our strategy and structure to deliver valuekey to our clients. To achieve a lower-cost, increased capability structure,strategy.
Based on current market trends, our new management team is building what we believe is an aligned, client-focused organization, supported by a recurring revenue stream and a large and diverse existing client base.
Our Strategy
We strive to be the trusted partner for clients of all sizes, integrating services and software into a consolidated solution that enables an efficient and effective caregiver and patient experience while driving positive financial outcomes. As a healthcare information technology and services company, we plan to continue investing in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through an evolving healthcare marketplace that is transitioning from fee-for-service to fee-for-value reimbursement models. With approximately 90,000 providers using our solutions, we are enabling care and believe we can truly transform the delivery of care through the following strategic priorities:priorities are:
Focus on the ambulatory client segment. In October 2015, we sold our former Hospital Solutions division to focus on our core ambulatory clients. Further, a recent operational reorganization better allows us to serve the needs of our ambulatory clients through a simpler, more nimble, and focused organization. We believe it is essential to protect, build and sell new capabilities within our ambulatory client segment. We are focused on our core by increasing quality and the serviceability of our solutions. We intend to continue to enhance the capabilities of our NextGen Ambulatory flagship product. At the same time, we intend to expand the capability of the highly scalable, pure cloud-based and mobile-enabled MediTouch® platform.
• | Focus on Ambulatory Care. We create for and invest in the specific needs of ambulatory care providers, giving us a distinct competitive advantage in our target market over solution providers who focus on hospitals first. While many of our competitors spread their R&D and localization investment across global regions, NextGen Healthcare maintains an exclusive focus on U.S.-only ambulatory practices. |
• | Provide an integrated ambulatory care platform with superb scalability, flexibility and interoperability. Many healthcare challenges are uniquely local or regional -- our platform and capabilities flex and scale to fit our clients’ practices and workflows, not the other way around. Our ability to interoperate is pervasive, allowing our clients to exchange data seamlessly. |
Platform as a service. With the introduction of our API 2.0 framework and our continued leverage of the Mirth interoperability platform, we will continue our evolution to plug and play extensibility and information sharing that allows our customers to innovate and deploy high-fidelity extensions to our core applications without the costs, risks (security, performance, etc.) or complexity commonly associated with direct binding. We have also introduced platform-enabled automation capabilities to empower our clients to drive cost out of their processes while supporting their needs to implement the highly personalized workflows that are required to support value based care. Our acquisition of Entrada and its cloud-based, mobile application in April 2017 demonstrates our commitment to innovation that becomes essential for practitioners by improving their clinical productivity with documentation support services that seamlessly integrate into their electronic health record. We believe there is significant opportunity to extend the solutions we offer existing and new clients through value-added services such as RCM and EDI.
Population health software and services. We are migrating into applications, analytics and services that will enable our clients to proactively manage the health of patient populations. We are establishing strong development partnerships with our most innovative customers who are actively participating in shared-risk contracts, and working together with them to create progressive population health capabilities. We support extraordinary information sharing capabilities vital to managing patient populations through our interoperability offerings.
• | Enable groups to successfully take on risk. We provide our clients with cloud-based population health tools that consume multi-sourced agnostic data, including adjudicated claims and risk stratification, care management tools, cost and utilization reporting, as well as quality measurement and reporting tools. Population health insights are delivered in core clinical and financial workflows enabling care givers to better engage their patients. |
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statements and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting policies and update our assumptions, estimates, and judgments, as needed, to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected.
We describe our significant accounting policies in Note 2,1, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report.
We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments (together “ASC 842”) during the quarter ended June 30, 2019 using the transition approach provided for under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allowed us to apply the new lease standard as of April 1, 2019, rather than the beginning of the earliest period presented. ASC 842 supersedes ASC 840 and requires the recognition of leased arrangements on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. Refer to Note 4, "Leases" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information regarding our adoption of ASC 842.
There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year ended March 31, 2017.2019.
Results of Operations
The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of comprehensive income for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (certain percentages below may not sum due to rounding):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license and hardware |
|
| 10.0 | % |
|
| 13.3 | % |
|
| 10.2 | % |
|
| 13.0 | % |
Software related subscription services |
|
| 18.7 |
|
|
| 17.6 |
|
|
| 18.6 |
|
|
| 16.9 |
|
Total software, hardware and related |
|
| 28.7 |
|
|
| 30.9 |
|
|
| 28.8 |
|
|
| 29.9 |
|
Support and maintenance |
|
| 30.6 |
|
|
| 31.2 |
|
|
| 31.2 |
|
|
| 31.0 |
|
Revenue cycle management and related services |
|
| 16.6 |
|
|
| 15.7 |
|
|
| 16.3 |
|
|
| 16.4 |
|
Electronic data interchange and data services |
|
| 17.6 |
|
|
| 17.0 |
|
|
| 17.6 |
|
|
| 17.4 |
|
Professional services |
|
| 6.4 |
|
|
| 5.1 |
|
|
| 6.2 |
|
|
| 5.3 |
|
Total revenues |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license and hardware |
|
| 4.3 |
|
|
| 4.4 |
|
|
| 4.0 |
|
|
| 5.1 |
|
Software related subscription services |
|
| 8.9 |
|
|
| 7.3 |
|
|
| 8.3 |
|
|
| 7.2 |
|
Total software, hardware and related |
|
| 13.2 |
|
|
| 11.8 |
|
|
| 12.3 |
|
|
| 12.3 |
|
Support and maintenance |
|
| 5.7 |
|
|
| 5.7 |
|
|
| 5.7 |
|
|
| 5.5 |
|
Revenue cycle management and related services |
|
| 11.7 |
|
|
| 10.5 |
|
|
| 11.5 |
|
|
| 11.1 |
|
Electronic data interchange and data services |
|
| 10.3 |
|
|
| 9.9 |
|
|
| 10.2 |
|
|
| 10.1 |
|
Professional services |
|
| 5.9 |
|
|
| 4.6 |
|
|
| 5.6 |
|
|
| 5.2 |
|
Total cost of revenue |
|
| 46.8 |
|
|
| 42.5 |
|
|
| 45.4 |
|
|
| 44.3 |
|
Gross profit |
|
| 53.2 |
|
|
| 57.5 |
|
|
| 54.6 |
|
|
| 55.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 33.1 |
|
|
| 29.4 |
|
|
| 32.3 |
|
|
| 32.1 |
|
Research and development costs, net |
|
| 15.7 |
|
|
| 15.4 |
|
|
| 15.2 |
|
|
| 14.9 |
|
Amortization of acquired intangible assets |
|
| 1.5 |
|
|
| 2.0 |
|
|
| 1.5 |
|
|
| 2.1 |
|
Restructuring costs |
|
| 0.1 |
|
|
| 0.2 |
|
|
| 0.0 |
|
|
| 1.2 |
|
Total operating expenses |
|
| 50.3 |
|
|
| 47.0 |
|
|
| 49.0 |
|
|
| 50.3 |
|
Income from operations |
|
| 2.9 |
|
|
| 10.5 |
|
|
| 5.5 |
|
|
| 5.4 |
|
Interest income |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.0 |
|
Interest expense |
|
| (0.6 | ) |
|
| (0.5 | ) |
|
| (0.6 | ) |
|
| (0.6 | ) |
Other expense, net |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.0 |
|
Income before provision for income taxes |
|
| 2.3 |
|
|
| 10.0 |
|
|
| 5.0 |
|
|
| 4.7 |
|
Provision for income taxes |
|
| 1.1 |
|
|
| 1.8 |
|
|
| 1.6 |
|
|
| 1.0 |
|
Net income |
|
| 1.2 | % |
|
| 8.2 | % |
|
| 3.4 | % |
|
| 3.7 | % |
|
| Three Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenues: |
|
|
|
|
|
|
|
|
Recurring |
|
| 90.6 | % |
|
| 90.1 | % |
Software, hardware, and other non-recurring |
|
| 9.4 |
|
|
| 9.9 |
|
Total revenues |
|
| 100.0 |
|
|
| 100.0 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
Recurring |
|
| 38.3 |
|
|
| 36.2 |
|
Software, hardware, and other non-recurring |
|
| 4.8 |
|
|
| 5.4 |
|
Amortization of capitalized software costs and acquired intangible assets |
|
| 6.4 |
|
|
| 4.9 |
|
Total cost of revenue |
|
| 49.5 |
|
|
| 46.4 |
|
Gross profit |
|
| 50.5 |
|
|
| 53.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 30.4 |
|
|
| 33.5 |
|
Research and development costs, net |
|
| 16.7 |
|
|
| 16.6 |
|
Amortization of acquired intangible assets |
|
| 0.7 |
|
|
| 0.9 |
|
Impairment of assets |
|
| 0.4 |
|
|
| 0.0 |
|
Restructuring costs |
|
| 1.3 |
|
|
| 0.0 |
|
Total operating expenses |
|
| 49.5 |
|
|
| 51.0 |
|
Income from operations |
|
| 1.1 |
|
|
| 2.6 |
|
Interest income |
|
| 0.1 |
|
|
| 0.0 |
|
Interest expense |
|
| (0.4 | ) |
|
| (0.5 | ) |
Other income (expense), net |
|
| (0.1 | ) |
|
| 0.3 |
|
Income before provision for (benefit of) income taxes |
|
| 0.7 |
|
|
| 2.3 |
|
Provision for (benefit of) income taxes |
|
| (0.3 | ) |
|
| 0.3 |
|
Net income |
|
| 0.9 | % |
|
| 2.0 | % |
Revenues
The following table presents our consolidateddisaggregated revenues for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
Software license and hardware |
| $ | 13,131 |
|
| $ | 16,995 |
|
| $ | 40,198 |
|
| $ | 48,966 |
|
Software related subscription services |
|
| 24,690 |
|
|
| 22,546 |
|
|
| 73,584 |
|
|
| 63,911 |
|
Total software, hardware and related |
|
| 37,821 |
|
|
| 39,541 |
|
|
| 113,782 |
|
|
| 112,877 |
|
Support and maintenance |
|
| 40,362 |
|
|
| 39,924 |
|
|
| 123,171 |
|
|
| 116,905 |
|
Revenue cycle management and related services |
|
| 21,922 |
|
|
| 20,048 |
|
|
| 64,327 |
|
|
| 62,037 |
|
Electronic data interchange and data services |
|
| 23,136 |
|
|
| 21,790 |
|
|
| 69,446 |
|
|
| 65,527 |
|
Professional services |
|
| 8,474 |
|
|
| 6,565 |
|
|
| 24,518 |
|
|
| 19,893 |
|
Total revenues |
| $ | 131,715 |
|
| $ | 127,868 |
|
| $ | 395,244 |
|
| $ | 377,239 |
|
|
| Three Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Recurring revenues: |
|
|
|
|
|
|
|
|
Subscription services |
| $ | 30,144 |
|
| $ | 28,328 |
|
Support and maintenance |
|
| 39,652 |
|
|
| 41,248 |
|
Managed services |
|
| 25,681 |
|
|
| 26,270 |
|
Electronic data interchange and data services |
|
| 23,970 |
|
|
| 24,161 |
|
Total recurring revenues |
|
| 119,447 |
|
|
| 120,007 |
|
|
|
|
|
|
|
|
|
|
Software, hardware, and other non-recurring revenues: |
|
|
|
|
|
|
|
|
Software license and hardware |
|
| 7,095 |
|
|
| 7,443 |
|
Other non-recurring services |
|
| 5,319 |
|
|
| 5,750 |
|
Total software, hardware and other non-recurring revenues |
|
| 12,414 |
|
|
| 13,193 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 131,861 |
|
| $ | 133,200 |
|
|
|
|
|
|
|
|
|
|
Recurring revenues as a percentage of total revenues |
|
| 90.6 | % |
|
| 90.1 | % |
We generate revenue from sales of licensing rights and subscriptions to our software products,solutions, hardware and third partythird-party software products, support and maintenance, managed services, revenue cycle management and related services ("RCM"), electronic data interchange (“EDI”) and data services, (“EDI”), and professionalother non-recurring services, such asincluding implementation, training, and consulting services performed for clients who use our products.
Consolidated revenue for the three months ended December 31, 2017 increased $3.8June 30, 2019 decreased $1.3 million compared to the prior year primarily due to higher sales ofa $0.5 million decrease in recurring revenues and a $0.8 decrease in software, related subscriptionhardware and other non-recurring revenues. The decrease in recurring revenues was driven by lower support and maintenance revenue resulting from client attrition, lower managed services RCM services, and EDI services,revenue also due to client attrition, partially offset by lower software license and hardware revenue. Software relatedan increase in subscription services increased $2.1 million from sales of our cloud-based Entrada platform acquired in April 2017, incremental sales from our acquisition of EagleDream Health in August 2017, and higher sales of our MediTouch® cloud-based subscriptions. Professional services revenue increased $1.9 million, which was mostly associated with transcriptionour analytics, patient portal, and editing services from our acquisition of Entrada, offset by lower sales of professional services due to lower client demand for our coreNextGen Enterprise solutions. The decrease in software, productshardware, and related implementation, training, and consulting services. RCM services revenue increased $1.9 million from the addition of new clients and organic growth achieved through cross selling and ramping up of RCM services provided to our existing clients. EDI revenue increased $1.3 million, whichother non-recurring revenues was primarily related to higher EDI services sold with our MediTouch® cloud-based solutions, addition of new clients, and further penetration of our existing client base. The $0.4 million increase in support and maintenance is primarily due to lower sales creditssoftware bookings and a decrease in the current year periodconsulting services revenue.
Cost of Revenue and the impact of our annual price increases, partially offset by client attrition. Software license and hardware declined $3.9 million, which mainly reflects the increasingly saturated end-market for electronic health records software and our transition to a recurring subscription-based model.
Consolidated revenue for the nine months ended December 31, 2017 increased $18.0 million compared to the prior year primarily due to higher sales of software related subscription services, RCM services, and EDI services, partially offset by lower software license and hardware revenue. Software related subscription services increased $9.7 million from sales of our cloud-based Entrada platform acquired in April 2017, and higher sales of our MediTouch® cloud-based subscriptions, Mirth interoperability solutions, patient portal, and QSIDental Web offerings as we continue to expand our client base. The $6.3 million increase in support and maintenance is primarily due to lower sales credits in the current year, addition of new customers, and the impact of our annual price increases. The $4.6 million increase in professional services is mostly associated with transcription and editing services from our acquisition of Entrada, offset by lower sales of professional services due to lower client demand for our core software products and related implementation, training, and consulting services. EDI revenue increased $3.9 million, which was primarily related to higher EDI services sold with our MediTouch® cloud-based solutions, addition of new clients, and further penetration of our existing client base. RCM services revenue increased $2.3 million from the addition of new clients and organic growth achieved through cross selling and ramping up of RCM services provided to our existing clients, offset by customer attrition. The $8.8 million decline in software license and hardware reflects the increasingly saturated end-market for electronic health records software and our transition to a recurring subscription-based model.
Recurring service revenue, consisting of software related subscription services, support and maintenance, RCM, and EDI, represented 84% and 82% of total revenue for the three months ended December 31, 2017 and 2016, respectively. For the nine months ended December 31, 2017 and 2016, recurring service revenue, represented 84% and 82%, respectively, of total revenue.
Our goals include further enhancement of our existing products, including expansion of our software and service offerings that support pay-for-performance initiatives around accountable care organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics capabilities, and further development and enhancements of our portfolio of specialty focused templates within our electronic health records software.
We intend to remain at the forefront of upcoming new regulatory requirements, including meaningful use requirements for stimulus payments and recent healthcare reform that is driving the transition towards pay-for-performance, value-based reimbursement models. We believe that the expanded requirements for continued eligibility for incentive payments under meaningful use rules will result in an expanded replacement market for electronic health records software. We also intend to continue selling additional software and services to existing clients, expanding penetration of connectivity and other services to new and existing clients, and capitalizing on growth and cross selling opportunities. We continue to expand our client base and cloud-based solution capabilities in the ambulatory market to meet the needs of practices of increasing size and complexity, and focus our strategy on accountable care organizations around interoperability, patient engagements, population health and collaborative care management, and enterprise analytics. Our software and service offerings offer clients a full suite of cloud-based solutions that better enable our clients to focus on care delivery. We believe we are well-positioned within the evolving healthcare market to deliver products and services that address the growing importance of quality collaborative care and shift from fee-for-service to value-based, pay-for-performance care. We also believe that a significant opportunity exists to continue cross selling RCM services to our existing clients as the portion of existing clients who are using RCM services is approximately 10%. We are actively pursuing efforts to achieve faster growth from expanded efforts to leverage our existing sales force towards selling RCM services. We also believe that ongoing increases in the complexity of medical billing and collections processes, including the migration to value-based reimbursement models, will create additional opportunities.
While it remains difficult to assess the relative impact or the timing of positive and negative trends affecting the aforementioned market opportunities, we believe we are well positioned to remain a leader in serving the evolving market needs for healthcare information technology. We believe that our operating results are attributed to a strong brand name and reputation within the marketplace for healthcare information technology software and services and investments in sales and marketing activities, including new marketing campaigns, Internet advertising investments, tradeshow attendance and other expanded advertising and marketing expenditures.
Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Cost of revenue: |
|
|
|
|
|
|
|
| ||||||||||||||||
Recurring |
| $ | 50,540 |
|
| $ | 48,153 |
| ||||||||||||||||
Software, hardware, and other non-recurring |
|
| 6,278 |
|
|
| 7,154 |
| ||||||||||||||||
Amortization of capitalized software costs and acquired intangible assets |
|
| 8,413 |
|
|
| 6,544 |
| ||||||||||||||||
Total cost of revenue |
| $ | 61,634 |
|
| $ | 54,352 |
|
| $ | 179,558 |
|
| $ | 167,164 |
|
| $ | 65,231 |
|
| $ | 61,851 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gross profit |
|
| 70,081 |
|
|
| 73,516 |
|
|
| 215,686 |
|
|
| 210,075 |
|
| $ | 66,630 |
|
| $ | 71,349 |
|
Gross margin % |
|
| 53.2 | % |
|
| 57.5 | % |
|
| 54.6 | % |
|
| 55.7 | % |
|
| 50.5 | % |
|
| 53.6 | % |
Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver our products and services. Cost of revenue also includes amortization of capitalized software costs and acquired technology, third party consultant and outsourcing costs, costs associated with our EDI business partners and clearinghouses, hosting service costs, third party software costs and royalties, and other costs directly associated with delivering our products and services. Refer to Note 5,6, "Intangible Assets" and Note 6,7, "Capitalized Software Costs" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of future expected amortization.
Share-based compensation expense included in cost of revenue was $0.3$0.5 million and $0.1$0.2 million for the three months ended December 31, 2017June 30, 2019 and 2016, and is included in the amounts in the table above. Share-based compensation expense included in cost of revenue was $0.7 million and $0.5 million for the nine months ended December 31, 2017 and 2016,2018 and is included in the amounts in the table above.
Gross profit for the three months ended December 31, 2017June 30, 2019 decreased $3.4$4.7 million compared to the prior year period due primarily to a $7.3$3.4 million increase in cost of revenue offset by the $3.8and $1.3 million higherlower revenues as discussed above. The increase in cost of revenue compared toover the prior year period is the result ofprimarily due to higher costs associated with the acquisitions of Entrada in April 2017 and EagleDream Health in August 2017, higher amortization of the software technology intangible assets associated with the two recent acquisitions, and higher personnel costs associated with delivering support and maintenance and RCM services, partially offset by lower amortization of previously capitalized software development cost, whichcosts, increased third party outsourcing costs and personnel costs related to our delivering our managed services, as well as an increase in hosting costs associated with higher related subscription services revenues. As a result, in a decline in our gross margin decreased to approximately 53% in50.5% for the current quarterthree months ended June 30, 2019 compared to 58%53.6% in the prior year quarter.year.
Gross profit for the nine months ended December 31, 2017 increased $5.6 million compared to the prior year period due primarily to $18.0 million higher revenues as discussed above, offset by a $12.4 million increase in cost of revenue. The increase in cost of revenue is the result of higher costs associated with the acquisitions of Entrada in April 2017 and EagleDream Health in August 2017, higher amortization of the software technology intangible assets associated with the two recent acquisitions, and higher personnel costs associated with delivering our RCM services. Gross margin decreased to approximately 55% in the nine months ended December 31, 2017 compared to 56% in the prior year nine months.
Selling, General and Administrative Expense
The following table presents our consolidated selling, general and administrative expense for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Selling, general and administrative |
| $ | 43,563 |
|
| $ | 37,542 |
|
| $ | 127,517 |
|
| $ | 120,913 |
|
| $ | 40,128 |
|
| $ | 44,636 |
|
Selling, general and administrative, as a percentage of revenue |
|
| 33.1 | % |
|
| 29.4 | % |
|
| 32.3 | % |
|
| 32.1 | % |
|
| 30.4 | % |
|
| 33.5 | % |
Selling, general and administrative expense consist of compensation expense, including share-based compensation, for management and administrative personnel, selling and marketing expense, facilities costs, depreciation, professional service fees, including legal, consulting, and accounting services, acquisition and transaction-related costs, and other general corporate and administrative expenses.
Share-based compensation expense included in selling, general and administrative expenses was $2.6$3.4 million and $1.6$2.3 million for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively, and is included in the amounts in the table above. Share-based compensation expense included in selling, general and administrative expenses was $6.5 million and $4.0 million for the nine months ended December 31, 2017 and 2016, respectively, and is included in the amounts above. The increase in share-based compensation for the three and nine months ended December 31, 2017June 30, 2019 compared to the same prior year periodsperiod is due to increased utilization of share-based awards to incentivize our executives and employees. Refer to Note 11,12, "Share-Based Awards" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information of our share-based awards and related incentive plans.
Selling, general and administrative expenses increased $6.0decreased $4.5 million for the three months ended December 31, 2017June 30, 2019 compared to the prior year as a result of a $2.0$2.5 million benefit recordedin certain employee severance and exit costs incurred in the prior year periodnot related to fair value adjustments ofany restructuring plan and a decrease in salaries and wages in the HealthFusion contingent consideration, higher incremental costscurrent year associated with our acquisitions of Entrada in April 2017 EagleDream Health in August 2017, increases in bad debt expense associated with our continued efforts to resolve aged customer receivable balances, and higher legal expense.
Selling, general and administrative expenses increased $6.6 million for the nine months ended December 31, 2017 compared to the prior year primarily due to higher incremental costs associated with our acquisitions of Entrada in April 2017 EagleDream Health in August 2017, increases in bad debt expense associated with our continued efforts to resolve aged customer receivable balances, and higher consulting costs associated with our assessment and implementation of the new revenue standard (ASC 606, Revenue From Contracts With Customers), including implementation of a new accounting system module, and higher legal expense, offset by $3.4 million of fair value adjustments related to the HealthFusion contingent consideration recorded in the prior year period.lower headcount.
Research and Development Costs, net
The following table presents our consolidated net research and development costs, capitalized software costs, and gross expenditures prior to capitalization, for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Gross expenditures |
| $ | 24,668 |
|
| $ | 20,766 |
|
| $ | 73,808 |
|
| $ | 62,601 |
|
| $ | 26,786 |
|
| $ | 26,913 |
|
Capitalized software costs |
|
| (4,023 | ) |
|
| (1,052 | ) |
|
| (13,647 | ) |
|
| (6,371 | ) |
|
| (4,735 | ) |
|
| (4,785 | ) |
Research and development costs, net |
| $ | 20,645 |
|
| $ | 19,714 |
|
| $ | 60,161 |
|
| $ | 56,230 |
|
| $ | 22,051 |
|
| $ | 22,128 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Research and development costs, as a percentage of revenue |
|
| 15.7 | % |
|
| 15.4 | % |
|
| 15.2 | % |
|
| 14.9 | % |
|
| 16.7 | % |
|
| 16.6 | % |
Capitalized software costs as a percentage of gross expenditures |
|
| 16.3 | % |
|
| 5.1 | % |
|
| 18.5 | % |
|
| 10.2 | % |
|
| 17.7 | % |
|
| 17.8 | % |
Gross research and development expenditures, including costs expensed and costs capitalized, consist of compensation expense, including share-based compensation for research and development personnel, certain third-party consultant fees, software maintenance costs, and other costs related to new product development and enhancement to our existing products. We intend to continue to invest heavily in research and development expenses as we continue to bring additional functionality and features to the medical community and develop a new integrated inpatient and outpatient, web-based software platform.
The capitalization of software development costs results in a reduction to our reported net research and development costs. Our software capitalization rate, or capitalized software costs as a percentage of gross expenditures, has varied historically and may
continue to vary based on the nature and status of specific projects and initiatives in progress. Although changes in software capitalization rates have no impact on our overall cash flows, it results in fluctuations in the amount of software development costs being expensed up front and the amount of net research and development costs reported in our condensed consolidated statement of net income and comprehensive income.
Share-based compensation expense included in research and development costs was $0.6$1.0 million and $0.3$0.6 million for the three months ended December 31, 2017June 30, 2019 and 2016,2018, respectively, and is included in the amounts in the table above. Share-based compensation expense included in research and development costs was $1.4 million and $0.7 million for the nine months ended December 31, 2017 and 2016, respectively, and is included in the amounts above.
Net research and development costs for the three months ended December 31, 2017 increased $0.9 millionJune 30, 2019 were flat compared to the prior year period, which is due to a $3.9 million increase in our grossperiod. Gross expenditures offset by $3.0 million higher capitalization of software costs. Net research and development costs for the nine months ended December 31, 2017 increased $3.9 million compared to the prior year, which is due to a $11.2 million increase in our gross expenditures, offset by $7.3 million higher capitalization of software costs. The increase in both gross expenditures and capitalization of software costs are relatedrelate to the development of the next major versions of our core software products and enhancements to our existing products, for which we incurred a higher level of personnelproducts. Our gross expenditures and third party development costs. Additionally, the acquisition of Entrada in April 2017 and an increase in our research and development headcount contributed to the increases in gross expenditures. Our software capitalization rate fluctuatesfluctuate due to differences in the nature and status of our projects and initiatives during a given year, which affects the amount of development costs that may be capitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Amortization of acquired intangible assets |
| $ | 1,956 |
|
| $ | 2,568 |
|
| $ | 6,015 |
|
| $ | 7,889 |
|
|
| Three Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Amortization of acquired intangible assets |
| $ | 865 |
|
| $ | 1,168 |
|
Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer relationships, trade name, and contracts intangible assets acquired as part of our business combinations. Refer to Note 5,6, "Intangible Assets" of our notes to condensed consolidated financial statements included elsewhere in this Report for an estimate of future expected amortization.
Amortization of acquired intangible assets for the three and nine months ended December 31, 2017June 30, 2019 declined $0.6$0.3 million and $1.9 million, respectively, compared to prior year period due to certain acquired intangible assets being fully amortized duringin the year, partially offset by the incremental amortization associate with intangible assets acquired from Entrada and EagleDream.prior fiscal year.
Restructuring Costs and Impairment of Assets
During the three and nine months ended December 31, 2016,June 30, 2019, we implemented a business restructuring plan as part of our continued efforts to preserve and grow the value of the Company through client-focused innovations while reducing our cost structure. As part of the restructuring, we reduced our total workforce by approximately 4% primarily within the research and development function and intend to expand on our research and development resources in India. We recorded $0.2$1.7 million and $4.7 million, respectively, of restructuring costs within operating expenses in our condensed consolidated statements of comprehensive income. The restructuring costs resulted from a restructuring plan that we announced in April 2016, and such costs consistconsisted primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement. TheThese amounts were accrued when it was probable that the benefits would be paid, and the amounts were reasonably estimable.
In connection with the restructuring plan, was substantially complete by the endwe also vacated a portion of fiscal 2017. During the threeour Irvine, CA location and nine months ended December 31, 2017,recorded impairments of $0.1 million to our operating right-of-use assets and certain related fixed assets. Furthermore, we recorded $0.1impairments of $0.3 million to our operating right-of-use assets and certain related fixed assets associated with our previously vacated locations, or portions thereof, in St. Louis, MO and Horsham, PA based on changes to our projected sublease rental income and estimated sublease commencement dates. Significant judgment was required to estimate the fair value of restructuring costs relatedeach asset group and actual results could vary from the estimates, resulting in potential future adjustments to adjustments of our estimated remaining lease obligations. Referamounts previously recorded. Refer to Note 14, "Restructuring Plan" 15, “Restructuring Plan” of our notes to condensed consolidated financial statements included elsewhere in this Report for additionalfurther details.
Interest and Other Income and Expense
The following table presents our interest expense for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Interest income |
| $ | 15 |
|
| $ | - |
|
| $ | 36 |
|
| $ | 9 |
|
| $ | 79 |
|
| $ | 29 |
|
Interest expense |
|
| (733 | ) |
|
| (629 | ) |
|
| (2,250 | ) |
|
| (2,445 | ) |
|
| (472 | ) |
|
| (730 | ) |
Other expense, net |
|
| (41 | ) |
|
| (4 | ) |
|
| (48 | ) |
|
| (146 | ) | ||||||||
Other income (expense), net |
|
| (133 | ) |
|
| 374 |
|
Interest expense relates to our revolving credit agreement that was entered into in January 2016 and the related amortization of deferred debt issuance costs. Other income and expense relate primarily to fluctuations in foreign currency associated with our operations in India. Refer to Note 7,8, “Line of Credit” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
The fluctuationschanges in our interest expense is primarily caused by changesfluctuations in outstanding balances under our revolving credit agreement inand the current year compared to prior year.related amortization of debt issuance costs. As of December 31, 2017,June 30, 2019, we had $39.0$6.0 million in outstanding balances under the revolving credit agreement, compared to an outstanding balance of $15.0$11.0 million as of March 31, 20172019 and $25.0$44.0 million as of December 31, 2016. All other fluctuationsJune 30, 2018. The change in interest and other income and expense are not deemed significant.due to fluctuations in the exchange rate of the Indian Rupee.
Provision for (Benefit of) Income Taxes
The following table presents our provision for (benefit of) income taxes for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Provision for income taxes |
| $ | 1,487 |
|
| $ | 2,342 |
|
| $ | 6,134 |
|
| $ | 3,950 |
| ||||||||
Provision for (benefit of) income taxes |
|
| (380 | ) |
| $ | 442 |
| ||||||||||||||||
Effective tax rate |
|
| 49.1 | % |
|
| 18.3 | % |
|
| 31.3 | % |
|
| 22.2 | % |
|
| -44.0 | % |
|
| 14.3 | % |
The decrease in the effective tax ratesrate for the three and nine months ended December 31, 2017June 30, 2019 compared to the prior year periods increasedperiod was primarily due to a one-time revaluationthe increased net benefit of deferred and foreign transition taxes, which was a result of new tax reform legislation enacted on December 22, 2017. The increase in the effective tax rates was offset by a favorable benefit due to an increase in the research and development credit claimed on our recently filed tax return.
We continue to fully assess thecredits and stock option windfall partially offset by unfavorable impact of the new tax reform legislation, that was enacted December 22, 2017, on our future taxes and on our consolidated financial statements. We have recorded the provisional impacts of the new tax reform legislation as of December 31, 2017 based on our most reasonable estimates. Our estimated impacts of the new tax reform legislation are based on our current knowledge, interpretation, and assumptions, and the recognized impacts could be materially different from current estimates based on our actual results in the fourth quarter of fiscal 2018, actions taken by the Company, the issuance of further guidance, and our further analysis of the new tax reform legislation. Refer to Note 9, "Income Taxes" of our notes to consolidated financial statements included elsewhere in this Report for more information.other nondeductible expenses.
Net Income
The following table presents our net income (in thousands) and net income per share and for the three and nine months ended December 31, 2017June 30, 2019 and 2016:2018:
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Net income | $ | 1,541 |
|
| $ | 10,486 |
|
| $ | 13,467 |
|
| $ | 13,826 |
|
| $ | 1,244 |
|
| $ | 2,648 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
|
| $ | 0.02 |
|
| $ | 0.04 |
|
Diluted | $ | 0.02 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
| $ | 0.22 |
|
| $ | 0.02 |
|
| $ | 0.04 |
|
As a result of the foregoing changes in revenue and expense, net income for the three and nine months ended December 31, 2017June 30, 2019 decreased $8.9$1.4 million and decreased $0.4 million, respectively, compared to the prior year periods.period.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the ninethree months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||
Cash and cash equivalents | $ | 23,359 |
|
| $ | 23,994 |
|
| $ | 28,607 |
|
| $ | 26,544 |
|
Unused portion of revolving credit agreement (1) |
| 211,000 |
|
|
| 225,000 |
|
|
| 294,000 |
|
|
| 256,000 |
|
Total liquidity | $ | 234,359 |
|
| $ | 248,994 |
|
| $ | 322,607 |
|
| $ | 282,544 |
|
|
|
|
|
|
|
|
|
| |||||||
Net income | $ | 13,467 |
|
| $ | 13,826 |
|
| $ | 1,244 |
|
| $ | 2,648 |
|
Net cash provided by operating activities | $ | 56,775 |
|
| $ | 81,423 |
|
| $ | 16,997 |
|
| $ | 3,012 |
|
(1) | As of |
Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital management, our cash and cash equivalents, and our revolving credit agreement.
Cash and Cash Equivalents
As of December 31, 2017, our cash and cash equivalents balance of $23.4 million reflects an $14.3 million decrease compared to $37.7 million as of March 31, 2017. This decrease primarily reflects $58.9 million of net cash paid for the acquisitions of Entrada and EagleDream, which were partially funded by $50.0 million of additional borrowings under our revolving credit agreement, $26.0 million of principal repayments, and payment of $18.8 million to settle the contingent consideration liability related to the acquisition of HealthFusion, offset by $56.8 million of cash from operations. Our outstanding loans under our revolving credit agreement was $39.0 million as of December 31, 2017.
We may continue to use a portion of our funds as well as available financing from our revolving credit agreement for future acquisitions or other similar business activities, although the specific timing and amount of funds to be used is not currently determinable. We intend to expend some of our available funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products.
Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short termshort-term assets including tax exempt and taxable money market funds, certificates of deposit and short termshort-term municipal bonds with average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly impact our investment income in future periods.
We believe that our cash and cash equivalents on hand at December 31, 2017,June 30, 2019, together with our cash flows from operations and liquidity provided by our revolving credit agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash flows for the ninethree months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
| Nine Months Ended December 31, |
|
| Three Months Ended June 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||
Net income | $ | 13,467 |
|
| $ | 13,826 |
|
| $ | 1,244 |
|
| $ | 2,648 |
|
Non-cash expenses |
| 47,895 |
|
|
| 45,613 |
|
|
| 20,894 |
|
|
| 14,359 |
|
Cash from net income, as adjusted | $ | 61,362 |
|
| $ | 59,439 |
|
| $ | 22,138 |
|
| $ | 17,007 |
|
Change in deferred revenue |
| (709 | ) |
|
| (8,195 | ) | ||||||||
Change in contract assets and liabilities, net |
|
| (650 | ) |
|
| (3,059 | ) | |||||||
Change in accounts receivable |
| 960 |
|
|
| 16,005 |
|
|
| 5,105 |
|
|
| 486 |
|
Change in other assets and liabilities |
| (4,838 | ) |
|
| 14,174 |
|
|
| (9,596 | ) |
|
| (11,422 | ) |
Net cash provided by operating activities | $ | 56,775 |
|
| $ | 81,423 |
|
| $ | 16,997 |
|
| $ | 3,012 |
|
For the ninethree months ended December 31, 2017,June 30, 2019, cash provided by operating activities decreased $24.6increased $14.0 million compared to the prior year period, of which $15.0$6.5 million of the decreaseincrease was driven by a declinerelated higher non-cash expenses, $2.4 million in net changes in contract assets and liabilities, $4.6 million associated with lower accounts receivable in the prior year period related to
improved collectionsbalances, and aggressive working capital management and $20.0$1.8 million of the decrease was due to changes in income taxes payableto other assets and receivable,liabilities, partially offset by $7.5 millionlower net income. The increase in non-cash expenses is primarily related to higher amortization of previously capitalized software costs, amortization of operating lease assets, accrued restructuring costs, and the non-cash impairment of assets recorded during the three months ended June 30, 2019. The increase in cash associated with net changes in contract assets and liabilities is primarily due to lower contract liabilities related to support and maintenance from lower deferred revenuehigher client attrition. Accounts receivable balances decreased due to continued efforts to collect and resolve aged balances, resulting in a corresponding increase in cash from collections in the prior year period caused by lower system salesthree months ended June 30, 2019. The net change in other asset and a shiftliabilities was primarily due to the timing of invoice vouchering and payments of our accounts payable, as well as changes in market dynamics toward cloud-based solutions.accrued compensation and related benefits primarily due to the payments and accruals of the annual bonuses. Net income for the ninethree months ended December 31, 2017June 30, 2019 decreased $0.4$1.4 million compared to the prior year period, as described in the "Net Income" section above. Non-cash expenses for the nine months ended December 31, 2017 increased $2.3 million compared to the prior year period primarily due to higher share-based compensation expense and higher bad debt expense, offset by a decrease in amortization of previously capitalized software costs and lower fair value adjustments related to the HealthFusion contingent consideration that were recorded in the prior year period.
Cash Flows from Investing Activities
Net cash used in investing activities for the ninethree months ended December 31, 2017June 30, 2019 was $80.1$8.4 million compared with $5.6$7.0 million of cash used in investing activities in the prior year period. The increase in net cash used in investing activities is primarily due to $58.9 million net cash paid for the acquisitions of Entrada and EagleDream, $9.3 million lower proceeds from sales of marketable securities, and $7.3 million increase inhigher additions to capitalized software costs associated with the development of new products and enhancement of existing products, offset by $0.6 million fewer additions to equipment and improvements.fixed assets.
Cash Flows from Financing Activities
Net cash provided byused in financing activities for the ninethree months ended December 31, 2017June 30, 2019 was $9.1$6.3 million compared with $79.0$6.8 million cash usedprovided by financing activities in the prior year period. The increase in cash providedused in financing activities relates to $24.0 million of net cash provided by our revolving credit agreement, including $50.0 million of additional borrowings and $26.0$5.0 million of principal repayments, compared to the prior year period repaymentnet additional borrowings of $80.0$7.0 million on our line of credit. Additionally, in the nine months ended December 31, 2017 we received $4.6
Contractual Obligations
We have minimum purchase commitments of $26.3 million in proceeds from the issuance of shares under employee stock plans. The increase in cash provided by financing activities was partially offset by $18.8 million paid to settle the contingent consideration liability related to the acquisition of HealthFusion in the nine months ended December 31, 2017.
Contractual Obligationspayments due under certain non-cancelable agreements to purchase goods and services.
The following table summarizes our significant contractual obligations at December 31, 2017June 30, 2019 and the effect that such obligations are expected to have on our liquidity and cash in future periods (in thousands):
|
|
|
|
|
| For the year ended March 31, |
|
|
|
|
|
| For the year ended March 31, |
| ||||||||||||||||||||||||||||||||||||||||||
Contractual Obligations |
| Total |
|
| 2018 (remaining three months) |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 and beyond |
|
| Total |
|
| 2020 (remaining nine months) |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 and beyond |
| ||||||||||||||
Operating lease obligations |
| $ | 60,114 |
|
| $ | 2,219 |
|
| $ | 9,321 |
|
| $ | 9,013 |
|
| $ | 8,998 |
|
| $ | 8,726 |
|
| $ | 21,837 |
|
| $ | 55,144 |
|
| $ | 7,830 |
|
| $ | 10,681 |
|
| $ | 10,353 |
|
| $ | 10,111 |
|
| $ | 8,370 |
|
| $ | 7,799 |
|
Remaining lease obligations for vacated properties (1) |
|
| 4,659 |
|
|
| 547 |
|
|
| 1,413 |
|
|
| 794 |
|
|
| 816 |
|
|
| 551 |
|
|
| 538 |
|
|
| 5,274 |
|
|
| 929 |
|
|
| 1,270 |
|
|
| 1,019 |
|
|
| 837 |
|
|
| 674 |
|
|
| 545 |
|
Line of credit obligations (Note 7) |
|
| 39,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 39,000 |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||||||
Purchase commitments (2) |
|
| 32,322 |
|
|
| 312 |
|
|
| 3,840 |
|
|
| 5,297 |
|
|
| 7,073 |
|
|
| 7,900 |
|
|
| 7,900 |
| ||||||||||||||||||||||||||||
Line of credit obligations (Note 8) |
|
| 6,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,000 |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Total |
| $ | 136,095 |
|
| $ | 3,078 |
|
| $ | 14,574 |
|
| $ | 15,104 |
|
| $ | 55,887 |
|
| $ | 17,177 |
|
| $ | 30,275 |
|
| $ | 66,418 |
|
| $ | 8,759 |
|
| $ | 11,951 |
|
| $ | 11,372 |
|
| $ | 16,948 |
|
| $ | 9,044 |
|
| $ | 8,344 |
|
(1) | Remaining lease obligations for vacated properties relates to remaining lease obligations at certain locations, including |
|
|
The deferred compensation liability as of December 31, 2017June 30, 2019 was $6.5$6.0 million, which is not included in the table above as the timing of future benefit payments to employees is not determinable.
The uncertain tax position liability as of December 31, 2017 was $4.9 million, which is not included in the table above as the timing of expected payments is not determinable.
New Accounting Pronouncements
Refer to Note 1, “Summary of Significant Accounting Policies” of our notes to condensed consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.
As of December 31, 2017,June 30, 2019, we were subject to minimal market risk on our cash and cash equivalents as we maintained our balances in very liquid funds with maturities of 90 days or less at the time of purchase.
As of December 31, 2017,June 30, 2019, we had $39.0$6.0 million in outstanding loans under our revolving credit agreement. The revolving loansborrowings under theour revolving credit agreement bear interest at our option of either, (a) for base rate loans, a base rate based on the highest of (i) 0%, (ii) the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A.,the administrative agent as its prime rate (ii) the greater of (A) the federal funds effective rate and (B)in effect at its principal office in New York City, (iii) the overnight bank funding rate (as(not to be less than zero) as determined by the Federal Reserve Bank of New York)York plus 0.50% or (iv) the LIBOR-based rate for one, two, three or six months Eurodollar deposits plus 1%, and (iii)(b) for Eurodollar loans, the one-month British Bankers Association London Interbank Offered Rate ("LIBOR")LIBOR-based rate for one, two, three or six months (as selected by us) Eurodollar deposits plus 1.00%), plus, in each case, an applicable margin based on our total leverage ratio from time to time, ranging from 0.50% to 1.50%, or (b) a LIBOR-based for base rate (subject to a floor of 0.00%) plus an applicable margin based on our leverage ratio from time to time, rangingloans, and from 1.50% to 2.50%. for Eurodollar loans. Accordingly, we are exposed to interest rate risk, primarily changes in LIBOR, due to our loans under the revolving credit agreement. A one hundred basis point (1.00%) change in the interest rate on our outstanding loans as of December 31, 2017June 30, 2019 would result in a corresponding change in our annual interest expense of approximately $0.4$0.1 million. Refer to Note 7,8, “Line of Credit” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
As of December 31, 2017,June 30, 2019, we had international operations that exposed us to the risk of fluctuations in foreign currency exchange rates against the United States dollar. However, the impact of foreign currency fluctuations has not been material to our financial position or operating results.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (our principal executive(principal financial officer and principal financial officer, respectively)accounting officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Security Exchange Act of 1934, as amended, the "Exchange Act") as of December 31, 2017,June 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis. The Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. They have also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Effective April 1, 2019, we adopted the new lease standard under ASC 842. We implemented changes to our processes, policies, and internal controls over financial reporting to address the impacts of the new lease guidance on our condensed consolidated financial statements and related disclosures. During the quarter ended December 31, 2017,June 30, 2019, there were no other changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Hussein Litigation
On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court granted on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. On July 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against Hussein, alleging that the plaintiffhe breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiff in the cross-complaint. On June 26, 2015, we filed a motion for summary judgment with respect to Hussein’s claims, which the Court granted on September 16, 2015, dismissing all of Hussein’s claims against us. On September 23, 2015, Hussein filed an application for reconsideration of the Court's summary judgment order, which the Court denied. Hussein filed a renewed application for reconsideration of the Court’s summary judgment order on August 3, 2017. The Court again denied Hussein’s application.
On October 28, 2015, May 9, 2016, and August 5, 2016, Hussein filed a motion for summary judgment, motion for summary adjudication, and motion for judgment on the pleadings, respectively, seeking to dismiss our cross-complaint. The Court denied each motion. Trial on our cross-complaint began June 12, 2017. On July 26, 2017, the Court issued a statement of decision granting Hussein’s motion for judgment on our cross-complaint. Final judgment over Hussein’s claims and our cross-claims was entered on January 9, 2018. Hussein has noticed his appeal of the order granting summary judgment over his claims, and we are evaluatingnoticed a potential cross-appeal.cross-appeal on the court’s statement of decision granting Hussein’s motion for judgment on our cross-complaint. Briefing on the cross-appeals was completed in fall 2018. A hearing on the cross-appeals was held on July 15, 2019. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us and certain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointed lead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8:13-cv-01818-CJC-JPR, lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing the complaint with prejudice. Plaintiffs filed a motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. On July 28, 2017, the Ninth Circuit issued a decision reversing and remanding the District Court's order on our motion to dismiss. On September 5, 2017, we filed a petition for rehearing en banc, which was denied on September 29, 2017. After the Ninth Circuit issued its mandate, the District Court reopened the case. The parties have begun discovery. We believe that the plaintiffs' claims are without merit and continue to defend against them vigorously, including by evaluating potential challenges to the Ninth Circuit decision. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of ours. The complaint arises from the same allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and gross mismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The matter was stayed pending the Ninth Circuit’s decision in the appeal described
above under the caption, “Federal Securities Class Action.” This stay now has been lifted and, pursuant to a stipulated briefing schedule, Defendants’ motion to dismiss is due February 2, 2018.
On September 28, 2017, a complaint was filed against our Company and certain of our current and former officers and directors in the United States District Court for the Central District of California, captioned Kusumam Koshy, derivatively on behalf of Quality Systems Inc. vs. Craig Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig, Paul A. Holt, and Quality Systems, Inc., No. 8:17-cv-01694, by Kusumam Koshy, a purported shareholder of ours. The complaint alleges breach of fiduciary duties and abuse of control, as well as unjust enrichment and insider selling by individual directors arising out of the allegations described above under the captionscaption “Hussein Litigation” and “Federal Securities Class Action,” QSI’sa related, now-settled, federal securities class action, as well as the Company’s adoption of revised indemnification agreements, and the resignation of certain officers of the Company. The complaint seeks restitution and disgorgement, court costs and attorneys’ fees, and enhanced corporate governance reforms and internal control procedures. On January 12, 2018, Defendants filed a motion to dismiss the derivative complaint.
On July 25, 2018, the Court dismissed the complaint with prejudice. On August 24, 2018, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit and filed her opening brief on January 23, 2019. We filed our response on March 25, 2019, and the plaintiff filed her reply on May 15, 2019. We believe that the plaintiff’s claims areappeal is without merit and intend to defend against themit vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
In addition to the above, we have experienced legal claims by customers regarding product and contract disputes and from time to time, claims by other third parties asserting that we have infringed their intellectual property rights. We believe that these claims, including those filed by Mr. Hussein, the Deerfield Beach Police Pension Fund and the shareholder derivative action, are without merit and intend to defend against them vigorously; however, we could incur substantial costs and diversion of management resources even if we are ultimately successful in the defense of such claims. Litigation is inherently uncertain and always difficult to predict. We refer you to the discussion of infringement and litigation risks in our “Item 1A. Risk Factors” section of our Annual Report.
Other Regulatory Matters
In
Commencing in April 2017, we have received a request for documents and information from the United States Attorney's Office for the District of Vermont pursuant to a Civil Investigative Demand (“CID”). The CID relates toand other government agencies in connection with an investigation concerning the certification we obtained for our software under the United States Department of Health and Human Services' Electronic Health Record (EHR) Incentive Program. We have provided documents andThe requests for information in responserelate to, that CID. On December 11, 2017, we received a subpoena from the United States Department of Justice in connection with the same matter seeking among other things records relating tothings: (a) data used to determine objectives and measures under the Meaningful Use (MU) and the Physician Quality Reporting System (PQRS) programs, (b) EHR software code used in certifying the 2014 EHRour software and information, and (c) payments provided for the referral of EHR business.
We continue to cooperate in this investigation. Requests and investigations of this nature may lead to future requests for information and ultimately the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In addition, our responses to these and any future requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter. Given the highly-regulated nature of our industry, we may, from time to time, be subject to subpoenas, requests for information, or investigations from various government agencies. It is our practice to respond to such matters in a cooperative, thorough and timely manner. We continue to respond to this CID and subpoena and intend to cooperate fully with the government. Requests and investigations of this nature may lead to the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In addition, our responses to these requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter.
Our business is subject to many risks and uncertainties, which may materially and adversely affect our future business, prospects, financial condition and results of operations. These risk factors are disclosed in “Item 1A. Risk Factors” in our Annual Report.
None.
None.
Not Applicable.
None.
Exhibit Number |
| Exhibit Description |
| Filed Herewith |
|
|
|
|
|
31.1 |
|
| X | |
|
|
|
|
|
31.2 |
|
| X | |
|
|
|
|
|
32.1 |
|
| X | |
|
|
|
|
|
101.INS** |
| XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
|
|
101.SCH** |
| XBRL Taxonomy Extension Schema |
|
|
|
|
|
|
|
101.CAL** |
| XBRL Taxonomy Extension Calculation |
|
|
|
|
|
|
|
101.DEF** |
| XBRL Taxonomy Extension Definition |
|
|
|
|
|
|
|
101.LAB** |
| XBRL Taxonomy Extension Label |
|
|
|
|
|
|
|
101.PRE** |
| XBRL Taxonomy Extension Presentation |
|
|
** | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities and Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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.
|
|
| |
Date: | By: | /s/ John R. Frantz | |
|
| John R. Frantz | |
|
| Chief Executive Officer (Principal Executive Officer) | |
|
|
| |
Date: | By: | /s/ James R. Arnold | |
|
| James R. Arnold | |
|
|
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
3837